WORLD TRADE  
ORGANIZATION  WT/DS54/R 
WT/DS55/R 
WT/DS59/R WT/DS64/R  
2 July 1998 
 
(98-2505) 
 Original:   English 
 
 
 
INDONESIA - CERTAIN MEASURES 
AFFECTING THE AUTOMOBILE INDUSTRY  
 
 
REPORT OF THE PANEL  
 
  
 
     
 
 The report of the Panel on Indonesia - Certain Meas ures Affecting the Automobile Industry is being 
circulated to all Members, pursuant to the DSU.  The report is being circulated as an unrestricted 
document from 2 July pursuant to the Procedures  for the Circulation and Derestriction of WTO 
Documents (WT/L/160/Rev.1).  Members are reminded that in accordance with the DSU only parties 
to the dispute may appeal a panel report.  An appeal  shall be limited to issues of law covered in the 
Panel report and legal interpre tations developed by the Panel.  There shall be no ex parte  
communications with the Panel or Appellate B ody concerning matters under consideration by the 
Panel or Appellate Body. 
 
  
Note by the Secretariat :  This Panel Report shall be adopted by the Disput e Settlement Body (DSB) within 60 days after the 
date of its circulation unless a party to the dispute decides to appeal or the DSB decides by consensus not to adopt the report .  
If the Panel Report is appealed to the Appellate Body, it sh all not be considered for adoption by the DSB until after the 
completion of the appeal.  Information on the current status of the Panel Report is available from the WTO Secretariat.  - i - 
  
TABLE OF CONTENTS
 
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I. INTRODUCTION ................................................................................................................ .1 
 A. Background...............................................................................................................1   1. Complaint of Japan ......................................................................................1 
  2. Complaint of the European Communities....................................................1 
  3. Complaint of the United States....................................................................2 
 B. Establishment and Composition of the Panel ...........................................................2  C. Information-Gathering Procedure under Annex V of the SCM Agreement .............3 
 D. Panel Proceedings.....................................................................................................3 II. FACTUAL ASPECTS...........................................................................................................3  
 A. Tax and Tariff Treatment in I ndonesia of Imported Completely  
  Built-Up Motor Vehicles ..........................................................................................4 
 B. Measures at Issue......................................................................................................4   1. 1993 Programme..........................................................................................4    (a) Decree No. 114/1993 ......................................................................5 
   (b) Decree No. 645/1993 ......................................................................6 
   (c) Decree No. 647/1993 ......................................................................7    (d) Decree No. 223/1995 ......................................................................7    (e) Decree No. 36/1997 ........................................................................9 
  2. National Car Programme .............................................................................9    (a) "The February 1996 Programme"...................................................9 
   (b) "The June 1996 Programme"........................................................12 
  3. The US$690 million loan to TPN ..............................................................15  C. Notifications by Ind onesia to WTO Committees....................................................15 
III. FINDINGS AND RECOMMENDATIONS REQUESTED BY THE PARTIES...............15  A. Japan ...................................................................................................................15  
 B. European Communities...........................................................................................16 
 C. United States...........................................................................................................18  D. Indonesia.................................................................................................................1 9 - ii - 
  
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IV. REQUEST FOR PRELI MINARY RULINGS ....................................................................19 
 A. Participation of Private Lawyers.............................................................................19   1. Objection of the United States ...................................................................19 
  2. Response of Indonesia ...............................................................................20 
   (a) General principles of international law support 
 Indonesia's sovereign right to select counsel of its 
 choice and organize and present its defence.................................22 
   (b) Practice before international adjudicatory bodies     confirms Indonesia's right.............................................................23    (c) The WTO Appellate Body supports Indonesia's 
    right...............................................................................................23 
   (d) GATT past practice does not and cannot circumvent     Indonesia's sovereign right ...........................................................24    (e) Practical and equitable considerations mandate     that Indonesia not be denied its right ............................................25 
 B. Preliminary objection to United States' claim regarding the US$690 million 
  loan to TPN.............................................................................................................26 
  1. Objection by Indonesia ..............................................................................26    (a) First, the loan was not raised in the Panel request 
    or the Panel's terms of reference...................................................26    (b) Second, the loan arose after the Panel was 
    established.....................................................................................26 
   (c) Third, the United States cannot "cure" its omission     of the loan from its Panel request by discussing the     loan in its first submission ............................................................27 
  2. Response of the United States ...................................................................27 
 C. Business Proprietary Information ...........................................................................28 
  1. Request of Indonesia..................................................................................28 
  2. Response of the United States ...................................................................29 
 D. Request from Indonesia for Termination of the Panel with 
  Respect to the National Car Programme.................................................................30 
  1. Request from Indonesia .............................................................................31 
  2. Response of Japan......................................................................................32 
   (a) It is still not clear whether the National Car 
    Programme has been fully terminated ..........................................32    (b) The Government of Indonesia has not provided any     assurances that it will not introduce the measures 
    of the same nature as the National Car Programme, 
     i.e. discriminatory measures to benefit specific     domestic products .........................................................................32 - iii - 
  
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   (c) Even if measures are eliminated, a panel can 
    and should rule on them................................................................33 
  3. Response of the European Communities ...................................................33   4. Response of the United States ...................................................................34    (a) The measures at issue are within the Panel's 
    Terms of Reference.......................................................................35 
   (b) Established GATT and WTO Panel practice is to     make findings on measures that are withdrawn     subsequent to the establishment of a Panel's     Terms of Reference.......................................................................35 
   (c) It is not established that the measures have, 
    in fact, expired ..............................................................................36    (d) A termination of the dispute would diminish     US rights under the DSU ..............................................................37    (e) Conclusion ....................................................................................38 
V. CLAIMS UNDER ARTICLE III OF GATT 1994 ..............................................................38 
 A. Claims under Article III:2, First Sentence of GATT 1994 .....................................38   1. Claims raised by Japan ..............................................................................38    (a) Article III:2, first sentence requires that sales 
    of imported products not be taxed at rates in     excess of rates imposed on like domestic products ......................39 
   (b) Luxury tax is an internal tax .........................................................39 
   (c) National cars are domestic products .............................................39    (d) National cars and imported automobiles     are "like" products ........................................................................39    (e) Imported products are taxed less favourably 
    than "like" domestic products .......................................................41 
   (f) Insignificant market share for imported     sedans is not a defence..................................................................42 
  2. Claims raised by the European Communities............................................42 
   (a) The sales tax on luxury go ods is an "internal tax"........................43 
   (b) Imported products are "like" the domestic 
    products exempted from the tax....................................................43 
   (c) Imported motor vehicles are taxed in "excess     of" domestic like motor vehicles ..................................................46    (d) Imported parts and components are 'indirectly'     taxed 'in excess of' like domestic parts, 
    components and materials.............................................................47 
  3. Claims raised by the United States ............................................................48  B. Claims under Article III:2, Second Sentence of GATT 1994.................................48   1. Claims raised by Japan ..............................................................................48 - iv - 
  
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   (a) National Cars and imported automobiles are 
    "directly competitive or substitutable" products...........................49    (b) National cars and imported automobiles are not     "similarly taxed" ...........................................................................49    (c) The tax exemption is accorded "so as to afford 
    protection" ....................................................................................49 
  2. Claims raised by the United States ............................................................50  C. Claims under Article III:4 of GATT 1994..............................................................51   1. Claims raised by Japan ..............................................................................51    (a) Article III:4 of GATT 1994 requires each WTO 
    Member to guarantee equality of competitive 
    opportunity between domestic goods and     imported goods .............................................................................51    (b) Imported parts a nd components and domestic 
    parts and components are "like" products.....................................52 
   (c) Imported parts and components are accorded 
    less favourable treatment than domestic like     products in two respects................................................................52 
  2. Claims raised by the European Communities............................................54 
   (a) The measures at issue are "laws, regulations 
    or requirements" ...........................................................................55 
   (b) The measures "affect the internal use" of parts 
    and components for the assembly of motor     vehicles .........................................................................................56    (c) Imported parts a nd components and domestic 
    parts and components are "like" products.....................................57 
   (d) The measures at issue give "less favourable 
    treatment" to imported parts and components ..............................57    (e) Local content requirements have already been     found contrary to Article III:4 of GATT ......................................57    (f) The TRIMs Agreement confirms that the measures     are compatible with Article III:4 of the GATT.............................57 
  3. Claims raised by the United States ............................................................58 
   (a) Summary of the measures.............................................................58 
   (b) The tariff and tax incentives and the government-     directed $690 million loan are inconsistent with     Article III:4 ...................................................................................63 
   (c) Indonesia's discriminatory tariff and tax incentives 
    and the government-directed $690 million loan do     not constitute a direct subsidy to domestic producers     within the meaning of Article III:8(b) ..........................................65 
 D. General Response by Indonesia to  Claims under Article III of GATT 1994 - 
 SCM Agreement prevails........................................................................................66 - v - 
  
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  1. The SCM Agreement is the lex specialis  for review of the 1993 
   and 1996 subsidy programmes, which Indonesia, as a     developing country, is  permitted to maintain ............................................67 
   (a) The 1993 incentive programme grants an exemption 
    from or reductions in import duties and the luxury  
     tax available to all companies in the automotive 
    industry .........................................................................................68    (b) The February 1996 National Car Programme grants     import duties and luxury tax exemptions to      producers of a National Car..........................................................68 
   (c) The Government's grant of exemptions and 
    reductions to import duties and the luxury tax to     certain manufacturers and assemblers of     automobiles and automotive parts is a subsidy.............................69    (d) Article 27.3 of the SCM Agreement permits 
    Indonesia, as a developing country, to maintain the 
    subsidies granted under the 1993 and February 1996     programmes ..................................................................................69    (e) Introduction of the February 1996 subsidy     programme was not inconsistent with Indonesia's     obligations unde r the SCM Agreement ........................................70 
  2. Indonesia's luxury tax subsidies to the automotive industry 
   are governed by the disciplines of the SCM Agreement and    not by Article III of the GATT 1994 .........................................................70 
   (a) Both the 1993 incentive programme and the February 1996  
National Car Programme subsidize certain automobile  
producers by granting reduced luxury tax ....................................70 
   (b) Subsidies are governed by and subject to the      disciplines of the SCM Agreement...............................................70    (c) General rules of treaty interpretation preclude     finding that a subsidy permissible under the SCM      Agreement is proscribed by Article III of the GATT 1994 ..........72 
   (d) The proper interpretation of  Article III:8(b) of the GATT 1994 
supports the view that Article III does not .......... override the SCM Agreement.....................................................................................73 
   (e) In a conflict between the SCM Agreement and Article III  
of the GATT 1994, the SCM Agreement prevails........................76 
   (f) The SCM Agreement defines subsidies and sets out 
    all of the rights and obligations pertaining to them ......................77    (g) The definition of "subsidy" in the SCM Agreement      is all-encompassing, contrary to the United States     assertion ........................................................................................77    (h) Article VI:5 of the GATT 1994 is irrelevant and 
    serves to limit a Complainant's unilateral remedy ........................77 
   (i) The United States' interpretation of Article 32.1,     footnote 56, of the SCM Agreement is flawed .............................78    (j) Indonesia's right, as a developing country, to maintain  
domestic-content subsidies is subject only to Indonesia's  
obligation not to cause serious prejudice to a like product...........79 - vi - 
  
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   (k) The application to this dispute of Article III of the 
    GATT 1994, as complainants advocate, would render     the SCM Agreement meaningless.................................................79    (l) Conversely, Indonesia's interpretation does not     render Article III useless, as complainants maintain, 
    but confines it appropriately .........................................................80 
   (m) Complainants' assertion that the SCM Agreement     cannot be lex specialis  because, if it were, generally 
    available and Article 8 subsidies would not be     constrained, is incorrect ................................................................82 
   (n) Even if the United States example were relevant, the 
    point the United States seeks to advance is incorrect     as a matter of law - the SCM Agreement addresses     generally available and other Article 8 .........................................82    (o) Japan's and the United St ates' claims that Indonesia's 
    measures violate Article III:2, second sentence are 
    incorrect ........................................................................................83    (p) Japan's view that Indonesia's argument renders the     General Interpretative Note meaningless is incorrect...................83    (q) Parts and components are not "indirectly" taxed in     excess of like domestic goods.......................................................83 
 E. Rebuttals to Indonesia's General Response to the Claims Raised under  
  Article III of GATT 1994 .......................................................................................83 
  1. Rebuttal arguments of Japan......................................................................83    (a) Indonesia's lex specialis  argument does not have 
    any merit .......................................................................................84 
   (b) The SCM Agreement would not be reduced to 
    inutility by Article III:2 of GATT.................................................86    (c) GATT Article III does not "conflict" with the SCM 
Agreement.....................................................................................87 
   (d) GATT Article III:8(b) has never excused tax discrimination     and should not be "re-thought" to excuse it now ..........................90 
  2. Rebuttal arguments of the European Communities ...................................92 
   (a) GATT Article III and the SCM Agreement are not 
    mutually exclusive ........................................................................92    (b) There is no conflict between GATT Article III and the     SCM Agreement .........................................................................101 
  3. Rebuttal arguments of the United States..................................................104 
   (a) The tariff and tax incentives under the 1993 Programme  
and theNational Car Programme violate Article III of  GATT 1994.................................................................................104 - vii - 
  
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   (b) Indonesia's argument that the SCM Agreement overrides  
Article III is unsupported by the text of the SCM Agreement  and GATT 1994, would result in the effective repeal of  Article III:2, and is inconsistent  with the negotiating history  
of theUruguay Round, established principles of public 
international law, and WTO jurisprudence.................................105 
   (c) The tax incentives under the 1993 Programme and the     National Car Programme are not protected by     Article III:8(b) of GATT 1994....................................................118 
 F. Additional Arguments Regarding th e Claims under Article III:4 of GATT 1994 
  Pertaining to the Tariff Measures .........................................................................119 
  1. Specific respon se by Indonesia................................................................119 
   (a) The customs import duties schedules for automotive 
    companies using differing levels of domestic content     are consistent with Article III:4 of GATT 1994 because 
    the schedules are border measures which are not 
subject to Article III:4 of GATT 1994 and are subsidies 
    Indonesia is permitted to maintain..............................................119 
(b) Indonesia's customs import duties subsidy does 
not involve a "requirement" necessary to "secure an advantage" within the scope of Article III:4 of GATT 1994......120 
  2. Rebuttal of Japan to arguments of Indonesia...........................................121 
   (a) The February 1996 programme violates GATT 
    Article III:4 .................................................................................122    (b) Indonesia's "border measure" defence has no merit ...................122    (c) Indonesia's "voluntary measure" defence has no merit...............124 
  3. Rebuttal of the European Comm unities to arguments of Indonesia ........125 
  4. Rebuttal of United States to arguments of Indonesia...............................126 VI. CLAIMS UNDER THE TRIMS AGREEMENT ..............................................................127  A. Claims Raised by Japan ........................................................................................127   1. Indonesia's Programmes are "TRIMS" as defined in the 
   TRIMS Agreement ..................................................................................128 
  2. Even if Indonesia's measu res were deemed to constitute 
   a subsidy, it is nonetheless also a TRIM..................................................129   3. Indonesia cannot enjoy the bene fit of the transitional period ..................129 
 B. Claims Raised by the European Communities......................................................129  C. Claims Raised by the United States......................................................................131 
 D. Response by Indonesia to claims under the TRIMs Agreement...........................133 
  1. Summary..................................................................................................133 - viii - 
  
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  2. The TRIMS "Illustrative List" cannot alter the fact that 
   Article III is inapplicable .........................................................................133   3. Subsidies are governed by the Subsidies Agreement and are not    within the scope of the TRIMS Agreement .............................................134   4. Customs import duty subsidies are not within the scope of 
   the TRIMS Agreement.............................................................................135 
  5. Indonesia has not violated the TRIMS Agreement:  The    TRIMS Agreement does not apply - it adds no new    obligations, but merely puts a gloss on Article III of GATT 1994..........135 
   (a) The TRIMS Agreement, unlike the SCM Agreement, 
    i s  n o t  lex specialis ;  it neither defines "TRIM" nor sets 
    forth special remedies .................................................................135    (b) The TRIMS Agreement does not establish a "new     balance of rights and obligations";  rather, it merely     elaborates on the FIRA Panel's decision regarding 
    the coverage of Article III of GATT...........................................136 
  6. Japan is in Error:  the Government most certainly does not 
   view the National Car Programme  as an investment programme............136 
  7. The underlying decree, rules and regulations, and Indonesia's    statements to the Committee on TRIMS establish that the    National Car Programme does not involve a TRIM ................................137 
  8. The measures are not investment measures but subsidies 
   granted to an automaker to use domestic parts and    components ..............................................................................................138   9. The measures are not TRIMS that violate Article III:2    of GATT 1994 .........................................................................................139 
  10. The TRIMS Agreement is not lex specialis  to any dispute......................139 
 E. Arguments made in rebuttal to Indonesia's responses to the claims under 
  the TRIMs Agreement ..........................................................................................139 
  1. Rebuttal arguments made by Japan..........................................................139    (a) The February 1996 Programme violates TRIMS 
    Article 2.1 ...................................................................................139 
   (b) The SCM Agreement does not excuse Indonesia's 
    violations of the TRIMS Agreement ..........................................140    (c) Incentive measures are covered by the TRIMS     Agreement...................................................................................142    (d) Indonesia's arguments would render parts of the 
    TRIMS Agreement virtually meaningless ..................................143 
  2. Rebuttal arguments made by the European Communities.......................143    (a) The measures at issue infringe GATT Article III and are 
    therefore contrary to Article 2.1 of the TRIMS Agreement .......144    (b) Article 2.1 of the TRIMS Agreement lays down a     legally distinct obligation............................................................144 - ix - 
  
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   (c) Even if it was found that there is a "conflict" between GATT 
Article III and the SCM Agreement, that conflict would not  preclude a violation of Article 2 of the TRIMS Agreement .......144 
   (d) The TRIMS Agreement may apply to subsidies.........................145   3. Rebuttal arguments made by the United States .......................................145 
   (a) The tariff and tax incentives under the 1993 Programme 
    and the National Car Programme are inconsistent with     Article 2 of the TRIMS Agreement ............................................145    (b) The Indonesian measures are "trade related measures" ..............147    (c) The TRIMS Agreement imposed a new obligation 
    on Indonesia................................................................................147 
   (d) The notion of lex specialis  is irrelevant in this case with 
    respect to the relationship between Article III and the     TRIMS Agreement .....................................................................147 
VII. ARTICLE I:1 CLAIMS ....................................................................................................149  
 A. Claims Raised by Japan ........................................................................................149 
  1. The National Car Progr amme of February 1996 .....................................149 
   (a) Article I:1 of GATT 1994 requires immediate and 
    unconditional MFN treatment for imported parts     and components ..........................................................................149    (b) The National Car Programme of February 1996 in 
    practice grants benefits only to automotive parts and 
    components imported or to be imported from Korea     in violation of Article I:1 of the GATT 1994 .............................150    (c) The fact that Indonesia's legislation does not     explicitly discriminate in favour of Korean products 
    cannot be a defence.....................................................................152 
   (d) The fact that only a certain portion of products  from 
    Korea are granted preferential treatment cannot be     a defence either ...........................................................................152 
  2. The Extended National Ca r Programme of June 1996 ............................153 
   (a) Indonesia granted benefits solely to imports of CBUs 
    from Korea (i.e. National Cars assembled at the Kia 
    factory in Korea) in viol ation of Article I:1 of GATT 1994.......153 
   (b) The fact that the previous authorization has expired      cannot be a defence.....................................................................154 
 B. Claims Raised by the European Communities......................................................155 
  1. Measures concerning the importation of National Cars...........................155 
   (a) The measures provide  "advantages" covered by 
    Article I:1 of GATT....................................................................155 - x - 
  
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   (b) The cars covered by the measures are "like"  
    other cars.....................................................................................156    (c) The measures benefit only and exclusively imports     of Kia cars originating in Korea .................................................156 
  2. Measures concerning the assembly of National Cars in Indonesia..........158 
   (a) The measures provide  "advantages" covered by 
    Article I:1 of GATT....................................................................158    (b) Parts and components made in South Korea are "like"     other parts and components ........................................................158    (c) The measures will benefit mainly, if not exclusively, 
    imports of parts and components from South Korea ..................159 
 C. Claims Raised by the United States......................................................................159  D. Indonesia's response to the claims raised under Article I:1 of GATT 1994 .........161   1. The June 1996 Programme expired 30 June 1997, so there 
   can be no present violation of Article I of GATT 1994...........................161 
   (a) The legal authority for the June 1996 Programme 
    expired on 30 June 1997 .............................................................161    (b) Because the programme and the authority under which     it was granted have terminated, there is no basis for     an affirmative determination by the Panel..................................162    (c) Prior Panel decisions support the refusal to rule on an 
    expired measure ..........................................................................162 
  2. Indonesia has not violated Article I of GATT 1994 because it did 
   not grant an advantage to automobiles or parts originating in one    country that it did not accord to like products originating in    other countries..........................................................................................163 
   (a) Indonesia did not grant an advantage to automobiles or 
    parts originating in one country ..................................................163    (b) That TPN made a commercial decision, without     government involvement, to enter into a commercial     relationship with a particular company does not constitute     a de facto violation of Article I...................................................163 
   (c) The Timor S515 and components and parts imported 
    for it are not "like" any passenger vehicles, components      or parts imported from the territories of complainants ..............164 
  3. The June 1996 Programme was a subsidy that expired and, 
   therefore, there is no violation of Article I of GATT 1994......................165 
   (a) The June 1996 Progra mme has expired and will not 
    be renewed ..................................................................................165    (b) As to unsold Timors, the fact that the luxury tax is not     forgone until sale is a Subsidies Agreement issue, not     an Article I issue .........................................................................165 
  - xi - 
  
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   (c) Even if the Panel finds that Article I does apply, TPN, 
    and not Kia, was the beneficiary of the import duty     exemption, the programme was not country-specific     and complainants import no like product, so Article I     was no violated ...........................................................................166 
 E. Rebuttals to Indonesia's response .........................................................................167 
  1. Rebuttal arguments made by Japan..........................................................167    (a) Indonesia's actions in structuring, adopting, and 
    expanding the National Car Programme ensures that     Korean products receive tax and tariff benefits denied to 
    Japanese products and, thus, constitute the violation 
    of GATT Article I.......................................................................168    (b) Indonesia's bizarre asserti on that no goods are like Timor or 
    parts and components for Timors is simply wrong.....................171    (c) The June 1996 Programme is  still in full force and effect..........174 
  2. Rebuttal arguments made by the European Communities.......................176 
   (a) The fact that the authorization granted to PT TPN 
    expired in June 1997 does not prevent the Panel from     ruling on the compatibility of that measure with     Article I:1....................................................................................177    (b) It is irrelevant that the Indonesian Government did not 
    mandate expressly PT TPN to import automobiles 
    or parts originating in Korea.......................................................179    (c) The automobiles and parts covered by the measures are     like any other automobiles and parts ..........................................180 
  3. Rebuttal arguments of the United States..................................................181 
   (a) The one-year exemption is not a "dead measure".......................181 
   (b) Indonesia conferred an advantage to a country...........................182    (c) The passenger cars in question are like products to     the Kia Sepia Sedan ....................................................................183 
VIII. CLAIMS UNDER THE SCM AGREEMENT..................................................................183  A. Existence of Specific Subsidies ............................................................................184 
  1. The measures at issue are subsidies.........................................................184 
   (a) Arguments of the European Communities..................................184 
   (b) Arguments of the United States ..................................................185    (c) Arguments of Indonesia..............................................................186 
  2. The measures at issue are specific ...........................................................186 
   (a) Arguments of the European Communities..................................186 
   (b) Arguments of the United States ..................................................187    (c) Arguments of Indonesia..............................................................190 - xii - 
  
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3. Indonesia's arguments that the measures are specific subsidies ..............190 
 B. Serious Prejudice Claims ......................................................................................190   1. Summary of claims ..................................................................................190   2. Basis for serious prejudice as a cause of action against 
   Indonesia as a developing country...........................................................191 
   (a) Arguments of the European Communities .................................191 
   (b) Arguments of the United States .................................................198    (c) Arguments of Indonesia regarding serious prejudice      as a cause of action in this dispute..............................................211 
  3. Like product.............................................................................................212 
   (a) Scope of "like" models ...............................................................212 
    (1) Arguments of the European Communities ....................212     (2) Arguments of the United States ....................................217     (3) Indonesia's arguments....................................................228    (b) CKDs as "like" finished Timors .................................................238 
    (1) Arguments of the European Communities ....................239 
    (2) Arguments of the United States ....................................241     (3) Arguments of Indonesia ................................................241    (c) "Imports" from/"exports" by complainant ..................................242     (1) Arguments of the United States ....................................242     (2) Arguments of Indonesia ................................................243 
  4. Article 6.3(a) of the SCM Agreement - displacement/impedance  
   of imports.................................................................................................244 
   (a) Arguments of the European Communities..................................244 
   (b) Arguments of the United States ..................................................249    (c) Response by Indonesia ..............................................................269 
  5. Article 6.3(c) of the SCM Agreement - Price undercutting.....................277 
   (a) Arguments of the European Community ....................................277 
   (b) Arguments of the United States ..................................................280    (c) Responses by Indonesia..............................................................281 
  6. Adjustments for factors affecting price comparability ............................282 
   (a) Arguments of Indonesia..............................................................282 
   (b) Arguments of the European Communities..................................282 
   (c) Arguments of the United States ..................................................285 
  7. Additional EC rebuttals to Indonesia's responses to serious 
   prejudice claims .......................................................................................286 
  8. Additional United States arguments concerning serious prejudice - 
the government-directed $690 million loan.............................................290 - xiii - 
  
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  9. Claims of threat of serious prejudice under the SCM Agreement ...........290    (a) Claim of the European Communities..........................................290 
   (b) Claim of the United States..........................................................290    (c) Response by Indonesia ...............................................................292 
 C. Claim under Article 28 of the SCM Agreement ...................................................296 
  1. Claims raised by the United States ..........................................................296 
  2. Response of Indonesia .............................................................................299    (a) Indonesia is subject to Article 27.3.............................................299 
   (b) Article 27.3 does not preclude the introduction or     expansion of domes tic content subsidies ....................................299 
   (c) The domestic content subsidy is not within the scope 
    of Article 27.4 because it is not an "export" subsidy     and Indonesia is an A nnex VII developing country....................300 
   (d) The domestic content subsidy is not within the scope     of Article 28.2 because it is not inconsistent with 
    the SCM Agreement ...................................................................300 
IX. ARTICLE X CLAIMS ....................................................................................................301  A. Claims under Article X:3(a) of GATT 1994.........................................................301   1. Claims raised by Japan ............................................................................301    (a) Article X:3(a) of the GATT 1994 requires uniform, 
    impartial and reasonable administration of regulations..............301 
   (b) Indonesia granted benefits to automobiles imported 
    by PT Timor in violation of Article X:3(a) of GATT 1994........302 
  2. Response of Indonesia .............................................................................302    (a) Japan's contention that the provision of "Pioneer 
    Status" to TPN violated Article X:3(a) of GATT 1994 
    is incorrect ..................................................................................302 
   (b) Indonesia has complied fully with the letter and the     spirit of Article X, which, in any case, does not     establish substantive obligations.................................................303    (c) The Government of Indonesia did not establish the     National Car Programme fo r the sole benefit of TPN ................304 
   (d) The Government of Indonesia is addressing properly 
    the issue of whether TPN has complied with the     relevant decrees:  in any case, this is a matter of     internal enforcement of Indonesian law, not of     compliance with Article X of GATT 1994.................................304 
  3. Rebuttal arguments made by Japan..........................................................304 - xiv - 
  
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 B. Claims under Article X:1 of GATT 1994 .............................................................305   1. Claims raised by Japan ............................................................................305 
  2. Indonesia's response to the claim under Article X:1................................307   3. Rebuttal arguments made by Japan..........................................................307 
X. ADDITIONAL ARGUMENTS REGA RDING WHETHER THE JUNE 1996 
 PROGRAMME IS AN EXPIRED MEASURE,  AND THE IMPLICATIONS IF SO .....309 
 A. Arguments of Indonesia........................................................................................309 
 B. Arguments of the United States ............................................................................310 
XI. CLAIMS RAISED UNDER THE TRIPs AGREEMENT.................................................311  A. Claims raised by the United States .......................................................................311 
 B. Response by Indonesia to the claims raised..........................................................313 
  1. The brand name requireme nt is consistent with the  
   national treatment obligation of Article 3 of the TRIPS Agreement .......313 
  2. The brand name requireme nt is consistent with the 
   obligations of Article 20 of the TRIPS Agreement .................................313 
  3. Article 65 exempts Indonesia from certain provisions of the 
   TRIPS Agreement....................................................................................314   4. A US car company would not have been precluded from     being a National Car producer .................................................................315 
 C. Rebuttal arguments made by the United States ....................................................315 XII. THIRD PARTY ARGUMENTS .......................................................................................318 
 A. India ...................................................................................................................... 318 
 B. Korea.....................................................................................................................3 18 
  1. Preliminary jurisdictional issue ...............................................................320 
  2. Substantive issues ....................................................................................321 
XIII. INTERIM REVIEW ..........................................................................................................3 22 
XIV. FINDINGS.................................................................................................................. .......323 
 A. Preliminary Rulings ..............................................................................................323   1. Presence of private lawyers as representatives of a party to  
the dispute.................................................................................................323 
2. The alleged loan to PT TPN as a measure covered by the terms  
of reference of this panel .........................................................................324 
3. Business proprietary information.............................................................324 
4. Whether the National Car  programme has expired and should 
therefore not be examined by this panel ..................................................325 - xv - 
  
  Page
  
B. Claims ...................................................................................................................326  
1. Claims of the complainants......................................................................326 
2. Indonesia’s general defence.....................................................................328 
C. Is the SCM Agreement the only “Applicable Law” to this Dispute? ...................329 
1. General considerations.............................................................................329 
2. Is there a general conflict between the SCM Agreement and 
Article III of GATT?................................................................................330 
3. Would the application of Article III of GATT to this dispute reduce 
the SCM Agreement to “inutility”? .........................................................332 
4. Article III:8(b) of GATT..........................................................................333 
5. Is the TRIMS Agreement applicable to this dispute? ..............................334 
6. Conclusion ...............................................................................................335 
D. Claims of Local Content Requirements................................................................335 
1. The relationship between the TR IMS Agreement and Article III of 
GATT 343 ..............................................................................................336 
2. The application of the TRIMS Agreement ..............................................337 
(a) Are the Indonesian measur es “investment measures”? ..............339 
(b) Are the Indonesian measures “trade-related”?............................342 (c) Illustrative List of the TRIMs Agreement ..................................342 
3. Article III:4 of GATT ..............................................................................345 
 E. Claims of Tax Discrimination...............................................................................346 
1. Is there a conflict between the provisions of  the  SCM Agreement 
and Article III:2 of GATT?......................................................................346 
2. Article III:2 of GATT ..............................................................................347 
(a) Article III:2, first sentence..........................................................348 
(b) Article III:2, second sentence .....................................................351 
3. Article III:8(b) of GATT..........................................................................352 
F. Claims of MFN Discrimination ............................................................................353 
1. General defences of Indonesia.................................................................354 
(a) Is the SCM Agreement the only agreement applicable to this 
dispute at the exclusion of Article I of GATT? ..........................354 
(b) Are the Claims Related to the June 1996 Car Programme 
Moot?..........................................................................................354 - xvi - 
  
 Page
 
2. Criteria for an Article I of GATT violation .............................................355 
(a) Are the tax and customs duty benefits of the February and 
June  1996 car programmes adva ntages of the types covered 
by Article I? ................................................................................355 
(b) Are these advantages offered “unconditionally” to all “like 
products”?...................................................................................356 
 (i) “like products”...............................................................356 
(ii) “unconditional advantages” ...........................................356 
G. Claims of Inadequate Publica tion and Partial Administration..............................358 
H. Claims of Serious Prejudice unde r Part III of the SCM Agreement.....................358 
1. Are the measures sp ecific subsidies?.......................................................359 
2. May the complainants bring a serious prejudice claim against 
Indonesia? ................................................................................................360 
3. Like product analysis...............................................................................361 
(a) Types of Cars..............................................................................362 
(b) Treatment of Cars Imported Unassembled .................................362 
(c) Products Not Originating in a Complaining Member.................362 
4. Should the Panel consider the effects of subsidies provided pursuant 
to the June 1996 Car Programme?...........................................................374 
5. Displacement and Impedance ..................................................................375 
(a) Market Share Data ......................................................................375 
(i) Relevance of Article 6.4 ................................................375 
(ii) Actual Sales and Market Share Data .............................376 
   (b) Non-introduction of New Models ..............................................382 
(i) EC-Origin Models .........................................................382 
(ii) US-Origin Models .........................................................384 
(iii) Assessment ....................................................................385 
   (c) Conclusion ..................................................................................386 
6. Price Undercutting ...................................................................................386 
(a) United States...............................................................................386 
(b) European Communities ..............................................................387 
7. Threat of Serious Prejudice......................................................................392 
 I. Claims under Article 28 of the SCM Agreement..................................................392 
 J. Claims under the TRIPS Agreement.....................................................................394 
1. Article 3 ...................................................................................................394 - xvii - 
  
 Page
 
(a) Acquisition of trademarks...........................................................395 
(b) Maintenance of trademarks.........................................................395 (c) Use of trademarks as specifically addressed in Article 20 .........396 
  2. Article 65.5 in Conj unction with Article 20 ............................................397 
XV. CONCLUSIONS AND RECOMMENDATION...............................................................397 WT/DS54/R, WT/DS55/R, 
WT/DS59/R, WT/DS64/R 
Page 1 
 
 
I. INTRODUCTION 
A. Background  
1. Complaint of Japan  
1.1 On 4 October 1996, Japan requested consultations  with Indonesia pursuant to Article 4 of the 
Understanding on Rules and Procedures Governing the Settlement of Disputes ("DSU"), Article 
XXII:1 of the General Agreement on Tariffs a nd Trade 1994 ("GATT 1994") and Article 8 of the 
Agreement on Trade-Related Investment Measures (the "TRIMs Agreement") regarding certain 
measures affecting the automotive industry of Indonesia (WT/DS55/1). 
1.2 On 29 November 1996, Japan requested additi onal consultations with Indonesia regarding the 
National Car Programme under Articles 1 and 4 of  the DSU, Article XXII:1 of GATT 1994 and 
Articles 7 and 30 of the Agreement on Subsidies and Countervailing Measures (the "SCM Agreement")  (WT/DS64/1). 
1.3 On 5 November and 3 December 1996, Japan and Indonesia held the consultations requested 
on 4 October 1996.  On 3 December 1996, also in Ge neva, Japan and Indonesia held the consultations 
requested on 29 November 1996.  No mutually satisfactory solution was reached.   
1.4 On 17 April 1997, Japan requested the establishment of a panel, pursuant to Articles 4.7 and 
6.1 of the DSU, Article XXIII:2 of GATT 1994, Artic le 8 of the TRIMs Agreement, and Article 30 of 
the SCM Agreement. Japan requested the panel to examine the consistency of various measures under 
the National Car Programme with Articles I:1, III:2,  III:4, X:1 and X:3(a) of GATT 1994, Article 2 of 
the TRIMS Agreement, and Articles 3.1(b) and 28.2 of the SCM Agreement.      
2. Complaint of the European Communities
 
1.5 On 3 October 1996, the European Commun ities requested consultations with Indonesia 
pursuant to Article 4 of the DSU, Article XXII of GATT 1994, Article 8 of the TRIMs Agreement 
and Articles 7 and 30 of the SCM Agreement, w ith respect to certain measures affecting the 
automobile industry (WT/DS54/1). 
1.6 The European Communities and Indonesia held  consultations on 6 November 1996 and on 
5 December 1996.  No mutually satisfactory solution was reached.   
1.7 On 12 May 1997, the European Communities re quested the establishment of a panel pursuant 
to Article XXIII:2 of GATT, Article 6 of the DSU,  Article 8 of the TRIMs Agreement (to the extent 
that it incorporates by reference Article XXIII of GATT) and Articles 7.4 and 30 of the SCM Agreement (to the extent that Article 30 incorp orates by reference Article XXIII of GATT).  The 
European Communities requested th e panel to examine the consistency of the measures identified 
with Articles I:1, III:2 and III:4 of GATT 1994, a nd Article 2 of the TRIMS Agreement.  The 
European Communities also requested  the panel to examine its compla int that the measures identified 
constitute "specific subsidies" within the meani ng of Articles 1 and 2 of the SCM Agreement which 
cause "serious prejudice" to the Community's interest in the sense of Article 6 of that Agreement.   
1.8 The European Communities also requested, in conjunction with its request for establishment 
of a panel, that the Dispute Settlement Body initia te the procedure provided in Annex V of the SCM 
Agreement pursuant to point 2 of that Annex.   WT/DS54/R, WT/DS55/R, 
WT/DS59/R, WT/DS64/R Page 2 
 
 3. Complaint of the United States
 
1.9 On 8 October 1996, the United States request ed consultations with Indonesia pursuant to 
Articles 1 and 4 of the DSU, Article XXII:1 of GATT 1994, Article 8 of the TRIMs Agreement (to 
the extent it incorporates by reference Article XXII of the GATT 1994), Articles 7 and 30 of the SCM 
Agreement (to the extent Article 30 incorporat es by reference Article XXII of the GATT 1994), and 
Article 64 of the TRIPS Agreement (to the extent it incorporates by reference Article XXII of the 
GATT 1994) regarding certain measures affecting trad e and investment in th e motor vehicle sector 
(WT/DS59/1). 
1.10 The United States and Indonesia held cons ultations on 4 November 1996 and 4 December 
1996, but failed to reach a mutually satisfactory solution.   
1.11 On 12 June 1997, the United States requested the establishment of a panel pursuant to 
Article 6 of the DSU, Article XXIII:2 of the GA TT 1994, Article 8 of the TRIMs Agreement (to the 
extent it incorporates by reference Article XXIII of the GATT 1994), Articles 7.4 and 30 of the SCM 
Agreement (to the extent Article 30 incorporat es by reference Article XXIII of the GATT 1994), and 
Article 64 of the TRIPS Agreement (to the extent  it incorporates Article XXIII of the GATT 1994).  
The United States requested the panel to examine the consistency of the measures identified with 
Articles I:1, III:2, III:4 and III:7 of GATT 1994, Ar ticles 3, 20, and 65 of the TRIPs Agreement, 
Article 28.2 of the SCM Agreement, and Article 2 of the TRIMS Agreement.  The United States also 
requested the panel to examine its complaint th at the measures identified constitute "specific 
subsidies" within the meaning of Articles 1 a nd 2 of the SCM Agreement which cause "serious 
prejudice" to the United States' interest in the sense of Article 6 and 27 of that Agreement.   
1.12 The United States also requested, in conjunctio n with its request for establishment of a panel, 
that the Dispute Settlement Body initiate the pro cedure provided in Annex V of the SCM Agreement 
pursuant to point 2 of that Annex.  The United St ates noted that this procedure had already been 
invoked in the context of the European Communities'  parallel request for establishment of a panel, 
and requested that the information-gathering pr ocess on the United States and European Communities 
claims be combined into a single exercise.   
B. Establishment and Co mposition of the Panel  
1.13 At its meeting on 12 June 1997, the DSB establis hed a panel pursuant to requests by Japan and 
the European Communities (WT/DS55 /6-WT/DS64/4, and WT/DS54/6, resp ectively).  At its meeting of 
30 July 1997, the DSB agreed to th e United States' request for estab lishment of a panel (WT/DS59/6), 
and also agreed, as provided for in Article 9 of the DSU in respect of multiple complainants, that the 
Panel established on 12 June 1997 to examine the comp laints by Japan and th e European Communities 
would also examine the United States' complaint.  
1.14 The terms of reference of the Panel are the following: 
"To examine, in the light of the relevant pr ovisions of the covered agreements cited by 
Japan in document WT/DS55/6-WT/DS64/ 4, by the European Communities in 
document WT/DS54/6, and by the United Stat es in document WT/DS59/6, the matter 
referred to the DSB by Japan, the European  Communities and the United States in those 
documents and to make such findings as  will assist the DSB in making the 
recommendations or in giving the rulings  provided for in those agreements". 
1.15 Pursuant to a joint request by Japan and th e European Communities, and as provided for in 
paragraph 7 of Article 8 of the DSU, on 29 July 1997 the Director-G eneral composed the Panel as 
follows: WT/DS54/R, WT/DS55/R, 
WT/DS59/R, WT/DS64/R 
Page 3 
 
 
Chairman: Mr. Mohamed Maamoun Abdel Fattah 
Members: Mr. Ole Lundby 
  Mr. David John Walker 
1.16 India and Korea reserv ed their rights as third parties to the dispute. 
C. Information-Gathering Procedure under Annex V of the SCM Agreement  
1.17 At its meeting of 12 June 1997, the DSB agreed  to the European Communities' request for the 
initiation of the Annex V procedure, and pursu ant to paragraph 4 of Annex V, designated 
Mr. Stuart Harbinson as its representa tive for purposes of that procedure. 
1.18 The 60-day period for the information-gather ing procedure provided for in Annex V to the 
SCM Agreement with respect to the European Communities' complaint began on the date of 
establishment of the Panel to hear the European  Communities' and Japan's claims, 12 June 1997, and 
ended on 11 August 1997.   
1.19 The United States also invoked the 60-day in formation-gathering procedure provided for in 
Annex V to the SCM Agreement.  Because the United States joined the dispute as a party only on 
30 July 1997, the 60-day period related to its clai ms was a separate, late r period, which ended 
22 September 1997.  All parties agreed that first subm issions by complainants should be due four weeks 
after the end of the second phase of the Annex V procedure (rel ated to the United Stat es' claims), so that 
all information developed through that procedure c ould be used in the preparation of the first 
submissions.  This postponement of the deadline for fi rst submissions, to take account of both phases of 
the Annex V procedure, necessitated  an equal postponement of the re st of the Panel's timetable.   
D. Panel Proceedings  
1.20 The Panel met with the parties on 3/4 Decem ber 1997 and on 13/15 January 1998.  The Panel 
met with the third parties on 4 December 1997.   
1.21 On 11 December 1997, the Chairman of the Pa nel informed the DSB that the Panel would not 
be able to issue its report within six months of the composition and establishment of the terms of 
reference of the Panel.  The reasons for the delay are the postponement of the schedule due to the 
Annex V procedure, as discussed above and set forth in WT/DS55/ 9-WT/DS64/7-WT/DS54/9-
WT/DS59/8.   
II. FACTUAL ASPECTS 
2.1 This dispute concerns a seri es of measures maintained by Indonesia with respect to motor 
vehicles and parts and components thereof.  The following is a summary of the factual information 
presented to the Panel, with respect to the tax and tariff treatment of imported  motor vehicles and parts 
and components thereof, and with respect to the measures at issue.   WT/DS54/R, WT/DS55/R, 
WT/DS59/R, WT/DS64/R Page 4 
 
 A. Tax and Tariff Trea tment in Indonesia of Imported Comp letely Built-Up Motor Vehicles
 
2.2 Completely Built-Up motor vehicles ("CBUs") imported into Indonesia are subject to luxury 
tax as set forth in Table 10 below, as well as to import duties.  Indonesia's current import duty rates on CBUs are as follows: 
Table 1 
Import Duty Rates on CBUs 
 Vehicle Category Import Duty 
Motor Vehicles for the Transport of 
Persons    Sedan  (Unit) 200% 
Commercial Motor Vehicles1 
 Category I (Unit)  Category II/III (Unit)  Category IV (Unit) 
 Category V (Unit) 80% 
70% 
105% 
5% 
B. Measures at Issue  
2.3 The measures at issue are the measures compri sing:  (1) "the 1993 Incentive System", which 
was amended in 1995 and 1996 (re ferred to herein as the "1993 pr ogramme"), (2) "the National Car 
Programme", which encompasses the so-called "F ebruary 1996 programme" and "the June 1996 
programme", and (3) a $US690 million loan2 to PT Timor Putra Nasional ("PT TPN" or "TPN").  All 
complainants raise claims with respect to the National Car Programme, and the European 
Communities and the United States also raise clai ms with respect to the 1993 programme.  In 
addition, the United States raises claims with r espect to the $US690 million loan.  These measures can 
be summarized as follows: 
1. "1993 Programme " 
2.4 In 1993, Indonesia adopted the so-called 1993 Incentive System.  The 1993 Incentive System 
consists of: 
 (a) import duty relief (reductions or exem ptions) on imports of automotive parts and 
accessories based on (1) the per cent of local content of the finished motor vehicle in 
which the parts are used, and (2) the type of vehicle in which the parts are used.  
                                                      
1 The commercial vehicle categories are defined as follows:   
I Gross Vehicle Weight up to 5 tons, with single drive-axles. 
II   Gross Vehicle Weight exceed ing 5 tons up to 10 tons. 
III   Gross Vehicle Weight exceed ing 10 tons up to 24 tons. 
IV   Gross Vehicle Weight up to 5 tons, with double drive-axles. 
V   Gross Vehicle Weig ht exceeding 24 tons. 
2 These designations are used in this report for c onvenience.  The United Stat es has argued that the 
National Car Programme is all a single programme, comprised of the February 1996 measures, the June 1996 
measures and the $US690 million loan to TPN.  Japan's view is that most of Government Regulation No. 
20/1996 and Government Regulation No. 36/1996 are not related to "national motor vehicles" and are outside the scope of the "National Car Programme". WT/DS54/R, WT/DS55/R, 
WT/DS59/R, WT/DS64/R 
Page 5 
 
 
 (b) import duty relief on imports of “subpa rts” used to make automotive parts and 
accessories based on (1) the per cent of local content of the completed part or accessory, and (2) the type of motor vehicl e in which the part or accessory is used. 
 (c) exemption from or reduction of luxury sales tax on goods for certain categories of 
motor vehicles.  
 (a) Decree No. 114/1993
 
2.5 The first decree in the 1993 programme was Minister of Industry Decree 
No. 114/M/SK/6/1993 (June 9, 1993) (“The Determinati on of Local Content Levels of Domestically 
Made Motor Vehicles or Components”).3  Decree No. 114/1993 defines "local components" or "local 
sub components" as "parts or sub parts of Moto r Vehicles which are domestically made and have 
Local Contents at a level of more than 40 per cent for [light commercial vehicles and passenger cars] 
... ".4  The decree sets forth import duties dependent on specified local content rates for passenger 
cars, commercial vehicles, and automotive parts and components.   
2.6 The local content rates and corresponding import duty rates applicable under this decree to 
parts for passenger cars are set forth below:   
Table 2 
Passenger Car Parts 
Local Content Rates Import Duty Rates 
less than 20% 100% 
20% to 30% 80% 
30% to 40% 60% 
40% to 60% 40% 
more than 60% 0% 
Thus, if the local content of a passenger car was le ss than 20 per cent, the importer paid an  import 
duty of 100 per cent on imported parts, etc. 
2.7 The local content rates and corresponding import duty rates applicable under this decree to 
parts for light commercial vehicles are set forth below:   
                                                      
3 Indonesia Exhibit 8. 
4 As used herein, the term "light commercial vehicles " refers to commercial motor vehicles with a gross 
vehicle weight up to 5 tons with single axle drives and commercial motor vehicles with a gross vehicle weight 
up to 5 tons with double axle drives, including such vehicles as jeeps, vans, minivans, sports utility vehicles, etc.  The term "passenger car" as used herein refers to sedans and station wagons. WT/DS54/R, WT/DS55/R, 
WT/DS59/R, WT/DS64/R Page 6 
 
 
Table 3 
Light Commercial Vehicle Parts 
Local Content Rates Import Duty Rates 
less than 20% 40% 
20% to 30% 30% 
30% to 40% 20% 
more than 40% 0% 
2.8 The local content rates and corresponding import duty rates applicable under this decree to 
parts for subparts for passenger cars and light commercial vehicles are set forth below:   
Table 4 
Subparts of Passenger Cars a nd Light Commercial Vehicles 
 Local Content Rates Import Duty Rates 
less than 20% 40% 
20% to 30% 30% 
more than 30% up to 40% 20% 
more than 40% 0% 
 (b) Decree No. 645/1993  
2.9 The purpose of the second decree forming pa rt of the 1993 Programme, Minister of Finance 
Decree No. 645/KMK.01/1993 (June 10, 1993) (“The Relief of Import Duty on the Import of Certain 
Parts and Accessories of Motor Vehicles for the Purpose of Automotive Assembling and/or 
Manufacture”), is to authorize the incentives identified above under Decree No. 114/1993.5 
                                                      
5 Indonesia Exhibit 36. WT/DS54/R, WT/DS55/R, 
WT/DS59/R, WT/DS64/R 
Page 7 
 
 
 (c)  Decree No. 647/1993  
2.10 A third decree forming part of the 1993 Programme, Minister of Finance Decree No. 
647/KMK.04/1993 (June 10, 1993) (“The Kinds and Types of Motor Vehicles Subject to Sales Tax on Luxury Goods”) provides reduced Indonesian sales tax on luxury goods for motor vehicles with 
specified local content rates.
6 Specifically, passenger cars with cylinder capacities of 1600cc or less 
and jeeps are subject to a luxury tax of 20 per cent provided that their local content exceeds 60 per cent.
7  (An exception is made for motor vehicles u sed for public purposes, such as police vans, 
ambulances, fire-engines, etc.).  If the local conten t is not in excess of 60 per cent, the applicable 
luxury tax rate is 35 per cent. 
2.11 The local content rates and corresponding luxury tax rates applicable under this decree to 
passenger cars with cylinder capacities of 1600 cc or less and jeeps are set forth below:    
Table 5 
Passenger Cars < 1600 cc and Jeeps 
 Local Content Rates Luxury Tax Rate 
greater than 60% 20% 
60% or less 35% 
 (d) Decree No. 223/1995  
2.12 In 1995, through Minister of Finance Decree No. 223/KMK.01/1995 (May 23, 1995) (“The 
Improvement of Decree of the Minister of Finance Number 645/KMK.01/1993 on the Relief of 
Import Duty on Parts and Accessories of Motor Ve hicles for the Purpose of  Automotive Assembly 
and/or Manufacture”), Indonesia modified the schedule of import duty rates corresponding to specified local content rates.
8  The local content rates and corresponding import duty rates for 
imported parts used in the manufacture or assembly of passenger cars and commercial vehicles were 
modified as set forth below:  
Table 6 
Parts for Passenger Cars and Commercial Vehicles 
 Sedans and station wagons (HS 87.03)  
 Local content (%)      Import duty (%)  
 less than 20       65  20-30       50  30-40       35  40-50       20  50-60       10 
 M o r e  t h a n  6 0       0  
                                                     
 
6 Indonesia Exhibit 33. 
7Article 3 of Decree No. 647/1993 defines “jeeps” as  “multi-purpose four wheeled motor vehicles, with 
double differential gears, chassis, total g.v.w. of 5 (five) tons or less and capacity of transporting less than 10 
(ten) people. 
8Indonesia Exhibit 27. WT/DS54/R, WT/DS55/R, 
WT/DS59/R, WT/DS64/R Page 8 
 
 
 Pick-ups (HS 87.04), Minibuses (HS 87. 02 or 87.03) and Jeeps (HS 87.03)  
 Local content (%)
     Import duty (%)  
 Less than 20      25  20-30       15 
 30-40       10 
 m o r e  t h a n  4 0       0  
 Buses (HS 87.02) and Trucks (HS 87.04) with a total weight of more than 5 tons but not 
more than 24 tons  
 Local content (%)
     Import duty (%)  
 L e s s  t h a n  2 0       2 5  
 20-30       15  m o r e  t h a n  3 0       0  
 Two-wheeled motor vehicles (HS 87.11)  
 Local content (%)
     Import duty (%)  
 L e s s  t h a n  2 0       2 5  
 20-30       15  30-40       10  m o r e  t h a n  4 0       0  
2.13 The local content rates and corresponding impor t duty rates for imported subparts used in the 
manufacture or assembly of parts and accessories for passenger and co mmercial vehicles were modified 
as set forth below:  
Table 7 
Subparts of Passenger a nd Commercial Vehicles 
 Sedans and Station wagons (HS 87.03), Pi ck-ups (HS 87.04), Minibuses (HS 87.02 or 
87.03) and Jeeps (HS 87.03)  
 Local content (%)
     Import duty (%)  
 L e s s  t h a n  2 0       2 5   20-30       15  30-40       10  m o r e  t h a n  4 0        0  
 Buses (HS 87.02) and Truck (HS 87.04) with a to tal mass of more than 5 tons but not more 
than 24 tons  
 Local content (%)
     Import duty (%)  
 L e s s  t h a n  1 0       2 5   10-20       15  m o r e  t h a n  2 0       0  
 Two wheel motor vehicles (HS 87.11)  
 Local content (%)
     Import duty (%)  
 l e s s  t h a n  2 0       2 5   20-30       15  30-40       10  m o r e  t h a n  4 0       0  WT/DS54/R, WT/DS55/R, 
WT/DS59/R, WT/DS64/R 
Page 9 
 
 
 (e) Decree No. 36/1997  
2.14 Minister of Finance Decr ee No. 36/KMK.01/1997 (January 21, 1997) ("The Granting of Import 
Duty Relief to Certain Parts and Accessories of Mo tor Vehicles for the Assemb ly and or Manufacturing 
of Motor Vehicles”)9 reissues the schedule of import duty re lief set forth in Decree No. 223/1995  in 
light of changes in the underlying customs statutes.  
2. "The National Car Programme " 
2.15 Two sets of measur es have been identified by all parties under the 1996 National Car 
programme:   
2.16 The first set of measures - the February 1996 Programme - provides for the grant of “pioneer” 
or National Car company status to Indonesian car comp anies that meet specified criteria as to ownership 
of facilities, use of tr ademarks, and technology.  Maintenance of  pioneer status is dependent on the 
National Cars' meeting increasing local content requir ements over a three year period.  The benefits 
provided are exemption from luxury tax on sales of National Cars, and exemp tion from import duties on 
parts and components.   
2.17 The second set of measures - the June 1996 Programme - provides that National Cars 
manufactured in a foreign country by Indonesian nationals and which fulfil the local content 
requirements prescribed by the Mini ster of Industry and Trade, shall be treated the same as National 
Cars manufactured in Indonesia, i.e. exempt from import duties and luxury tax.  In accordance with 
Decree 142/96, imported Natio nal Cars are deemed to comply wi th the 20 per cent local content 
requirement for the end of the first production year  if the overseas producer manufacturing the National 
Cars “counter-purchases ” Indonesian parts and components that account for at least 25 per cent of the 
C&F value of the imported cars. 
2.18 The United States alleges a third element of the National Car Programme - a series of loans, 
totalling US$690 million with a maturity of 10 y ears, made on 11 August 1997, to TPN (the only 
pioneer company) for TPN to carry out the national ca r project.  The loans allegedly were made by a 
consortium of state-owned and private banks at the di rection of the Government of Indonesia, with the 
state-owned banks providing at least 50 per cent of the financing. 
 (a) "The February 1996 Programme " 
2.19 The so-called February 1996 programme consis ts of a series of de crees and regulations 
published in February and March 1996. 
 (1) Presidential Instruction No. 2/1996  
2.20 Presidential Instruction No. 2/1996 (“The Deve lopment of the National Automobile Industry”) 
was issued on 19 February, 1996.10  The purpose of Presidential In struction No. 2/1996 is “to continue 
to strengthen the self-reliance of th e nation, particularly in providing means of land transportation in the 
form of the production of a national car . . . ”  Pres idential Instruction No. 2/1996 directs the Mi nister of 
Industry and Trade, the Minister of Finance, and th e State Minister for the Mobilization of Investment 
Fund/Chairman of Capital Investment Coordinati ng Board to implement a series of “provisions.” 
2.21 First, Presidential Instruction No. 2/1996 di rects these ministers collectively to implement 
“measures in close coordination to  realize as fast as possible the development of the national car 
                                                      
9Indonesia Exhibit 9. 
10Indonesia Exhibit 1. WT/DS54/R, WT/DS55/R, 
WT/DS59/R, WT/DS64/R Page 10 
 
 industry, which meets the following criteria:  (a) the us e of a brand name of its own;  (b) domestically 
produced; (c) the use of components which are domestically produced.” 
2.22 Second, Presidential Instruction No. 2/1996 di rects the Minister of Industry and Trade “to 
foster, guide and grant facilities, in a ccordance with the use of provisions of laws in effect such that the 
national car industry:  (a) uses a br and name of its own;  (b) uses components produced domestically as 
much as possible;  (c) is able to export its products.” 
2.23 Third, Presidential Instruc tion No. 2/1996 directs the Minister of Finance to “grant the 
following facilities in the field of taxation in accord ance with regulations in force:  (a) import duty 
exemption for importation of components produced domest ically as much as possible which still need to 
be imported;  (b) the assessment of the Value Added Tax at the rate of 10 per cent upon the delivery of 
the produced automobiles;  (c) payment of the Sa les Tax on Luxury Goods which is owed upon the 
delivery of the produced automobiles w ill be borne by the Government.” 
 (2) Decree No. 31/1996
 
2.24 Also on 19 February 1996, Indonesia issued Minister of Industry and Trade Decree No. 
31/MPP/SK/2/1996 (“The Na tional Motor Vehicle”).11  Decree No. 31/1996 identifies its purpose as “to 
implemen[t] Presidential Instruction No.2 of 1996 on the Development of the National Car Industry ... in 
the framework of promoting industry ... .” 
2.25 Decree No. 31/1996 sets fort h the requirements for designation as a “national motor vehicle”. 
Specifically, national motor vehicles are those which: 
 (a) are made domestically at production facili ties owned by national industrial enterprises 
or Indonesian corporations, the shares of which are wholly owned by Indonesian 
citizens; 
 (b) use "a brand name of its own which has never been registered by any other party in 
Indonesia and which is owned by an Indonesian companies/citizen"; and 
 (c) are "developed with technology, constr uction, design and engine ering based on national 
capability applied by stages." 
The Decree also provides that “the motor vehicle in dustrial enterprise whic h produces national motor 
vehicles in accordance with the requirements set fort h in Article 1 will be granted the status of ‘Pioneer 
enterprise'.” 
2.26 Decree No. 31/1996 sets forth a schedule of local content rates to be achieved by a “national 
motor vehicle industrial enterpri se given 'Pioneer status'”: 
                                                      
11Indonesia Exhibit 2. WT/DS54/R, WT/DS55/R, 
WT/DS59/R, WT/DS64/R 
Page 11 
 
 
Table 8 
Local Content Schedule fo r National Motor Vehicle 
 Time Period Local Content Rate 
end of the first year > 20% 
end of the second year > 40% 
end of the third year > 60% 
 (3) Decree No. 82/1996  
2.27 The third measure issued on February 19, 1996,  was Decree of the Minister of Finance No. 
82/KMK.01/1996 (“The Improvement of the Decree of the Minister of Finance No. 645/KMK.01/1993 
on the Grant of Import Duty Relief to Certain Pa rts and Components of Motor Vehicles for the 
Assembly Purposes and/or Manufacture of Motor Vehicles as Previ ously Improved by the Decree of the 
Minister of No. 223/KMK.01/1995”).12  Decree No. 82/1996 establishe s that parts and components 
imported by a producer/assembler of National Cars , for assembly or manufacture of National Cars 
fulfilling the local content rates identified above, are exempted from import duties.   
 (4) Government Regulation No. 20/1996  
2.28 The final measure issued on February 19,  1996, was Government Regulation No. 20 (“The 
Amendment of Government Regulation No. 50 of 19 94 Regarding the Implementation of Law No. 8 of 
1983 on Value Added Tax on Goods an d Services and Sales Tax on L uxury Goods as Amended by Law 
No. 11 of 1994”).13  By this regulation, National Cars fulf illing the specified requirements, including 
local content rates, were exempted from luxury tax. 
2.29 Thus, Regulation No. 20/1996 establis hed the following luxury tax structure: 
                                                      
12Indonesia Exhibit 21. 
13Indonesia Exhibit 20. WT/DS54/R, WT/DS55/R, 
WT/DS59/R, WT/DS64/R Page 12 
 
 
Table 9 
Luxury Tax Rate Schedule 
 Type of Motor Vehicle Luxury Tax Rate 
passenger cars > 1600cc 
jeeps with local content ≤ 60%  
35% 
light commercial vehicles    (other 
than jeeps) using diesel  
25% 
passenger cars ≤ 1600cc 
jeeps with local content > 60% light commercial vehicles    (other than jeeps) using gas  
 
20% 
national motor vehicles 0% 
 (5) Decree of the State Mini ster for Mobilization of Invest ment Funds/Chairman of the 
  Investment Coordinating Board No. 01/SK/1996  
2.30 On 27 February 1996, Indonesia issued Decree  of the State Minister  for Mobilization of 
Investment Funds/Chairman of the Investment Coordinating Bo ard No. 01/SK/1996 ("Investment 
Regulations Within the Framework of the Realizatio n of the Establishment of the National Automobile 
Industry").14  The decree provided that "to realise the es tablishment of [a] 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 that purpose."  
 (6) Ministry of Industry and Trad e Decree No. 002/SK/DJ-ILMK/II/1996   
2.31 On 27 February 1996, Decree No. 002/SK/DJ-I LMK/II/1996 of the Ministry of Industry and 
Trade was issued.15  This Decree designated PT Timor Putra Nasional (“TPN”) as "a pioneer national 
motor vehicle enterprise."  On 5 March 1996, Deci sion No. 02/SK/1996 of the State Minister for the 
Mobilization of Investment Funds/Cha irman of the Capital Investment Co-ordinating Board was issued.  
This decision designated TPN "to establ ish and produce a National Car."    
2.32 The National Car, the "Timor", was to be ba sed on the design and other technology of the Kia 
Sephia, model produced by Kia Moto rs of Korea.  The Timor was to  be produced initially in knock-
down form in Korea by Kia Motors, for export to In donesia, where it was to be assembled at TPN's 
facility at Karawang, Indonesia.  (At the ti me that the February 1996 programme was announced, 
construction of this facility had not yet begun.)  TPN was to gradually increase the level of local content 
of the Timor.   
 (b) "The June 1996 Programme " 
2.33 The so-called June 1996 programme comprises a series of decrees issued in June 1996. 
                                                      
14Indonesia Exhibit 4. 
15Indonesia Exhibit 41. WT/DS54/R, WT/DS55/R, 
WT/DS59/R, WT/DS64/R 
Page 13 
 
 
 (1) Presidential Decree No. 42/1996  
2.34 On 4 June 1996, Presidential Decree No. 42/1996 (“The Production of National Cars”) was 
issued.16  This Decree No. 42/1996 stated that:  
National cars which are made overseas by I ndonesia workers and fulfil the local content 
stipulated by the Minister of  Industry and Trade will be trea ted equally to those made in 
Indonesia. 
In other words, National Cars in fully built-up form could be imported free of duty and luxury tax, if 
they were made by Indonesian personnel and fulfil led the local content requirements for the National 
Car.  
2.35 This Decree also provided that this tax a nd duty exemption would be granted only once for a 
maximum period of one year, and would involve a tota l number of vehicles to  be stipulated by the 
Minister of Industry and Trade.  In Minister of Industry and Trade Decree No. 1410/MPP/6/1996 (30 
June 1996)17, TPN was authorized to import 45,000 Timors  pursuant to Decree No. 42/1996.   
 (2) Regulation No. 36/1996  
2.36 Also on 4 June 1996, Indonesia issued G overnment Regulation No. 36/1996 (“The Amendment 
of Government Regulation No. 50 of 1994 on the Implementation of Law No. 8 of 1983 on Value 
Added Tax on Goods and Services and Sales Tax on Luxury G oods as Amended by Law No. 11 of 
1994, as Lastly Amended by Gove rnment Regulation No. 20/1996”).18  Regulation No. 36/1996 made 
further revisions to the luxury ta x on motor vehicles, which, as di scussed, had been most recently 
revised on 19 February 1996, in Regulation No. 20/1996. 
2.37 Regulation No. 36/1996 established the following luxury tax schedule: 
                                                      
16Indonesia Exhibit 6. 
17Indonesia Exhibit 13. 
18Indonesia Exhibit 3. WT/DS54/R, WT/DS55/R, 
WT/DS59/R, WT/DS64/R Page 14 
 
 
Table 10 
Luxury Tax Rate Schedule
 
Type of Motor Vehicle Luxury Tax Rate 
passenger cars ≥ 1600cc. 
passenger cars with local content ≤ 60%. 
jeeps with local content ≤ 60%. 
buses with local content ≤ 60%.  
35% 
combis, minibuses, vans and pick-ups using 
    diesel as fuel, with local content ≤ 60%.   
25% 
combis, minibuses, vans and pick-ups using 
    gasoline as fuel with local content ≤ 60%.    
20% 
sedans and station wagons < 1600cc  
   manufactured in Indonesia with local  
   content > 60%. combis, minibuses, vans and pick-ups using     gasoline or diesel as fuel, manufactured in     Indonesia with local content with local 
    content > 60%. 
buses manufactured in Indonesia.  
motorcycles < 250cc manufactured in Indonesia. national motor vehicles.  
 
0% 
 (3) Decree No. 142/1996   
2.38 As indicated, Presidential Decree No. 42/ 1996 permitted the “national motor vehicle” to be 
produced abroad for a period of one  year and still receive the duty and tax benefits of the National 
Motor Vehicle programme, if the local content requi rements for the National Car (20 per cent local 
content for the first year) were met and the ca r was produced by Indonesian personnel.   
2.39 The Decree of the Minister of Industr y and Trade No. 142/MPP/Kep/6/1996, issued 
5 June 1996 (“The Production of the National Cars”)19 established guidelines for meeting the local 
content requirement referred to in Decree 42/1996.  Decree No. 142/1996 provides that “the production 
of national cars can be carried out  overseas ... on the condition that I ndonesian parts and components are 
used”, and then st ates further that “[t]he procurement of I ndonesian-made parts and components shall be 
performed through the system of c ounter purchase of parts and compon ents of motor vehicles by the 
overseas company carrying out the production and ree xporting of national cars  to Indonesia.”  In 
addition, the decree states that “[t]he value of the counter purchase ... shall be fixed at the minimum of 
25% (twenty-five per cent) of the import value of the national cars assembled abroad (C&F value).” 
2.40 In other words, counter purchases by the ove rseas producer of the National Car of Indonesian 
motor vehicle parts and components worth at least 25 per cent of the C&F import value of the imported 
National Cars would satisfy the local cont ent requirements for the National Car.  
                                                      
19Indonesia Exhibit 7. WT/DS54/R, WT/DS55/R, 
WT/DS59/R, WT/DS64/R 
Page 15 
 
 
 (4) Audit of TPN's performance under Decree 142/1996  
2.41 Indonesia has submitted a letter to the Panel dated January 1998, containing the results of an 
audit of TPN's compliance with the counterpurchas e requirement of Decree No. 142/1996.  The letter 
indicates that TPN was found in the audit not  to have met the count erpurchase requirement. 
3. The US$690 million loan to TPN  
2.42 The United States' claims include one additional measure, which it characterizes as a further 
component of the National Car Programme: a loan  provided on 11 August 1997.  According to the 
United States, at the direction of the Indonesian Government a consortium of four government-owned 
banks and twelve private banks de cided to disburse US$650 million in ten-year loans to TPN to carry 
out the national car project.  The United States also  asserts that one of the Government-owned banks 
involved previously had disbursed a US$40 million br idging loan to TPN, bringing the total loan 
amount to US$690 million.  According to the United States, the loans reportedl y will carry an annual 
interest rate of 3 per cent over the 3-6 month deposi t rate, a maturity of 10 year s, and a grace period of 
3 years, and the four government-owned banks will provide one-half of the $650 million loan. 
2.43 On 25 February 1998, Indonesia notified the Su bsidies Committee that, as of 21 January 1998, 
it had terminated all subsidie s previously granted under the National Car programme.  On 
2 March 1998, Indonesia notified the Pa nel and requested the Panel to terminate the di spute settlement 
proceeding, at least as it relates to th e 1996 National Car programme measures.  
C. Notifications by I ndonesia to WTO Committees  
2.44 On 23 May 1995, Indonesia made a notification with respect to the 1993 Incentive System to 
the TRIMs Committee unde r Article 5.1 of the TRIMs Agreem ent (G/TRIMS/N/1/IDN/1).  On 
28 October 1996, Indonesia notified the TRIMs Commit tee that it was “withdraw ing” its notification 
related to automobiles because it consid ered that its programme was not a TRIM 
(G/TRIMS/N/1/IDN/1/Add.1); on the same day Indonesia made a notification with respect to its 1993 Incentive System and its 1996 National Car progr amme to the SCM Committee (G/SCM/N/16/IDN). 
III. FINDINGS AND RECOMMENDATI ONS REQUESTED BY THE PARTIES
20 
 A. Japan  
3.1 Japan  requests the Panel to find that: 
 (a) the luxury sales tax exemption with re gard to domestically produced National Cars 
pertaining to the February 1996 National  Car Programme measures identified21 is 
inconsistent with Article III:2 of GATT 1994,  since imported automobiles are subject to 
luxury sales tax in excess of that applied to the like domestic products (i.e. National 
Cars); 
 (b) the local content requirements with rega rd to domestically produced National Cars  
pertaining to the February 1996 National Ca r Programme measures identified are 
inconsistent with Article III:4 of GATT 1994, since the requirements accord to products 
                                                      
20The descriptions in this section of the findings and recommendations requested by the parties are as 
they appear in the parties' submissions.  These descriptions do not necessarily correspond to the parties' claims 
as identified in their requests for a panel.   
21Decree Nos. 114/1993, 645/1993. WT/DS54/R, WT/DS55/R, 
WT/DS59/R, WT/DS64/R Page 16 
 
 
imported from Japan treatment less favourable  than that accorded to like domestic 
products; 
 (c) the local content requirements and the ex emption from customs tariff and luxury sales 
tax pertaining to the February 1996 Nationa l Car Programme measures identified are 
trade related investment measures as stipulated  in paragraph 1(a) of  the Illustrative List 
annexed to the TRIMs Agreement, and are ther efore inconsistent with Article 2 of the 
TRIMs Agreement; 
 (d) the customs tariff exemption with rega rd to the import of automotive parts and 
components and the sales tax exemption pertaining to the February 1996 National Car 
Programme measures identifie d are inconsistent with Ar ticle I:1 of GATT 1994, since 
the exemptions are not accorded to the like products originating in all other members 
including Japan; 
 (e) the exemption from customs tariff and sales tax granted under the extended National 
Car Programme of June 1996
22 solely to the completed automobiles originating in the 
Republic of Korea is inconsistent with Ar ticle I:1 of GATT 1994, since the exemption 
is not accorded to the like products origin ating in other Members including Japan;  
 (f) the extended National Car Programme meas ures were not prompt ly published and have 
not been administered in a uniform, impa rtial and reasonable manner, thus being 
inconsistent with Articles X: 1 and X:3(a) of GATT 1994.   
3.2 Japan  requests that the Panel recommend that I ndonesia bring its measures into conformity 
with its obligations under GA TT 1994 and the TRIMs Agreement. 
 B. European Communities    
3.3 The European Communities  requests the Panel to find that: 
 (a) Indonesia violates the provisions of Articl e III:2, first sentence, by exempting from the 
luxury sales tax the sales of the follo wing categories of  motor vehicles: 
  (i) domestically manufactured motor cy cles with engines of 250 cc or less; 
  (ii) combines, minibuses, vans and pi ck-ups using gasoline as fuel which 
are manufactured domestically and have a local content of more than 60 per 
cent; 
  (iii) combines, minibuses, vans and pi ck-ups using diesel oil as fuel which 
are manufactured domestically and have a local content of more than 60 per 
cent; 
  (iv) domestically  manufactured buses; 
  (v) domestically manufactured se dans and stations wagons of less 
than 1,600 cc with a local content of more than 60 per cent;   
  (vi) National Cars assembled in Indonesia by pioneer companies;  and 
                                                      
22Presidential Decree No. 42/1996, Decree No. 142/1996. WT/DS54/R, WT/DS55/R, 
WT/DS59/R, WT/DS64/R 
Page 17 
 
 
  (vii) imported National Cars. 
 (b) the following measures favour the “use” by Indonesian car manufac turers of domestic 
parts and components over “lik e” imported parts and compon ents and are, accordingly, 
inconsistent with Article III:4 of GATT: 
  (i) the exemption from the luxury sales tax of locally manufactured 
combines, minibuses, vans and pick-ups  with more than 60 per cent local 
content; 
  (ii) the exemption from the luxury sales tax of locally manufactured 
sedans and stations wagons of less than  1,600 cc with more than 60 per cent 
local content; 
  (iii) the exemption from the luxury sa les tax of National Cars assembled in 
Indonesia by pioneer companies meeting certain local content requirements; 
  (iv) the exemption from the luxury sa les tax of National Cars assembled in 
Korea by “overseas producers” meeting certain counter-purch asing obligations; 
  (v) the grant of import duty relief to parts and components used in the 
assembly of motor vehicles (or of othe r parts and component s for the assembly 
of motor vehicles) in Indonesia based on the finished vehicles  (or the parts and 
components)  meeting certain local content requirements;  
  (vi) the exemption from import dutie s for parts and components used for 
the assembly of National Cars in I ndonesia by pioneer companies meeting 
certain local content obligations. 
 (c) the following measures are inconsistent with I ndonesia's obligations under Article I:1 of 
GATT: 
  (i) the exemption from customs duties on imports of National Cars;   (ii) the exemption from the sales tax on luxury goods for imported 
National Cars; 
  (iii) the exemption from the sales tax on luxury goods for National Cars 
assembled in Indonesia; and 
  (iv) the exemption from custom s duties on imports of parts and 
components for the assembly of  National Cars in Indonesia. 
 (d) the measures listed in paragraph b. above are also TRIMs inconsistent with Article III 
of GATT and, accordingly, that by applying th ose measures Indonesia is in violation of 
its obligations under Article 2.1 of the TRIMs Agreement. 
 (e) the following incentives granted to PT TPN under the National Car Programme 
constitute "specific subsidies" within the meaning of Articles 1 and 2 of the SCM 
Agreement and cause "serious prejudice" to th e interests of the Community in the sense 
of Article 5(c) of that Agreement: WT/DS54/R, WT/DS55/R, 
WT/DS59/R, WT/DS64/R Page 18 
 
   (i) customs duty relief for parts and components intended for assembly 
into National Cars; 
  (ii) exemption from the luxu ry sales tax for National Cars;  
  (iii) customs duty relief for National Cars imported from Korea.  
 C. United States
 
3.4 The United States  requests the Panel to find that: 
 (a) Indonesia’s system of tariff and tax incentives under the 1993 Incentive System23 and 
National Car programmes24 and the government-directed $690 million loan to TPN are 
inconsistent with Article III:4 of GATT 1994 and are not covered by Article III:8 of 
GATT 1994; 
 (b) Indonesia’s discriminatory application of the luxury sales  tax is inconsistent with 
Article III:2, first sentence, of GATT 1994; 
 (c) alternatively, Indonesia' s discriminatory application of the luxury sales tax is 
inconsistent with Article III:2, second sentence; 
 (d) Indonesia's exemption of CBU Kia Sephi a sedans imported from Korea from import 
  duties and the luxury sales tax vi olates Article I:1 of GATT 1994. 
 (e) Indonesia’s system of ta riff and tax incentives under the 1993 Incentive System and 
National Car programmes and the governmen t-directed $690 million loan to TPN are 
inconsistent with Article 2 of the TRIMs Agreement; 
 (f) Indonesia’s grant of “natio nal motor vehicle” benefits onl y to motor vehicles bearing a 
unique Indonesian trademark owned by Indone sian nationals discriminates against 
foreign-owned trademarks and their owners and is inconsistent with Articles 3, 20 and 
65 of the TRIPS Agreement; 
 (g) Indonesia has extended the scope of its tari ff and tax subsidies in a manner inconsistent 
with Article 28.2 of the SCM Agreement. 
 (h) Indonesia's subsidies under the National  Motor Vehicle Programme have caused 
serious prejudice to the interests of the Unit ed States within the meaning of Articles 6 
and 27 of the SCM Agreement;  
 (i) Indonesia's subsidies under the Nationa l Motor Vehicle Programme have caused a 
threat of serious prejudice to  the interests of the United States within the meaning of 
Articles 6 and 27 of the SCM Agreement. 
3.5 The United States  requests that the Panel recommend th at Indonesia bring its measures into 
conformity with its obligations  under GATT 1994, the TRIMs Agreem ent, the TRIPS Agreement, and 
the SCM Agreement.   
                                                      
23Decrees No. 114/1993, 645/1993, 647/1993, 223/1995, 36/1997, and Regulation 36/1996. 
24Decrees No. 82/1996, 31/1996, 42/1996. 36/1996, 142/1996, Regulations 20/1996 and 36/1996, and 
Presidential Instruction No. 2/1996. WT/DS54/R, WT/DS55/R, 
WT/DS59/R, WT/DS64/R 
Page 19 
 
 
3.6 The United States  also requests that the Panel recomme nd, pursuant to Article 7.8 of the SCM 
Agreement, that Indonesia take appropriate steps to  remove the serious prejudice and the threat of 
serious prejudice or wi thdraw its subsidies. 
 D. Indonesia  
3.7 Indonesia  requests the Panel to reject the compla inants' assertions and find that the 1993 
incentive programme and the 1996 National Car progra mme are allowable subsid ies under the Subsidies 
Agreement and do not violate any provisions of GATT 1994, the TRIMs Agreement, or the TRIPs 
Agreement. 
IV. REQUESTS FOR PRELIMINARY RULINGS  
A. Participation of Private Lawyers  
4.1 On 25 November 1997, Indonesia provided to th e Panel a list of its delegation to the first 
meeting of the Panel with the parties.  On 28 Nove mber 1997, the United Stat es, in a letter to the 
Chairman of the Panel, noted that Indonesia's dele gation list included several private lawyers, and 
objected to the participation of these non-governmental employees in meetings of the Panel.  On 
1 December 1997 and 3 December 1997, Indonesia submitt ed letters to the Chairman of the Panel, 
responding to the objection raised by th e United States.  At it s first substantive mee ting with the parties, 
the Panel heard arguments of the part ies and made a ruling on this issue.25 
1. Objection of the United States  
4.2 The following are the arguments of the United States  in support of its objection: 
4.3 The issue of the participation of private lawyer s in panel meetings was a ddressed by the panel in 
the Bananas  case (WT/DS27/R/USA,  adopted 25 September 1997, para . 7.10-7.12).  In that case, 
following the objections of the complainants, the pane l limited attendance at panel meetings to members 
of governments.  In so ruling, the panel ma de the following observations, among others: 
- Past practice in GATT and WT O dispute settlement has been not  to admit private lawyers to 
panel meetings if any party objected to their presence. 
- Because private lawyers may not be subject to disciplinary rules such as those that applied to 
members of governments, th eir presence in panel meetings could give rise to concerns about 
breaches of confidentiality. 
- The admission of private lawyers to panel me etings, if it became a common practice, would not 
be in the interest of small Members as it could entail disproportionately large financial burdens 
for them. 
- The panel had concerns about whether the pr esence of private lawy ers would change the 
intergovernmental character of WT O dispute settlement proceedings. 
- Limiting attendance at panel meetings to memb ers of governments would not in any  respect 
adversely affect the right of part ies or third parties to meet and consult with their private lawyers 
in the course of panel proceedings, nor to rece ive legal or other advice in the preparation of 
written submissions from non-governmental experts. 
                                                      
25See Findings, section  XIV.A.1, for this ruling. WT/DS54/R, WT/DS55/R, 
WT/DS59/R, WT/DS64/R Page 20 
 
 4.4 These observations of the Bananas
 panel are equally applicable to this Autos  dispute.  
Moreover, while the Appellate Body ruled that privat e lawyers could participate in the Appellate Body 
hearing in Bananas , the Appellate Body carefully limited it s ruling to proceedings of the Appellate 
Body, not panels, and took pains to note that it was not dealing with an appeal of the panel's ruling in 
Bananas  concerning the participation of private lawyer s in panel meetings.  (WT/DS27/AB/R, adopted 
25 September 1997, para. 11).  While the United States does not agree with the Appe llate Body's limited 
ruling, that ruling is distinguishable from the present case in that the entire Appellate Body process is a 
new process for which prior GATT practice, argu ably, does not provide an appropriate guide. 
4.5 However, the panel process is not new, and ther e is no basis at this time for the WTO to change 
its established practice in this area .  If a change is to be made in WT O dispute settlement  practice, such a 
change must be negotiated and agreed in the context of the review of the WTO dispute settlement rules and procedures scheduled to be completed by the e nd of 1998.  A change of this magnitude would entail 
a fundamental alteration of the premises underlying WTO dispute se ttlement and its operation, and 
would erode the control of governments over what has been a well-functioning government-to-
government process for the peaceful settlement of disputes. 
4.6 Moreover, the fact that the private lawyers in  question attended the consultations in the Autos
 
dispute is neither releva nt nor dispositive for purposes of this panel proceeding.  Indonesia conditioned 
its agreement to consult on the presence of thes e individuals.  Even then, however, there was an 
understanding between the United St ates and Indonesia that the privat e lawyers would not address the 
United States delegation, and that  should they do so, the United Stat es delegation woul d not respond.  
As a result, the private lawyers were limited to  the role of communicating with their client. 
4.7 Therefore, the United  States objects to th e participation of non-governmental employees in 
meetings of the Panel in the Autos  dispute and requests the Panel to make a finding with respect to this 
matter prior to the 3 December 1997, me eting of the Panel with the parties. 
2. Response of Indonesia  
4.8 In its letter dated 1 December 1997, Indonesia  made the following arguments: 
4.9 The Government of the Republic of Indonesi a has the sovereign right to determine the 
composition of its delegations to, and select its spok esmen at, all meetings of  WTO bodies and organs.  
This sovereign right is based on the customary intern ational law principle of the sovereign equality of 
states. 
4.10 Moreover, it is recognized in  the practice of internationa l dispute tribunals, including the 
Appellate Body of the WTO.  In upholding the ri ght of Saint Lucia to include non-government legal 
counsel on its delegation for the Appe llate Body hearing and to allow c ounsel to speak at the hearing in 
the EU Bananas  proceeding, the Appellate Body stated: 
4.11 On 15 July 1997, the Appellate Body notified th e participants and third participants in this 
appeal of its ruling that the request by Saint Luci a would be allowed.  The Appellate Body said the 
following: 
   ... we can find nothing in the Ma rrakesh Agreement Establishing the 
World Trade Organization (the "WTO Agreement"), the DSU or the Working 
Procedures, nor in customary internatio nal law or the prevailing practice of 
international tribunals, which prevents  a WTO Member from determining the 
composition of its delegation in Appellate  Body proceedings.  Having carefully 
considered the request made by the Governme nt of Saint Lucia, a nd the responses dated 
14 July 1997 received from Canada;  Jamaica;   Ecuador;  Guatemala;  Honduras;  WT/DS54/R, WT/DS55/R, 
WT/DS59/R, WT/DS64/R 
Page 21 
 
 
Mexico and the United States, we rule that it is for a WTO Member to decide who should represent it as members of its delega tion in an oral hearing of the Appellate 
Body. 
* * * * * 
 We note that there are no provisions in the Marrakesh Agreement Establishing the 
World Trade Organization (the "WTO Agreem ent"), in the DSU or in the Working 
Procedures that specify who can represent a government in making its representations 
in an oral hearing of the Appellate Body.  With respect to GATT practice, we can find 
no previous panel report which speaks specifica lly to this issue in the context of panel 
meetings with the parties.  We also not e that representation by counsel of a 
government's own choice may we ll be a matter of particular significance - especially 
for developing country Members - to enable  them to participate fully in dispute 
settlement proceedings. 
 WT/DS27/AB/R (9 Septembe r 1997) at paras. 10 and 12. 
4.12 Thus, the Appellate Body fully  rejected the bases and logic of the underlying panel report, upon 
which the United States bases its objection.  In this regard, my Government wishes to reiterate, first, that the individuals in question are retained by the Govern ment of the Republic of Indonesia and, obviously, 
are completely subject to its direction, not th e other way around.  Thus, the "intergovernmental 
character" of the panel process will not be disturbed by their participation.  Indeed their participation is 
required to preserve the "intergovernmental character"  of the process by helping to ensure that my 
Government is able to achieve its goals in the process.  Second, as the United States well knows, these 
individuals are subject to the strict confidentiality requirements set forth under the United States legal 
system.  Moreover, they are contractually bound to my  Government to maintain the confidentiality of 
the proceeding.  Will any of the other participants in the proceedi ng be so bound?  If anything, the 
inclusion of respected private attorneys will reduce the breaches of confidentiality that occur in panel 
proceedings.  Third, the Government of the Republic  of Indonesia is perfectly capable of making 
independent financial decisions regarding contracting legal or other experts and any attempt by the United States to insert itself into this area is insulting and misplaced.  This point, in particular, highlights 
the inappropriateness of the United States, as I ndonesia's opponent in this proceeding, having any say 
whatsoever in Indonesia's composition of its defence team.  Finally, th e decision of the Appellate Body 
emphasizes the importance of fu ll - not partial - particip ation by accre dited counsel. 
4.13 The United States ignor es the logic of this decision and atte mpts to avoid its application to the 
instant proceeding, even though every rationale
 noted by the Appellate Body  applies here in full.  
Moreover, the Appellate Body noted that the issue of  private counsel participation before the Panel had 
not been appealed by a party to the EU Bananas  dispute because the Member state which included the 
private attorney in its delegation, Saint Lucia, was a third party to the dispute and the issue had not been 
directly appealed by the Respondent.  (The respondent in the EU Bananas  dispute was, in any case, the 
European Communities which, like the United States and Japan, maintains an army of attorneys with 
WTO expertise and thus has no need for private assist ance to defend its interests before the WTO.)  The 
decision of the Appellate Body in the EU Bananas  proceeding therefore should guide the Panel in 
rejecting the United States' objection.  
4.14 The right to determine the composition of dele gations to meetings with the Panel in dispute 
settlement proceedings is particul arly important for developing count ries like Indonesi a.  These WTO 
members do not have at their disposal specially tr ained and highly experienced corps of WTO legal 
experts.  The only way Indonesia can obtain full a nd effective representation in this dispute is by 
retaining outside legal experts, whic h it has done.  Effective legal re presentation, chosen by the party 
participating in the dispute is as necessary for the legitimacy of the WTO dispute settlement process as it WT/DS54/R, WT/DS55/R, 
WT/DS59/R, WT/DS64/R Page 22 
 
 is for the legitimacy of any dispute settlement process.  The United States' arguments to the contrary are 
absurd.  
4.15 The United States cannot deny that under customary international law Indonesia has the 
sovereign right to compose its delegation to panel mee tings in this dispute.  The United States does not 
and cannot cite anything in  the Marrakesh WTO Agreement, the DSU or the Working Procedures of this 
Panel that limits this sovereign right.  Nor does or can the United States cite to any Panel decision or 
recommendation that limits the right and permits challenges to the credentials or qualifications of accredited delegates.  All that the United States can do is to point to past GATT practice.  The mere fact that previously no country has formally maintained its opposition to challenges to  its sovereign right to 
compose its delegation cannot be the basis for extingui shing Indonesia's insisten ce on the exercise of 
that right now.  This is particularly true because,  unlike the old GATT regime, decisions by Panels (and 
the Appellate Body) under the DSU are legally binding and the basis fo r retaliation if not  implemented.  
In short, Members did not deem the right to coun sel so important when they could simply block a 
negative panel decision and be done with it.  
4.16 In its letter dated 3 December 1997, Indonesia  made the following arguments:  
 (a) General principles of in ternational law support Indonesia's sovereign right to select 
counsel of its choice and orga nize and present its defence  
4.17 The principle of "sovereign equality of states" provides that all  states are free to choose 
representation of their choice be fore international adjudicatory bodies or subsidiary organs of 
international organizations.  This principle is an ac cepted rule of customary international law.  Thus, 
Indonesia has an absolute right to compose its own delegations to meet ings of international 
organizations, including WTO dispute settlement proceedings. 
4.18 The United Nations International Law Commi ssion (the ILC) expressly recognized the 
importance of the principle of sovereign equality of states in technical proceedings such as WTO dispute 
settlement.  In his Fifth Report on Relations Between States and International Organizations, the Special 
Rapporteur explains the rationale for this principle as follows: 
 [T]he sending State should have a wider freedom of choice with respect to the members of its 
delegations to organs of international organi zations and to conferences convened by such 
organizations [as compared  with members of permanent missions].  One of the salient features 
of present-day international rela tions is the increasing number of subsidiary organs set up by 
international organizations to deal with very specialized matters of highly technical character 
which require the enlisting of the services of experts possessing the necessary training and 
experience  ... .  For these reasons it is highly desirabl e, if not indispensabl e, that the sending 
States should enjoy the widest possible freedom in  the choice of the members of its delegations 
to such organs and conferences .26 
4.19 The Report recognizes that a country may need  to include outside experts in its delegation in 
order to deal effectively with th e increasingly specialized nature of subject matters addressed by 
international fora.  WTO dispute settlement proc eedings are exceedingly specialized and complex 
proceedings that involve a wide range of technical tr ade, economic and legal issues that must be litigated 
under highly technical procedural ru les and requirements.  This is ex actly the type of proceeding where 
the ILC declared that specialized expertise is indispensable. 
                                                      
26See Yearbook of the International Law Commission, 1970, Vol. II, p. 19 (emphasis added). WT/DS54/R, WT/DS55/R, 
WT/DS59/R, WT/DS64/R 
Page 23 
 
 
 (b) Practice before international adjudi catory bodies confirms  Indonesia's right  
4.20 The principle of sovereign equality of states is fully consistent with the practice of every  major 
international dispute sett lement tribunal and international or ganization.  These practices support 
Indonesia's right to include outside private attorneys in  its delegation to the WTO.   Each of the following 
international dispute settlement tribunals and inte rnational organizations permits states complete 
freedom in composing their delegations: 
Dispute resolution tribunals  
- International Court of Justice; 
- International Centre for Settlement of Investment Disputes; 
- Permanent Court of Arbitration; 
- European Court of Human Rights; - Inter-American Court of Human Rights; - United Nations Compen sation Commission;  and 
- Iran-United States Claims Tribunal 
Other international organizations
 
- United Nations; 
- Food and Agriculture Organization; - International Labour Office; - International Telecommunication Union; - United Nations Conference on Trade and Development; 
- World Intellectual Property Organization;  and 
- Organization of American States. 
4.21 In sum, no tribunal or organization (other than North American Free Trade Agreement in 
certain proceedings) limits in any way a state's decision to accredit outside counsel as members of its delegation.  Nor does any limit the degree of coun sel's involvement in a di spute proceeding.  The 
absence of restrictions in all the major dispute reso lution tribunals and other or ganizations is consistent 
with the general principle of customary international law that recognizes the sovereign right of countries 
to accredit representatives of their choosing to represent them in international fora. 
 (c) The WTO Appellate Body  supports Indonesia's right
 
4.22 On 15 July 1997, the Appellate Body in the EU Banana Regime  proceeding allowed outside 
counsel for the ACP States, not only to attend the oral proceedings but also to present the ACP States' 
legal case.  The Appellate Body disagreed with the Panel's reasoning in denying outside counsel's 
participation in the Panel proceeding and concluded: 
... we can find nothing in the Marrakesh Agreement Establishing the World Trade 
Organization  (the "WTO Agreement "), the DSU  or the Working Procedures  [of the 
Panel], nor in customary international law or the prevailing practice of international 
tribunals, which prevents a WTO Member from determining the composition of its 
delegation in Appellate Body proceedings ... we rule that it is for a WTO Member to 
decide who should represent it as members of its delegation in an oral hearing of the Appellate Body.
27 
                                                      
27Report of the Appellate Body in the EU Banana Regime , para. 10. WT/DS54/R, WT/DS55/R, 
WT/DS59/R, WT/DS64/R Page 24 
 
 4.23 In addition, we note that th e Appellate Body recognized the importance of representation by 
counsel of a government's own choice not only in th e Appellate Body proceedings, but also during the 
entire dispute settlement procee ding, including the Panel proceeding .  Moreover, the Appellate Body 
emphasized the crucial nature of th is right for developing countries, su ch as Indonesia, in particular.  
According to the Appellate Body: 
We also note that representation by counsel of a government's own choice may well 
be a matter of particular significance - especially for developing-country Members - to enable them to participate fully in dispute settlement proceedings.  Moreover, 
given the Appellate Body's mandate to  review only issues of law or legal 
interpretation in panel reports, it is par ticularly important that governments be 
represented by qualified counsel in  Appellate Body proceedings.
28 
4.24 The Appellate Body recognizes that each WT O Member may freely compose its delegation to 
the Appellate Body.  We believe that the Appellat e Body finding applies to Panel proceedings as well 
because nothing in the WTO agreemen ts restricts a Member's right to compose its delegation in Panel 
proceedings.   
 (d) GATT past practice does not and cannot  circumvent Indonesia's sovereign right  
4.25 In earlier dispute settlement proceedings under the GATT, delegations were, in virtually every 
instance, composed solely of government representatives.  This pr actice does not circumvent Indonesia's 
right to include outside counsel as accredited members of its dispute settl ement delegation.  The fact that 
in the past developing countries chose not to include outside counsel in their delegations (or were bullied 
by complainants such as the Unit ed States not to do so) does not block Indonesia from exercising its 
rights under international law to choos e its representatives to the disput e proceeding.  This right would 
be lost only  if the WTO Agreement or the DSU limited w ho could be members of a delegation.  As 
noted by the Appellate Body in  the passage from the Bananas  case quoted above, there is no such 
limitation.  Further, as also recognized by the Appellate Body, customary international law and the 
practice of other international di spute settlement tribunal s uniformly support a country's right to select 
the representatives of its choice.  As a matter of international law, then, past GATT practice does not prevent Indonesia from accrediting outside counsel as members of its delegation. 
4.26 Also, the change in the nature of GATT/WTO  dispute settlement underc uts the importance of 
past GATT practice.  Under the GA TT, panel decisions (indeed, all st ages of a proceeding) could be 
blocked by either party, including the losing party.  Di spute settlement was viewed  principally as part of 
the "diplomatic" process.  Due largely to the insist ence of the United States, the diplomatic process was 
replaced by a "judicial" process, in which the lo sing party cannot block a panel (or Appellate Body) 
decision. 
4.27 Having expert counsel in a binding, "judicial" WTO proceeding is infinitely more important 
than it was in non-binding GATT proceedings.  Because of the radical change in  the disput e settlement 
system, prior GATT practice is not rele vant.  Thus, for practical reasons as well as under principles of 
international law, Indonesia's sovere ign right to include outside counse l on its delegation is not affected 
by past GATT practice. 
                                                     
 
28See Report of the Appellate Body in the EU Banana Regime , para. 12. WT/DS54/R, WT/DS55/R, 
WT/DS59/R, WT/DS64/R 
Page 25 
 
 
 (e) Practical and equi table considerations mandate that  Indonesia not be denied its right  
4.28 As the Appellate Body has recognized, in order to participate on equal terms with Complainants 
and other countries with large corps of trade lawyers,  Indonesia must be allowed to select its counsel for 
WTO dispute settlement proceedings.  USTR, the European Communities and Japan each have a cadre 
of attorneys with substantial expe rience in WTO matt ers.  In contrast, Indonesi a has only a few attorneys 
with experience in trade disputes before the WTO.  The language barrier adds another burden to Indonesia's effectiv e representation because the WTO proceedi ng will be conducte d in English, both 
with regard to written submis sions and oral presentations. 
4.29 The WTO will not be a meaningful and fair fo rum in which countries ca n resolve trade disputes 
unless the interests of all parties to the disputes are represented efficiently and effectively and in 
4accordance with their wishes.  Without the support of  outside counsel, Indonesia's interests will not be 
adequately represented in this proceeding. 
4.30 We refer the Panel and complainants to the writings of the eminent WTO scholars 
William Davey, John Jackson and Alan Sykes.  In re gard to what these three experts describe as the 
"basic problems" of devel oping countries in WTO dis pute settlement proceedings, they conclude that 
developing countries such as Indonesia  "clearly are not as able to us e the dispute settlement system as 
developed countries". 
4.31 Principles of international la w and practices of all the major international dispute settlement 
tribunals and international organizations, incl uding the WTO Appellate Body, support Indonesia's 
position to have counsel of its c hoice to represent it s interests during the WTO proceedings.  
Complainants' objections to Indonesi a's inclusion of outside counsel in its delegation to the WTO are 
groundless and contravene principles of international law and practice s of international organizations 
and the spirit of equity in the WTO.  Moreover, th e objections comprise a litigation strategy designed to 
disadvantage Indonesia in the WTO proceeding.  In this  regard, complainant United States, in particular, 
employs the very device it states excluding outside counsel will preclude. 
4.32 The Panel should ignore complainants' objections  and recognize Indonesia's sovereign right to 
counsel.  Any other decision, including any compromise
, will taint the proceeding and, indeed, 
completely undermine the legitimacy of the WTO as a body for resolv ing disputes between developed 
nations with substantial WTO expertise and signi ficant political and economic power and developing 
countries lacking such expertise and power. 
4.33 At the first substantive meeting, Japan  made the following arguments before the Panel: 
4.34 Regarding the issue of the participation of pr ivate lawyers, Japan has some systemic concerns, 
in particular the following two: 
i) First, dispute settlement proceedings u nder the auspices of GATT/WTO have been 
supposed to be intergovernmental.  The pres ence of private lawyers would change this 
intergovernmental character. 
ii) Second, since private lawyers may not be subject to disciplinary rules such as those 
applied to members of governments, Japa n has some concerns about the breaches of 
confidentiality. 
4.35 In this regard, Japan prefers the non-partic ipation due to the preceding concerns, but Japan 
understands that it is the Panel who should decide on this issue.  However, Japan believes that it would 
be essential for the Panel to ensure  the observance of the general rules applied to the participants of the 
Panel, including confidentiality, in case the Panel allows their participation. WT/DS54/R, WT/DS55/R, 
WT/DS59/R, WT/DS64/R Page 26 
 
  B. Preliminary Objection to the United States' Claims Regarding the $US690 Million 
Loan to TPN  
4.36 Indonesia raised a preliminary objection to the Un ited States' claims with respect to the $US690 
million loan to TPN, on the basis that this loan was not within the Panel's terms of reference. On 
3 December 1997, the Panel heard argume nts and made a ruling on this issue.29 
1. Objection by Indonesia  
4.37 The following are Indonesia's  arguments in support of  this objection.   
4.38 As a preliminary matter, Indonesia asks th e Panel to rule that it will not examine the 
$690 million loan discussed at great length by the Un ited States.  In its first submission, the United 
States argues that an August 1997 loan of $690 milli on to Timor Putra Nasional is inconsistent with 
Article III:4 of the General Agreement and Article 2 of the TRIMs Agreement and is a specific subsidy that causes serious prejudice.  The August 1997 loan  should not be examined by the Panel because it 
was not raised in the 12 June 1997 request of the United States for the es tablishment of a panel 
(WT/DS59/6) or in the Panel’s terms of reference. 
 (a) First, the loan was not raised in the Pa nel request or the Pane l’s terms of reference
 
4.39 Article 6.2 of the Understanding on Rules and Procedures Governing the Se ttlement of Disputes 
(the DSU) states that “[t]he reques t for the establishment of panel ... sh all identify the specific measures 
at issue.”  In European Communities-Regime for the Importation, Sale and Distribution of Bananas , 
WT/DS27/AB/R (9 September 1997) (para. 143 at p. 64), the Appellate Body examined Article 6.2 and 
stated: 
Article 6.2 of the DSU requires that the claims  ... must all be specified sufficiently in 
the request for the establishment of a panel in order to allow the defending party and 
any third parties to know the legal basis of the complaint. 
4.40 The terms of reference in the present dispute are the standard terms of reference in which the 
definition of the matter is supplied by Complainants’ requests for establishment of a panel.  Neither the 
United States, which now belatedly seeks to inject the loan into this proceeding, nor the other 
Complainants, identify the loan in their panel requests.  The pane l in United States-Imposition of Anti-
Dumping Duties on Imports of Fresh and Chilled Atlantic Salmon from Norway,  ADP/87 
(27 April 1994) (at para. 336), concluded that: 
 a matter, including each claim composing that matter, could not be examined 
by a panel under the [General] Agreemen t unless that same matter was within 
the scope of, and had been identified in, the written statement or statements 
referred to or contained in its terms of reference. 
 (b) Second, the loan arose af ter the Panel wa s established  
4.41 The Panel in United States-R estrictions on Im ports of Sugar  (22 June 1989), BISD 36S/331, 
concluded that a matter ar ising after the establishmen t of a panel is not within the scope of the panel 
proceeding.  The Panel stated:  
 Since the matter raised by Australia [complainant] had arisen only after the 
establishment of the Panel  by the Council ... , contrac ting parties had no reason to 
                                                      
29See Findings, section XIV.A.2, for this ruling. WT/DS54/R, WT/DS55/R, 
WT/DS59/R, WT/DS64/R 
Page 27 
 
 
expect that the reallocation of sugar q uotas among Caribbean countries [the matter] 
would be an issue before the Panel.  The Pa nel therefore decided that this reallocation 
was not part of its mandate.30 
Furthermore, in United States-Measure s Affecting Alcoholic and Malt Beverages  (19 June 1992), BISD 
39S/206 (para. 3.5.), the panel concluded that “its te rms of reference [did] not permit it to examine 'any 
new measure which may come into effect during the Panel's deliberations'."  Id.  at para. 3.5. 
 (c) Third, the United States cannot “cure” its omission of the loan from its Panel request by 
discussing the loan  in its first submission  
4.42 In European Communities-Regime for the Importation, Sale and Distribution of Bananas , 
WT/DS27/AB/R (9 September 1997), the Appellate Body stated that: 
 If a claim  is not specified in the request for the establishment of a panel, then a faulty 
request cannot be subsequently "cured" by a complaining party's argumentation in its 
first written submission to the panel  or in any other submissi on or statement made later 
in the panel proceeding.31 
As did the United States here, in United States-Denial of Most-Favoured-Nation Treatment as to Non-
Rubber Footwear from Brazil  (19 June 1992), BISD 39S/128, Braz il made arguments in its first 
submission concerning issues not raised in consulta tions or in its request for the establishment of a 
Panel.  The Panel rejected Brazil’s arguments and conc luded that the terms of reference were "limited to 
the matters raised by Brazil  in its request for the establishment of this Panel".32 
4.43 For the foregoing reasons, the Panel should rule that it will not examine any claim by the 
United States regarding the August 1997 loan. 
2. Response of the United States  
4.44 Indonesia argues that the Panel should not consider the $690 million gove rnment-directed loan 
because it was not raised in the United States reques t for a panel.  It is true that the loan was not 
identified in the United States request, because the loan had not yet been made. 
4.45 However, there is precedent for panels taking a more flexible and dynami c approach to disputes 
than the rigid straitjacket advocated by Indonesia.  In India - Patent Protecti on for Pharmaceutical and 
Agricultural Chemical Products , WT/DS50/R (issued 5 Sept ember 1997) ("Indian Mailbox ") the panel 
rejected an Indian request to bar a United States claim because the claim had not been included in the 
United States request for a panel.  Because the new cl aim of the United States in that case addressed the 
same "problem" identified in the United States re quest for a panel, the panel concluded that the new 
claim was within the panel's terms of reference. 
4.46 Here, the United States clearly indicated in its request for a panel that the "problem" was the 
National Car Programme, which resulted in, among other things, the discriminatory treatment of 
imported auto parts and subparts and subsidies that  caused serious prejudice to the interests of the 
United States. The $690 million governme nt-directed loan is merely the most recent component of the 
National Car Programme, a component that exacerbates the problem previously identified in the United 
States' request for a panel. 
                                                      
30At para. 5.8 (emphasis added). 
31At 64, para. 143 (second emphasis added). 
32At para. 6.2. WT/DS54/R, WT/DS55/R, 
WT/DS59/R, WT/DS64/R Page 28 
 
 4.47 This Panel demonstrated that it would not be bound by the mainstream of GATT dispute 
settlement practice when it decided to  allow Indonesia's private counsel to  participate in the meetings of 
the Panel.  With respect to the admissibility of the $690 million government-directed loan to TPN, the Panel should show similar flexibility by following the lead of the Indian Mailbox
 panel. 
4.48 In the recent report in Argentina - Measures Affecting Imports of Footwear, Textiles, Apparel 
and Other Items , the panel declined to make a preliminary ruling on a jurisdictional issue similar to the 
issue raised by Indonesia.  Contra ry to Indonesia's assertion, this was not because the panel lacked 
guidance on the issue, but because it is standard panel practice to defer decisions on such issues to the 
final panel report.  These types of issue are not proce dural, but instead are substantive.  To resolve these 
issues, a panel is required to make findings of fact. 
4.49 In this case, to resolve the issue raised by I ndonesia, 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 Programme, or whether it is a separate measure in itself.  This question implicates many 
other issues raised in this dispute, because I ndonesia's defence concerni ng several claims of the 
Complainants is based on the proposition that the National Car Programme ca n be divided up into 
individual "programmes", some of which allegedly have expired. 
4.50 The United States submits that the Panel s hould not prejudge the outcome of these issues one 
way or another by making a ruling on a preliminary obj ection, especially when standard practice is to 
defer such rulings to the final panel report. 
C. Business Proprietary Information  
4.51 Indonesia requested the Panel to require the United States to subm it, prior to the first substantive 
meeting of the Panel with the parties, certain inform ation characterized by the United States in its first 
submission as "business proprietary". The United St ates indicated in its first submission that it had 
further information in its possession that was releva nt to its serious prejudice claims but that the 
information was "business proprietary" and the United States was reluctant to provide it to the Panel in 
the absence of "adequate procedures" to protect such in formation.  At its first meeting with the parties, 
the Panel heard arguments and made a ruling with respect to this issue.33 
1. Request of Indonesia  
4.52 The United States refers obliquely to confiden tial data in its possessi on which it claims would 
demonstrate serious prejudice  and threat thereof if only the Panel pr ocess could be trusted with the data, 
which then would allow the United States to present it.  (See  Section VIII.B.)  This presentation is 
inadequate.  The United States ha s the burden of establishing serious prejudice on the basis of positive 
evidence and it cannot hide behind the claimed sensitivit y of its “data.” 
4.53 The United States tactic raises issues of fairness, as well. The goal of the United States, 
apparently, is to allow itself to be “forced” to pres ent the data in its second submission, to which, of 
course, the Government will have no opport unity to respond in its second submission. 
4.54 This gamesmanship undermines the legitimacy of  the Panel proceeding.  The United States is 
well aware that the WTO - like the United States International Trade Commission and the United States Department of Commerce - has procedures to prot ect confidential data.  Article 18.2 of the DSU 
designates all written submissions to the Panel as  “confidential.”  According to Article 18.2: 
                                                     
 
33See Findings, section XIV.A.3, for this ruling. WT/DS54/R, WT/DS55/R, 
WT/DS59/R, WT/DS64/R 
Page 29 
 
 
 Members shall treat as confidential inform ation submitted by another Member to the 
Panel or the Appellate Body which that Member has designated as confidential. 
Article 18.2 also provides that, on request, a Member submitting confidential da ta shall “produce a non-
confidential summary of the [confidential] info rmation” contained in its written submission. 
4.55 The United States, however, treats this proc eeding as no-holds-barred litigation and, to secure 
an advantage, pretends that Article 18 does not exist, acting as though this is the first time the issue of confidentiality has arisen.  The Panel should not coun tenance this attempt by a developed, experienced, 
sophisticated WTO Member to gain an unfair adva ntage over Indonesia.  Rather, the Panel should 
require the United States to submit its confidential data immediately, prior to the 3-4 December 1997 
hearing.  The data should be  available for review and
 comment  by the legal experts hired and accredited 
by Indonesia and informative non-confidential summar ies should be given to the Indonesian delegation. 
Moreover, Indonesia must  be given an opportunity to review and respond fully to the data and to any 
additional United States argumentation based on it. 
2. Response of the United States  
4.56 The issue raised by Indonesia is much ado about nothing.  Regarding business proprietary 
information, in its first submission the United Stat es noted that it had additional information in its 
possession documenting the plans and projections of Ge neral Motors, Ford, and Chrysler with respect to 
the Indonesian motor vehicle market.  The United States  indicated that it was reluctant to provide such 
information to the Panel unless the Panel first es tablished adequate proce dures to protect such 
information.  Indonesia claims that this legitimate desire to ensure the protection of business proprietary 
data constitutes an unfair tactic and that the protectio n of business proprietary da ta is adequately ensured 
by Article 18.2 of the DSU. 
4.57 Article 18.2 of the DSU merely recognizes that  confidential information should be treated as 
confidential, but in itself does no t establish procedures for ensuring the protection of such information. 
Therefore, the United States was justified in being ca utious with the information supplied to it by private 
companies. 
4.58 Be that as it may, while the United States reserves its right to submit additional factual 
information in this proceeding, at this point, th e United States does not intend to submit the business 
proprietary information we have been discussing.  The informatio n in question relates to the plans of 
United States auto-manufacturers to enter, or expand their presence in, the Indonesian passenger car market, plans that were cancelled in light of th e introduction of the National Car Programme.  The 
information included in the first United States submission summarizes that information in a 
non-confidential manner, and Indonesia has not disputed the accuracy of th is data or the existence of the 
United States manufacturers' plans.  Indeed, an att achment to Indonesia's first submission to the Panel 
corroborates this information and the existence of these plans.  Therefore, there is no present need to 
submit this information, because the points that th is information would corr oborate are uncontested by 
Indonesia. 
4.59 At no place in Indonesia's first written su bmission to the Panel does Indonesia contest the 
existence of the United States manufacturers' plans to  enter, or expand their presence in, the Indonesian 
passenger car market.  At the first meeting of the Panel, Indonesia announc ed, for the first time, that it 
does, indeed, contest the existence of these plans.  If Indonesia plans to revise its defence by submitting 
rebuttal information of its own, then  the United States, of course, rese rves its own right to counter that 
information with information of its own. 
4.60 Moreover, the United States not es the following statement of the Appellate Body in its report in 
the Bananas
 case:  "There is no requirement in the DS U or in GATT practice for arguments on all WT/DS54/R, WT/DS55/R, 
WT/DS59/R, WT/DS64/R Page 30 
 
 claims relating to the matter referr ed to the DSB to be set out in a complaining party's first written 
submission to the panel." (para. 145). 
D. Request from Indonesia for Termination of the Panel with Respect to the National Car 
Programme  
4.61 On 26 February 1998,  Indonesia  officially submitted to the Panel a copy of a letter from 
Indonesia to the Chairman of the SCM Committee, whic h letter Indonesia reques ted the Chairman of the 
Committee to consider as a formal modification of its notification of subsidies granted to the National Automobile Industry (G/SCM/N/16/ID N).  This notification, to whic h were attached copies of the 
referenced decrees and regulations issued  on 21 January 1998, states the following: 
4.62 On 21 January 1998, the Government of  Indonesia took the following actions: 
 - Presidential Decree No. 20/1998
34 revoked Presidential Decree No. 42/1996 (4 June 
1996) and declared Presidenti al Instruction No. 2/1996 (19 February 1996) obsolete, 
thereby terminating the authority for fu rther import duty and luxury tax exemption 
subsidies to producers of a national car. 
 - Minister of Industry and Tr ade Decree No. 19/MPP/Kep/1/199835 revoked (effective 2 
February 1998) Minister of Industry and Trade Decree No. 31/MPP/SK/2/1996(19 
February 1996) and all departmental regula tions issued pursuant to it to implement 
Presidential Instruction No. 2/1996. 
 - Minister of Industry and Tr ade Decree No. 20/MPP/Kep/1/199836 revoked (effective 2 
February 1998) Minister of Industry a nd Trade Decree No. 142/MPP/Kep/6/1996 (5 
June 1996), which had authorized production of na tional cars to be carried out overseas 
for a one-year period, in implementation of Presidential Decree No. 42/1996.  (This 
decree already ha d terminated by its own terms.) 
 - Government Regulation No. 14/199837 amended Government Regulation No. 50/1994 
(28 December 1994), as previously amende d by Government Regulation No. 20/1996 
(19 February 1996) and by Government Re gulation No. 36/1996 (14 June 1996), so as 
to eliminate (effective 2 February 1998) th e exemption of national cars from payment 
of the luxury sales tax. 
 - Minister of Financ e Decree No. 19/KMK.01/199838 revoked (effective 2 February 
1998) Minister of Finance Decree No . 404/KMK.01/1996 (7 June 1996), which had 
exempted national cars produced overseas ( during the one-year period specified in 
Minister of Industry and Trade Decree No . 142/MPP/Kep/6/1996) from payment of the 
customs import duty.  (This decree alr eady had terminated by its own terms.) 
 - Minister of Financ e Decree No. 20/KMK.01/199839 amended Minister of Finance 
Decree No. 36/KMK.01/1997 (21 January 1997) to delete (effectiv e 2 February 1998) 
the authority to exempt parts and components  for assembly or manufacture of national 
cars from payment of the customs import duty.   
                                                      
34Indonesia Exhibit 51. 
35Indonesia Exhibit 52. 
36Indonesia Exhibit 53. 
37Indonesia Exhibit 54. 
38Indonesia Exhibit 55. 
39Indonesia Exhibit 56. WT/DS54/R, WT/DS55/R, 
WT/DS59/R, WT/DS64/R 
Page 31 
 
 
4.63 On 27 February 1998, the Panel sent a communi cation to all parties concerning this subsidy 
notification received from Indonesia.  The Panel asked Indonesia to inform the Panel what action, if any, 
Indonesia requested the Panel to take on the basis of the no tification, and what I ndonesia believed to be 
the legal implications of the notified revocations for the panel process.  The Panel asked the 
complainants to respond to Indonesia's comments.  
1. Request from Indonesia  
4.64 Indonesia  responded to the Panel as follows: 
4.65 The Government of Indonesia believes that, given the actions it took on 21 January 1998 (as set 
out in our 25 February letter), the dispute settleme nt proceeding should be terminated, at least as it 
relates to the measures origin ally promulgated in 1996 to pr omote the National Car Programme.40 We 
would hope that the three complaining parties would c hoose to withdraw their complaints.  If they do 
not, though, the Panel should terminate the proceeding and issue a report limited to declaring that the 
matter was resolved through the abolition of the measures at issue. 
4.66 As set out in Indonesia's lett er of 25 February, the decrees and regulations issued by the 
Indonesian Government on 21 January revoked or am ended all of the decrees, instructions and 
regulations implementing measures  to promote the National Car Pr ogramme which allegedly were 
inconsistent with Indonesia's obligations under the General Agreement, the SCM Agreement, the 
TRIMs Agreement and the TRIPs Agreement.  (In th e two instances in which decrees were amended 
rather than revoked, the amendment abolished all meas ures in the decree that previously had benefited 
the National Car Programme.)  All of  the decrees, instructions and regulations cited in each of the 
complaining parties' request for establishment of a panel (at leas t, regarding the National Car 
Programme) were revoked (or amended in relevant pa rt), and all of the measures to promote the 
National Automobile Industry which were ther eby implemented ceased to be in effect. 
4.67 Article 19.1 of the DSU provides that:  [w]here a panel or the Appellate Body conclu des that a measure is inconsistent with a 
covered agreement, it shall recommend that the Member concerned bring the measure 
into conformity with that agreement.  (Footnote omitted.) 
4.68 Article 3.7 of the DSU confirms that this  forward-looking remedy - elimination of an 
inconsistent measure - is the only WTO-consistent reme dy.  Therefore, even if the measures to promote 
the National Automobile Programme had been inco nsistent with a provision of the WTO (which 
Indonesia does not accept), there is nothing further to remedy.  Under such circumstances, it would be 
inappropriate for the Panel to do more than note the termination of the measur es and declare that no 
determination is warranted as to th e claimed WTO inconsistency of them. 
4.69 Prior Panel decisions support the refusal to rule  on an expired measure, as previously set out by 
Indonesia (See section VII. D(c)).  In Thailand-Restrictions on  Importation of and Internal Taxes on 
Cigarettes (7 November 1990), BISD 37S/200, prior to  the panel's decision, Thailand issued regulations 
eliminating the discriminatory elements of two taxe s.  Even though the underlying authority to reimpose 
discriminatory taxes remained in effect, the panel co ncluded that the current regulations were consistent 
with Thailand's GATT obligations. 
4.70 In the 1989 dispute regarding EEC-Restrictions on Imports of Dessert Apples (22 June 1987), 
BISD 36S/93, the EEC measures lapsed prior to the Pa nel's decision.  Chile urge d the panel to rule that 
                                                     
 
40See Findings, section XIV.A.4, for the Panel's ruling on this request. WT/DS54/R, WT/DS55/R, 
WT/DS59/R, WT/DS64/R Page 32 
 
 the EC should offer compensation since a ruling th at the measures should be withdrawn would be 
meaningless.  The panel refused to do so. 
4.71 These prior panel decisions support the conc lusion that, since the measures promoting the 
National Car Programme and their underlying legal author ity have expired, the Pa nel should declare that 
no decision on the merits of the alleged incons istency with WTO agreements is appropriate. 
2. Response of Japan
 
4.72 Japan  responded to the Panel as follows:   
4.73 The Government of Indonesia expressed its hope  that the complaining parties would withdraw 
the complaints.  In addition, Indonesia argued that , if the complaining parties do not do so, the Panel 
should neverthele ss terminate the proceeding and issue a re port limited to declari ng that the matter was 
resolved through the abolition of the measures at issue. 
4.74 The Government of Japan finds it difficult to sh are the view of Indonesia.  Japan still does not 
believe that a mutually satisfactory solution has be en achieved.  Unless such  a mutually satisfactory 
solution is obtained between the parties, a panel is obl iged to submit its findings to the DSB as described 
in Article 12:7 of the DSU.  Article 12 of the DSU re quires a panel to follow the procedures and not to 
unilaterally terminate the proceeding.  In this regard , there are three elements Japan would particularly 
like to point out. 
 (a) It is still not clear whether the National Car Programme has been fully terminated  
4.75 First, some parts of the decr ees issued by the Indonesian Govern ment are still unclear in their 
implications.  For example, the decrees did not e xplicitly revoke the Presidential Decree No. 2/1996, 
which Japan believes is the most important basis for the National Car Program me, while declaring it 
"obsolete" instead. 
4.76 Second, and more importantly, the Government of Japan has not been convinced that all the 
exemptions of import duties and luxury taxes have been  terminated.  As we all can recall, at the second 
Panel meeting, Indonesia explained that the Indonesi an Government would request PT Timor to return 
the benefits already given to it, since it failed to  meet the requirements of the June 1996 programme and 
the first year requirements of the February 1996 progr amme.  Despite this stat ement, however, Japan has 
been informed that favourable treatment under the Programme in question might continue for Timor 
cars remaining stock, including unsold Korean made National Cars. 
4.77 Japan is trying to gather further informati on from the Indonesian Government regarding these 
factual matters. 
 (b) The Government of Indonesia has not provi ded any assurances that it will not introduce 
the measures of the same nature as the National Car Programme, i.e. discriminatory 
measures to benefit spec ific domestic products  
4.78 It should be noted that Indonesia in its letter of 2 March still denies the inconsistency of the 
National Car Programme with its ob ligations under the relevant provi sions of the WTO Agreements.  
This, together with unclarity regarding the terminati on of the Programme makes it difficult for Japan to 
judge, at this stage, whether the Government of Indonesia has decided against introducing programmes 
of the same kind in the future. WT/DS54/R, WT/DS55/R, 
WT/DS59/R, WT/DS64/R 
Page 33 
 
 
 (c) Even if measures are eliminated, a panel can and should rule on them  
4.79 The Government of Japan is of the view that even if measures are eliminated, a panel still can 
and should rule on them.  In fact , Japan has already discussed th is issue before this Panel. 
4.80 As already described more fully by Japan (See  section X.B.3 and 4), Japan believes that it has 
been the usual practice of GATT/WTO panels to rule at least on measures that were effective at the time 
the panel's terms of reference were fixed, even if such measures later became ineffective before the 
panel rendered its ruling.  "The di spute settlement system of the WTO is a central element in providing 
security and predictability to the mult ilateral trading system", as described in Article 3:2 of the DSU.  In 
this respect, if a panel should not rule on this ki nd of occasion, a WTO Member might easily evade the 
WTO reviews. 
4.81 Japan sincerely hopes that the Panel will continue to review this case. 
3. Response of the European Communities   
4.82 The European Communities  responded to the Panel's request as follows:  
4.83 For the reasons set out below, the European Communities disagree with  Indonesia's demand and 
respectfully request the Panel to rule on all the cl aims within its terms of reference, including those 
concerning the 1996 National Car Programme. 
4.84 The legal consequences of the measures en acted by Indonesia on 21 January 1998 are far from 
clear.  For instance, Pr esidential Instruction No. 2/1996 has not  been revoked but merely declared 
"obsolete" by Presidential Decree Number 20/1998.   The precise implicatio ns of a declaration of 
"obsolescence" by what appears to be a norm of infe rior rank are unclear.  It is also unclear to the 
European Communities how, if at all, the measures  of 21 January 1998 will appl y to those cars imported 
from Korea which have not been sold yet. 
4.85 In the European Communities' view, there is  no good reason for the Panel to take any decision 
as regards these and other similar issues precipitat ely and on the basis of the limited information which 
has been made available by Indonesia.  We consider  that the Panel should complete its report in the 
normal fashion, and that the issues raised by I ndonesia should be clarified and decided within the 
framework provided by Article 21 of the DSU.  If the measures taken on 21 January 1998 already 
constitute appropriate impl ementation of the DSB recommendations  in this case, Indonesia will find 
itself in the enviable position of not having to adopt  any further implementing measures.  On the other 
hand, if it was established in accordance with Article 21 of the DSU that such is not the case, the complainants would have access to the mechanisms  provided in the DSU in case of non-compliance 
with the recommendations of the DSB. 
4.86 Furthermore, it must be noted that the meas ures taken on 21 January 1998 do not provide for the 
reimbursement of the benefits al ready granted under the National Car Programme.  As a result, those 
subsidies will continue to benefi t future sales of National Cars.  Accordingly, whether or not the 
measures adopted on 21 January 1998 are considered  to have revoked effect ively the National Car 
Programme, the Panel will be required to rule on the compatibility of those subsidies with the SCM 
Agreement. 
4.87 Similarly, as admitted impl icitly by Indonesia, the measures adopted on 21 January 1998, do not 
effect the 1993 Programme.  Thus, again, the Panel, wi ll in any event have to issue a report ruling on the 
claims regarding the 1993 Programme , whether or not the 1996 National Car Programme is deemed to 
have been effectively revoked. WT/DS54/R, WT/DS55/R, 
WT/DS59/R, WT/DS64/R Page 34 
 
 4.88 Contrary to Indonesia's argume nts, past practice supports th e European Communities' request 
that the Panel rule on all the claims within its te rms of reference.  Unde r GATT 1947, several panels
41 
considered measures that were no longer in force in cases where, as in the present dispute, the measures were still in force at the time the Panel was established. 
4.89 This practice has continued under the WTO Agr eement.  In US - Standards for Reformulated 
Gasoline42, the Panel decided not to rule on a discontin ued measure, but only because the measure had 
been terminated before the terms of reference were established and was unlikely to be renewed.  In US -°Measures affecting imports of Wo ven Wool Shirts and Blouses from India
, the Panel decide that: 
 "in the absence of an agreement between the parties to terminate the proceedings, we 
think that it is appropriate to issue our fi nal report regarding the matter set out in the 
terms of reference of this Panel in or der to comply with our mandate [....] 
notwithstanding the withdrawal of the US restraint"43,44 
4.90 For the reasons set out above, the European Co mmunities respectfully request the Panel to reject 
Indonesia's demand and to rule on all th e claims within its te rms of reference, including those relating to 
the 1996 National Car Programme. 
4. Response of the United States  
4.91 The United States  responded to the Panel's request as follows:   
4.92 The United States does not concur in Indonesia’s request.45  
4.93 By way of background, by letter dated 25 Fe bruary 1998, Indonesia informed the Chairman of 
the SCM Committee that I ndonesia purportedly “had term inated all subsidies prev iously granted to the 
National Automobile Industry.”  Notwithstanding the fact that the deadline for submitting information 
and argument in this dispute closed on 30 January 1998,  Indonesia provided copies of this letter, and the 
attachments thereto, to the Panel, the Chairman of the Dispute Settlement Body, and the complainants in this dispute. 
                                                     
 
41See for instance the Panel Report on European Communities - Restrictions on Imports of Dessert 
Apples, Complaint by Chile , adopted on 22 June 1989, BISD 36S/93;  the Panel Report on EEC - Restrictions 
on Imports of Apples, Complaint by the United States , adopted on 22 June 1989, BISD 36S/135;  the Panel on 
United States - Prohibition of Imports of Tuna and Tuna Products from Canada , adopted on 22 February 1982, 
BISD 29S/91;  the Panel Report on EEC - Restrictions on Imports of Apples from Chile , adopted on 
10 November 1980, BISD 27S/98;  and the Panel Report on EEC - Measures on Animal Feed Proteins , adopted 
on 14 March 1978, BISD 25S/49. 
The panel reports invoked by Indonesia do not support its position, as already demonstrated by Japan in 
its second submission to the Panel (see Section X.B.4). 
42Panel Report on United States - Standards for Reformulated Gasoline , WT/DS2/R, adopted on 
20 May 1996, para. 6.19. 
43Panel Report on United States - Measures Affecting Imports of Woven Wool Shirts and Blouses from 
India, adopted on 23 May 1997, WT/DS33/R, para.6.2. 
44In Argentina - Certain measures affecting Imports  of Footwear, Textiles, Apparel and Other Items  
(WT/DS56/R, at pp.83-86, on appeal) the Panel decided not to rule on a measure which was revoked after the 
circulation of the request for the establishment of a Pane l but before the DSB agreed to the establishment of the 
Panel. 
45  The United States also does not concur in any termination of this proceeding with re spect to the 1993 
Programme, and notes that the measures  notified by Indonesia to the SCM Committee do not affect the 1993 
Programme. WT/DS54/R, WT/DS55/R, 
WT/DS59/R, WT/DS64/R 
Page 35 
 
 
4.94 In a communication dated 27 February 1998, th e Panel requested that Indonesia inform the 
Panel by 2 March as to “what action, if any, it reques ts the Panel to take on the basis of this notification 
and why, and what it believes to be the legal implic ations of these revocations for the panel process.”  
The Panel also requested the complainant parties in this dis pute to respond to Indonesia’s comments by 
6 March. 
4.95 At the outset, the United States must express some dismay that the Panel even has considered 
Indonesia’s untimely submission.  Having said that, however, the Un ited States ap preciates being 
afforded the opportunity to comment on Indonesia’s reque st.  For the reasons set forth below, the United 
States does not concur in Indonesia’s request. 
 (a) The Measures at Issue Are Within the Panel’s Terms of Reference  
4.96 Indonesia’s request relates only to "the measures to promote the National Automobile 
Programme."46 Indonesia does not dispute that these measures are within the Panel’s terms of reference.  
The only question is whether a Panel is  free, notwithstanding it s terms of reference, to decline to make a 
finding on measures within its terms of reference at the request of the responding party.  The United 
States submits that a Panel may not.47   The fact that the responding pa rty claims that the measures have 
been withdrawn does not change this legal conclusion. 
 (b) Established GATT and WTO Pa nel Practice Is to Make Find ings on Measures that Are 
Withdrawn Subsequent to the Establishment of a Panel’s Terms of Reference  
4.97 Even assuming, for purposes of argument, that the measures comprising the National Car 
Programme have been revoked and have ceased to ha ve any legal or operational effect, Indonesia is not 
entitled to a termination of this dispute absent agr eement by the complaining parties.  Prior GATT and 
WTO practice dictates that a pane l should make findings on discontinue d measures covere d by its terms 
of reference in situations where, as is the case here, a measure was in force at the time the panel was established.
48  This practice was most recently reaffirmed in United States - Measures Affecting Imports 
of Woven Wool Shirts and Blouses from India , WT/DS33/R, Report of the Panel, as modified by the 
Appellate Body, adopted on 23 May 1997, para. 6.2. 
4.98 Indonesia’s references to Th ailand - Restrictions on Importa tion of and Internal Taxes on 
Cigarettes , DS10/R, Report of the Panel adopted on 7 November 1990, BISD 37S/200, and EEC -  
Restrictions on Imports of Dess ert Apples - Complaint by Chile , L/6491, Report of the Panel adopted on 
22 June 1989, BISD 36S/93, are inapposite .  With respect to Thai Cigarettes , Japan previously has 
demonstrated how that report doe s not support Indonesia’s position.49  Moreover, even if the Panel 
should not accept Japan’s dem onstration, Thai Cigarette s is an aberration from the mainstream of GATT 
and WTO practice. 
                                                      
46  See page 2 of 2 March 1998 letter from Indonesia to the Panel. 
47  Note that the Appellate Body has also spoken on the failure of a panel to make a finding on a 
measure within its terms of reference.  In Japan - Taxes on Alcoholic Beverages  (WT/DS8/AB/R), the Appellate 
Body stated that:   
We note that the Panel's conclusions on "like products" and on "directly competitive or substitutable 
products" contained in paragraphs 7.1(i) and (ii), respec tively, of the Panel Report fail to address the full range 
of alcoholic beverages included in the Panel's Terms of Reference. ... We consider this failure to incorporate 
into its conclusions all the products referred to in the Te rms of Reference, consistent with the matters referred to 
the DSB in WT/DS8/5, WT/DS10/5 and WT/DS11/2, to be an error of law by the Panel.  (Page 26) 
48  The parties previously have addressed this issu e in connection with Indonesia’s argument that the 
complainants’ claims concerning the June 1996 meas ures are moot.  (See section VII.E.3 and X.C).   
49  See  Section X.B.4. WT/DS54/R, WT/DS55/R, 
WT/DS59/R, WT/DS64/R Page 36 
 
 4.99 As for Dessert Apples
, it directly contradicts Indonesia’s position.  In that case, the panel did  
make findings of GATT inconsiste ncy with respect to measures th at had expired after the panel’s 
establishment.  What the panel declined to do, a nd properly so, is recommend,  as requested by Chile, 
that the EEC provide compensation. 
 (c) It Is Not Established that the Measures Have, in Fact, Expired  
4.100 Assuming, for purposes of argument, that a pa nel may ignore its terms of reference and decline 
to make findings with respect to a measure that ha s expired subsequent to the panel’s establishment, 
Indonesia has failed to establish that the measures that comprise  the National Car Programme have 
expired.  At best, the status of  these measures remains unclear. 
4.101 Looking at the measures from one perspective,  and taking Indonesia at its word, the measures 
still have legal and operatio nal effect with respect to  products imported and sold  prior to the revocation 
of those measures.  According to Indonesia, the local content requirements of these measures, and 
TPN’s failure to satisfy those requi rements, continue to constitute the basis for seeking repayment by 
TPN of previously forgiven duties and taxes.50  These measures will be th e governing legal instruments 
should TPN challenge any Government dema nd for repayment of duties and taxes. 
4.102 Looking at the measures from a different perspe ctive, it is questionable whether the benefits 
conferred by the various legal inst ruments (as opposed to the legal inst ruments themselves) really have 
been withdrawn.  Notwithstanding Indonesia’s assurances to the Pa nel and the complainants, it was 
reported in February that TPN had requested that the Government of Indonesia provide a tax exemption 
for those Timor Kia Sephias that remain unsold.51   The Government apparently was willing to consider 
TPN’s request, because Indonesia’s Minister of Industry and Trade was quoted as stating:  "I am having 
discussions with the finance mini ster over whether these 15,000 cars will be exempted from the taxes 
like those imported with them."52  It now appears that the Government, did, indeed, grant TPN’s request, 
deciding "that the remaining 15,000 cars could maintain their tax exemptions."53 
                                                      
50  In a question to Indonesia, the United States described Indonesia’s position as follows: “[A]ccording 
to Indonesia, TPN will have to reimburse the Government of Indonesia for import duties and luxury taxes that 
were exempted under Decree No. 42/96.”  Questions from the United States to Indonesia , 15 January 1998, 
page 1.  The United States asked Indonesia to confirm whether this description was accurate.  Id .  Indonesia 
confirmed that this description was accurate.  Answers of  Indonesia to the 15 Janu ary 1988 Questions of the 
United States .  Indonesia also stated to the Panel that the rele vant Customs District Office “will issue a letter to 
TPN demanding payment of the customs import duties and luxury sales tax due by virtue of TPN’s failure to 
satisfy the criteria of the National Car Programme for the first year.”  Importation, Enforcement and Effect of 
TPN’s Non-Fulfillment , submitted by Indonesia on 30 January 1998.  
51  “Timor Car Project Has ‘Moral Obligation’ to Continue,” Asia Pulse   (19 Feb. 1998) (US Exhibit 41, 
p. 1). 
52 “Minister Asks Indonesian ‘National Car’ Ma ker to Evaluate Viability,” Agence France Presse  (19 
Feb. 1998) (US Exhibit 41, p.2). 
53“Indonesia Chief Falls Short on Promised Economic Reforms”, New York Times  (5 March 1998) (US 
Exhibit 41, pp. 3-5); see also  “Indonesia Defends Car Tax Break,” AP Online  (5 March 1998) (US Exhibit 41, 
pp. 6-7); “Indonesia Dodging IMF Reform Dema nds...Again, Say Analysts ”, Agence France Presse  (3 March 
1998) (US Exhibit 41, pp. 8-10); and “Several IMF Conditions Go Unheeded in Indonesia”, The Boston Globe  
(3 March 1998) (US Exhibit 41, pp. 11-14). WT/DS54/R, WT/DS55/R, 
WT/DS59/R, WT/DS64/R 
Page 37 
 
 
4.103 Moreover, in the statement quot ed in the preceding paragraph,  the Minister of Industry and 
Trade describes the issue as “whether these 15,000 [u nsold] cars will be exempted from the taxes like 
those imported with them  [i.e., the previously sold cars].”  (Emp hasis added).  This suggests that, 
notwithstanding its prior assura nces to the Panel and the complainants, Indonesia did not  require TPN to 
reimburse the Government for luxury taxes owed on those cars that had been sold prior to the 
completion of the local content audit.  In addition, it is now entirely unclear what has happened with 
respect to the forgone import duties owed on those ca rs that were sold and those that remain unsold. 
4.104 Finally, it must be emphasized that none of the measures notified by Indonesia to the SCM 
Committee provides for th e reimbursement of the subsidies al ready conferred unde r the National Car 
Programme.  As previously demons trated by the United States, th ese subsidies constitute “non-
recurring” subsidies that will benefit future sales of cars produced by TPN, a point that Indonesia did not 
seriously dispute.54  Thus, whether or not the measures notif ied by Indonesia to the SCM Committee can 
be considered as revoking the legal instruments th at make up the National Car Programme, the Panel 
will be required to consider the subsidies conferred by these legal in struments in connection with the US 
and EC claims under the SCM Agreement. 
 (d) A Termination of the Dispute Would Diminish US Rights Under the DSU  
4.105 It is axiomatic that rulings of panels “cannot  add to or diminish the rights and obligations 
provided in the covered agreements.”  Article 19.2, DSU.  Pursuant to Article 1 and Annex 1 of the 
DSU, the DSU itself is a “covered agreement.”  In the context of this case, under Article 21 of the DSU, the United States has the right to ensure that the National Car Programme is withdrawn and stays 
withdrawn or otherwise is brought into conformity with Indonesia’s WTO obligations.  Under Article 22 
of the DSU, the United States has the right to co mpensation or retaliation if these conditions are not 
fulfilled. 
4.106 If the Panel were to grant Indonesia’s request and terminate the dispute settlement proceeding 
with respect to the National Car Programme, the Pane l effectively would be depriving the United States 
of its rights under Articles 21 and 22 of the DSU.  Because the Panel would not have made any findings 
that the measures were inconsis tent with Indonesia’s WTO obliga tions, Indonesia arguably would be 
free at that point to reintroduce these measures, an d the United States would have to commence an 
entirely new dispute settlement proceeding. 
4.107 The evidence suggests that such  a scenario is highly plausible.  Newspaper report s indicate that 
subsidization of the Nati onal Car is continuing.
55 
4.108 Finally, the facts developed in this proceeding should make the Panel extremely sceptical of any 
claims by Indonesia that the discri mination against imports from the complainants and the subsidization 
of TPN under the National Ca r Programme have ended.  Consider the following: 
 - The history of the National Car Programme,  particularly the manner in which TPN was 
selected to be the producer of the National Car;56 
                                                      
54  See  Sections VIII.B.2(b) and VIII.B.4(c). 
55  “IMF Effort Not Working, Suharto Tells Clinton”, The Washington Post  (17 Feb. 1998) (US Exhibit 
41, pp. 15-18).  “Indonesia Chief Falls Short on Promised Economic Reforms”, New York Times  (5 March 
1998) (US Exhibit 41, pp. 3-5).  “Indonesian Forest Fund Used for National Car: Camdessus”, Agence France 
Presse  (21 Jan. 1998) (US Exhibit 41, p. 19). 
56First Submission of the United States , 20 October 1997, paras. 34-80. WT/DS54/R, WT/DS55/R, 
WT/DS59/R, WT/DS64/R Page 38 
 
  - The obvious contradiction be tween Indonesia’s denial that  the joint venture between 
TPN and Kia Motors was to be the producer of the National Car and all of the evidence to the contrary, including the third-party submission by Korea;
57 
 - The obvious contradiction between Indonesi a’s assertion that the Government of 
Indonesia played no role in the provision of the $690 million loan to TPN and all of the 
evidence to the contrary and the fact that the IMF required the Government  to revoke 
special credit privileges fo r the National Car Programme;58 
 - The obvious contradiction be tween Indonesia’s assurance th at TPN would be required 
to reimburse the Government for foregone  customs duties and luxury taxes due in 
connection with the CBU Sephias imported from Korea and the evidence (described 
above) that the Government is not requiring reimbursement; 
 - The fact that Presidential Decr ee No. 20/1988 declares Presidential 
Instruction No. 2/1996 "obsolete" rather than "revoked";  and 
 - The fact that even in its letter of 2 Ma rch 1998, Indonesia continues to insist that the 
National Car Programme was not inconsistent with its WTO obligations.  This indicates 
that Indonesia feels free to resurrect the me asures in question when it determines that 
the time is ripe. 
In short, the status of the National Car Programme remains unclear, and it is not (nor should it be) the 
Panel’s task to predict the future based on the incomp lete information available at this time.  Instead, 
these are matters that are properly dealt with under Article 21 of the DSU.  If it should turn out that the 
measures in question constitute adequate implem entation of the recommendations by the DSB, 
Indonesia will have fulfill ed its WTO obligations.  However, s hould it be established under Article 21 
that the measures in question do not constitute adequa te implementation, the United States and the other 
complaining parties would still ha ve their rights under Article 22. 
 (e) Conclusion  
4.109 Both before and after this Panel was establishe d, the United States sought  a mutually acceptable 
solution with Indonesia of th is matter.  Indonesia refuse d, preferring to let the dispute settlement process 
run its course.  It is now inappropriate for Indonesia to  seek a termination of th is dispute after the case 
has been fully briefed and argued. 
4.110 Accordingly, for the foregoing reasons, the Un ited States respectfully  requests that the Panel 
deny Indonesia’s request to terminate this dis pute with respect to th e National Car Programme. 
                                                      
57See, e.g., Second Submission of the United States , 23 December 1997, Attachment A, para. 36, 
note 7. 
58See, e.g., section VIII.A.2 (footnote 423);  and IMF News Brief No. 98/2  (15 Jan. 1998) (US Exhibit 
41, pp. 20-22). WT/DS54/R, WT/DS55/R, 
WT/DS59/R, WT/DS64/R 
Page 39 
 
 
V. CLAIMS UNDER ARTI CLE III OF GATT 1994 
A. Claims Under Article III:2,  First Sentence of GATT 1994  
1. Claims Raised by Japan  
5.1 Japan  claims that the National Ca r Programme of February 1996 vi olates Article III:2, first 
sentence of GATT 1994.  (See  Section III.A).  The following are Japan's  arguments in support of this 
claim: 
5.2 One of the essential elements of Indonesia's  National Car Programme is the discriminatory 
exemption from the sales tax on l uxury goods (luxury tax) which would ot herwise be levied on sales of 
National Cars.  This privilege results in imposition of  an internal tax on imported "like" automobiles in 
excess of that applied to domestica lly produced National Cars, thus viol ating Article III:2, first sentence 
of GATT 1994. 
 (a) Article III:2, first sentence  requires that sales of imported  products not be taxed at rates 
in excess of rates impos ed on like domestic products  
5.3 The first sentence of GATT Article III:2 provides that imported products: 
 "shall not be subject, directly or indirectly, to internal taxes or other internal charges of 
any kind in excess of those applied, directly  or indirectly, to like domestic products." 
Under the recent GATT/WTO precedents, Article III:2, first sentence has been applied in a 
straightforward manner: 
 "[T]he words of the first sentence requir e an examination of the conformity of an 
internal tax measure with Article III by de termining, 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 appl ied to the like domestic products."59 
The National Car Programme meets both of these criteria.  (b) Luxury tax is an internal tax
 
5.4 According to Indonesia's relevant laws a nd regulations, the sales tax on luxury goods is 
applicable to both domestically ma nufactured and impor ted automobiles.60  The tax is collected from 
either domestic manufactures or  importers, as the case may be.61 
 (c)  National Cars are domestic products  
5.5 Under the relevant regulations62, National Cars (or National Motor Vehicles) must be 
"domestically produced by using fa cilities owned by national indus trial companies or Indonesian 
statutory bodies with total share bel onging to Indonesian citizens".  The very language of the decree thus 
makes it clear the National Cars are domestic products.  (See  Section II.B.2).  
                                                      
59Report of the Appellate Body on Japan-Taxes on Alcoholic Beverages  ("Japan-Alcoholic 
Beverage II "), WT/DS8/AB/R, WT/DS10/AB/R, WT/DS11/AB/R, adopted on 4 October 1996 pp.18-19. 
60Government Regulation No.36/1996 (Japan Exhibit 25).  (See  also Section II.B.2.) 
61Decree of Minister of the Finan ce No.272/KNK.04/1995 (Japan Exhib it 24);  Decree of the Ministry 
of Finance No. 647/KMK.04/1993 (Japan Exhibit 23). 
62Decree of Minister of the Industry and Tr ade No.31/MPP/SK/2/1996 (Japan Exhibit 28). WT/DS54/R, WT/DS55/R, 
WT/DS59/R, WT/DS64/R Page 40 
 
  (d) National Cars and imported automobiles are "like" products
 
5.6 Regarding the legal test for determining "like"  products, recent Appell ate Body reports have 
repeatedly affirmed that: 
 "a determination of 'like products' for the pur pose of Article III:2, first sentence, must 
be construed narrowly, on a case-by-case basis, by examining relevant factors 
including: 
(i) the product's end-uses  in a given market, 
(ii) consumers' tast es and habits and 
(iii) the product's propertie s, nature and quality."63 
5.7 However, in this present case, it is almost me aningless to discuss "likeness", because, even if 
vehicles identical in all aspects (including the e nd-uses, properties, nature and quality) with National 
Cars are manufactured abroad (for example, in Ja pan) and imported, they would still be treated 
differently from National Cars.  
5.8 Moreover, foreign brand "like" products of Nati onal Cars (the Timor S515) actually are sold in 
the Indonesian auto market.  As  shown by the Table 11 below,   the National Car - Timor Sephia sedans 
(1500cc) - are no different from other competitive pr oducts imported or assemb led by other automakers 
in Indonesia.  First, their common end-use in the Indon esian market is passenger transportation.  Second, 
although consumers' brand preference s may exist, the products themselv es are generally recognized to 
belong to the same "sedan" category.  Indonesia may cont end that the mere fact that the former vehicles 
are manufactured abroad makes them  different (or that Indonesian c onsumers prefer domestic products, 
and thus, imported products are not regarded as "lik e" products of such domestic products). However, 
these arguments cannot prevail, since it would deny the fundamental pr inciple of Article III.64 
                                                      
63Report of the Appellate Body on Canada-Certain Measures Concerning Periodicals ("Canada -  
Periodicals "), WT/DS31/AB/R, adopted on 30 June 1997, pp. 19-20.  Report of the Appellate Body on Japan- 
Alcohol Beverages II, p.19.   See also Working Party Report on Border Tax Adjustment ("Border Tax 
Adjustment "), L/3464, adopted on 2 December 1970 (BISD 18S/97) para.18.  
64In this connection, a panel report on Japan- Customs Duties, Taxes and Labelling Practices on 
Imported Wines and Alcoholic Beverages ,adopted on 10 November 1987  L/6216,(BISD 34S/83),stated that, 
[even if consumers prefer traditional Japanese shochu to vodka]"the traditional Japanese consumers habits with 
regard to shochu provided no reason for not considering vodka to be a 'like' product," since "the aim of Article III:2... could not be achieved if differential taxes could be used to crystallize consumer preferences for 
traditional domestic products." See
 para .5.7 of the Panel Report. Of course, it would be  difficult to assume any 
wider difference between domestic automobiles and impo rted automobiles for Indon esian consumers than the 
difference between shochu and vodka for Japanese consumers.  WT/DS54/R, WT/DS55/R, 
WT/DS59/R, WT/DS64/R 
Page 41 
 
 
Table 11 
Like Products 
Company P.T. Timor Toyota Mitsubishi Honda Suzuki 
Brand Timor S515i Corolla La ncer Civic Baleno SY 416 
Category Sedan Sedan Sedan Sedan Sedan 
Engine 
displacement 1,500cc 1,600cc 1,600cc 1,600cc 1,600cc 
Luxury Tax 0% 35% 35% 35% 35% 
Price 
(1,000Rp) (March 1997) 36,400-36,900 68,300-71,800 65,000-72,000 71,160-74,860 44,750 
 (e) Imported products are taxed less favourably than "like" domestic products  
5.9 As noted earlier, the category, or the concept of,  "National Cars" consists, in principle, of 
domestic products.  The regulati on at issue accords the luxury tax exemption to  this category of 
domestic products, thereby creating more favourable terms than im ported products.  In fact, paragraph 
(4) of Article 23 of Government Regulation No . 50/1994 on the Implementation of Law No.8/1983 on 
Value Added Tax on Goods and Services and Sa les Tax on Luxury Goods as amended by the 
Government Regulation No.20/1996 provides as follows: 
 "(4) National motor vehicles which are domestically produced  by using trade marks 
created by relevant industrial companies themselves ... shall be granted government 
borne sales tax on luxury goods on their delivery."  ( Italics  added.)65  
On the other hand,  under the February 1996 Program me, no imported motor ve hicles qualify as the 
"National Cars" and all imported sedans are subject to 35 per cent luxury tax. [(See  Chart-3 )]** 
5.10 This mechanism deprives imported automobiles of an opportunity for tax exemption, which is 
available for domestic automobiles, precisely because they are imported products.  To this extent, this 
case presents the same issue as a Panel faced in United States - Measures Affecting The Importation, 
Internal Sale and Use of Tobacco.66 
5.11 In that case, all imported tobacco was subject to an internal tax (the  Budget Deficit Assessment 
of "BDA"), but not all domestic t obacco was subject to the tax.  Th e Panel found that "the BDA, as 
currently applied, provided less favourable treatment to  imported tobacco than to like domestic 
tobacco."67 
                                                      
65Government Regulation No.20/1996 (Japan Exhibit 26);  Government Regulation No.36/1996 (Japan 
Exhibit 25) which amended the former regulation but without relevant substantive changes.   
66United States - Measures Affecting the Import ation, Internal Sale and Use of Tobacco 
("United States - Tobacco"), DS44/ R, adopted on 4 October 1994.  
67Id. para.90.  This panel further found that "an internal regulation which merely exposed imported 
products to a risk of discrimination ... constitutes, by  itself, a form of discrimination, and therefore less 
favourable treatment within the meaning of  Article III." (paras. 92-93, 95-98).  WT/DS54/R, WT/DS55/R, 
WT/DS59/R, WT/DS64/R Page 42 
 
 Quite similarly, at issue in this proceeding is ta x exemption which is available for some domestic 
products (i.e., Nationa l Cars) but from which no  imported product s may benefit.  Accordingly, imported 
like products are taxed less favour ably than domestic products. 
 (f) Insignificant market share fo r imported sedans is not a defence
 
5.12 For various reasons, imported  assembled sedans have earned only a fraction of the Indonesian 
market.  The share of foreign pass enger vehicles in the market was 0.28 per cent in 1994, 2.58 per cent 
in 1995 and 0.29 per cent in 1996.68  However, previous Panels cons istently have rejected a defence 
based on the insignificant economic consequence of imported products69, and there is no reason for this 
Panel to diverge from that clear precedent.  
5.13 Indonesia admits all the facts ne cessary to establish a violation of   GATT Article III :2.  The first 
sentence of Article III:2 prohibits  a WTO Member from subjecting import ed goods to internal taxes in 
excess of those applied to like domest ic products.  Indonesia admits that: 
 (1) "The Indonesian luxury tax is an internal tax";  and  
 (2) "Under the February 1996 national car  programme, the Government excuses [PT 
Timor] from payment of the luxury tax on the 1500cc Timor S515 ... while imposing 
the non-subsidized rate of 35 per cent on imports of like products ."  (See  Section V.D.) 
Therefore, Indonesia itself admits that it applies greater taxes on imported cars than it applies on like 
domestic products.  No more need be said to establish a prima facie  violation of the first sentence of 
Article III:2. 
5.14 The Government of Japan continues to submit that the February 1996 Programme also violates 
the second sentence of Article III:2 (See  Section V.B.1), but it considers that this point requires no more 
argumentation in light of Indonesi a's admissions that it discrimi nates between National Cars and 
imported "like" automobiles. 
5.15 Having admitted a prima facie  violation of Article III:2, Indone sia raises as its only defence a 
series of related arguments intended to show that Article III:2 does not  apply - despite its plain language 
- to tax discrimination of this kind.  (See  Section V.D.)  Those argument s are meri tless and should be 
rejected by the Panel.  (See  Section V.E.1.).  Therefore, th e February 1996 Programme violates 
Article III:2. 
2. Claims Raised by the European Communities  
5.16 The European Communities  claims that Indone sia has violated its obligations under 
Article III:2, first sentence, by exempting from the Sales Tax on Luxury G oods the sales of the 
following categories of  motor vehicles (See  Section III.B): 
 (1) domestically manufactu red motor cycles with e ngines of 250 cc or less; 
 (2) combines, minibuses, vans and pick-ups us ing gasoline as fuel which are manufactured 
domestically and have a local c ontent of more than 60 per cent; 
                                                      
68Motor Vehicle Market Share 1992-1997 (Japan Exhibit 60).  
69United States - Taxes on Petroleum and Certain Imported Substances, L/6175 adopted 17 June 1987, 
BISD 34S/136, para.5.1.9; United St ates - Tobacco,  paras. 99-100.  WT/DS54/R, WT/DS55/R, 
WT/DS59/R, WT/DS64/R 
Page 43 
 
 
 (3) combines, minibuses, vans and pick-ups usi ng diesel oil as fuel which are manufactured 
domestically and have a local c ontent of more than 60 per cent; 
 (4) domestically manufactured buses; 
 (5) domestically manufactured sedans and stations wagons of  less than 1,600 cc with a 
local content of more than 60 per cent;   
 (6) National Cars assembled in I ndonesia by Pioneer companies;  and 
 (7) imported National Cars. 5.17 The following are the European Communities'  arguments in support of this claim: 
5.18 GATT Article III: 2,  first sentence,  provides that: 
 The products of the territory of any contrac ting imported into the territory of any other 
contracting party shall not be subject, directly  or indirectly, to internal taxes or other 
internal charges of any kind in excess of those applied, directly or indirectly to like domestic products. 
5.19 As confirmed by the Appellate B ody in  Japan - Alcoholic Beverages
70 and Canada -  Certain 
Measures concerning Periodicals71, in order to establish whether an inte rnal tax is applied in violation of 
Article III:2, first sentence, it is necessary to make two determinations: 
- first,  whether the taxed imported and domestic products are “like”;  and 
- second, whether the taxes applied to the import ed products are “in excess of” those applied to 
the like domestic products.   
5.20 Before making those two dete rminations, however, it must be ascertained whether the taxes in 
question constitute an “internal tax”. 
 (a)  The Sales Tax on Luxury Goods is an “internal tax " 
5.21 The Sales Tax on Luxury Goods  is levied on the sale of both domestic and imported motor 
vehicles and not just “on” or “in connection” with  the importation of motor vehicles, even if some 
categories of domestic motor vehicles are subsequently exempted therefrom. Accordingly,  the Sales 
Tax on Luxury Goods has to be considered as an “interna l tax” in the terms of  Article III:2, and not as 
an import charge within the purview  of GATT Articles II and VIII.  
 (b) Imported products are “like” the domestic products exempted from the tax  
5.22 The term “like product” is not defined in the GATT 1994. In  Japan - Alcoholic Beverages72 and 
Canada - Certain Measures  concerning Periodicals73  the Appellate Body endorsed the basic approach 
set out in the 1970 Report of the Work ing Party on Border Tax Adjustment: 
                                                      
70Appellate Body Report on  Japan - Alcoholic Beverages , WT/DS 8/AB/R, WT/DS 10/AB/R, WT/DS 
11/AB/R,  adopted 1 November 1996, pp. 18-19.  
71Appellate Body  Report on  Canada - Certain Measures concerning Periodicals , WT/DS 31/AB/R,  
pp. 22-23.  
72Appellate Body Report on Japan - Taxes on Alcoholic Beverages , WT/DS 8/AB/R, WT/DS 10/AB/R, 
WT/DS 11/AB/R, adopted 1 November 1996, p.20.  WT/DS54/R, WT/DS55/R, 
WT/DS59/R, WT/DS64/R Page 44 
 
  ... the interpretation of the term [like product] should be examined on case-by-case 
basis. This would allow a fair assessment in each case of the different elements that constitute a similar product. Some criter ia were suggested for determined, on a 
case-by-case basis, whether a product is “sim ilar”: the product’s end uses in a given 
market; consumers’ ta stes and habits, which change from country to country; the 
products properties, nature and quality.
74 
5.23 The tax exemptions provided by the measures  in dispute are not based on any  factor which 
affects of itself the pr operties, nature or quality of the produc ts concerned or their end uses, nor 
consequently prevent the exempted products fr om being “like” the non-exempted products. 
5.24 Exemptions (1) and (4) are based, only and ex clusively, on the country of manufacture of the 
products. 
5.25 Exemptions (2), (3) and (5) are also based on th e country of manufacture of the products and, in 
addition, on their level of local content. 
5.26 Exemption (6) applies to motor vehicles  which fulfil the following three conditions: 
 - first, they must be National Cars manufactured by a Pioneer Company; 
 - second, they must have been manufactured in Indonesia;  and 
 - third, the manufacturer must comply with certain local content requirements. 
5.27 Exemption (7) is also based on three conditions:  - first, the cars must be National Ca rs manufactured by a Pioneer Company; 
 - second, they must have been manufactur ed with the “participation” of Indonesian 
nationals;  and  
 - third, they must incorporate a certain percentage of “counte r-purchased” parts and 
components exported from Indonesia. 
5.28 For the purposes of exemption (6) and exemp tion (7) a motor vehicle is deemed to be a 
“National Car” if it satisfies the conditions enumer ated in Article 1 of De cree 31/96, which provides 
that: 
 National vehicles shall be those which:  (a) are domestically produced by using facil ities owned by national industrial companies or 
Indonesian statutory bodies with total shar es belonging to Indonesian citizens;  and 
 (b) use trade marks created by relevant in dustrial companies themselves and not yet 
registered by other partie s in Indonesia and owned by Indonesian citizens;  and 
 (c) are developed with technology, design s and engineering on the basis of national 
capacity to be realized in phases. 
5.29 Clearly, motor vehicles manufactured in I ndonesia are not, by definition, “unlike” motor 
vehicles manufactured in the territory of any other Member. 
                                                                                                                                                                    
 
73Appellate Body Report on Canada - Certain measures concerning Periodicals , WT/DS 31/AB/R,  
p.21.  
74Report of the Working Party on Border Tax Adjustments , BISD 18S/97, para 18.  WT/DS54/R, WT/DS55/R, 
WT/DS59/R, WT/DS64/R 
Page 45 
 
 
5.30 Similarly, there is nothing which,  a priori, makes Indonesian manufactured parts and 
components for the assembly of  motor vehicles “unlike” Co mmunity manufactured parts and 
components.75  It follows that motor vehicles with 61 pe r cent Indonesian made parts and components 
do not, for that reason alone, cease to be “like” moto r vehicles with 100 per cent Community content for 
the purposes of Article I II:2, first sentence.   
5.31 The additional criteria on which exemptions (6) and (7) for National Cars are based do not 
relate, directly or indirectly, to the characteristics of  those cars but, instead, to the characteristics of the 
car manufacturers.  As establis hed by previous Panel Reports, differences in the producers’ 
characteristics which do not affect th e products’ characteristics can neve r justify a different tax treatment 
of the products involved. 
5.32 Thus, the Panel report on United States - M easures affecting Alcohol ic and Malt Beverages , 
concluded that the granting of a tax credit for be er from small breweries but not for beer from large 
breweries infringed Article III:2, first sentence, whether or not this credit was also available in the case 
of imported beer because: 
 ... beer produced by large breweries is not unlike beer produced by small breweries.   
Indeed the United States did not assert that the size of the breweries affected the nature of the beer produced or otherwise affected beer as a product ... .
76   
5.33 This finding was invoked as a precedent by the subsequent Panel Report on United States -  
Standards for Reformulated and Conventional Gasoline,  which in clear and une quivocal manner stated 
the principle that: 
 Article III:4 of the General Agreement deal s with the treatment to be accorded to like 
products; its wording does not allow le ss favourable treatmen t dependent on the 
characteristics of the producer. 77 
                                                      
75In  United States  - Measures affecting Alcoholic and Malt Beverages , (adopted on 19 June 1992, 
BISD 39S/206, at para 5.22) the Panel found that the granting of tax exemptions and tax credits by the states of Michigan, Ohio and Rhode Island only to wines produced using local ingredients was in violation of 
Article III:2, first sentence.
 
76Panel Report on United States - Measures affecting Alcoholic and Malt Beverages , adopted 19 June 
1992, BISD 39S/206,  at para 5.19  
77Panel Report on United States - Standards for Conventional and Reformulated Gasoline , WT/DS 2/R, 
adopted 20 May 1996,  para 6.11. The Panel went on to state the following (at paras 6.11 and 6.12): 
The Panel noted that in the Malt Beve rages case, a tax regulation according less 
favourable treatment to beer on the basis of size of the producer was rejected. Although this 
finding was made under Article III:2 concerning fi scal measures, the Panel considered that the 
same principle applied to regulations under Article III:4. Accordingly, the Panel rejected the 
United States argument that the requirement s of Article III:4 are met because imported 
gasoline is treated similarly to gasoline from similarly situated domestic parties. 
Apart from being contrary to the ordinary meaning of the terms of Article III:4, any 
interpretation of Article III:4 in this manner would mean that the treatment of imported and domestic goods concerned could no longer be as sured on the objective basis of their likeness 
as products. Rather, imported goods would be subject to a highly subjective and variable 
treatment according to extraneous factors. Th is would thereby create great instability and 
uncertainty in the conditions of competition as between domestic and imported goods in a 
manner fundamentally inconsistent with the object and purpose of Article III  
See also
 Panel Report on  United States - Taxes on Automobiles , DS 31/R, unadopted, at 
paras 5.53-5.54.  WT/DS54/R, WT/DS55/R, 
WT/DS59/R, WT/DS64/R Page 46 
 
 5.34 Although this conclusion concerns Article III:4, the Panel made it clear that the same principle 
applied also to fiscal meas ures under Article III:2. 
5.35 In light of the foregoing, the European Co mmunities submits that each of the following 
categories of goods should be considered as a sing le category of “like products” for the purposes of 
applying Article III:2, first sentence, in the present case: 
 - imported and Indonesian made motorcycles of 250 cc or less; 
 - imported combines, minibuses, vans and pick-ups and Indonesian made  combines, 
minibuses, vans and pick ups, including thos e with a local content of  60 per cent or 
more; 
 - imported and Indonesian made buses;  
 - imported sedans and stations wagons of le ss than 1,600 cc and Indonesian made sedans 
and station wagons of less than 1,600 cc, incl uding those with a local content of  60 per 
cent or more;  
 - imported motor vehicles and National Cars assembled in Indonesia by Pioneer 
Companies;  and 
 - imported parts, components and raw materi als for the assembly of motor vehicles and 
Indonesian made parts, components and raw materials, including those incorporated 
into imported National Cars. 
 (c) Imported motor vehicles are taxed in  “excess of” domestic like motor vehicles
 
5.36 Imported motor vehicles are taxed “in exce ss of” domestic like products because they are 
always subject to the Sales Tax on Luxury Goods at a rate ranging from 20 per cent to 35, whereas like 
domestic products can benefit fr om exemptions (1) through (6). 
5.37 The fact that some domestically made like products (namely, motor vehicles other than buses 
and motorcycles of less than 250 cc manufactured by  non-Pioneer companies and with less than 60 per 
cent local content) are also subjec t to the Sales Tax on Luxury Goods does not preclude a violation of 
Article III:2, first sentence. As noted in the Pa nel Report on United States - Measures affecting 
Alcoholic and Ma lt Beverages : 
The prohibition of discriminatory taxes in Arti cle III:2,  first sentence, is not conditional 
on a 'trade effects test' nor is  it qualified by a de minimis standard .... [T]he fact that 
only approximately 1.5 per cent of  domestic beer in the United States is eligible for the 
lower tax rate cannot justif y the imposition of higher internal taxes on imported 
Canadian beer than on competing domestic beer” .78  
5.38 For the same reasons, it is irrelevant that some of the exemptions (e.g. exemption (5)) may in 
practice not have been applied yet due to the te mporary lack of qualifying domestic production. As 
noted also in United States - Measures affecting Alcoholic and Malt Beverages : 
                                                      
78Panel Report on United States - Measures  affecting Alcoholic and Malt Beverages , adopted 
19 June 1992, BISD 39S/206, para 5.6.  WT/DS54/R, WT/DS55/R, 
WT/DS59/R, WT/DS64/R 
Page 47 
 
 
legislation mandatorily requiring the executive authority to take action inconsistent with 
the General Agreement would be  inconsistent with Article III, whether or not the 
legislation were being applied.79 
5.39 It is also without relevance that National Cars imported from Korea by  PT TPN were exempted 
from the Sales Tax on Luxury Goods by Presidential Decree 42/96. There subs ists a violation of 
Article III:2 because not all imported cars that are “like” the exempted domestic cars benefit from that exemption. 
5.40 As put by the Panel Report on Un ited States - Measures affecting the Importation, Internal Sale 
and Use of Tobacco : 
"In accordance with the national treatment provisions of Article III:2 each pound of 
tobacco imported into the United States had to be accorded treatment no less favourable 
in respect of internal taxes than that accorded to like domestic products."80 
5.41 By the same token, in the present case ever y single motor vehicle impor ted into Indonesia (and 
not just National Cars imported from  Korea) should be accorded tr eatment “no less favourable” in 
respect of the Sales Tax on Luxury Goods than that  granted in each case to the “most favoured” 
category of like domestic products. 
 (d) Imported parts and componen ts are ‘indirectly’ taxed ‘in exce ss of’ like domestic parts, 
components and materials  
5.42 Article III:2 prohibits not just  “direct” discrimination agains t imported products but also any 
kind of “indirect” discrimination. 
5.43 When the level of the tax applicable on a finished  product is function of its  local content level,  
imported parts and components are, as a result, subject “indirectly” to a tax which is in excess of that indirectly applied on domestic like parts and components . This form of indirect tax discrimination arises 
whether or not, in addition, there is also “direct”  tax discrimination betwee n the domestic and imported 
finished goods into which the parts and components are incorporated. 
5.44 Confirmation of the above is provided by th e Panel Report on EEC - Regulation on Imports of 
Parts and Components . In that case, the Panel found that the anti-circumvention duties imposed by the 
Community pursuant to its anti-dumping regulatio ns on finished products assembled within the 
Community territory which did not meet  certain local content requirements: 
subject imported parts and materials indirectly to an internal charge in excess of that 
applied to like domestic products and [...] are consequently contrary to Article III:2 first 
sentence”.81 
                                                      
79Id. at para 5.39. See also Panel  Report on US - Taxes on Petroleum and Certain Imported Substances, 
adopted 17 June 1987, BISD 34S/136, para 5.2.2; and Panel Report on Thailand - Restrictions on Importation of 
and Internal Taxes on Cigarettes, adopted on 7 November 1990, 37S/200, 227, para 84.  
80Panel Report on United States - Measures affecting the Importation, Internal Sale and Use of 
Tobacco , adopted on 4 October 1994, para 98. In support of this conclusion, the Panel referred to the 
“no-balancing” principle established with respect to  Article III:4 by the Panel report on United States  -  Section 
337 of the Tariff Act of 1930 , adopted on 7 November 1989, BISD 36S/345, 387. This principle has been 
recently restated  by the Panel repo rt on United States- Standards for Co nventional and Reformulated  Gasoline , 
WT/DS 2/R, adopted 20 May 1996, at paras 6.14-6.15.    
81Panel Report on EEC - Regulation  on Imports of Parts and Components , adopted on 16 May 1990, 
BISD 37S/132 at para 5.9.  WT/DS54/R, WT/DS55/R, 
WT/DS59/R, WT/DS64/R Page 48 
 
 5.45 Exemptions (2) (3) (5) (6) and (7) are to be condemned under Article III:2, first sentence, the European Communities cites for the same reasons as th e duties in the above case. 
5.46 As shown above, exemptions (2) (3) (5) and (6 ) are “directly” discrimi natory against imported 
motor vehicles in that they are available only for domestically produced  motor vehicles.  In addition, 
they discriminate “indirectly” ag ainst imported parts and components because,  in order to qualify for 
the exemptions, domestic motor vehicles must incorp orate a minimum percentage of locally made parts 
and components. 
5.47 Exemption (7) does not discriminate "direct ly" against imported motor vehicles.  To the 
contrary,  it is an exemption reserved for certain imported motor vehicles. Nonetheless, exemption (7) 
infringes Article III:2, first sentence, because it is linked to a local content re quirement and, therefore, 
discriminates “indirectly” against im ported parts and components.   
3. Claims Raised by the United States 
 
5.48  The United States  claims that Indonesia’s  discriminatory applicat ion of the luxury tax (See  
Section III.C) is inconsistent w ith Article III:2, first sentence, of GATT 1994.  The following are the 
United States' arguments in support of this claim.   
5.49 Article III:2, first sentence, provides as follows: 
The products of the territory of any contrac ting party imported into the territory of any 
other contracting party shall not be subject, di rectly or indirectly, to internal taxes or 
other internal charges of any kind in excess of  those applied, directly or indirectly, to 
like domestic products. 
5.50 Under Regulation No. 36/1996, motor vehicles produced or assembled in  Indonesia with a local 
content in excess of 60 per cent, or national motor ve hicles that satisfy the local content requirements of 
Decree No. 31/1996, are exempt from the luxury tax.   However, imported CBU motor vehicles that are 
“like” their Indonesian-made counterp arts are subject to the luxury ta x, the precise amount of the tax 
depending on the type of motor vehicle.82  Thus, the luxury tax on importe d motor vehicles is “in excess 
of” the tax on like domestic motor vehicles that are exempt from the tax under Regulation No. 36/1996.  
As the Appellate Body stated in Japan - Taxes on Al coholic Beverages , for purposes of Article III:2, 
first sentence, “[e]ven the smallest amount of ‘excess’ is too much".83  Here, the amount s are not small, 
but instead are the difference  between 0 and 35 per cent. 
B. Claims Under Ar ticle III:2, Second Sentence of GATT 1994  
1. Claims Raised by Japan  
5.51 Japan  argues that "the National Car Programme" of February 1996 (See  Section III.A) violates 
Article III:2, second sentence of GATT 1994.  The following are Japan's  arguments in support of this 
claim:   
5.52 Even if the National Car Programme did not vi olate Article III:2, first sentence, the National 
Car Programme still violates Article III:2, sec ond sentence, which prohibits a Member country from 
                                                      
82To reiterate, the applicable luxury tax rates under Regulation No. 36/1996 are: (1) 35 per cent  for 
passenger cars and jeeps; (2) 25 per cent  for light commerci al vehicles (other than jeep s) that use diesel as fuel; 
and (3) 20 per cent for light commercial vehicles (other than jeeps) that use gasoline as fuel. 
83WT/DS8/R, WT/DS10/R, WT/DS11/R, Report of the Appellate Body, adopted 1 November 1996, 
p. 24.  WT/DS54/R, WT/DS55/R, 
WT/DS59/R, WT/DS64/R 
Page 49 
 
 
applying "internal taxes or other internal charges to imported or domestic product s in a manner contrary 
to the principle set forth in paragraph 1." 
5.53 A recent Appellate Body  report has held that: 
... three separate issues must be addressed to  determine whether an internal tax measure 
is inconsistent with Article III:2, second sentence.  These three issues are whether: 
  (1) the imported products and th e domestic products are "directly 
competitive or substitutable products" which are in competition with 
each other ; 
  (2) the directly competitive or substitutable imported or domestic 
products are "not similarly taxed ";  and 
  (3) the dissimilar taxation of the indirectly competitive or 
substitutable imported domestic products is "applied ... so as to afford 
protection to dome stic production ".84  
 (a) National Cars and imported automobiles are "directly competitive or substitutable" 
products  
5.54 Japan  indicates that the same evidence presented in  the context of its "like product" argument 
for its claim under Article III:2, first sentence (See  Section V.A.1) supports its argument in the context 
of its claim under Article III:2, second sentence that National Cars are indistinguishable from imported 
automobiles. 
 (b) National Cars and imported au tomobiles are not "similarly taxed " 
5.55 Since National Cars are exempted from the l uxury tax while any imported sedans are subject to 
35 per cent luxury tax, they are obviously not taxed "similarly". 
5.56 Moreover, according to the Indonesia in its no tification of subsidies, the luxury tax exemption 
constitutes a "subsidy".  If National Cars and import ed sedans are indeed similarly taxed within the 
margin of de minimis magnitude85, it is inconceivable how the tax exemption could constitute a 
"subsidy".  Accordingly, by Indonesia's own admi ssion National Cars and imported sedans are not 
similarly taxed. 
 (c) The tax exemption is accorde d "so as to afford protection " 
5.57 Indonesia has accorded the titl e of its Programme: "Development  of the National Automobile 
Industry"86 to the Presidential Instruction, which initiate d the Programme. In addition to the Indonesian 
stated purpose of "the development of domestic moto r vehicles in order that the national mobile industry 
can [quickly come] into being and can produce usi ng brands created by itse lf", this objective is 
expressed unambiguously in "Elucidation on Govern ment Regulation No. 36/ 1996", a supplementary 
legislative document for the government regula tion granting tax exemption to National Cars.87  It states: 
                                                      
84Report of the Appellate Body on Japan - Alcoholic Beverages II , p.24.  This three part test was 
affirmed by the Appellate Body Report in Canada - Periodicals , p.23.  
85Report of the Appellate Body on Japan - Alcoholic Beverages II , pp.26-27.  We discuss whether the 
characterization of a "subsidy" constitutes the valid defence in para. 3.501 - 3.521 below.  
86Presidential Instruction No.2/1996 (Japan Exhibit 8).  
87Government Regulation No.36/1996 (Japan Exhibit 25).  WT/DS54/R, WT/DS55/R, 
WT/DS59/R, WT/DS64/R Page 50 
 
 
[I]t is necessary to support the domestic auto motive industry in or der to further promote 
its growth particularly in the face of global competition
.  One of the methods which can 
be added is the provision of a tax incentive in the form of exception from the imposition of sales tax on luxury goods.... (Emphasis added.) 
5.58 "Objective" factors surrounding the tax exempti on testify to its "protec tive" character as well.
88  
As we have already discussed, the share of importe d passenger automobiles has been insignificant for a 
variety of reasons which ar e unrelated to comp etitiveness of foreign products.  To grant an additional 
advantage to domestic production in this environm ent would do nothing more than add a layer of 
"insulation" to th e Indonesian market. 
2. Claims Raised by the United States   
5.59 The United States  claims that Indonesia’s discriminato ry application of the luxury tax is 
inconsistent with Article III:2, second se ntence, of GATT 1994.  The following are the United States'  
arguments in support of this claim: 
5.60  As argued in Section V.A.(3) the exemption from the luxury tax under the National Car 
Programme violates Article III:2, first sentence, of GATT 1994.  Shoul d the Panel find otherwise, it is 
nevertheless the case that this ex emption constitutes a violation of Ar ticle III:2, sec ond sentence, which 
prohibits a Member from applying "internal taxes or other internal charges to  imported or domestic 
products in a manner contrary to the principle set forth in paragraph 1".89 
5.61  In Japan Liquor II , the Appellate Body set forth the follow ing test for establishing a violation of 
Article III:2, second sentence:90  
... [T]hree separate issues must be addres sed to determine whether an internal tax 
measure is inconsistent with  Article III:2, second senten ce.  These three issues are 
whether: 
   (1) the imported products and th e domestic products are "directly 
competitive or substitutable product s" which are in competition with 
each other ; 
   (2) the directly competitive or substitutable imported and domestic 
products are "not similarly taxed ";  and 
                                                      
88Report of the Appellate Body on Japan - Alcoholic Beverages II , pp.27-31; Report of the Appellate 
Body on Canada - Periodicals , pp31-32.  
89In its request for the establishment of a panel in this case, the United States did not limit its claim 
under Article III:2 to the first sentence of that provisio n.  In its first submission to the Panel, however, the 
United States limits its arguments to Article III:2, first sentence, based on the belief that there can be no serious 
disagreement that the tax incentives under the National Car programme discriminate against imported passenger 
cars that are "like" domestic passenger cars.  Based on its interpretation of Indonesia's arguments submitted as 
of the end of the first meeting of the Panel, the United States does not believe that Indonesia has contested the fact that, insofar as Article III:2 is concerned, the products in question are "like products".  However, in 
anticipation that Indonesia may revise its arguments at th is stage of the proceeding, the United States addresses 
its claim under Article III:2, second sentence. 
90Japan - Taxes on Alcoholic Beverages , WT/DS8/AB/R, Report of the Appellate Body adopted 
1 November 1996, page 25 (italics in original).  The Appellate Body subsequently affirmed this test in Canada -  
Certain Measures Concerning Periodicals , WT/DS31/AB/R, Report of the Appellate Body adopted 30 July 
1997, page 23. WT/DS54/R, WT/DS55/R, 
WT/DS59/R, WT/DS64/R 
Page 51 
 
 
   (3) the dissimilar taxation of the directly competitive or substitutable 
imported domestic products is "applied ... so as to afford protection to 
domestic production ". 
5.62  All of the elements required by Article III:2,  second sentence, as inte rpreted by the Appellate 
Body, are present in this case.  First, there is ample evidence that the Timor Kia Sephia is “directly 
competitive or substitutable” with impo rted passenger cars.  Second, the difference between a tax rate of 
zero and a tax rate of 35 per cent clearly constitutes non-similar taxation.   
5.63  Finally, the tax exemption is accorded “so as to afford protecti on”.  The Elucidation on 
Government Regulation No. 36/1996, the instrument that actually confers the tax exemption, states that 
the purpose of the exemption is to “support the domes tic automotive industry in order to further promote 
its growth particularly in the face of global competition ”.91  M o r e o v e r ,  t h e  v e r y  s i z e  o f  t h e  t a x  
differential makes it clear that the dissimilar ta xation was applied “so as to afford protection ”.92 
C. Claims Under Articl e III:4 of GATT 1994  
1. Claims Raised by Japan  
5.64 Japan  claims that the local content requirements for the National Cars and their parts and 
components under the February 1996 programme (See  Section III.A) violate Article III:4 of  GATT 
1994.  The following are Japan's  arguments in support of these claims: 
5.65 The manufacturer of the National Cars (i.e., so called "pioneers") receive the following two 
substantive competitive benefits: 
 (1) it may import automotive parts and compone nts used in the assembly of National Cars 
duty free;  and 
 (2) purchasers of such National Cars pay no luxury tax, in comparison to the 20 per cent- 
35 per cent luxury tax that  would normally apply. 
These benefits are conditioned on the attainment  of the following levels of local content: 
- At the end of first year, the local content rate of more than 20 per cent; 
- At the end of second year, the local cont ent  rate of more than 40 per cent; 
- At the end of third year, the local content  rate of more than 60 per cent. 
 (a) Article III:4 of GATT 1994 requires each WTO Member to guarantee equality of 
competitive opportunity between domestic goods and imported goods  
5.66 GATT Article III:4 provides as follows: 
The products of the territory of any Member imported into the territory of any other 
Member shall be accorded treatment no less  favourable than that accorded to like 
products of national origin in respect of all laws, regulations and re quirements affecting 
their internal sale, offering for sale, purch ase, transportation, distribution or use. 
5.67 In Canada - Import, Distribu tion and Sale of Certai n Alcoholic Drinks by Provincial Marketing 
Agencies , the panel found: 
                                                      
91US Exhibit 10. 
92Japan - Taxes on Alcoholic Beverages , WT/DS8/AB/R, Report of the Appellate Body adopted 
1 November 1996, page 32. WT/DS54/R, WT/DS55/R, 
WT/DS59/R, WT/DS64/R Page 52 
 
 
the requirement of Article III:4 to accord imported pr oducts treatment no less 
favourable than that accorded to domest ic products was a requirement to accord 
imported products competitive opportunities no less favourable than those accorded to 
domestic products.
93 
5.68 The test for compliance with GATT Article II I:4 is two-fold.  First, are the imported and 
domestic goods in question "like products"?  Sec ond, have the imported products received treatment 
"less favourable" than the domestic like product?  Ther efore, interpretation of Ar ticle III:4 in the context 
of the present dispute boils dow n to the following two elements: 
 (1) whether or not imported automotive parts and components and domestic automotive 
parts and components ar e "like" products; and 
 (2) whether imported automotive parts and components are accorded less favourable 
treatment than domestic like products, in view of the local content requirements. 
 (b) Imported parts and components and dome stic parts and components are "like" products  
5.69 Relevant factors in determin ing whether or not imported automotive parts and components and 
domestic automotive parts and components are " like products" may be constructed on a case-by-case 
basis by examining relevant factors including: 
(i) the product's end-uses  in a given market, 
(ii) consumers' tast es and habits, and 
(iii) the product's propertie s, nature and quality.94 
5.70 Domestic automotive parts and components and automotive parts and components from Japan 
are regarded as a single product for use in the assembly of automobi les, and thus it is practically 
unnecessary to discuss the "like" products issue furt her in this present case .  Automotive parts and 
components are identical in all resp ects (including the end-uses, propert ies, nature and quality) with 
domestic ones may be imported from abroad. 
5.71 Imported automotive  parts and components  from Japan and other WTO Members are "like" 
domestic parts and components that may be used in the assembly of National Cars.  The only distinction 
that the Indonesia has made relevant under the Prog ramme is not whether impo rted or domestic parts 
and components differ in any physic al respect, but where they originate.  Thus, imported and domestic 
parts and components are "like products" unde r Article III:4.  
 (c) Imported parts and components are acco rded less favourable treatment than domestic 
like products in two respects  
5.72 Only parts and components that originate in  Indonesia contribute to  the satisfaction by a 
National Car producer of the local content requi rement upon which Indonesia has conditioned the duty 
free treatment of the remaining im ported parts and components used to assemble the National Car and 
the luxury tax exemption on National Cars. 
                                                      
93Canada - Import, Distribution and Sale of Certain Alcoholic Drinks by Provincial Marketing 
Agencies, DS21/R, adopted on 18 February 1992 (BISD 39S/27)  para.5.5.  
94Working Party Report on Border Tax Adjustment , para.18;  Report of the Appellate Body on Japan -  
Alcoholic Beverages II , p.19; Report of the Appellate Body on Canada - Periodicals , pp.19-20.  WT/DS54/R, WT/DS55/R, 
WT/DS59/R, WT/DS64/R 
Page 53 
 
 
 (1) The import duty exemption on automotive parts and components used in the assembly 
of National Cars conditioned upon the attainme nt of certain levels of local content 
accords advantages to domestic automotive parts and components not available to 
imported like products   
5.73 WTO/GATT panels have consis tently found that requirements to  purchase domestic products to 
obtain an advantage violate Article III:4.  The EC-Bananas III  case, a WTO panel quoted and reaffirmed 
the following description by the 1994 GATT panel on EC-Bananas II  regarding the scope of 
Article III:4: 
previous panels had found consistently that  this obligation applies to any requirement 
imposed by a contracting party, including re quirements 'which an enterprise voluntarily 
accepts in order to obtain an advantage from the govern ment (EEC - Regulation on 
Imports of Parts and Components , adopted on 16 May 1990 (BISD 37S/132), 
para. 5.21).'  In the view of the Panel, a requirement to purchase a domestic product in 
order to obtain the right to import a produc t at a lower rate of duty under a tariff quota 
is therefore a requirement affecting the pur chase of a product within the meaning of 
Article III:4.95 
5.74 The Bananas III  finding reinforces firmly  established GATT precedent (e.g. the 1958 panel 
report on Italian Di scrimination Against Imported Agriculture Machinery96 and the 1984 report on 
Canada - Administration of the Fore ign Investment Review Act ("FIRA")97). 
5.75 On the basis of their domestic origin, I ndonesian automotive parts and components receive 
treatment substantially more fa vourable than do even identical automotive parts and components 
imported from Japan and other WTO Members. In particular, only part s and components that originate 
in Indonesia contribute to the satis faction by a National Car producer of the local content requirement 
upon which Indonesia has conditioned the import duty (a nd further luxury tax) exemption.  In other 
words, Indonesia's National Car Pr ogramme established local content targets that automakers must 
satisfy in order to obtain a slidi ng scale of duty preferences, thereby favouring the purchase of domestic 
over imported like products for purposes of automobile production.  The pl ain language of Article III:4, 
as applied in the EC - Bananas III  and other cases (including the FIRA  and Italian Agriculture 
Machinery  cases) leaves no doubt that such an arrangement violates Article III:4. 
 (2) The luxury tax exemption on sales of National Cars conditioned upon the attainment of 
certain levels of local content accords advantages to domestic automotive parts and 
components not available to imported like products     
                                                      
95EEC-Import Regime for Bananas, DS38/R, para. 146, 11 February 1994 (not adopted)("EC - 
Bananas II"), as quoted and adopted by the WTO panel in EC - Regime for the Importation, Sale and 
Distribution of Bananas ("EC - Bananas III"), WT/DS27/R/USA, paras. 7.179 and 7.180.  
96See the 1958 panel report on Italian Discrimination Against Imported Agriculture Machinery , which 
concluded that Italian government credits for the purchase of domestically-produced machinery "might 
adversely modify the conditions of competition between the domestic and imported products" in violation of 
Article III:4. (BISD 7S/60, para. 12, adopted on 23 October  1958).  
97See 1984 report on Canada - Administration of the Foreign Investment Review Act ("FIRA "), in 
which the panel found that "requirements to buy from Cana dian suppliers are inconsistent with Article III:4."  
(BISD 30S/140, para. 5.10, adopted on  7 February 1984.) In particular, the FIRA  panel noted that the coverage 
of "requirements" under Article III:4 included "undertakings," even if voluntary, to purchase domestic products 
if:  "once they were accepted [such undertakings] becam e part of the conditions under which the investment 
proposals were approved, in wh ich case compliance could be legally enforced." (para. 5.4)  WT/DS54/R, WT/DS55/R, 
WT/DS59/R, WT/DS64/R Page 54 
 
 5.76 On the basis of their domestic origin, I ndonesian automotive parts and components receive 
treatment substantially more fa vourable than do even identical automotive parts and components 
imported from Japan and other WTO Members. 
5.77 The conditioning of the luxury tax exemption on a local content requirement affords protection 
to domestic automotive parts and components because it promotes the sale of National Cars over other 
domestically assembled sedans that contain a greater proportion of import ed parts.  Such less favourable 
luxury tax treatment of imported pr oducts relative to a domestic like pr oduct stands in clear violation of 
Article III:4 precisely in the same way as the import  duty exemption discussed in the preceding section. 
2. Claims Raised by the European Communities
 
5.78 The European Communities  claims that the following measures (See  Section III.B) applied by 
Indonesia are inconsistent with Ar ticle III:4 of GATT 1994 because th ey favour the “use” by Indonesian 
car manufacturers of domestic parts and components  over “like” imported parts and components:  
 (1) the exemption from the Sales Tax on Luxur y Goods of locally manufactured combines, 
minibuses, vans and pick-ups with more than 60 per cent local content; 
 (2) the exemption from the Sales Tax on Luxury  Goods of locally manufactured sedans and 
stations wagons of less than 1,600 cc w ith more than 60 per cent local content; 
 (3) the exemption from the Sales Tax on L uxury Goods of National Cars assembled in 
Indonesia by Pioneer companies meeting certain local content requirements; 
 (4) the exemption from the Sales Tax on L uxury Goods of National Cars assembled in 
Korea by “overseas producers” meeting certain counter-purch asing obligations; 
 (5) the grant of import duty relief to parts a nd components used in the assembly of motor 
vehicles (or of other parts and components for the assembly of motor vehicles)  in 
Indonesia based on the finished vehicles (or the parts and co mponents)  meeting certain 
local content requi rements;  and 
 (6) the exemption from import duties for part s and components used for the assembly of 
National Cars in Indonesia by Pioneer Companies meeting certain local content 
obligations. 
5.79 The following are the European Communities's  arguments in support of these claims:   
5.80 Article III:4 of GATT provides in pertinent part that: 
The products of the territory of any contrac ting party imported into the territory of any 
contracting party shall be accorded treatment no less favourable than that accorded to 
the products of national origin in respect of all laws, regulatio ns and requirements 
affecting their internal  .... use. 
5.81 In order to rule on this claim, the Panel is required by the wording of Article III:4 to make the 
following determinations: 
- first, whether the measures at issue ar e “laws, regulations or requirements”; 
- second, whether they  “affect the internal us e” of parts and component s for the assembly of 
motor vehicles; WT/DS54/R, WT/DS55/R, 
WT/DS59/R, WT/DS64/R 
Page 55 
 
 
- 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. 
 (a) The measures at issue are “laws,  regulations or requirements " 
5.82 The measures at issue are contained in generally applicable Presidential Instructions, 
Government Regulations and Decrees of the Minister of Finance and of  the Minister of Industry and 
Trade.  Therefore, they are “laws or regulations” within the meaning of Article III:4.  
5.83 The measures are “voluntary” in the sens e that car manufacturer s are not under a legal 
obligation to use local parts and components and that failure to comply with the local content targets set 
by the measures only entails the loss of the tax and tariff benefits linked theret o. This, however, does not 
have the consequence of placing the measures  outside the purview of  Article III:4.  
5.84 Previous Panels have made clear that III: 4 does not apply only to “mandatory” measures.  
Where compliance with a certain measure is necessary in  order to secure an advantage or benefit, such 
measure may also be covered by Article III:4.  As  noted by the Panel Report on EEC - Regulation on  
Imports of Parts and Components : 
... the comprehensive coverage of ‘all  laws, regulations or requirements affecting ’ 
[emphasis added by the Panel] the internal sa le, etc. of imported pr oducts suggests that 
not only requirements which an  enterprise is legally bound to  carry out,  such as those 
examined by the FIRA Panel .... but also t hose which an enterprise voluntarily accepts 
in order to obtain an advantage from the government constitute ‘re quirements’ within 
the meaning of that provision.98 
5.85 The “advantage” in question may consist of a be nefit granted in respect of an import measure, 
such as for instance a tariff exemption.  Thus, in EC - Regime for the Importa tion, Sale and Distribution 
of Bananas  the Panel found that a requireme nt to purchase domestic banana s in order to obtain the right 
to import bananas at a lower duty rate under a tari ff rate quota was a requirement  affecting the internal 
purchase of a product within th e meaning of Article III:4.99   
                                                      
98Panel Report on European Communities - Regulation on imports of Parts and Components , adopted 
on 16 May 1990, 37S/132, 197,  para 5.21. 
This principle has been consistently followed by other Panels. Thus, the Panel Report on Italian 
discrimination against Imported Agricultural Machinery  (adopted on 23 October 1958, BISD 7S/60, 64, para 12) 
found that an Italian law providing es pecial credit terms to farmers for th e purchase of agricultural machinery 
conditional on the purchase by the farmers of Italian machin ery was contrary to Article III:4.  Similarly,  the 
Panel Report on EEC - Payments and subsidies paid to Processors and Producers of Oilseeds and Related 
Animal Feed Proteins (adopted on 25 January 1990, BISD 37S/86, 124-125) concluded that the payment by the 
Community of subsidies to the processors of oilsee ds who purchased oilseeds of Community origin was 
contrary to Article III:4.  
99See e.g. Panel report on EC - Regime for the Importation, Sale and Distribution of Bananas , adopted 
25 September 1997,  WT/DS 27/R/USA, paras. 7.179 and 7.180. On appeal, this finding has been upheld by the Appellate Body  (WT/DS 27/AB/R,  adopted 25 September 1997, at para 211). 
 WT/DS54/R, WT/DS55/R, 
WT/DS59/R, WT/DS64/R Page 56 
 
  (b) The measures  "affect the internal use"  of  parts and components for the assembly of 
motor vehicles  
5.86 For a measure to “affect” the use of parts and components for motor vehicles , it does not have to 
regulate directly those products.  It only has to af fect the conditions of comp etition between domestic 
and imported parts and components.  In the words of the Panel Report  on Italian Discrimination Against 
Imported Agricultural Machinery :  
... The selection of the word ‘affecting’ would imply [...] that the drafters of the Article 
intended to cover in [Article III:4] not only the laws and regulations which directly 
governed the conditions of sale or purchase  but also any laws or regulations which 
might adversely modify the conditions of  competition between the domestic and 
imported products on the internal market.100 
5.87 The measures in dispute “affect” the internal use of automotive parts and components because 
they “modify adversely the conditions of compe tition”’ between domestic and imported parts and 
components by giving to the Indonesian car manufacturers  tax and tariff incentives for using local parts 
and components instead of impo rted like parts and components.101 
                                                      
100Panel Report on “Italian Discrimination against Imported Agricultural Machinery” , adopted on 23 
October 1958, 7S/60, 64, para 12.  
101That the purpose of the measures at  issue is to increase the use of local parts and components at the 
expense of imported parts is not only obvious from the structure and design of the measures but has been openly acknowledged by the Indonesian authorities. 
Thus, the only recital of  Decree 645/93 reads as follows: 
“Considering that to increase the effici ency of the motor - vehicle assembling 
industry, the parts and accessories industry thereo f, and in the framework of saving  foreign 
exchange as well as increase domestic production , it is deemed necessary to regulate relief of 
import duty on importation of certain parts and accessories for assembling purposes” [emphasis added] 
The recital of Decree 223/95 am ending Decree 645/93 is even less ambiguous in this respect: 
“considering that with a view to in crease the volume of local contents
 used in the 
industry of automotive assembly  and the industry of automotiv e parts and accessories, as well 
as within the framework of economising on fo reign exchange and enhancing the utilisation of 
domestic product s it is necessary to improve...” [emphasis supplied] . 
A similar statement is found in the first recital of Government Regulation 36/96: 
“Considering that in an effort to motivate development in the car industry to expand 
the use of domestic car components , it is deemed necessary to provide facilities of Sales Tax 
on certain goods considered as Luxury, on the tr ansfer of certain motor vehicles ” [emphasis 
supplied] 
More recently, the “policy ob jective” of the measures at issue has been defined in the following terms 
in Indonesia’s notification under Article XVI:1 of GA TT 1994 and Article 25 of the SCM Agreement as 
"to support development of the domestic automotive industry, including increased 
use of domestically produced components ” [emphasis supplied] (G/SCM/N/16/IDN) WT/DS54/R, WT/DS55/R, 
WT/DS59/R, WT/DS64/R 
Page 57 
 
 
 (c) Imported parts and components and dome stic parts and components are “like” products  
5.88 The mere fact of being manufactured in Indone sia does not of itself confer upon Indonesian 
made parts and components any specific characteristic s, properties,  nature or quality which makes them 
“unlike” parts and components made in the Community.  
 (d) The measures at issue give “less favourable treatment” to imported parts and 
components  
5.89 The measures at issue afford  “less favourable treatment” to  imported parts and components 
because the use of those parts does not entitle Indone sian car manufact urers to the same tax and tariff 
benefits as the  use of like domestic parts. As  a result, whenever both Community made parts and 
components and Indonesian made part s and components can be obtained on the same conditions,  the 
Indonesian car manufacturers will give  preference to the purchase or internal production of Indonesian 
made parts and components over the im portation of Community made ones. 
 (e) Local content requirements  have already been found contra ry to Article III:4 of GATT  
5.90 Local content requirements similar to the one s under consideration have already been found to 
be inconsistent with Article III:4 of GATT by previous Panels. 
5.91 In the 1984 case concerning Canada’s Foreign Investment Review Act (“FIRA”) , the Panel 
found that the undertakings given to the Canadian  Government by certai n foreign investors to, inter alia ,  
purchase goods of Canadian origin in specified amounts or proportions af forded "less favourable 
treatment" to like imported products and were therefore contrary to Article III:4.102 
5.92 Local content requirements ha ve also been found contrary to Article III:4 by the 1990 Panel 
Report on EC - Regulation on Im ports of Parts and Components .  In that case, the Panel concluded that, 
by making the suspension of anti-circumvention proceedings initiated in accordance with the 
Community’s anti-dumping regulations against the subs idiaries of Japanese companies established in  
Community territory conditional upon th e investigated companies giving an undertaking to limit the use 
of Japanese parts and materials, without imposi ng similar limitations on the use of like domestic 
products,  the latter were give n more favourable treatment in violation of Article III:4.103 
 (f) The TRIMs Agreement confirms that the measures are incompatible with Article III:4 
of the GATT  
5.93 The TRIMs Agreement has confirmed beyond doubt that local content requirements such as the 
ones under consideration are inconsis tent with Article III:4 of GATT. Indeed, the Illustrative List of 
TRIMs annexed to that Agreement reads in relevant parts as follows: 
 1. TRIMs that are inconsistent with th e obligation of nationa l treatment provided 
for in paragraph 4 of Ar ticle III of GATT 1994 incl ude those [....] compliance 
with which is  necessary to obtai n an advantage, and which require: 
 (a) the purchase or use by an enterprise of   products of domestic  origin or from any 
domestic source [...] in terms of a pr oportion of volume or value of its local 
production. 
                                                      
102Panel report on Canada - Administration of the Foreign Investment Review Act , adopted on 7 
February 1984, BISD 30S/140, paras 5.4-5.12.  
103 Panel report on EEC - Regulation on Imports of Parts and Components , adopted on 16 May 1990, 
BISD  37S/132, paras 5.19-5.21.  WT/DS54/R, WT/DS55/R, 
WT/DS59/R, WT/DS64/R Page 58 
 
 5.94 The measures in dispute fall s quarely within point 1 (a) of the I llustrative List and are  therefore 
contrary to  GATT Article III:4.  
3. Claims Raised by the United States
 
5.95 The United States  claims that Indonesia’s system of tariff and tax incentives and the 
government-directed $690 million loan to TPN (See  Section III.C), all of which are contingent upon the 
use of domestic automotive parts, are inconsistent with Article III:4 of GATT 1994 and are not covered 
by Article III:8(b) of GATT 1994.  The following are the United States'  arguments in support of these 
claims:   
 (a) Summary of the measures  
5.96  Imported automotive parts, as well as importe d subparts, face discrimination once they arrive in 
Indonesia.  Indonesia offers several incentives to purchaser s and users of automoti ve parts and subparts 
that are intended to encourage th e use of Indonesian-made parts and s ubparts.  These incentives can be 
summarized as follows: 
 (1) Import duty incentives  
5.97  Under Decree No. 645/1993, as amended by  Decree No. 223/1995, the import duty rate on 
imported automotive parts and subparts decreases as th e local content of the finished product (either a 
motor vehicle or a motor vehicle part) increases.104  If the degree of local content exceeds a certain 
threshold (60 per cent in the case of  passenger cars, 40 per cent in the case of light commercial vehicles, 
and 40 per cent in the case of subparts of passenger cars and light commercial  vehicles), imports may 
enter duty-free.  (See  Tables 6 and 7) 
5.98  In addition, under the National Motor Vehi cle programme, Article 4(2) of Decree No. 
645/1993, as amended by Article 1 of  Decree No. 82/96, exempts "[i]m ports of parts and equipment of 
motor vehicles for assembling purpo ses or manufacture of national motor vehicles which fulfil the 
required local contents stipulated by the Minister of Industry and Trade ... ."  As set forth in Article 3(1) of Decree No. 31/1996, in order to receive national mo tor vehicle benefits, the local content rates shown 
in Table 8 must be achieved. 
5.99  Finally, under Article 1 of Presidential Decr ee No. 42/1996, national motor vehicles produced 
abroad were allowed to be importe d free of the 200 per cent Indonesia n tariff on CBU pa ssenger cars if 
such cars “fulfill[ed] the local content requirements as stipulated by the Minister of Industry and Trade”;  i.e., if they satisfied the local content rates of De cree No. 31/1996 set forth in the preceding paragraph.  
Thus, TPN was allowed to import CBU Kia Sephia sedans from Ko rea without having to pay the 
200 per cent tariff on finished passenger cars.  TPN wa s allowed to do so only because, as a participant 
in the joint venture to assemble a "national motor vehicle", it was subject to the local content schedule 
set forth in Decree No. 31/1996. 
(2) Tax incentives
 
5.100 Under Decree No. 647/1993, passenger cars and jeeps were subject to a luxury tax of only 
20 per cent, provided that their local content exceede d 60 per cent.  Otherwise, the luxury tax for these 
motor vehicles was 35 per cent.  Regulation No . 20/1996 established a more complex luxury tax 
schedule, although the distinguishing fe ature of the schedule continued to be that the luxury tax rate 
decreased as the rate of local c ontent increased.  Finally, Regulat ion No. 36/1996 increased the degree of 
discrimination inherent in Indonesia’ s luxury tax structure by establishi ng a luxury tax rate of 0 per cent 
                                                      
104Decree No. 223/1995 replaced the incentive schedule originally c ontained in Decree No. 645/1993. WT/DS54/R, WT/DS55/R, 
WT/DS59/R, WT/DS64/R 
Page 59 
 
 
for national motor vehicles and motor vehicles with  a local content greater than 60 per cent.  Under 
Regulation No. 36/1996, the following luxury tax schedule currently exists: 
Table 12 
Luxury Tax Relief 
Type of Motor Vehicle Luxury Tax Rate 
passenger cars ≥ 1600cc 
passenger cars with local content ≤ 60% 
jeeps with local content ≤ 60%  
35% 
light commercial vehicles (other than jeeps) 
  using diesel fuel with local content ≤ 60%  
25% 
light commercial vehicles (other than jeeps) 
  using gasoline with local content ≤ 60%  
20% 
passenger vehicles < 1600cc manufactured in  Indonesia with local content > 60% 
light commercial vehicles (diesel or gasoline)   With local content > 60% national motor vehicles  
 
0% 
Under this schedule, all passenger vehicles and light commercial ve hicles (with the exception of 
passenger cars with a cylinder capac ity greater than or equal to 1600cc) are exempt from the luxury tax 
provided that  the local content of the vehicle exceeds 60 per cent.  Thus, the incentive to use domestic, 
rather than imported, automotive parts is even grea ter.  And, of course, national motor vehicles are 
subject to their own local content sche dule, as set forth in Decree No. 31/1996. 
 (3) The government-directed $690 million loan  
5.101 Finally, there is the government-directed $690 mi llion loan to TPN.  Th is loan conferred an 
advantage on TPN because of (1) the concessional te rms of the loan; and (2) in the absence of this 
intervention by Indonesia, TPN would not have been able  to obtain such a loan due to its own financial 
situation, the financial situation of its partner, Kia Motors, and the overall clamp down on lending by the 
Indonesian Government.  In addition, the eviden ce is overwhelming that  Indonesia ordered the 
consortium of government-owned banks and private banks to provide the loan because of TPN’s 
status as a participant in the production of a “national motor vehicle".  TPN’s status, in turn, was contingent upon satisfaction of the local content requirements for a “national motor vehicle” set forth in 
Decree No. 31/1996. 
5.102 The most recent component of the Nationa l Motor Vehicle programme was introduced on 
11 August 1997, when a consortium of four governme nt-owned banks and twelve private banks decided 
to disburse US$650 million in ten-year loans to TPN to carry out the national car project.
105   Although 
the twelve private banks have not been identified in full, the four  government-owned banks reportedly 
are Bank Dagang Nagara (BDN), Bank Expor Im por, Bank Rakyat Indone sia, and Bank Tabungan 
Negara.106  BDN previously had disbursed a US$40 milli on bridging loan to TPN, bringing the total 
loan amount to US$690 million.  The loans reportedly w ill carry an annual intere st rate of 3 per cent 
                                                      
105"16 Banks to Lend $690 Million for Timor Car Project”, Jakarta Post , 12 August 1997 (US 
Exhibit 14, pp. 161-162). 
106 Id. WT/DS54/R, WT/DS55/R, 
WT/DS59/R, WT/DS64/R Page 60 
 
 over the 3-6 month deposit rate, a maturity of 10 years, and a gr ace period of 3 years.
107  The four 
government-owned banks would provide one-half of the $650 million loan.108 
5.103 The circumstances surrounding this loan indica te that the loan was provided at the express 
direction of the Government of Indonesia, and that  but for the Government’s involvement, TPN never 
would have obtained the loan. 
5.104 On 21 April 1997, nine economics  ministers were inst ructed by the President to coordinate 
efforts to implement the car programme.109  This group was given a mand ate to ensure that the Kia 
Timor venture has a local c ontent of 60 per cent by 1999.110  The President’s directive apparently 
resulted, among other things, in a directive from the Minister of National Development Planning that 
"All government bodies and state-ow ned companies should purchase th e Timor when they need new 
sedans".111 
5.105 In May, the Coordinating Minister for Ec onomy and Finance announced that Indonesia had 
"ordered" 13 banks to lend US$1.3 billion to TPN.112  The private banks hesitated to do so, but were 
eventually persuaded to do so.113  Even after being persuaded, the private banks would agree to provide 
no more than one-half of the financing. 
5.106 In addition, the decision to grant the $690 mi llion loan package came at a time when Indonesia, 
due to the depreciation of the rupiah and overly a ggressive lending by banks, was clamping down on 
credit and cancelling large projects, thereby making  the loan to TPN all the more extraordinary.114  
Indeed, the President of Indonesia, in his state of the na tion address, announced "t hat all projects that 
were not a national priority would be shelve d given the ‘new realities’ facing the country".115  As a 
                                                      
107 Id. 
108 Id. 
109  “RI to Finish Car Programme by ‘99”, The Jakarta Post , 23 April 1997, p. 1 (US Exhibit 14, 
pp. 105-107). 
110  “Timor in Trouble at WTO and at  Home”, Business Times (Singapore ), 25 June 1997 (US 
Exhibit 14, pp. 143-145). 
111  "Timor Faces Rough Road at WTO; Indonesia’s Go vernment Promises to Back Vehicle Project", 
The Nikkei Weekly , 23 June 1997, p. 23 (US Exhibit 14, pp. 140-142). 
112 "Analysts Warns [ sic] About Loans for Timor Car", Jakarta Post , 13 August 1997, p. 1 (US 
Exhibit 14, pp. 163-165). 
113  “Indon Banks May Land in the ER”, Business Times (Singapore ), 15 August 1997, p. 7 (US 
Exhibit 14, pp. 166-169); see also “Indonesia Company: Suharto Clan’s Business Activities”, EIU Viewswire , 
28 July 1997 (US Exhibit 14, pp. 154-157)  (“This year the government twisted bankers’ arms to procure a 
$690m loan to finance [TPN’s] assembly  plant.”).  Apparently, while the Government of Indonesia initiated the 
“national motor vehicle” programme, it lacked the money to  pay for it.  Therefore, the involvement of private 
lenders was necessary.  “BRI Not Under Pressure to Support Nat’l Car Programme,” ANTARA - The 
Indonesian National News Agency , 13 June 1997 (US Exhibit 14, pp. 136-137).  Moreover, international banks 
had refused to lend to TPN.  “Bumpy Road Ahead for Motoring Plan”, South China Morning Post , 8 June 1997, 
p. 7 (US Exhibit 14, pp. 132-135). 
114 As one commentator noted of the decision to grant the $690 million loan, “The move appears to 
contradict government policy to clamp down on credit growth.”  “Jakarta Plans New ‘National’ Car”, Financial 
Times (London ), 7 May 1997, p. 4 (US Exhibit 14, pp. 110-111). 
115  “Timor Car Project Not to Be Rescheduled in  Face of Currency Crunc h” Agence France Presse , 
20 August 1997 (US Exhibit 14, pp. 170-171);  see also “Timor Car Project Won’t Be Rescheduled”, Jakarta 
Post, 21 August 1997 (US Exhibit 14, pp. 172-173), in which it was reported that: 
President Soeharto, in his National Day Addr ess last Saturday, called on the business 
community to select projects for implementation carefully in view of the currency upheaval 
currently confronting the economy.  Soeharto said the government and business should review 
their investment projects to ascertain which shou ld be given top priority and which should be 
postponed. WT/DS54/R, WT/DS55/R, 
WT/DS59/R, WT/DS64/R 
Page 61 
 
 
result, according to the Coordinati ng Minister for Economy and Finance, the Government “took stock of 
projects according to their scale of  priority.  Obviously, high priority programmes will not be axed".116  
However, when asked by reporters whether the Timor car project would be rescheduled, the 
Coordinating Minister responded that “the term ‘national’ classifies it as a high priority project”.117  This 
followed an earlier statement by the Coordinating Minister that "E veryone must support the [national 
car] programme".118 
5.107 Likewise, the Minister of I ndustry and Trade was reported as declaring that, because the Timor 
car project was a national project, it would not be rescheduled despite the rupi ah plunge that prompted 
the rescheduling of other major projects.119  This followed earlier statements by Government officials 
stressing the critical importance of the Kia Timor project: 
 "The government, as the facilitator, will pr ovide whatever assistance they need, either 
in construction, licensing or other aspects of the industry."120  
 "We have to support the programme from all sides so the project can be finished as 
soon as possible."121 
 "The government has money to spend.  And, naturally, it is in the government’s interest 
to use that money for priority programmes, particularly a national programme".122 
5.108 Banking sources indicated that Bank Indonesia,  the central bank, woul d provide subsidized 
liquidity credit of up to 70 per cent of  the funds needed for the car project.123  I n  s u m m a r i z i n g  t h e  
decision to grant the $690 million loan package, one economist characte rized the loans as “special credit 
which ‘seemed to be endorsed by the central bank’.”124  However, an editorial in The Jakarta Post  best 
captured the situation:125 
Given the power of the government, and in view of the “national” label put on the 
Timor car programme, those bank s will have no other choice but to give the required 
loans, at the great risk of suffering bad credit. 
                                                                                                                                                                     
See also , “Indonesia: Jakarta Pledges to Cut Big Projects”, Financial Times (USA ) 
(17 September 1997) <http://www.u sa.ft.com/hippocampus/v4514e.htm > (US Exhibit 15, pp. 3-4). 
116  “Ministers Review Projects Rescheduling”, Business Daily , 8 Sepember 1997 (US Exhibit 14, pp. 
174-175). 
117  Id. 
118  “13 Banks Ordered to Finance Timo r Car Project”, The Jakarta Post , 7 May 1997, p. 12 (US 
Exhibit 14, pp. 112-114). 
119  “National Car Programme Not Affected by Curren cy Crisis”, ANTARA - The Indonesian National 
News Agency , 10 September 1997 (US Exhibit 14, pp. 176-178). 
120  “RI to Finish Car Program by ‘99”, The Jakarta Post , 23 April 1997, p. 1 (US Exhibit 14, pp. 105-
107). 
121  “Government Agencies Urged to Buy Timor Nat’l Car”, ANTARA - The Indonesian National News 
Agency , 5 June 1997 (US Exhibit 14, pp. 129-131). 
122  "Govt Offices to Be Obliged to Buy Timor Car", The Jakarta Post , 4 June 1997, p. 1 (US Exhibit 14, 
pp. 126-128). 
123  “13 Banks Ordered to Finance Timor Car Project” The Jakarta Post , 7 May 1997, p. 12 (US 
Exhibit 14, pp. 112-114). 
124  "Analysts Warn About Loans for Timor Car" Jakarta Post . 13 August 1997 (US Exhibit 14, 
pp. 163-165). 
125 Quoted in “Indonesia ‘National’ Car Stalls” International Herald Tribune , 27 May 1997, p. 17 (US 
Exhibit 14, pp. 123-125). WT/DS54/R, WT/DS55/R, 
WT/DS59/R, WT/DS64/R Page 62 
 
 5.109 Indeed, newspapers reported that the Gover nor of Bank Indonesia (the Indonesian central bank) 
was opposed to state banks gr anting a large loan to TPN.
126  However, the Governor reportedly was 
forced to approve the deal following a meeting with the President.127 
5.110 Finally, all indications are that TPN was not perceived as a sound credit risk, and that the 
decision to grant the US$690 million loan package was based on something other than commercial 
considerations.  Reportedly, some of the private ba nks involved were willing to immediatel y write off 
any credit they would give to TPN.128  Some analysts regarded the decision “as a double standard and a 
violation of prudent banking principles.”129   Other analysts were more specific130: 
Economist Faisal Basri from th e University of Indonesia and automobile analyst Suhari 
Sargo doubted [TPN’s] capacity to repay the de bts in view of the sm all sales target set 
by the company.  “An annual sales target of 40,000 vehicles per annum is too small to 
reach a break-even point,” Faisal was quoted by Antara as saying.  Faisal also doubted 
whether the US$690 million loans would be  sufficient for [TPN] to develop a 
manufacturing industry with a minimum local content of 60 per cent , as required by the 
government.  Analyst Suhari foresaw a fina ncial burden of at least US$170 million a 
year for [TPN] simply to install and servi ce the debts beginning in 2000.  “This amount 
will be equivalent to 15,000 cars.  That’s ve ry hard for [TPN] because it has to produce 
and sell 150,000 vehicles a year to get a 20 per cent profit margin, ... .”  He said 
between 30,000 and 50,000 sedans were sold each year, or 15 per cent to 20 per cent of 
the country’s total automobile market. 
5.111 Moreover, the Kia Timor project was in so much trouble that the Government of Indonesia 
finally wound up “roping in two leading domes tic automakers, PT Astra International and PT 
Indomobil.”131  Indomobil was charged with assembling th e Timor Kia Sephias, while the Government 
asked Astra to participate by supervising the cons truction of assembly facilities and the nation-wide 
distribution of the cars.132 
5.112 To make matters worse, and the decision to gr ant the loan package even  more questionable, the 
decision was made in light of the fact that TPN’s partner, Kia, was in extremely perilous financial 
condition.  Kia was responsible for putting up US$400 million to build the assembly plant.133  O n  
15 July 1997, the Kia Group was placed under control of a bankruptcy protection committee by bankers 
                                                      
126  “Indonesian National Car Marker to Get Lo ans from State Banks” , Agence France Presse , 
29 April 1997 (US Exhibit 14, pp. 108-109);  see also “Minister Says Indonesia to Slash Credit to National 
Car”, Agence France Presse , 14 May 1997 (US Exhibit 14, pp. 119-120); “Indonesia Preparing Team to Defend 
Nat’l Car Policy at WTO”, ANTARA - The Indonesian National News Agency , 9 May 1997 (US Exhibit 14, 
pp. 115-118); and “Jakarta Plans New ‘National’ Car”, Financial Times (London ), 7 May 1997, p. 4 (US Exhibit 
14, pp. 110-111). 
127 Id.  See also  “13 Banks Ordered to Finance Timor Car Project”, The Jakarta Post , 7 May 1997, p.12 
(US Exhibit 14, pp. 112-114). 
128  “13 Banks Ordered to Finance Timo r Car Project”, The Jakarta Post , 7 May 1997, p. 12 (US 
Exhibit 14, pp. 112-114). 
129  “Indonesia Tries to Head Of f Bank Crisis” The Nikkei Weekly , 4August 1997, p. 20 (US Exhibit 14, 
pp. 158-160). 
130  “Analysts Warn About Loans for Timor Car”, Jakarta Post , 13 August 1997 (US Exhibit 14, pp. 
163-165). 
131  “Astra, Indomobil Roped in to Speed Up Timor Car Project” Business Times (Singapore ), 
16 May 1997, p.1 (US Exhibit 14, pp. 121-122).  One source described TPN’s manufacturing plans as “currently 
in disarray”.  Id. 
132 Id.  Astra’s decision to “help” did not come as a surprise to some observers, because Astra is 9.3 per 
cent owned by the Nusamba Group, an investment company controlled by three foundations controlled by the 
President.  Id. 
133  “A Furious Flap Over Favoritism", Business Week , 8 July 1996, p. 14 (US Exhibit 14, pp. 92-95). WT/DS54/R, WT/DS55/R, 
WT/DS59/R, WT/DS64/R 
Page 63 
 
 
concerned about the company’s debt of nearly US$11 billion.134  On 22 July 1997, South Korean banks 
refused to meet the full funding requested by th e Kia Group, and demanded that Kia executives 
surrender management control.135  Subsequently, on 22 September 1997, the main units of the Kia 
Group, including Kia Motors, filed fo r special court protection “in a last -ditch attempt to  prevent South 
Korea’s eighth-largest conglomerate from being dismantled and its management ousted by bank 
creditors.”136 
5.113 Finally, in October 1997, Indonesia appealed to  the International Monetary Fund and the World 
Bank for help in the face of a 32 per cent decline in the rupiah since August 1997.137  However, 
notwithstanding this crisis , and notwithstanding calls for further bu dget cuts, newspapers reported that 
“[t]he government has ruled out cuts in th e controversial national car programme ... .”138 
 (b) The tariff and tax incentives and the government-directed $690 million loan are 
inconsistent with Article III:4  
5.114 Article III:4 states the following: 
The products of the territory of any contrac ting party imported into the territory of any 
other contracting party sha ll be accorded treatment no less favourable than that 
accorded to like products of national origin  in respect of all laws, regulations and 
requirements affecting their internal sale, of fering for sale, purc hase, transportation, 
distribution or use.  The provisions of this paragraph shall not prevent the application of 
differential internal transportation charges which are based exclusively on the economic operation of the means of transport a nd not on the nationality of the product. 
5.115 Indonesia’s tariff and tax incen tives for automotive parts and subparts and the provision of the 
$690 million loan are openly discrimi natory and are in plain contrave ntion of Article III:4 of GATT 
1994.  First, they each constitute regulations or  requirements that “aff ect” the sale, purchase, 
transportation and distribution of imported and do mestic automotive parts and subparts.  Second, 
imported automotive parts and subpart s are “like” domestic automotive parts and subparts.  Third, the 
tariff and tax incentives and the $690 million loan di scriminate against import ed automotive parts and 
subparts. 
 (1) The tariff and tax incentives and the government-directed $690 million loan are 
regulations or requireme nts that affect the internal sale, etc. of automotive parts and 
subparts  
5.116 Indonesia’s tariff and tax incentives  are “regulations” or “requirements” that affect the internal 
sale, offering for sale, purchase, distribution or use of automotive parts and subparts in Indonesia.  
Manufacturers or assemblers of motor vehicles (or motor vehicle parts) pay a lower duty on imported 
parts (or subparts) if the finished motor vehicle (o r the finished part) satisfies local content targets 
                                                      
134  “S. Korea Bankruptcy Panel Takes Control of Kia”, Los Angeles Times , 16 July 1997 (US 
Exhibit 14, pp. 146-148);  see also  “South Korea: Emergency Loans Gi ve Breathing Space to Carmaker Kia”, 
Financial Times (London ), (16 July 1997 (US Exhibit 14, pp. 149- 150); and “Koreans Place Kia Motors Under 
Bankruptcy Shield” New York Times , 16 July 1997 (US Exhibit 14, pp. 151-153). 
135  “South Korea: Banks Refuse Full Funding of Kia Rescue”, Financial Times  (23 July 1997) 
<http://www.usa.ft.com/hippocampus/7f1 2a.htm> (US Exhibit 15, pp. 1-2). 
136  “Kia: Debt-Hit Motor Group Seeks Court Protection”, Financial Times (USA ) (23 September 1997) 
<http://www.usa.ft.com/hippocampus/v47d5a.htm> (US Exhibit 15, p. 5). 
137  “Indonesia: IMF Urged to Back Rescue”, Financial Times (USA ) (13 October 1997) 
<http://www.ft.com/hippocampus/v50cd6. htm> (US Exhibit 15, pp. 8-9). 
138  “Indonesia: Fund Managers Urge Government to Cut Budget Deep”, Financial Times (USA ) 
(11 October 1997) <http://www.ft.com/hippocam pus/v5074c.htm> (US Exhibit 15, pp. 6-7). WT/DS54/R, WT/DS55/R, 
WT/DS59/R, WT/DS64/R Page 64 
 
 decreed by the Government.  As such, the various Indonesian measures clearl y create an incentive for 
manufacturers or assemblers to pur chase domestic parts or subparts, as opposed to imported parts or 
subparts. 
5.117 Moreover, while “a determinati on of whether there has been a vi olation of Article III:4 does not
 
require a separate consideration of whether a meas ure ‘afford[s] protection to domestic production’”139, 
it is worth recounting that Indonesia has made no secret of the fact that the purpose of the various 
measures is to protect the domestic automotive pa rts industry.  The preambl e to Decree No. 114/1993 
(which establishes the loca l content thresholds for the 1993 programme ) states that the objective of the 
measure is “supporting and encouraging the development of the automotive industry and/or the 
component industry ...”.  Likewise , the Elucidation to Regulation No . 20/1996 (which established luxury 
tax incentives) states that the purpose of the regulation was “to speed up the achievement [of] the national motor vehicle industry using local component s ...”.  The Elucidation to Regulation No. 36/1996 
is to the same effect.  Most recen tly, in its notification to the SCM Committee, Indonesia stated that the 
objective of both the 1993 and National Motor Ve hicle programmes was the “increased use of 
domestically produced components”.
140 
5.118 In the Screwdriver  panel report, the panel recognized th at requirements that  an enterprise 
voluntarily accepts to gain government-provide d advantages are nonetheless “requirements”141: 
The Panel noted that Article III:4 refers to “all laws, regulations or requirements 
affecting (the) internal sale, offering for sa le, purchase, transportation, distribution or 
use”.  The Panel considered that the comprehensive coverage of “all  laws, regulations 
or requirements affecting ” the internal sale, etc. of impo rted products suggests that not 
only requirements which an enterprise is le gally bound to carry out, ... but also those 
which an enterprise voluntarily accepts in  order to obtain an advantage from the 
government constitute “require ments” within the meaning of that provision ... . 
5.119 Indonesian producers or assemblers  of motor vehicles (or motor vehi cle parts) that seek to take 
advantage of the tariff and tax in centives offered by the Government  must satisfy the local content 
targets of the relevant measures.  These targets are re quirements - or regulations - within the meaning of 
Article III:4. 
5.120 These tariff and tax incentives also clearly “affect” the sale of  imported automotive parts and 
subparts, because they provide a clear incentive to an Indonesian manufacturer or assembler to augment 
its purchases of Indonesian-made parts.  For example,  a manufacturer or an assembler of motor vehicles 
can obtain a complete exemption from tariffs on im ported parts and the luxury tax on finished motor 
vehicles if the local content of the vehicle exceeds 60 per cent.  In th e case of a producer of a “national 
motor vehicle”, such as Kia Timor, the target is even lower; 20 per cent local content in the first year.  These incentives directly affect (and it is their st ated purpose to affect) th e competitive conditions under 
which automotive parts and subparts are sold to manufacturers and assemble rs.  Therefore, these 
incentives “affect” the sale of au tomotive parts subparts in Indonesia.
142 
                                                      
139 “European Communities - Regime for the Impor tation, Sale and Distribution of Bananas ”, Report of 
the Appellate Body, WT/DS27/AB/R, adopted 25 September 1997, para. 216 (emphasis in original). 
140G/SCM/N/16/IDN (13 January 1997), pp. 3 and 4. 
141"EEC - Regulation on Imports of Parts and Components ", L/6657, adopted on 16 May 1990, BISD 
37S/132, 197, para. 5.21 (emphasis in original).  See also  "Canada - Administration of the Foreign Investment 
Review Act ", L/5504, adopted on 7 February 1984, BISD 30S/140, 158, para. 5.4. 
142See "Italian Agricultural Machinery ", L/833, adopted 23 October 1958, BISD 7S/60, 64, para. 12 
(“. . . [T]he text of paragraph 4 referred . . . to  laws and regulations and requirements affecting  internal sale, 
purchase, etc., and not to laws, regulations and requirements governing the conditions of sale or purchase.  The selection of the word ‘affecting’ would imply, in the op inion of the Panel, that th e drafters of the Article WT/DS54/R, WT/DS55/R, 
WT/DS59/R, WT/DS64/R 
Page 65 
 
 
5.121 As for the $690 million loan to TPN, this lo an is no different in kind from the special credit 
facilities that were condemned by the panel in Italian Agricultural Machinery .  TPN received the 
government-directed loan because of its status as a pa rticipant in the Kia Timor joint venture to produce 
a “national motor vehicle”.  Kia Timor achieved its status because of its commitment to satisfy the local 
content requirements of Decree No . 31/1996.  As such, the loan, just  as much as the tariff and tax 
incentives, adversely modifies th e conditions of competition between domestic and imported automotive 
parts and subparts on the Indonesian market. 
 (2) Domestic and imported automotiv e parts and subparts are “like products " 
5.122 Although there obviously are hundreds, if not thousands, of i ndividual parts that go into a 
finished motor vehicle, for purposes of Article II I:4, imported automotive pa rts and subparts are “like” 
automotive parts and subparts made in Indonesia.  Domestic and imported pr oducts share the same 
physical characteristics and commercial uses.  Thus, while a clutch and a shock absorber may differ from each other, a domestic and imported clutch are “like” each other, just as  a domestic and imported 
shock absorber are “like” each othe r.  In Indonesia, however, the Gove rnment discriminates against the 
imported clutch and shock absorber by providing in centives that favour the purchase and use of their 
domestic counterparts. 
 (3) Indonesia’s tariff and tax incentives and the government-directed $690 million loan to 
TPN provide less favourable treatment to imported automotive parts and subparts  
5.123 Indonesia imposes progressively lower import dut ies on imported automotive parts and subparts 
based on the local content of the finished motor ve hicle or the finished part.  Similarly, Indonesia 
exempts sales of motor vehicles from the luxury tax if the local content of the vehicle exceeds 60 per 
cent.  Finally, the Indonesian governme nt directed a consortia of banks to extend special credit facilities, 
in the form of a $690 million loan, to TPN in order to enable the joint venture in which it is the predominant partner, Kia Timor, to produce a “natio nal motor vehicle” that will satisfy local content 
targets.  Each of these measures accords manifestly less favourab le treatment to imported automotive 
parts and subparts in comparison to their domestica lly-made counterparts, and eac h of these measures is 
calculated to place imported products at a comp etitive disadvantage by creating an incentive for 
Indonesian manufacturers or assemble rs of motor vehicles or motor vehicle parts to use Indonesian-
made parts or subparts.  Indeed, Indon esia has made no secret of the fact that the express purpose of this 
discriminatory treatment is to increase the use of  Indonesian-made parts.  I ndonesia’s discriminatory 
measures constitute precisely the type of protectioni st regulatory measures that  Article III:4 condemns. 
 (c) Indonesia’s discriminatory tariff and ta x incentives and the government-directed $690 
million loan do not constitute  a direct subsidy to domestic producers within the 
meaning of Article III:8(b ) 
5.124 Indonesia’s discriminatory tariff and tax in centives and the government-directed $690 million 
loan do not constitute “the payment of subsidies excl usively to domestic produc ers” within the meaning 
of Article III:8( b), because domestic producers of automotive parts or subparts do not receive subsidy 
payments.  In the case of tariff incentives th at favour the use of domestic automotive parts , the subsidies 
go to domestic producers or assemblers of motor vehicles  in the form of lower (or no) import duties on 
imported automotive parts.143  In the case of tariff incentives that favour the use of domestic automotive 
subparts , the subsidies go to domestic producer s or assemblers of automotive parts  in the form of lower 
                                                                                                                                                                     
intended to cover in paragraph 4 not only the laws an d regulations which directly governed the conditions of 
sale or purchase but also any laws or regulations wh ich might adversely modify the conditions of competition 
between the domestic and imported products on the internal market.”  (Emphasis in original)). 
143In the case of Presidentia l Decree No. 42/1996, the subsidy took the form of an exemption from the 
200 per cent tariff on imports of completely built-up Kia Sephia sedans. WT/DS54/R, WT/DS55/R, 
WT/DS59/R, WT/DS64/R Page 66 
 
 (or no) import duties on imported subparts.  In the case of tax incentives that favour the use of domestic 
automotive parts
, the subsidies go to domestic producer s or assemblers of motor vehicles  in the form of 
an exemption from the luxury tax.144  Finally, in the case of the government-directed $690 million loan, 
TPN received the loan in its capacity as  a producer of the “n ational motor vehicle ” and as  user of 
parts .145  As such, these discriminatory measures do no t constitute payments exclusively to Indonesian 
producers of automotive part s (or subparts); rather, they modify the conditions of competition between 
domestic and imported products in  contravention of Article III:4. 
5.125 Article III:8(b) states: 
The provisions of this Article shall not prev ent the payment of subsidies exclusively to 
domestic producers, including payments to domestic producers derived from the 
proceeds of internal taxes or charges applie d consistently with the provisions of this 
Article and subsidies effected through gove rnmental purchases of  domestic products. 
5.126 A series of GATT 1947 panel repor ts have interpreted Article III:8 (b) very narrowly to hold that 
the only subsidies subject to exclusion from the natio nal treatment obligations of Article III are those 
subsidies that are paid exclusively  to domestic producers.  Thus, for ex ample, credit facilities provided 
to purchasers146, and not producers, and payments whose be nefits could be partially retained by 
processors147, have been found not to qu alify under Article III:8(b). 
5.127 Of particular relevance is the panel re port in the Italian Agricultural Machinery  case.  In that 
case, the Italian Government provided special credit facilities to purchasers of Italian agricultural 
machinery.  In finding these facilities to be in  violation of Article III:4, and not excluded by 
Article III:8(b), the panel “agreed . . . that . . . the provisions of paragraph 8(b) would not be applicable 
to this particular case since the credit facilities pr ovided under the Law were granted to the purchasers of 
agricultural machinery and could not be consider ed as subsidies accorded to the producers of 
agricultural machinery.”148  With respect to the Indonesian subsid ies at issue here, these subsidies are 
provided to the purchasers  of automotive parts (or, in some cases , subparts) and cannot be considered as 
subsidies accorded to the producers  of automotive parts (or subparts). 
D. General response by Indones ia to claims Under Article II I of GATT 1994 - SCM Agreement 
prevails  
5.128 Indonesia  makes a general response to all of the cl aims raised by the complainants, including 
those under Article III, by arguing that the Agr eement on Subsidies and Countervailing Measures 
("SCM Agreement") is the lex specialis , and prevails, for review of the 1993 and 1996 subsidy 
programmes, which Indonesia, as a developing country, is permitte d to maintain.  In addition, Indonesia  
responds specifically to the claims under Article III:4 regarding th e tariff measures, by arguing that these 
are border measures and voluntary m easures and thus not governed by Ar ticle III. (See Section V.F.1.)  
Indonesia  also responds specifically to all of the claims (including those under Article III) made with 
                                                      
144Under Regulation No. 36/1996, there are no gradations in terms of local content rates.  If local 
content exceeds 60 per cent, the vehicle is exempt from th e luxury tax.  If not, the vehicle is subject to the 
luxury tax based on the rate applicable to the vehicl e type.  In the case of a “national motor vehicle,” the 
applicable local content rate varies by year. 
145At the risk of repetition, TPN received the government -directed loan due to its status as a participant 
in the Kia Timor joint venture to prod uce the “national motor vehicle.”  Ki a Timor’s status, in turn, was based 
on its obligation to satisfy specific local content targets under Decree No. 31/1996. 
146"Italian Agricultural Machinery ", L/833, adopted 23 October 1958, BISD 7S/60, 64, para. 16. 
147"European Economic Community - Payments and Subsidies Paid to Processors and Producers of 
Oilseeds and Related Animal-Feed Proteins", L/6627, adopted on 25 January 1990, BISD 37S/86, para. 137. 
148 BISD 7S/60, 64, para. 14. WT/DS54/R, WT/DS55/R, 
WT/DS59/R, WT/DS64/R 
Page 67 
 
 
respect to the June 1996 measures by  arguing that those measures have expired.  (See Section X.A.)  
The following are Indonesia's  general responses to the Article III cl aims raised. 
1. The SCM Agreement is the lex specialis  for review of the 1993 and 1996 subsidy programmes, 
which Indonesia, as a developing c ountry, is permitted to maintain  
5.129 The provisions of the SCM Agreement prevail over those of the General Agreement in the 
instant dispute because they are more specific to subsidies.  Sinclair149 describes lex specialis  as "the 
concept that a specific norm of  conventional international law may prevail over a more general 
norm".150  Lex specialis  is "widely supported  in doctrine"151 and extends back to Grotius.152  "Among 
agreements that are equal in respect to the qualities mentioned, that should be given preference which is 
more specific and approaches more nearly to the su bject in hand:  for special provisions are ordinarily 
more effective than those that are general".153  Furthermore, GATT panels have recognized lex specialis .  
For example, the Panel in EEC - Restrictions on Imports of Dessert Applies - Complaint by Chile  
examined the restrictive measures at issue in the context of Article XIII instead of Article I because, if found, Article XIII was lex specialis
.154 
5.130 The 1993 and 1996 subsidy programmes are out of the scope of the provisions of the General 
Agreement.  Generalia specialbus , which is related to lex specialis , "does not merely involve that 
general provisions do not derogate  from specific ones, but also, or pe rhaps as an alternative method of 
statement, that a matter governed by a specific provisi on, dealing with it as such, is thereby taken out of 
the scope of a general provision dealing with the category of subject to which that matter belongs , and 
which therefore might otherwise govern  it as part of that category".155 
5.131 Because the SCM Agreement ad dresses subsidies in a manner far more specific than the 
General Agreement, it is lex specialis  for this dispute. 
5.132 Complainants seek to mask their inability to prove that the two Indonesian programmes still in 
effect (the 1993 incentive programme and the Fe bruary 1996 national car programme) are causing 
adverse effects to their interests.  They unsuccessfully attempt to do so by asserting that the programmes 
are inconsistent with Ar ticle III of the GATT 1994 (as well as Ar ticle I of GATT 1994 and Article 2 and 
the Illustrative List of the TRIMs Agreement.)156  Their attempts fail.  Both programmes are subsidy 
measures and so the SCM Agreement (as well as GATT Article XVI) is the lex specialis .  Unlike many 
other WTO agreements, the SCM Agreement provides su bstantial special and differential treatment for 
developing countries like Indonesia.  The 1993 and February 1996 subsidy programmes fully conform 
                                                      
149Sir Ian Sinclair, K.C.M.Q., Q.C., Bencher of the Middle Temple, Member of the International Law 
Commission, Associate member of the Institut de Droit In ternational, Sometime Legal Advisor to H.M. Foreign 
and Commonwealth Office. 
150Ian Sinclair, The Vienna Convention on the Law of Treaties 96 (2nd ed. 1984). 
151Ian Sinclair, The Vienna Convention on the Law of Treaties 96  (2nd ed. 1984) (citing Y.B. of the Int'l 
L. Commission (1976-II), 120. 
152Wilfred Jenks, The Conflict of Law-Making Treaties , 1953 Brit. Y.B. Int'l L. 446. 
153Book II, Cap. XVI, sec. xxix (1):  translation by Kelsey in Classics of International Law edition, vol. 
ii (1929) 428. cited in Wilfred Jenks,  The Conflict of Law-Making Treaties , 1953 Brit. Y.B. Int'l L. 446. 
154EEC - Restrictions on Imports of Dessert Apples - Complaint by Chile (22 June 1989), BISD 36S/93, 
133, para. 12.28. 
155Gerald Fitzmaurice, The Law and Procedure of th e International Court of Justice 1951-4:  Treaty 
Interpretation and Other Treaty Points , 1957 Brit. Y.B. Int'l L. 236 (second emphasis added).  
Sir Gerald Fitzmaurice, K.C.M.Q., Q.C., was Legal Advisor to the Foreign Office. 
156As will be discussed, the third Indonesian programme subject to complaint--established by the June 
1996 decrees and regulations--is no longer in effect.  By its terms it expired 30 June 1997 and has not been (and will not be) renewed. WT/DS54/R, WT/DS55/R, 
WT/DS59/R, WT/DS64/R Page 68 
 
 to Indonesia's obligations, as a developing country, under the SCM Agr eement.  The Panel, therefore, 
should dismiss all three complaints.   
 (a) The 1993 incentive programme grants an ex emption from or reduct ions in import duties 
and the luxury tax available to all companies in the automotive industry  
5.133 In June 1993, the Government recognized th at its existing policy of seeking to have 
manufacturers and assemblers of automobiles and automotive com ponents, subcomponents and parts 
produce their products in Indonesia was unsuccessful.  The Government therefore created a new policy, 
the 1993 Incentive Programme.  Under the programme, manufacturers and assemblers are free to source 
wherever they wish (in Indonesia or abroad).  Th e Government, however, grants exemptions from or 
reductions in import duties and the luxury tax for co mpanies that choose to source specified percentages 
of their parts and components in Indonesia. 
5.134 Decree of the Minister of Industry No. 114/ M/SK/6/1993 (9 June 1993) granted incentives in 
the form of exemption from or reduction in import duties to auto motive component producers and 
assemblers that purchase I ndonesian parts and components.157 Since 21 January 1997, pursuant to 
Decree of the Minister of Fi nance No. 36/KMK.01/1997, the import duty on major components has 
ranged from 65 per cent for producers and assemblers who source less than  20 per cent of their parts and 
components domestically to 0 per cent for those w ho source more than 60 per cent domestically.158  For 
subcomponents and parts, the duty ra nges from 25 per cent for those w ho source less than 20 per cent 
domestically to 0 per cent for those who source more than 40 per cent domestically. 
5.135 At present, pursuant to Decree of th e Minister of Finance No. 272/KMK.04/1995 (28 
June 1995), the luxury tax rate is 20 per cent for domestically produced sedans of 1600cc or less and 
domestic content of more than 60 per cent ;  it is 35 per cent for other sedans.159 
 (b) The February 1996 National Car Progra mme grants import dut ies and luxury tax 
exemptions to producers of a National Car  
5.136 Instruction of the President No. 2/1996 ( 19 February 1996) establishes the national car 
programme and directs the Minister of Finance to grant exemption from import duties regarding 
imported parts and components and from payment of  luxury tax to companies designated as producers 
of a national car.160  The exemption from import duties currently is implemented by Article 4 of Decree 
of the Minister of Finance No. 36/KMK.01/1997 (21 January 1997) and the exemption from the luxury 
tax is implemented by Government  Regulation No. 36/1996 (4 June 1996).161 
5.137 Decision of the State Minister for the Mobilization of Investment Funds No. 02/SK/1996 
(5 March 1996) designated Timor Putra Na sional (TPN) to produce a national car.162  Under Decree of 
the Minister of Industry and Trade No. 31/MPP/SK /2/1996 (19 February 1996), TPN's receipt of the 
import duty and luxury tax exempti ons is conditioned on, among other th ings, the sourcing of at least 
20 per cent of the national car's parts and components domestically at the end of the first year, at least 
40 per cent at the end of the second year and at least 60 per cent at the end of the third year. The 
programme effectively terminates in the third year.163 
                                                      
157See Indonesia Exhibit 8.  The schedule of incentives granted has been amended several times since 
1993. 
158See Indonesia Exhibit 9. 
159See Indonesia Exhibit 10. 
160See Indonesia Exhibit 1. 
161See Indonesia Exhibit 9 and 3, respectively. 
162See Indonesia Exhibit 5. 
163See Indonesia Exhibit 2. WT/DS54/R, WT/DS55/R, 
WT/DS59/R, WT/DS64/R 
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 (c) The Government's grant of exemptions a nd reductions in import duties and the luxury 
tax to certain manufacturers and assemblers of automobiles and automotive parts is a 
subsidy  
5.138 Articles 1 and 2 of the Subsidies Agreement defi ne specific subsidy.  They provide in relevant 
part that "a subsidy shall be deemed to exist if ... there is a financial contribution by a government” 
where: 
 - "government revenue that is otherw ise due is foregone or not collected" 
(Article 1.1(a)(l)(ii));  and 
 - a benefit is thereby conferred that is "spe cific to an enterprise or industry or group of 
enterprises or industr ies" (Article 2.1). 
5.139 Under the 1993 incentive programme, the Governme nt forgoes or does not collect revenue that 
is otherwise due by granting an exemption from or re duction in the rate of import duties on automotive 
parts and components.  Thus, there is  the requisite financial contributi on by the Government.  As will be 
discussed in the next subsection, the subsidy falls under the provisions of Ar ticle 3 of the Subsidies 
Agreement.  Thus, by virtue of Article 2.3 of th at Agreement, there is the requisite specificity.164 
5.140 The same is true with regard to the Fe bruary 1996 national car programme.  It exempts 
companies designated by the Government as producers of a national car from the payment of either import duties on automotive parts and components or  the luxury tax.  The Government, therefore, 
forgoes or does not collect revenue ot herwise due from specific enterprises. 
5.141 Because both programmes indisputably provi de subsidies, the SCM Agreement is the lex 
specialis  and the WTO conformity of th e programmes must be assessed pursuant to the provisions of 
only this Agreement. 
 (d) Article 27.3 of the SCM Agreement perm its Indonesia, as a developing country, to 
maintain the subsidies granted under  the 1993 and February 1996 programmes  
5.142 Entitlement to the subsidies granted under both the 1993 and February 1996 programmes and 
the level of the subsidy granted to each recipient depends upon the percentage of locally sourced parts 
and components in a particular car model or au tomotive component.  Ther efore, these subsidies 
technically fall within the scope of Article 3.1(b) as "subsidies contingent (wheth er solely or as one of 
several other conditions) upon the use of domestic over  imported goods". 
5.143 Indonesia is a developing country.  Accordingly, Indonesia is within the ambit of Article 27.3 of 
the Subsidies Agreement, which provides that "[t]he prohibition of paragraph 1(b) of Article 3 shall not 
apply to developing country Members for a period of fi ve years ... from the date of entry into force of 
the WTO Agreement [i.e., until 1 January 2000]." Inst ead, the provisions of Articles 5 to 7 regarding 
"actionable subsidies" apply.  (See Section VIII.B.2(c)).  No Complainant has, as required by Article 6, 
demonstrated by positive evid ence that the Indonesian au to subsidies result in "s erious prejudice" to its 
interests.  (See Sect ion VII.B).  Therefore, the Panel should:  (1) rule that the subsidies provided by 
Indonesia under the 1993 and February 1996 programmes are consistent with Indonesia's obligations 
under the Subsidies Agreement; and (2) be cause the Subsidies Agreement is the lex specialis , dismiss all 
three complaints. 
                                                      
164The United States Government o fficially has recognized that the 1993 programme is a subsidy 
programme.  In its April 1997 report entitled Indonesia’s Automotive Market Summary, the US Department of 
Commerce declared that "[t]his policy [the February 1996 national car programme] represents a net increase in 
the amount of subsidy  paid under the system". (Emphasis added.)  See  Indonesia Exhibit 11. WT/DS54/R, WT/DS55/R, 
WT/DS59/R, WT/DS64/R Page 70 
 
  (e) Introduction of the February 1996 subs idy programme was not inconsistent with 
Indonesia's obligations under the SCM Agreement  
5.144 Indonesia  further asserts that Indonesia's introdu ction of the February 1996 programme was 
consistent with its obligations under Articles 27.3 and 28.2 of the Subsidies Agreement.  These 
arguments are set forth in detail in Section V III.C, which covers the claim raised by the United States  
under Article 28 of the SCM Agreement, and Indonesia's responses to this claim.   
2. Indonesia's luxury tax subsidies to the automoti ve industry are governed by the disciplines of 
the SCM Agreement and not by Article III of the GATT 1994  
5.145 This is the first dispute involving the re lationship between the WTO Agreement on Subsidies 
and Countervailing Measures and Arti cle III of the General Agreement.165  Prior to the entry into force 
of the WTO Agreements, no intern ational legal definition of subs idy existed.  There was no all-
encompassing structure of remedies applicable to subs idies.  Subsidy disciplines applied only to a small 
number of GATT Contracting Parties and ther e was no over-arching WTO agreement governing the 
relationship of the substantive agreements.  Thus, there was no basis for claiming that the Tokyo Round 
Subsidies Code was lex specialis  in instances such as those presented in this dispute.  This all changed 
with the entry into force of the WT O.  Subsidies are governed by and subject to the disciplines of the 
Subsidies Agreement, not Article III of the General Agreement. 
 (a) Both the 1993 incentive programme and the February 1996 National Car Programme 
subsidize certain automobile produ cers by granting reduced luxury tax  
5.146 The luxury tax rate for sedans (passenger vehicles) is 35 per cent.166  Decree No. 272 
implements the 1993 Incentive Programme . Article 2(1) sets a subsidized luxury tax rate of 20 per cent 
for domestically produced sedans with an engine cap acity of less than 1600cc and with local content of 
greater than 60 per cent.  Also, the Government forg oes collection of 15 per cent of the generally applied 
35 per cent luxury tax rate with respect to those enterprises producing au tomobiles meeting these 
criteria.  Therefore, the measure is a specific subsidy within the meaning of Articl es 1.1(a)(l)(ii) and 2 of 
the Subsidies Agreement.  
5.147 With respect to producers of a national  car, Instruction of the President No. 2/1996 
(19 February 1996)167 and its implementing regulations and decr ees declare that the 35 per cent luxury 
tax is "borne by the Government."  Thus, the Febr uary 1996 programme also provides a subsidy within 
the meaning of Article 1.1(a)(1)(ii) of the Subsidies Agreement that is  specific within the meaning of 
Article 2.168 
 (b) Subsidies are governed by and subject to the disciplines of the SCM Agreement  
5.148 Articles 3 through 9 of the SC M Agreement set out the disciplines  applicable to different types 
of subsidies and the remedies applic able to each type.  All subsidies fall into one of three categories -
prohibited, actionable or non-actionable.  Two types of  subsidies are prohibited by virtue of Article 3.1 -
subsidies contingent upon export perfo rmance and subsidies contingent upon the use of domestic over 
                                                      
165Canada did not  argue that its “funded” postal rates for certain periodicals was a subsidy under the 
terms of, and subject to the disciplines of, the Subsidies Agreement.  This is a crucial distinction between the instant dispute and Canada-Certain Measures Concerning Periodicals
, WT/DS31/R (14 March 1997). 
166See Decree of the Minister of Finance No. 272/KMK.04/1995 (28 June 1995) at Indonesia 
Exhibit 10. 
167See Indonesia Exhibit 1. 
168The United States also argues that the August 1997 loan is inconsistent with Article III:4 of the 
General Agreement.  However, as demonstrated above, the loan is not within the Panel’s Terms of Reference 
and so should not be examined. WT/DS54/R, WT/DS55/R, 
WT/DS59/R, WT/DS64/R 
Page 71 
 
 
imported goods.  Four types of subs idies are non-actiona ble:  subsidies which ar e "not specific within 
the meaning of Article 2" (Article 8.1(a)); assistan ce for certain research activities (Article 8.2(a)); 
assistance to disadvantaged regions (Article 8.2(b)); and assistance to promote adaptation to new 
environmental requirements (Article 8.2(c)).  All subsidies which are neither prohibited under Article 3 
nor non-actionable under Article 8 ar e actionable and are governed by Articles 5 through 7 of the SCM 
Agreement.  Thus, all subsidies are covered.  If they are one of the two subsidies identified in Article 3 
they are prohibited.  If they are one of the four identified in Articles 8, they are non-actionable. If they are specific subsidies within the meaning of Articles  1 and 2 but are not among the subsidies identified 
in Articles 3 or 8, then they fall into the residual category of actionable subsidies. 
5.149 The SCM Agreement also sets out in detail the remedies applicable to the three categories of 
subsidies.  For developed country WTO Members, the remedy applicable to the two types of subsidies 
identified in Article 3.1 is the ma ndate to "withdraw the subsidy without  delay" (Article 4.7).  The only 
prerequisite for such a ma ndate is the proven existence of a prohibited subsidy.  The complaining party 
is not required to plead or prove any adverse effects.  For all WTO Members, subsidies that meet the 
criteria of Article 8 are, as the term indicates, non-actiona ble.  They are genera lly permissible and are 
not subject to remedial action. 
5.150 For the residual category of actionable subsidie s, including those not prohibited for developing 
countries by virtue of Article 27, a complaining pa rty must establish both the existence of a subsidy 
within the meaning of Articles 1 and 2 and adverse ef fects to its interests through the use of that subsidy 
(Article 5).  Where both the subsidy and the adverse effects are established, the remedy is that the 
developing country Member "shall ta ke appropriate steps to remove the adverse effects or shall 
withdraw the subsidy" (Article 7.8).  In other words,  the remedy is to elimin ate the harm to the trade 
interests of the complainin g Member.  The subsidizing country can choose to do so by eliminating the 
measure, but it is not required to do so.  Its only ob ligation then is to eliminate the adverse effects. 
5.151 By virtue of the special and differential trea tment provided by Article 27, the prohibitions of 
Article 3.1 do not apply to developing country WT O Members (Articles 27.2 and 27.3).  Accordingly, 
the Article 7 remedy provisions applicable to ac tionable subsidies apply in stead of the remedial 
provisions of Article 4 (Article 27.7) .  The effect is that, as here (because Indonesia is a developing 
country), Complainants must plead and prove not only the existence of one of the two types of subsidies 
identified in Article 3.1
169, but also that the subsidy alleged has caused adverse effects to their interests 
(Article 5). 
5.152 In sum, the remedy where both the subsidy a nd the adverse effects are proven is the remedy 
applicable to actionable subsidies - the adverse effects of the subsidy sh all be removed.  The subsidizing 
developing country can choose to do so by elimin ating the measure but it also has the option of 
maintaining the measure and taking acti on to eliminate the adverse effects. 
                                                      
169Both the 1993 and February 1996 programmes impose the type of local content eligibility 
requirements contemplated by Article 3.1(b).  The June 1996 programme doe s not, but is irrelevant because it 
already has ended. WT/DS54/R, WT/DS55/R, 
WT/DS59/R, WT/DS64/R Page 72 
 
  (c) General rules of treaty interpretation pr eclude finding that a subsidy permissible under 
the SCM Agreement is proscribed by Article III of the GATT 1994  
5.153 Under general rules of treaty in terpretation, one must give meanin g and effect to all terms of a 
treaty.  As properly recognized by the WTO Appellat e Body:  "An interpreter is not free to adopt a 
reading that would result in reducing whole clause s or paragraphs of a tr eaty to redundancy or 
inutility".170  Therefore, Articl e III:2 of the General Agreement cannot control this dispute because, if it 
did, the entire SCM Agreement would be reduced to inutility. 
5.154 Under Article III:2 no imported product shall be su bject to an internal tax in excess of that 
applied to a like domestic product.  Article 3.8 of  the WTO Dispute Settlement  Understanding codifies 
long-standing GATT practice that in fringement of an obligation of th e General Agreement such as that 
of Article III:2 is considered prima facie  to constitute a case of nullification or impairment.  In other 
words, the covered practice is proscribed and the complaining party need not plead or prove adverse 
trade effects.171 
5.155 The Indonesian luxury tax is an internal ta x.  Under the 1993 Incentive Programme, passenger 
sedans with an engine capacity of less than 1600cc  and an Indonesian content of more than 60 per cent 
are obliged to pay a subsidized luxury tax of only 20 per cent if they are produced in Indonesia, while 
the imported like product (imported passenger sedans w ith an engine capacity of less than 1600cc and 
an Indonesian content of more than 60%) are subj ect to the non-subsidized luxury tax rate of 35 per 
cent.  Under the February 1996 national car programme , the Government excuses TPN from payment of 
the luxury tax on the 1500cc Timo r S515 (which meets the applicab le local content level) while 
imposing the non-subsidized rate of 35 per cent on impor ts of like products.  (T here is no ban on imports 
of small-engine-capacity sedans th at would be "like" the Timor.  However, Complainants have the 
burden of proving that there actually  are such imports because, if they do not do so, they fail to prove 
"serious prejudice" with respect to  the "actionable" subsidization by Indonesia of the luxury tax rate for 
certain domestic sedans.)  
5.156 If Article III:2 applied, then no more would n eed to be established.  Complainants would not 
have to plead or prove that they have suffered adve rse trade effects by reason of the subsidized luxury 
tax rates.  Despite the Subsidies Agreement, which permits actionable subsidies to be maintained unless 
they are proven to cause adverse trade effects, the measure--indeed all such actionable subsidies - would be proscribed under Article III:2 of the General Agreement merely  upon a showing of discrimination 
due to a subsidy.  Such a holding would render mean ingless the provisions of the Subsidies Agreement 
relating to actiona ble subsidies. 
5.157 In this dispute the is sue is limited to Articl e III:2 and tax subsidies.
172  H o w e v e r  t h e  s a m e  
interpretational problem would arise with respect to vi rtually all subsidies other than subsidized import 
duties and other border charges. The purpose of most subsidies is to provide financial assistance to a 
targeted industry or a small group of industries.  By their very nature and by design, subsidies 
discriminate against producers of like products (bot h domestic and imported) that do not receive the 
subsidy.  To the extent that a subsidy is not pr ovided to an imported product (which is the case in 
virtually every subsidy ever granted), then it does not provide national treatment.  Accordingly, one 
                                                      
170United States - Standards for Reformulated and Conventional Gasoline , WT/DS2/AB/R (20 May 
1996) (p.23) footnote omitted).  See also Japan - Taxes on Alcoholic Beverages , WT/DS/AB/R (4 October 
1996) (p. 12); DSU, Article 3.2. 
171In its Uruguay Round TRIMs submission of 6 February 1989, the United States recognized that 
certain GATT provisions (e.g., Article I) proscribe pr actices, while others (e.g., Article VI) remedy adverse 
trade effects (MTN.GNG/NG12/W/14 at  pp. 12-13).  GATT Article XVI and the Subsidies Agreement, like 
GATT Article VI, remedy trade e ffects of actionable subsidies. 
172The import duty subsidies relate to border measures, not to internal laws subject to Article III:4 of the 
General Agreement.  This renders much of Complainants' argumentation irrelevant. WT/DS54/R, WT/DS55/R, 
WT/DS59/R, WT/DS64/R 
Page 73 
 
 
cannot give meaning and effect to the framework of the Subsidies Agreement requiring proof of adverse 
trade effects as to actionable subsidies if Article II I of the General Agreement and its national treatment 
principle is applied. 
5.158 The importance of the existence of a legal de finition of subsidies and an all-encompassing 
structure of remedies is evident by contrasting th e subsidies provisions applic able to goods with those 
applicable to services.  In its Explanatory Note on the Scheduling of Initial Commitments in Trade in 
Services173 (intended to assist countries in preparing their services commitme nts in the Uruguay Round), 
the GATT Secretariat stated: 
Article XVII [national treatment] applies to subsidy-type measures in the same way that 
it applies to all other measures.  Article XV (Subsidies) merely obliges Members to 
“enter into negotiations with a view to  developing the necessary multilateral 
disciplines” to counter the distortive effect s caused by subsidies.  Therefore, any 
subsidy which is a discriminatory measure within the meaning of Article XVII would 
have to be either schedul ed as a limitation on nationa l treatment or brought into 
conformity with that Article .  Subsidy-type measures ar e also not excluded from the 
scope of Article II (MFN).  An exclusi on of such measures would require a legal 
definition of subsidies which is currently not provided for under the GATS . 
5.159 The GATS contains no "legal definition of subsidies", and so the GATS requirements regarding 
national treatment (which permit scheduling a limita tion on the obligation) apply.  In the goods area, 
there is a legal definition in the SCM Agreement,  thereby warranting exclusion of subsidies from 
application of the national treatmen t obligation of GATT Article III. 
5.160 The only conceivable interpre tation of the relationship of s ubsidies and Article III of the 
General Agreement that would not reduce the SCM Agreement to redundancy or inutility is that 
subsidies which meet the criteria  of Articles 1 and 2 of the SC M Agreement are governed by and are 
subject to the disciplines of only the SCM Agreem ent.  Actionable subsidies (including Article 3.1 
subsidies which are actionable for de veloping countries by virtue of Ar ticle 27) require proof of adverse 
trade effects. That requirement cannot be subverted merely by ar guing that the subsidy violates 
Article III of the GATT 1994 by denying national treatment. 
 (d) The proper interpretation of  Article III:8(b) of the GA TT 1994 supports the view that 
Article III does not override the SCM Agreement  
5.161 In Canada-Certain Meas ures Concerning Periodicals , WT/DS31/AB/R (30 June 1997), the 
Appellate Body discussed and ruled upo n Article III:8(b).  The facts of the dispute show that Canada did 
not argue that its funded postal ra tes programme was a subsidy under the criteria of Articles 1 and 2 of 
the Subsidies Agreement and, therefore, was subjec t to the disciplines and remedies of only that 
Agreement.  Rather, Canada argued simply that its practice was excused (i.e. , not subject to any 
discipline or remedies) by virtue of Article III:8(b) of the General Agreement. 
5.162 The United States disagreed, arguing that the transfer of funds from one government entity to 
another did not fulfil the condition of Article III:8(b) regarding "the payment of subsidies exclusively to 
domestic producers."  The Panel si ded with Canada.  The finding of the Panel with which the Appellate 
Body disagreed and wh ich it reversed was: 
Thus, we do not find that Canada Post retain s any economic benefits from the "funded" 
rate scheme it applies to certain Canadian periodicals.  The payment of the subsidy is 
made "exclusively" to Canadian publishers  that qualify for the scheme.  Since 
                                                      
173MTN.GNS/W/164 (3 September 1993) at p. 6 (emphasis added). WT/DS54/R, WT/DS55/R, 
WT/DS59/R, WT/DS64/R Page 74 
 
 
Article III:8(b) explicitly recognizes that  subsidies exclusively paid to domestic 
producers are not subject to the national trea tment rules of Article III, including those 
under Article III:4, we find that Canada's "f unded" rate scheme on  periodicals can be 
justified under this provision.
174 
5.163 In analysing the Appellate Body's discussion, one must consider the following facts.  The 
Appellate Body was ruling on whether the government paid a subsidy exclusiv ely to domestic producers 
and it was doing so in a dispute in which both parties focused solely  on the General Agreement.  The 
Appellate Body was not asked to de cide and it did not address the question presented in this dispute, 
which is whether a subsidy permissible under the SC M Agreement (except to the extent it is proven to 
cause adverse trade effects) can still be proscribed as a violation of the national treatment principle of 
Article III of the General Agreement. 
5.164 With this in mind, let us analyze the text, drafting history, context,  and object and purpose of 
Article III:8(b).  The Chairman of the Working Party that examined the provision that became Article III:8(b) explained the purpose of  and need for the provision as follows: 
This provision had been added to the Geneva  draft [of the ITO Charter] because it was 
felt that if subsidies were paid on domest ic and not on imported products it might be 
construed that Members we re not applying the "national treatment" rule.
175 
At the Havana Conference, the Report of the Sub-Committee that examined Article 18 of the draft ITO 
Charter (the predecessor of Article III of the General Agreement) stated: 
This sub-paragraph [Article III:8(b)] was redraf ted in order to make it clear that nothing 
in Article 18 could be construed to sanc tion the exemption of domestic products from 
internal taxes imposed on like imported products or the remiss ion of such taxes.  At the 
same time the Sub-Committee r ecorded its view that nothing in this sub-paragraph or 
elsewhere in Article 18 would override th e provisions of Section C of Chapter IV  [on 
Subsidies.]176 
Previous GATT panel reports addres sing Article III:8(b) have focuse d on the first portion of this 
quotation from the Havana Reports.  However, neit her they nor the Appellate Body in Canada-
Periodicals  focused on or analyzed th e portion emphasized above. 
5.165 The panel report most relevant to this dis pute is United States-Measu res Affecting Alcoholic 
and Malt Beverages  (19 June 1992), BISD 39S/206.177  There, the panel, as  quoted by the Appellate 
Body in Canada-Periodicals , stated: 
                                                      
174WT/DS31/R (14 March 1997) (para. 5.44). 
175E/CONF.2/C.3/A/W.49, p. 2. 
176Report of Committees and Principal Sub-comm ittees, United Nations Conference on Trade and 
Employment, held at Havana, Cuba from 21 November 1947 to 24 March 1948, ICITO I/8 (September 1948) at 
66, para. 69 (emphasis added). 
177Two other reports discussing Article III:8(b) are not of value in this dispute because they address 
whether a subsidy was indeed paid exclusively to domestic producers, a fact not at issue in this dispute.  Italian 
Discrimination Against Imported Agricultural Machinery  (23 October 1958), BISD 7S/60; and European 
Economic Community-Payments and Subsidies Paid to Processors and Producers of Oilseeds and Related 
Animal-Feed Proteins  (25 January 1990), BISD 37S/86.  The US erroneously claims that the requirement set out 
in Italian Machinery  is not met with regard to what they term  Indonesia’s tariff and tax incentives for 
automotive parts and subparts.  (See S ection V.E.3(b)).  As discussed in the next section of this submission, 
subsidized customs import duties are bo rder measures, not internal measures , and therefore are not within the 
scope of Article III.  The luxury tax subsidy applies to assembled automobiles and is provided exclusively to the WT/DS54/R, WT/DS55/R, 
WT/DS59/R, WT/DS64/R 
Page 75 
 
 
Article III:8(b) limits therefore the permissi ble producer subsidies to "payments" after 
taxes have been collected or payments otherwise consistent  with Article III .  This 
separation of tax rules,  e.g. on tax exemptions or reductions, and subsidy rules  makes 
sense economically and politically.  Even if the proceeds from non-discriminatory 
product taxes  may be used for subsequent subsidies , the domestic producer like his 
foreign competitors must pay the product ta xes due. The separation of tax and subsidy 
rules contributes to greater transparency.  It  also may render abuses  of tax policies for 
protectionist purposes more difficult, as in the case where producer aids require 
additional legislative or gove rnmental decisions in whic h the different interests 
involved can be balanced.178 
The full import of this statement is clear from the following finding of the United States-Measures 
Affecting Alcoholic and Malt Beverages  Panel: 
The words "payment of subsidies" refer only to direct subsidies involving a payment , 
not to other subsidies such as  tax credits or tax reductions.179 
5.166 One must note, however, that United States Alcoholic Beverages  was decided prior to the 
completion of the Uruguay Round negotiations and, th erefore, under the then-existing GATT regime.  
The Tokyo Round Subsidies Code did not contain an all-encompassing definition of subsidies.  Its 
membership was limited to those Contracting Partie s who chose to adhere an d the relationship of the 
Code to the GATT was not expresse d and was subject to differing vi ews.  Further, because the GATT 
and the Code were separate legal instruments, provis ions of one could not be raised and analyzed by a 
panel in a dispute involving the other. 
5.167 All of that changed with the entry into forc e of the WTO Agreements.  Article 1 of the SCM 
Agreement identifies four types of subsidies: (i) direct transfer of funds;  (ii) forgoing of revenue 
otherwise due;  (iii) provision of goods or services at non-market prices ;  and (iv) payment to a funding 
mechanism directed by a private body.  Only the firs t type is a "direct subsidy."  All Members of the 
WTO adhere to both the General Agreement and the SCM Agreement and both agreements are integral 
parts of the Agreement Establishi ng the World Trade Organization (see  Article II.2 thereof).  Finally, 
dispute settlement panels are mand ated to address the relevant provi sions of all WTO agreements cited 
by the parties to a dispute.  (Article 7.2 of the Dispute Settlement Understanding.) 
5.168 Under these circumstances, gene ral rules of treaty interpretation require rethinking the scope of 
Article III:8(b).  Under the WTO, "the payment of subs idies" language in Articl e III.8(b) must refer to 
all subsidies identified in Article 1 of the SCM Ag reement, not merely to the subset of "direct" 
subsidies.  This interpretation,  and only this interpretation, a voids rendering the SCM Agreement 
meaningless.  Under this interpretation, any and all subsidies provided exclusively to domestic 
producers are not governed by the national treatment principle of Article III of the General Agreement 
(which by definition they could not meet).  Rather, su bsidies that fall within the scope of Articles 1 and 
2 of the SCM Agreement and that  are actionable under Articles 5 and 6, are subject only to the 
disciplines of Article 7 of the SCM Agreement and, even then, only if they cause adverse effects to the interests of ot her Members. 
                                                                                                                                                                    
 
producers or assemblers, thereby fulfilling th e criterion set out in Italian Machinery .  United States-Measures 
Affecting the Importation, Internal Sale and Use of Tobacco  (12 August 1994), DS44/R, also is not relevant.  
There, the complaining parties sought unsuccessfully to use Article III:8(b) to argue that United States 
producers (but not importers) benefitted from a subsidy de rived from the proceeds of an internal tax which was 
not within the scope of Article III:8(b) but was in violation of Article III:2. 
178BISD 39S/206 (para 5.10 at p. 272)(emphasis added). 
179Id. at p. 271-72, para. 5.8 (emphasis added). WT/DS54/R, WT/DS55/R, 
WT/DS59/R, WT/DS64/R Page 76 
 
  (e) In a conflict between the SCM Agreement and Article III of the GATT 1994, the SCM 
Agreement Prevails  
5.169 The "General interpretative note to Annex 1A " of the Agreement Establishing the World Trade 
Organization states: 
In the event of conflict between a provisi on of the General Agreement on Tariffs and 
Trade 1994 and a provision of another agr eement in Annex 1A to the Agreement 
Establishing the World Trade Organization (referre d to in the agreements in Annex 1A 
as the "WTO Agreement"), the provision of  the other agreement shall prevail to the 
extent of the conflict. 
The Report of the Panel in European Communities-Reg ime for the Importation, Sa le and Distribution of 
Bananas , WT/DS27/R/USA (22 May 1997), defines "conflict" as follows: 
As a preliminary issue, it is necessary to de fine the notion of "conf lict" laid down in the 
General Interpretative Note.  In light of the wording, the context, the object and the purpose of this Note, we consider that it is  designed to deal with (i) clashes between 
obligations contained in GATT 1994 and obliga tions contained in agreements listed in 
Annex 1A, where those obligations are mutually exclusive
 in the sense that a Member 
cannot comply with both obligations at the same  time, and (ii) the situation where a rule 
in one agreement prohibits what a rule in another agreement explicitly permits  . 
However, we are of the view that the concept of "conflict" as embodied in the General 
Interpretative Note does not relate to situa tions where rules contained in one of the 
Agreements listed in Annex 1A provide for different or complementary obligations in 
addition to those contained in GATT 1994.  In  such a case, the obligations arising from 
the former and GATT 1994 can both be complied with  at the same time without the 
need to renounce explicit rights  or authorizations.  In this latter case, there is no reason 
to assume that a Member is not capable of, or not required to meet the obligations of 
both GATT 1994 and the relevant Annex 1A Agreement.  (Emphasi s added; footnote 
omitted.) 
5.170 If the Panel were to conclude that it cannot reconcile the coverage and disciplines of the SCM 
Agreement and Article III of the General Agreemen t (either by reason of general rules of treaty 
interpretation or through interpretati on of Article III: 8(b)), then a "conflict" would exist between the 
Subsidies Agreement and Article III of the General Agreement.  By virtue of the General Interpretative 
Note, the provisions of the Subsidies Agreement would prevail. 
5.171 The SCM Agreement permits Indonesia, as a de veloping country, to subsidize the luxury tax 
rate unless those subsidies are proven to cause adve rse trade effects.  Articl e III of the GATT 1994, on 
the other hand, would proscribe these subsidies on the ground that they denied  national treatment under 
the terms of Article III:2.  Adverse trade effects would not  need to be proven.  In other words, the SCM 
Agreement explicitly permits what Article III of the GATT 1994 would prohibit.  Indonesia's 
obligations under the two provisions would be mutua lly exclusive.  One simply could not apply the 
general prohibition of Article III:2 and, at the same  time, provide Indonesia its explicit rights under the 
SCM Agreement regarding the proof of adverse effects.   This falls squarely within the definition of 
"conflict" in the General Interpretative Note.  Hence, the provisions of the SCM Agreement (an 
"Annex 1A Agreement") would prevail over Article III of the General Agreement. 
5.172 Article III:4 of GATT 1994 also conflicts with the SCM Agreement insofar as it prohibits 
measures which the SCM Agreemen t does not prohibit.  Take, for example, a law that provides 
assistance to an industry in  a disadvantaged region (meeting the requ irements Article 8.2(b) of the SCM WT/DS54/R, WT/DS55/R, 
WT/DS59/R, WT/DS64/R 
Page 77 
 
 
Agreement) or other "greenlight" subsidies.  This  subsidy is permitted by the SCM Agreement, but 
would violate Article III:4, if it applied.  A simila r conflict arises in the instant case, where the SCM 
Agreement, as Indonesia has demo nstrated, permits the measures wh ich complainants argue violate 
Article III:4.  Also, even if complainants were correct, a conflict would exist and only the SCM 
Agreement would apply. 
 (f) The SCM Agreement define s subsidies and sets out all of the rights and obligations 
pertaining to them  
5.173 Articles 1 through 9 of the SCM Agreement comprehensively  set out the definitions of, 
disciplines on and remedies for subsidies.  The SCM Agreement covers all  subsidies.  If a subsidy is one 
of the two types of subsidies identified in Article 3, it is a prohibited subsidy.  If a subsidy is one of the 
four types of subsidies identified in Article 8, it is  a non-actionable subsidy.  If a subsidy is specific 
within the meaning of Article 2, but neither prohibited under Article 3 nor non-actionable under 
Article 8, it falls into the residual category of actionable subsidies. 
5.174 Also, the Subsidies Agreement covers all  remedies for subsidies,  with Article 27 providing 
special and differentia l treatment of developing country Members.  If a subsidy is a prohibited subsidy, a 
complainant must prove the existence of a prohibi ted subsidy and the remedy is that the Member 
“withdraw the subsidy without delay”  (Article 4.7).  If a subsidy is an actionable subsidy, including an 
otherwise prohibited subsidy granted or maintained by a developing country, a complainant must prove 
the existence of a subsidy within the meaning of Articles 1 and 2 and  adverse effects to the 
complainant’s interests thr ough the use of that subsidy (Article 5).  The remedy is that the Member 
“shall take appropriate steps to remove the adverse effects or shall withdraw the subsidy.” (Article 7.8).  
Procedures and remedies for certain non-actionable subsidies are set forth at Article 9. 
 (g) The definition of "subsidy" in the SCM Agreement is all-encompassing, contrary to the 
United States assertion  
5.175 To support its argument that the definiti on of subsidy in the SCM Agreement is not 
all-encompassing, the United States cites Article 1.1 of the SCM Agreement as stating that the definition 
is “[f]or the purpose of this Agreement”. 
5.176 First, the United States’ attempt to use this language to confine the de finition ignores the fact 
that all WTO agreements are part of a unitary whol e.  The SCM Agreement is part of the family of 
WTO agreements.  Article II:2 of the Agreement Establishing the World Trade Organization states that 
“[t]he agreements and associated legal in struments included in Annexes 1, 2 and 3 … are integral parts 
of this Agreement, binding on all Members.”  Prior to the entry into force of the WTO Agreements, no 
international legal definition of subsidy existed.  There was no all-encompassing structure of definitions, 
disciplines and remedies, and the Subsidies Code a pplied to only a small numb er of GATT Contracting 
Parties.  With the entry into force of the WTO ag reements, the SCM Agreemen t’s definition of subsidy 
became the sole definition of subsidy for the family of WTO agreements. 
5.177 Second, the United St ates fails to (and cannot ) provide an alternative definition of subsidy.  
Finally, the measures at issue clearly fall within  the definition of “subsidy” set out at Articles 
1.1(a)(1)(ii) and 2 of the SCM Agreement.  (See Sections V.D. 1 and VIII.A.1 and 2). 
 (h) Article VI:5 of the GATT 1994 Is Irrele vant and Serves to Limit a Complainant’s 
Unilateral Remedy  
5.178 The United States cites GATT Article VI:5 to supp ort its argument that the SCM Agreement 
was not intended to be the exclusive remedy against measures that can be characterized as subsidies.  (See Section V.E.3)  However, Article VI:5 is irreleva nt to this case.  It has nothing to do with whether a WT/DS54/R, WT/DS55/R, 
WT/DS59/R, WT/DS64/R Page 78 
 
 subsidy can be granted by the host country (i.e., wh ether the obligations of Article III of the General 
Agreement apply as well as those of the SCM Agreemen t) or, for that matter, with subsidies at all.  
Rather, it prevents the au thorities of an importing
 country from double counting when imposing duties 
under domestic anti-dumping or countervailing duty laws.180   
 (i) The United States' interpretation of Articl e 32.1, footnote 56,  of the SCM Agreement is 
flawed  
5.179 The United States cites foot note 56 of Article 32 of the SCM Ag reement as indicating that the 
drafters did not intend for the Agreement to be th e exclusive remedy against measures within the 
Agreement’s definition of subsidy (See Section V.E.3) , and thus there is no "conflict" between the SCM 
Agreement and the General Agreemen t.  This interpretation is inco rrect.  Article 32.1 and footnote 56 
were taken verbatim from the Tokyo Round Subsidies C ode, in which they appear as Article 19.1 and 
footnote 38.  A companion article and footnote appe ar in the Tokyo Round Anti-Dumping Code.  Only 
the reference to "dumping", as  opposed to "subsidy", differs.181  Thus, it is clear that the drafters of the 
Tokyo Round Codes considered that thes e articles and their footnotes appl ied to actions by authorities of 
importing  countries under domestic countervailing duty or  anti-dumping laws.  In this context “other 
relevant provisions” of the General Agreement re fers to other permissibl e actions by importing 
authorities, such as safeguard actions under Article XIX of the General Agreement, which are 
“appropriate” when the conditions for application of that remedy are satisfied. 
5.180 There are two additional reas ons why the United States' argument is flawed.  First, the 
United States' argument ignores the significance of the words “relevant” and “where appropriate” in 
footnote 56: 
This paragraph is not intended to preclude action under other relevant  provisions of 
GATT 1994, where appropriate .  (Emphasis added.) 
The United States ignores the very text it seeks to interpret.  Othe r GATT provisions are not “relevant” 
and, moreover, action under other GATT provisions is  not “appropriate” and th erefore is precluded, 
because the measures at issue are clearly covered by  the SCM Agreement, which also provides remedies 
for them. 
5.181 Second, Article 32.1 itself states: 
No specific action against a subsidy of another Member can be taken except in 
accordance with the provisions of GA TT 1994, as interprete d by this Agreement .  
(Emphasis added; footnote omitted.) 
The words “as interpreted by this Agreement” confirm the supremacy of the SCM Agreement in 
defining and providing remedies for subsidies. 
                                                      
180In situations in which the granting of a subsidy leads to an export price that is below “normal value” 
(the comparable price for the like product when destined for consumption in the home country’s market), the 
authorities of the importing country could, absent Article VI:5, impose both anti-dumping and countervailing 
duties.  Article VI:5 prevents this.   
181The text of Article 16.1 of the Anti-Dumping Code and footnote 16 follow (with differing text, from 
Article 19.1 and footnote 38 of the S ubsidies Code, included within brackets). 
Article 16.1:  “No specific action against dumping of exports from another Party [a subsidy of another 
signatory] can be taken except in accordance with the pr ovisions of the General Agreement, as interpreted by 
this Agreement.” 
Footnote 16:  “This is not intended to preclude action under other relevant provisions of the General 
Agreement, as [where] appropriate.”  WT/DS54/R, WT/DS55/R, 
WT/DS59/R, WT/DS64/R 
Page 79 
 
 
 (j) Indonesia’s right, as a developing country,  to maintain domestic-content subsidies Is 
subject only to Indonesia’s oblig ation not to cause serious prejudice to a like product . 
5.182 Because Indonesia is a developing country Me mber, “[t]he prohibition of paragraph 1(b) of 
Article 3 shall not apply … for a period of five years … from the date of entry into force of the WTO 
Agreement [i.e. , until 1 January 2000]” to its domestic-cont ent subsidies (Article 27.3).  Instead, 
Articles 5 through 7 apply.  No Complainant has, as required by Article 6, demonstrated by positive 
evidence that the domestic-content subsidies result in “serious prejudice” to a like product.  (See 
Section VIII.B.) 
 (k) The application to this dispute of Ar ticle III of the GATT 1994, as complainants 
advocate, would render the SCM Agreement meaningless  
5.183 If Article III:2 were to proscribe actionable subsidies that are not proven to cause adverse 
effects, the provisions of the Subsidies Agreement regarding actionable subsidies would be rendered 
meaningless. 
 (1) Virtually all subsidies are intended to, an d actually do, benefit only domestic products  
5.184 Under the SCM Agreement, with regard to an  actionable subsidy, a complainant must prove 
both the existence of a subsidy within the meaning of Articles 1 and 2 and  adverse effects to the 
complainant’s interests through the use of that subsidy (Article 5).  In contrast , according to Article 3.8 
of the Understanding on Rules and Procedures Govern ing the Settlement of Disputes (DSU) as well as 
long-standing GATT practice, a measure infringi ng upon Article III:2 of the General Agreement is 
proscribed outright.  Under Article III:2, an imported product shall not be subject to an internal tax in 
excess of that applied to a like domestic product.  A complainant need not prove adverse effects to its 
interests resulting from that measure. 
5.185 By definition, subsidies discri minate against like products, both domestic and imported, that do 
not receive the subsidy.  To the extent that a subs idy is not provided to an imported product, which is 
virtually always the case, the subsidy would violate the national treatment requirement of Article III if 
that obligation were applicable. 
 (2) Under complainants’ interpretation, Indonesia’s luxury tax subsidies would be 
condemned solely because of their disc riminatory nature and the European 
Communities and United States would not have to show serious prejudice  
5.186 The subsidy provided under the 1993 Incentive Pr ogramme benefits passenger sedans with an 
engine capacity of less than 1600cc and an Indonesian content of more than 60 per cent.  In contrast, 
imported passenger sedans with an engine capacity of less than 160 0cc and an Indonesian content of 
more than 60 per cent are subject to a non-subsidized luxury tax rate that is in excess of the subsidized 
rate.  Under the February 1996 National Car Programme , a 1500cc Timor S515 that meets the applicable 
local content level is not subject to the luxury tax, whereas a similar imported car would be subject to a 
non-subsidized luxury tax rate in excess of the subsidized rate. 
5.187 If Article III:2 were applied instead of the SCM Agreement, Indonesi a’s luxury tax subsidies 
would be condemned solely because of their inhe rently discriminatory nature.  The European 
Communities and the United States  would not have to meet the SCM Agreement’s requirement of 
proving serious prejudice. WT/DS54/R, WT/DS55/R, 
WT/DS59/R, WT/DS64/R Page 80 
 
  (l) Conversely, Indonesia’s interpretation does not render  Article III useless, as 
complainants maintain, but confines it appropriately  
5.188 Indonesia’s interpretation that s ubsidies that meet the criteria of Articles 1 and 2 of the SCM 
Agreement are governed solely by the SCM Agreemen t is the only reasonable interpretation of the 
relationship between subsidies and Article III that  would not render crucial provisions of the SCM 
Agreement meaningless.  Moreover, contrary to Co mplainants’ assertions, Indonesia’s interpretation 
does not render Article III useless, but conf ines Article III to its appropriate sphere. 
 (1) A “conflict” exists - Article III of the General Agreement and the SCM Agreement are 
mutually exclusive and cannot be applied si multaneously; the obligations of the SCM 
Agreement are not additional, supplementary or complementary to Article III of the 
GATT 1994  
5.189 According to the Panel in European Commu nities-Regime for the Importation, Sale and 
Distribution of Bananas , a "conflict" exists when: 
 (i) mutually exclusive GATT 1994 and Annex 1A Agreement obligations clash;  and  
 (ii) a rule in one agreement prohibits what a rule in another agreemen t explicitly permits.  
Obligations are mutually exclusive wh en a Member cannot comply with both 
obligations at the same time.182 
5.190 A "conflict" does not exist when rules in an  Annex 1A Agreement pr ovide for different or 
complementary obligations in addition to thos e in GATT 1994 because the Annex 1A and GATT 1994 
obligations "can both be complied w ith at the same time without the ne ed to renounce explicit rights or 
authorizations ."183 
5.191 Contrary to the assertions of the European Communities and Japan (See  Sections V.E.1 and 2), 
Indonesia's GATT 1994 and SCM Agreement obligations are mutually exclusive because they cannot 
“both be complied with at the same time without the need to renounce [the] explicit right[] or 
authorization[]” to maintain th e subsidies at issue absent seri ous prejudice to a like product.  
Furthermore, Article III would “prohibit” what the SCM Agreement “permits”.  The SCM Agreement 
specifically does not prohibit developing countri es from granting a subsidy involving differential 
internal tax treatment on products.  On the other hand, Articl e III:2 of GATT 1994 prohibits such 
differential tax tr eatment on products.  Thus , a conflict clearly exis ts in the instant case.184 
5.192 In Bananas III , the Panel specifically addressed the type of conflict which exists in the instant 
case in an example dealing with the relationship be tween Article XI and the Agreement on Textiles and 
Clothing (ATC): 
Article XI:1 of GATT 1994 prohibits what Article 2 of the ATC permits in equally 
explicit terms.  It is true that Members could theoretically comply  with Article XI:1 of 
                                                      
182European Communities-Regime for the Importation, Sale and Distribution of Bananas 
(22 May 1997), WT/DS27/R/USA, 321, para. 7.159.  
183Id. at para 7.160 (emphasis added).  
184The European Communities and Japan also argue that the Subsidies Agreement does not explicitly 
authorize or permit Indonesia to appl y discriminatory measures prohibited by Article III.  As discussed, the 
measures at issue are not prohibited by Article III.  The European Communities emphasizes the word 
“explicitly”, implying that the Subsidies Agreement is not explicit enough.  Yet the Subsidies Agreement is 
explicit enough that the EC itself admits that “Indonesia is … authorised to grant ‘subsidies’ under certain 
conditions.”  Those conditions are the absence of serious prejudice to a like product and they are met in the 
instant case.  WT/DS54/R, WT/DS55/R, 
WT/DS59/R, WT/DS64/R 
Page 81 
 
 
GATT, as well as with Articl e 2 of the ATC, simply by refraining from invoking the 
right to impose quantitative restrictions in the textiles sector because Article 2 of the 
ATC authorizes rather than mandates the imposition of quantitati ve restrictions.  
However, such an interpretation would render whole Articles or sections of Agreements 
covered by the WTO meaningless and run c ounter to the object and purpose of many 
agreements listed in Annex 1A which were negotiated with the intent to create rights 
and obligations which in parts differ substantially from those of the GATT 1994 .185 
5.193 Contrary to Japan’s a ssertion (See Section V.E.1(3)(c)), the relationship between  Article III and 
the SCM Agreement is analogous to th e relationship between Article XI and the ATC - a conflict exists 
regardless of whether Indonesia "could theoretically comply with" both Article III and the SCM 
Agreement "simply by refraining from invoking the right " to maintain the subsidies at issue absent 
serious prejudice to a like product.  This is because the SCM Agreement “authorizes rather than mandates” maintenance of such subsidies.  Findi ng that a conflict does not exist "would render" the 
provisions of the SCM Agreem ent regarding actionable su bsidies “meaningless.”   
5.194 Furthermore, such a finding would “run count er to the object and purpose” of the SCM 
Agreement.  Special and differenti al treatment of devel oping country Members is one of the objects and 
purposes of the Subsidies Agreement as evidenced by Article 27, which details that treatment, and by 
the language of Article 27.1 (“Memb ers recognize that subsidies ma y play an important role in 
economic development programmes of developing country Members.”). 
5.195 The Panel in Bananas III
 recognized that “many agreem ents listed in Annex 1A … were 
negotiated with the intent to create  rights and obligations which in pa rts differ substantially from those 
of the GATT 1994.”  Indonesia’s right to maintain the subsidies at issue absent  serious prejudice to a 
like product is precisely this type of  right.  It “differ[s] substantially  from those of the GATT 1994” and 
it is part of the compromise negotiated betw een the developed and the developing countries. 
5.196 The DSU prohibits the diminish ment of Indonesia’s right to maintain the subsidies at issue 
absent serious prejudice to a like product.  “Recom mendations and rulings of the DSB cannot add to or 
diminish the rights and obligations provided in th e covered agreements.”  (DSU Article 3.2.)  
Furthermore, the DSU not only prohibits the nullifi cation or impairment of  Indonesia’s benefits, it 
prohibits the impedance of an objective of th e Subsidies Agreement expressed in Article 27.1 
(“Members recognize that s ubsidies may play an important role in economic development programmes 
of developing country Members”.).  “All solutions to  matters formally raised under the consultation and 
dispute settlement provisions of the covered agreements … shall not nullify or impair benefits accruing 
to any Member under those agreements, nor impe de the attainment of any objective of those 
agreements” (DSU Article 3.5). 
5.197 The United States wrongly cr iticizes the Panel in Bananas III  and Indonesia for not fully 
supporting the proposition that a conflict exists if obligations are not mutually exclusive.  (See 
Section V.E.3).  First, as disc ussed above, the obligations are  mutually exclusive.  Furthermore, the 
negotiating history of the SCM Agr eement supports the view that a c onflict exists where a "right" 
granted by one Agreement is "precluded" by a provisi on in another Agreement.  Annex 1A Agreements, 
including the SCM Agreement, were “negotiated with th e intent to create rights and obligations which in 
parts differ substantially fr om those of the GATT 1994."186  The opposite view, as discussed above, 
                                                      
185 European Communities-Regime for the Importation, Sale and Distribution of Bananas 
(22 May 1997), WT/DS27/R/USA, 321, n. 403  (emphasis added).  
186 See European Communities-Regime for the Importation, Sale and Distribution of Bananas (22 May 
1997), WT/DS27/R/USA, 321, n. 403.  WT/DS54/R, WT/DS55/R, 
WT/DS59/R, WT/DS64/R Page 82 
 
 “would render whole Articles or  sections of Agreements covered by the WTO meaningless and run 
counter to the object and purpose of many agreements listed in Annex 1A.”
187 
 (2) Paragraph 8(b) of Article III of the GATT 1994 is inapposite, except clarifying that 
Article III applies to discriminatory internal taxes on like products  
5.198 Article III applies to  discriminatory internal  taxes on like products .  The import duty subsidies 
are border measures, not internal measures, and therefore are outside the scope of Article III.  (See Section V.F.1).  The luxury tax subsidy is provid ed exclusively to producers or assemblers of 
automobiles and therefore is al lowed under Article III:8(b) and is in accordance with Italian 
Discrimination Against Imported Agricultural Machinery .188  The European Comm unities’s and Japan’s 
arguments regarding the interpretati on of Article III: 8(b) in United States-Mea sures Affecting Alcoholic 
and Malt Beverages189 and Canada-Certain Measur es Concerning Periodicals190 are addressed in 
Section V.D.2.  Moreover, even if the Panel find s that the luxury tax subsidy is not allowed under 
Article III:8(b), there is still no like product in the instant case.  In quoting the report of the 
Sub-Committee of the Havana Conference, the European Communities itself recognizes that there must 
be a like product.  Article III:8(b) was redrafted “in order to make it clear that nothing in Article [III] 
could be construed to sanction the exemption of do mestic products from intern al taxes imposed on like  
imported products or the remission of such taxes.”191   
 (m) Complainants’ assertion th at the SCM Agreement cannot be lex specialis  because, if it 
were, generally available and Ar ticle 8 subsidies would not be constrained, is incorrect  
5.199 The example made by the Unit ed States (See Section V.E.3(a )(2)) involves differential internal  
taxation subject to Article III and is irrelevant to the instant case.  The import duty subsidies are not 
internal measures (See Sect ion V.F.1.), the luxury tax subsidy is a llowed under Article III:8(b) and there 
are no like products involved in the instant case. 
 (n) Even if the United States example were relevant, the point the United States seeks to 
advance is incorrect as a matter of law-the SCM Agreement addresses generally 
available and other Article 8 subsidies  
5.200 Articles 1 through 9 of the SCM Agreement ar e comprehensive and explicit in setting out the 
definitions of, disciplines on and remedies for subs idies.  The absence of an SCM Agreement remedy 
for non-specific subsidies, such as the one described by the Unit ed States, does not indicate that the 
SCM Agreement fails to provide an al l-encompassing structure of remedies.  Instead, this absence is part 
of that all-encompassing structure of remedies.  Th e detail and explicitness of the remedy provisions of 
the SCM Agreement indicate that this result was inte nded by the drafters.  In  particular, the remedy 
provisions of Article 9 clearly do not  apply to non-specific subsidies (Article 8.1(a)), only to other 
non-actionable subsidies (Article 8.1(b) ).  In any event, the United Stat es example is irrelevant in the 
instant case because the measures at issue are actionable subsidies. 
                                                      
187 See id. 
188 Italian Discrimination Against Imported Agricultural Machinery (23 October 1958), BISD 7S/60.  
189 United States-Measures Affecting Alcoholic and Malt Beverages (19 June 1992), BISD 39S/206.  
190 Canada-Certain Measures Concerning Periodicals (30 June 1997), WT/DS31/AB/R.  
191 Report of Committees and Principal Sub-co mmittees, United Nations Conference on Trade and 
Employment, held at Havana, Cuba from 21 November 1947 to 24 March 1948, ICITO I/8 (September 1948) at 66, para. 69 (emphasis added).
 WT/DS54/R, WT/DS55/R, 
WT/DS59/R, WT/DS64/R 
Page 83 
 
 
 (o) Japan's and the United St ates' claims that Indonesia's measures violate Article III:2, 
second sentence are incorrect  
5.201 Japan's and the United States ' claims that Indonesia's measur es violate Article III:2, second 
sentence are incorrect.  The SCM Agreement is lex specialis   and, in the alternative, insofar as a conflict 
exists, controls the resolution of this disput e, including claims under Article III:2.    
 (p) Japan’s view that Indonesia’s argume nt renders the General Interpretive Note 
meaningless is incorrect  
5.202 Japan argues that "Indonesia’s ‘lex specialis’  theory would render the General Interpretative 
Note completely unnecessary and w ould severely weaken the GATT’s fundamental obligations".  (See 
Section V.E.1).  Japan has mischa racterized Indones ia’s position. 
5.203 Indonesia’s lex specialis  argument does not “render the General Interpretative Note completely 
unnecessary.”  Rather, Indo nesia’s argument is suppor ted by the General Interp retative Note.  Because a 
“conflict” exists, the General Interpretative Note  mandates that the provisions of the Subsidies 
Agreement “prevail to the extent of the conflict.”   Nor do any of Indones ia’s arguments “severely 
weaken the GATT’s fundamental oblig ations.”  As discussed above, Indonesia’s interpretation that 
subsidies that meet the cr iteria of Articles 1 and 2 of the SC M Agreement are solely governed by the 
SCM Agreement is the only reasonable interpretation of the relationship between subsidies and Article 
III that would not render the SCM Agreement meani ngless.  This interpretation does not “severely 
weaken” Article III, but confines Article III to its appropriate sphere. 
 (q) Parts and components are not "indirec tly" taxed in excess of  like domestic goods   
5.204 Parts and components are not "i ndirectly" taxed in excess of "t he like domestic goods".  First, 
there are hardly any "like" parts and components.  Second, importers of these parts and components 
continue to pay the tax in a direct manner and in the amounts and at the rates they have been paying for 
years.  Not receiving benefits received by another comp any does not at all, either directly or indirectly, 
increase the tax on parties that do not receive the benefit. 
E. Rebuttals to Indonesia's gene ral response to the claims ra ised under Article III of GATT 1994  
1. Rebuttal arguments of Japan  
5.205 The following are Japan's  arguments rebutting Indonesia's gene ral defence to the claims raised 
under Article III of GATT 1994:   
5.206 Indonesia argues that GATT Ar ticle III does not apply to this dispute.  That view is wrong, 
however. 
5.207 Regarding the luxury tax exemption, while Indonesia has not made other counter-arguments, 
such as those it has made concerning the import duty exemption. Therefore, it  is undisputed that the 
local content requirement, at le ast in connection with the luxury tax exemption, constitutes a prima facie  
violation of GATT Article III:4 by treating domestic parts and components more favourably than like 
imports and the only question is whether the app lication of GATT Article III:4 to the luxury tax 
exemption is denied by virtue  of the SCM Agreement.   
5.208 Indonesia argues that its measures in que stion are actionable subsidies under the SCM 
Agreement, and specifically that they are subsidies contingent on the use of domestic products that would be prohibited by SCM Article 3.1(b) but are made actionable inst ead by virtue of Article 27.3.  
There is no dispute that Indonesia' s discriminatory tax policies fa ll within the SCM Agreement's WT/DS54/R, WT/DS55/R, 
WT/DS59/R, WT/DS64/R Page 84 
 
 
definition of "subsidy" and they  are actionable on a transitional basis under part III of the SCM 
Agreement.  The only implication of this analysis is that, under the SCM Agreement, such subsidies are 
subject to the remedial provisions stipulated by Article 7, just like other subsidies including tax 
exemptions on domestic products actionable under the SCM Agreement,  instead of Article 4, which 
provides the extremely expeditious procedures for prohi bited subsidies. Therefore, the issue is whether 
the national treatment obligations  of GATT Article III also apply to actionable subsidies. 
5.209 Indonesia further argues that the national treatm ent obligations of GATT Article III do not apply 
to actionable subsidies, regardless of their nature, contending that such subsidies are governed solely by 
the SCM Agreement.  In order to support that positi on, Indonesia mentioned four  main arguments in its 
First Submission:  the SCM Agreement is the lex specialis  for "subsidies" within its definition; applying 
GATT Article III:2 to "subsidies" would reduce the SCM Agreement to inutility; GATT Article III and 
the SCM Agreement "conflict" with each other; and GATT Article III: 8(b) should be "re-thought" in 
light of the SCM Agreement. 
5.210 None of  Indonesia's arguments have merit.   Both GATT Article III and the SCM Agreement 
are applicable to the National Car Programme, there is no "conflict" between them, and GATT 
Article III prohibits the Indonesian measures.  To ac cept Indonesia's argument, that is, to fail to apply 
GATT Article III:2 to "sub sidies" would render one of the GATT's core provisions meaningless.  Under 
Indonesia's interpretation, discriminatory imposition of  internal taxes would be allowed in the name of 
"subsidy", but that would deprive Article III:2 of all life and purpose, because its sole function is to 
prohibit the discriminatory imposition of internal ta xes.  The following discussion demonstrates the 
flaws in the arguments made by Indonesia to support  its incorrect theory of the relationship between 
GATT Article III and the SCM Agreement. 
  (a) Indonesia's lex specialis  argument does not have any merit
 
5.211 Indonesia argues that "[t]his dispute involve s subsidies and so is governed by the [SCM] 
Agreement, and not by the [GATT] or the [TRIMs Ag reement]".  Indonesia further argues that the SCM 
Agreement "is the lex specialis  and the WTO conformity of the programmes must be assessed pursuant 
to the provisions of only  this Agreement". (See Section V.D.) 
  (1) Indonesia's lex specialis  argument is unsupported  
5.212 Indonesia's lex specialis  argument lacks any legal foundation.   Indonesia essentially concedes 
this by failing in its First Submissi on to cite a single textual provision in support of its assertion that only  
the SCM Agreement applies to discriminatory tax brea ks and other subsidy meas ures.  This failure is 
unsurprising, of course, because there simply is no WT O rule that provides for specific agreements, such 
as the SCM Agreement, to apply to the complete ex clusion of general WTO oblig ations, such as national 
treatment.  The lack of textual support al one is enough to reject Indonesia's position192, but it is only 
compounded by the further absence from Indonesia's argu ments of any citation to the drafting history, a 
Panel decision, or even a treatise in its support. 
  (2) Indonesia's lex specialis  argument is wrong  
5.213 Indonesia's lex specialis  argument is also wrong.  It is in consistent with the text of the WTO 
Agreements.   
                                                      
192See Vienna Convention on the Law of Treaties, art.  31;  See also,  United States - Standards for 
Reformulated and Conventional Gasoline ("US - Gasoline "), WT/DS2/AB/R, adopted on 20 May 1996,  pp. 
16-17. WT/DS54/R, WT/DS55/R, 
WT/DS59/R, WT/DS64/R 
Page 85 
 
 
5.214 As mentioned, no WTO rule provides for specific  agreements to apply to the complete exclusion 
of general WTO obligations.  To the contrary, the WTO Agreements expressly provide for a different - 
and much narrower - rule of law.  Specifically, th e General Interpretative No te to Annex 1A of the 
Agreement Establishing the WTO (the "General Interpretative Note") provides: 
In the event of a conflict between a provision of the General Agreement on Tariffs and 
Trade 1994 and a provision of another agreement in Annex 1A [of the WTO Agreement], the provision of the other agreement shall prevail to the extent of the conflict. 
5.215 The existence of the General Interpre tative Note thoroughly undermines Indonesia's lex 
specialis  argument.  The General Interpretative Note explic itly specifies the consequences if a "conflict" 
should arise between the GATT and certain other agreements, including the SCM Agreement, and it 
provides for preemption only "to the extent of the conflict."  But if the SCM Agreement were the lex 
specialis  that applied to the complete exclusion of th e GATT, as Indonesia argues,  then no "conflict" 
could ever occur between the two.  It is obvious that the WTO Membership, by adopting the General 
Interpretative Note, formally ac knowledged the possibility of "c onflict".  Thus, the General 
Interpretative Note, by its very existence, disproves Indonesia's lex specialis  theory. 
5.216 In addition, Indonesia's theory is disprove d by the existence of footnote 56 to the SCM 
Agreement, which specifies that the SCM Agreem ent does not "preclude action under other relevant 
provisions of GATT 1994, where appropriate."  As with the General Interp retative Note, footnote 56 
definitively shows that the SCM Agreement does not  apply to the complete exclusion of the GATT.
193 
5.217 Indonesia asserts that the SCM Agreement creates the "sole defin ition of subsidy for the family 
of WTO Agreements".  However, th ere is no reason to ignore the plai n language of Article 1.1 of the 
SCM Agreement, which expressly states that the definition is "for the purpose of this Agreement".  One should interpret that article in good faith in accordance with the ordina ry meaning to be given to its 
terms, as the Vienna Conv ention guides us to do. 
5.218 Indonesia also claims its "right as a developing country to maintain domestic-content subsidies" 
absent serious prejudice to a like product.  As me ntioned already, the measures in question are not 
prohibited under the SCM Agreement,  but made actionable on a transi tional basis by virtue of SCM 
Article 27.3.  However, this does not mean that developing countries are granted rights for exemption 
not only from SCM Article 3.1(b) but also from all other WTO provisions, including GATT Article III.  In the context of discriminatory imposition of intern al taxes, the measures in question are at the same 
time subject to GATT Article III.  
 (3) Indonesia's lex specialis  argument has seriously dama ging implications for the WTO 
system  
5.219 If adopted, Indonesia's lex specialis  argument would create loophol es in the GATT large enough 
to undermine the WTO's fundamental purpose of trade liberalization.  In Indonesia's view of the WTO 
system, sanitary measures, technical standards, and en tire categories of other m easures would be largely 
exempted from the GATT and other general WTO disciplines.  This result would occur, perversely, despite the facts that such meas ures were undeniably subject to the GATT before the Uruguay Round 
and that the clear purpose of the Uruguay Round was to strengthen - not weaken - mu ltilateral 
disciplines. 
5.220 The damage to the WTO system that would result from adoption of Indonesia's lex specialis  
argument is well illustrated by this case, since it would excuse Indonesia 's violations of GATT 
                                                     
 
193Vienna Convention on the La w of Treaties, art. 26. WT/DS54/R, WT/DS55/R, 
WT/DS59/R, WT/DS64/R Page 86 
 
 
Articles I:1, X:1, and X:3, although nothing a bout the SCM Agreement comes anywhere close to 
waiving the MFN obligation, excusing Indonesia's failu re to publish its programm es, or allowing it to 
administer its programmes unreasonably and partially. 
 (b) The SCM Agreement would not be reduced  to inutility by Article III:2 of GATT
 
5.221 As noted by the Appellate Body and previo us Panels, under general rules of treaty 
interpretation, one must give meani ng and effect to all terms of a tr eaty and must not "adopt a reading 
that would result in reducing whole clauses or pa ragraphs of a treaty to redundancy or inutility."194  
Indonesia invokes this principle in an attempt to prove that GATT Ar ticle III:2 does not  apply to the 
National Car Programme, contending that applicatio n of Article III:2 would reduce the entire SCM 
Agreement to inutility.  (See Section V.D.2).  That argument is not only wrong, but backwards, and it 
should be rejected. 
5.222 In fact, the SCM Agreement will continue to impose a variety of subs tantive and procedural 
disciplines on subsidies and c ountervailing measures regardless of the applicability of GATT 
Article III:2. There exist various subsidies which are subject to the SCM Agreement and are not 
proscribed by GATT Article III:2.  For example, exempting domestic enterprises from certain internal 
taxes or charges, such as registration taxes, would  not violate GATT Article III :2,  when those taxes or 
charges are not applied in connection with imported products.  However, such measures still fall into the 
scope of Article 1(a)(1)(ii) and Article 2.1 of the SCM Agreement and therefore these measures are subject to the disciplines of the SCM Agreement to their fullest extent.  
5.223 Further, the SCM Agreement is not meaningles s, even though GATT Arti cle III, as a whole, 
applies to subsidies.  The text of  GATT Article III supports this obse rvation, because  the "subsidies" 
covered by GATT Article III:8(b) ar e not prevented by GATT Article III, but they may still be subject to 
the provisions of the SCM Agreement.  Thus, it is plainly wrong to say that the SCM Agreement would 
be reduced to inutility if the Panel rules that GATT Ar ticle III:2, or the entire GATT Article III, applies 
to this case. 
5.224 By contrast, GATT Arti cle III:2 would be reduced to inutili ty if one accepted Indonesia's view 
of the SCM Agreement.  Under th at view, SCM Article 27.3 grants developing country Members a 
licence to impose discriminatory taxe s on imported goods in clear contra vention of GATT Article III:2.  
That view would further lead to an absurd conc lusion that even developed country Members could 
engage in such discriminatory taxation, provided onl y that such discrimination was not contingent on the 
use of domestic over imported products, since noth ing in the SCM Agreement prohibits such kinds of 
subsidies.  It should be apparent that Indonesia's approach would eviscerate GATT Article III:2.  All 
discriminatory internal taxation that had previously been regarded as violations of GATT Article III:2 would be suddenly recast as "subsi dies" exempt from GATT Article III:2  disciplines.  There would be 
no GATT Article III:2, because its so le function is to prohibit discrimi natory internal taxes and they 
would all be exempt from its disciplines.  The reasoning of the US - Malt Beverages
 Panel is exactly on 
point;  that Panel rejected an ar gument like Indonesia's, declaring th at "such an interpretation would 
virtually eliminate the prohibition in Article III:2 of discriminatory intern al taxation by enabling 
contracting parties to exempt all do mestic products from indirect taxes."195 
5.225 Thus, the Appellate Body's warning that WTO provisions cannot be construed in a manner that 
deprives them of all force and ef fect precludes giving the SCM Agreement such a broad construction as 
                                                      
194Appellate Body Report on US - Gasoline , p. 23;  Appellate Body Report on Japan - Taxes on 
Alcoholic Beverages ("Japan - Alcoholic Beverages II "),  WT/DS8/AB/R, WT/DS10/AB/R, WT/DS11/AB/R, 
adopted on 1 November 1996, p. 12. 
195See Panel Report on United States - Measures Af fecting Alcoholic and Malt Beverages ("US -  Malt 
Beverages"), DS23/R, adopted on 19 June 1992 (BISD 39S/206), para. 5.12. WT/DS54/R, WT/DS55/R, 
WT/DS59/R, WT/DS64/R 
Page 87 
 
 
to essentially repeal GATT Article III:2.196  There is no danger of GATT Article III:2 reducing the SCM 
Agreement to inutility, but, as US - Malt Beverages  recognized, adoption of I ndonesia's argument would 
most certainly have that effect on GATT Article III:2.197 
5.226 Other considerations also st rongly dictate that the SCM Agreem ent must be construed to avoid 
this result.  First, WTO cases that have addressed potential areas of conflict or overlap between WTO 
Agreements have favoured application of each agreement in accor dance with its terms, rather than 
allowing one agreement to ove rride another unnecessarily.198  Second, numerous Panels over the years 
have recognized GATT Article III:2's critical impor tance both in its own right and in maintaining the 
effectiveness of Articles I (MFN) and II (tariff bindings).199  Finally, there is no doubt that before the 
Uruguay Round Article III:2 prohibited discriminatory  internal taxes and it would be perverse to 
construe a Uruguay Round Agreement in a manner th at undermined an essent ial GATT discipline. 
  (c) GATT Article III does not "conflict" with the SCM Agreement    
5.227 Indonesia also argues that the SCM Agreement conflicts with GA TT Article III:2 and, per the 
General Interpretative Note, the SC M Agreement prevails in the conf lict.  That argument cannot be 
supported because there is no such conflict. 
5.228 The Bananas III  Panel construed the term "c onflict" in the General Interpretative Note to include 
both cases of "mutually exclusive"  obligations and cases where the GATT prohibits what an Annex 1A 
Agreement "explicitly permits," but not to cases wh ere the two agreements provide for "different or 
complementary obligations."  As the Unite d States has observed, the Bananas III  Panel construed the 
term "conflict" rather broadly.  (See Section V.E.3).  A finding that  a "conflict" arises only where two 
agreements establish "mutually exclusive" obligatio ns would be more in keeping with the drafting 
history of the General Interpretative  Note (See Section V.E.1) and with  earlier decisions that have sought 
to minimize potential conflicts between WTO agreements.200  Even if one accepts the broad view of 
"conflict" from Bananas III , however, there is no "conflict" between the SCM Agreement and GATT 
Article III:2. 
 (1) The obligations of GATT Article III: 2 and the SCM Agreement are not "mutually 
exclusive " 
5.229 It is so clear that a Member  may comply with the obligations of both GATT Article III and the 
SCM Agreement simply by not engaging in tax disc rimination that Indonesia does not even seriously 
argue that the two are "mutually exclusive."  Indone sia's does state that its "obligations under the two 
provisions would be mutually exclusive," but that cannot be regarded as a serious argument, because 
Indonesia did not (and could not ) identify a single obligation  of the SCM Agreement that requires 
                                                      
196See, e.g., Appellate Body Report on Japan - Alcoholic Beverages II , p.12. 
197Panel Report on US - Malt Beverages , para. 5.12. 
198Panel Report on Canada - Certain Measures Concerning Periodicals ("Canada - Periodicals "), 
WT/DS31/R, adopted on 30 July 1997, as modified by the Appellate Body, paras. 5.17-5.18.  Appellate Body 
Report on Canada - Periodicals , WT/DS31/AB/R, adopted on 30 July 1997, p. 18. 
199See, e.g., Panel Report on US - Malt Beverages , paras. 5.9, 5.12. 
200See, e.g., Report of the Appellate Body on Canada Periodicals , p. 18.  The WTO Secretariat 
presented its views on the concept of “conflict” between  two international agreements in connection with the 
negotiation of the Multilateral Agreement on Investment. The WTO Secretariat stated that, in the strict sense of 
the term, a conflict of law arises where an act obligated  under one agreement is prohibited under another. The 
WTO Secretariat also differentiated the concept of “conflict” from the concept of “overlap.”  "Relationship of 
Proposed MAI Provisions to the WTO - Note by the WTO Secretariat," DAFFE/MAI/RD(96)37 (Japan Exhibit 
68, p.2).  See also  “The Relationship between the MAI and the WTO Agreements (Note by the Chairman)," 
DAFFE/MAI/(96)21 (Japan Exhibit 69).  WT/DS54/R, WT/DS55/R, 
WT/DS59/R, WT/DS64/R Page 88 
 
 
conduct in violation of GATT Arti cle III:2.  Instead, it appears that  Indonesia has confused the two 
prongs of Bananas III
. 
 (2) The SCM Agreement does not "explicitly permit" tax discrimination in violation of 
GATT Article III:2  
5.230 Indonesia's entire "conflict" ar gument depends on a finding that  the SCM Agreement "explicitly 
permits" violations of Article III: 2.  But Indonesia fails to point the Panel to any such "explicit" language 
in the text.  It would be impossible to do so.  Th ere simply is no language in the SCM Agreement that 
"explicitly permits" tax di scrimination in violation of GATT Article III.  The Textiles and Clothing 
Agreement explicitly authorized an  exemption from the obligation to eliminate quantitative restrictions 
provided by GATT Article XI.  Lack ing any language in the SCM Agreement, equivalent to that under 
Articles I and II of the ATC, one cannot jump to th e conclusion that the relationship between Article III 
and the SCM Agreement is "analogous to the rela tionship between Article XI and the ATC."   
5.231 Lacking textual support, Indonesia nevertheless soldiers on by advancing a lengthy, elaborate, 
and rather convoluted argument a bout "actionable subsidies."   
5.232 But still, nothing about Indonesia's argument  shows that the SCM Agreement authorizes - 
explicitly or implicitly - "actionabl e subsidies" that violate GATT Artic le III:2.  Indonesia concludes that 
"the SCM [Agreement] specifically  does not prohibit developing countries from granting a subsidy 
involving differential internal ta x treatment on products and ..., on the other hand, Article III:2 of GATT 
1994 prohibits such differential internal  tax treatment on products", and that  this situation is "conflict".  
(See Section V.D.).  Indonesia appears to be attempting, sub silentio , to stretch the definition of 
"explicitly permits".  Indonesia w ould have the Panel believe that something the SCM Agreement "does 
not prohibit" is "explici tly permitted".  Silence on tax disc rimination can never mean "explicit 
permission", however.  Therefore, th e Panel should reject Indonesia's attempt to equate silence with 
"explicit permission". 
5.233 The Indonesian argument seems to stem from a misunderstanding of Article 27.3 of the SCM 
Agreement.  By its terms, SC M Article 27.3 provides developi ng country Members a temporary 
exemption from one obligation of the SCM Agreem ent, specifically, from SCM Article 3.1(b)'s 
prohibition of subsidies conditioned upon the use of  domestic over imported goods.  For developing 
country Members, during the five year transitio nal period, subsidies conditioned upon the use of 
domestic over imported goods are not deemed to be prohibited s ubsidies under Part II of the SCM 
Agreement, but are still ac tionable subsidies under Part III by virt ue of Article 27.3.   However, are 
actionable subsidies "explicitly permitted" to ignor e GATT Article III?  Th e answer is obviously 
negative.  As demonstrated so far, GATT Article I II does and should apply to subsidies under the SCM 
Agreement, including actionable subs idies.  There is no reason to read an exemption from SCM Article 
3.1(b) as an exemption from GATT Article III, or from any other WTO obligation.  To the contrary, 
exceptions from GATT principles have traditiona lly been interpreted narrowly by GATT and WTO 
panels, and as already discussed,  footnote 56 to the SCM Agreement provides that the SCM Agreement 
does not "preclude action under other relevant pr ovisions of GATT 1994, where appropriate."   
 (3) The SCM Agreement and GATT Article III:2 create "different or complementary" 
obligations  
5.234 The Panel should recognize that the SCM Agreem ent and GATT Article II I:2 create "different 
or complementary obligations".  As described by the Bananas III  Panel, two provisions are "different or 
complementary", and do not conflict, if "both can be co mplied with at the same time without the need to 
renounce explicit  rights or authorizations".  GATT Articl e III:2 and the SCM Agreement can both be 
complied with and Indonesia has fail ed to show that such compliance  would require it to renounce any 
"explicit rights". WT/DS54/R, WT/DS55/R, 
WT/DS59/R, WT/DS64/R 
Page 89 
 
 
5.235 It should be recalled here that what trigge rs the luxury tax exemption is not merely the use  of a 
domestic product (i.e., parts and components ) by a domestic producer, it is the sale  of a domestic product 
(i.e., an automobile) with domestic content to the final consumer.  We theref ore do not have here only 
the type of discrimination addr essed by Article 3.1(b) of the SCM Agreement (i.e., a subsidy to a 
producer contingent upon use of a domestic product), but also a type of discrimination governed only by 
GATT Article III:2 (i.e., internal tax discriminatio n between imported and do mestic products).  This 
highlights the fact that GATT Article III and SCM Article 3.1(b) have clearly different purposes, coverage, and remedies.    
5.236 Further, with regard to remedies, the SCM Ag reement allows both disput e settlement procedures 
under Article 4 or Arti cle 7 and countervailing measur es in accordance with Part V of the Agreement, 
while remedies for viol ations of GATT Article III:2 are provided under GATT Article XXII and 
Article XXIII.  In this respect, Indonesia attaches too much emphasis to the higher burden of proof under 
the SCM Agreement.  However, Indon esia's proposition that the SCM Ag reement is more favourable to 
defending parties than GATT Article III in terms of remedial procedures, and thus provides defending 
parties some procedural rights, is questionable.  The remedial process und er Article 7 of the SCM 
Agreement is much more expeditious than t hose under the Dispute Settl ement Understanding.  
Complaining parties are required to prove adverse trade effects but they can secure remedies under Article 7 of the SCM Agreement much earlier than in the case of a claim concerning the infringement of the GATT obligations under the DSU.  In other words, complaining parties bear the burden of proving 
adverse trade effects in exchange for a more expeditious remedy.  Indonesia also stresses that, under 
Article 7 of the SCM Agreement, the only remedy required is to eliminate "the adverse effects".  
However, we do not see any substantial difference between the obligations to eliminate the adverse effects and those to bring the meas ures into conformity with the GA TT obligations.  It should also be 
noted that under Article 7 of the SCM Agreement "appr opriate steps to remove the adverse effects" have 
to be taken within 6 months from the date of adopti on of the recommendations by the DSB, only 2/5 of 
the 15 months guideline for the "reasonable period of time" to implement the DSB recommendations 
stipulated by Article 21.3 of th e DSU.  Therefore, even though Article III of the GATT 1994 is 
applicable, complaining parties may c hoose to resort to Article 7 of the SCM Agreement, as the United 
States and the European Communities do in this case.  
  (4) "Conflict" should be narrowly interpreted
 
5.237 In keeping with the fundamental objective and purpose of the WTO system - trade liberalization 
- WTO cases that have addressed potential areas of conflict and overlap between the WTO agreements 
have favoured application of each agreement in accordance with its terms to the maximum extent 
possible, rather than unnecessarily allo wing one agreement to override another.201  
5.238 Given that under the WTO system, waivers a nd exceptions "have to be interpreted narrowly"202,  
the waiver of the prohibition under Article 3.1( b) of the SCM Agreemen t cannot reasonably be 
interpreted as a license to violate any and all other obligations under the WTO agreements.   Japan's  
claim under Article III  of   GATT 1994 is not that the Programmee provides a prohibited subsidy, but 
that it violates national treatment, including I ndonesia's obligation under GATT  Article I II:2 to tax 
domestic and imported like products at the same rate.  If the WTO Me mbers had intended to waive the 
                                                      
201See, e.g., Report of the Appellate Body on Canada - Periodicals , page 19.  
202As noted in the GATT panel report on US - Countervailing Duties on Fresh, Chilled and Frozen Pork 
from Canada , provisions that constitute "an exception to basic principles of the General Agreement had to be 
interpreted narrowly."  BISD 38S/30, para. 4.4, adopted 11 July 1991.  See also Norway - Procurement of Toll 
Collection Equipment , GPR DS2/R, para. 4.5, adopted 13 May 1992 ("Since Article V:16(3) [of the 
Government Procurement Agreement] was an exceptions provision, its scope had to be interpreted narrowly"); 
Canada - Import Restrictions on Ice Cream and Yoghurt , BISD 36S/68, para. 59, adopted 4 December 1989 
(The panel "noted, as had previous panels, that exceptions were to be narrowly interpreted.").  WT/DS54/R, WT/DS55/R, 
WT/DS59/R, WT/DS64/R Page 90 
 
 
obligations under GATT Article I II:2 entirely for developing countries, they would have done so 
explicitly, given that "[t]he MFN requirement in Ar ticle I, and also tariff bindings under Article II, 
would become ineffective" without enforcement  of the Article III: 2 prohibition on discriminatory tax 
measures, including discriminatory tax exemptions.
203 
5.239 The drafting history of the term "conflict" in th e General Interpretative No te in the "third track" 
negotiating group also confirms that  the term suggests an irreconc ilable difference.   The initial 
discussion on the relationship between GATT 1994 a nd the other WTO agreements occurred during the 
drafting of the Understanding on Rules and Procedures  Governing the Settlement  of Disputes ("DSU")  
in the "third track" negotiating group chaired by Mr . Julio Lacarte.  The delegation of Canada then 
submitted on 14 October 1993 a proposal entitled "Con flict of Substantive Provisions" that included the 
addition of  the following "Headnote to Annex 1A in the MTO Agreement": 
In the event of a conflict between a prov ision of the GATT (1993) and a provision of 
another agreement in Annex 1A, the provi sion of the other agreement shall take 
precedence to the extent of the inconsistency."204 
5.240 At the session of 19 October 1993,  the de legation of Japan proposed to delete the term 
"inconsistency" and replace it with th e term "conflict".  Other delegations approved this amendment, and 
it was incorporat ed in a working paper dated 6 December 1993 pr epared by the secretariat to record the 
results of this session and to facilitate future discussions amo ng the negotiating group.205  T h e  
delegations that addressed this amendment at the se ssion generally concurred that it was intended to 
clarify the limited number of instances in which th e Note would apply.  Whereas "inconsistency" was 
open to a broad interpretation, "conflict" referred only to irreconcilable differences between an 
obligation under GATT 1994 and an obligation under a nother WTO agreement, such that the provisions 
of the two agreements were mutually exclusive a nd could not both be enforced at the same time. 
 (d) GATT Article III:8(b) has never excu sed tax discrimination and should not be 
"re-thought" to excuse it now  
  (1) GATT Article III:8(b) has never excused tax discrimination  
5.241 Article III:8(b) provides that Article III "sha ll not prevent the payment of subsidies exclusively 
to domestic producers, including paym ents to domestic producers derive d from the proceeds of internal 
taxes or charges applied consistently w ith the provisions of this Article ...." 
5.242 As is evident from the textual reference to "pay ments . . . derived from the proceeds of internal 
taxes," the scope of Article III:8(b) is limited to direct payments to producers.  Other measures that may 
be characterized as "s ubsidies," such as discrimina tory tax breaks for domestic  products, are not covered. 
5.243 This plain understanding of Article III:8(b) was confirmed by the GATT Panel in US - Malt 
Beverages .206  That Panel unequivocally rejected the argu ment that discriminatory tax breaks were 
"subsidies" protected by Article III:8(b), declaring that such an argument was contrary to the text, 
"context, declared purpose and drafting history of Article III."207  The drafting history could hardly be 
more clear about this point; the Hava na Conference rejected an altern ative to Article III:8(b) proposed 
by the Cuban delegate that would have expressly pe rmitted "the exemption of domestic products from 
                                                      
203US - Malt Beverages , paras. 5.9, 5.12. 
204Canadian Proposal "Conflict of Substantive Provisions" dated 14 October 1993 (Japan Exhibit 64).  
205Draft prepared by the GATT Secretariat da ted 6 December 1993 (Japan Exhibit 65).  
206Panel Report on US - Malt Beverages , paras. 5.7-5.12. 
207Id. at para. 5.9.  WT/DS54/R, WT/DS55/R, 
WT/DS59/R, WT/DS64/R 
Page 91 
 
 
internal taxes as a means of indirect subsidization. . . ."208  This evidence from the drafting history 
confirms the plain text of Article III:8(b) in showing that it is limited to direct  payments to producers.  
Discriminatory tax breaks for products have never been  covered by Article III:8( b), and are inconsistent 
with GATT Article III:8(b).  The US - Malt Beverages  decision was followed by the GATT Panel in US 
- Tobacco  and it was reaffirmed in Canada - Periodicals , by the Appellate Body  which declared that 
Article III:8(b) "was intended to exempt from the obligations of Article III only  the payment of 
subsidies which involve the expenditu re of revenue by a government."209 
5.244 Therefore, it is beyond doubt that the well-settle d understanding of Article III:8(b) is that it 
covers direct payments of subsidie s, but not discriminatory tax breaks.  Indonesia does not dispute this.  
Instead, it admits that its position is inconsistent with the prevailing understandi ng of Article III:8(b) by 
advocating a "re-thinking" of that  Article.  (See Section V.D.) 
5.245 Also, even if the di scriminatory tax breaks could be co nsidered as "subsidies" under GATT 
Article III:8(b), they are not directed "exclusively to domestic producers".  The direct beneficiaries of the luxury tax exemption are consumers, not the produce r of National Cars or producers of its parts and 
components.
210   
 (2) GATT Article III:8(b) should not be "re-thought" to excuse tax discrimination  
5.246 Indonesia argues that GATT Ar ticle III:8(b) should be "re- t hought" to exempt "all subsidies 
identified in Article 1 of the SCM Agreement" from the obligations of GATT Article III.  (See 
Section V.D).  In other words, Indonesia argues that the SCM Agreement's definition of "subsidy" 
should be read into Article III:8(b).  Because the SCM Agreement's definition of "subsidy" includes 
foregoing "government revenue that is otherwise due ", Indonesia argues that th is Panel should reject 
US- Malt Beverages .  
5.247 It is Indonesia's argument th at should be rejected.  The SCM Ag reement itself rejects the notion 
that its definition of "subsidy" s hould be applied to other WTO Agreem ents.  SCM Article 1.1 expressly 
states that the definition of "subsidy" is pr ovided "[f]or the purpose of this Agreement ."  There is no 
suggestion anywhere in the WTO text that the SCM definition of "subsidy" s hould be applied to GATT 
Article III. 
5.248 Indonesia's argument is also undermined by the fact that the Appellate Body reaffirmed US -   
Malt Beverages  in Canada - Periodicals .211  If the Appellate Body c onsidered that the scope of 
Article III:8(b) had to be "re-thought" in light of  the SCM Agreement, it could have and should have 
done so in Canada - Periodicals .  But it did not "re-think" Article III:8(b); it reaffirmed the accepted 
understanding.  Faced with this glar ing flaw in its argument, Indonesia  argues weakly that Canada did 
not argue for application of the SCM Agreement in that case.  But what Canada did or did not argue in a 
previous case is wholly irrelevant here.  What ma tters is that the Appellate Body has considered the 
scope of Article III:8(b) and has decided that it applies only to direct subsidy payments, not to 
                                                      
208Id. at para. 5.11. 
209Panel Report on United States - Measures Affectin g the Importation, Internal Sale and Use of 
Tobacco , DS44/R, adopted on 4 October 1994, para. 109 & note; Report of the Appellate Body on Canada -  
Periodicals , pp. 31-33 (emphasis added). 
210See Panel Report on Italian Agricultural Machinery, para.14 (holding that Article III:8(b) does not 
apply to payments granted to purchasers of agricultural machinery, because such payments cannot be regarded 
as subsidies to the producers of the machinery).   See also European Economic Community - Payments and 
Subsidies paid to Processors and Producers of Oils eeds and related Animal-Feed Proteins ("EEC - Oilseeds "), 
L/6627, adopted on 25 January 1990, 37S/86, para.137 (holding that subsidy payments that economically 
benefit oilseed processors, and not only oilseed produce rs, are not subsidies paid "exclusively to domestic 
producers" under Article III:8(b)).  
211Appellate Body Report on Canada - Periodicals , pp. 32-34.  WT/DS54/R, WT/DS55/R, 
WT/DS59/R, WT/DS64/R Page 92 
 
 discriminatory tax breaks.  Indonesi a's position is at odds with the Ap pellate Body's interpretation of 
Article III:8(b), and it should be rejected. 
5.249 Moreover, the rationale  of US - Malt Beverages
 remains every bit as valid today as it was when 
adopted.  It is still the case that including tax disc rimination within the scope of Article III:8(b) is 
contrary to the text, context, declared purpose, and dr afting history of Article III.  It also remains true 
that "the prohibition of discriminatory internal taxes in Article III:2 would be ineffective if 
discriminatory internal taxes on imported product s could be generally justified as subsidies for 
competing domestic producers in  terms of Article III:8(b)."212  Thus, the Appellate Body's admonition 
against reducing WTO provisions to inutility precludes any "re-thinking" of Article III:8(b) that would 
render Article III:2 ineffective.  And, once again, there is no reason whatsoever to believe that, by 
strengthening multilateral disciplines on subsid ies, the Uruguay Round essentially repealed 
Article III:2's prohibition on discriminatory taxation.   As stressed in the beginning of this Part, 
weakening Article III by abandoni ng its established interpretation and adopting Indonesia's proposed 
"re-thinking" would cause grave harm to the core WT O disciplines of MFN, tari ff bindings, and national 
treatment.213 
5.250 For all these reasons, the Gove rnment of Japan submits that there is no reason for the Panel to 
abandon a well-established and recently reaffirmed interpreta tion of a key GATT provision. 
2. Rebuttal arguments of the European Communities  
5.251 The following are the European Communities'  arguments rebutting Indonesia's general 
response to the claims raised under Article III of GATT 1994:  
 (a) GATT Article III and the SCM Agreement are not mutually exclusive  
5.252 Indonesia does not even attempt to argue that the tax incentives identified in Section III.B are 
consistent with GATT Articles III:2 , first sentence, and III:4. Instead , Indonesia contends that those 
measures are “subsidies” within the meaning of the SCM agreement and, as such, not subject to GATT 
Article III but only and exclus ively to the SCM Agreement. 
5.253 The European Communities does not dispute that the measures at issue are subsidies. Indeed, 
the European Communities claims that those measures are “specific subsidies” within the meaning of the SCM Agreement which cause “serio us prejudice” to its interests, contrary to Indonesia’s obligations 
under that Agreement. Nevertheless, the European Communities is of the view that GATT Article III 
and the SCM Agreement are not mutually exclusive and, therefore, can be applied simultaneously to the same measures. 
 (1) GATT Article III:8(b)  confirms that Article III applies to subsidies
 
5.254 Article III:8(b) of GATT reads as follows: 
(b) The provisions of this Article sha ll not prevent the payment of subsidies 
exclusively to domestic producers, includ ing payments to domestic producers derived 
from the proceeds of internal taxes or charge s applied consistently with the provisions 
of this Article and subsidies effected through governmental purchases of domestic 
products. 
                                                      
212Panel Report on US - Malt Beverages , para. 5.9. 
213Id. paras. 5.9, 5.12. WT/DS54/R, WT/DS55/R, 
WT/DS59/R, WT/DS64/R 
Page 93 
 
 
5.255 Article III:8(b) does not create an exception to  the other provisions of Article III. Rather, the 
purpose of Article III:8(b) is to clarify that the ot her provisions of Article III  do not apply to certain 
types of subsidies.214 Those subsidies which are not covered by Article III:8(b) are not contrary  per se  to 
the other provisions of Article III. Nonetheless, Article III:8(b) has the clear implication that measures 
not falling within that provision are not exempt from the other provisions of Article III simply because 
they can be characterized as “subsidies”. 
5.256 The use of the term “payment” in the phrase “p ayment of subsidies” cl early indicate s that the 
scope of Article III:8(b) is limited to subsidie s involving an actual tran sfer of funds from the 
Government to domestic producers. Exemptions or reductions from an indirect sales tax on products do 
not involve any such transfer of funds. Therefor e, that type of subsidies is not covered by 
Article III:8(b). The same reasoning applies in the ca se of subsidies in the form of an exemption or 
reduction of import duties. 
5.257 The drafting history of GATT provides furthe r confirmation that Article III:8(b) was not 
intended to cover exemptions or reductions from indirect taxes on pr oducts. The Report of the 
Sub-Committee at the Havana Conference which examined this provisions noted that: 
This subparagraph was re-drafted in order to make it clear that nothing in [Article III] 
could be construed to sanction the exempti on of domestic products from internal taxes 
imposed on like imported products or the remission of such  taxes. At the same time the 
Sub-Committee recorded its view that nothi ng in this sub-paragraph or elsewhere in 
[Article III] would override the provisions of Section C of Chapter IV [on subsidies]215. 
5.258 Furthermore, the drafters of Article III explicitly re jected a proposal by Cuba at the Havana 
Conference to amend that Article to read: 
The provisions of this Articl e shall not preclude the exem ption of domestic products 
from internal taxes as a means of indirect  subsidization in the cases covered under 
Article [XVI].216 
5.259 This view is also supported by the 1992 Pane l Report on US - Measur es Affecting Alcoholic 
and Malt Beverages . In that case, the United States argued that  the application of a lower excise tax to 
small United States producers of beer was allowable as a subsidy under Article III:8(b). This defence 
was  categorically rejected by the Panel:  
5.12  The Panel found, therefore, that the e xpansive interpretation of Article III:8(b) 
suggested by the United  States is not supported by the text, context, declared purpose 
                                                      
214As noted by the Panel Report on United States - Measures affecting Alcoholic and Malt Beverages  
(adopted on 19 June 1992,  BISD 39S/206, at para 5.8)  
“... in contrast to Article III:8 (a), where it is stated that ‘this Article shall not apply to  ... 
[government procurement]’, the underlined word s are not repeated in Article III:8 (b). The 
ordinary meaning of the text of Article III:8 (b), especially the words ‘shall not prevent’, 
therefore suggests that Article III does apply to subsidies, an d that Article III:8(b) only 
clarifies that the product-related  rules in paragraph 1 through 7 of Article III ‘shall not prevent 
the payment of subsidies exclusively to domestic producers ’ [emphasis added by the Panel]  
     215Indonesia contends that neither previous GATT Panel Reports nor the Appellate Body Report on 
Canada - Certain Measures Concerning Periodicals  (adopted on 30 June 1997, WT/DS 31/AB/R) have focused 
or analysed the last sentence of this citation. This is arguably true but irrelevant. That sentence confirms the proposition that Article III and Article XVI are not mutually exclusive: the mere fact that a measure is a subsidy 
falling within Article XVI does not exclude the applicati on of Article III  and, conversely, the application of 
Article III does not exclude the application of Article XVI. 
 
     216E/CONF.2/C.3/6, p.17; E/CONF.2/C.3/A/W.32, page 2.  WT/DS54/R, WT/DS55/R, 
WT/DS59/R, WT/DS64/R Page 94 
 
 
and drafting history of Article III,  and if carried to its logical conclusion, such an 
interpretation would virtually eliminate the pr ohibition in Article III:2 of discriminatory 
internal taxation by enabling contracting pa rties to exempt all domestic products from 
indirect taxes. The Panel accordingly found th at the reduced federal excise tax rates on 
beer are not covered by Article III:8(b).
217 
5.260 Indonesia contends that the Panel Report on US - Measures affecting Alcoholic and Malt 
Beverages  was adopted under the GATT 1947 and that it is necessary to "re-think" the scope of 
Article III:8 (b) in light of the WTO Agreement, and in particular of the SCM Agreement. More 
precisely, according to Indonesia, “under the WTO, the ‘payment of su bsidies’ language in Article III:8 
(b) must refer to all subsidies iden tified in Article 1 of the Subsidies Agreement".   (See Section V.D.) 
5.261 Yet, in the recent case Canada - Certain measures co ncerning Periodicals218, the Appellate Body 
has endorsed expressly the Panel Report on US - M easures Affecting Alcoholic  and  Malt Beverages ,  
thus confirming that the interpretation of Article III:8 (b) of GATT made by that Panel remains still valid under GATT 1994. 
5.262 The issue in dispute in Canada - Certain measures concerning Periodicals
 was whether the 
application by Canada Post of a reduced postal ra te to certain domestic periodicals was a subsidy 
covered by Article III:8 (b). Following a careful ex amination of the text, the context and the drafting 
history of that provision in line with the analysis ma de in the preceding paragr aphs,  the Appellate Body 
concluded as follows: 
We do not see a reason to distinguish a redu ction of tax rates on a product from a 
reduction in transportation or postal rates. Indeed, an examination of the text, context, 
and object and purpose of Article III:8(b) sugg ests that it was intended to exempt from 
the obligations of Article III only the payment of subsidies which involves the 
expenditure of revenue by a government ”219 [emphasis added]. 
5.263 The Appellate Body then went  on to express its agreement with  the following passage of the 
Panel Report on  US - Measures affe cting Alcoholic and Malt Beverages : 
5.10 Article III:8(b) limits, th erefore, the permissible produc ers subsidies to  ‘payments’ 
after taxes have been collecte d or payments otherwise consis tent with Article III. This 
separation of tax rules, e.g. on tax exempti ons or reductions, and subsidy rules makes 
sense economically and politically. Even if the proceeds from non-discriminatory 
product taxes may be used for subsequent subsidies, the domestic producer, like his 
foreign competitors, must pay the product ta xes due. The separation of tax and subsidy 
rules contributes to greater transparency. It also may render abuses of tax policies for protectionist purposes more difficult, as in the case where producer aids require 
additional legislative or governmental decisi ons in which the different interests can be 
balanced.
220 
5.264 Thus, contrary to the suggestions advanced  by Indonesia, in Canada - Certain measures 
concerning Periodicals  the Appellate Body made it very clear that a subsidy in the form of an exemption 
                                                      
     217Panel Report on United States - Measures affecting Alcoholic and Malt Beverages , adopted on 19 
June 1992, BISD 39S/206, at para 5.12.  
     218Appellate Body Report on Canada - Certain Measures concerning Periodicals , adopted on 
20 June 1997, WT/DS 31/AB/R.   
     219Id., at p. 34.  
     220Panel Report on United States - Measures affecting Alcoholic and Malt Beverages  (adopted on 19 
June 1992, BISD 39S/206, at para 5.10), reproduced in Appellate Body Report on Canada - Certain Measures 
concerning Periodicals , WT/DS 31/AB/R, p. 34.  WT/DS54/R, WT/DS55/R, 
WT/DS59/R, WT/DS64/R 
Page 95 
 
 
or reduction of tax rates on a produc t does not fall within Article I II:8(b).  The Appellate Body Report 
on Canada - Certain measur es concerning Periodicals  cannot be explained away simply by saying that 
Canada did not raise the argument that the measur es at issue were subsidies covered by the SCM 
Agreement.  (See Section V.D).  GATT Article II I:8(b) cannot have different meanings depending on 
the arguments raised by the parties to a dispute.  If the SCM Agreement had changed the meaning of 
GATT Article III:8(b), the Appellate Body should have taken into account that new meaning, even if it 
was not invoked by Canada. 
 (2) The SCM Agreement is not lex specialis  
5.265 As a preliminary remark, the European Commun ities notes that it may be questionable whether 
the lex specialis  principle qualifies as a “customary rule of interpretation of public international law” in 
the sense of Article 3.2 of the DSU.  The defendant  has not provided any evidence to that effect.  
Furthermore, the European Communiti es notes that such principle is nowhere mentioned in the Vienna 
Convention on the Law of the Treaties. 
5.266 Assuming that the lex specialis  rule was in fact a customary rule of public international law, the 
General Interpretative Note to A nnex 1A would exclude its application between the GATT and the other 
Annex 1A Agreements.  The clear in tention of the WTO drafters was that the relationship between the 
GATT 1994 and the other Agreements included in A nnex 1A should be governed only and exclusively 
by the rule contained in the General Interpretative Note to Annex 1A.  The wording of that Note was 
carefully chosen so as to restrict the number of instances where the other Agreements included in 
Annex 1A would prevail over GATT 1994.  (See Sec tion V.E.1.)  Those cautions would have been 
unnecessary if the drafters had en visaged the application of the lex specialis  rule between GATT and the 
other Annex 1 Agreements.221 
5.267 In any event,  Indonesia has not shown that the SCM Agreement is the lex specialis  in this 
dispute.  Unlike GATT Arti cle III:2, which is specifically concerned with indirect taxation,  the SCM 
Agreement does not contain any rule dealing specifically  with indirect taxes.  Moreover, whilst virtually 
all measures falling within Article II I:2 may be construed as “subsidies” within the meaning of Article 1 
of the SCM Agreement, the opposite is clearly not true: most subsidies subj ect to the SCM Agreement 
do not fall within either Article III:2 or any of the other provisions of Article III. Thus, if the lex 
specialis  principle was deemed applicable, Article III: 2 and not the SCM Agreement would have to be 
considered as the relevant lex specialis  with respect to the tax exemptions and reductions granted by 
                                                      
     221The lex specialis rule has never been invoked by prior Panels or by the Appellate Body in order to 
decide on the relationship between GATT 1994 and another Agreement contained in Annex 1A. The Panel 
Reports on EC - Regime for the Importation, Sale and Distribution of Bananas,  examined the relationship 
between the GATT, on the one hand, and the TRIM s Agreement and the Agreement on Import Licensing 
Procedures, on the other hand, exclusively in light of the General Interpretative Note, even though, having 
regard to the greater degree of specifi city of the obligations they impose, the two latter agreem ents are arguably 
lex specialis with respect to the GATT. Acco rding to the Panel, those two agreements and the GATT were 
“equally applicable” to the measures at  issue in the absence of a “conflict”  within the meaning of the General 
Interpretative Note. (See e.g. WT/DS27/R/USA, adopted on 25 September 1997, at paras 7.152.- 7.158) 
 The Report of the Appellate Body in the same case (WT/DS27/AB/R, adopted on 
25 September 1997, at para 204)  hold that: 
 “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 im porting licensing procedures. If the Panel had done so, 
then there would have been no need for it to address th e alleged inconsistency with Article X:3 (a) of the GATT 
1994)” [emphasis added] 
 Thus, the Appellate Body ruled that “both” Article X of GATT and the Licensing Agreement 
applied to the measures and that the latter should ha ve been applied “first”, and not “instead of” GATT 
Article X, as the lex specialis rule would have required.  WT/DS54/R, WT/DS55/R, 
WT/DS59/R, WT/DS64/R Page 96 
 
 Indonesia.  As will be shown be low GATT Article III:4 and the SCM Agreement overlap. Some (but by 
no means all) measures covered by Article III:4 are also covered by the SCM Agreement.  Thus, it 
cannot be said that any one of  them is lex specialis  with respect to the other.
222 
 (3) The application of GATT Article III to subsidies does not render the SCM Agreement  
redundant  
5.268 Indonesia’s contention that virtually all subs idies other than subsidized import duties are 
contrary to GATT Article III is based on a gross misinterpretation of the scope of that provision. Moreover, it ignores that the remedies provided by the SCM Agreement are diff erent from the remedies 
available in case of breach of the GATT. 
5.269 Article 1 of the SCM Agreement identifies th ree different ways in which a Government can 
provide a subsidy
223: 
 (i) by making a direct transfer of funds (e.g. grants, loans, an equity infusion); 
 (ii) by foregoing or non collecting government revenue that is otherwise due (e.g. fiscal 
incentives such as tax credits); and 
 (iii)  by providing goods or serv ices, or by purchasing goods.  
5.270 Direct transfers of funds are not covered by GATT Article III:2, which is concerned only with 
the application of indirect taxes on  products. Moreover, loans, grants or equity infusions are not “laws, 
regulations or requirements” which “affect” as such the internal sale, offering for sale, purchase, transportation, distribution or use of products
.224  For that reason, the granting of this category of 
subsidies cannot breach by itself GATT Article III:4.  As shown by previous Panel Reports, this type of 
subsidies may be contrary to Arti cle III:4 only to the extent that they are linked to a measure which 
affects the internal sale, purchase, use, etc. of domestic goods. For example,  in Italian Agricultural 
Machinery225,  the Panel found that an Italian law providing special credit terms to farmers for the 
purchase of agricultural machinery conditional upon th e purchase of machinery produced in Italy was, 
by virtue of that condition, contra ry to GATT Article III:4. As discus sed above, that subsidies in the 
                                                      
     222The relationship between GATT Article III:4 and the SCM Agreement is similar to that between the 
GATT and the GATS as described by the Appellate Body in the following passage of its Report on EC - Regime 
for the Importation, Sale and Distribution of Bananas  (WT/DS27/AB/R, adopted on 25 September 1997, at 
para 221): 
“Given the respective scope of application of th e two agreements, they may or may not overlap, 
depending on the nature of the measures  at issue. Certain measur es could be found to fall exclusively within the 
scope of GATT 1994, when they affect  trade in goods as goods. Certain measures could be found to fall 
exclusively within the scope of the GATS, when they affect the supply of services as services. There is yet a 
third category of measures that could be found to fall within the scope of both the GATT and the GATS (...) In all such cases in this third category,  the measure in question could be scru tinised under both the GATT 1994 and 
the GATS. However, while the same measure could be scrutinized under both agreements, the specific aspects 
of that measure examined under each agreement could be different. Under th e GATT 1994, the focus is on how 
the measure affects the goods involved . Under the GATS, the focus is on ho w the measure affects the supply of 
the service or the service suppliers in volved. Whether a certain measure affecting the supply of a service related 
to a particular goods is scrutinized under the GATT 1996 or the GATS, or both, is a matter that can only be 
determined on a case-by-case basis”.
 
     223In addition, Article A.1 (a) (1) (iv) of the SC M Agreement refers to the hypothesis where a 
Government makes payments to a funding mechanism or entrusts or directs a private body to carry out one or 
more of the types of functions illustrated in (i) to (iii).  
     224 E/CONF.2/C.3/6, p.17;  E/CONF.2/C.3/A/W.32, p.2.  
     225Panel Report on Italian Agricultural Machinery , adopted on 23 October 1958, 7S/60.  WT/DS54/R, WT/DS55/R, 
WT/DS59/R, WT/DS64/R 
Page 97 
 
 
form of direct transfer of funds are not caught  by GATT Article III is further confirmed by GATT 
Article III:8(b). 
5.271 The above considerations are equally applicable in the case of subsidies falling within category 
(iii), even if GATT Article III:8(b)  does not refer to the provision of  goods and services to a domestic 
producer.  Thus, for instance, the provision of raw ma terials by the Government  at a subsidized price 
would not be contrary to either Ar ticle III:2 or Article II I:4, because it does not affect as such the 
internal sale, offering for sale, etc of goods.  On th e other hand, the provision by the Government of, for 
example, services of transportation or distribution at subsidized rates only for domestic goods would be 
contrary to Articles III:4226 and/or III:2. 
5.272 Category (ii) includes, in essence, three differ ent types of subsidies: s ubsidies granted in respect 
of indirect taxes on products; subs idies granted in respect of import duties; and subsidies granted in 
respect of direct taxes. 
5.273 If the taxes are indirect, GATT Ar ticle III:2 may apply.  In contra st, subsidies granted in respect 
of direct taxes are not covered by Ar ticle III:2 which, to repeat, is concerned only with indirect taxes. 
Nor are those subsidies subject to GATT Article III:4 .  First, because direct  taxes are not applied on 
“products” and therefore do not “affect” as such their sale, offering for sale, etc. Moreover, a reduction or exemption from a direct tax could never be consid ered to give “more favourable treatment” in the 
sense of Article III:4, given that foreign producers (and  indirectly their products) are not subject to those 
taxes in the first place. Like the subsidies falling with in the category (i), subsid ies granted in respect of 
direct taxes may infringe Article III:4 only to the ex tent that they are linked to other conditions which 
favour the use, purchase, et c. of domestic products. 
5.274 Subsidies granted in respect of import duties are not covered, in principl e, by Article III since 
import duties are border measures. Ne vertheless, this type of subsidie s may violate Article III:4 where, 
as in the present dispute,  its granting is conditional upon complian ce with a measure, such as a local 
content target, which affects the internal  use of products (see Section V.F.3). 
5.275 In sum, whilst GATT Article III and the SC M Agreement may overlap in respect of certain 
measures, most subsidies covered by the SCM Ag reement do not fall within the scope of GATT 
Article III. 
5.276 Moreover, Articles 4 and 7 of the SCM Agreem ent provide specific re medies which are more 
rigorous for the subsidising Member than the ordina ry remedies available unde r the DSU in case of 
breach of GATT Article III. 
5.277 The importance of this differen ce is perfectly illustrated by th e present dispute. If the Panel 
finds that Indonesia has violated Article III of GA TT, Indonesia will be requi red “to bring the measure 
into conformity with” the GATT (cf. Article 19 of the DSU). In practice, this means that Indonesia will have to amend or repeal the m easures, but only for the future. 
5.278 In contrast, if the Panel f ound that those measures constitute  subsidies which have caused 
“serious prejudice” to the interests of the EC,  Indonesia would be  required, in accord ance with Article 
7.8 of the SCM Agreement, to “withdraw” the subsidie s or to “remove” its “adverse effects”.  This may 
imply the obligation for Indonesia not just to repeal or amend the measures but in addition to recover the 
                                                     
 
     226Thus, for instance, in Canada - Certain measures concerning periodicals , the application by Canada 
Post of more favourable postage rates for domestic period icals was found to violate Ar ticle III:4.  (Panel Report 
WT/DS31/R, at paras 5.31-5.44, as modified by the Appellate Body Report, WT/DS31/AB/R, adopted on 20 June 1997, at pp. 32-35).
 WT/DS54/R, WT/DS55/R, 
WT/DS59/R, WT/DS64/R Page 98 
 
 unpaid duties and taxes on motor vehi cles which have alread y benefited from those exemptions, to the 
extent that those subsidies contin ue to cause “adverse effects”.  
 (4) The non-application of GATT Articl e III:2 to subsidies would render GATT 
Articles III:2 and III:8(b) superfluous  
5.279 Whilst, for the reasons explained above, the application of GATT Articl e III to subsidies would 
by no means render the SCM Agreement redun dant, its non-application would reduce GATT 
Article III:2 to inutility. In effect, any measure falling within GATT Article III:2 can be construed as “revenue foregone” within the meaning of Article 1.1 (a) (1) (ii) of the SCM Agreement and therefore as a “subsidy”. 
5.280 As noted by the Panel Report on US - Meas ures affecting Alcoholic  and Malt Beverages
: 
... As any fiscal burden imposed by discrimina tory internal taxes on imported goods is 
likely to entail a trade-distorting advantage for import-competing domestic producers, the prohibition of discriminatory internal ta xes on imported products could be generally 
justified as subsidies for competing domestic  producers in terms of Article III:8 (b).
227 
... carried to its logical conclusion, [the Un ited States interpreta tion] would virtually 
eliminate the prohibition in Arti cle III:2 of discriminatory internal taxation by enabling 
contracting parties to exempt all dome stic producers from indirect taxes...228 
5.281 Furthermore, Indonesia’s lex specialis  argument also would reduce to inutility GATT 
Article III:8(b). In fact, if the SCM was lex specialis  with respect to Article III:2 whenever a subsidy is 
involved, there would be no need to clarify in th e GATT that certain categori es of subsidies are not 
covered by GATT Article III. 
 (5) The SCM Agreement has not modified th e relationship between the rules on subsidies 
and the rules on national treatment which existed under GATT 1947  
5.282 Under GATT 1947, there was no question that Article XVI was lex specialis  vis-à-vis Article III 
to the extent that “subsidies” were concerned; or that there was a “conflict” between those two 
provisions simply because Article XV I did not prohibit certain types of  measures that were prohibited 
by Article III. 
5.283 Indonesia does not, apparently, dispute that under GATT 1947 Article III and Article XVI were 
not mutually exclusive. Yet, Indonesia contends that “a ll of that changed with the entry into force of the 
WTO”.  Indonesia gives two reasons for that “chang e”.  The first reason is that the SCM Agreement 
provides an “all encompassing structure of remedies” against subsidies. The second reason is that the 
SCM Agreement contains a definition of “subsidy”.  As  will be shown below, both reasons are far from 
compelling. 
5.284 Article XVI of GATT 1947 did contain also  an “all encompassing structure of remedies 
applicable to subsidies”, in the sense that  it provided remedies with respect to all  subsidies.  Section A 
laid down a remedy for all “subsidies in general”;  whereas Section B provided  additional remedies for 
export subsidies.  The remedies provided in Section A of Article XVI in respect of the type of subsidies 
at issue in this dispute are less rigorous for the subsidising Member than those provided in the SCM 
Agreement.  But they are no less “encompassin g”.  Formally, the rela tionship between the SCM 
                                                      
     227Panel Report on United States - Measures affecting Alcoholic and Malt Beverages  (adopted on 19 
June 1992, BISD 39S/206, at para 5.9.  
     228Id., at para 5.12  WT/DS54/R, WT/DS55/R, 
WT/DS59/R, WT/DS64/R 
Page 99 
 
 
Agreement and Article III of GATT 1994 is identical to the rela tionship between Article XVI of GATT 
1947 and Article III of GATT 1947. The mere fact th at the remedies against subsidies have been 
strengthened in the SCM Agreement is not a suffici ent reason to conclude that Article III no longer 
applies to subsidies. 
5.285 The fact that the SCM Agreement contains a de finition of subsidies is also irrelevant.  The 
absence of a definition of “subsidy” in GATT 1947 did not make Article XVI ina pplicable, nor therefore 
prevented it from applying concurren tly with Article III to the same me asures.  Furthermore, Article 1.1 
of the SCM Agreement states very clearly that the de finition of subsidy contained therein is only for the 
purposes of that Agreement.    
 (6) Article 32.1 juncto Footnote 56 of the SCM Agreement confirms that the SCM 
Agreement does not  exclude the application of  GATT Article III to subsidies   
5.286 If, as claimed by Indonesia, the WTO Agreemen t had rendered GATT Articl e III inapplicable to 
subsidies, one would expect to find some indication in the SCM Agreement of the drafters’ intention to 
introduce such a fundamental change with respect to  the situation existing under GATT 1947.  Yet,  the 
SCM Agreement does not contain the sl ightest trace of such intention.  
5.287 To the contrary, Article 32.1 juncto  Footnote No 56 of the SCM Agreement indicates that the 
drafters of the WTO Agreement expr essly envisaged the continued appl ication of GATT Article III to 
subsidies covered by the SCM Agreement. 
5.288 Article 32.1 of the SCM Agreement reads as follows: 
No specific action against a subsidy of another member can be taken except in 
accordance with the provisions  of GATT 1994,  as interp reted by this Agreement. 
5.289 Footnote No 56 to this paragraph then states that: 
This paragraph is not intended to preclude  action under other relevant provisions of 
GATT 1994, where appropriate. 
5.290 The obvious purpose of Article 32.1 is to prev ent Members from taking act ion against subsidies 
on the basis of GATT Articles VI (to the extent that its provisions concern subsidies) or XVI, 
independently from the more precise rules laid down in the SCM Agreement. GATT Article III is not a 
provision “interpreted” by the SCM Agreement but, in stead, one of the “other relevant provisions” to 
which reference is made in footnote No 56. Thus, in  conformity with that footnote the SCM Agreement 
does not preclude the Community from taking action under Article III against a subsidy covered by the 
SCM Agreement.229  
                                                      
     229Article 32.1 and footnote No 56 of the SCM Agreement reproduce the wording of Article 19.1 of 
the Tokyo Round Code and footnote No 1 to that Article, with the only difference that the references in the latter 
agreement to “the General Agreement” have been replaced by  references to  the “GATT 1994”. The official title 
of the Tokyo Round Code was “Agreement on the Interpretation and Application of Articles VI, XVI and XXIII 
of GATT”. Moreover one of the recitals included in the Preamble to the Code referred expressly to the desire of 
the parties “to apply fully and to interpret the prov isions of Articles VI, XVI and XXIII”. Thus,  it was 
indisputable that the provisions referred to in Article 19.1 of the Tokyo Round Code as being “interpreted” by 
the Code were Articles VI, XVI and XXIII; and that  the “o ther  relevant provisions” of GATT referred to in the 
footnote included inter alia  Article III. During the last phases of the Uruguay Round, the title of the SCM 
Agreement was changed from “Agreem ent on the Interpretation and Application of Articles VI, XVI and 
XXIII” to the current one because it was thought that the SCM Agreement created rights and obligations which 
went beyond merely “interpreting” and “applying” those provided in GATT Articles VI and XVI (see Appellate WT/DS54/R, WT/DS55/R, 
WT/DS59/R, WT/DS64/R Page 100 
 
  (7) Indonesia’s interpretation  would lead to an unjustified relaxation of the rules on
 tax 
discrimination existing under GATT 1947, c ontrary to the object and  purpose of the 
WTO Agreement  
5.291 The WTO Agreement is premised on the preserva tion of the level of trade liberalization already 
achieved under GATT 1947. This is apparent already from the Preamble to the WTO Agreement, which 
reads in pertinent part as follows: 
 Resolved, therefore, to develop an integr ated, more viable and durable multilateral 
trading system encompassing  the General Agreement on Tariffs and Trade, the results of past trade liberalization efforts,  and all of the results of the Uruguay Round of 
Multilateral Trade Negotiations, 
 Determined to preserve the basic principles  and to further the objectives underlying this 
multilateral trading system. 
5.292 The same objective of preserving the GATT “a cquis” also underlies the incorporation into 
GATT 1994 of the text of GATT 1947, together with  all the legal instruments adopted under that 
agreement
230, as well as the provision made in Article XVI.1 of the WTO Agreement to the effect that 
the WTO shall be guided by the “decisions, procedur es and customary practi ces” followed under GATT 
1947, except as otherwise provided.   
5.293 For that reason,  the instances where the WT O Agreement permits meas ures which would have 
been contrary to GATT 1947 are fe w and exceptional. Such derogatio ns have generally a temporary 
character and/or are restri cted to areas wh ere the GATT 1947 was not enforced de facto  (e.g. the textile 
sector now covered by the Agreemen t on Textiles and Clothing) and/or  where the applicability of the 
GATT 1947 was unclear or at least ha d been disputed by some Member s (e.g. in the case of TRIMs now 
covered by the TRIMs Agreement or in the case of VERs and other “grey area”  import restrictions now 
expressly subject to the Ag reement on Safeguards). 
5.294 In contrast,  Indonesia’s lex specialis  argument would lead, if accepted by the Panel, to the 
permanent nullification of a basic GATT rule wh ich was largely non controversial under GATT 1947 
and which was never the subject of spec ific discussions during the Uruguay Round. 
5.295 Under GATT Article I II:2, first sentence, the application of  an internal tax to an imported 
products “in excess of”  that applied to a like domest ic product is always prohib ited. This prohibition is 
not conditional on a trade effects test nor is it qualified by a de minimis  standard.  As noted by the 
Appellate Body in Japan - Taxes on Alcoholic Beverages , “even the smallest amount of ‘excess’ is too 
much”.231 
                                                                                                                                                                     
Body Report on Brazil - Measures  affecting desiccated Coconut , adopted on 20 March 1997, WT/DS22/AB/R, 
at p.17). Furthermore, unlike the Tokyo Round Code, the SCM Agreement has no Preamble. Article 32.1 and 
footnote No 56 were not adapted to take into acco unt those changes, which ha s rendered their meaning 
somewhat less clear than in the Tokyo Round Code. Yet, there is no indication in the drafting history that the negotiators intended to give a different meaning to Article 32.1 and footnote No 56 from that which Article 19.1 
and footnote No 1 to that Article had under the Tokyo Round Code.  According to the EC’s recollection of the 
negotiations, Article 32.1 and footnote No 56 were added to the Dunkel Text by the Secretariat, together with 
the other Final provisions, and adopted by the negotiators without discussion. 
     230See paragraph 1 of Annex 1A.  
     231Appellate Body Report on Japan - Taxes on Alcoholic Beverages , WT/DS8/AB/R, WT/DS 
10/AB/R, WT/DS11/AB/R, adopted 1 November 1996, at p. 23. WT/DS54/R, WT/DS55/R, 
WT/DS59/R, WT/DS64/R 
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5.296 If the SCM Agreement excluded the application of Article III:2 to subsidie s, tax discrimination 
between like produc ts would no longer be prohibited232.  Instead, the  complainant would have to prove 
that the measure causes “adverse effects” to its interests.233  Furthermore, if the tax exemption or 
reduction was granted to all domest ic producers, it could not be c onsidered as a “specific” subsidy 
within the meaning of Article 2 of the SCM Agreem ent and, therefore, would no be “actionable” at 
all.234 
5.297 The consequences would be even less acceptable in the case of Article III:2, second sentence. In 
accordance with that provision, a Member is pr evented from applying different taxes to two products 
which are “directly competitive or substitutable” so as  to afford protection to its domestic production. 
Thus, for example, two previ ous Panels (one under GATT 1947235 and one under GATT 1994236) have 
found that by applying a lower excise tax to local sh ochu than to imported whisky (a competing product) 
Japan afforded protection to its domestic productio n of shochu, thereby infringing GATT Article III:2, 
second sentence.  If Indonesia’s lex specialis  argument prevailed, Japan could argue that the tax 
differential constitute s a subsidy to its domestic shochu producer s, which is therefor e subject to the SCM 
Agreement and not to GATT Article III.  Yet, the SCM Agreement is concerned only with the “adverse 
effects” caused by a subsidy with resp ect to imports of a “like product”.   It provides no remedy in those 
cases where the subsidy cau ses “serious prejudice” to a competing importing product.237  Thus, 
Indonesia’s argument would have th e consequence that a tax system which has already been condemned 
twice would have to be tolerated in the future.238  
 (b) There is no conflict between GATT Article III and the SCM Agreement  
5.298 In the alternative, Indonesia argues that the Pa nel should find that there is a “conflict” in the 
sense of the General Interpretative Note to  Annex 1 A between the SCM Agreement and GATT 
Article III. 
5.299 As recalled pertinently by Ja pan (See Section V.E.1), the drafti ng history of that Note indicates 
clearly that the term “conflict” must  be interpreted narrowly. The drafte rs distinguished consciously that 
notion from broader notions such as “inconsisten cy” or mere “difference”.  There was a general 
consensus among the negotiators that in practice the app lication of the rule laid down in the Note should 
be restricted to the very limited  number of instances in which the obligations under the GATT and 
another Annex 1A agreement are trul y irreconcilable.  Clearly, the present case is not one of those 
instances. 
5.300 As noted by the Panel Report on EC - Regime for the Importation, Sale and Distribution of 
Bananas , there is no “conflict” where, as in the present case: 
                                                      
     232Article 3.1 (b) of the SCM Agreement only prohibits subsidies contingent upon the use of domestic 
over imported goods but not subsidies which are granted only upon the production or sale of domestic products, 
to the exclusion of imported products.  
     233See Article 5 of the SCM Agreement.  
     234See Article 8.1 (a) of the SCM Agreement. 
     235Panel Report on Japan - Customs Duties, Taxes and Labelling Practices on Imported Wines and 
Alcoholic Beverages, adopted on 10 November 1987, BISD 34S/83.  
     236Panel Report on Japan - Taxes on Alcoholic Beverages , WT/DS8/R, WT/DS10/R, WT/DS11/R, as 
modified by the Appellate Body Report, WT/D S8/AB/R, WT/DS10/AB/R, WT/DS11/AB/R, adopted 
1 November 1996.  
     237In addition, to the extent that the subsidy is granted to all Japanese shochu producers, Japan could 
argue that the subsidy  is  no t “specific” within the meaning of Article 2 of the SCM Agreement.  
     238Indonesia might try to argue th at the SCM Agreement is not lex specialis  with respect to Article 
III:2, second sentence, but this would lead to an equally anomalous results: the remedy would be more rigorous 
in the case of discriminatory taxation between competing products than in the case of discriminatory taxation between like products.
 WT/DS54/R, WT/DS55/R, 
WT/DS59/R, WT/DS64/R Page 102 
 
 
...  the rules contained in one of the Agr eements listed in Annex 1A provide for 
different or complementary ob ligations in addition to those contained in GATT 1994.
239 
5.301 Instead, according to that Panel report, the co ncept of “conflict” is desi gned to deal with the 
following two situations: 
... (i) clashes between obligations contained in GATT 1994 and obligations contained in 
Agreements listed in Annex 1A, where those obligations are mutually exclusive in the sense that a Member cannot comply with both obligations at the same time, and (ii) the 
situation where a rule in one agreement prohi bits what a rule in another agreement  
explicitly
 permits240[emphasis added]. 
5.302 None of these two situations  occurs in the present case. 
5.303 Clearly, Indonesia is not subject to two mutua lly exclusive obligations, because there is nothing 
in the SCM Agreement which requires Indone sia to grant the subsidies at issue. 
5.304 Nor does the SCM Agreement “permit explic itly” what the GATT Article III prohibits. In 
cannot be considered that a provision in an Annex 1A Agreement “permits explicitly”  what GATT 
prohibits unless it states in positive terms a right to do it  (e.g. “Members may apply or maintain 
measure X”), as opposed to merely abstain from prohibiting it.  In a ddition,  there must be identity 
between the prohibited measures and the explicitly permitted m easures.  An incidental overlap between 
two provisions which focus on two different types of measures does not constitute a “conflict”.  As 
shown below,  none of these two cond itions is met in the present case.  
5.305 By its own words, Article 27.3 of the SCM Agreement is limited to  stipulate a temporary 
exception to the prohibition contained in Article 3.1 (b) of the same agreement in favour of developing 
Members. It does not “authorise explicitly” developi ng Members to deviate from  any other obligation, 
either in the SCM Agreement, such as Article 5, or in other agreements, such as GATT Articles III:2 
and III:4.  
5.306 From the mere fact that Article 3 of the SC M Agreement does not prohibit a certain type of 
subsidies, it cannot be inferred a contrario  that Members have an “explicit right” to grant that type of 
subsidies in violation of a differen t obligation contained in another agr eement, such as GATT Article III.  
For instance, the fact that Article 3 of the SCM does not prohibit the granting of subsidies in the form of 
an exemption from an indirect tax only for domestic goods (irrespectiv e of their local content level), 
does not mean that Members have been granted ther eby an “explicit authori zation” to tax imported 
products in excess of domestic like products, contrary to the prohibition contained in GATT 
Article III:2. By the same token,   the fact that Article 3.1(b) juncto  Article 27.3 of the SCM Agreement 
does not prohibit, on a temporary basis, the granting of local content subsidies by developing Members 
cannot be construed as an “explicit authorization”  for those Members to violate GATT Articles III:2 
and III:4. 
5.307 Article 5 of the SCM Agreement lays down an obligation not to cause “a dverse effects” through 
the granting of “actionable subsidies”.  Clearly, this  does not amount to an “explicit authorization” to 
take any measure which may be characterized as an  “actionable subsidy” and which does not cause 
“adverse effects”, even if such measure is contrary to the provisions of GATT. 
                                                      
     239See e.g. Panel Report on EC - Regime for the Importation, Sale and Distribution of Bananas ,  
adopted 25 September 1997, WT/DS27/R/USA,  at para 7.155. 
     240Id., para 7.154. 
 WT/DS54/R, WT/DS55/R, 
WT/DS59/R, WT/DS64/R 
Page 103 
 
 
5.308 Finally, Article 8 of the SCM Agreement provi des that certain types of subsidies shall be 
considered as non-actionable. This means simply that  those subsidies are non-ac tionable under Parts III  
or V of the SCM Agreement. It does not mean that  Members have an “explicit right” to take measures 
which violate GATT Article III. 
5.309 Furthermore, in the present case there can be no “conflict” because  the required identity 
between the prohibited and the allegedly permitted measures does  not exist.  Arti cle III prohibits 
measures which discrimina te between imported and domestic produ cts, whereas the measures allegedly 
permitted by the SCM Agre ement are subsidies.  These two categories of measures are conceptually 
different, even if certain individua l measures may fall simultaneously within both categories.  Given the 
lack of identity between the two categories of me asures, it cannot be said that the SCM Agreement  
authorises “explicitly”  what is prohibited  by GAT T Article III. 
5.310 In EC - Regime for the Importati on, Sale and Distri bution of Bananas , the Panel elaborated on 
its interpretation of the notion of “c onflict” in the Note by identifying as an example of such “conflict” 
the relationship between GATT Article XI:1 and Arti cle 2 of the Agreement on Textiles and Clothing 
(the “ATC”): 
For instance, Article XI:1 of GATT prohibits the imposition of quant itative restrictions, 
while Article XI:2 of GATT contains a rather limited catalogue of exceptions. At the same time, Article 2 of the Agreement on Textiles and Clothing authorises the 
imposition of quantitative restrictions in th e textiles and clothing sector, subject to 
conditions specified in Article 2:1-21 of th e ATC. In other words, Article XI:1 of 
GATT prohibits what Article 2 of the ATC permits in equally explicit terms. It is true 
that Members could theoretically comply with Article XI:1 of GATT, as well as with Article 2 of the ATC, simply by refr aining from invoking the right to impose 
quantitative restrictions in the textiles sector because Article 2 of the ATC authorises rather than mandates the imposition of quan titative restrictions. However, such an 
interpretation would render whole Articl es or sections covered by the WTO 
meaningless and run counter to the object a nd purpose of many agreements listed in 
Annex 1A which were negotiate d to create rights and obliga tions which in parts differ 
substantially from those of the GATT 1994.
241 
5.311 The relationship of Article 2 of the ATC to GA TT Article XI is readily distinguishable from the 
relationship of the SCM Agreement to GATT Article III: 
 - Article 2 of the ATC grants a positive right to do something, namely to maintain 
quantitative restrictions.  On the contrary, the SCM Agreement does not confer a 
positive right to grant subsidies.  Its only purpose is to create remedies against certain categories of subsidies. 
 - There is total identity between the measures prohibited by GATT Article XI and those 
authorized by Article 2 of the ATC  (quantita tive restrictions in both cases).  The SCM 
agreement and GATT Article III, on the other hand, are concerned each with a different type of measures (subsidies  and measures which do not a fford national treatment to 
imported products, respectively), even if the two categories may overlap in respect of 
certain individual measures. 
 - According to the Panel, the application of  GATT Article XI:1 to measures covered by 
Article 2 of the ATC would have rendered the latter Article “meaningless”.  In contrast, 
                                                     
 
     241Id. at footnote No 390. 
 WT/DS54/R, WT/DS55/R, 
WT/DS59/R, WT/DS64/R Page 104 
 
 
the application of Article III to subsidies does not render the SCM Agreement redundant.  Quite to the contrary, its non-a pplication would reduce GATT Articles III:2 
and III:8 (b) to inutility. 
 - According to the Panel, the ATC was ne gotiated with the object and purpose to 
derogate from the GATT. In fact, that intention is set out explicitly in Article 1.1 of the 
ATC Agreement. In contrast,  there is no indi cation either in the text or in the drafting 
history of the SCM Agreement that it was negotiated with the intention of derogating from the GATT rules on national treatment.  Moreover, unlike in the case of the ATC Agreement with respect to GA TT Article XI, there would be  no apparent rationale for 
such derogation.  In particular, given that such derogation would be, again unlike in the 
case of the ATC with respect to GATT Arti cle XI,  permanent and not just temporary. 
5.312 The absence of a conflict between the SCM agreement and GATT Article III is further 
confirmed by Article 32.1 juncto
 footnote 56 of the SCM Agreement, which as already discussed admits 
expressly the possibility that action against subsid ies may also be taken unde r other GATT provisions, 
including Article III.  
5.313 To conclude, it must be recalled that the relationship of the SCM Agreement to GATT 
Article III is formally identical to the relationshi p of GATT Article XVI to GATT Article III. The SCM 
Agreement does not “permit explicitly” subsidies whic h are contrary to GATT Article III any more than 
Article XVI did under GATT 1947.  Thus, to hold  that there is a “conflict” between the SCM 
Agreement and GATT Article III woul d be tantamount to admitting th at there was also an “internal 
conflict” within GATT 1947.  Yet, it is clear that th e only purpose of the General Interpretative Note to 
Annex 1A was to solve the potential conflicts be tween GATT and the new agreements on trade in goods 
negotiated during the Uruguay Round which build upon the provisions of  GATT.  It was not the purpose 
of the Note to solve any inherited  “internal conflicts” within GATT itself which, somehow, would have gone unnoticed for almost 50 years. 
3. Rebuttal Arguments of the United States
 
5.314 The following are the United States'  arguments rebutting Indonesia's general response to the 
claims raised under Ar ticle III of GATT 1994:  
 (a) The tariff and tax incentives under  the 1993 Programme and the National Car 
Programme violate Ar ticle III of GATT 1994  
5.315 The tariff and tax incentives under the 1993 Programme and the National Car Programme 
violate Article III:4 of GATT 1994 be cause: (1) they each constitute regulations or requirements that 
“affect” the sale, purchase, transportation and dist ribution of imported and do mestic automotive parts 
and subparts; (2) imported automotive parts and subparts are “like” domestic automotive parts and subparts;  and (3) they each discri minate against imported automotive pa rts and subparts.  In addition, 
the tax incentives under the National Car Programme violate Article III:2, first sentence, of GATT 1994, 
because they result in the imposition of taxes on import ed products that are in excess of those applied to 
like domestic products.  A lternatively, these tax incentives violat e Article III:2, se cond sentence, of 
GATT 1994 because:  (1) imported passenger cars and domestic passenger cars are directly competitive 
or substitutable products that are in competition with  each other;  (2) the directly competitive or 
substitutable imported or domestic passenger cars are no t similarly taxed;  and (3) the dissimilar taxation 
is applied so as to afford protection. 
5.316 Indonesia has not disputed any of  these conclusions that make up the elements of a violation of 
Article III:2 and Article III:4.  Instead, Indonesia argues that Artic le III does not apply to the tax 
incentives because:  (1) these incentives constitu te “subsidies”; and (2) the SCM Agreement overrides WT/DS54/R, WT/DS55/R, 
WT/DS59/R, WT/DS64/R 
Page 105 
 
 
Article III.  In addition, and notwithstanding a ruli ng of the Appellate Body to the contrary, Indonesia 
argues that the tariff incentiv es are not governed by Ar ticle III:4 becau se they constitute “border 
measures”.  As the United States will demonstrat e, not only are both arguments wrong as a matter of 
law, but, if accepted, they would have far-reachi ng and dangerous implicati ons for the world trading 
system. 
(b) Indonesia's argument that the SCM Agreem ent overrides Ar ticle III is unspported by 
the text of the SCM Agreement and GATT 1994, would result in the effective repeal of 
Article III:2, and is inconsistent with th e negotiating history of the Uruguay Round, 
established principles of public inte rnational law, and WTO jurisprudence  
5.317 In the case of the tax incentives provi ded under the 1993 Programme and the National Car 
Programme, Indonesia does not dispute that the measures violate Article III.  Instead, it argues that 
Article III is inapplicable because the measures constitute subsidies, and, thus, according to Indonesia, 
are governed solely by the provisions of the SCM Agre ement.  According to Indonesia, because, under 
Article 27.3 of the SCM Agreement, Indonesia ha s a time-limited exemption from the prohibition 
against the use of local content subsidies containe d in Article 3.1(b) of that agreement, only the 
provisions of the SCM Agreement apply.  Any other result, accord ing to Indonesia,  results in a 
“conflict” within the meaning of the General Inte rpretative note to Anne x 1A of the Marrakesh 
Agreement Establishing the World Trade Organization  (“WTO Agreement”), because Article III 
prohibits what Article 27.3 allegedly permits.  Indonesia’s argument is  wrong for a variety of reasons. 
 (1) Indonesia’s argument is unsupported by the text of the SCM Agreement and GATT 
1994  
5.318 Indonesia’s argument is premised on the existenc e of what it refers to as “an all-encompassing 
definition of subsidies” in the SCM Agreement that applies across the WTO agreements.  However, the 
definition in the SCM Agreement is not “all-encompassing”.  When one looks at the text of the SCM Agreement, as one must under the Vienna Conven tion on the Law of Treaties ("Vienna Convention”
), 
Article 1.1 states very clearly that the definition of “subsidy” contained therein is “For the purpose of 
this Agreement ....”  In other words, the definiti on of “subsidy” is limited to the SCM Agreement. 
5.319 Second, Indonesia’s argument is also premised on what it refe rs to on page 91 of its first 
submission as “an all-encompassing structure of re medies ... ”.  Again, however, there is no such 
structure.  Consider again the actual text of the treaty.  Article 32.1 of the SCM Agreement provides as follows: 
No specific action against a subsidy of another Member can be taken except in 
accordance with the provisi ons of GATT 1994, as interp reted by this Agreement. 
Moreover, Article 32.1 contains a f ootnote 56, which reads as follows: 
This paragraph is not intended to preclude  action under other relevant provisions of 
GATT 1994, where appropriate. 
5.320 There can be no clearer indication that the dr afters did not intend that the SCM Agreement be 
the exclusive remedy against a measure that happen s to fall within that agreement’s definition of a 
subsidy. 
5.321 Indonesia argues that the complainants' inte rpretation of note 56 is wrong because they 
somehow ignore the words "relevant" and "appropriate ".  According to Indonesia, because the measures 
at issue are covered by the SCM Agreement, ot her GATT provisions are neither "relevant" nor 
"appropriate". WT/DS54/R, WT/DS55/R, 
WT/DS59/R, WT/DS64/R Page 106 
 
 5.322 This is a classic example of  tautological reasoning that assu mes the answer to the question 
posed.  According to Indonesia, because the SCM Agreement is lex specialis , no other provision of 
GATT can be "relevant" or "appropriat e" within the meaning of note 56. 
5.323 However, it is Indonesia that ignores the text of note 56, and essentiall y renders that provision 
superfluous, in violation of establ ished principles of treaty inte rpretation.  Indeed, if the SCM 
Agreement truly were lex specialis , there would be no reason for note 56. 
5.324 Other provisions support the conclusion that the SCM Agreement was not intended to be the 
exclusive mechanism for challenging measures that can be characterized as subsidies.  For example, Article VI:5 of GATT 1994 provides as follows: 
No product of the territory of  any contracting party importe d into the territory of any 
other contracting party shall be subject to  both anti-dumping and countervailing duties 
to compensate for the same situation of dumping or export subsidization. 
Article VI:5 recognizes that expor t subsidies may be characterized as a problem of dumping or 
subsidization, and simply preclude s Members from imposing both remedies in the case of a single act of 
subsidization.  Article VI:5 beli es Indonesia’s claim that the remedies in the SCM Agreement are 
exclusive or all-encompassing. 
5.325 More generally, it has long been recognized that  the GATT provisions that  deal explicitly with 
subsidies are not the only provisions that are relevant  to subsidies.  In this regard, the following 
statement by Prof. John Jackson is worth noting:
242 
However, there are certain measures in other articles of GATT [other than Article XVI] 
that bear on the freedom of a nation to subs idize and that offer a measure of remedy for 
a GATT member that is harmed by another’s su bsidy.  Four other articles in particular 
must be related to Article XVI.  Th ese are Article VI on anti-dumping and 
countervailing duties, Ar ticle XIX regarding increases of imports that threaten serious 
injury (the “escape clause”), Article XXI II regarding nullification and impairment, and 
Article III regarding national treatment.  
5.326 In short, Indonesia’s argument is contradicted by the text of the relevant agreements, and must 
be rejected for that reason. 
(2) Indonesia’s argument woul d result in the effective repeal of Article III:2  
5.327 Aside from the fact that Indonesia’s lex specialis  argument ignores the text of the relevant 
agreements, the flaws in its argument can best be appreciated when one considers how Indonesia’s 
theory operates with respect to  Article III:2 of GATT 1994. 
5.328 In this case, Indonesia argues that the tax discrimination in fa vour of Indonesian motor vehicles 
is a subsidy because it constitutes foregone government revenue within the meaning of Article 1.1(a)(1)(ii) of the SCM Agreement.  Acco rding to Indonesia, because this tax discrimination 
constitutes a subsidy, it can be reme died only under the SCM Agreement. 
5.329 However, consider the consequences of Indonesia’s argument.  Suppose that a Member 
discriminates against imports across the board, so that  all domestic products are taxed at one rate, and all 
imported products are taxed at a higher rate.  Assume also that  no local content requirements are 
involved.  Based on Indone sia’s logic, this tax discrimination constitutes a subsidy in the form of 
                                                     
 
     242J. Jackson, World Trade and the Law of GATT , § 15.4, page 377 (1969) (Emphasis added). WT/DS54/R, WT/DS55/R, 
WT/DS59/R, WT/DS64/R 
Page 107 
 
 
revenue foregone that is provided to all producers of  domestic products and th at can be remedied only 
under the SCM Agreement.  Yet, when one turns to  the SCM Agreement, one finds that there is no 
remedy.  This is because under the SCM Agreement, a subsidy that is available to all domestic products 
is not specific within the meaning of Article 2 of  the SCM Agreement, and, as such, is non-actionable 
under Article 8.1(a) of  the SCM Agreement. 
5.330 Thus, the consequence of Indonesia’s argument  is that Arti cle III:2 effectively has been 
repealed and Members are free to engage in economy-wide tax discrimination against imported 
products.  Article III:2 no longer appl ies, because it has been overridden by the SCM Agreement, but the 
SCM Agreement provides no redress becau se the “subsidy” is non-actionable. 
5.331 There is not the slightest bit of evidence th at the Uruguay Round negotiators intended such a 
dramatic and dangerous outcome.  Moreover, th e drafting history of GATT 1947 indicates that the 
drafters expressly rejected such an outcome.  In pa rticular, during the Havana negotiations, the drafters 
of Article III rejected the following proposal by Cuba: 
The provisions of this Articl e shall not preclude the exem ption of domestic products 
from internal taxes as a means of indire ct subsidization in cases covered under 
Article XVI. 
The absurd consequences of Indonesia’s argument reveal exactly how erroneous that argument is. 
 (3) Indonesia’s argument is contradicted  by the Uruguay Round negotiating history  
5.332 In light of the manifestly absurd results ge nerated by Indonesia’s argument, one should consider 
the negotiating history of the TRIM s Agreement and the SCM Agreement.   While we are talking about 
Article III of GATT 1994 at the moment, Indonesia  has argued that the TRIMs Agreement imposes no 
additional substantive obligations, but instead merely interprets Article III (See Section VI.D).  The 
United States does not agree with Indonesia’s char acterization of the TRIMs Agreement, but, for the 
sake of argument, let us assume that Indonesia is correct. 
5.333 Indonesia cites to a report of the Chairman  of the Negotiating Group on Trade-Related 
Investment Measures (See Section VI.D).  MTN.GNG/NG12/W/27 (19 July 1990).  The report 
contained a bracketed Chairman’s text, Article A2(c)(iii) of which read as follows: 
(c) An investment measure is “applied” when:  ....  (iii) it is a condition for, or a factor in determining eligibility for, receipt of 
an advantage from a contracting party or avoiding withdrawal of an 
advantage. 
A bracketed footnote 2 to clause (i ii) further provided the following: 
An advantage can include the provision of a s ubsidy, and attention will be paid to the 
negotiations in the Negot iating Group on Subsidies to  ensure no conflict. 
5.334 As Indonesia correctly notes, the question of whether TRIMs would include “incentive-based” 
measures, including measures that could be characte rized as subsidies, was a bone of contention during 
the RIMs negotiations, as refl ected by the brackets aro und the above-quoted language. WT/DS54/R, WT/DS55/R, 
WT/DS59/R, WT/DS64/R Page 108 
 
 5.335 However, Indonesia leaves the drafting histor y at that, and fails to mention what happened 
thereafter.  In the so-called Dunkel Draft, is sued in December, 1991, the TR IMs Agreement appeared in 
what was, for substantive purposes, its final form.  MTN.TNC/W/FA, page N.1 et seq  (United States 
Exhibit 26).  In the Dunkel Draft, paragraph 1 of the Illustrative List of TRIMs covered, as does its 
counterpart in the final TRIMs Agr eement, TRIMs “compliance with wh ich is necessary to obtain an 
advantage ... .”  Thus, the battle over the inclusion of incentive-based measures  had been resolved in 
favour of their inclusion, albeit by using different language from that in the Chairman’s draft. 
5.336 In addition, the notification requirements and transitional arrange ments contained in Article 5 of 
the TRIMs Agreement also had reached their final form in the Dunkel Draft.  Under Article 5 of the 
Dunkel Draft, countries had 90 days in which to  notify existing non-conforming TRIMs, and were 
granted a period of time in which to eliminate them.  Developing count ries had five years, while least-
developed countries had seven years.   In addition, countries were precluded from introducing new non-
conforming TRIMs. 
5.337 Now let us turn to the version of the SCM Ag reement in the Dunkel Draf t, and, in particular, 
Article 27.  MTN.TNC/W/FA, pages I.33-35 (United States Exhibit 27).  There one finds no exemption 
for developing country Members from the prohibition in Article 3.1(b) against the use of local content 
subsidies.  Instead, Arti cle 27.3 of the Dunkel Draft consisted of  what ultimately be came Article 27.4, 
the provision dealing with developing country Member phase outs of export subsidies. 
5.338 Thus, in the Dunkel Draft, to the extent th ere was a “conflict” betw een the SCM Agreement, 
Article III:4, and the TRIMs Agreem ent, the “conflict” was exactly the opposite of the “conflict” alleged 
by Indonesia.  Under the draft SCM Agreement, developing country Members were prohibited from 
using local content subsidies, but under the TRIM s Agreement, developing country Members could use 
such subsidies for a limited period of time, provided that they notified them in a timely manner. 
5.339 Of course, as Indonesia correctly notes, the ne gotiators were aware of the overlap between the 
TRIMs Agreement and the SCM Agreement, and they subsequently proceeded to deal with it.  On 
December 15, 1993, the Trade Negotiating Committee is sued a draft Final Act.  In the draft SCM 
Agreement, a new provision appeared, Article 27. 2bis.  MTN/FA II-13, page 32 (United States 
Exhibit 28).  This provision, which ultimately was renumbered as Article 27.3, granted developing and 
least developed country Members a time-limited exemption from the prohibition against local content 
subsidies in Article 3.1(b) of the SCM Agreement. 
5.340 With the addition of Article 27.2bis, the “conf lict” between Article III:4 , the TRIMs Agreement, 
and the SCM Agreement in the Dunkel Draft was e liminated.  In the case of developing and least 
developed Members, those TRIMs that were permitte d by Article 5 of the TR IMs Agreement during the 
transition period no longer were prohibited by the SCM Agreement. 
5.341 What this drafting history shows is that it wa s not the intent of the negotiators that the SCM 
Agreement override Articl e III:4 or the TRIMs Agreement.  In stead, as was the case under GATT 1947, 
there was to be overlapping, if not identical, treatm ent of local content incentives under these different 
regimes. 
5.342 What this drafting history also highlights is th at the “conflict” alleged by  Indonesia in this case 
is an artificial one.  If Indonesia had notified its pre-WTO TRIMs in accordance with the provisions of 
Article 5.1 of the TRIMs Agreement, they would have been protected under both the TRIMs Agreement 
and the SCM Agreement.  As for Indonesia’s post -WTO TRIMs, it was never the intention of the 
drafters to permit such measures under Article III:4 or the TRIMs Agreement, even though they might 
be temporarily exempt from the special remedies of the SCM Agreement. WT/DS54/R, WT/DS55/R, 
WT/DS59/R, WT/DS64/R 
Page 109 
 
 
 (4) Indonesia’s argument is inc onsistent with establ ished principles of public international 
law 
5.343 Indonesia cites the report of the panel in the Bananas III  case for the proposition that a 
“conflict” exists where a rule in one agreement prohibits what a rule in another agreement explicitly 
permits.243  However, Indonesia’s reliance on Bananas III  is misplaced for several reasons.244 
5.344 First, neither the Bananas III  panel nor Indonesia cites any support for the proposition that a 
“conflict,” within the meaning of pub lic international law, can exist in  a situation where a rule in one 
agreement explicitly permits what a rule in another agreement prohibits, The absence of any citation is due to the fact that the rule under public internationa l law is clear: a conflict exists only in situations 
where obligations
 are mutually exclusive; i.e. , “when two (or more) treaty instruments contain 
obligations which cannot be complied with simultane ously.”  7 Encyclopedia of Public International 
Law (North-Holland 1984), page 468. 
5.345 Moreover, even assuming for purposes of ar gument that the statement by the Bananas III  panel 
is correct, there still is no conflict between the rules of Article III and the rule s of the SCM Agreement.  
This is because, as previously noted, footnote 56 of the SCM Agreement expressly contemplates that 
subsidy practices may be actionable under other relevant provisions of GATT 1994. 
5.346 In addition, again assuming for purposes of argument that the statement by the Bananas III  
panel was correct, there is no conflict because th e SCM Agreement does not “explicitly permit” local 
content subsidies.  Indeed, all that Article 27.3 do es is to exempt developing country Members, for a 
period of time, from the prohibition of Article 3.1(b).  More generally, to the extent that “permit” is a 
synonym for “authorize,” the authority to provide subsidies does not flow from the SCM Agreement, 
but instead from a Member’s sovereignty.  The SCM Agreement simply specifies the circumstances under which one Member that has suffered adverse trade effects may seek re dress against subsidies 
provided by another Member.  In addition, the SCM Ag reement also prohibits certain types of subsidies, 
and provides a remedy against them, because they ar e considered to be presumptively distortive and a 
cause of adverse trade effects. 
5.347 In addition, simply as a textual matter, it is  impossible to conclude that a time-limited 
exemption from a prohibition (which is what Article 27.3 provides) constitutes a positive conferral of an 
"explicit right" to do something. 
5.348 Finally the fact that the SCM Agreement may not prohibit a certain type of subsidy cannot be 
construed as the conferral of an explicit right to violate a different obligati on contained in a different 
WTO agreement.  For example, as the United States demonstrated at the first meeting of the Panel, an 
exemption only for domestic products fr om an indirect tax would be a non- specific (generally available) 
subsidy under the SCM Agreement.  As such, it would be a non-actionable subsidy.   However, the fact 
that such a subsidy is not prohibited by, or even  actionable under, the SC M Agreement does not mean 
that Members are "explicitly permitt ed" to tax imported products in ex cess of domestic like products in 
violation of Article III:2.  Likewise, the fact that developing c ountry Members are temporarily exempted 
from the prohibition in Article 3.1(b) does not mean that they are "explicitly permitted" to violate 
Article III:2 and Article III:4. 
                                                     
 
     243European Communities - Regime for the Importation, Sale and Distribution of Bananas , 
WT/DS27/R, Report of the Panel, as modified by the Appellate Body, adopted on 25 September 1997, para. 7.159. 
     244Among other things, the panel’s statement conc erning the definition of a “conflict” was dicta  
inasmuch as the panel found that no conflict existed.  Un fortunately, because this aspect of the panel report was 
not appealed, the Appellate Body was not presented w ith the opportunity to co rrect the panel’s error. WT/DS54/R, WT/DS55/R, 
WT/DS59/R, WT/DS64/R Page 110 
 
 5.349 Finally, it must be emphasized that under publ ic international law “[t]here is a presumption 
against conflicts in that parties do not normally inte nd to incur conflicting obligations”.  7 Encyclopedia 
of Public International Law  (North-Holland 1984), page 470.  This presumption flows logically from the 
basic maxim ut res magis valeat quam pereat , a principle that is embodied  in the Vienna Convention , 
and which requires that a treaty shall be interpre ted in good faith in accor dance with the ordinary 
meaning to be given to its terms in the context of th e treaty and in the light of its object and purpose.  
More specifically, what this means is the following245: 
When a treaty is open to two interpretati ons one of which does and the other does not 
enable the treaty to have appropriate effe cts, good faith and the obj ects and purposes of 
the treaty demand that the former  interpretation should be adopted. 
As discussed above, Indonesia’s argument utterly fa ils to comply with this  fundamental principle, 
because the Indonesian argument woul d render Article III:2 a nullity. 
5.350 Two corollary principles flow from this f undamental principle.  First, the burden is on 
Indonesia, as the party alleging a c onflict, to demonstrate convincingly that a conflict exists.  Indonesia 
has failed to sati sfy this burden. 
5.351 Second, the Panel must, to the extent possible, interpret the relevant provisions so as to avoid a 
conflict.  As discussed below, existing WTO jurisp rudence provides a vehicle for avoiding a conflict. 
 (5) Existing WTO jurisprudence recognizes that  the subject matter of  the WTO agreements 
can overlap  
5.352 Existing WTO jurisprudence recognizes that the subject matt er of the WTO agreements can 
overlap.  The Appellate Body acknowledged this point most recently in Bananas III , where it stated the 
following246: 
The second issue is whethe r the GATS and the GATT 1994 are mutually exclusive 
agreements.  The GATS was not intended to de al with the same subject matter as the 
GATT 1994.  The GATS was intend ed to deal with a subject matter not covered by the 
GATT 1994, that is, with trade in services.  Thus, the GATS applies to the supply of 
services.  It provides, inter alia , for both MFN treatment and national treatment for 
services and service suppliers .  Given the respective scope of application of the two 
agreements, they may or may not overlap, de pending on the nature of the measures at 
issue.  Certain measures could be found to  fall exclusively within the scope of the 
GATT 1994, when they affect trade in goods as goods.  Certain measures could be 
found to fall exclusively within the scope of the GATS, when they affect the supply of 
services as services.  There is yet a third category of measures th at could be found to 
fall within the scope of both the GATT 1994 and the GATS.  These are measures that 
involve a service relating to a particular g ood or a service supplied in conjunction with 
a particular good.  In all such cases in this  third category, the measure in question could 
be scrutinized under both the GATT 1994 and the GATS.  However, while the same 
                                                      
     2451966 Yearbook of the International Law Commission , Vol. II at 219; See also , United States -  
Standards for Reformulated  and Conventional Gasoline , WT/DS2/AB/R, Report of the Appellate Body adopted 
20 May 1996, pages 24-25 (“One of the corollaries of the ‘general rule of interpretation’ in the Vienna 
Convention  is that interpretation must give meaning and effect to all the terms of a treaty.  An interpreter is not 
free to adopt a reading that would result in reducing whol e clauses or paragraphs of a treaty to redundancy or 
inutility.”); and Japan - Taxes on Alcoholic Beverages , WT/DS8/AB/R, Report of the Appellate Body adopted 1 
November 1996), pages 11-12. 
     246European Communities - Regime for the Importation, Sale and Distribution of Bananas , 
WT/DS27/AB/R, Report of the Appellate Body adopted 25 September 1997, para. 221 (footnote omitted). WT/DS54/R, WT/DS55/R, 
WT/DS59/R, WT/DS64/R 
Page 111 
 
 
measure could be scrutinized under both agreements, the specific aspects of that 
measure examined under each agreement c ould be different.  Under the GATT 1994, 
the focus is on how the measure affects the goods involved.  Under the GATS, the 
focus is on how the measure affects the suppl y of the service or the service suppliers 
involved.  Whether a certain measure affec ting the supply of a service related to a 
particular good is scrutinized under the GATT  1994 or the GATS, or both, is a matter 
that can only be determined on a case-by-case basis.  This was also our conclusion in 
the Appellate Body Report in Canada - Periodicals . 
5.353 Like the relationship between GATT 1994 and GATS di scussed in Bananas III , the coverage of 
Article III and the SCM Agreement overlap, but the fo cus of each is different.  The focus of the SCM 
Agreement is on subsidies, which in the context of this case, happen to be specific (or actionable) 
because their receipt is made contingent on the ba sis of discrimination agai nst imported goods.  By 
contrast, the national treatment provisions of Article III focus on the discrimination. 
5.354 This difference in focus can be appreciated by considering the remedy applicable to prohibited 
subsidies under the SCM Agreement.  Under Articl e 4.7 of the SCM Agreement, if a panel finds a 
measure to be a prohibited local content subsidy, the panel must "recommend that the subsidizing 
Member withdraw the subsidy without delay".247  A panel is not allowed to recommend that the 
subsidizing Member eliminate the local content contingency of the subsidy.  
5.355 More generally, if a Member were to violat e Article III:4 by making use of domestic inputs a 
condition for the receipt of a subsidy, the measure would continue to be a violatio n of Article III:4 if the 
subsidy element were replaced with some other form of incentive or disincentive.  On the other hand, if 
the local content aspect of a subsidy were dropped, the subsidy would continue to be subject to the SCM Agreement, although the nature of th e relevant discipline under the SCM Agreement migh t be affected. 
5.356 Thus, the Panel can avoid a “conflict” by si mply recognizing that Article III and the SCM 
Agreement have overlapping coverage, but a different focus.  In so doing, the Panel will have complied 
with its obligation under public international law prin ciples to avoid interpreti ng Article III and the SCM 
Agreement in a manner that gives rise to a conflict. 
 (6) GATT and WTO Panels and the Appellate Body have not relied on the concept of 
lex specialis to determine that one WTO agreement takes precedence over another  
5.357 In response to a question from the Pane l concerning GATT/WTO panel reports, the United 
States  stated that the concept of lex specialis  had been discussed in the following reports. 
5.358 In EEC Restrictions on Imports of Apples from Chile , L/5047, Report of the Panel adopted 
10 November 1980, BISD 27S/98, although the term lex specialis  was not used, the European 
Communities argued that with respect to Chile' s claim under Articl e I of GATT 1947, the European 
Communities "action, being a quan titative restriction, should be examined in connection with the 
most-favoured-nation type commitment contained in Article XIII." Para. 3.2.  The panel agreed with the 
European Communities. Para. 4.1.  However, this case involved the relationship between different 
provisions of a single agreement, GATT 1947, as  opposed to the relationship between different 
agreements. 
5.359 In European Economic Community - Restrictions  on Imports of Dessert Apples - Complaint by 
Chile , L/6491, Report of the Panel adopted 22 June 1989,  BISD 36S/93, the same issue arose, and this 
time the European Communities did invoke expressly the concept of lex specialis .  Para. 5.2.  As in the 
                                                      
     247Under Article 1.2 and Appendix 2 of the DSU, Article 4.7 is a special or additional rule or 
procedure that prevails over the general rules of the DSU. WT/DS54/R, WT/DS55/R, 
WT/DS59/R, WT/DS64/R Page 112 
 
 prior case, the panel agreed with the European Co mmunities, stating as follows: "[Article XIII] deals 
with the non-discriminatory administration of quantitative restrictions and is thus the lex specialis  in this 
particular case."  Para. 12.28. Ag ain, however, this case involved the relationship between different 
provisions of a single agreement. 
5.360 In Panel on Import, Distribution and Sale of Alcoholic Drinks by  Canadian Provincial  
Marketing Agencies , L/6304, Report of the Panel adopted 22 March 1988, BISD 35S/ 37, Canada argued 
that Article III of GATT 1947 wa s not relevant to the case because Article XVII contained the only 
obligation related to state trading.  Para. 3.47.  The EEC argued in re sponse that Article XVII was not a 
lex specialis  exempting state-trading from all other provisi ons of GATT 1947.  Para. 3.48.  The panel 
declined to reach the issue because it already had found that the measures  in question violated 
Article XI.  Para. 4.26. In dicta , however, the panel opined that Article III:4 was also applicable to 
state-trading enterprises, at least in certain situations.  Id .  Although the panel did not address the issue, 
this case, too, involved the re lationship between different provisions of a single agreement. 
5.361 In Bananas III , the concept of lex specialis  was raised in several different ways. 
European Communities - Regime for the Impo rtation, Sale and Distribution of Bananas , 
WT/DS27/R/USA, Report of the Panel, as modified by the Appellate Body, adopted 
25 September 1997. First, the panel ruled that Article XIII:2(d) was lex specialis  vis-à-vis Article XIII:1.  
Para. 7.75.  This issue involved the relationship be tween different paragraphs of a single article of a 
particular agreement. 
5.362 In Bananas III , the concept of lex specialis  also was raised in connection with the relationship 
between (1) the Licensing Agreemen t and Article XIII;  and (2) the TRIMs Agreement and Article III. 
The issue relating to the Licensing Agreement was described as follows: 
The Complaining parties did not consider the concept of lex specialis to be relevant in 
this instance regarding the relation between the Licensing Agreement and Article XIII 
of GATT.  Two separate agreements were involved, each of which were given equal 
force under the Marrakesh Protocol unless ther e was conflict between their provisions.  
Since there was no conflict betw een the provisions at issue, it was entirely permissible 
to assert a breach of Article  XIII obliga tions in tandem with th e Licensing Agreement 
violations discussed above.  Para. 3.14. 
5.363 The issue relating to the TRIMs Agreement was described as follows: 
Second, Article 2.1 also made it clear that a Member did not cede any of its rights under 
Article III by raising a claim under the TRIMs.  Thus, a Member was not restricted to 
arguing that a measure violated the TRIMs Agreement when there was an independent 
argument under Article III.  Such measur es were covered by both the TRIMs and the 
GATT, and not only by the TRIMs Agreement as lex specialis .  Para. 445. 
5.364 In resolving these issues concerning the relationship between GA TT 1994 and the Annex 1A 
agreements, the panel did not rely on the concept of lex specialis .  Instead, the panel relied on the 
General Interpretative Note to Annex 1A of the WTO Agreement, the note that deals with conflicts 
between GATT 1994 and the other Annex lA agreements.  Paras. 7.157-7.163.  The United States will not reiterate its prior arguments concer ning this aspect of the Bananas III
 report, but instead emphasizes 
the following points.  First, if the panel had thought that the concept of lex specialis  governed the 
relationship between GATT 1994 and the other Annex 1A agreem ents, there would have been no need 
to resort to the General Interpretativ e Note.  Second, if the concept of lex specialis  operated in the 
manner suggested by Indonesia, the General Interpreta tive Note would be superfluous, because there can 
be no conflict where, by virtue of lex specialis , a single agreement controls. WT/DS54/R, WT/DS55/R, 
WT/DS59/R, WT/DS64/R 
Page 113 
 
 
5.365 The concept of lex specialis  also was invoked in the Bananas III  appeal.  WT/DS27/AB/R, 
Report of the Appellate Body adopted 25 Septem ber 1997.  The European Communities challenged the 
panel's particular application of Article 1.3 of the Lice nsing Agreement, arguing that Article 1.3 is lex 
specialis  for the administration of import licensing pro cedures, while Article X:3(a) of GATT 1994 is 
lex generalis  for the administration of all "laws, regulations , decisions, and rulings ...".  Para. 32.  In 
response, the complainants argued that only in th e event of a conflict between GATT 1994 and a 
provision of another Annex 1A agreement (such as the Licensing Agreement) would the provision of the 
latter agreement prevail.  Para. 70. 
5.366 The Appellate Body concluded th at Article X:3(a)  and Article 1.3 both appl ied in the sense that 
both provisions gave rise to separate  and distinct obligations.  Para. 204.  However, the Appellate Body 
stated that the panel should have ap plied 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 in consistency with Article X: 3(a) of the GATT 1994.  Id
. 
The Appellate Body did not find that one ag reement trumped the other on the basis of lex specialis . 
5.367 Finally, the concept of lex specialis  was invoked by the United States in EC Measures 
Concerning Meat and Meat Products (Hormones) , WT/DS26/R/USA, Report of  the Panel circulated 
18 August 1997, for the proposition that the panel sh ould begin its analysis with the SPS Agreement.  
Para. IV.5.  Without expressly endorsi ng the United States invocation of lex specialis, the panel decided 
to first examine claims raised under the SPS Agreem ent.  Para. 8.42.  The panel's decision on this 
particular point was not raised on appeal.  WT/DS26/AB/R, Report of the Appellate Body circulated 16 
January 1998. 
5.368 Thus, while the concept of lex specialis  has been invoked from time to  time, in no instance has a 
panel or the Appellate Body relie d on this concept to determine that one WTO agreement trumps 
another.  To the contrary, such re lationships have been resolved by applying the General Interpretative 
Note, which deals with conflict s between GATT 1994 and other An nex 1A agreements.  As the 
United States previously has demonstrated, howeve r, there is no conflict between the provisions of 
GATT 1994 and the SCM Agreement. 
5.369 With respect to Japan's point regarding the Ge neral Interpretative Note, Indonesia fails to rebut 
Japan's argument.  Japan's argument, as the United States understands it, is that if the SCM Agreement truly were lex specialis , it would control automatically, whether or  not a "conflict" existed, and there 
would be no need for the General Interp retative Note.  Put differently, to th e extent that there is a rule of 
lex specialis  in the WTO Agreement, it is found in  the General Interp retative Note.  
 (7) Whether Indonesia's argu ment is characterized as lex specialis  or conflict, if accepted, it 
would render Article III:2 of GATT 1994 a nullity  
5.370 Whether Indonesia's argument is  characterized as one based on lex specialis  or "conflicts",  
Indonesia has not been able to explain how, unde r its argument, Article III:2 of GATT 1994 does not 
become a nullity.  Likewise, Indonesia has not offere d a scintilla of evidence that the Uruguay-Round 
negotiators intended such an outcome. 
 (8) Indonesia's erroneous assertion regarding the specificity of subs idies indicates that 
Indonesia was well aware of the flaws in its argument  
5.371 Finally, on the subject of lex specialis  and "conflicts", the United States would like to elaborate 
with respect to the question of whether or not most  subsidies are specific.  By way of background, one WT/DS54/R, WT/DS55/R, 
WT/DS59/R, WT/DS64/R Page 114 
 
 of the most troubling aspects of Indonesia's argument s is the statement that:  "The purpose of most 
subsidies is to provide financial as sistance to a targeted industry or a small group of industries." (See 
Section V.D.2(c).) 
5.372 The reason why this sentence was so troublin g is as follows.  Several members of the 
United States interagency team working on this di spute have spent most of their careers in the 
subsidies/countervailing duty area and are considered as experts in the area.  In particular, they were intimately involved in the development and evolu tion of the so-called "specificity test" under the 
United States countervailing duty law,  and one member of the team can claim, with some  justification, 
to be the author of Ar ticle 2.1 of the SCM Agreement.  Whil e there is no global "census" of all 
government measures that satisfy th e SCM Agreement's definition of "subsidy", these individuals knew, 
based on their experience, that most subsidy program mes are not, in fact, targ eted to a small group of 
industries.  Instead, most subsidy programmes i nvolve the provision of sm all amounts of financial 
assistance to numerous industry groups  or sectors.  The very reason fo r a specificity test is to avoid 
having to subject such programmes to unila teral or multilateral subsidy remedies. 
5.373 Moreover, these types of generally avai lable subsidy programmes do not show up in 
notifications to the SCM Committee, because, under Ar ticle 25.2 of the SCM Agreement, only specific 
subsidies must be notified.  Likewise, since the specific ity test became firmly esta blished as a part of the 
United States countervailing duty law in the mid-' 80's, these types of generally available subsidy 
programmes also have largely disappeared from co untervailing duty proceedings, because petitioning 
domestic industries know that the U.S. investigat ing authorities will find such programmes to be 
non-specific and, thus, non-counterva ilable.  In other words, the specific subsidies that show up in 
notifications to the SCM Committee or countervailing duty proceedings are only the "tip of the subsidies iceberg". 
5.374 Thus, the members of the United States team  were troubled by the a bove-quoted sentence by 
Indonesia.  The United States team concluded that In donesia must have inserted the sentence in question 
for a reason, and the task was to determine what that  reason was.  Ultimately, the riddle was solved by 
asking and answering the following series of questions: 
Question
 Why would Indonesia make an assertion regarding the specificity of subsidies 
that is, at worst, inaccurate and, at best, unsupported by empirical evidence? 
Answer   Indonesia does not want the Panel to  think about non-specific subsidies. 
Question  Why does Indonesia not want the Panel to think about non-specific subsidies? 
What is it about non-specific subsidies th at makes them different from specific 
subsidies? 
Answer   Non-specific subsidie s are non-actionable by virtue of Article 8.1(a). 
Question  Why is the non-actionability of non-spec ific subsidies relevant to Indonesia's 
argument that the SCM Agreement ov errides provisions of GATT 1994? 
Answer   It must be the case that if the SCM Agreement trumps GATT, then measures 
currently considered to be violative of  one or more provisions of GATT 1994 
would become permissible if charac terized as non-specific subsidies. 
Question  What types of measures would be mo st likely to become permissible if 
characterized as non-sp ecific subsidies? 
Answer   Discriminatory tax measures  that violate Article III:2. WT/DS54/R, WT/DS55/R, 
WT/DS59/R, WT/DS64/R 
Page 115 
 
 
5.375 The upshot of all this is th at with respect to Indonesia's argu ment concerning the supremacy of 
the SCM Agreement, the United States  suspects that Indonesia was aware of the fatal flaw in its theory 
(i.e., the fact that, under its theory, Article III:2 becomes a nullity) long before the complainants had 
discovered it.  Indonesia's assertion regarding the alleged specific ity of most subsidies was simply a 
smokescreen intended to divert th e Panel's attention from the conseq uences of Indonesia's argument. 
5.376 In the final analysis, whether or not most subsid ies are specific is not re levant to this dispute. 
What is relevant is the fact that if Indonesia' s argument is accepted, any Member will be able to 
construct and maintain a tax syst em that discriminates against im ports without running afoul of its 
obligations under Article III:2.  All that a Member has to do is ensure that the beneficiaries of such a 
system constitute a sufficiently large segment of the economy so as to render the system non-specific.  
Under Indonesia's theory, if the system is non-sp ecific, it is not actionabl e under the SCM Agreement 
and Article III:2 no longer applies. 
 (9) Indonesia’s assertion that it would not ha ve signed the WTO Agreement if Article III 
applied to local content subsidies is legally irrelevant and factually suspect  
5.377 At bottom, Indonesia’s argument that the SCM Agreement overrides Article III is based on its 
claim that neither Indonesia nor any other devel oping country would have signed the WTO Agreement 
if Article III continued to apply to local content subsidies.  Alt hough Indonesia has yet to make this 
assertion in writing, one of Indonesia's representatives made the assertion in his oral presentation at the 
first meeting of the Panel.248  However, this assertion is legally irrelevant and factually suspect. 
5.378 As a matter of law, it is irrelevant that a Memb er, with the benefit of hi ndsight, feels that it may 
have made a bad bargain, because neither panels  nor the Appellate Body have the authority to 
renegotiate the bargains re flected in the text of the WTO agreements.  As the Appellate Body has stated, 
panels and the Appellate Body must respect the ba lance of rights and oblig ations reflected in the 
language of the WTO agreements.249  More recently, in the India Mailbox  case, the Appellate Body 
chastized a panel for attempting to read into the TRIPS Agreement words that are not there based on the 
"legitimate expectations" of Members.250  In that case, the Appellate Body stated the following:251 
The duty of a treaty interpreter is to exam ine the words of the treaty to determine the 
intentions of the parties.  This should be done in accordance with the principles of 
treaty interpretation set out in Article 31 of the Vienna Convention .  But these 
principles of interpretation ne ither require nor condone the imputation into a treaty of 
words that are not there or the importation into a treaty of concepts that were not 
intended. 
5.379 As demonstrated above, when the princi ples of Article 31 of the Vienna Convention  are applied, 
Indonesia’s alleged “conflict” disappea rs.  The fact that Indonesia wishes that Article III and the SCM 
Agreement said something other than what they in fact say is legally irrelevant. 
5.380 In addition, the fact of th e matter is that Indonesia did  benefit from the last minute insertion of 
Article 27.3 into the text of the SCM Agreement, an d the evidence suggests that Indonesia is well aware 
of the nature and the value of this benefit. 
                                                      
     248The written version of Indonesia's st atements differ from the oral pr esentations, and, unfortunately, 
panels do not prepare transcripts of their meetings.  However, the members of the United States delegation 
distinctly recall Indonesia maki ng the assertion in question. 
     249United States - Measure Affecting Imports of Woven Wool Shirts and Blouses , WT/DS33/AB/R, 
Report of the Appellate Body adopted 23 May 1997, page 19. 
     250India - Patent Protection for Pharmaceuti cal and Agricultural Chemical Products , WT/DS50/AB/R, 
Report of the Appellate Body issued 19 December 1997, para. 45. 
     251Id. WT/DS54/R, WT/DS55/R, 
WT/DS59/R, WT/DS64/R Page 116 
 
 5.381 Because Indonesia is temporarily exempt from the prohibition in Article 3.1(b), there has been 
little discussion in this case regarding the procedures in Article 4 of the SCM Agreement for challenging prohibited subsidies.  It is appropria te at this point to recall what those procedures are.  Suffice it to say 
that the process under Article 4 is rapid - very rapid. 
5.382 Under Article 4.4 of the SCM Agreement, a complainant may request the establishment of a 
panel within 30 days of the request for consultations , as opposed to the standard period of 60 days under 
Article 4.7 of the DSU.  Under Article 4.6 of the SC M Agreement, a panel is to circulate its final report 
to all Members within 90 days of the date of the composition and the establishment of the panel’s terms of reference, with no provision ma de for extensions.  Under Article 12.8 of the DSU, a panel normally 
has six months (180 days) within which to issue its re port, but may take up to nine months (270 days). 
5.383 Under Article 4.8 of the SCM Agreement, fo llowing the issuance of a panel report, the DSB 
must adopt the report (or one of the parties must notif y its decision to appeal) within 30 days, as opposed 
to the standard period of 60 days under Article 16 .4 of the DSU.  If a report is appealed, under 
Article 4.9 of the SCM Agreement, the Appellate Body  normally must issue its report within 30 days of 
the notice of appeal, but may take up to 60 days.  Under Article 17.5 of the DSU, the Appellate Body 
normally has 60 days in which to issue its report, but may take up to 90 days. 
5.384 Finally, under Article 4.7 of the SCM Agreemen t, if a measure is found to be a prohibited 
subsidy, the subsidizing Member must withdraw the subsidy “without delay.”  By contrast, under 
Article 21.3 of the DSU, a Member has “a reasonabl e period of time” in which to comply with a DSB 
recommendation or ruling, the benchmark for which, pursuant to Article 21.3(c), is 15 months from the 
date of adoption of a panel or Appellate Body report. 
5.385 What all of this means is that if Indonesia  had not been exempted by Article 27.3 from the 
prohibition of Article 3.1(b) and the remedies of Article 4, this Panel w ould not be here.  If the 
complainants in this case, including the United St ates, had been able to bring a complaint under 
Article 3.1(b) and Article 4, and assuming that a pa nel was composed on the same day as this Panel was 
(30 July 1997), the panel would have issued its ruling on the Article 3.1(b) claim no later than 
28 October 1997.
252  Indonesia would have filed its appeal no later than 27 November 1997.253  
Indonesia would have filed its appell ant submission on 2 December, and the complainants in this case 
would have filed their appe llee submissions on 9 December.254  The oral hearing before the Appellate 
Body would have taken place on 12 December, and the Appellat e Body’s report would be due on 
27 December.255  The panel and Appellate Body reports w ould be adopted by the DSB no later than 
22 January 1998, the next scheduled meeting of th e DSB.  Following adoption, Indonesia then would 
have to withdraw the subsidies “without delay” unde r Article 4.7 of the SCM Agreement.  While the 
phrase “without delay” has yet to be construed, presum ably it must mean a time period far shorter than 
the “reasonable period of time” referred to in Ar ticle 21.3 of the DSU or the six-month period for 
withdrawal set forth in Article 7.9 of the SCM Agreement with respect to  adverse effects cases.  Thus, if 
Article 3.1(b) and Article 4 of the SCM Agreement were applicable to the Indonesian subsidies, the 
complainants could expect a withdrawal of the subsidies some time in the first half of 1998. 
                                                      
     252Although this issue has never been definitively deci ded, presumably an Article 3.1(b) claim would 
have to be pursued separately from other claims if the complainant wished to take advantage of the accelerated 
timetable of Article 4. 
     253It would be Indonesia appealing, of course, because there is no question that the subsidies in 
question fall under Article 3.1(b). 
     254Annex 1 (Timetable for Appeals), Working Procedures for Appellate Review , WT/AB/WP/3 
(28 February 1997). 
     255Id.  Again, because there is no question that the Indonesian subsidies fall under Article 3.1(b), there 
would be no need for the Appellate Body to extend its deadline of 30 days. WT/DS54/R, WT/DS55/R, 
WT/DS59/R, WT/DS64/R 
Page 117 
 
 
5.386 As things now stand, however, the Panel has i ndicated that it will not be  issuing its report until 
the end of April 1998.  Even then, in all likelihood, the issuance of the report simply will trigger an 
appeal by Indonesia that will further delay the with drawal of the measures in question.  Once the 
Appellate Body rules in complainants’ favour and th e Panel and Appellate Body  reports are adopted by 
the Dispute Settlement Body, then if  it is impracticable for Indonesia  to comply immediately, Indonesia 
will have a “reasonable period of time” in which to bring its measures into conformity with its 
obligations.256  In short, the measures in question ma y not be withdrawn until some time in 1999.257 
5.387 In the view of the United States, Indonesia  has received quite a bargain.  If Indonesia were 
subject to Article 3.1(b) and Article 4, we would be very close to the point at which the parties would be 
discussing the timing of Indonesia’ s withdrawal of its lo cal content subsidies.   However, because 
Indonesia is exempt from those provisions, the partie s will not reach that stage until some time in late 
1998. 
5.388 Moreover, the evidence indicates that Indonesia understands full well the nature of the benefits 
it enjoys by virtue of its exemption from the expe dited procedures for prohibi ted subsidies.  Throughout 
the history of this disput e, officials of both Indonesi a and TPN repeatedly have made statements to the 
public and the press that the Nationa l Car Programme is not in any  je opardy, because by the time the 
WTO dispute settlement process runs its course, the objectives of the National Car Programme will have 
been accomplished and TPN (or Kia Timor, dependi ng on who one believes) will be firmly established 
as a bona fide (albeit subsidized) auto producer.258  Recently, even officials from Kia Motors have taken 
up the refrain, stating that it will “take at least from two to three years for the WTO to come up with 
mediation-crafted measures”.259 
5.389 Moreover, when one steps back a bit, it is cl ear that at a minimum, Indonesia is no worse off 
than it was before the entry into force of the WTO Agreement.  Under GATT 1947, the tax incentives in 
question were prohibited by Article III:2 and Article III:4, and also were actionable under the serious 
prejudice provisions of Article XVI.  Because of Article 27.3, however, nothing has really changed in 
that regard.  The tax incentives continue to be pr ohibited by Article III:2 and Article III:4 of GATT 1994 
and continue to be subject to a se rious prejudice claim unde r the SCM Agreement.  Thus, it is incredible 
for Indonesia to claim, as it has via Dr. Makarim, that it would not ha ve signed the WTO Agreement if it 
had known that its local content subsidies would be subj ect to Article III.  If that truly were Indonesia’s 
belief, then it would not have been a Contracting Party of GATT 1947. 
5.390 In summary, the Panel should be extremely s ceptical of assertions by Indonesia that it somehow 
got a raw deal by signing on to a package under whic h local content subsidies ar e prohibited by virtue of 
Article III.  As discussed above, I ndonesia benefits from being tempor arily exempt from the accelerated 
procedures of Articl e 4 of the SCM Agreement.  At a minimu m, it is no worse off than it was under 
GATT 1947. 
                                                      
     256With respect to the United States claim of serious prejudice, under Article 7.9 of the SCM 
Agreement, Indonesia would have six months in which to withdraw the subsidies or remove the adverse effects. 
     257The United States assumes that Indonesia will abid e by its commitment to the IMF to withdraw the 
measures once the DSB has ruled against it. 
     258“RI to Finish Car Program by ‘99”, Jakarta Post , 23 April 1997 (US Exhibit 14, p. 105); “Indonesia 
Preparing Team to Defend Na t’l Car Policy at WTO”, ANTARA , 9 May 1997 (US Exhibit 14, p. 117); “Astra, 
Indomobil Roped in to Speed Up Timor Car Project,” Business Times (Singapore ), 16 May 1997 (US Exhibit 
14, p. 121); “Bumpy Road Ahead for Motoring Plan”, South China Morning Post , 8 June 1997 (US Exhibit 14, 
p. 132)  (quoting a TPN official as stating that the WTO dispute “will not impact our activities.  The WTO takes time.”); and “Timor in Trouble at WTO and at Home”, Business Times
 (Singapore), 25 June 1997 (US Exhibit 
14, p. 144) (“Jakarta is gambling that it has time on its side.”). 
     259"Timor President’s Resignation Won’t Affect Kia in Indonesia", Asia Pulse , 4 November 1997 (US 
Exhibit 24, p. 25). WT/DS54/R, WT/DS55/R, 
WT/DS59/R, WT/DS64/R Page 118 
 
  (c) The tax incentives under the 1993 Progra mme and the National Car Programme are not 
protected by Article III:8(b) of GATT 1994  
5.391 Indonesia appears to argue that the tax in centives provided under the 1993 Programme and the 
National Car Programme are protected by Article III: 8(b) because the tax “subsidies” are received by 
producers or assemblers of automobi les.  (See Sectio n V.D.)  This argument misses the point, and 
misstates the meaning of Article III:8(b) and the precedents relating thereto. 
5.392 Insofar as Article III:4 is c oncerned, Article III:8(b) provides that the provision of a subsidy 
exclusively to a producer of a like domestic product  and not to a foreign producer does not violate the 
non-discrimination requirements  of Article III: 4.  However, insofar as Article III:4 is concerned, in the 
case of Indonesia’s tax incentives , the imported products discriminate d against through the local content 
requirements are automotive parts and subparts, not finished automobiles.  Thus, the fact that these tax incentives may constitute subsidies to purchasers
 of Indonesian automotive  parts and subparts (i.e. 
producers of finished automobiles or finished parts) does not excu se the discriminatory treatment 
accorded to imported automotive parts and subparts.260 
5.393 Moreover, Article III:8(b) does not insulate the Indonesian tax incentiv es from the requirements 
of Article III:2.  In the Canada Periodicals case, the Appellate Body affirmed that Article III:8(b) “was intended to exempt from the obligations of Articl e III only the payment of subsidies which involves the 
expenditure of revenue by a government".
261  In so ruling, the Appellate Body quoted with approval the 
following passage from the United States - Malt Beverages case:262 
Article III:8(b) limits, theref ore, the permissible producer subsidies to "payments" after 
taxes have been collected or payments othe rwise consistent with Article III.  This 
separation of tax rules, e.g. on tax exempti ons or reductions, and subsidy rules makes 
sense economically and politically.  Even if the proceeds from non-discriminatory 
product taxes may be used for subsequent subsidies, the domestic producer, like his 
foreign competitors, must pay the product taxe s due.  The separation of tax and subsidy 
rules contributes to greater transparency.  It  also may render abuses  of tax policies for 
protectionist purposes more difficult, as in the case where producer aids require 
additional legislative or gove rnmental decisions in whic h the different interests 
involved can be balanced. 
5.394 Indonesia’s tax incentives do not involve the ex penditure of revenue by Indonesia.  For that 
reason, also, they are not protected by Article III:8(b) .  Indonesia’s argument to the contrary is that the 
introduction of the SCM Agreement effectively has am ended the scope of Article III:8(b).  This is 
nothing more than a recycled versio n of Indonesia’s “conflicts” argumen t, which the United States has 
addressed previously and exposed as a specious ar gument that is unsupported by the text of the 
agreements, their drafting history, public intern ational law principles, and WTO jurisprudence. 
                                                      
     260Italian Agricultural Machinery , L/833, Report of the Panel adopted 23 October 1958, BISD 7S/60, 
64, para. 14. 
     261Canada - Certain Measures Concerning Periodicals , WT/DS31/AB/R, Report of the Appellate Body 
adopted 30 July 1997, page 34. 
     262Id. quoting from BISD 39S/206, para. 5.10, adopted 19 June 1992. WT/DS54/R, WT/DS55/R, 
WT/DS59/R, WT/DS64/R 
Page 119 
 
 
 F. Additional arguments rega rding the claims und er Article III:4 of  GATT 1994 pertaining 
to the tariff measures  
1. Specific response by Indonesia  
5.395 In addition to its general response concerning all of the claims under Article III of GATT 1994, 
Indonesia  makes a specific response with respect to the claims that the tariff measures at issue violate 
Article III:4 of GATT 1994.  The following are Indonesia's  arguments in this regard:   
 (a) The customs import duties schedules for automotive companies using differing levels 
of domestic content are c onsistent with Article III: 4 of GATT 1994 because the 
schedules are border measures which are not subject to Article III:4 of GATT 1994 and 
are subsidies Indonesia is  permitted to maintain  
5.396 Customs duties are, by defi nition (Article I:1 of  GATT 1994), "imposed on or in connection 
with importation" and hence are border measures rather than internal regulations.  Therefore they are not covered by Article III:4 (or any of  Article III) of GATT 1994 which, as the title to the Article itself 
notes, is limited to "National Treatment on Internal
 Taxation and Regulation."263 
5.397 As previously discussed, under the 1993 Ince ntive Programme, the level of the import duty 
imposed on imported automobi les and automotive parts is set by re ference to the proportion of parts and 
components produced in Indonesia that are used in each  particular automobile model.  Similarly, under 
the February 1996 national car programme, producers designated as producers of a national car and 
meeting the criteria for that programme are exempt from import duties on imported parts and 
components.  Both programmes grant exemptions from  customs import duties, which are - irrefutably - 
border measures.  There can be no serious argument that internal regulation is involve d.  Therefore, 
Article III of the General Agreement, including Article III:4, is inapplicable. 
5.398 This conclusion is not affected by the Report  of the Panel in Canada-Administration of the 
Foreign Investment Review Act  (FIRA ) (7 February 1984), BISD 30S/140, which is the leading GATT 
decision regarding local c ontent regimes.  In FIRA  corporate undertakings to purchase goods of 
Canadian origin became part of the conditions und er which each proposed investment was approved, 
and derogations therefrom could be legally enforced.  This legal obligation to purchase domestic goods 
was a "requirement" affecting the internal sale of a product and thus was within the scope of 
Article III:4.  No border measures were involved. 
5.399 For similar reasons the Report of the Pane l in EEC-Regulation on Imports of Parts and 
Components  (16 May 1990), BISD 37S/132, is inapposite.   There, suspension by the European 
Communities of an anti-dumping circumventi on proceeding depended on the undertaking of the 
Japanese respondent companies to change their sour cing from imported parts an d materials to  parts and 
materials produced in the European Communities .  Neither the "advantage" found by the Panel 
(suspension of an EEC administrative proceeding)  nor the undertaking to use EEC goods was a border 
measure.  The same is true with respect to the Re port of the Appellate Body in European Communities -  
Regime for the Importation, Sale  and Distribution of Bananas , WT/DS27/AB/R (9 September 1997).  
As the Appellate Body stated: 
At issue in this appeal is not whether any import licensing requirement, as such, is 
within the scope of Article III:4, but whet her the European Communities procedures 
and requirements for the distribution of import licences  for imported bananas among 
                                                      
     263The United States' argument that the import duty incentives are within the scope of Article III:4 
(See SectionV.C.3 and V.F.4) is simply wrong. WT/DS54/R, WT/DS55/R, 
WT/DS59/R, WT/DS64/R Page 120 
 
 
eligible operators within the European Communities
 are within the scope of this 
provision.  Id.  at para. 211 (emphasis added). 
The “advantage” within the scope of Article III:4 was the distribution of licences among eligible 
operators (an internal measure)  and not the border measure (the licensing requirement) itself. 
5.400 In the instant case, there is no classic local content requi rement obligating a company to 
purchase locally.264  All automotive companies are free to choose wh ere to source automotive parts and 
components.  Each company makes a corporate deci sion about whether it wishes to benefit from the 
subsidization of customs import duties granted to thos e choosing to use specified levels of domestically 
produced parts and components.265 
 (b) Indonesia’s customs import duties subsidy does not involve a "requirement" necessary 
to “secure an advantage” within th e scope of Article III:4 of GATT 1994  
5.401 Complainants erroneously contend that Indonesi a’s subsidized customs import duties are within 
the scope of Article III: 4 of the General Agreement.  They claim that the issue is “not the reduction of duties, as such, but conditioning such reduction on the purchase of domestic parts and components.” 
5.402 The flaw in complainants’ positi on is fundamental - the scope of Ar ticle III is limited to internal 
laws, regulations and requi rements;  subsidized customs import dut ies are border measures, not internal 
laws, regulations or requirement s.  No WTO or GATT precedent supports expanding the scope of 
Article III to cover border measures.  Indeed, the precedents Complainants cite – Italian Machinery
,266 
EEC – Parts and Components267, EEC–Oilseeds268, Bananas III269 and FIRA270 - disprove their 
contention. 
5.403 Italian Machinery  involved credit facilities available only to purchasers of domestic tractors - 
clearly internal measures.  The Panel’s identification of the scope  of Article III was simple and 
unambiguous:  “ … the intention of the drafters of [Article III of the General] Agreement was clearly to 
treat imported products in the same  way as the like domestic produc ts once they had been cleared 
through customs .”271 
                                                      
     264The United States Government officially acknowledges this in the April 1997 report entitled 
Indonesia’s Automotive Market Summ ary prepared by the United States Department of Commerce (see  
Indonesia Exhibit 11)  The Department declares that “loc al content requirements are not explicit” in the 1993 
Incentive Programme. 
     265Even the United States recognizes that Indonesia's sy stem of sliding tariff rates is not a local content 
regime as that term has been understood and used in the WTO and the GATT.  During the 26 October 1989 
meeting of the Uruguay Round negotiating group on TRIMs, the United States defined local content as "a barrier that could not be overcome no matter how much better an imported product might be."  
(MTN.GNG/NG12/13 at para. 43.)  The Indonesian subsidy programmes, unlike the undertakings in FIRA
 or 
EEC-Parts and Components , do not present a barrier that cannot be overcome.  Each company can choose 
whether it is in its commercial interest to source a certain amount locally and pay one rate of duty on imported 
parts or to source less in Indonesia and pay a different duty rate. 
     266Italian Discrimination Against Imported Agricultural Machinery (23 October 1958), BISD 7S/60.  
     267EEC-Regulation on Imports of Parts and Components (16 May 1990), BISD 37S/132.  
     268European Economic Community-Payments and Subsidies Paid to Processors and Producers of 
Oilseeds and Related Animal-Feed Proteins (25 January 1990), BISD 37S/86.  
     269European Communities-Regime for the Importation, Sale and Distribution of Bananas 
(9 September 1997), WT/DS27/AB/R.  
     270Canada-Administration of the Foreign Investment Review Act (FIRA) (7 February 1984), 
BISD 30S/140.  
     271Italian Discrimination Against Imported Agricultural Machinery  (23 October 1958), BISD 7S/60, 
64, para. 11 (emphasis added).  WT/DS54/R, WT/DS55/R, 
WT/DS59/R, WT/DS64/R 
Page 121 
 
 
5.404 EEC - Parts and Components  involved:  (i) “anti-circumven tion duties” imposed on finished 
products assembled in the European Communities (n ot on imported parts); and (ii) the suspension of 
European Communities administrative proceedings where companies agreed to limit their use of 
imported parts.  Both clearly are internal measures, not border measures.  After stating that the European 
Communities’s “anti-circumvention duties” were neither conditioned upon the importation of a product 
nor imposed at the time of importation, the Panel said :  “the imposition of ‘ordinary customs duties’ for 
the purpose of protection is allowed unless they exceed tariff bindings. … By contrast, internal taxes that 
discriminate against import ed products are prohibited.”272 
5.405 Oilseeds  involved payments to processors of dome stic oilseeds.  The principle the European 
Communities believes relevant appears to be that “ … the exposure of a particular imported product  to a 
risk of discrimination constitutes, by itself, a form of discrimination.”273  Once again, as the first 
emphasized portion of the quote demonstrates, the meas ure at issue was an inte rnal measure affecting a 
product that already had been im ported, not a border measure. 
5.406 What of Bananas III ?  There, too, the Appellate Body expressly declared: 
At issue in this appeal is not whether any import licensing requirement, as such, is 
within the scope of Article III:4, but  whether the European Communities procedures 
and requirements for the distribution of import licences  for imported bananas among 
eligible operators within the European Communities  are within the scope of this 
provision.274 
The "advantage" within the scope of Article III: 4 was the distribution of licences among eligible 
operators, something that occurred after importation and thus was an internal measure.  The "import 
licensing requirement, as such", - the border measur e - was not addressed becau se, as a border measure, 
it could not be within the scope of Article III. 
5.407 Lastly, the FIRA  decision, addressed at pages 99 to  100 of Indonesia’s First Submission, 
provides Complainants no succour.  In this, the lead ing GATT decision regarding local content regimes, 
the Panel found that corporate unde rtakings to purchase goods of Ca nadian origin, an internal 
requirement, were within th e scope of Article III:4.275  As in the other cases Complainants cite, no 
border measure was involved. 
5.408 Complainants have not pointed to any preced ent declaring that Article III applies to border 
measures.  They cannot.  No such  precedent exists because Article  III applies only to measures 
regarding imported goods that have cleared customs. 
5.409 What of the linkage of the level of customs im port duties to the level of domestic content?  
Rather than seeking to tr ansform a border measure into an internal measure so as to apply Article III, 
the proper approach is to analyze whether this domes tic content subsidy is consistent with Indonesia’s 
obligations, as a developing c ountry, under the SCM Agreement. 
                                                      
     272European Economic Community-Regulation on Imports of Parts and Components (16 May 1990), 
BISD 37S/132, 192, para. 5.4.  
     273European Economic Community-Payments and Subsidies Paid to Processors and Producers of 
Oilseeds and Related Animal-Feed Proteins (25 January 1990), BISD 37S/86, 125, para. 141 (first emphasis 
added).  
     274European Communities-Regime for the Importation, Sale and Distribution of Bananas 
(9 September 1997), WT/DS27/AB/R, 85, para. 211 (emphasis added). 
     275Canada-Administration of the Foreign Investment Review Act (FIRA) (7 February 1984), 
BISD 30S/140. WT/DS54/R, WT/DS55/R, 
WT/DS59/R, WT/DS64/R Page 122 
 
 
2. Rebuttal of Japan to Arguments of Indonesia
 
5.410 Japan  argues, in rebuttal to Indonesia's response to  the claim under Articl e III:4 pertaining to 
the tariff measures, that the February 1996 programme  violates GATT Article III:4 and cannot escape 
review as a purported "borde r measure" or "voluntary m easure."  The following are Japan's  rebuttal 
arguments in this regard: 
 (a) The February 1996 programme violates GATT Article III:4  
5.411 The February 1996 programme waives payment of the 35 per cent luxury tax and import duties 
of up to 65 per cent on automotive parts and co mponents in connection wi th the National Car, 
conditioned on the National Car meeting certain lo cal content requirements.  Thus, it creates strong 
incentives for the National Car manufacturer to  favour Indonesian parts and components over like 
imported parts and components, in  clear violation of GATT Articl e III:4. (See Section V.C.1.) 
 (b) Indonesia's "border meas ure" defence has no merit  
5.412 Regarding the local content requirement in  connection with the import duty exemption, 
Indonesia argues that it is a "border measure," because  "[c]ustom duties are, by definition (Article I:1 of 
the General Agreement), 'imposed on or in connection wi th importation.'"  Indonesia further argues that 
it follows that such a measure cannot be an "internal regulation" subjec t to Article III:4.  However, both 
the text of GATT Article III:4 and the GATT/WTO precedent cases disprove this assertion. 
 (1) The text of GATT Article III:4 shows th at it applies to "all" measures "affecting" 
conditions of internal sale  
5.413 First, the text of GATT Article III:4 provides th at the Article shall be a pplied "in respect of all  
laws, regulations and re quirements affecting  [imports'] internal sale, offering for sale, purchase, 
transportation, distribution or use."  Nothing in the te xt requires such laws, re gulations, and requirements 
to affect only  wholly internal matters, or in other words, not to have any connectio n whatsoever with the 
border.  Nor is there any textual basis for the rigi d distinction that Indonesi a has attempted to draw 
between "border measures" and "interna l measures".  Rather, Article III:4, by its terms, applies to "all" 
measures "affecting [im ports'] internal sale, [etc.]," regardless of how Indonesia chooses to describe its 
measures for purposes of these proceedings.276  
5.414 In the instant case, the issue is not the reduction of import duties as such.  The Government of 
Japan is not challenging the duties of up to 65 per cent that Indonesia maintains on imports of 
automotive parts and components.  In stead, the issue here concerns th e incentives, including the import 
duty incentive, created by Indonesia to encourage the purchase of domestic  automotive parts and 
components over like imports.  Providing an Indonesian automaker with incentives to purchase domestic 
parts and components clearly "affects" the conditions of  "internal sale."  Moreover, what is encouraged 
by this measure is a purely internal activity (i.e. pur chase of domestic parts and components), which has 
little connection with "borders."  Thus, regardless of whether the incentives involve "border measures" 
such as import duties, they "affect" conditions of  internal sale for impo rted automotive parts and 
components and are covered by the pl ain text of GATT Article III:4. 
5.415 It should likewise be noted that, in connecti on with the luxury tax exemption, the issue for 
purposes of Article III:4 is not the luxury tax ex emption as such.  The di scriminatory luxury tax 
                                                      
     276Indonesia seems to rely on the title of GATT Article III, underscoring the word "internal" in the title 
language "National Treatment on Internal Taxation and Regulation."  However, the Government of Indonesia 
makes mistakes in interpreting the title , as is obvious from the text of GATT Article III:4.  A regulation is 
subject to GATT Article III:4 if it affects conditions of internal sale. WT/DS54/R, WT/DS55/R, 
WT/DS59/R, WT/DS64/R 
Page 123 
 
 
exemption as such violates Article III:2.  What matters for purposes of Article III:4 is the local content requirements which must be satisf ied to obtain the luxury tax exemp tion.  By creating incentives to 
purchase Indonesian parts and components, the loca l content requirements a ccord Indonesian products 
more favourable treatment than like imported  products, in violati on of Article III:4. 
 (2) The GATT/WTO precedents also show that  GATT Article III:4 applies to "border 
measures" that affect cond itions of internal sale  
5.416 Indonesia's argument is also in consistent with the long-standing co nstruction of Article III:4 that 
has been accepted by GATT and WTO panels sin ce 1958.  The early GATT precedent in Italian 
Discrimination Against Imported Agricultural Machinery , which has been cited approvingly many times 
since, stated that Article III:4 applies to laws "affecting  internal sale, purchase, etc." and not only to laws 
"governing the conditions of sale or purchase."  The Pa nel further elaborated, "the  selection of the word 
'affecting' would imply that the drafters of the Articl e intended to cover in paragraph 4 not only the laws 
and regulations which directly gove rned the conditions of sale or purchase but also any laws or 
regulations which might adversely modify the condi tions of competition between the domestic and 
imported products on the internal market."277 
5.417 Other, more recent decisions are even more directly on point in specifically holding that 
measures involving "border measures " and "affecting" the conditions of "internal sale" or purchase fall 
within the coverage of GATT Article III:4.  For example, the Panel in United States - Section 337 of the 
Tariff Act of 1930  held that the "fact that Section 337 is used  as a means for the enforcement of United 
States patent law at the border do es not provide an escape from the applicability of Article III:4."278 
5.418 This conclusion was most recent ly reaffirmed by both the Panel and the Appellate Body in EC -  
Regime for the Importation, Sale and Distribution of Bananas ("Bananas III").279  In that case, the 
European Communities argued, to both the Panel and the Appellate Body, that the measure at issue was 
a border measure, not an internal measure subject to GATT Article III:280, but that argument was not 
accepted.  Instead, the Panel found that the Eu ropean Communities' meas ures violated GATT 
Article III:4 in that they affected internal sales conditions, by allocating a ce rtain portion of the licences 
required to import bananas at a reduced duty rate  exclusively to operators who marketed certain 
quantities of domestic bananas.  The Panel expressly held that "bor der measures may be within the 
purview of the national treatment clause" of Article III:4.281  It further stated, "if the mere fact that the 
European Communities regulations .... include or ar e related to a border measure such as a licensing 
requirement would mean that the Ar ticle III cannot apply, it would not  be difficult to evade the GATT 
national treatment obligation."282  The Panel's finding was exam ined and upheld by the Appellate 
Body.283  Thus, it is clear that the Panel a nd the Appellate Body Report on Bananas III  rejected an 
argument identical to Indonesia's in a very similar context. 
                                                      
     277Panel Report on Italian Discrimination Agains t Imported Agricultural Machinery ("Italian 
Agricultural Machinery "), L/833, adopted on 23 October 1958, 7S/60, 64, para.12.  (Emphasis in original.) 
     278Panel Report on United States - Section 337 of the Tariff Act of 1930  ("US - Section 337"), 
L/6439, adopted on 7 November 1989, BISD 36S/345, 385-386, para. 5.10.  See also Panel Report on EEC - 
Regulation on Imports of Parts and Components, L/6657, adopted on 16 May 1990, BISD 37S/132, 197. 
     279Panel Report on EC - Regime for the Importation, Sale and Distribution of Bananas ("Bananas III "), 
WT/D2S7/R/USA, adopted on 25 September 1997, as modified by the Appellate Body.  Appellate Body Report 
on Bananas III , WT/DS27/AB/R, adopted on 25 September 1997. 
     280Panel Report on Bananas III , paras. 4.265-4.271.  Appellate Body Report on Bananas III , 
paras, 33-36.  
     281Panel Report on Bananas III  , para. 7.176.  
     282Id., para. 7.177. 
     283 Appellate Body Report on Bananas III ,  paras. 209-211. WT/DS54/R, WT/DS55/R, 
WT/DS59/R, WT/DS64/R Page 124 
 
 5.419 Indonesia's curious attempt to claim that the Appellate Body's report in Bananas III
 supports its 
position not only fails, but undercuts the heart of its argument.  Indonesia quotes  the Appellate Body as 
stating:  
At issue in this appeal is not whether any import licensing requirement, as such, is 
within the scope of Article III:4, but whet her the European Communities procedures 
and requirements for the distribution of im port licences for im ported bananas among 
eligible operators within the European Co mmunities are within the scope of this 
provision. 
But, far from supporting Indonesia's position, this quotation highlights its error.  The quotation 
demonstrates that GATT Article III:4 does in fact apply to measures, such as Indonesia's import duty 
incentive, that "affect" internal sales conditions fo r imports regardless of whet her such measures also 
have some relationship with the border.  Indeed, th e Appellate Body's  statement so undercuts Indonesia's 
position and supports Japan's that it may be reformulated easily to apply to this case as follows: 
At issue in this case is not whether any im port duty, as such, is within the scope of 
Article III:4, but whether Indonesia's require ments which encourage internal purchase 
of domestic automotive parts and components  within Indonesia are within the scope of 
this provision. 
5.420 The other two cases cited by Indonesia likewise fa il to support its argument.  While it may be 
true, as Indonesia says, that the m easures at issue in Cana da - Administration of the Foreign Investment 
Review Act  were not border measur es, nothing about that decision suppor ts the alleged interpretation 
that any measure related to  border measures cannot be  subject to GATT Article III:4.    T h a t  P a n e l  
simply did not address this issue.  Finally, as fo r EEC - Regulation on Imports  of Parts and Components , 
Indonesia's assertion that the measures  at issue there did not involve borde r measures is simp ly incorrect.  
The "advantage" found by that Panel to violate Ar ticle III:4 concerned the suspension of proceedings 
under the anti-circumvention provision of the anti-dumping legislation, which, contrary to Indonesia's 
characterization, obviously implicates  border measures.  In fact, the European Communities argued in 
that dispute that the measures "were not internal measures within the meaning of [GATT Article III]"284, 
which the Panel rejected.  
5.421 Therefore, Indonesia's "border measure" defence is inconsistent with both the plain text of 
Article III:4 and its well -established understanding. 
 (c) Indonesia's "voluntary measure" defence has no merit  
5.422 Indonesia also seems to argue that, since the m easures at issue in this  case are not mandatory 
measures but measures with which the company may co mply voluntarily to obtain a benefit, they are not 
covered by GATT Articl e III:4 (see Section V.F.1).  However, that argument does not have any merit.     
5.423 Indonesia's argument is inconsistent with the firmly established interpretation of GATT 
Article III:4 that has been affirmed by many GATT/WTO panels.  These decisions establish that where 
compliance with a certain measure is necessary to secure an "advantage," such a measure is covered by 
GATT Article III:4.  For example, the Panel in Italian Agricultural Machinery  found inconsistent with 
GATT Article III:4 an Italian law that created volun tary incentives for farmers to purchase domestic 
agricultural machinery by providi ng special credit terms to farmer s for the purchase of domestic 
                                                      
     284Panel Report on EEC - Parts and Components ,  para.3.43. WT/DS54/R, WT/DS55/R, 
WT/DS59/R, WT/DS64/R 
Page 125 
 
 
machinery, but not for imports.285  Other similar examples include the Panel Report on EEC - Parts and 
Components286 and the recent Panel and Appell ate Body Reports on Bananas III .287  
5.424 The well-established conclusion that GATT Ar ticle III:4 covers not only mandatory measures 
but also voluntary measures is reinforced by the Illustrative List of the TRIMs Agreement, which 
explicitly provides that "TRIMs that are inconsistent with .... [GATT Article III:4] include those .... 
compliance with which is necessary  to obtain an advantage ...."  (See also Section VI.A.)   
3. Rebuttal of European Communi ties to arguments of Indonesia  
5.425 The European Communities  argues, in rebuttal to Indonesi a's response to the claim under 
Article III:4 pertaining to the tariff measures, th at import duty relief contingent on local content 
requirements violates GATT  Article III:4 and cannot escape review as a purpor ted "border measure" or 
"voluntary measure".  The following are the European Communities'  rebuttal arguments in this 
regard: 
5.426 Indonesia argues that Article III:4 does not appl y to the measures mentioned in numbers (v) and 
(vi) of part (b) of the Eur opean Communities' claims (See  Section III.B), because they are border 
measures. 
5.427 The European Communities would agree that th e application of a reduced or zero customs duty 
rate on imports of automotive parts a nd components is a “border measure” which, if applied in isolation, 
would fall outside the scope of GATT Article III:4. In  the present case, however, the granting of that 
tariff advantage is conditional upon the motor vehicles  into which the imported parts and components 
are assembled reaching a certain perc entage of local content. In order to reach that percentage, local 
assemblers must use local parts and components instead  of imported ones. Therefore, it is indisputable 
that the measure “affects” the internal use within I ndonesia of parts and components within the meaning 
of GATT Article III:4. 
5.428 It is a well established prin ciple that GATT Articl e III:4 does not apply only to “mandatory” 
measures but also where compliance with a certain measure (such as the local content targets at issue in 
the present case) is necessary in order to secure an advantage or benefit (such as the possibility to import 
inputs at a reduced or zero rate).  As noted by th e Panel Report on EEC - Regulation on Imports of Parts 
and Components : 
... the comprehensive coverage of ‘all laws , regulations or requ irements affecting  
[emphasis added by the Panel] the internal sa le, etc. of imported pr oducts suggests that 
not only requirements which an enterprise is legally bound to carry out, such as those 
examined by the FIRA Panel .... but also t hose which an enterprise voluntarily accepts 
in order to obtain an advantage  from the government constitu te ‘requirements’ within 
the meaning of that provisions288” [emphasis added]. 
                                                      
     285Panel Report on Italian Agricultural Machinery , paras. 11-12.  See para. 3.07 above. 
     286Panel Report on EEC - Parts and Components , para. 5.21.  See para. 3.11 above. 
     287Panel Report on Bananas III , para. 7.178.  Appellate Body Report on Bananas III , paras. 211- 214.  
See paras. 3.09-3.10 above. 
     288Panel Report on European Communities - Regulation on imports of Parts and Components , adopted 
on 16 May 1990, 37S/132, 197,  para 5.21. This principle has been applied also by  other Panels. Thus, the Panel 
Report on Italian discrimination against Imported Agricultural Machinery  (adopted on 23 October 1958, 
BISD 7S/60, 64, para 12) found that an Italian law providing especial credit terms to farmers for the purchase of 
agricultural machinery conditional on the purchase by the farmers of Italian machinery was contrary to Article 
III:4.  Similarly,  the Panel Report on EEC - Payments and subsidies paid to Processors and Producers of 
Oilseeds and Related Animal Feed Proteins (adopted on 25 January 1990, BISD 37S/86, 124-125) concluded WT/DS54/R, WT/DS55/R, 
WT/DS59/R, WT/DS64/R Page 126 
 
 5.429 The “advantage” in question may consist of a bene fit granted with respect to a border measure, 
such as for instance a tariff exempt ion or reduction. This has been co nfirmed by the recent Panel reports 
on EC - Regime for the Importation, Sale and Distribu tion of Bananas
.289 
5.430 One of the measures in dispute in that case were the so-called “operato r category rules” for the 
allocation of licences to import of “third country” bananas at lowe r tariff rates within a tariff quota. In 
accordance with those rules, 30 pe r cent of the tariff quota was reserv ed for operators who had marketed 
during a preceding three-year period bananas of Eu ropean Communities origin or of traditional ACP 
sources. 
5.431 The Panel found that the requirement to ma rket bananas of European Communities origin 
afforded more favourable treatment to those bana nas than to like imported bananas and therefore 
violated Article III:4 of GATT. In reaching this co nclusion the Panel rejected expressly an  argument 
submitted by the European Communities to the effect that the measures were border measures and as such not subject to Arti cle III:4. The Panel restated the view of a previous (unadopted) Panel Report 
dealing with the same matter that  
"... a requirement to purchase a domestic product in order to obtain the right to import a 
product at a lower rate of duty under a tariff quota is therefore a re quirement affecting 
the purchase of a product within  the meaning of Article III:
290". 
5.432 The situation is identical in the present case. In order to obta in the right to import parts and 
components at a lower rate of duty,  the assemblers of motor vehicles  are required to use (and purchase 
previously if they do not manufacture them inte rnally) domestic parts and components, thereby 
affording more favourable treatment to those parts and components than to like imported parts and 
components. 
5.433 The findings of the Panel Reports on EC - Regi me for the Importation, Sale and Distribution of 
Bananas  with respect to the operator category rules were upheld by the Appellate Body on appeal.291 
Indonesia misreads the findings of  the Appellate Body. The obvious meaning of the passage of the 
Appellate Body report cited by Indonesia in its submission (See  Section V.F.1) is that while, in 
principle, import licensing require ments are not within the scope of  Article III:4, the requirements 
applied by the European Communities  went “far beyond the mere impor t licence requirements needed to 
administer the tariff quota” and affect ed the “internal sale, offering for sale... etc” of  bananas. By the 
same token, in the present case, th e local content targets go beyond what  is necessary to apply a tariff 
reduction/exemption and affect the internal use of parts and components within the meaning of 
Article III:4. 
4. Rebuttal of United States  to arguments of Indonesia  
5.434 The  United States  argues that Indonesia’s argument that  Indonesia's tariff incentives do not 
violate Article I II:4 of GATT 1994 because they are “borde r measures” has been rejected by the 
Appellate Body.  The following are the United States'  arguments in this regard: 
                                                                                                                                                                     
that the payment by the Community of subsidies to the processors of oilseeds who purchased oilseeds of 
Community origin was contrary to Article III:4.  
     289See e.g. Panel Report on EC - Regime for the Importation, Sale and Distribution of Bananas , 
WT/DS27/R/GTM, WT/DS27/R/HND, adopted on 25 September 1997, at paras 7.171-7.182, 7.216-7.219 and 
7.244-7.250.  
     290Id. at para 7.179, quoting the Panel Report on EEC - Import regime for Bananas , issued on 11 
February 1994 (not adopted), DS 38/R, para 146.  
     291Appellate Body report on EC - Regime for the Importation, Sale and Distribution of Bananas , 
WT/DS27/AB/R, adopted on 27 September 1997, at para 211.  WT/DS54/R, WT/DS55/R, 
WT/DS59/R, WT/DS64/R 
Page 127 
 
 
5.435 Indonesia argues that the tariff incentives  under the 1993 Programme and the National Car 
Programme do not violate Article III:4 of GA TT 1994 because Article III:4 does not address 
“advantages” that are conferred in the form of bor der measures.  According to  Indonesia, “There can be 
no serious argument that internal regulation is in volved.  Therefore, Article III of the General 
Agreement, including Article III:4, is inapplicable.”. 
5.436 To the contrary, there can be no serious  argument that internal regulation is not  involved.  
Indonesia’s argument consists of a discussion of pane l decisions that found violations of Article III:4, 
but that did not involve border measures.  From this, Indonesia concludes that Article III:4 does not 
cover advantages conferred in the form of border measures. 
5.437 This is a classic non sequitur .  The fact that these panels were  not dealing with border measures 
does not prove that advantages conferred in the form of  border measures are not co vered by Article III:4.  
All it proves is that these pane ls did not address the question. 
5.438 However, the Appellate Body has  addressed and rejected the very  argument advanced here by 
Indonesia.  In Bananas III , in connection with the European Communities’s licensing regime, the 
European Communities argued that (1) the panel erred in finding the licensing regime to be an internal 
measure subject to Article III:4, and not a border measure, and (2) th e panel misunderstood the notion of 
internal measures in GATT 1994.292  However, the Appellate Body fla tly rejected this argument.  Of 
particular relevance is the follo wing discussion of the Appellate Bo dy regarding hurricane licences293: 
Hurricane licences allow for additional im ports of third-country (and non-traditional 
ACP) bananas at the lower in-quota tariff rate.  Although their issuance results in 
increased exports from those countries, we note that hur ricane licences are issued 
exclusively to European Communities pr oducers and producer organizations, or to 
operators including or directly representing them.  We also note that, as a result of the 
European Communities practi ce relating to hurricane licences, these producers, 
producer organizations or operators can expe ct, in the event of a hurricane, to be 
compensated for their losses in the form  of "quota rents" generated by hurricane 
licences.  Thus, the practice of issuing hurricane licences constitutes an incentive for operators to market European Communities ba nanas to the exclusion of third-country 
and non-traditional ACP bananas.  This practice therefore af fects the competitive 
conditions in the market in favour of European Communities bananas ... . 
For these reasons, we agree with the Panel that the European Communities practice of 
issuing hurricane licences is  inconsistent with Arti cle III:4 of the GATT 1994. 
5.439 Like the hurricane licences in Bananas III
, the tariff incentives provided by Indonesia may 
constitute border measures.  However, the manner in  which they are awarded constitutes an incentive to 
favour Indonesian automotive parts and subparts over imported parts a nd subparts, thereby affecting the 
competitive conditions in the Indonesian market in fa vour of Indonesian parts and subparts.  As such, 
they violate Article III:4. 
VI. CLAIMS UNDER THE TRIMS AGREEMENT 
A. Claims Raised by Japan  
6.1 Japan  argues that the National Car Programme (see Section III.A) violat es Article 2 of the 
TRIMs Agreement.  The following are Japan's  arguments in support of this claim:   
                                                      
     292Id. at para. 33. 
     293Id. at para. 213-214. WT/DS54/R, WT/DS55/R, 
WT/DS59/R, WT/DS64/R Page 128 
 
 6.2 Article 2:1 of the TRIMs Agreement provides th at "no Member shall apply any TRIM that is 
inconsistent with the provisions of Article III or Article XI of GATT 1994."  The issues before this 
panel, therefore, are twofold: (i) whether or not the National Car Programme is a "TRIM", and 
(ii) whether or not it violates either of the releva nt GATT articles.  As we  have demonstrated, the 
exemption from the luxury tax and the import duty on the basis of local content is in violation of 
Article III:4.  Consequently, the second of the above ha s been met, and the focus of the analysis here is 
on the first of the two issues. 
1. Indonesia's Programmes are "TRIMs" as defined in the TRIMs Agreement
 
6.3 There is no doubt that Indonesia's programmes  constitute "investment measures re lated to 
trade".294  First, in the context of GATT/WTO, a "measure"  is interpreted broadly.  For example, in the 
case of GATS, it is expressly stated that "'measure' means any measure by a Member, whether in the form of law, regulation, rule, procedure, deci sion, administrative action, or any other form".
295  In light 
of the usage of the term within the context of  the TRIMs Agreement, the notion of a "measure" should be interpreted similarly.  Governme nt regulations requiring certain lo cal content to obtain an exemption 
from a luxury tax or specifying levels of import duty thus constitute "measures
" within the meaning of 
the TRIMs Agreement. 
6.4 Second, Indonesia's programmes are all "tra de-related investment  measures".  The National Car 
Programme has been established specifically "with a view to supporting the development of the 
automotive industry."296   The central aspect of the National Ca r Programme is to develop the domestic 
manufacturing capability of autom obiles and automotive parts and components.  The fact that the 
Programme includes "investment meas ures" is also obvious from the fa ct that one of its implementing 
regulations is entitled "Investmen t Provisions for Realization of th e National Automobile Industry."297  
The Programme indeed impacts on the automobile  industry in Indonesi a where foreign-owned 
manufacturers are actively participating.  Furthermore, these are all "trade-related" since the Programme is conditioned on local conten ts requirements and thus naturally affects trade. 
6.5 Indonesia has essentially conf irmed this point in prior me etings of the WTO Committee on 
Trade-Related Investment Measures.  In the  Minutes of the Meeting Held on 30 September and 
1 November 1996 , the representative of Indonesia stated: 
[T]he National Car Programme wa s intended to bring about major structural changes in 
the Indonesian automotive sector so that it co uld develop into a world standard industry 
... .  These policies were expected to encour age car companies to increase their local 
content, resulting in a rapid growth of investments  in the automotive component 
industry. (Emphasis added)298   
6.6 In addition, the Illustrative List in the Annex to the TRIMs Agreement, paragraph 1, specifically 
includes local content requirements as TRIMs that are inconsistent with Article III:4: 
TRIMs that are inconsistent with the obli gation of national trea tment provided for in 
[Article III:4] include those ...compliance  with which is necessary to obtain an 
advantage, and which require: 
                                                      
     294TRIMs Agreement Article 1.  
     29594 GATS Article XXVIII(a).  
     296Government Regulation No. 36/1996 (Japan Exhibit 25), preamble.  
     297Decree of the State Minister for Mobilization of Investment Funds/Chairman of the Investment 
Coordinating Board No.01/SK/1996 (Japan Exhibit 29).  
     298G/TRIMS/M/5 (Japan Exhibit 63), para. 24, 27 November 1996.  WT/DS54/R, WT/DS55/R, 
WT/DS59/R, WT/DS64/R 
Page 129 
 
 
 (a) the purchase or use by an enterprise of products of domestic origin ... specified 
in terms of a proportion of volume or  value of its local production .... 
Indonesia's measures, which are contin gent on compliance with local c ontent requirements , thus clearly 
constitute prohibited TRIMs as set forth in the Illustrative List. 
6.7 Furthermore, Japan considers that any TRIMs which violate GATT Arti cle III, including both 
Article III:2 and Article III:4, are inconsistent with Article 2.1 of the TRIMs Agreement.  Japan believes that the February 1996 Programme violates GATT Articl e III, is a "trade-related  investment measure", 
and thus violates TRIMs Article 2.1. 
2. Even if Indonesia's measures were deemed to constitute a subsidy, it is  nonetheless also a TRIM
  
6.8 Indonesia claims that the measure is a "subsidy" rather than a "TRIM".299  However, the 
concepts of a TRIM and subsidy are not mutually excl usive.  Nothing in the text, objective or purpose of 
the TRIMs Agreement would support the contention th at a TRIM is no longer a TRIM simply because 
the local administering authority prefers to call it a subsidy rather than a TRIM. 
3. Indonesia cannot enjoy the bene fit of the transitional period  
6.9 Nor can Indonesia enjoy the benefit of the fi ve-year transitional period for developing countries 
stipulated in TRIMs Agreement, Arti cle 5.2, in light of Indonesia's failu re to comply with its notification 
and standstill obligations.  The TRIMs Agreement, Article 5.2 requires notification for Members to 
benefit from the transitional period, and Article 5. 4 imposes a standstill obligation during the period.  
Indonesia has complied with neither provision.  First, there is no notification.  Indonesia submitted a 
notification on 23 May 1995300, which specifies certain automotive related measures, but the notification 
was withdrawn in October 1996.301  Second, even if the notification had not been withdrawn, its content 
is irrelevant to the National Car Programme.  While the measures a ppeared in the notification may be 
tangentially related to the National Car Programme , the Programme itself was not specified in the 
notification.  Moreover, the National Car Programme , which was introduced in 1996, could have never 
been notified in the notification, which was due within 90 days after the date of entry into force of the 
WTO Agreement  (i.e., 1 January 1995) and was actually made  by Indonesia in May 1995.  Therefore,  
Indonesia cannot enjoy the benefit of  the transitional period under Article 5.2. of the TRIMs Agreement. 
B. Claims Raised by the European Communities  
6.10 The European Communities  claims that Indone sia has violated its  obligations under 
Article 2.1 of the TRIMs Agreement, as the fo llowing measures (See Section III.B) are TRIMs 
inconsistent with Articl e III of GATT 1994:   
 (1) the exemption from the Sales Tax on Luxu ry Goods of locally manufactured combines, 
minibuses, vans and pick-ups with more than 60 per cent local content; 
 (2) the exemption from the Sales Tax on L uxury Goods of locally manufactured sedans 
and stations wagons of less than 1,600 cc with more than 60 per cent local content; 
                                                      
     299See Notification under Article 5.1 of the Agreement on Trade-Related Investment Measures, 
Indonesia Addendum (G/TRIMS/N/1/IDN/1/Add.1) (Japan Exhibit 18); S UBSIDIES  / Replies to Questions posed 
by JAPAN Concerning the Updating Notification of INDONESIA (G/SCM/Q2/IDN/9)  (Japan Exhibit 20), 
2.(iii).  
     300Notification under Article 5.1 of the Agreement on Trade-Related Investment Measures, Indonesia 
(G/TRIMS/N/1/IDN/1) (Japan Exhibit 17).  
     301Notification under Article 5.1 of the Agreement on Trade-Related Investment Measures, Indonesia 
Addendum (G/TRIMS/N/1/IDN/1/Add.1) (Japan Exhibit 18).  WT/DS54/R, WT/DS55/R, 
WT/DS59/R, WT/DS64/R Page 130 
 
 
 (3) the exemption from the Sales Tax on L uxury Goods of National Cars assembled in 
Indonesia by Pioneer Companies meeting certain local cont ent requirements; 
 (4) the exemption from the Sales Tax on L uxury Goods of National Cars assembled in 
Korea by “overseas producers” meeting certain counter-purch asing obligations; 
 (5) the grant of duty relief to parts and comp onents used in the assembly of motor vehicles 
(or of other parts and components for the assembly of motor vehicles) in Indonesia 
based on the finished vehicles (or the pa rts and components) meeting certain local 
content requirements;  and 
 (6) the exemption of import duties for part s and components used for the assembly of 
National Cars in Indonesia by Pioneer Companies meeting certain local content 
obligations. 
6.11 The following are the European Communities'  arguments in support of this claim: 
6.12 Article 2.1 of the TRIMs Agreement provides that:  
Without prejudice to other rights and obliga tions under GATT 1994, no Member shall apply 
any TRIM that is inconsistent with the provi sions of Article III or  Article XI of GATT. 
6.13 The notion of TRIM (“Trade Related Invest ment Measure”) is not defined in the TRIMs 
Agreement.  Nevertheless, the Annex to the TRIMs Agreement contains what Article 2.2 of that Agreement describes as: 
An Illustrative List of TRIMs that are inconsis tent with the obligation of national treatment 
provided for in paragraph 4 of Article II I of GATT 1994 and the obligation of general 
elimination of quantitative restrictions prov ided  for in paragraph 1 of Article XI. 
6.14 The above measures are “inve stment measures” beca use they are specifically designed to 
promote investment into the automotive sector wi th the purpose of achieving “full manufacturing” of 
motor vehicles in Indonesia. Further, the measures are “trade related” becaus e they encourage the use 
of domestic parts and components over imported ones. Finally, as de monstrated above,  the measures 
are inconsistent with Article III:4 and, in some cases, also with Article III:2, first sentence. 
6.15 The above analysis is confirmed by the Illustrative List annexed to the TRIMs Agreement. 
Indeed, the measures at issue fall squarely within th e category defined in Item 1 (a) of the Illustrative 
List,  which reads as follows: 
 1. TRIMs that are inconsistent with th e obligation of nationa l treatment provided 
for in paragraph 4 of Article III of GA TT 1994 include those [....] compliance with 
which is  necessary to obtain an  advantage, and which require: 
  (a) the purchase or use by an enterprise  of  products of domestic origin or from 
any domestic source [...] in terms of a proportion of volume or value of its local production. 
6.16 Article 5.2 of the TRIMs Agreement provide s a temporary derogation from the obligation 
contained in Article 2 in respect of TRIMs which were  in force at least 180 days before the entry into 
force of the WTO Agreement and which have been  duly notified by the Member concerned within 
90 days from the entry into force of the WTO Agreement, as required by Article 5.1 of the TRIMs WT/DS54/R, WT/DS55/R, 
WT/DS59/R, WT/DS64/R 
Page 131 
 
 
Agreement. In the case of developing country Memb ers, such as Indonesia, this temporary derogation 
has a duration of five years.  
6.17 On 23 May 1995, Indonesia made a notificati on under Article 5.1 of the TRIMs Agreement302. 
This notification, however, does not entitle Indonesia to invoke the te mporary arrangement provided in 
Article 5.2 with respect to the measures at issue.  
6.18 In the first place,  Indonesia’s notification wa s made more than 90 days after the entry into 
force of the WTO Agreement. Accordingly, it does not constitute a valid notification under Article 5.1.  
6.19 Moreover,  Indonesia’s notification covered only the measures provided in Decree 645/93. The 
tax benefits provided in Govern ment Regulation 36/96 and the incentives granted under the National 
Car Programme were introduced by Indonesia only  af ter the entry into force of the WTO Agreement. 
For that reason, they were not, and could not have been, notified under Article 5.1. 
6.20 On 28 October 1996 (i.e. imme diately before the first round of consultations with the 
Community took place) Indonesia withdrew formally its notification. Allegedl y  because, based on a 
further analysis of the measures concerned, it ha d concluded that the measures were not  TRIMs303. In 
reality, however, the obvious reason for withdr awing the notification was Indonesia’s belated 
realisation that the notification would not only fail to provide the expected immunity for the notified 
measures, but, in addition,  would represent an open  admission that both the notified measures and the 
non-notified ones are contrary to Articles III: 4 of GATT and 2 of the TRIMs Agreement.  
C. Claims raised by the United States  
6.21 The United States  claims that Indonesia’s  system of tariff and tax incentives and the 
government-directed $690 million loan to  TPN (See Section III.C) are inc onsistent with Article 2 of the 
TRIMs Agreement.  The following are the United States'  arguments in support of this claim: 
6.22 Indonesia’s system of tariff and tax incentiv es and the government-dir ected $690 million loan 
to TPN are based upon the achievement  of designated local content targ ets and, as such, discriminate 
against imported automotive parts (and subparts) in favour of their dome stic counterparts.  In addition 
to violating Article III:4 of GATT 1994, these measures also violate Article 2 of the TRIMs 
Agreement. 
6.23 Article 2 of the TRIMs Agreements, in  pertinent part, states the following: 
1. Without prejudice to other right s and obligations under GATT 1994, no 
Member shall apply any TRIM that is incons istent with the provisions of Article III … 
of GATT 1994. 
2. An illustrative list of TRIMs that are inconsistent with the obligation of 
national treatment provided for in paragraph 4 of Article III of GATT 1994 … is contained in the Annex to this Agreement. 
6.24 Paragraph 1(a) of the Illustrativ e List, in turn, provides as follows: 
1. TRIMs that are inconsistent with the obligation of national treatment provided 
for in paragraph 4 of Articl e III of GATT 1994 include th ose which are mandatory or 
                                                     
 
     302G/TRIMS/N/1/IDN/1, dated 1 June 1995. 
     303G/TRIMS/N/1IDN/1/Add.1, dated 31 October 1996. WT/DS54/R, WT/DS55/R, 
WT/DS59/R, WT/DS64/R Page 132 
 
 
enforceable under domestic law or under ad ministrative rulings, or compliance with 
which is necessary to obtain an  advantage, a nd which require:  
(a) the purchase or use by an enterpri se of products of domestic origin or 
from any domestic source , whether specified in terms of particular 
products, in terms of volume or valu e of products, or in terms of a 
proportion of volume or value of it s local production ... . (emphasis 
added). 
6.25 The tariff and tax incentives provided by Indonesi a fall squarely within the example of a TRIM 
in paragraph 1(a) of the Illustra tive List.  The tax and tariff ince ntives under the 1993 Programme and 
the National Car Programme require, within the meani ng of Article 1(a) of the Illustrative List, "the 
purchase or use by an enterprise of products of domestic origin or from an y domestic source ...". 
"Compliance" with these requirements "is necessary to obtain an advantage" within the meaning of 
Article 1 of the Illustrative List.  As such, these incentives fall squarely within the Illustrative List.  Under both the 1993 programme and the National Motor Vehicle programme, in order to obtain the 
“advantage” of tariff or tax reductions or exemptions, an “enterprise” must “comply” with the 
requirement to “use . . . products of domestic origin”.  Likewise , the provision of the government-
directed $690 million loan to TPN  was based on TPN’s status as a participant in the production of a 
“national motor vehicle”, a status which, in turn , was based on compliance with the requirement to 
satisfy the local content requirements for a “nationa l motor vehicle”.  Therefore, the tariff and tax 
incentives and the provision of the government-di rected $690 million loan cons titute TRIMs that are 
prohibited by Article 2.1 of the TRIMs Agreement. 
6.26 With respect to the 1993 programme, Indonesia,  as a developing count ry, could have taken 
advantage of the notification and transitional arrangements of Artic le 5 of the TRIMs Agreement.  
Paragraphs 1 and 2 of Article 5 provide, in pertinent part: 
1. Members, within 90 days of the da te of entry into force of the WTO 
Agreement [i.e., by 31 March 1995], sh all notify the Council for Trade in 
Goods of all TRIMs they are applying th at are not in conformity with the 
provisions of this Agreement.  Such TR IMs of general or specific application 
shall be notified, along with  their principal features. 
2. Each Member shall eliminate all TRIMs which are notified under 
paragraph 1 … within five years [of the date of entry into force of the WTO 
Agreement] in the case of a devel oping country Member ... .  (footnote 
omitted). 
6.27 Indonesia did notify, pursuant to Article 5.1, that portion of the 1993 programme providing 
tariff incentives.  However, that notification was unt imely, because it was made on 23 May 1995, well 
after the deadline for notifying TRIMs under Article 5.1 had closed.
304   Moreover, the notification did 
not cover that portion of the 1993 pr ogramme providing tax incentives.305 Subsequently, Indonesia 
withdrew that portion of its notification pertaining to the tariff incentives for motor vehicles.306  As a 
                                                      
     304G/TRIMS/N/IDN/1 (1 June 1995). 
     305Id. 
     306G/TRIMS/N/IDN/1/Add. 1 (31 October 1996). WT/DS54/R, WT/DS55/R, 
WT/DS59/R, WT/DS64/R 
Page 133 
 
 
result, Indonesia has not notified any of the TRIMs desc ribed above, and, thus, is ineligible to take 
advantage of the transitional arrangements in Article 5.2.307 
D. Response by Indonesia to Claims under the TRIMs Agreement  
6.28 Indonesia  argues, in response to the claims unde r the TRIMs Agreement, that the TRIMs 
Agreement interprets Arti cle III of the GATT 1994, and adds no ne w obligations; thus it cannot alter 
the fact that Article III is not applicable.  The following are Indonesia's  arguments in this regard. 
1. Summary  
6.29 At the start of the Uruguay Round negotiations , the United States, the European Communities, 
Japan and other developed countries had grand plan s for an agreement that would broadly discipline 
investment measures.  Throughout the negotiations, however, the deve loped countries' efforts were 
countered by virtually all developing countries.  To  avoid the absence of an y agreement at all, the 
agreed-upon TRIMs text provides that the type of lo cal content measure found to  be inconsistent with 
Article III of the General Agreement in Canada-Adm inistration of the Forei gn Investment Review Act  
(7 February 1994), BISD 30S/140, (as well as an other type of measure previously found to be 
inconsistent with Article XI) should also be proscribed as a TRIM.  In other words, to be a TRIM, a 
measure must be inconsistent with GATT Articles III or XI. 
6.30 Article 2.1 of the TRIMs Agreement states: 
Without prejudice to other rights and obligations under GATT 1994, no 
Member shall apply any TRIM that is inconsistent with the provisions of 
Article III  or Article XI of GATT 1994. (Emphasis added.) 
The TRIMs Agreement does not add any new obligations ; it merely interprets Article III.  This was 
recognized in the Report of the Panel on European Communities-Regim e for the Importation, Sale and 
Distribution of Bananas , WT/DS27/R/USA (22 May 1997), whic h declares at paragraph 7.185: 
In considering these arguments, we firs t examine the relationship of the TRIMs 
Agreement to the provisions of GATT.  We note that with the exception of its 
transition provisions the TRIMs Agreement essentially interprets and clarifies 
the provisions of Article III  (and also Article XI) where trade-related 
investment measures are concerned. Th us the TRIMs Agreement does not add 
to or subtract from those GATT obligations , although it clarifies that Article 
III:4 may cover investment-related matters.  (Emphasis added; footnote omitted.) 
6.31 As demonstrated (See Secti on V.D), Indonesia's luxury tax s ubsidy is not inconsistent with 
Article III of the General Agreement.  Therefore, the TRIMs Agreement is not germane to this dispute. 
2. The TRIMs "Illustrative List" cannot alter the fact that Article III is inapplicable
 
6.32 Complainants seek to use th e TRIMs Illustrative List as the tail to wag the Article III dog, 
claiming that the Indonesian measures  fall within the scope of paragra ph 1(a) of the List and hence are 
TRIMs.  
                                                      
     307Of course, Indonesia could not have notified its TRIMs under the National Motor Vehicle 
programme, because Indonesia did not introduce those TRIMs until after the 90-day no tification window of 
Article 5.1 had closed. WT/DS54/R, WT/DS55/R, 
WT/DS59/R, WT/DS64/R Page 134 
 
 6.33 During the Uruguay Round negotiations, the Unit ed States clearly indicated the subordinate 
nature of the Illustrative List.  The official mi nutes of the 10-11 July 1989 meeting of the TRIMs 
negotiating group record the following exchange: 
One participant asked for clarification on the nature of and the role that would 
be assigned to "illustrative lists"; were they only concepts within the 
framework of the negotiations, would th ey remain illustrative rather than 
definitive in any final agreement and would they be open-ended so that they could be added to at a later stage? ... The representative of  the United States
 
said that the lists should be purely illustrative .  Disciplines should be based on 
general criteria  such as the inherently trade distorting nature of TRIMs and 
illustrative lists could then be drawn up with specific examples of TRIMs that 
were subject to specific disciplines .  In that way any new measure that was 
devised could still be caught by the di scipline even if it did not appear on an 
illustrative list.308 
6.34 The United States, the European Communiti es, Japan and other de veloped countries had 
extensive negotiating goals for the TRIMs Agreement,  but at the end of the negotiation the parties 
could not even agree upon basic definitions such as  "investment" measure and "trade-related."  The 
only "general criteria" that survived the negotiating process and was reflected in the final text of the 
TRIMs Agreement was that a TRIM must be inconsistent  with the obligations of either Article III or XI 
of the General Agreement.  In sum, because the luxury tax subsidy is not inconsistent with Article III, it 
cannot be proscribed by the TRIMs Agreement. 
3. Subsidies are governed by the subsidies agreem ent and are not within the scope of the TRIMs 
Agreement  
6.35 One of the many fundamental issues on whic h there were major differences of opinion among 
the participants in the Uruguay Round TRIMs negot iating group was whether subsidies were governed 
solely by the Subsidies Agreement or  also could be considered to be an "incentive" or a "condition for 
receipt of an advantage" and thus governed by the TRIMs Agreement.  The United States and Japan 
argued that subsidies could also be TRIMs.  Arge ntina, Hungary, India, the Nordics, the Philippines 
(for ASEAN), Poland a nd others disagreed.309  So did the European Communities, which included the 
following in its 13 November 1989 submission to the TRIMs negotiating group: 
                                                      
     308MTN.GNG/NG12/11 at para. 55 (emphasis added). 
     309Argentina and other developing countries declared that "any suggestion that investment measures 
themselves, including incentives , should be prohibited is not only inappropriate but unrealistic and 
unacceptable."  MTN.GNG/NG12/W/25 at  para. 4 (emphasis added).  Hungar y "...wanted it spelled out that a 
TRIMs agreement would not establish different disciplines on investment incentives or subsidies to those agreed 
to in the Subsidies Negotiating Group."  MTN.GNG/NG12/22 at para. 7.  India said that it could not be 
presumed that investment measures constitute a form of subsidization.  MTN.GNG/NG12/W/18 at para. 52.  
The Nordics declared explicitly that "incentives" were  covered by the Subsidies Agreement, not the TRIMs 
Agreement.  MTN.GNG/NG12/W/23 at para . 10.  They also said "there appeared to be a consensus emerging in 
the Group ... that incentives lay outside the ambit of this  Group and remedies to their adverse trade effects could 
be found in GATT disciplines on subs idies."  MTN.GNG/NG12/14 at para. 10 0.  According to the Philippines, 
"incentives contingent upon investment measures should be outside the scope of the TRIMs negotiations."  
MTN.GNG/NG12/20 at para. 2.  Poland said that ince ntives linked to TRIMs are subsidies and should be 
disciplined by GATT Article XVI and the Subsidie s Agreement.  MTN.GNG/NG12/14 at para. 75. WT/DS54/R, WT/DS55/R, 
WT/DS59/R, WT/DS64/R 
Page 135 
 
 
[G]overnment incentives, including subs idies, are being addressed in the 
Negotiating Group on Subsidies; such ince ntives are therefore not the subject 
of the current negotiations on TRIMs.310 
6.36 The disagreement remained throughout the life of the negotiating group.  In the "Chairman's 
Report on the Status of Work in the Negotiating Group" (MTN.GNG/NG12/W/27), the paragraph and 
accompanying footnote asserting that  subsidies could be TRIMs was in brackets, thereby signifying 
lack of agreement with the proposition.311  In its 1997 Report to the WT O Council for Trade in Goods, 
the TRIMs Committee stated:  “[d]iffering views con tinue to be expressed on issues such as ... the 
relationship of the provisions of the [TRIMs] Agre ement to those of other WTO agreements, including 
the Agreement on Subsidies and Countervailing Measures and the Agreement on Agriculture.”312  Even 
the United States has acknowledged that "[o]ther issu es that appear to require additional follow [sic] 
include:  ... the relationship of the TRIMs Agreement with the Agreement on Subsidies and 
Countervailing Measures."313 
6.37 The foregoing clarifies that no consensus exists that subsidy measures also are subject to the 
disciplines (whatever they might be) of the TRIM s Agreement.  The luxury tax reductions and 
exemption under the 1993 Incentive Programme and th e February 1996 national car programme are not 
TRIMs;  they are subsidies.  They are governed by  and subject to the disciplines of the Subsidies 
Agreement. 
4. Customs import duty subsidies are not within the scope of the TRIMs Agreement  
6.38 The TRIMs Agreement merely interprets Article III of the General Agreement.  It does not add 
new obligations.  Therefore, where, as here, Articl e III is not applicable, the TRIMs Agreement is not 
applicable.  The “Illustrative List,” therefore, is irrelevant.  Custom s duty subsidies are governed by the 
Subsidies Agreement and are not within  the scope of the TRIMs Agreement. 
5. Indonesia has not violated the TRIMs Agreem ent:  The TRIMs Agreement does not apply - it 
adds no new obligations, but merely put s a gloss on Articl e III of GATT 1994  
(a) The TRIMs Agreement, unlike the SCM Agreement, is not lex specialis ; it neither 
defines “TRIM” nor sets forth special remedies  
6.39 The TRIMs Agreement differs substantially  from the SCM Agreement.  Unlike the SCM 
Agreement, which is lex specialis  for this dispute, the TRIMs Agreement is not lex specialis  for this or, 
for that matter, any dispute.  This is because the TRIMs Agreement: 
- first, does not define “TRIM” (in fact, it  does not contain even a limited definition of 
“TRIM”);  and 
- second, does not set forth sp ecial remedies for m easures found to be TRIMs (in fact, it 
sets forth no remedies at all). 
To Indonesia’s knowledge, thes e facts concerning the TRIMs Agreement are not in dispute. 
                                                      
     310MTN.GNG/NG12/W/22 at para. A.3. 
     311See id . at para. A2(c)(iii) and note 2. 
     312G/L/193 (15 October 1997) at para. 5. 
     313"United States Paper on WTO Agenda" para. C.4, reprinted in Inside US Trade  at 10 
(18 April 1997). WT/DS54/R, WT/DS55/R, 
WT/DS59/R, WT/DS64/R Page 136 
 
 
(b) The TRIMs Agreement does not establish a “new balance of rights and obligations”; 
rather, it merely elaborates on the FIRA Pa nel’s decision regarding the coverage of 
Article III of GATT  
6.40 The United States asserts that the TRIMs Agreement establishes a “new balance of rights and 
obligations,” and that Indonesia ignor es it (See Section VI.E.3).  These allegations are unfounded.  It 
should go without saying that any  contract, memorandum of understanding or trade agreement 
establishes a “balance of rights and obligations”.  The real question, however, is:  what was agreed to?  Indonesia has demonstr ated conclusively
 that the developing countries successfully countered the 
developed states’ drive to increase the sc ope of what became the TRIMs Agreement. 
6.41 As Indonesia has demonstrated, the TRIMs Ag reement was conceived of and drafted in order 
to further specify the application of Article III of the GATT to trade-related investment measures.  No 
provision of the TRIMs Agreement br ings Indonesia’s subsidies within the scope of the Agreement. 
6.42 In further specifying Article III, the TRIMs Ag reement elaborates on the decision of the Panel 
in Canada-Administration of the Fo reign Investment Review Act (FIRA)  (7 February 1994), BISD 
30S/140.  The United States, in discussing this fa ct, attempts to undercut Indonesia's argument by 
focusing on the word “essentially” in the followi ng passage from paragraph 7.185 of Bananas III : 
the TRIMs Agreement essentially interp rets and clarifies the provisions of 
Article III (and also Article XI) where trade-related investment measures are concerned. 
The United States asserts that “essentially” indicates that the TRIMs Agreement must cover other items 
(See Section VI.E.3).  But the Unit ed States ignores, as it  must, the very next sentence from the Panel 
report, which clarifies that the Panel did not use “esse ntially” to indicate that the phrase following it is 
false or incomplete: 
Thus the TRIMs Agreement does not add to or  subtract from those GATT obligations, 
although it clarifies that Ar ticle III:4 may cover inve stment-related measures. 
This quotation pretty much sums it up.  It is a precise
 statement of Indonesia’s position. 
6.43 Thus, the United States, in its arguments, runs  afoul of the very criticism it levies against 
Indonesia.  It is complainants, not Indonesia, that co me before this Panel seek ing to revisit and rewrite 
the TRIMs Agreement by having the Panel adopt in terpretations explicitly rejected during the 
negotiations. 
6. Japan is in Error; the Government most ce rtainly does not view the National Car Programme  
as an investment programme  
6.44 The two measures which make  up the National Car Programme ar e subsidies.  This has been 
the consistent view of Indonesia since this dispute began.  When  the measures initially were 
introduced, the Indonesian Government, on the basis of an incomplete and unsound analysis of the 
legal nature of the subsidies under the WTO Agreem ents, notified them as TRIMs.  Upon a more 
exacting legal analysis, the Government realized its mistake, withdrew its TRIMs notification and 
notified the measures as subsidies. 
6.45 From time to time, some I ndonesian officials have referred to the measures as relating to 
industrial development, trade, investment, etc.  Thes e references do not and cannot alter the nature of 
the measures.  Nor do the statements of various officials from competing bur eaucracies change the 
Government’s position that the measur es are subsidies.  As demonstrated, the measures are subsidies to WT/DS54/R, WT/DS55/R, 
WT/DS59/R, WT/DS64/R 
Page 137 
 
 
a domestic industry to encourage its development.  Alternative descriptions or  characterizations cannot 
alter this fact. 
7. The underlying decree, rules and regulations, a nd Indonesia’s statements  to the Committee on 
TRIMs establish that the National Ca r Programme does not involve a TRIM  
6.46 Japan claims that beca use one implementing decree314 contains the word “investment” in its 
title (which, according to Japan, means that it addr esses the measure as an investment measure), the 
subsidy must be a TRIM.  This is incorrect.  Of the large number of regula tions and decrees regarding 
the National Car Programme, Japan selected a single re gulation on the basis of its heading.  Japan then 
arbitrarily affixed the designation “key” to that singl e regulation and, finally, promoted it to the rank of 
evidence that the National Car Programme is an “investment measure.” 
6.47 The seminal regulation for the February 1996 me asure is Presidential Instruction No. 2/1996 of 
19 February 1996.  It simply instructs two Minister s, the Minister of Industry & Trade (MIT) and the 
Minister of Finance (MOF), to perform detailed activities.  It also charges the Minister for the Mobilization of Investment Funds/C hairman of the Investment Coor dinating Board (BKPM) with the 
very general task of “safeguarding” the development of the national car industry. 
6.48 On 19 February 1996, the same day that Pres idential Instruction No. 2/1996 was issued, both 
MIT and MOF issued their implementation decrees.  MIT implemented the Presidential Instruction by 
issuing Decree No. 31/MPP/SK/2 /1996; MOF issued implementi ng Decree No. 82/KMK.01/1996.
315 
6.49 The BKPM implementing regulation appeared ei ght days later, on 27 February 1996.  BKPM 
had to wait until further implementing regulations were  issued by the two principal ministries before 
ascertaining what secondary supporti ng regulation was approp riate for it to promulgate.  The principal 
implementing regulation (supplementing the two decree s cited above) was issued by MIT’s Director 
General for the Metal, Machin ery & Chemical Industries (D ecree No. 002/SK/D J-ILMK/II/1996), 
appointing a Pioneer Motor Vehicle Industrial Enterpri se.  Only after the Director General issued this 
decree did BKPM issue the Investment Provisions for the Realization of the National Automobile 
Industry.  Even then, on closer scru tiny, the “Investment Provisions” turn out to be merely a rehash of 
the earlier MIT Decree (No. 31/MPP/SK/2/1996). 
6.50 Why did BKPM have to issue a regulation at all?   It had to issue the regulation because TPN is 
a Domestic Capital Investment  Company (a PMDN), and all PM DN companies operate under the 
auspices of BKPM.  BKPM Decree No. 01/SK/1996 is not a “key implementing regulation.”  It is 
merely an administrative and proced ural regulation that could not be issued prior to the MIT and MOF 
decrees.  Moreover, it simply repeat s another Ministerial decree.  Ag ain, the February 1996 national car 
measure is a subsidy and Comp lainants’ misrepresentations do not bring it under the TRIMs 
Agreement. 
6.51 Japan similarly misuses Indonesia’s presen tation at the 30 September 1996 meeting of the 
Committee on TRIMs.  At this meeting, Indonesia responded to ques tions posed by the delegation of 
Japan and mentioned at least seven obj ectives of the National Car Programme: 
                                                      
     314Decree of the State Minister for the Mobilization of Investment Funds/Chairman of the Investment 
Coordinating Board No. 01/SK/1996 regarding Investment Regulations within the Framework of the Realization 
of the Establishment of the National Automobile Industry  (27 February 1996).  
     315MIT and MOF had been in close coordination with the Office of the President in the planning and 
drafting of the regulations giving birth to the national car.  That is why their implementing regulations appeared the same day as the regulation they are intended to implement.
 WT/DS54/R, WT/DS55/R, 
WT/DS59/R, WT/DS64/R Page 138 
 
 
- to improve the competitiveness of local companies and strengthen overall industrial 
development; 
- to promote the competitiveness of  Indonesia’s automotive production; 
- to develop the capacity of multip le-source auto parts and components; 
- to encourage the development of the automotive industry and the automotive 
component industry; 
- to bring about major structural change s in the Indonesian automobile industry; 
- to encourage the transfer of technology an d contribute to large-sc ale job creation; and 
- to encourage car companies to increase their local content, resulting in a rapid growth 
of investment in the auto mobile component industry. 
6.52 Like Japan’s selective use of  Indonesia’s regulations  to buttress its asse rtion that Indonesia’s 
national car policy is an investment measure, Japan again has acted arbitrarily here.  It has chosen one 
of the seven objectives to carry its allegation that  the February 1996 national car measure is a TRIM 
and, even then, its conclusi on does not reflect the facts. 
6.53 The single sentence used by Japan as evidence that the national car measure is a TRIM is in 
item 4 of page 2 of Indonesia’s response: 
These policies are expected to encourage car companies to increase their local content, 
resulting in a rapid growth of investme nts in the automotive component industry. 
But Japan’s interpretation even of this one (of se ven) goals is inaccurate.  The expectation and, 
therefore, the objective is directed toward car companies increasing their local content.  The measure is 
a subsidy conditioned upon the increasing use of local c ontent.  The “rapid growth of investments” is 
not an objective of the national car measure; it is only a side product of such objective. 
8. The measures are not investment measures but subsidies granted to an automaker to use 
domestic parts and components  
6.54 The Indonesian measures are not  investment measures, but subs idies granted to an automaker 
to use domestic parts and componen ts, for the following reasons:   
1. The subsidies are granted by the Minister of Finance. 2. The regulating authority over the automake r vests with the Mini ster of Industry and 
Trade. 
3. The involvement of the Minister for th e Mobilization of Investment Funds/Chairman 
of the Capital Investment Coordinating Board is purely administrative and is required 
only because the automaker happens to be a domestic capital investment company. 
4. The considerable number of regulatio ns providing and implementing the subsidy do 
not once refer to "investments". WT/DS54/R, WT/DS55/R, 
WT/DS59/R, WT/DS64/R 
Page 139 
 
 
5. Although subsidies may at time s indirectly a ffect investment decisi ons of the recipient 
of the subsidy or other parties, these de cisions are not the object, but rather the 
unintended result, of the subsidy.  Indeed, increased investment indirectly results from 
many subsidies. 
6. Moreover, even if the TRIMs Agreement di d apply, the subsidies are not inconsistent 
with Article III of GATT 1994. 
9. The measures are not TRIMs that violate Article III:2 of GATT 1994  
6.55 The government measures are not TRIMs.  Specific subsidies by definition discriminate 
between products benefiting from the subsidies a nd those that do not.  If GATT Article III:2 and 
Article III:4 were applied every time a specific subsidy came up, virtually all actionable subsidies 
granted by developing countries would be undone by GATT Articles III:2 and III:4 and the TRIMs 
Agreement.  Article 32.1 of the SCM Agreement unequivocally provi des that GATT actions against 
subsidies are to be resolved unde r the SCM Agreement.  It is th e SCM Agreement that deals with 
actionable subsidies under Art. 27.3, not the GATT. 
10. The TRIMs Agreement is not lex specialis  to any dispute  
6.56 Unlike the SCM Agreement, the TRIMs Agreement is not lex specialis  to any dispute.  By its 
very terms it cannot be.  For example, Article 2. 1 of the TRIMs Agreement states that the TRIMs 
Agreement operates "[w]ithout prejudice to other rights and obligations under GATT 1994". 
6.57 The Article continues, stating, "no Member shall apply any TRIM that is inconsistent with the 
provisions of Article III or Article XI of GATT 1994".  (This passage breathes new life into Article III 
of GATT 1994 which, complainants assert, Indonesia's lex specialis  and conflict arguments would 
render moribund.)  Thus the TRIMs Agreement itself states that it is naught  but a general agreement 
that depends upon the General Agreement to have any meaning whatsoever.  
6.58 Given this, other Annex 1A and 1C Agreements  can apply and, more importantly, in the case 
of those agreements which are  lex specialis , such as the SCM Agreement, control certain disputes, such 
as this one, to the complete exclusion of the TRIMs Agreement. 
E. Arguments made in rebuttal to Indonesia' s responses to the claims under the TRIMs 
Agreement  
1. Rebuttal arguments made by Japan  
6.59 Japan  makes the following arguments in rebuttal to  Indonesia's responses to the claims under 
the TRIMs Agreement: 
 (a) The February 1996 Programme  violates TRIMs Article 2.1  
6.60 As demonstrated (See Section VI.A), the February 1996 Programme violates GATT 
Article III, is a "trade-relate d investment measure," and thus  violates TRIMs Article 2.1. WT/DS54/R, WT/DS55/R, 
WT/DS59/R, WT/DS64/R Page 140 
 
 6.61 Indonesia argues that the TRIMs Agreemen t only interprets GATT Article III and GATT 
Article III is not applicable to the February 1996 Pr ogramme.  As discussed (See Section VI.D), GATT 
Article III does apply and the Progr amme is inconsistent with it.
316   
6.62 Indonesia also attempts to evade its violati on of the TRIMs Agreement by arguing that the 
Illustrative List of the TRIMs Agreement is "purely i llustrative" and that the Li st cannot alter the "fact" 
that GATT Article III is inapplicable.  Once ag ain, however, the Government of Japan has amply 
demonstrated that Article III does in fact apply.  It appears, moreover, that  Indonesia misunderstands 
Japan's argument.  The Government of Japan does no t argue that the National Car Programme violates 
TRIMs Article 2 because it is on the Illustrative List, but that it violates TRIMs Article 2 because it is a 
TRIM and it is inconsistent with GATT Article III.  Thus, Indonesia's  argument about the nature of the 
List is irrelevant.   
6.63 Therefore, the February 1996 Programme is inconsistent with the TRIMs Agreement and the 
Government of Indonesia's contra ry argument lacks any merit. 
 (b) The SCM Agreement does not excuse in donesia's violations of the TRIMs Agreement  
6.64 Indonesia seems to argue that there is a conflict between SCM Article 27.3 and TRIMs 
Article 2.1, such that SCM Article 27.3 excuses the violations of TRIMs Articl e 2.1.  However, that 
argument also lacks any merit.  These provisions do not conflict and Indonesia's assumption that the 
SCM Agreement would prevail in a hy pothetical conflict is unfounded. 
6.65 As discussed (See Section V.E.1), the Bananas III  Panel found that a conflict between two 
WTO Agreements can only arise if the two esta blish "mutually exclusive" obligations or one 
"explicitly permits" what another prohibits.  As already shown with respect to GATT Article III, 
however, the SCM Agreement neither creates obligations that are "m utually exclusive" with TRIMs 
Article 2.1 nor "explicitly permits" violations of TRIMs Article 2.1. 
6.66 Rather, the TRIMs and SCM Agreements create  “different or complementary obligations.”  
The TRIMs Agreement applies to TR IMs regardless of whether such TRIMs are also “subsidies” under 
the SCM Agreement and the SCM Agreement applies to “subsidies” regardless of whether such 
“subsidies” are also TRIMs.  A WTO Member can, and therefore must, comply with the provisions of both Agreements with respect to a measure that is both a “subsid y” under the SCM Agreement and a 
TRIM under the TRIMs Agreement.  Nothing in the text, context, object or purpose of the TRIMs 
Agreement supports the Indonesian contention that a TRIM is no longer a TRIM simply because the 
administering authority prefers to call it something else. 
6.67 This conclusion is strengthened by a review  of the TRIMs and SCM pr ovisions that establish 
the transition periods for developing country Member s.  SCM Article 27.3 allows developing countries 
a period of time (five years for Indonesia) before they must comply with the prohibition on subsidies 
contingent on the use of domestic over imported pr oducts.  TRIMs Article 5.1 likewise also allows 
developing country Members time be fore they must comply with the TRIMs Article 2 provisions on 
                                                     
 
     316The Government of Indonesia misunderstands the na ture of the TRIMs Agreement.  Contrary to 
Indonesia’s assertion that the “TRIMs Agreement does not add any new obligations; it merely interprets Article 
III,” it in fact contains a variety of  procedural and substantive obligations .  The fact that TRIMs Article 2.1 
references GATT Article III does not mean that the TRIMs Agreement “merely interprets” Article III, as 
Indonesia would have it.  Instead, the principle of pacta sunt servanda  requires that the TRIMs Agreement must 
apply in accordance with its terms to all measures with in its scope (i.e., to all TRIMs).  The language from 
Bananas III  quoted by Indonesia fails to support its position.  That language shows that the Bananas III  Panel 
correctly noted that TRIMs Article 2.1 neither adds to  nor detracts from GATT obligations.  All that signifies, 
however, is that Article 2.1 does not modify the scope of the GATT provisions in cases where those provisions apply. WT/DS54/R, WT/DS55/R, 
WT/DS59/R, WT/DS64/R 
Page 141 
 
 
local content requirements which ar e inconsistent with GATT Article III, provided that the measure 
existed when the WTO Agreements entered into fo rce (i.e., on 1 January 1995) and that the Member 
notified the measure within ninety days of such entry into force (i.e., by 1 April 1995).317  For TRIMs 
that are also “subsidies” under the SCM Agreemen t, it is clearly possible for developing country 
Members to receive the benefits of the transitiona l arrangements under both Ag reements by acting in 
accordance with the terms of each Agreement.  Moreover, if such TRIMs should be subject only to the SCM Agreement, it would render the specifically crafted notific ation requirement under the TRIMs 
Agreement, for the substantial part  of its coverage , meaningless.  
6.68 Finally, if a conflict may some day arise be tween the TRIMs and SCM Agreements, there is no 
reason to assume - as Indonesia apparently does - that the SCM Agreement would prevail in such a 
conflict.  Indonesia’s faulty assu mption seems to result from its mistaken equating of the GATT and 
the TRIMs Agreement, discussed above.  The plain te xt of the General Interpretative Note refutes this 
assumption.  That Note expressly provides that Annex 1A Agreements - including both
 the TRIMs 
Agreement and the SCM Agreement - prevail over the GATT to the extent of a conflict.  The General 
Interpretative Note thus gives th e TRIMs and SCM Agreements alike a hierarchical status above the 
GATT in the event of a conflict, but it does not es tablish any hierarchy between the two.  Recent 
Appellate Body Reports al so support the conclusion.318 For example, in Canada - Certain Measures 
Concerning Periodicals , a WTO panel firmly rejected an argument by Canada that the scope of the 
GATS and the GATT were mutually exclusive, holding that: 
The ordinary meaning of the texts of GATT 1994 and GATS as well as Article II:2 of 
the WTO Agreement, taken together, indi cates that obligations under GATT 1994 and 
GATS can co-exist and that the one does not ov erride the other.  If the consequences 
suggested by Canada were intended, ther e would have been provisions similar to 
Article XVI:3 of the WTO Agreement or the General Interpretative Note to Annex 1A 
in order to establish hierarchical orde r between GATT 1994 and GATS.  The absence 
of such provisions between the two instru ments implies that GATT 1994 and GATS are 
standing on the same plain in the WTO Agreement, wit hout any hierarchical order 
between the two."319 
The WTO Appellate Body approved this aspect of the panel decision in the Periodicals  case, quoting 
the above reasoning by the panel and noting that:  "T he entry into force of the GATS ... does not 
diminish the scope of application of GATT 1994".320  Since GATS is not covered by the General 
Interpretative Note (which gives WTO agreements in Annex 1A other than GATT precedence over 
GATT in the event of a conflict), GATS is on equal footing with GATT.  In the same way, the TRIMs 
Agreement is on equal footing with the SCM Agreem ent.  Thus, the Panel should not, without any 
textual basis, elevate one Anne x 1A Agreement over the others. 
                                                      
     317In this connection, India, a third party, stated at th e first meeting that "[w]hile we agree that delay in 
notifying measures should ideally not occur, it must at the same time also be realized that small delegations 
often have constraints of resources which at times leads to an unintended delay in the notification of their 
measures."  This point is irrelevant to our arguments and it is not necessary for this Panel to decide the 
procedural question raised by India.  It is clear that the issue in this dispute is not merely procedural because the Government of Indonesia introduced the National Car Programme after the entry into force of the WTO
, even 
after the deadline specified by Article 5.1 of the TRIMs Agreement, and it could never have notified the 
measure in accordance with Article 5.1, needless to say, regardless of  how large a delegation it has in Geneva.  
     318 Appellate Body Report on Canada - Periodicals , pp.18-19.  Appellate Body Report on Bananas III , 
paras. 221-222. 
     319Report of the Panel on Canada - Periodicals , WT/DS31/R, para. 5.17. 
     320Report of the Appellate Body on Canada - Periodicals , page 19. WT/DS54/R, WT/DS55/R, 
WT/DS59/R, WT/DS64/R Page 142 
 
  (c) Incentive measures are covered by the TRIMs Agreement
 
6.69 The Government of Indonesia also contends  that “no consensus exist[ed] that subsidy 
measures also are subject to the disciplines of the TRIMs Agreement,” that its incentives to encourage purchases of domestic goods over imports "are not TRIMs;  they are subsidies", and thus “they are 
subject to the disciplines of the Subsid ies Agreement”.  (See Section VI.D). 
6.70 However, Indonesia's allegation contradicts the text of the TRIMs Agreement.  The text of the 
Agreement requires only two elements for a measure to  constitute a violation of TRIMs Article 2.1:  
first, the measure is an "investm ent measure related to trade in go ods";  and second, the measure is 
"inconsistent with the provi sions of [GATT] Article III or Article XI".  As described in paragraph 3.14 
above, it has been firmly established that GATT Arti cle III:4 applies not only to mandatory measures 
but also to measures with which a company may comply voluntarily to obtain a benefit.  Therefore, it is clear that TRIMs Article 2. 1 also applies to such voluntary measur es, or incentive measures, as long as 
they fall within the concept of "TRIMs".    
6.71 The Illustrative List in the Annex of th e TRIMs Agreement also demonstrates that the 
February 1996 Programme is a TRIM.  That list e xplicitly provides that prohibited TRIMs include any 
local content requirement "com pliance with which is necessary to obtain an advantage". 
6.72 Because the text of the TRIMs Agreement clearly and unambiguously establishes that it 
applies not only to mandatory measures but also to measures "compliance with which is necessary to 
obtain an advantage", there is no need to resort  to the drafting history to understand this point.
321  In 
fact, however, a review of the preparatory work of  the TRIMs Agreement confirms - unsurprisingly, in 
view of the plain text - that the negotiators decide d to include so-called "in centive measures" in the 
TRIMs Agreement. 
6.73 Although the preparatory work shows active discussion about the definition of a "TRIM" 
throughout the negotiations and a wide variety of views were expressed322, at the final stage a 
consensus was created, as discussed below.  
6.74 Late in the TRIMs negotiations  (i.e., October 1991 th rough 20 December 1991), the Chairman 
distributed texts for the purpose of discussion.  The key phrase c oncerning incentive measures (i.e. , 
“TRIMs .... compliance with which is necessary to obtain advantage”) was included in the Chairman's 
first draft, removed in the revised text of 25 November 1991 at the behest of India and other developing 
countries, and revived in the Chairm an’s second draft after developed countries objected to the earlier 
deletion.  Ultimately, this phras e was finally adopted, with the de veloping countries accepting it in 
exchange for the developed countri es' acceptance of the five-year transition period.  Indeed, the 
negotiating group rejected a proposal by one Member that would have expre ssly limited TRIMs to 
mandatory measures.  
6.75 It is also relevant to note that the fi nal TRIMs Agreement did not incorporate a position 
advanced by some developing countries that would have provided for only the disciplines of the SCM 
Agreement to apply, when a "subsidy" (as defined in the SCM Agreement) was granted contingent on 
meeting certain requirements, such as local content requirements.  That position was rejected, because 
most Members recognized that it w ould create too large a loophole in the TRIMs Agreement.  This 
                                                      
     321Vienna Convention on the Law of Treaties, arts. 31-32. 
     322See Submission by Japan (MTN.GNG/NG12/W/12) dated  9 June 1988;  Submission by Japan 
(MTN.GNG/NG12/W/20) dated 13 September 1989;  Submission by India (MTN.GNG/NG12/W/18) dated 11 
September 1989;  Submission by the European Communities (MTN.GNG/NG12/W/22) dated 16 November 
1989;  Submission by the Nordic Countries (MTN.GNG/NG12/W/23) dated 22 November 1989;  and Communication from the United States (MTN.GNG/NG12/W/24) dated 24 January 1990. WT/DS54/R, WT/DS55/R, 
WT/DS59/R, WT/DS64/R 
Page 143 
 
 
loophole was avoided by leaving both the SCM Agre ement and the TRIMs Ag reement silent about 
their relationship, thereby ensuring that the discip lines of both would apply to measures that were both 
TRIMs and "subsidies." 
6.76 Thus, it is clear that the positions advanced in the quotations from the preparatory work cited 
in Indonesia's First Submission were not adopted in th e final text of the TRIMs Agreement.  Of course, 
it is the text of a treaty itself that governs and any views expressed during th e negotiations that do not 
comport with the text carry no weight.323  
6.77 Finally, subsequent practice under the WTO,  which is relevant to its interpretation324, confirms 
that TRIMs that fall within the SCM definition of "s ubsidy" have nevertheless been understood to also 
be subject to the TRIMs Agreement.  This is demo nstrated by the fact that even many developing 
country Members have included such measures in their notifications to the TRIMs Committee under 
Article 5.325   In fact, the Government of Indonesia itself notified the TRIM s Committee of the 
incentive measures in its 1993 au tomobile programmes, although it did so late and later withdrew the 
notification, apparently in c onnection with these proceedings.326 
 (d) Indonesia's arguments would render parts of the TRIMs Agreement virtually 
meaningless  
6.78 Finally, it should also be noted that Indonesia's argument that incentive measures should be 
governed only by the SCM Agreement, not by the TRIMs Agreement, would render parts of the 
TRIMs Agreement virtually meaningless. 
6.79 As discussed (See Section VI.A), the text of the TRIMs Agreement clearly shows that an 
incentive measure, or a measure "compliance with which is necessary to obtain an advantage", is 
within the coverage of the Agreement.  It appears th at a TRIM that is an incentive measure would very 
often also be a "subsidy" under the SCM Agreement.  Therefore, if an interpretation were taken that a 
measure, which constitutes both a "TRIM" under the TRIMs Agreement and a "subsidy" under the 
SCM Agreement, shall be governed only by the SCM Agreement, that would ne gate a substantial part 
of the TRIMs Agreement coverage. 
6.80 Accordingly, a "TRIM" under the TRIMs Agreement should not be excluded from the 
coverage of the TRIMs Agreement, only because it constitutes a "subsidy" under the SCM Agreement. 
2. Rebuttal arguments made  by the European Communities  
6.81 The following are the European Communities'  rebuttal arguments to Indonesia's responses to 
the claims under the TRIMs Agreement: 
                                                      
     323See Vienna Convention on the Law of Treaties, arts. 31-32.  See also  Appellate Body Report on 
Japan - Alcoholic Beverages II , pp. 10-12. 
     324See Vienna Convention on the Law of Treaties, art. 31(3)(b). 
     325Incentive measures were notified, for ex ample, by Venezuela, on 12 April 1995, 
G/TRIMS/N/1/VEN/1, by South Africa, on 8 May 1995, G/TRIMS/N/1/ZAF/1, and by the Dominican Republic, on 10 May 1995, G/TRIMS/N/1/DOM/1. 
     326Notification under Article 5.1 of the Agreement on Trade-Related Investment Measures, Indonesia 
(G/TRIMS/N/1/IDN/1) (Japan Exhibit 17).  Notificati on under Article 5.1 of the Agreement on Trade-Related 
Investment Measures, Indonesia Addendum (G/TRIMS/N/1/IDN/1/Add.1) (Japan Exhibit 18). WT/DS54/R, WT/DS55/R, 
WT/DS59/R, WT/DS64/R Page 144 
 
  (a) The measures at issue infringe GATT Article III and are therefore contrary to 
Article 2.1 of the TRIMs Agreement  
6.82 Indonesia argues that the me asures at issue do not infringe Article 2.1 of the TRIMs 
Agreement because they are not w ithin the scope of, and therefore cannot be “inconsistent” with, 
Article III. The European Communities has shown (see Sections V.A.2 and V.C.2) that the measures at 
issue are inconsistent with GATT Articles III:2 and/or III:4. Therefore, they are contrary also to Article 2.1 of the TRIMs Agreement. 
 (b) Article 2.1 of the TRIMs Agreement lays down a legally distinct obligation
 
6.83 Indonesia claims that  the TRIMs Agreement “interprets GATT Article III and does not add 
new obligations”.  Indonesia reli es for this proposition on the following passage of the Panel Reports 
on EC regime concerning the Importatio n, Sale and Distribution of Bananas  : 
with the exception of its transitional pr ovisions, the TRIMs Agreement, essentially 
interprets and clarifies the provisions of Article III (and also Article XI) were trade-related investment measures concerned. Thus the TRIMs Agreement does not add 
to or subtract from those GA TT obligations, although it clarif ies that Article III:4 may 
cover investment matters
327. 
6.84 Properly interpreted, this pa ssage means that, in substance , the TRIMs Agreement is limited to 
restate and clarify the obligations laid down GATT Article III. Formally , however, Article 2.1 of the 
TRIMs Agreement lays down an obligation which is  distinct from the obligation contained in GATT 
III. This is confirmed by the prior finding in the same Panel Report that the provisions of GATT and 
the TRIMs Agreement were “equally applicable” to the European Communities’s import licensing 
procedures.328  Furthermore, if Article 2.1 of the TRIMs did not provide for an additional and distinct 
obligation, it would have been superfluous to stipul ate in Article 3 of the TRIMs Agreement that all 
exceptions under GATT 1994 shall  apply also to th e provisions of the TRIMs Agreement. Likewise, it 
would have been unnecessary to sa te in Article 4 of the TRIMs Agreement that developing Members 
shall be free to deviate from Article 2  “to the extent and in such manner” as Article XVIII of GATT 
and other related legal instruments permit those Members to deviate from GATT Articles III and XI. 
 (c) Even if it was found that there is a “c onflict” between GATT Ar ticle III and the SCM 
Agreement, that conflict would not precl ude a violation of Article 2 of the TRIMs 
Agreement   
6.85 The General Interpretative Note to Annex 1A only applies to conflicts between GATT and the 
other Annex 1A Agreements. It does not  apply to conflicts between the TRIMs Agreement and the 
SCM Agreement.  Accordingly, even if it was foun d by the Panel that there is a “conflict” between 
GATT Article III and the SCM Agreement, such “conf lict” would not preclude a violation of the 
legally distinct obligation contained in Article 2 of the TRIMs Agreement.  In fact, the existence of a 
“conflict“ between the SCM Agreement and GATT Ar ticle III would not make the measures concerned 
“consistent” with GATT Article III but merely exclude the application of that provision.  Quite to the 
contrary, the existence of a “conflict” between the SCM Agreement and GATT Article III would presuppose necessarily that the measures  are “inconsistent” with the latter. 
                                                     
 
     327See e.g. WT/DS27/R/USA, adopted 25 September 1997, at para 7.185. 
     328Id. at para 7.158. WT/DS54/R, WT/DS55/R, 
WT/DS59/R, WT/DS64/R 
Page 145 
 
 
 (d) The TRIMs Agreement may apply to subsidies  
6.86 The TRIMs Agreement applies to any trade related investment measure which is inconsistent 
with GATT Article III.  Given that GATT Article III may apply to measures which are “subsidies” within the meaning of the SCM Agreement, it foll ows that the TRIMs Agreement may also apply to 
“subsidies”. This is confirmed by the Illustrative List.  In accordance with its ordinary meaning,  the 
term “advantage” used in the Illustrative List may include also “subsidies” within the meaning of the 
SCM Agreement.
329 
3. Rebuttal Arguments made by the United States  
6.+87 Noting that it agrees with the points made by  Japan and the EC at the second meeting of the 
Panel, and, in particular, the arguments made by  the European Communities  (See Section VI.E.2(b)), 
the United States  makes the following arguments in rebuttal  to Indonesia's responses to the claims 
under the TRIMs Agreement: 
 (a) The tariff and tax incentives under the 1993 Programme and the National Car 
Programme are inconsistent with Article 2 of the TRIMs Agreement   
6.88 With respect to Indonesia’s vi olations of Article 2 of the TR IMs Agreement, Indonesia argues 
that the TRIMs Agreement imposes no new obligations, but is merely an interpretation of Article III of 
GATT 1994.  Indonesia, of course, must advance this ar gument in light of its “c onflict” argument (the 
flaws in which we have addressed (See Section V.E.III)), because th e General interpretative headnote 
to Annex 1A addresses only allege d “conflicts” between the GATT 1994 and the provisions of another 
Annex 1A agreement, not alleged “conflicts” between two or more A nnex 1A agreements other than 
GATT 1994. 
6.89 In advancing its argument, Indonesia relies on a statement made by the panel in the Bananas III  
case at para. 7.185 of the report.330  Indonesia argues that the panel ruled that the TRIMs Agreement 
does not add any new obligations.  Howeve r, that is not what the Bananas III  panel said.  While the 
panel said that the TRIMs Agreement “essentially” interprets Article III and Article XI of GATT 1994, 
the panel also noted that the TRIMs Agreement cl arified those obligations and granted transition 
provisions.  Moreover, the panel’s hol ding simply was that in the context of that particular case, the 
panel did not need to make a specific ruling under the TRIMs Agreement, because it already had found 
                                                      
     329As recalled by Indonesia, one of the issues discussed during the negotiations of the TRIMs 
Agreement was whether the definition of TRIMs should c over subsidies. All the negotiating positions cited in 
Indonesia’s submission correspond to th is phase of the negotiations.  Eventually, however, no agreement could 
be reached to prohibit (or otherwise limit the use) of any other TRIMs beyond those already prohibited by Articles III and XI of GATT 1947. In vi ew of that, it was no longer considered  necessary to define the notion of 
TRIMs, with the consequence that  the question whether or not to include subsidies in that definition became 
moot. 
It is worth noting that, despite the “lack of consensus” alleged by Indonesia, a majority of the Members 
which have made notifications under Article 5.1 of the TRIMs Agreement  (15 out of a total of 24, according to 
the European Communities’s own estimate) have included therein TRIMs linked to tax and tariff benefits which 
prima facie  are subsidies within the meaning of Article 1 of the SCM Agreement. Namely, the list of such 
Members include Argentina, Chile, Colombia, Costa Rica,  Dominican Republic, Egypt, Indonesia (withdrawn), 
Malaysia, Pakistan, Poland, Romania, Thailand, Uruguay, Venezuela and South Africa. Some of the notified 
schemes are remarkably similar to the ones at issue in this dispute. For instance, South Africa grants a rebate 
from an excise tax to motor vehicles which attain a minimum local content (G/T RIMS/N/1/ZAF/1), whereas 
Venezuela applies a lower import duty on imports of au tomotive parts and components by car assemblers which 
meet certain local content requ irements (G/TRIMS/N/1/VEN/1). 
     330European Communities - Regime for the Importation, Sale and Distribution of Bananas , 
WT/DS27//R, Report of the Panel, as modified by the Appellate Body, adopted 25 September 1997, para. 7.185. WT/DS54/R, WT/DS55/R, 
WT/DS59/R, WT/DS64/R Page 146 
 
 the measures in question to be viol ative of Article III:4.  That li mited holding is far different from 
holding that the TRIMs Agreement does not, in itself, impose obligations. 
6.90 Indeed, the Bananas III
 panel itself recognized that th e TRIMs Agreement reflected a new 
balance of rights and obligations; namely, a trade-of f between the clarification of obligations and the 
grant of transition periods.  An additional trade-of f that the panel did not mention was the addition of 
transparency requirements in the form of the notific ation provisions in Article 5.  For purposes of our 
Autos  dispute, the most important clarification was that “incentive-based” measures, such as 
Indonesia’s local content incentives, are covered. 
6.91 As the Appellate Body stated in the Wool Shirts  case, page 16, where an agreement reflects a 
carefully drawn balance of rights and obligations of Members, “[t]hat balance must be respected”.331  
Rather than respecting the balance reflected in the TRIMs Agreement,  Indonesia would have this Panel 
ignore it. 
6.92 Indonesia’s other argument is that the dr afting history of the TRIMs Agreement somehow 
demonstrates that the TRIMs Agreement was not intended to impose a new balance of rights and 
obligations.  This argument, t oo, is easily disposed of. 
6.93 Indonesia cites to a st atement made by the United States  during the TRIMs negotiations that 
allegedly demonstrates the subordina te nature of the TRIMs Illustrati ve List.  However, the statement 
in question was made in the context of a United Stat es proposal that was not adopted, and, thus, is of 
limited, if any, relevance. 
6.94 Second, Indonesia refers to the fact that an  issue in the negotiations was whether subsidies 
could be considered an “incentive” or a “condition for receipt of an advantage” and, thus, subject to the 
TRIMs Agreement.  As discussed previously in c onnection with Indonesia’s “co nflicts” argument, the 
drafting history of the TRIMs Agreem ent demonstrates:  (1) that local content subsidies are covered by 
the TRIMs Agreement; and (2) that Article 27.3 of the SCM Agreement was added at the last minute to ensure that subsidies permitted by the transitiona l provisions of the TRIMs Agreement would not be 
precluded by the SCM Agreement.  Indeed, the very fact that Article 27.3 was added to the SCM 
Agreement demonstrates that the draf ters intended that local content subsidies would be covered by the 
TRIMs Agreement. 
6.95 Third, Indonesia refers to a document, "US Paper on WTO Agenda"
332, which states that 
"[o]ther issues that appear to require additional fo llow [sic] include:  ... the relationship of the TRIMs 
Agreement with the Agreement on Subsidies and Countervailing Measures."  The document was 
drafted for the so-called "Invisibles  Committee" (senior Capital-Based Officials), which functions as an 
ad hoc and unofficial steering group of  sorts.  Other participants in the Committee had asked the United 
States to draft the paper as a means of "kick-starting" a collective assessment of the Singapore Ministerial and the ensuing and continuing work acr oss the spectrum of WTO activities.  Thus, the 
paper was a discussion paper, and was intended to provide a representative mix of Members' actual or 
perceived thoughts about where the WTO has been a nd where it ought to go.  It definitely was not 
intended to convey US positions on particular issues. 
6.96 With respect to the discussion of the TRIMs Agreement, the paper draws no conclusions about 
the legal relationships between the agreements cited, nor does it even suggest that there are conflicts among them.  Instead, it merely ex presses the commonsense and obvious  point that in considering the 
future work of the TRIMs Commit tee, it might be appropriate to look at how the three agreements 
                                                     
 
     331United States - Measures Affecting Imports of Woven Wool Shirts and Blouses , WT/DS33/AB/R, 
Report of the Appellate Body adopted 23 May 1997, page 19. 
     332US Exhibit 40. WT/DS54/R, WT/DS55/R, 
WT/DS59/R, WT/DS64/R 
Page 147 
 
 
relate to one another given th eir obvious overlap.  Given the views that Indonesia already had 
articulated in the TRIMs Committee and the SCM Co mmittee, it is hardly surprising that this issue 
would be identified as one for furthe r discussion.  Also, by the time th e paper was drafted, there already 
had been several "sleights of hand"  by several Members that were ma king multiple notifications under 
the TRIMs and SCM Agreements and then later "with drawing" some.  Because a measure can be both 
a TRIM and a subsidy in substance, the italicized "Question for Discussion" in the paper appropriately 
suggests that Members should  take a look at all of the notifica tion provisions to see where gaps from 
one could fill in for another, or where improvem ents are needed in order to monitor phase-out 
obligations across agreements. 
6.97 Thus, even if this Panel should find incorrec tly that Article III:4 of  GATT 1994 does not apply 
to the Indonesian tax and tariff incentives due to an  alleged “conflict” with the SCM Agreement, those 
measures nonetheless violate Article 2 of the TRIMs Agreement. 
 (b) The Indonesian measures are "t rade related investment measures " 
6.98 Indonesia also argues that the measures in question do not violate Article 2.1 of the TRIMs 
Agreement because they are not "investment" measures.  In the view of the United States, if a measure 
described in the Illustrative List of the TRIMs Ag reement is being applied,  nothing more need be 
shown to establish an Article 2 vi olation.  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 enterpri se, putting the measure within the coverage of the 
TRIMs Agreement.  The United Stat es is unaware of anything in th e negotiating history of the TRIMs 
Agreement that would warrant a different conclusion. 
6.99. Moreover, even if the identification of a rela tionship to an investment were necessary to prove 
an inconsistency with the TRIMs Agreement, the Indonesian measures in question fulfil such a 
condition, because they necessitate an investment in Indonesia (either as a producer of motor vehicles 
or motor vehicle parts) to qualify for the various tax and tariff incentives. 
 (c) The TRIMs Agreement impo sed a new obligation on Indonesia  
6.100 Indonesia's argument that beca use the TRIMs Agreement allegedl y merely restat es Article III, 
the TRIMs Agreement does not give ri se to a separate obligation, refl ects a fundamental misperception 
of the significance of the TRIMs Agreement.  It is true that, to an extent, the TRIMs Agreement codifies the GATT 1947 panel jurisprudence concerni ng Article III:4 arising out  of such cases as 
Italian Tractors
, EC Parts and Components , and FIRA .  However, because panel decisions were not, 
and are still not, stare decisis , Indonesia was not bound by this ju risprudence.  Japan - Taxes on 
Alcoholic Beverages , WT/DS8/AB/R, Report of the Appe llate Body adopted  1 November 1996, 
pages 14-16.  By signing the WTO Agreement, Indonesia did  become bound by this jurisprudence, as 
codified in the TRIMs Agreement.  Thus, th e TRIMs Agreement imposed a new obligation on 
Indonesia. 
 (d) The notion of lex specialis  is irrelevant in this case with respect to the relationship 
between Article III and the TRIMs Agreement  
6.101 Insofar as the issues in this dispute are concerned, because Indonesia did not notify the 
measures in question pursuant to Article 5.1 of  the TRIMs Agreement, there are no conflicting 
obligations between Article III and the TRIMs Agreement.  Thus, the notion of lex specialis  is 
irrelevant. WT/DS54/R, WT/DS55/R, 
WT/DS59/R, WT/DS64/R Page 148 
 
 6.102 Having said that, however, the Unit ed States should note that in the Bananas III  case, the Panel 
found, at para. 7.158, that in the absence of  a "conflict" between GATT 1994 and the TRIMs 
Agreement, both agreements applied equally.  This finding would not have been necessary if the Panel had considered that the TRIMs Agreement was lex specialis  in relationship to GATT 1994. 
6.103. More generally, Article III:2, Article I II:4, and the TRIMs Agreement each impose legally 
distinct obligations on Members, a nd a single measure may be found to be inconsistent with all three.