INDONESIA - CERTAIN MEASURES AFFECTING THE AUTOMOBILE INDUSTRY
Document: REPORT OF THE PANEL
Date: 2 July 1998
Document codes: WT/DS54/R; WT/DS55/R; WT/DS59/R; WT/DS64/R
Complainant: Japan
Respondent: Indonesia
Third parties: India, South Korea, U.S.
Dispute stage: Panel
Agreements cited: Art. 3, 6, 28.2, 5  Subsidies and Countervailing Measures (SCM)Art. I:1, X:1, X:3(a), III:2, III:4  GATT 1994Art. 2  Trade-Related Investment Measures (TRIMs)

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. 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

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 process 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, respectively). At its meeting of
30 July 1997, the DSB agreed to the United States' request for establishment 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 complaints by Japan and the 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 provisions 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

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 representative 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 submissions by complainants should be due four weeks
after the end of the second phase of the Annex V procedure (related to the United States' 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 first submissions, to take account of both phases of
the Annex V procedure, necessitated an equal postponement of the rest 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-

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

A. Tax and Tariff Trea tment in Indonesia of Imported Completely 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 loan 2 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 respect 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

 (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 vehicle 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

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 and 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

 (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

 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 commercial vehicles were modified
as set forth below:
Table 7
Subparts of Passenger and 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 total 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

 (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 Motor Vehicles for the Assembly 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 companies 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 exemption 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 direction 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 Instruction No. 2/1996 is “to continue
to strengthen the self-reliance of the nation, particularly in providing means of land transportation in the
form of the production of a national car . . . ” Presidential Instruction No. 2/1996 directs the Minister of
Industry and Trade, the Minister of Finance, and th e State Minister for the Mobilization of Investment
Fund/Chairman of Capital Investment Coordinating 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

industry, which meets the following criteria: (a) the use 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 accordance with the use of provisions of laws in effect such that the
national car industry: (a) uses a brand 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 domestically 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 will 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 National 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 engineering based on national
capability applied by stages."
The Decree also provides that “the motor vehicle in dustrial enterprise which produces national motor
vehicles in accordance with the requirements set forth 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 enterprise given 'Pioneer status'”:

11Indonesia Exhibit 2.
WT/DS54/R, WT/DS55/R,
WT/DS59/R, WT/DS64/R

Table 8
Local Content Schedule for 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 Previously 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 1994 Regarding the Implementation of Law No. 8 of
1983 on Value Added Tax on Goods and Services and Sales Tax on Luxury 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

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 Realization 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/Chairman of the Capital Investment Co-ordinating Board was issued.
This decision designated TPN "to establish 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

 (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 Indonesia workers and fulfil the local content
stipulated by the Minister of Industry and Trade will be treated 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

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 car 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 Indonesian parts and components are
used”, and then states further that “[t]he procurement of Indonesian-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 content requirements for the National Car.

19Indonesia Exhibit 7.
WT/DS54/R, WT/DS55/R,
WT/DS59/R, WT/DS64/R

 (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 counterpurchase 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 reportedly will carry an annual
interest rate of 3 per cent over the 3-6 month deposit rate, a maturity of 10 years, 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 Panel and requested the Panel to terminate the dispute settlement
proceeding, at least as it relates to the 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 programme 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 identified 21 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

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 identified are inconsistent with Article 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 Article I:1 of GATT 1994, since the exemption
is not accorded to the like products originating in other Members including Japan;
 (f) the extended National Car Programme meas ures were not promptly 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 GATT 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 following 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

 (vii) imported National Cars.
 (b) the following measures favour the “use” by Indonesian car manufacturers of domestic
parts and components over “like” imported parts and components 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-purchasing obligations;
 (v) the grant of import duty relief to parts and 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
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 Indonesia'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 those 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 the 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

 (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 System 23 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 only 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 United 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

3.6 The United States also requests that the Panel recommend, 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 withdraw 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 programme are allowable subsidies 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 the United States. At its first substantive meeting with the parties,
the Panel heard arguments of the parties 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 addressed 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 panel limited attendance at panel meetings to members
of governments. In so ruling, the panel made 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 WTO dispute settlement proceedings.
- Limiting attendance at panel meetings to memb ers of governments would not in any respect
adversely affect the right of parties 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

4.4 These observations of the Bananas
 panel are equally applicable to this Autos dispute.
Moreover, while the Appellate Body ruled that private 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 lawyers in panel meetings. (WT/DS27/AB/R, adopted
25 September 1997, para. 11). While the United States does not agree with the Appellate 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, arguably, 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 WTO 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 end 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 relevant 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 States 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 would 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, meeting 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 spokesmen 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 Appellate Body hearing and to allow counsel 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 Government of Saint Lucia, and 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

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 specifically 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 Government 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 Indonesia's opponent in this proceeding, having any say
whatsoever in Indonesia's composition of its defence team. Finally, the decision of the Appellate Body
emphasizes the importance of full - not partial - participation by accredited 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 assistance 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 particularly important for developing count ries like Indonesia. 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, which 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

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 meetings 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 insistence 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 for 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 organize 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 relations 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 trade, economic and legal issues that must be litigated
under highly technical procedural rules and requirements. This is exactly 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

 (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 resolution tribunals and other organizations 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

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 proceeding, 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 agreements 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 practice does not circumvent Indonesia's
right to include outside counsel as accredited members of its dispute settlement 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 choose its representatives to the dispute 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 dispute settlement tribunals 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 undercuts 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. Dispute settlement was viewed principally as part of
the "diplomatic" process. Due largely to the insistence 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 dispute settlement
system, prior GATT practice is not relevant. Thus, for practical reasons as well as under principles of
international law, Indonesia's sovereign right to include outside counsel 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

 (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 experience in WTO matters. In contrast, Indonesia has only a few attorneys
with experience in trade disputes before the WTO. The language barrier adds another burden to
Indonesia's effective representation because the WTO proceedi ng will be conducte d in English, both
with regard to written submissions and oral presentations.
4.29 The WTO will not be a meaningful and fair fo rum in which countries can 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 Indonesia'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, the 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 presence 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

 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 arguments 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 Panel’s terms of reference

4.39 Article 6.2 of the Understanding on Rules and Procedures Governing the Settlement of Disputes
(the DSU) states that “[t]he request for the establishment of panel ... shall 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 panel in United States-Imposition of Anti-
Dumping Duties on Imports of Fresh and Chilled Atlantic Salmon from Norway, ADP/87
 a matter, including each claim composing that matter, could not be examined
by a panel under the [General] Agreement 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 was established
4.41 The Panel in United States-R estrictions on Imports of Sugar (22 June 1989), BISD 36S/331,
concluded that a matter ar ising after the establishment 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

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-Measures Affecting Alcoholic and Malt Beverages (19 June 1992), BISD
39S/206 (para. 3.5.), the panel concluded that “its terms 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 submission 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 concluded 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 government-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 dynamic approach to disputes
than the rigid straitjacket advocated by Indonesia. In India - Patent Protection for Pharmaceutical and
Agricultural Chemical Products, WT/DS50/R (issued 5 September 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 claim 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 government-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

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 procedural, 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 submit, prior to the first substantive
meeting of the Panel with the parties, certain information 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 information. 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 possession which it claims would
demonstrate serious prejudice and threat thereof if only the Panel process 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 has the burden of establishing serious prejudice on the basis of positive
evidence and it cannot hide behind the claimed sensitivity 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 opportunity 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

 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 data shall “produce a non-
confidential summary of the [confidential] information” 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 countenance 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 summaries 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 General 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 protection of business proprietary data 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 not establish procedures for ensuring the protection of such information.
Therefore, the United States was justified in being cautious 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 this 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 this information would corroborate 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 announced, 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, reserves 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

claims relating to the matter referr ed to the DSB to be set out in a complaining party's first written
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, which letter Indonesia requested 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 national cars to be carried out overseas
for a one-year period, in implementation of Presidential Decree No. 42/1996. (This
decree already had terminated by its own terms.)
 - Government Regulation No. 14/1998 37 amended Government Regulation No. 50/1994
(28 December 1994), as previously amended by Government Regulation No. 20/1996
(19 February 1996) and by Government Regulation 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.01/1998 38 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 already had terminated by its own terms.)
 - Minister of Financ e Decree No. 20/KMK.01/1998 39 amended Minister of Finance
Decree No. 36/KMK.01/1997 (21 January 1997) to delete (effective 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

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 notification, and what Indonesia 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 originally 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 measures 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 thereby 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 remedy. 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 the 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 taxes. Even though the underlying authority to reimpose
discriminatory taxes remained in effect, the panel concluded 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 Panel's decision. Chile urged 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

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 authority have expired, the Panel should declare that
no decision on the merits of the alleged inconsistency 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 nevertheless terminate the proceeding and issue a report limited to declaring 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 obliged to submit its findings to the DSB as described
in Article 12:7 of the DSU. Article 12 of the DSU requires 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 Indonesian 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 programme. Despite this statement, 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 specific 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 termination 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

 (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 this 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 dispute settlement system of the WTO is a central element in providing
security and predictability to the multilateral trading system", as described in Article 3:2 of the DSU. In
this respect, if a panel should not rule on this kind 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 apply 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 precipitately 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 implementation 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, will 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

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. Under 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 Woven 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 the claims within its terms 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 Indonesia purportedly “had terminated all subsidies previously 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 respect 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

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 requests 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 dispute 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 request. 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 its 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 party claims that the measures have
been withdrawn does not change this legal conclusion.
 (b) Established GATT and WTO Pa nel Practice Is to Make Findings 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 have any legal or operational effect, Indonesia is not
entitled to a termination of this dispute absent agreement by the complaining parties. Prior GATT and
WTO practice dictates that a panel should make findings on discontinued measures covered 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 Dessert 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 demonstration, Thai Cigarettes 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 Terms 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 measures 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

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 operational 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 requirements, continue to constitute the basis for seeking repayment by
TPN of previously forgiven duties and taxes.50 These measures will be the governing legal instruments
should TPN challenge any Government demand 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 instruments (as opposed to the legal instruments 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 minister 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’ Maker 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

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 assurances 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 cars 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 under 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 notified 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 instruments 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 Panel 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 obligations, 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 reports indicate that
subsidization of the National 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 discrimination against imports from the complainants and the subsidization
of TPN under the National Car 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

 - 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 for the National Car Programme;58
 - The obvious contradiction be tween Indonesia’s assurance that 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 fulfilled its WTO obligations. However, s hould it be established under Article 21
that the measures in question do not constitute adequate implementation, the United States and the other
complaining parties would still have 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 this matter. Indonesia refused, preferring to let the dispute settlement process
run its course. It is now inappropriate for Indonesia to seek a termination of this 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 dispute with respect to the 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

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 luxury goods (luxury tax) which would otherwise 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 domestically produced National Cars, thus violating 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 imposed 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 applied 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 imported 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 regulations 62, 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 belonging 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 Trade No.31/MPP/SK/2/1996 (Japan Exhibit 28).
WT/DS54/R, WT/DS55/R,
WT/DS59/R, WT/DS64/R

 (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 products imported or assembled by other automakers
in Indonesia. First, their common end-use in the Indonesian market is passenger transportation. Second,
although consumers' brand preferences may exist, the products themselv es are generally recognized to
belong to the same "sedan" category. Indonesia may contend that the mere fact that the former vehicles
are manufactured abroad makes them different (or that Indonesian consumers 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 principle 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

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 imported 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

Quite similarly, at issue in this proceeding is ta x exemption which is available for some domestic
products (i.e., National Cars) but from which no imported products may benefit. Accordingly, imported
like products are taxed less favourably 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 passenger 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 imported goods to internal taxes in
excess of those applied to like domestic 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, Indonesia 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 meritless 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 engines 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 content 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 States - Tobacco, paras. 99-100.
WT/DS54/R, WT/DS55/R,
WT/DS59/R, WT/DS64/R

 (3) combines, minibuses, vans and pick-ups usi ng diesel oil as fuel which are manufactured
domestically and have a local content 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 internal 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 “internal 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 Working 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

 ... 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 from 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 shares belonging to Indonesian citizens; and
 (b) use trade marks created by relevant in dustrial companies themselves and not yet
registered by other parties 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

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” motor vehicles with 100 per cent Community content for
the purposes of Article III: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 the products’ characteristics can never justify a different tax treatment
of the products involved.
5.32 Thus, the Panel report on United States - M easures affecting Alcoholic 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 fiscal 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

5.34 Although this conclusion concerns Article III:4, the Panel made it clear that the same principle
applied also to fiscal measures 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, including 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 from 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 subject 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 Malt Beverages:
The prohibition of discriminatory taxes in Article 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

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 imported 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 excess of’ like domestic parts,
components and materials
5.42 Article III:2 prohibits not just “direct” discrimination against 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 between 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 report on United States- Standards for Conventional 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

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 the duties in the above case.
5.46 As shown above, exemptions (2) (3) (5) and (6 ) are “directly” discriminatory against imported
motor vehicles in that they are available only for domestically produced motor vehicles. In addition,
they discriminate “indirectly” against imported parts and components because, in order to qualify for
the exemptions, domestic motor vehicles must incorporate 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 imported parts and components.
3. Claims Raised by the United States

5.48 The United States claims that Indonesia’s discriminatory application 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 contracting 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 vehicles 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 counterparts 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 imported 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 amounts 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 jeeps) 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

applying "internal taxes or other internal charges to imported or domestic products 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 domestic 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 magnitude 85, 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 initiated the Programme. In addition to the Indonesian
stated purpose of "the development of domestic motor 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 regulation 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

[I]t is necessary to support the domestic automotive industry in order 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 "protective" character as well.
88
As we have already discussed, the share of imported 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 the 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 sentence, 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. Should the Panel find otherwise, it is
nevertheless the case that this exemption constitutes a violation of Article III:2, second 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 following 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 products" 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

 (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 imported 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 domestic 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 taxation 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 requirements affecting
their internal sale, offering for sale, purchase, transportation, distribution or use.
5.67 In Canada - Import, Distribu tion and Sale of Certain 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

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? Therefore, interpretation of Article III:4 in the context
of the present dispute boils down to the following two elements:
 (1) whether or not imported automotive parts and components and domestic automotive
parts and components are "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 physical respect, but where they originate. Thus, imported and domestic
parts and components are "like products" under 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 requirement upon which Indonesia has conditioned the duty
free treatment of the remaining imported 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

 (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 requirements '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 product 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 Machinery 96 and the 1984 report on
Canada - Administration of the Foreign 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 parts 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 sliding scale of duty preferences, thereby favouring the purchase of domestic
over imported like products for purposes of automobile production. The plain 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 which case compliance could be legally enforced." (para. 5.4)
WT/DS54/R, WT/DS55/R,
WT/DS59/R, WT/DS64/R

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 imported parts. Such less favourable
luxury tax treatment of imported products relative to a domestic like product 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 Article III:4 of GATT 1994 because they 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 with 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-purchasing 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 components) meeting certain
local content requirements; 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 contracting 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

- 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 thereto. 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 sale, etc. of imported products suggests that
not only requirements which an enterprise is legally bound to carry out, such as those
examined by the FIRA Panel .... but also those which an enterprise voluntarily accepts
in order to obtain an advantage from the government constitute ‘requirements’ within
the meaning of that provision.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 Importation, Sale and Distribution
of Bananas the Panel found that a requirement to purchase domestic bananas 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 the 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

 (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 imported 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 amending 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 products 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 objective” of the measures at issue has been defined in the following terms
in Indonesia’s notification under Article XVI:1 of GATT 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

 (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 characteristics, 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 manufacturers 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 parts 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 importation of Community made ones.
 (e) Local content requirements have already been found contrary 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 certain 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 Imports 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 subsidiaries of Japanese companies established in
Community territory conditional upon the 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 given 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 national treatment provided
for in paragraph 4 of Article III of GATT 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 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.
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WT/DS59/R, WT/DS64/R

5.94 The measures in dispute fall s quarely within point 1 (a) of the Illustrative 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 purchasers and users of automotive parts and subparts
that are intended to encourage the use of Indonesian-made parts and subparts. 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 the 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]mports 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 motor 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 imported free of the 200 per cent Indonesian tariff on CBU passenger 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 Decree 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 was 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 exceeded 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 content increased. Finally, Regulation No. 36/1996 increased the degree of
discrimination inherent in Indonesia’s luxury tax structure by establishing a luxury tax rate of 0 per cent

104Decree No. 223/1995 replaced the incentive schedule originally contained in Decree No. 645/1993.
WT/DS54/R, WT/DS55/R,
WT/DS59/R, WT/DS64/R

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 capacity 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 schedule, 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 government-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

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 "that 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,
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result, according to the Coordinating 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 rupiah 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 characterized 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 banks 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.usa.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).
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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 immediately 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 the University of Indonesia and automobile analyst Suhari
Sargo doubted [TPN’s] capacity to repay the debts in view of the small 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 service the debts beginning in 2000. “This amount
will be equivalent to 15,000 cars. That’s very 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 the 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 Off 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).
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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 for 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 the 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 contracting 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 and 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 subparts are “like” domestic automotive parts and subparts. Third, the
tariff and tax incentives and the $690 million loan di scriminate against imported automotive parts and
subparts.
 (1) The tariff and tax incentives and the government-directed $690 million loan are
regulations or requirements 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/7f12a.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/hippocampus/v5074c.htm> (US Exhibit 15, pp. 6-7).
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decreed by the Government. As such, the various Indonesian measures clearly 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 violation of Article III:4 does not

require a separate consideration of whether a measure ‘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 local 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 components ...”. The Elucidation to Regulation No. 36/1996
is to the same effect. Most recently, 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-provided 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 imported 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 “requirements” within the meaning of that provision ... .
5.119 Indonesian producers or assemblers of motor vehicles (or motor vehicle 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 requirements - 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 the 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 stated purpose to affect) the competitive conditions under
which automotive parts and subparts are sold to manufacturers and assemble rs. Therefore, these
incentives “affect” the sale of automotive parts subparts in Indonesia.
142

139 “European Communities - Regime for the Importation, 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
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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 participant 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 the 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 III:4, imported automotive parts 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 other. In Indonesia, however, the Government 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 government 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 favourable treatment to imported automotive
parts and subparts in comparison to their domestically-made counterparts, and each 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, Indonesia 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 protectionist 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 exclusively to domestic producers” 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 that 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 producers 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.
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(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 producers 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 parts (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 prevent 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 governmental 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 purchasers 146, and not producers, and payments whose be nefits could be partially retained by
processors147, have been found not to qualify 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 provided 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 permitted to maintain. In addition, Indonesia
responds specifically to the claims under Article III:4 regarding the tariff measures, by arguing that these
are border measures and voluntary measures and thus not governed by Article 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.
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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 claims raised.
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
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. Sinclair 149 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 provision, 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 Article III of the GATT 1994 (as well as Article 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 substantial 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.
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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 reductions 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 companies 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 who source more than 60 per cent domestically.158 For
subcomponents and parts, the duty ranges 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 Nasional (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.
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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 industries" (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 reduction in the rate of import duties on automotive
parts and components. Thus, there is the requisite financial contribution 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 that 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 otherwise 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 (whether 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 evidence that the Indonesian auto subsidies result in "serious 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) because 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.
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 (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 VIII.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 Article 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 subsidies. 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 producers 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 capacity of less than 1600cc and with local content of
greater than 60 per cent. Also, the Government forgoes 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 Articles 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 February 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 performance 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

imported goods. Four types of subs idies are non-actionable: 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 are 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 mandate to "withdraw the subsidy without delay" (Article 4.7). The only
prerequisite for such a mandate 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-actionable. 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 effects 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 complaining Member. The subsidizing country can choose to do so by eliminating the
measure, but it is not required to do so. Its only obligation 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 shall 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 action 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

 (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 meaning 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, Article 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 infringement of an obligation of the 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 with 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 imports of like products. (There 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 meaningless the provisions of the Subsidies Agreement
relating to actionable 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 virtually 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 effects 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

cannot give meaning and effect to the framework of the Subsidies Agreement requiring proof of adverse
trade effects as to actionable subsidies if Article III 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 applicable 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 commitments 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 treatment 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 developing countries by virtue of Article 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 upon Article III:8(b). The facts of the dispute show that Canada did
not argue that its funded postal rates 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 sided with Canada. The finding of the Panel with which the Appellate
Body disagreed and which it reversed was:
Thus, we do not find that Canada Post retains 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

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 exclusively 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 SCM 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 were 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 redrafted 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 remission 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 the 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 the 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

Article III:8(b) limits therefore the permissible 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 taxes 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, provisions 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 mandated to address the relevant provisions 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 Article 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, subsidies 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 other 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.
WT/DS54/R, WT/DS55/R,
WT/DS59/R, WT/DS64/R

 (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 (referred 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-Regime for the Importation, Sale and Distribution of
Bananas, WT/DS27/R/USA (22 May 1997), defines "conflict" as follows:
As a preliminary issue, it is necessary to define the notion of "conflict" 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 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 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. (Emphasis 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 interpretation 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 adverse trade effects. Article 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 requirements Article 8.2(b) of the SCM
WT/DS54/R, WT/DS55/R,
WT/DS59/R, WT/DS64/R

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 differential 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 through 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 instruments 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 applied to only a small number of GATT Contracting
Parties. With the entry into force of the WTO agreements, the SCM Agreement’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 irrelevant to this case. It has nothing to do with whether a
WT/DS54/R, WT/DS55/R,
WT/DS59/R, WT/DS64/R

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 authorities 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 Agreement. 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 appear 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 these articles and their footnotes applied 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. Other 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 Subsidies 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

 (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.
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 Governing 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, Indonesia’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

 (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 confines 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 agreement 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 those in GATT 1994 because the Annex 1A and GATT 1994
obligations "can both be complied with at the same time without the need 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 treatment on products. Thus, a conflict clearly exists 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 between 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
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

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 the 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 Agreement regarding actionable subsidies “meaningless.”
5.194 Furthermore, such a finding would “run count er to the object and purpose” of the SCM
Agreement. Special and differential treatment of developing 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 parts 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 between 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. “Recommendations 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 subsidies 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 provision in another Agreement. Annex 1A Agreements,
including the SCM Agreement, were “negotiated with the 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

“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 Communities’s and Japan’s
arguments regarding the interpretation of Article III:8(b) in United States-Measures Affecting Alcoholic
and Malt Beverages 189 and Canada-Certain Measur es Concerning Periodicals 190 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 domestic products from internal 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 Article 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 Section V.F.1.), the luxury tax subsidy is allowed 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 all-encompassing structure of remedies. Instead, this absence is part
of that all-encompassing structure of remedies. The 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

 (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 dispute, 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 would severely weaken the GATT’s fundamental obligations". (See
Section V.E.1). Japan has mischaracterized Indonesia’s position.
5.203 Indonesia’s lex specialis argument does not “render the General Interpretative Note completely
unnecessary.” Rather, Indonesia’s argument is supported by the General Interpretative 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 "the 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 company 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 raised under Article III of GATT 1994
1. Rebuttal arguments of Japan
5.205 The following are Japan's arguments rebutting Indonesia's general 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 least 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

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 prohibited 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 position, 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 "subsidies" 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 Agreement]". 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 Submission 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 WTO rule that provides for specific agreements, such
as the SCM Agreement, to apply to the complete exclusion of general WTO obligations, such as national
treatment. The lack of textual support al one is enough to reject Indonesia's position 192, but it is only
compounded by the further absence from Indonesia's arguments 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

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 explicitly 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 definition 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 Convention 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 loopholes 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 entire categories of other measures 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 Law of Treaties, art. 26.
WT/DS54/R, WT/DS55/R,
WT/DS59/R, WT/DS64/R

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 meaning 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) are 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 Article 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 inutility 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 taxes on imported goods in clear contravention 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 only 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 "subsidies" 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 domestic 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 effect 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,
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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 Indonesia'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 Agreement 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 override 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 that undermined an essential GATT discipline.
 (c) GATT Article III does not "conflict" with the SCM Agreement
5.227 Indonesia also argues that the SCM Agreement conflicts with GATT 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 "conflict" 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,
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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. Lacking any language in the SCM Agreement, equivalent to that under
Articles I and II of the ATC, one cannot jump to the conclusion that the relationship between Article III
and the SCM Agreement is "analogous to the relationship between Article XI and the ATC."
5.231 Lacking textual support, Indonesia nevertheless soldiers on by advancing a lengthy, elaborate,
and rather convoluted argument about "actionable subsidies."
5.232 But still, nothing about Indonesia's argument shows that the SCM Agreement authorizes -
explicitly or implicitly - "actionable subsidies" that violate GATT Article III:2. Indonesia concludes that
"the SCM [Agreement] specifically does not prohibit developing countries from granting a subsidy
involving differential internal tax 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 would 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 III does and should apply to subsidies under the SCM
Agreement, including actionable subsidies. 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 provisions 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 III: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 complied 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 failed 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

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 therefore 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 dispute settlement procedures
under Article 4 or Arti cle 7 and countervailing measures 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, Indonesia's proposition that the SCM Agreement 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 "appropriate steps to remove the adverse effects" have
to be taken within 6 months from the date of adoption 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 choose 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 allowing 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.").
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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 Note 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 and 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 "Conflict 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 the term "conflict". Other delegations approved this amendment, and
it was incorporated in a working paper dated 6 December 1993 prepared 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 another WTO agreement, such that the provisions
of the two agreements were mutually exclusive and 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 payments to domestic producers derived from the proceeds of internal
taxes or charges applied consistently with 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 "subsidies," such as discriminatory 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 alternative 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 dated 6 December 1993 (Japan Exhibit 65).
206Panel Report on US - Malt Beverages, paras. 5.7-5.12.
207Id. at para. 5.9.
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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 expenditure 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 subsidies, but not discriminatory tax breaks. Indonesia does not dispute this.
Instead, it admits that its position is inconsistent with the prevailing understanding 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 producer 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 Agreement itself rejects the notion
that its definition of "subsidy" should be applied to other WTO Agreements. 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" should 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 glaring 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.
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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 WTO disciplines of MFN, tariff 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 interpretation 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 exclusively 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 “serious 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, including payments to domestic producers derived
from the proceeds of internal taxes or charges 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.
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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” clearly indicates 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 exemption 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,
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and drafting history of Article III, and if carried to its logical conclusion, such an
interpretation would virtually eliminate the prohibition in Article III:2 of discriminatory
internal taxation by enabling contracting parties to exempt all domestic products from
indirect taxes. The Panel accordingly found that 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 subsidies’ language in Article III:8
(b) must refer to all subsidies identified in Article 1 of the Subsidies Agreement". (See Section V.D.)
5.261 Yet, in the recent case Canada - Certain measures concerning 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 made in the preceding paragraphs, 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) suggests 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 affecting Alcoholic and Malt Beverages:
5.10 Article III:8(b) limits, therefore, the permissible producers subsidies to ‘payments’
after taxes have been collected or payments otherwise 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 taxes 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 decisions 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

or reduction of tax rates on a product does not fall within Article III:8(b). The Appellate Body Report
on Canada - Certain measures 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 Communities 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 Annex 1A would exclude its application between the GATT and the other
Annex 1A Agreements. The clear intention of the WTO drafters was that the relationship between the
GATT 1994 and the other Agreements included in Annex 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 envisaged 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 III:2 may be construed as “subsidies” within the meaning of Article 1
of the SCM Agreement, the opposite is clearly not true: most subsidies subject 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 agreements 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
 “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

Indonesia. As will be shown below 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 different 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 the 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 measures 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 scrutinised 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 the 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 involved. 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

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 the 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: subsidies 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 contrast, 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 within the category (i), subsidies 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, etc. of domestic products.
5.274 Subsidies granted in respect of import duties are not covered, in principle, by Article III since
import duties are border measures. Nevertheless, this type of subsidies 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 remedies 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 GATT, Indonesia will be required “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 measures, 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 accordance with Article
7.8 of the SCM Agreement, to “withdraw” the subsidies 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 Article 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

unpaid duties and taxes on motor vehicles which have already benefited from those exemptions, to the
extent that those subsidies continue 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 Article 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 discriminatory internal taxes on imported goods is
likely to entail a trade-distorting advantage for import-competing domestic producers,
the prohibition of discriminatory internal taxes 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 interpretation] would virtually
eliminate the prohibition in Article III:2 of discriminatory internal taxation by enabling
contracting parties to exempt all domestic 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 XVI 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 “all 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

Agreement and Article III of GATT 1994 is identical to the relationship 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 inapplicable, nor therefore
prevented it from applying concurrently with Article III to the same measures. Furthermore, Article 1.1
of the SCM Agreement states very clearly that the definition 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 Article 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 slightest 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 application 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 interpreted 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 action 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 “other 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

 (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, procedures and customary practices” followed under GATT
1947, except as otherwise provided.
5.293 For that reason, the instances where the WT O Agreement permits measures which would have
been contrary to GATT 1947 are fe w and exceptional. Such derogatio ns have generally a temporary
character and/or are restricted to areas where 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 had been disputed by some Members (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 Agreement 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 specific 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 domestic product is always prohibited. 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

5.296 If the SCM Agreement excluded the application of Article III:2 to subsidies, tax discrimination
between like products 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 previous Panels (one under GATT 1947235 and one under GATT 1994236) have
found that by applying a lower excise tax to local shochu than to imported whisky (a competing product)
Japan afforded protection to its domestic production of shochu, thereby infringing GATT Article III:2,
second sentence. If Indonesia’s lex specialis argument prevailed, Japan could argue that the tax
differential constitutes a subsidy to its domestic shochu producers, which is therefore 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 respect 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 the 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 drafting history of that Note indicates
clearly that the term “conflict” must be interpreted narrowly. The drafters 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 application 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 not “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

... the rules contained in one of the Agr eements listed in Annex 1A provide for
different or complementary obligations 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 Indonesia 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 measures. 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 conditions 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” developing 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 different obligation contained in another agreement, 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 “adverse 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

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-actionable 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 discriminate between imported and domestic products, whereas the measures allegedly
permitted by the SCM Agre ement are subsidies. These two categories of measures are conceptually
different, even if certain individual 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 GATT Article III.
5.310 In EC - Regime for the Importati on, Sale and Distribution of Bananas, the Panel elaborated on
its interpretation of the notion of “conflict” 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 quantitative 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 negotiated to create rights and obligations 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 (quantitative 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

the application of Article III to subsidies does not render the SCM Agreement
redundant. Quite to the contrary, its non-application 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 indication 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 GATT 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 Article 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 subsidies 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 relationship of GATT Article XVI to GATT Article III. The SCM
Agreement does not “permit explicitly” subsidies which 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 the only purpose of the General Interpretative Note to
Annex 1A was to solve the potential conflicts between 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 Article III of GATT 1994:
 (a) The tariff and tax incentives under the 1993 Programme and the National Car
Programme violate Article 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 parts 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 imported 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 not 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 constitute “subsidies”; and (2) the SCM Agreement overrides
WT/DS54/R, WT/DS55/R,
WT/DS59/R, WT/DS64/R

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 Article 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 international 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 Agreement. 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 definition 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 provisions of GATT 1994, as interpreted by this Agreement.
Moreover, Article 32.1 contains a footnote 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

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 "appropriate" within the meaning of note 56.
5.323 However, it is Indonesia that ignores the text of note 56, and essentially 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 precludes 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 subsidize and that offer a measure of remedy for
a GATT member that is harmed by another’s subsidy. Four other articles in particular
must be related to Article XVI. Th ese are Article VI on anti-dumping and
countervailing duties, Article XIX regarding increases of imports that threaten serious
injury (the “escape clause”), Article XXIII 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 favour 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 remedied 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

revenue foregone that is provided to all producers of domestic products and that 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 applies, because it has been overridden by the SCM Agreement, but the
SCM Agreement provides no redress because 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 particular, 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 TRIMs 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 (iii) further provided the following:
An advantage can include the provision of a s ubsidy, and attention will be paid to the
negotiations in the Negotiating 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 characterized as subsidies, was a bone of contention during
the RIMs negotiations, as reflected by the brackets around the above-quoted language.
WT/DS54/R, WT/DS55/R,
WT/DS59/R, WT/DS64/R

5.335 However, Indonesia leaves the drafting histor y at that, and fails to mention what happened
thereafter. In the so-called Dunkel Draft, issued in December, 1991, the TRIMs 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 which 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 arrangements 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 countries 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, Article 27.3 of the Dunkel Draft consisted of what ultimately became 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” between the SCM Agreement,
Article III:4, and the TRIMs Agreement, 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 TRIMs 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 permitted by Article 5 of the TRIMs 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 Article III:4 or the TRIMs Agreement. Instead, as was the case under GATT 1947,
there was to be overlapping, if not identical, treatment 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

 (4) Indonesia’s argument is inc onsistent with established 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 public 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 rules 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 Agreement 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 obligation 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 from 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 SCM Agreement does not mean
that Members are "explicitly permitted" to tax imported products in excess of domestic like products in
violation of Article III:2. Likewise, the fact that developing country 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 with the opportunity to correct the panel’s error.
WT/DS54/R, WT/DS55/R,
WT/DS59/R, WT/DS64/R

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 intend 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 effects, good faith and the objects 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 would 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 conflict, to demonstrate convincingly that a conflict exists. Indonesia
has failed to satisfy 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 jurisprudence 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 intended 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 that 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 good 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

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 discussed 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 violation 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 the relevant discipline under the SCM Agreement might 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 principles to avoid interpreting 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

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 response 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 relationship 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 Agreement 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 there was conflict between their provisions.
Since there was no conflict between the provisions at issue, it was entirely permissible
to assert a breach of Article XIII obligations in tandem with the 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 GATT 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 concerning 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 agreements, 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 Interpretative 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

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 September 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 applied 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 applied 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 inconsistency with Article X:3(a) of the GATT 1994. Id

The Appellate Body did not find that one agreement 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 endorsing 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 relationships 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 Interpretative Note. Put differently, to the extent that there is a rule of
lex specialis in the WTO Agreement, it is found in the General Interpretative 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

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 the 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 unilateral 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 Article 25.2 of the SCM Agreement, only specific
subsidies must be notified. Likewise, since the specificity test became firmly established 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 Indonesia 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 that 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 overrides 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 characterized as non-specific subsidies.
Question What types of measures would be mo st likely to become permissible if
characterized as non-specific subsidies?
Answer Discriminatory tax measures that violate Article III:2.
WT/DS54/R, WT/DS55/R,
WT/DS59/R, WT/DS64/R

5.375 The upshot of all this is th at with respect to Indonesia's argument 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 the Panel's attention from the consequences 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 actionable 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 developing 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 hindsight, feels that it may
have made a bad bargain, because neither panels nor the Appellate Body have the authority to
renegotiate the bargains reflected 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 neither 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” disappears. 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, and 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 making 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

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 appropriate 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 SCM 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 made for extensions. Under Article 12.8 of the DSU, a panel normally
has six months (180 days) within which to issue its report, 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 notify 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 reasonable 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 panel 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 appellant 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” under Article 4.7 of the SCM Agreement. While the
phrase “without delay” has yet to be construed, presumably 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

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 the 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 may 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 parties 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 expedited procedures for prohibited subsidies. Throughout
the history of this dispute, officials of both Indonesia 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, depending 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 prohibited by Article III:2 and Article III:4 of GATT 1994
and continue to be subject to a serious prejudice claim under the SCM Agreement. Thus, it is incredible
for Indonesia to claim, as it has via Dr. Makarim, that it would not have signed the WTO Agreement if it
had known that its local content subsidies would be subject 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 which local content subsidies are prohibited by virtue of
Article III. As discussed above, Indonesia benefits from being temporarily exempt from the accelerated
procedures of Article 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

 (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 discriminated 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 incentives 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 Article 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, therefore, 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 taxes 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 version of Indonesia’s “conflicts” argument, 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 international 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

 F. Additional arguments rega rding the claims under 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 automobiles and automotive parts is set by reference 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 involved. 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 sourcing from imported parts and 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 Report 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

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 where 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 those 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 the 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 Article III is limited to internal
laws, regulations and requirements; subsidized customs import duties 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 Components 267, EEC–Oilseeds 268, Bananas III 269 and FIRA 270 - 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 system 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

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 imported 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 measure at issue was an internal measure affecting a
product that already had been imported, 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 measure - was not addressed because, 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 leading 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 transform a border measure into an internal measure so as to apply Article III,
the proper approach is to analyze whether this domestic content subsidy is consistent with Indonesia’s
obligations, as a developing country, 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

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 Article 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 with importation.'" Indonesia further argues that
it follows that such a measure cannot be an "internal regulation" subject 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 applied "in respect of all
laws, regulations and re quirements affecting [imports'] internal sale, offering for sale, purchase,
transportation, distribution or use." Nothing in the text requires such laws, regulations, and requirements
to affect only wholly internal matters, or in other words, not to have any connection 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 "internal measures". Rather, Article III:4, by its terms, applies to "all"
measures "affecting [imports'] 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. Instead, the issue here concerns the 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. purchase 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 plain 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

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 local content requirements accord Indonesian products
more favourable treatment than like imported products, in violation of Article III:4.
 (2) The GATT/WTO precedents also show that GATT Article III:4 applies to "border
measures" that affect conditions of internal sale
5.416 Indonesia's argument is also in consistent with the long-standing construction 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 Panel further elaborated, "the selection of the word
'affecting' would imply that the drafters of the Article 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 does 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 certain 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 Article 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.
 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

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, the 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 requirements 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 measures at issue in Canada - 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 for EEC - Regulation on Imports of Parts and Components,
Indonesia's assertion that the measures at issue there did not involve border measures is simply 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 comply voluntarily to obtain a benefit, they are not
covered by GATT Article 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

machinery, but not for imports.285 Other similar examples include the Panel Report on EEC - Parts and
Components286 and the recent Panel and Appellate 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 purported "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 apply 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 and 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 Indonesia 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 the 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 sale, etc. of imported products suggests that
not only requirements which an enterprise is legally bound to carry out, such as those
examined by the FIRA Panel .... but also those 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.
 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

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 exemption or reduction. This has been confirmed by the recent Panel reports
on EC - Regime for the Importation, Sale and Distribution of Bananas
.289
5.430 One of the measures in dispute in that case were the so-called “operator category rules” for the
allocation of licences to import of “third country” bananas at lower tariff rates within a tariff quota. In
accordance with those rules, 30 per cent of the tariff quota was reserved 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 requirement 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 import licence requirements needed to
administer the tariff quota” and affected 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 III: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

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 border 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 panel 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 covered by Article III:4.
All it proves is that these panels 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) the 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 following discussion of the Appellate Body 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 Article 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 and 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) violates 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

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 has 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, decision, 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. Government regulations requiring certain local 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 "trade-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 Car Programme is to develop the domestic
manufacturing capability of autom obiles and automotive parts and components. The fact that the
Programme includes "investment measures" is also obvious from the fa ct that one of its implementing
regulations is entitled "Investment 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 contents 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 was intended to bring about major structural changes in
the Indonesian automotive sector so that it could 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

 (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 contingent on compliance with local content requirements, thus clearly
constitute prohibited TRIMs as set forth in the Illustrative List.
6.7 Furthermore, Japan considers that any TRIMs which violate GATT Article 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 Article 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 exclusive. Nothing in the text, objective or purpose of
the TRIMs Agreement would support the contention that 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, Article 5.2, in light of Indonesia's failure 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 Article 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); SUBSIDIES / 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,
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 (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-purchasing 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 provisions 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 provided 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 with the purpose of achieving “full manufacturing” of
motor vehicles in Indonesia. Further, the measures are “trade related” because they encourage the use
of domestic parts and components over imported ones. Finally, as demonstrated 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 the category defined in Item 1 (a) of the Illustrative
List, which reads as follows:
 1. TRIMs that are inconsistent with th e obligation of national 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,
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Agreement. In the case of developing country Members, 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 temporary 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 Government Regulation 36/96 and the incentives granted under the National
Car Programme were introduced by Indonesia only after 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. Allegedly because, based on a
further analysis of the measures concerned, it had 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 inconsistent 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-directed $690 million loan
to TPN are based upon the achievement of designated local content targets and, as such, discriminate
against imported automotive parts (and subparts) in favour of their domestic 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 inconsistent 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.
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enforceable under domestic law or under ad ministrative rulings, or compliance with
which is necessary to obtain an advantage, and 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 Illustrative List. The tax and tariff incentives 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 untimely, 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).
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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 Article 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 local content measure found to be inconsistent with
Article III of the General Agreement in Canada-Administration of the Foreign 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-Regime for the Importation, Sale and
Distribution of Bananas, WT/DS27/R/USA (22 May 1997), which declares at paragraph 7.185:
In considering these arguments, we first 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. Thus 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 paragraph 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.
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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 negotiating 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 and others disagreed.309 So did the European Communities, which included the
following in its 13 November 1989 submission to the TRIMs negotiating group:

 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 Subsidies Agreement. MTN.GNG/NG12/14 at para. 75.
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[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 WTO 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] Agreement 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 the 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, Article III is not applicable, the TRIMs Agreement is not
applicable. The “Illustrative List,” therefore, is irrelevant. Customs 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 puts a gloss on Article 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 measures found to be TRIMs (in fact, it
sets forth no remedies at all).
To Indonesia’s knowledge, these facts concerning the TRIMs Agreement are not in dispute.

 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).
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(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 ignores 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 scope 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 brings 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 following 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 United States ignores, as it must, the very next sentence from the Panel
report, which clarifies that the Panel did not use “essentially” 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 Article III:4 may cover investment-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 come before this Panel seeking 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. These 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 measures are subsidies. As demonstrated, the measures are subsidies to
WT/DS54/R, WT/DS55/R,
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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 Car Programme does not involve a TRIM
6.46 Japan claims that beca use one implementing decree 314 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 regulations and decrees regarding
the National Car Programme, Japan selected a single regulation on the basis of its heading. Japan then
arbitrarily affixed the designation “key” to that single 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 Ministers, 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/Chairman of the Investment Coordinating 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 implementing 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 supporting regulation was appropriate for it to promulgate. The principal
implementing regulation (supplementing the two decrees cited above) was issued by MIT’s Director
General for the Metal, Machin ery & Chemical Industries (D ecree No. 002/SK/DJ-ILMK/II/1996),
appointing a Pioneer Motor Vehicle Industrial Enterprise. 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 scrutiny, 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 procedural regulation that could not be issued prior to the MIT and MOF
decrees. Moreover, it simply repeats another Ministerial decree. Again, 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 questions posed by the delegation of
Japan and mentioned at least seven objectives 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.
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- 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-scale job creation; and
- to encourage car companies to increase their local content, resulting in a rapid growth
of investment in the automobile 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 conclusion 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 investments 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 content. 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 subsidies granted to an automaker
to use domestic parts and components, 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".
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5. Although subsidies may at time s indirectly affect investment decisions 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 provides 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-related investment measure," and thus violates TRIMs Article 2.1.
WT/DS54/R, WT/DS55/R,
WT/DS59/R, WT/DS64/R

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 Programme. As discussed (See Section VI.D), GATT
Article III does apply and the Programme 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 illustrative" and that the List 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 not 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 contrary 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 Article 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 hypothetical 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 TRIMs 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 “subsidy” 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 Members. 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

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 Agreements 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 assumption seems to result from its mistaken equating of the GATT and
the TRIMs Agreement, discussed above. The plain text 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 the 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, indicates 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 order between GATT 1994 and GATS. The absence
of such provisions between the two instruments 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 Annex 1A Agreement over the others.

 317In this connection, India, a third party, stated at the 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

 (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 Subsidies 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 provisions of [GATT] Article III or Article XI". As described in paragraph 3.14
above, it has been firmly established that GATT Article 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 measures, 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 explicitly provides that prohibited TRIMs include any
local content requirement "compliance 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 expressed 322, at the final stage a
consensus was created, as discussed below.
6.74 Late in the TRIMs negotiations (i.e., October 1991 through 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 Chairman’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

loophole was avoided by leaving both the SCM Agre ement and the TRIMs Ag reement silent about
their relationship, thereby ensuring that the disciplines 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 the final text of the TRIMs Agreement. Of course,
it is the text of a treaty itself that governs and any views expressed during the 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 "subsidy" 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 automobile programmes, although it did so late and later withdrew the
notification, apparently in connection 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 that 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 negate 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

 (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 relies for this proposition on the following passage of the Panel Reports
on EC regime concerning the Importation, 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 GATT obligations, although it clarifies 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 the provisions of the TRIMs Agreement. Likewise, it
would have been unnecessary to sate 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 Article 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 Article 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

 (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 TRIMs 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 argument in light of its “conflict” argument (the
flaws in which we have addressed (See Section V.E.III)), because the General interpretative headnote
to Annex 1A addresses only alleged “conflicts” between the GATT 1994 and the provisions of another
Annex 1A agreement, not alleged “conflicts” between two or more Annex 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 holding 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 this 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 view 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 automotive parts and components by car assemblers which
meet certain local content requirements (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

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-off that the panel did not mention was the addition of
transparency requirements in the form of the notification 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, too, 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 subordinate nature of the TRIMs Illustrative 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 connection with Indonesia’s “conflicts” argument, the
drafting history of the TRIMs Agreement 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 drafters 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 follow [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 expresses 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

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 further discussion. Also, by the time the paper was drafted, there already
had been several "sleights of hand" by several Members that were making multiple notifications under
the TRIMs and SCM Agreements and then later "withdrawing" 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 States is unaware of anything in the 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 allegedly merely restates Article III,
the TRIMs Agreement does not give rise to a separate obligation, reflects 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

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, and a single measure may be found to be inconsistent with all three.