Aug 31, 1998

DEVELOPMENT: SERIOUS IMPLICATIONS OF INDONESIA CAR PANEL REPORT

BY BHAGIRATH LAL DAS*

New Delhi, Aug -- The report of the WTO panel on Indonesian car programme has serious implications for developing countries, hence it needs their close attention.  

In the Uruguay Round, one of the few special dispensations in substantial terms for developing countries is the import substitution subsidy, i.e., the subsidy provided to firms for using domestic products in preference to imported products. It has the potential of encouraging domestic economic activities and also of conserving foreign exchange. One of the ways of providing subsidy is to have differential rates of taxation and provide tax benefits. This panel report implies that such measures will be violating the Agreement on TRIMs. 

Thereby the report severely restricts the flexibility of developing countries in respect of such subsidies. It amounts to a substantive interpretation of the WTO agreements, limiting the benefits to developing countries in the WTO, which are already quite meagre. 

The Indonesian car programme provides for tax benefits for finished cars incorporating a certain percentage value of domestic products, and also customs duty benefits for imported components and parts used in cars incorporating a certain percentage value of domestic products. 

The panel report says that these measures violate the Agreement on TRIMs which prohibits domestic content requirement, and that the provisions of the Agreement on Subsidies permitting developing countries to provide subsidies for use of domestic goods in preference to imported goods does not protect such measures.  

To come to these conclusions on legal interpretations, the panel has taken circuitous routes, rather than approaching the subject directly. The panel report makes a subtle, but a tenuous, distinction between the Art.III of GATT 1994 and "the provisions" of this article. This distinction appears totally artificial, as an Article cannot be viewed as separate from its provisions. One may be tempted to ask: what is the content of Article III of GATT 1994, devoid of its provisions contained in its various paragraphs?  

The legal considerations in brief are the following.  

The subsidy for the use of domestic products over imported products is permissible for developing countries in accordance with the Agreement on Subsidies. However, it conflicts with the provisions of Article III of GATT 1994, which prohibit less favourable treatment to imported products compared to domestic products. Further, the Agreement on TRIMs prohibits measures which are "inconsistent with the provisions of Article III". All these agreements are in Annex 1A to the WTO Agreement, i.e., the Agreements Establishing the World Trade Organisation. The Indonesian measure is in conflict with Article III as it provides benefit for the use of domestic products over imported products. The point at issue is whether the measure is still permissible, being in conformity with the relevant provision of the Agreement on Subsidies, or it is not permissible since the Agreement on TRIMs prohibits measures which are inconsistent with the provisions of Article III.

The General interpretative note to Annex 1A (page 20 of the WTO publication "The Results of the Uruguay Round of Multilateral Trade Negotiations: The Legal Texts") says that "In the event of conflict between a provision of the General Agreement on Tariffs and Trade 1994 and a provision of another agreement in Annex 1A to the Agreement Establishing the World Trade Organisation, the provision of the other agreement shall prevail to the extent of the conflict". It speaks of the "provision" of GATT 1994, and the contents of Article III are provisions of GATT 1994. Hence if these provisions conflict with those of the Agreement on Subsidies, which is admittedly "another agreement in Annex 1A", the Agreement on Subsidies will prevail, and the measure will have the protection of this agreement. Then the question arises whether the measure still violates the obligations of the Agreement on TRIMs.

The panel report says that the measure violates the Agreement on TRIMs, as this agreement creates obligations quite independent of those of Article III. A plain reading of the relevant provision of the Agreement on TRIMs conveys that it prohibits a measure that is "inconsistent with the provisions of Article III". The report makes a surprising assertion that the obligations of TRIMs are in respect of "provisions of Article III", i.e., the paragraphs constituting the Article III, and not Article III itself. As mentioned above, it is an artificial distinction. An article of an agreement is constituted by its provisions, and it cannot be seen as separate from its provisions.  

Further, even if one goes by the fine distinction made by the panel between an article and its provisions, it would still appear that it is "the provisions of Article III" over which the Agreement on Subsidies prevails. The General interpretative note quoted above applies to a conflict between a "provision" of GATT 1994 and a "provision" of another agreement in Annex 1A.  

Hence, in accordance with the General interpretative note, the relevant provision relating to subsidies for the use of domestic product in the Agreement on Subsidies will prevail over the "provisions of Article III", which the panel report seems to protect from such prevalence. In fact, the obligations of TRIMs do not exist except in so far as there is inconsistency with the provisions of Articles III or XI of GATT 1994. As mentioned above, Article III and also its provisions get modified in their content by the Agreement on Subsidies in respect of the import substitution subsidy. Hence such a subsidy cannot be held to violate the Agreement on TRIMs. 

Indonesia has not gone in appeal, hence the report of the panel stands in its entirety. Of course, it is true that the panel reports are not binding on subsequent panels on similar subjects, yet the fact remains that this report has gone unchallenged by developing countries. Herein lie the interest of all of them and not only Indonesia, as the panel has pronounced on an important matter of interpretation applicable to all developing countries. The remedy lies in taking up the issue strongly when this subject of the import substitution subsidy comes up again in the WTO, either in the form of a dispute or otherwise. The developing countries are not bound by this recommendation of the panel, which will be deemed to be applicable to this specific measure of Indonesia. It cannot be deemed to be applicable to other similar measures of other developing countries.

 (* Bhagirath Lal Das was formerly India's Representative to GATT and later headed the Trade Programmes Division of the UN Conference on Trade and Development. He is the author of the publication 'The WTO Agreements: Deficiencies, Imbalances and Required Changes')