6.35 One of the many fundamental issues on which 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. Argentina, 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:

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 continue 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 issues 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 TRIMs 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 Agreement: 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 special 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.

(b) The TRIMs Agreement does not establish a "new balance of rights and obligations"; rather, it merely elaborates on the FIRA Panel's decision regarding the coverage of Article III of GATT

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 demonstrated 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 Agreement 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 Agreement elaborates on the decision of the Panel in Canada-Administration of the Foreign Investment Review Act (FIRA) (7 February 1994), BISD 30S/140. The United States, in discussing this fact, attempts to undercut Indonesia's argument by focusing on the word "essentially" in the following passage from paragraph 7.185 of Bananas III:

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:

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 interpretations explicitly rejected during the negotiations.

6. Japan is in Error; the Government most certainly does not view the National Car Programme as an investment programme

6.44 The two measures which make up the National Car Programme are 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 Agreements, 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 Indonesian 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 bureaucracies change the Government's position that the measures are subsidies. As demonstrated, the measures are subsidies to a domestic industry to encourage its development. Alternative descriptions or characterizations cannot alter this fact.

7. The underlying decree, rules and regulations, and Indonesia's statements to the Committee on TRIMs establish that the National Car Programme does not involve a TRIM

6.46 Japan claims that because one implementing decree³¹⁴ contains the word "investment" in its title (which, according to Japan, means that it addresses 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 measure 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 Presidential 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 eight 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, Machinery & Chemical Industries (Decree 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 PMDN 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 Complainants' misrepresentations do not bring it under the TRIMs Agreement.

6.51 Japan similarly misuses Indonesia's presentation 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:

• 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 multiple-source auto parts and components;
• to encourage the development of the automotive industry and the automotive component industry;
• to bring about major structural changes in the Indonesian automobile industry;
• to encourage the transfer of technology and 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 assertion 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:

But Japan's interpretation even of this one (of seven) 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:

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 and 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 under the SCM Agreement. It is the 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.

6.61 Indonesia argues that the TRIMs Agreement 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 violation 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 again, 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 indonesia'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 establish "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 "mutually 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 provisions 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 products. TRIMs Article 5.1 likewise also allows developing country Members time before they must comply with the TRIMs Article 2 provisions on local content requirements which are inconsistent with GATT Article III, provided that the measure existed when the WTO Agreements entered into force (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 Agreement, it is clearly possible for developing country Members to receive the benefits of the transitional 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 notification requirement under the TRIMs Agreement, for the substantial part of its coverage, meaningless.

6.68 Finally, if a conflict may some day arise between 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 establish any hierarchy between the two. Recent Appellate Body Reports also 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 WTO Appellate Body approved this aspect of the panel decision in the Periodicals case, quoting the above reasoning by the panel and noting that: "The 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 Agreement. Thus, the Panel should not, without any textual basis, elevate one Annex 1A Agreement over the others.

To Continue with Incentive measures are covered by the TRIMs Agreement .

³⁰⁹ Argentina 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). Hungary "...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 subsidies." MTN.GNG/NG12/14 at para. 100. 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 incentives linked to TRIMs are subsidies and should be disciplined by GATT Article XVI and the Subsidies Agreement. MTN.GNG/NG12/14 at para. 75.

³¹⁰ MTN.GNG/NG12/W/22 at para. A.3.

³¹¹ See id. at para. A2(c)(iii) and note 2.

³¹² G/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).

³¹⁴ Decree 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).

³¹⁵ MIT 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.

³¹⁶ The Government of Indonesia misunderstands the nature 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 within 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.

³¹⁷ In 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.

³¹⁹ Report of the Panel on Canada - Periodicals, WT/DS31/R, para. 5.17.

³²⁰ Report of the Appellate Body on Canada - Periodicals, page 19.