WT/DS54/15

WORLD TRADE WT/DS55/14

WT/DS59/13
WT/DS64/12
ORGANIZATION 7 December 1998

(98-4860)

INDONESIA – CERTAIN MEASURES AFFECTING THE

AUTOMOBILE INDUSTRY

Arbitration
under Article 21.3(c) of the
Understanding on Rules and Procedures
Governing the Settlement of Disputes

Award of the Arbitrator

Christopher Beeby
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I. Introduction

1. On 23 July 1998, the Dispute Settlement Body (the "DSB") adopted the Panel Report1 in
Indonesia – Certain Measures Affecting the Automobile Industry. With respect to the
1993 Programme2, the Panel found that the local content requirements linked to certain sales tax
benefits and customs duty benefits violate the provisions of Article 2 of the Agreement on Trade-
Related Investment Measures (the "TRIMs Agreement") and that the sales tax discrimination aspects
violate Article III:2 of the GATT 1994.3 With respect to the 1996 National Car Programme4, the
Panel found, inter alia, that Indonesia had acted inconsistently with Article 2 of the TRIMs Agreement
and Articles I and III:2 of the GATT 1994, and that the European Communities had demonstrated that
Indonesia had caused serious prejudice to the interests of the European Communities within the
meaning of Article 5(c) of the Agreement on Subsidies and Countervailing Measures.5 The Panel
recommended "that the Dispute Settlement Body request Indonesia to bring its measures into
conformity with its obligations under the WTO Agreement."6

2. In a communication dated 21 August 1998, Indonesia informed the DSB, pursuant to

Article 21.3 of the Understanding on Rules and Procedures Governing the Settlement of Disputes (the
"DSU"), that it would "fully comply" with the recommendations and rulings of the DSB adopted
on 23 July 1998.7 Indonesia also stated its belief that measures taken by it on 21 January 1998 to
repeal the February 1996 Programme constituted "appropriate implementation of the

1
Adopted 23 July 1998, WT/DS54/R, WT/DS55/R, WT/DS59/R, WT/DS64/R.
2
The Panel Report (paras. 2.4-2.14) lists the following as the measures comprising the
1993 Programme: Minister of Industry Decree No. 114/M/SK/6/1993, 9 June 1993 ("The Determination of
Local Content Levels of Domestically Made Motor Vehicles or Components") ("Decree 114/1993"); Minister of
Finance Decree No. 645/KMK.01/1993, 10 June 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")
("Decree 645/1993"); Minister of Finance Decree No. 647/KMK.04/1993, 10 June 1993 ("The Kinds and Types
of Motor Vehicles Subject to Sales Tax on Luxury Goods") ("Decree 647/1993"); Minister of Finance Decree
No. 223/KMK.01/1995, 23 May 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 Vehicles for the
Purpose of Automotive Assembly and/or Manufacture") ("Decree 223/1995"); and Minister of Finance Decree
No. 36/KMK.01/1997, 21 January 1997 ("The Granting of Import Duty Relief to Certain Parts and Accessories
of Motor Vehicles for the Assembly and/or Manufacturing of Motor Vehicles") ("Decree 36/1997"). The parties
confirmed that these were the measures at issue in this arbitration. I note that Decree 36/1997 declared "null and
void" the Decrees 645/1993 and 223/1995.
3
Panel Report, para. 15.1(a) and (b).
4
For a description of the measures comprising the 1996 National Car Programme – consisting of the
February 1996 Programme and the June 1996 Programme -- see paras. 2.15-2.41 of the Panel Report. All
parties agree that these measures are not at issue in this arbitration.
5
Panel Report, para. 15.1(a)-(d).
6
Panel Report, para. 15.4.
7
WT/DS54/12, WT/DS55/11, WT/DS59/10, WT/DS64/9, 27 August 1998.
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recommendations and rulings of the DSB" concerning the February 1996 Programme.8 With regard
to the 1993 Programme, Indonesia stated the following:

… while intending to act expeditiously, Indonesia would require a

reasonable period of time in which to examine all the options to meet
its WTO obligations. In this context, Indonesia would require time
until no later than 23 October 1999. ...9

3. On 21 September 1998, consultations were held pursuant to Article 21.3 of the DSU among
Indonesia, the European Communities, Japan and the United States in order to reach agreement on a
"reasonable period of time" for the implementation by Indonesia of the recommendations and rulings
of the DSB adopted on 23 July 1998. These consultations and further written communications
between the parties did not lead to an agreement. The European Communities requested, on
8 October 1998, that the "reasonable period of time" for implementation of the recommendations and
rulings of the DSB in respect of the 1993 Programme be determined by binding arbitration pursuant to
Article 21.3(c) of the DSU.10

4. By letter dated 21 October 1998, the parties informed the Director-General of the World
Trade Organization (the "WTO") that they had agreed that I should act as arbitrator. The parties also
agreed to extend the time-period provided for in Article 21.3(c) of the DSU for the binding arbitration
for a period of 45 days to 7 December 1998. They agreed that my award would be deemed to be the
award of the arbitrator for the purposes of Article 21.3(c) of the DSU in determining the reasonable
period of time for Indonesia to implement the recommendations and rulings of the DSB. By letter
dated 23 October 1998, the parties were informed that the Director-General had conveyed the
agreement of the parties to appoint me as arbitrator, that I had accepted the appointment and that I
would issue my award to the parties by 7 December 1998.

8
WT/DS54/12, WT/DS55/11, WT/DS59/10, WT/DS64/9, 27 August 1998.
9
Ibid.
10
WT/DS55/12, WT/DS64/10, WT/DS54/13, WT/DS59/11,G/L/262, 13 October 1998.
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5. In a letter sent by Japan to the Director-General on 23 October 1998, Japan clarified its
position in this arbitration as follows:

The arbitration requested by the European Communities in its letter

dated 8th October 1998 is concerning the reasonable period of time
for the implementation of the recommendations and rulings on the so-
called "1993 Programme". Since Japan requested the Panel to make
rulings and recommendations on the "1996 Programme" only, Japan is
not a party to the arbitration for the "1993 Programme". However, as
Japan is still interested in this arbitration, it jointly signed the letter [of
21 October] to you in view of participating in the arbitration process.

6. Written submissions were received from Indonesia, the European Communities and the
United States on 6 November 1998, and an oral hearing was held on 16 November 1998.

II. Arguments of the Parties

A. Indonesia

7. Indonesia asserts that 15 months, until no later than 23 October 1999, constitutes a reasonable
period of time for implementation of the recommendations and rulings of the DSB in this case.
Indonesia requests this period of time in order to assess fully the impact of changing the 1993
Programme on the industries concerned and to consider the various WTO-consistent policy options,
as well as to provide a transitional period to allow the existing industries to make the necessary
structural adjustments. By the end of January 1999 at the latest, a new policy is scheduled to be ready
for issuance, and it will become effective by 23 October 1999. Indonesia requests the additional
period of nine months after January 1999 as a transitional period to allow its existing industries to
make the necessary structural adjustments. Indonesia makes it clear that the "impracticability" of
complying immediately with the recommendations and rulings of the DSB stems not from any
particularly complex or time-consuming legislative procedure, but rather from its current social and
economic difficulties.

8. In the view of Indonesia, there are three principal factors that should be considered as
"particular circumstances" to be taken into account in determining the reasonable period of time
pursuant to Article 21.3(c) of the DSU in this case. First, the underlying domestic economic situation
is severe. Indonesia states that its economy is near collapse, and that the economic slump has crippled
businesses and industries and has pushed many heavily indebted companies into bankruptcy.
Unemployment has reached unprecedented levels. The recommendations and rulings of the DSB
must be implemented while the Government of Indonesia aims simultaneously to stabilize its
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economy and preserve productive assets. The automotive industries are among those most severely
affected by the economic and financial crisis.

9. Second, comprehensive deliberations are needed in order to bring the 1993 Programme into
conformity with Indonesia's obligations under the Marrakesh Agreement Establishing the World
Trade Organization11 (the "WTO Agreement"). Unlike the 1996 National Car Programme that
involved only one company, the 1993 Programme involves 190 labour-intensive companies/industries
employing tens of thousands of Indonesian workers. The Government of Indonesia must prevent
further unemployment and a deepening of the economic crisis by helping the companies to survive.
The legislative procedures to bring the 1993 Programme into conformity with the recommendations
and rulings of the DSB require a longer period than would be required for mere revocation of the
measures found to be inconsistent with Indonesia's WTO obligations. WTO-consistent replacement
measures are being considered. The Government of Indonesia has to conduct a comprehensive review
of the measures at issue, focusing on alleviating possible negative impacts to the industries which
might arise if the elements of subsidy under the 1993 Programme are abolished.

10. Third, a transitional period for adjustment is needed before the new policy becomes effective.
As early as August 1998, the Government of Indonesia began conducting preliminary
interdepartmental planning discussions to debate how best to bring the 1993 Programme into
conformity with the recommendations and rulings of the DSB without deepening the economic crisis.
Extensive meetings also have been held with the industry associations concerned, during which these
associations maintained that they need a transition period in order for the automotive producers to
make necessary structural adjustments to allow them to survive the changes.

11. Indonesia notes that the first paragraph of the preamble to the WTO Agreement stresses the
importance of ensuring full employment in trade and economic endeavours. Indonesia's priority is to
stem rising unemployment resulting from its economic and financial crisis in order to preserve social
stability. In light of Article 21.7 of the DSU, Indonesia argues that the above factors constitute
"particular circumstances" within the meaning of Article 21.3(c) of the DSU which make it
impracticable for it to comply immediately with the rulings and recommendations of the DSB.

B. European Communities

12. The European Communities argues that the "reasonable period of time" for implementation of
the recommendations and rulings of the DSB in this case is no more than six months from the date of

11
Done at Marrakesh, Morocco, 15 April 1994.
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adoption of the Panel Report, i.e. by January 1999. In the view of the European Communities,
Members are not automatically entitled to the 15-month period mentioned in Article 21.3(c) of the
DSU. This is but a "guideline" for the arbitrator. An arbitrator should not accede to requests for 15
months unless the requesting Member demonstrates that it is not "practicable" to comply within a
shorter period of time. The European Communities refers to the award of the arbitrator in
EC Measures Concerning Meat and Meat Products (Hormones) ("European Communities -
Hormones") for the proposition that the reasonable period of time "should be the shortest period
possible within the legal system of the Member to implement the recommendations and rulings of the
DSB."12

13. According to the European Communities, in determining what is reasonably "practicable", the
arbitrator should consider exclusively:

(i) the content of the required implementing measure. For example, drafting a
technically complex measure such as a sanitary regulation may require more than a
simple change of a tariff or tax rate; and

(ii) the legal nature of the required implementing act, as well as the procedures which are
necessary under the domestic law of the Member concerned in order to adopt that
type of act. For example, for constitutional reasons, the amendment of an act of
Parliament is generally more time-consuming than the amendment of an act of the
Executive.

The European Communities asserts, on the other hand, that the political, economic or social
consequences of the required implementing measures are not pertinent considerations which the
arbitrator may take into account in order to determine the "reasonable period of time". Indeed,
according to the European Communities, if such elements were to be taken into account, this would
have the paradoxical result that those measures which are the most protectionist in effect could be
maintained for the longest period of time after they have been declared inconsistent with a Member's
WTO obligations.

14. The European Communities contends that the measures that have to be repealed or amended
in order to implement the recommendations and rulings of the DSB are contained in Decree 36/1997

12
WT/DS26/15, WT/DS48/13, 29 May 1998, para. 26.
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and Government Regulation 50/1994.13 Both Decree 36/1997 and Government Regulation 50/1994
are acts of the Indonesian Executive, and not acts of the Indonesian Parliament. As such, they could
be amended, repealed or replaced by acts of the same nature within a relatively brief period of time.
Previous amendments of Decree 36/1997 and Government Regulation 50/1994 have been adopted and
entered into force in much less than 15 months. Moreover, the "content" of the required
implementing measures cannot be an excuse for delaying implementation for 15 months. In
January 1998, within a period of a few weeks, Indonesia amended Decree 36/1997 and Government
Regulation 50/1994 in order to abolish similar tax and tariff benefits provided for in the 1996 National
Car Programme. There is no reason why the measures required for implementing the Panel's
recommendations and rulings with regard to the 1993 Programme could not be adopted in an equally
expeditious manner. In view of Indonesia's own acknowledgement that the implementing measures
will be ready for issuance in early 1999 at the latest, there is no justification for delaying the
implementation of the recommendations and rulings of the DSB beyond that date.

15. According to the European Communities, Indonesia's argument that a transitional period is
needed should be rejected. The fact that certain manufacturers of motor vehicles and of parts and
components for motor vehicles have benefited in the past from the measures condemned by the Panel
cannot provide an excuse for continuing to afford protection to those manufacturers on a "transitional"
basis.

C. United States

16. The United States submits that unless Indonesia presents a legally relevant justification as to
why immediate implementation is "impracticable", the arbitrator should find that immediate
implementation is not "impracticable" and that Indonesia should implement the recommendations and
rulings of the DSB immediately. Should the arbitrator find that immediate implementation is
impracticable, the arbitrator should find one month from the date of the arbitrator's award,
i.e., January 1999, to be the "reasonable period of time".

17. According to the United States, it is clear from the text, context, object and purpose of the
second sentence of Article 21.3 of the DSU that Indonesia is eligible for a "reasonable period of time"
only if it first establishes that immediate compliance is impracticable. Indonesia has not established
that immediate compliance is impracticable and has, in fact, demonstrated that immediate compliance
is practicable. "Impracticable" means "incapable of being performed or accomplished by the means

13
The European Communities refers to 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 Goods, as
amended.
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employed or at command".14 The factors that would go into determining whether or not immediate
compliance is "impracticable" are those relating to:

(i) the legal form of implementation (e.g., legislation, regulation, decree, etc.);

(ii) the period of time in which the implementing Member can achieve the proposed legal
form of implementation, assuming that the Member applies itself in good faith; and

(iii) the nature of the legislative or regulatory change to be made (e.g., making a simple
change in a tariff rate, as compared to making more complex changes like the
development of a new scientific standard).

Factors that are not relevant are the political instability, economic hardship, adjustment costs and
social unrest that may be associated with implementation. These factors are inevitable whenever a
government proposes to end its protection of a domestic industry, and, for that reason, should not be
included in an objective assessment of whether immediate compliance is impracticable.

18. On this basis, the United States asserts that immediate compliance by Indonesia is not
impracticable in this case. The measures making up the 1993 Programme take the form of ministerial
decrees that can readily be revoked or revised by similar decrees without having to go through any
complicated or time-consuming legislative process. In the consultations among the parties concerning
the reasonable period of time, Indonesia stated that it could not repeal or revise the measures that
comprise the 1993 Programme as expeditiously as it had done with respect to the 1996 National Car
Programme because a revision of the 1993 Programme would "affect the entire automobile industry in
Indonesia." However, inconvenience to the beneficiaries of a measure found to be inconsistent with
the WTO Agreement is not a factor that should be considered in determining whether immediate
compliance is impracticable. Moreover, even if such inconvenience were a factor, Indonesia has not
demonstrated, as a factual matter, that there is any such inconvenience.

19. In the view of the United States, it is not enough for Indonesia to rely on its well-known
economic problems as a basis for delaying compliance with its WTO obligations. Indonesia has not
shown that the prolongation of its WTO-inconsistent 1993 Programme will improve its overall
economic situation. Indeed, it is equally plausible that the prompt elimination of the distortions
inherent in the 1993 Programme will improve Indonesia's economic situation.

14
Written submission of the United States, para. 21. The United States cites Webster's Third New
International Dictionary (1976).
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D. Japan

20. While Japan understands the current economic difficulties in Indonesia that have severely
affected its industries, it is not in a position specifically to express its view on the reasonable period of
time for implementation in this case. Japan, however, draws attention to certain systemic issues.
First, in accordance with Article 21.1 of the DSU, prompt compliance with recommendations or
rulings of the DSB "is essential to ensure effective resolution of disputes to the benefit of all
Members." Due attention should be paid to this provision and to the provisions of the DSU relating to
the interests of developing country Members. Second, the 15-month period in Article 21.3(c) is a
"guideline" and Members are not automatically entitled to it. Therefore, when the period for
implementation is to be made shorter or longer through the arbitration process pursuant to
Article 21.3(c) of the DSU, "particular circumstances" should be clearly indicated.

III. Award

21. Article 21.1 of the DSU states the general principle that "[p]rompt compliance with
recommendations or rulings of the DSB is essential in order to ensure effective resolution of disputes
to the benefit of all Members." Pursuant to Article 21.3 of the DSU: "If it is impracticable to comply
immediately with the recommendations and rulings, the Member concerned shall have a reasonable
period of time in which to do so." Where the reasonable period of time is determined through binding
arbitration pursuant to Article 21.3(c), that provision stipulates that:

... a guideline for the arbitrator should be that the reasonable period of
time to implement panel or Appellate Body recommendations should
not exceed 15 months from the date of adoption of a panel or
Appellate Body report. However, that time may be shorter or longer,
depending upon the particular circumstances.15

I consider that my mandate in this arbitration relates exclusively to determining the "reasonable
period of time" for implementation under Article 21.3(c) of the DSU.

22. Indonesia has indicated, both in its written submission and in statements made at the oral
hearing, that it intends not simply to revoke its existing measures constituting the 1993 Programme
that have been found by the Panel to be inconsistent with its obligations under the WTO Agreement,
but also to design new measures that are consistent with its obligations under the WTO Agreement.
Indonesia intends to do this by amending the existing measures governing the 1993 Programme.16

15
DSU, Article 21.3(c).
16
Written submission of Indonesia, p. 4.
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Indonesia has stated that its domestic rule-making process -- including interdepartmental consultations
and consultations with affected companies and industries -- has been underway since early
August 1998, and that its new "policy" designed to implement the recommendations and rulings of the
DSB will be "ready for issuance" by the end of January 1999.17 Indonesia has indicated that it
requires six months from the date of adoption of the Panel Report to conduct the domestic rule-
making process necessary to implement the recommendations and rulings of the DSB in this case. I
agree with the Award of the Arbitrator in European Communities – Hormones that:

Read in context, it is clear that the reasonable period of time, as

determined under Article 21.3(c), should be the shortest period
possible within the legal system of the Member to implement the
recommendations and rulings of the DSB.18

In my view, six months is the shortest period possible for Indonesia to complete its domestic rule-
making process in order to implement the recommendations and rulings of the DSB.

23. Indonesia also requests an additional period of nine months following the issuance of its
implementing measure (i.e., to 23 October 1999) as a "transition" period to allow the affected
companies/industries to make structural adjustments. I do not view structural adjustments of
Indonesia's affected industries as a "particular circumstance" which may be taken into account under
Article 21.3(c) of the DSU.19 In virtually every case in which a measure has been found to be
inconsistent with a Member's obligations under the GATT 1994 or any other covered agreement, and
therefore, must be brought into conformity with that agreement, some degree of adjustment by the
domestic industry of the Member concerned will be necessary. This will be the case regardless of
whether the Member concerned is a developed or a developing country. Structural adjustment to the
withdrawal or the modification of an inconsistent measure, therefore, is not a "particular
circumstance" that can be taken into account in determining the reasonable period of time under
Article 21.3(c).

17
Written submission of Indonesia, p. 4.
18
WT/DS26/15, WT/DS48/13, 29 May 1998, para. 26.
19
I note that the Award of the Arbitrator in Japan – Taxes on Alcoholic Beverages WT/DS8/15,
WT/DS10/15, WT/DS11/13, 14 February 1997 rejected the argument that adverse effects on producers (and
consumers) of the products involved constitute "particular circumstances" that should be taken into account in
determining the reasonable period of time under Article 21.3(c) of the DSU.
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24. On the other hand, Indonesia is a developing country. In that context, I note that Article 21.2
of the DSU requires that:

Particular attention should be paid to matters affecting the interests of

developing country Members with respect to measures which have
been subject to dispute settlement.

Although the language of this provision is rather general and does not provide a great deal of
guidance, it is a provision that forms part of the context for Article 21.3(c) of the DSU and which I
believe is important to take into account here. Indonesia has indicated that in a "normal situation", a
measure such as the one required to implement the recommendations and rulings of the DSB in this
case would become effective on the date of issuance.20 However, this is not a "normal situation".
Indonesia is not only a developing country; it is a developing country that is currently in a dire
economic and financial situation. Indonesia itself states that its economy is "near collapse".21 In these
very particular circumstances, I consider it appropriate to give full weight to matters affecting the
interests of Indonesia as a developing country pursuant to the provisions of Article 21.2 of the DSU.
I, therefore, conclude that an additional period of six months over and above the six-month period
required for the completion of Indonesia's domestic rule-making process constitutes a reasonable
period of time for implementation of the recommendations and rulings of the DSB in this case.

25. In light of the above considerations, and pursuant to Article 21.3(c) of the DSU, I determine
that the reasonable period of time for Indonesia to implement the recommendations and rulings of the
DSB in this case is twelve months from the date of adoption of the Panel Report by the DSB, that is,
twelve months from 23 July 1998.

20
Statement by Indonesia at the oral hearing.
21
Written submission of Indonesia, p. 2.
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Signed in the original at Geneva this 27th day of November 1998 by:

_______________________

Christopher Beeby