Avoiding a WTO panel

Avoiding a WTO panel

The Indonesian government has apparently not given much leeway
to its negotiating team to maneuver in the bilateral talks over
the Timor car with each of the three complaining parties, Japan,
the European Union and the United States. From the snippets of
information that leaked out of the supposedly confidential
negotiations at the World Trade Organization (WTO) in Geneva over
the past two months and then on the sidelines of the WTO
conference in Singapore, it appears the Indonesian negotiators
simply dragged their feet and stuck to the rigid position
demanded by Jakarta.

Foot-dragging not only worsens Indonesia's position but also
entails a greater cost in terms of the foreign exchange spent on
the negotiating team and the foreign lawyers, and of the bad
publicity resulting from the opaque policy. It would be much
better for Indonesia to settle the dispute during the bilateral
negotiations as all parties could focus attention on the broader
aspects of their relationships rather than being preoccupied with
the car policy. Most previous trade disputes have been settled
during such bilateral negotiations under WTO auspices.

Proceeding to an independent panel of judges would be
detrimental to Indonesia's position as the judges would consider
only the General Agreement on Tariffs and Trade (GATT) rules and
would not take other factors into account.

A Japanese negotiator was quoted as complaining that the
Indonesian team could not answer satisfactorily several basic
questions on the logic and viability of the national car policy.
The Indonesian team remained stubbornly persistent in its
outlook, claiming that Indonesia had the right to a pursue a
special policy-- which temporarily departs from the GATT rules--
to develop its national car industry.

GATT (Article XVIII) does allow member countries, especially
developing ones, to take special measures with the objective of
developing a particular industry. The GATT Agreement on subsidies
and countervailing measures also allows Indonesia to grant
subsidies to a particular industry. However, such special
measures are subject to a clear set of rules, such as
notification procedures, and have to be supported by logical
explanations justifying the measures and the viability of the
programs.

Both the manner in which the policy was unexpectedly launched
last February, to the shock of existing automobile assemblers,
and the underlying principles of the program seemed to fail to
meet the GATT procedures. The most damaging element of the
national car policy is the preferential treatment granted to one
particular company. Its is against both the most-favored nation
and national treatment rules, two of the four GATT cornerstones.

Furthermore the Indonesian government failed to fulfill WTO
notification procedures, in spite of strong advice to do so from
the Indonesian mission to the WTO.

It seemed that the government could neither come up with
reasonable justification for the policy-- which runs against the
basic principles of the prevailing automobile program implemented
since the 1980s-- nor explain its economic feasibility. We can
imagine how difficult it has been for the negotiating team to
defend the policy, which even in Indonesia has been condemned as
a failure by most automobile analysts. It is a delicate, uphill
task for the team to explain why only one company, PT Timor Putra
Nasional-- which has no previous experience in the car industry
and happens to be owned by a politically well-connected
businessman-- has been chosen as the beneficiary of the policy,
at least for the first three years.

It has been even harder for the team to explain why the Timor
car is treated as an Indonesian national car when it is fully
manufactured in South Korea by Kia Motor. Since PT Timor Putra
Nasional has had to start its operations virtually from scratch,
it has been an equally formidable task to convince the
complainants that the Timor car would achieve a minimum local
content of 60 percent within three years. Failure to defend the
economic viability of the national car program would kill the
credibility of Indonesia's claim that invoking the special
measures is necessary to develop a national car industry.

It appears the government needs to come up with some
concessions to avoid the proceedings progressing to a WTO panel
and therefore further negative publicity which has already
affected Timor car sales.