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.