Containing likely policy damage

By Mari Pangestu

JAKARTA (JP): The European Union (EU), Japan and the United States have all lodged complaints against Indonesia's "national car" policy with the World Trade Organization (WTO). Indonesia's national car policy allows only one domestic company to produce a "national" car with special privileges in the form of duty-free imports and exemption from luxury sales taxes. These special privileges are conditional on satisfying domestic content requirements and only given for three years. The privileges are significant, as the car can be sold at about half the price of similar vehicles.

Without being privy to the exact content of the complaints, one can go by previous press statements made by both sides to speculate on the complaints and Indonesia's likely defense.

The complainants will first argue that the policy is a clear violation of the basic and founding principle of GATT in 1947: non-discrimination. In Article 1, members are required to give Most Favored Nation treatment to all imports. The undeniable fact is that the moment the imported KIA cars from Korea rolled off the ship and were released from customs without paying duty, there has been discriminatory treatment of imports.

A second argument they can use is violation of another basic principle, namely equal national treatment, which compels members to give the same treatment to domestic and foreign companies.

Yet a third argument would be that Indonesia has violated the TRIMS (Trade Related Investment Measures) accord agreed at the Uruguay Round Negotiations. The TRIMS Agreement requires countries to eliminate certain investment-related requirements which distort trade, such as local content requirements. Indonesia in fact did notify the WTO that it would eliminate its local content regulations in the automotive sector (as well as for dairy and soybean products) in 1995 and by the terms of the TRIMS agreement would eliminate them by 2000, and also as bound by the agreement not add any new ones after Jan. 1, 1995.

It has been said that Indonesia could use the special and differential treatment given to developing countries, which allows them to temporarily conduct policies inconsistent with GATT principles and obligations. The exceptions are allowed for developing countries based on various criteria such as the balance of payments, national interest, and infant industries.

Based on the facts and the principles and agreements under the WTO, I am of the opinion that Indonesia's case is weak. Violation of the basic principles, TRIMS aside, would constitute what lawyers could call an "open and shut" case. Meanwhile, although there are exceptions for a "temporary" deviation from GATT principles and regulations as a developing country, there are not many examples of developing countries actually using it and one can only speculate that this is because of the difficulties in actually proving and justifying the exceptions based on those criteria. Furthermore, it is not clear whether the exceptions can be applied in a discriminatory way which is the case with the Indonesian "national car" policy. We should also remember that Indonesia is dealing with major economies which have a lot of experience with trade disputes.

Given that the case is weak, but faced with the reality that the EU, Japan and the U.S. have all lodged their complaints with the WTO -- what would be the best response for Indonesia's longer term interests?

This case will be another important test for the Dispute Settlement Understanding (DSU) under the World Trade Organization (WTO) that became effective Jan. 1, 1995. What is the dispute settlement procedure under the WTO and how does it work?

In brief, the DSU provides a unified system to settle disputes arising from all agreements covered under the WTO. The reforms of the dispute settlement procedure under DSU basically expedites the decision-making process by making it more automatic and judicial compared with the previous system. The DSU has been hailed as one of the cornerstones of an open, fair and rule-based system. Since Jan. 1, 1995 and to September 1996, 54 disputes dealing with 34 separate measures have been raised at the WTO compared with 196 disputes raised during the 47 years of the existence of GATT.

In fact taking the dispute to the DSU is better for a small country like Indonesia than having these major economies resort to unilateral measures against Indonesia. Under the dispute settlement procedure, retaliation in any form, can only be undertaken after consultations, and independent panel rulings have failed to resolve a dispute. The dispute settlement procedure is also meant to settle disputes between any members, whatever their size and economic might. Thus, under the WTO umbrella Indonesia stands on an equal footing with the major powers, as long as the arguments follow WTO principles. The disputes that have already been brought to the WTO to date, increasingly involve developing countries bringing complaints against other developing countries, and also against major developed countries.

The different stages of the procedures and the associated time limits are key to ensuring that the settlement procedure is not prolonged and that WTO violations can be quickly remedied. Given the time limits, the argument that the process may take as long as three years to settle is a weak one. This implies that we should just go through the motions and prolong the dispute settlement procedure as long as possible so that by the time decision is reached, the policy is no longer in place. Such a strategy would have worked under the old rules, but not under the present system.

The stages in the dispute settlement process are mainly: consultation (60 days), independent panel establishment, issuance of report and ruling (six and a half months to one year), adoption of panel report (60 days), compliance within a reasonable period or appeal (three months) and compliance (within a reasonable time agreed upon by the disputing parties). Thus, the whole process could take 20 months, but a panel decision could be reached within 12 months, especially if the violation is as clear cut as already discussed and the panel decides quickly.

Given the weak case and the process we face, what would be the best approach? We have already entered the first stage, where Indonesia will have consultations. It is in our longer-term interests to try to resolve the dispute before the 60 day consultation period is over. In fact 11 out of the 34 disputes taken to the WTO since Jan. 1, 1995 have come to nothing as a result of withdrawal or a modification of the measures under dispute. Once the case reaches the panel, it will be up to the independent panel to give a final ruling. The probability is high that the ruling will be against us, as argued above.

Some might say, so what? Let's just go through the motions and if the ruling is against us, then we will comply or have to face the heavy consequences of retaliation. After all even countries like the U.S. have lost cases, even after the appeal stage -- where the complainants were developing countries, Brazil and Venezuela -- and the U.S. agreed to comply with the verdict and bring its laws into line with the requirements.

Thus, what we are going through is part and parcel of the trading system in which disputes are bound to arise. However, the big difference is the nature of the violation -- and we are guilty of a violation of a basic principle and after a panel ruling it is on record forever. The damage to our international reputation is not easily quantifiable, but we have to think carefully of the broader consequences.

The writer is Head of the Economics Department at the Centre for Strategic and International Studies and a lecturer at the University of Indonesia.

Window A: Based on the facts and the principle and agreements under the WTO, I am of the opinion that Indonesia's case is weak.

Window B: The damage to our international reputation is not easely quantifiable, but we have to think carefully of the broader consequences.