Containing likely policy damage

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.