WT/DS54/R, WT/DS55/R, WT/DS59/R, WT/DS64/R Page 149 VII. ARTICLE I:1 CLAIMS A. Claims raised by Japan 1. The National Car Programme of February 1996 7.1 Japan claims that the National Car Programme of February 1996 (See Section III.A) violates Article I:1 of GATT 1994. The following are Japan's arguments in support of this claim: (a) Article I:1 of GATT 1994 requires immediate and unconditional MFN treatment for imported parts and components 7.2 The National Car Programme introduced in February 1996 accords a special advantage including exemption from customs duty to automotive parts and components imported or to be imported from Korea for use in assembling National Cars. This advantage constitutes a violation of Article I:1 of GATT 1994 which requires the "immediate and unconditional" extension of general most-favoured-nation treatment to imports from member countries relative to the treatment of imports of like products from any other country. 7.3 As the 12 December 1995 letter from the President Director of TPN to the State Minister for the Mobilization of Investment Coordinating Board shows clearly, TPN, which is currently the only National Car producer, has expressed its intention to rely on Kia Motors, Korea. In particular, the President Director of TPN stated plainly that the company applied to obtain approval to "(1) [m]anufacture four-wheeled motor vehicles with the 'TIMOR' brand name at the KIA Motors Corp., South Korea factory which are then to be delivered to Indonesia in SKD form with a local production of 65,000 units from 1996, 1997, and 1998; [and] (2) [m]anufacture four-wheeled motor vehicles with the 'TIMOR' brand name at third party's/parties' licensed assembly plant(s) in Indonesia with its primary material imported from overseas (KIA Motors Corp.) starting from full- CKD and gradually decreasing by the use of local components/parts with a total production from 1997, 1998, and 1999 of 125,000 units." (Italics added.) The correspondence between the President Director and the State Minister shows that both of them understood that most of the parts and components for assembling national cars in Indonesia would be imported from Korea at least in the initial stages and that they intended to effectuate this understanding. Accordingly, TPN is expected to import many of the parts and components for the purpose of assembling National Cars only from Kia. The preferential treatment for National Cars, including the duty-free treatment of imported parts and components in particular, is likely to lead to benefits for imports of parts and components from Korea, compared with those from other countries. 7.4 Article I:1 of the GATT provides as follows: "With respect to customs duties and charges of any kind imposed on or in connection with importation or exportation or imposed in the international transfer of payments for imports or exports and with respect to the method of levying such duties and charges, and with respect to all rules and formalities in connection with importation and exportation, and with respect to all matters referred to in paragraph 2 and 4 of Article III, any advantage, favour, privilege or immunity granted by any contracting party to any product originating in or destined for any other country shall be accorded immediately and unconditionally to the like product originating in or destined for the territories of all other parties." 7.5 In EC - Bananas III, a recent WTO panel articulated the following three-part test to determine whether an import measure violates Article I:1: WT/DS54/R, WT/DS55/R, WT/DS59/R, WT/DS64/R Page 150 [an import measure] is inconsistent with the European Communities' obligations under Article I:1 [if] it constitutes [1] an advantage [2] of the type covered by Article I that is accorded to [products from one country or group of countries] but [3] which is not accorded to like products from all Members ...333 (emphasis added). The National Car Programme must be evaluated under the same three-part test. It violates Article I:1 because the customs duty and luxury tax exemptions (1) confers an advantage, (2) of the type covered by Article I:1, (3) to imports of automotive parts and components from Korea but not to imports of like products from other WTO members. 7.6 In addition, Article I:1 requires that MFN treatment be accorded "immediately and unconditionally", but the National Car Programme also violates this requirement. (b) The National Car Programme of February 1996 in practice grants benefits only to automotive parts and components imported or to be imported from Korea in violation of Article I:1 of the GATT 1994 7.7 The February 1996 Programme grants benefits only to automotive parts and components from Korea. As such, it impermissibly provides advantages to Korean parts and components that are not accorded to parts and components from other WTO Members, in violation of Article 1 (regardless of whether or not the Programme constitutes a subsidy). In addition, such advantages can be accorded to imported parts and components from other countries only if they are for use in National Cars, in violation of the Article I:1 requirement of "unconditional" most favoured nation treatment. The discrimination in practice in favour of parts and components from Korea is precisely the sort of discrimination that preceding panels have long held to be inconsistent with Article I:1. (1) Indonesia grants benefits solely to imports from Korea 7.8 While National Cars are required to meet certain local content levels, the balance of the parts and components necessary to assemble National Cars is imported. Indonesia provides the sole National Car producer, PT Timor, with the benefits of duty free treatment of such parts and components. 7.9 While there is no reference to Korea or a Korean company in Indonesia's regulations which establish and regulate the National Car Programme, the intended beneficiary of the Programme, PT Timor, has intended, since even prior to the formal establishment of the Programme, to import parts and components for assembly of National Cars only from a Korean company. Even before the initiation of the Programme, the State Minister for the Mobilization of Investment Coordinating Board supported this intent and Indonesia effectuated it through Presidential Instruction No.2/1996.334 Accordingly, only certain automobile parts and components from Korea are granted duty free treatment, while parts and components from any other country including Japan are not. 7.10 Indonesia also provides a luxury tax exemption for National Cars. On its face, this measure gives advantages to the sales of National Cars. In addition, the luxury tax exemption also 333 Report of the Panel on EC - Bananas III, para.7.194. 334 Letter dated 27 December 1995 from Mr. Sanyoto Sastrowardoyo, State Minister for the Mobilization of Investment Coordinating Board to Mr. Hutomo Mandala Putra, President Director of PT. Timor Putra Nasional (Japan Exhibit 35). WT/DS54/R, WT/DS55/R, WT/DS59/R, WT/DS64/R Page 151 indirectly benefits parts and components imported or to be imported from Korea for the purpose of assembling National Cars. The increase of the National Cars' market share, thanks to the luxury tax exemption, would naturally expand sales and profits of Kia. As parts and components for assembly of National Cars are imported only from Kia, such indirect benefits are to be exclusively granted to Kia's parts and components. Accordingly, only certain parts and components from Korea are granted indirect benefits of the luxury tax exemption, while parts and components from any other country including Japan are not. (2) The benefits for imports from Korea constitute an advantage that is covered by Article I:1 7.11 The duty free treatment is an "advantage" prohibited under Article I:1 because duty free treatment obviously is an advantage with respect to "customs duties and charges of any kind imposed on or in connection with importation. The luxury tax exemption is also an "advantage" prohibited under Article I:1 because the exemption relates to "internal taxes or other internal charges" that are "matters referred to in paragraph 2 ... of Article III." Accordingly, the first and second part of the EC - Bananas III three-part test are satisfied. (3) The advantage is not accorded to "like products" from any country other than Korea 7.12 Article I:1 of GATT 1994 obliges the GOI to accord the advantage to "like products" from all WTO Members, not only from Korea. 7.13 With respect to the "likeness", the discussion in terms of Article III should apply with equal force. First, the Report of the Working Party on Boarder Tax Adjustments335 suggests that the criteria, such as "the product's end users, consumers' tastes and habits, and the product's properties, nature and quality", should be used " for interpreting 'like or similar products' generally in the various provisions of GATT 1947".336 Also in the Spain - Tariff Treatments of Unroasted Coffee the panel found whether the products in their end-use are "regarded as a well-defined and single product" to be relevant in determining whether they are "like products"337, for the purpose of Article I:1. 7.14 Under the preceding criteria, parts and components imported from Japan, or any other country, and those imported from Korea for assembly of National Cars constitute "like products" for the purpose of Article I:1. Parts and components from Japan and those imported from Korea for assembly of National Cars are in their end-use regarded as a single product, that is, parts and components for use in the assembly of automobiles.