Aug 31, 1998

ANOTHER BLOW TO THIRD WORLD INDUSTRIALIZATION?

Geneva, Aug (Chakravarthi Raghavan) -- The WTO ruling on the Indonesian national car project, adopted by the Dispute Settlement Body in July, seems likely to place another obstacle to development and industrialization of developing countries. 

The ruling will strengthen the view in the South that the system is stacked against it, is being used to advance the neo-mercantalist interests of North-based global corporations, prevent rise of competition to them in the South, and promote a particular form of globalization and transnationalization of the world.  

It will also strengthen the suspicion among some experts, of a clear and studied effort within the system, through panel processes (and otherwise), to restrictively interpret WTO rules on rights of developing countries to subsidise and promote domestic production, and an expanded interpretation of obligations of developing countries so as to increase market access and share for transnational firms based in the industrialized world.

The ruling was handed down by a three-member panel in June, and adopted by the WTO Dispute Settlement Body at its meeting in July. 

Indonesia could have appealed against the convoluted reasoning and interpretations of the panel, and would probably have won on atleast some of the legal issues. But it did not do so.  

At the July meeting of the DSB, the Indonesian representative had explained that though her government disagreed with several points of the ruling, it was not appealing against it, in view of the country's agreement with the IMF and termination of the car project itself under the IMF conditionality.  

But neither India as an interested third party before the panel, nor any other developing country likely to be affected, could have taken the issues to the Appellate Body - since the WTO system restricts such appeals on law only to the parties to a dispute.  

There are reports that, encouraged by the ruling in the Indonesian dispute, a sleuth of similar disputes against a number of developing countries of Asia and Latin America are being readied.  

All these will have implications for Third World countries, in their various industrialization and development strategies and programmes -- unless they use the opportunity of forthcoming reviews of the TRIMS, and the ongoing review of DSU, to bring about procedural and substantive remedial changes. 

The Indonesian national car project began with a link-up of the Korean enterprise (Kia motors) with the Suharto family businesses, as part of the Korean auto-maker's efforts to break into the Indonesian market, dominated by Japanese, European, and Europe- based subsidiaries of US automobile giants.

The direct benefits to a country of a domestic a car industry, as well as the spillover effects in encouraging domestic steel, engineering and other ancillary industries, are well documented in economic history.  

Shorn of the charges against it of corruption and patronage to the Suharto children, the project could be justified on merits. But one could also take a different view on whether the automobile sector (of the individual car consumerist model, as against public sector and transport models) is the best development strategy. 

However, the socalled 'economic efficiency' argument against Third World industrialization via initial protection and state support to domestic enterprises is not such an open and shut case, as made out by neo-liberals ensconced in the WTO. 

After the near collapse of the Indonesian economy under IMF mandated policies, and the ouster of President Suharto, the entire web of industries and enterprises, including the national car project, associated with old regime, have come under a cloud.  

Some Indonesian critics even view positively, the IMF role in ousting Suharto from power.

But the mass unemployment, rise in poverty and destitution has created explosive social discontent and a backlash against the 'reforms' with the IMF and the WTO being identified as part of the problem. And even among critics of the previous regime, there are efforts to ensure that the baby is not thrown out with the bathwater.

By the time the WTO panel was in its final stages, the government of Indonesia had wound up the controversial car project. President Suharto had resigned, and with him went many of the family influences and links in businesses; but foreigners who used these links for profitable contracts and projects, have merely changed allegiances, and continue to prosper.

As reported in the media soon after the first IMF accord, and confirmed by Indonesia at the DSB in July, one of the IMF conditions for loans was that Indonesia 'shall accept' the ruling and implement it (and thus not exercise its WTO right/option of not implementing the ruling but compensating trading partners).

At a WTO-organized symposium on trade and environment for NGOs, early this year, WTO Director-General Renato Ruggiero, in an effort to disarm Northern environment lobbies (agitated over the shrimp- turtle panel's ruling against US unilateral trade actions) had drawn pointed attention to this option and had said 'no country is compelled to implement a ruling, but only to compensate its trading partners' if it is not able to implement.

Challenged from the floor to comment on the IMF 'cross- conditionality' in Indonesia, in effect subverting that country's rights under the WTO, Ruggiero tried to distance the WTO from IMF actions, saying he could not comment on actions by other international organizations.  

However, there are some indications that informally WTO officials and the IMF staff have been working in tandem. For e.g. it has become known, in Jakarta, that after that country's agreement with IMF, WTO officials 'advised' Indonesia to 'notify' to WTO, the trade liberalization measures (under the agreement with the IMF). Indonesia did not comply; they had no such obligation. If the Indonesians had acted according to WTO advice, it would have prevented any Indonesian government in future, when country gets out of the clutches of the IMF, to reverse policies now favouring foreign enterprises over national.  

The national car project, linked to the Suharto family, is now so politically controversial that, during a recent visit to Jakarta, Indonesian officials were unwilling (on record or off) to explain or discuss these matters or even the legal implications. But even those happy over the fall of the Suharto family business and corruption, are concerned about the implications of the panel ruling for fostering domestic industries in future. Similar concerns are evident throughout the region.  

And while a panel ruling does not bind other panels, panels could find themselves guided to adopt the earlier rulings as their own.  

The laboured and tortuous reasoning of the panel for its interpretations have strengthened the suspicion of several Third World trade officials and observers over the secretariat role, in servicing and guiding panels, which are gradually whittling away the rights of developing countries. 

Members of some past panels, speaking non-attributively, have confirmed that they get assistance and guidance from the legal and substantive divisions of the secretariat, but aver that, panel members are responsible for their conclusions.

In this light, an analysis of various rulings suggest a subtle effort, by use of vague concepts like 'legitimate expectations' of trading partners, and ensuring 'competitivity' in, and 'contestability' of markets, to whittle down the limited rights, and special and differential treatment available to developing countries, to promote domestic enterprises and industrialization.

The Uruguay Round has no official negotiating history - and under international law, it was for the body that negotiated and concluded the negotiations to approve such a history. When the Uruguay Round ended no negotiating history was presented and adopted; and while the formal proposals were derestricted and have been published, most of the negotiations took place informally on the basis of informal texts. 

At the time the negotiations concluded (and before Marrakesh) some secretariat officials privately confessed to the difficulties of providing a negotiating history, but indicated that the secretariat had been keeping files and notes. While these files and notes are of no value, some the recent rulings have raised the suspicion that information in these files are being used to promote a particular interpretation favourable to the industrialized countries.  

Whatever the facts, the Indonesia car panel ruling will strengthen concerns in the developing world, more so in civil society, of the bias of the WTO system, and secretariat, against the developing world, and hence of the WTO becoming 'illegitimate'. In substance, the Indonesia car panel has put on a higher footing the TRIMs agreement, and thus extended the obligations under Art III of GATT 1994. In December 1993, when the negotiations were concluded at official level by the Trade Negotiations Committee, the TRIMS agreement was viewed by most participants as merely clarifying the obligations of Art. III of GATT. If there were other views, these were not publicly expressed.

The panel has placed the Subsidies Agreement (which has given some limited rights to developing countries to subsidize and promote domestic industries), at an inferior level, below that of TRIMS (which is an accord, by reference, to the Art III obligations of GATT and incapable of standing alone). The panel has extended the reach of the TRIMS as an independent agreement, and of the WTO accords as creating cumulative obligations, governing not only foreign investments and government measures relating to them, but domestic investments too.  

Not figuring in the panel ruling, is the fact (deducible from the now de-restricted formal proposals and documents of the Uruguay Round) that such a wide definition of "investments", and trade rules to govern them, had in fact been attempted by the demandeurs (Japan and the United States) at an early stage of the negotiations within the TRIMS negotiating group, but failed.The final compromise agreement became possible only when both the wide-ranging definitions of investments and attempts to create new obligations going beyond GATT Art. III were given up, and there was an agreement to merely clarify existing obligations. 

Not also of value to the panel is the fact, known to everyone who closely followed the negotiations (and this was reported contemporaneously without any denials), that the various agreements were negotiated separately, often in a non-transparent way among a small group of negotiators, and forced down on the large majority of developing countries, under threats of dire consequences if negotiations fail. 

And the final package as an annex to the WTO draft treaty emerged so late that most governments had no time to have the package of agreements vetted by their legal experts -- from viewpoint of internal inconsistency and contradictions.

After the December 1993 official TNC meeting, and before Marrakesh, there was some scrutiny of texts -- but changes were discouraged on the ground that tampering with wording in one place may unravel everything.

But the panel has taken a different view of the way the negotiations were conducted and concluded, namely, of carefully crafted and negotiated texts, with all participants fully aware of varying terminology and phrases and words used, and hence intending differing interpretations. From this, the panel has proceeded to the view that when a number of international agreements are entered into by the same parties at the same time, there has to be a presumption that there are no conflicts.

That the parties to the WTO accords in Annex IA, did envisage conflicts, and hence put in the over-riding general interpretative note to Annex IA, is got around by the argument that this could apply to any conflict between the obligations of GATT 1994 (including Art.III) and the Subsidies Agreement, but not between TRIMS and the Subsidies Agreement.

 This dictum about no conflict between TRIMS and Subsidies Agreement is achieved by "interpreting" the TRIMS as a "full-fledged" Agreement of the WTO, and that references to the "provisions of Art.III of GATT 1994" in the TRIMS should be interpreted as a reference, not to the Article as such -- as would be the ordinary meaning of the term in international public law interpretations -- but only to its "substantive aspects"! The panel does not explain where it got this "qualification" to distinguish between "substantive aspects" and the Article itself.

The panel uses the Appellate body ruling, in the US-EC banana dispute, to buttress this view and promote the theory of cumulative obligations on the same subject in different agreements.  

In the banana dispute, the US, in pursuing the interests of the Chiquita banana TNC, had also challenged the EC's whole-sale distribution regime under the (General Agreement on Trade in Services, or GATS), knowing that without the GATS challenge, the US may have no locus standi in disputes involving Annex IA accords, since the US exports no bananas.  

The issue in that case hence was over the EC's obligations under the agreements under Annex IA (i.e. GATT 1994 and other agreements in the area of trade in goods) and those in Annex IB (GATS) and whether one excludes the other.

The WTO treaty itself has no provision analogous to that in Annex IA, on any conflicts amongst the agreements in Annexes IA, IB, IX and Annex 2. Thus in any conflict among the three, issues such as the general and the particular, and a presumption(rebuttable though) about no conflict is possible. But all Annex IA accords are covered by the General interpretative note about conflicts, and shows that the signatories envisaged possible conflicts, and ways to resolve them.

The Indonesian national car project -- a joint venture of the South Korean Kia Motors and an Indonesian enterprise (linked or owned by the Suharto family) -- was given preferential treatments on import duties on initial shipment of cars (from Korea), and on components and parts to be imported for assembling in Indonesia, as other subsidies via preferential taxes -- all linked to progressive indigenisation and local content.

The EC, Japan and the US challenged these measures at the WTO, principally as violative of Art. III of GATT 1994, the TRIMS agreement, the Subsidies Agreement all agreements in Annex IA.  

The US also claimed that the Indonesian measures (for example that the car should use an Indonesian trade mark) violated TRIPS. But the panel ruled against these claims.  

One of the major defences of Indonesia was that its measures were in the nature of assistance provided by the government to the national car project, and governed by the permissible (to developing countries) subsidies of the Subsidies Agreement to promote industrialization, and not an 'investment measure' under TRIMS and the linked Art III of GATT.

Indonesia also argued that as per the general interpretative note to Annex IA of the WTO, in any conflict between GATT 1994 and any of the annexed agreements, the provisions of the annexed agreement are to prevail, and hence its rights under the Subsidies accord prevailed over the conflicting obligations of Art. III of GATT and the linked TRIMS.

Article 1 of the TRIMS accord stipulates that it applies to all investment measures in the area of trade in goods (thus excluding its applicability to other trades under the WTO); and Art. 2 says that without prejudice to other rights and obligations under GATT 1994, no Member shall apply any TRIM that is inconsistent with provisions of Art III or Art XI of GATT 1994. The second para of Art.2 annexes to the agreement an 'illustrative list' of TRIMs inconsistent with the national treatment obligations under Art.III.4 of GATT 1994 or general elimination of QRs under Art. XI of GATT 1994.

Before the Uruguay Round, a GATT panel had ruled against Canada in the FERA case, making illegal Canadian requirements (by an agreement with a foreign investor) on use of local content or supplies and other such steps, as also requiring exports of the product. That panel ruled that the Canadian export performance requirement measures were beyond its purview, but that the local content requirements and the QRs on imports were contrary to Canadian obligations under Art III and Art XI of GATT. That panel, before which a number of developing countries had intervened, had also said that while its ruling applied to the industrialized countries, it made no judgement on restrictions maintained by developing countries under the BOP provisions. 

Subsequently, there were controversies among GATT parties on what were the measures that would fall foul of the national treatment obligations of the Art III. 

During the TRIMS negotiations, developing countries unitedly made clear that the negotiations could only address, directly trade- related and trade-distortive investment measures, and not investment or investment measures per se, and that within these parameters, they would only agree to a clarification of existing obligations set out in the Canadian FERA panel ruling.  

Japan and the US ultimately agreed to this compromise, with the stipulation that there would be a review of the TRIMS after 5 years, to propose amendments to the texts, and whether TRIMS should be complemented with provisions on investment policy and competition policy. The last was put in by developing countries who insisted thattheir investment policies are aimed at countering the RBPs of TNCs.

It stretches credulity to conclude, as the panel has done, that the negotiators of TRIMS, in the language used in Art. 2, had in mind only the 'substantive aspects' of Art.III of GATT 1994, i.e. conceptually to the ten paras of Art.III and not the Article as a whole!  

Why? Because the TRIMS agreement provides for applying the General Exceptions of GATT, and also because it has notification requirements, transition provisions for developing countries etc, and hence as an independent agreement - despite the lack of any definition and other general attributes of an independent accord.

The plain language in TRIMS Art 2 is ignored to achieve the end objective of making TRIMS prevailed over the Subsidies accord.  

The panel has said it would not provide any definition of an 'investment measure' (thus keeping options open for the future?). It ruled that the Indonesian measures were aimed at encouraging local manufacturing capability, and hence by any 'reasonable interpretation' is an investment measure (and not a subsidy or aid?), thus bringing within range of the WTO guns any effort by any developing country, now or in the future, to encourage local manufacturing capacity through state aid. 

The general thrust of the car panel ruling, raises some important questions about the WTO and its TRIMS and other agreements that need to be clarified and reinterpreted or amended to enable development and provide level playing field for domestic enterprises, and a chance for developing countries to develop.

Given the automaticity of adoption of panel rulings, there is a case for the dispute settlement process to have an independent secretariat, rather than the WTO secretariat which is also a servicing secretariat and, at the instance of WTO members, produces studies and reports on the issues.

Also to be addressed is the question whether for the sake of costs, the present practice of choice of panellists (trying to find members from among WTO delegations or those near about Geneva), is one more case of cards being stacked against the developing world.