TRAINING PROGRAMME FOR THE

GOVERNMENT OF INDONESIA

THE TRIMS AGREEMENT

Jogjakarta, Indonesia26-29 March 2019

AGENDA

• Introduction to the Agreement on Trade-Related Investment Measures (TRIMS Agreement)

• What is a TRIM?

• Relationship between Article 2.1 of the TRIMS Agreement and Articles III:4 and XI:1 of the GATT 1994

• Carve-out provision in Article III:8(a) and exception in III:8(b) of the GATT 1994

• General obligations under Article 2.1 of the TRIMS Agreement

• Other provisions: applicability of GATT exceptions

• Relevant case law

INTRODUCTION TO THE TRIMS AGREEMENT

• The TRIMS Agreement was negotiated during the Uruguay Round.

• It disciplines investment measures that can have trade-restrictive and trade-distorting effects.

o Investment is a monetary asset purchased with the idea that the assetwill provide income in the future or will be sold at a higher price for aprofit.

• Investment protection in international law usually revolves around issues suchas:

o Protection against expropriationo MFN treatmento National treatmento Fair and equitable treatment

• The TRIMS Agreement, however, contains only a subset of these protections anddoes not establish any new independent disciplines beyond those alreadycontained in WTO law.

• Havana Charter addressed the treatment of foreigninvestment in a chapter on economic development. ThisCharter, however, was never ratified.

• Some provisions of the GATT 1947 have an indirect impacton the regulation of investments.

• GATT Panel Report, Canada – Foreign Investment RegulationAct (FIRA):

o Panel ruled that "voluntary undertakings" required by theCanadian government as a condition for the establishmentof investment violated Article III:4, in as far as they requirethe purchase of domestic over imported products

INTRODUCTION TO THE TRIMS AGREEMENT

INTRODUCTION TO THE TRIMS AGREEMENT

• Negotiating mandate during the Uruguay Round of negotiations:

"Following an examination of the operation of GATT Articles relatedto the trade-restrictive and trade-distorting effects of investmentmeasures, negotiations should elaborate, as appropriate, furtherprovisions that may be necessary to avoid such adverse effects ontrade."

• The emphasis placed in this mandate on trade effects made it clear thatthe negotiations were not intended to deal with the regulation of"investment" as such.

• The negotiators agreed that the Agreement would clarify the applicationof GATT provisions on national treatment for imported goods (Article III)and quantitative restrictions on imports or exports (Article XI) to trade-related investment measures.

• However, note indirect rules on investment in the GATS: the supply of services through mode 3 (commercial presence).

WHAT IS A TRIM?

• Coverage: Article 1 states that the Agreement applies toinvestment measures related to trade in goods only.

o Thus, the TRIMS Agreement does not apply to services.

• No definition of what a "trade-related investment measure" is:

o But the Annex contains an Illustrative List of measures thatare inconsistent with GATT Articles III:4 and Article XI:1 ofGATT 1994.

o Panel in India – Solar Cells: The measures at issue wereTRIMS, because their aim was to regulate investments.Moreover, the measure at issue was found to be "trade-related" because it contained a local-content requirement.

GENERAL OBLIGATIONS

• Article 2.1 prohibits TRIMS inconsistent with Articles IIIand XI of the GATT 1994:

o "Without prejudice to other rights and obligationsunder GATT 1994, no Member shall apply any TRIMthat is inconsistent with the provisions of Article III orArticle XI of GATT 1994".

o However, does the measure at issue fall under thescope of these provisions (a threshold issue)?

THE CARVE-OUT PROVISION IN

ARTICLE III:8(A)

• Measures that are covered by Article III:8(a) of theGATT 1994 are not subject to the national treatmentobligation in Article III:4. Article III:8(a) states that thenational treatment requirements under Article III:

(a) shall not apply to laws, regulations orrequirements governing the procurement bygovernmental agencies of products purchased forgovernmental purposes and not with a view tocommercial resale or with a view to use in theproduction of goods for commercial sale …

THE CARVE-OUT PROVISION IN

ARTICLE III:8(A)

• Article III:8(a) appears to refer to procurementeffectuated through the purchase of goods, rather than abroader notion of procurement.

• The procurement must concern the purchase of productsthat are in a competitive relationship with the productsaffected by discriminatory treatment, which is addressedin Article III:4. Thus, these products must be identical,like, or directly competitive/substitutable (AppellateBody Report, India – Solar Cells, para. 5.40).

Domestic producers

THE CARVE-OUT PROVISION IN

ARTICLE III:8(A)

• The procurement must be performed by governmentalagencies for governmental purposes.

• What is "governmental agency" and what is"governmental purpose"?

• The Appellate Body clarified that the phrase "productspurchased for governmental purposes" in Article III:8(a)refers to "what is consumed by government or what isprovided by government to recipients in the dischargeof its public functions" (Canada – Renewable Energy,para. 5.68).

• As an example, the Appellate Body referred to asituation where a public hospital purchasespharmaceuticals and provides them to patients (ibid,footnote 514).

THE CARVE-OUT PROVISION IN

ARTICLE III:8(A)

• The purchase of goods must not be made with aview to commercial resale or with a view to use inthe production of goods for commercial sale.

• Whether a transaction constitutes a "commercialresale" must look at "whether the transaction isoriented at generating a profit for the seller in thelong run". However, the existence of profit is not initself determinative (Appellate Body Report, Canada– Renewable Energy, para. 5.71).

EXCEPTION IN ARTICLE III:8(B)

• Article III "shall not prevent":

(b) "… the payment of subsidies exclusively todomestic producers, including payments to domesticproducers derived from the proceeds of internal taxesor charges applied consistently with the provisions ofthis Article and subsidies effected throughgovernmental purchases of domestic products".

EXCEPTION IN ARTICLE III:8(B)

• This provision was most recently clarified by theAppellate Body in Brazil – Taxation. The key "take-aways" from this decision:

o This provision covers only "payment ofsubsidy", but not revenue foregone by agovernment, such as tax exemptions.

o Import-substitution measures, as a conditionfor a subsidy, are not covered either. This isbecause these measures affect the competitiveopportunities of products other than thosesubsidized.

ARTICLE 2.1 AND ARTICLE III:4

• Article III:4 prohibits Members from applying internal regulations that discriminate between domestic and imported like products. It provides:

The products of the territory of any [Member] imported into the territory of any other [Member] shall be accorded treatment no less favourable than that accorded to like products of national origin in respect of all laws, regulations and requirements affecting their internal sale, offering for sale, purchase, transportation, distribution or use. […]

ARTICLE 2.1 AND ARTICLE III:4

• In Korea – Various Measures on Beef, the Appellate Body noted that three elements must be shown to establish a violation of Article III:4:

• the imported and domestic products at issue must be "like products";

• the measure at issue must be a law, regulation, or requirement affecting the products' internal sale, offering for sale, purchase, transportation, distribution, or use; and

• the imported products must be accorded "less favourable treatment" than that accorded to like domestic products (para. 133).

ARTICLE 2.1 AND ARTICLE III:4

• Panels and the Appellate Body have employed four criteria in analyzing "likeness":

o the properties, nature and quality of the products;

o the end-uses of the products;

o consumers' tastes and habits; and

o the tariff classification of the products (Appellate Body Report, EC – Asbestos, para. 101).

ILLUSTRATIVE LIST

Annex

"TRIMs that are inconsistent with the obligation of nationaltreatment provided for in paragraph 4 of Article III of GATT1994 include those which are mandatory or enforceable underdomestic law or under administrative rulings, or compliancewith which is necessary to obtain an advantage, and whichrequire: …"

ILLUSTRATIVE LIST

… and which require:

(a) the purchase or use by an enterprise of products of domestic origin or from any domestic source, whether specified in terms of particular products, in terms of volume or value of products, or in terms of a proportion of volume or value of its local production; or

(b) that an enterprise's purchases or use of imported products be limited to an amount related to the volume or value of local products that it exports.

ILLUSTRATIVE LIST

TRIMS that are inconsistent with the obligation ofgeneral elimination of quantitative restrictions providedfor in paragraph 1 of Article XI of GATT 1994 includethose which are mandatory or enforceable underdomestic law or under administrative rulings, orcompliance with which is necessary to obtain anadvantage, and which restrict:

(a) the importation by an enterprise of products used in or related to its local production, generally or to an amount related to the volume or value of local production that it exports;

ILLUSTRATIVE LIST

• What is the practical purpose of the Illustrative List and the TRIMS Agreement?

• The Illustrative List serves as a "shortcut" for Members challenging TRIMS.

• If a challenged TRIM is one of the measures in the list, a complainant is not required to prove the elements of the legal test in Article III:4, such as "likeness" and "less-favourable treatment". Measures listed in the Annex are presumed to be inconsistent with both Article 2.1 of the TRIMS Agreement and Article III:4 of the GATT 1994.

OTHER PROVISIONS

• Other provisions:

o Transitional periods (longer for developing countries and LDCs), but now expired.

o "All exceptions under GATT 1994 shall apply" (Article 3).

RELEVANT CASE LAW

• In Indonesia – Autos, the EC, Japan and the U.S. challenged under the TRIMS Agreement several programs of Indonesia conditioning tax and customs duty benefits for car manufacturers on compliance with local-content requirements. For example, the 1993 Program:

o Provided import duty reductions or exemptions on imports of automotive parts based on the percentage of local content of the finished motor vehicle in which the parts are used; and

o Provided for reduced luxury sales taxes on motor vehicles with specified amount of local content.

• Indonesia's main defense was that, because the measures at issue were subsidies, the SCM Agreement applied to the exclusion of the TRIMS Agreement.

• In the Panel's view, both agreements applied cumulatively. The local-content requirements were found to be WTO-inconsistent.

RELEVANT CASE LAW

• In Canada – Renewable Energy, the measure at issue was the Ontario's feed-in tariff (FIT) program, which aimed to encourage investments in the generation of renewable energy. Under this program, favorable prices, above market level, were paid to electricity generators that purchased a certain amount of energy-generation equipment (e.g. wind turbines and solar panels) of domestic origin.

• Canada's main defense that the program constituted government procurement failed, as products that were procured (electricity) and discriminated against (energy-generation equipment) were not the same.

• Similar measures and outcome in India – Solar Cells.

RELEVANT CASE LAW

• In Brazil - Taxation, the measures at issue were local-content requirements attached to various programs established by the Brazilian Government, providing for exemptions, reductions or suspensions of certain Brazilian federal taxes. These measures covered a broad range of products, from information technology goods, to cars, and machinery.

• Brazil argued that some of the challenged programs were subsidies exclusively to domestic producers and were excluded from the scope of the national treatment obligation in Article III by virtue of Article III:8(b).

• The panel and the Appellate Body, however, rejected this defense.