WTO Case Analysis concerning Indonesia

This page contains a WTO case analysis concerning Indonesia Importation of Horticulture and Animal Products.

Introduction

This case concerns a trade dispute between Indonesia and other countries led by the US and New Zealand in particular over certain measures in the nature of quantitative restrictions imposed by the Indonesian government on imports of horticulture and other animal-related products from those countries into Indonesia with an obvious aim to benefit the stagnant domestic cultivators and industries. The other reason cited by Indonesia was price regulation and Halal requirements for Muslim communities of Indonesia.

Many countries including the United States and New Zealand had trade relations with Indonesia for a long time. The US and New Zealand were, in particular, exporting horticulture and animal products to Indonesia. Indonesia in 2015 imposed up to 18 measures on these imports from these countries under its various laws.

The import of certain commodities into Indonesia including horticulture products has been quite a sensitive issue in Indonesia with local cultivators finding it hard to compete with multinationals from the USA and New Zealand exporting these products in Indonesia at a cheaper rate. They often build pressures on their government to regulate the floodgates of imports to benefit the local cultivators.

The US and New Zealand have much bigger industries were definitely at a comparative advantage compared to Indonesian homegrown cultivators. But Indonesia being a WTO Partner also had to abide by the WTO treaties which prohibited protectionism in International Trade.

WTO and GATT provisions ordinarily prohibit protectionism in International Trade except in exceptional circumstances. Protectionist measures also have a downside for many Indonesians.

If domestic cultivators end up benefiting from such state restrictions, then a large part of Indonesian population that is involved in the hospitality, hoteling, and tourism sector ends of suffering as domestic products are much costlier for them compared to the cheap imports especially from the United States and New Zealand.

The measures/restrictions that Indonesia imposed had their origin in its Food law which favored domestic self-sufficiency over imports and this they connected with the security of their independence and sovereignty. This line of thinking has an international semblance. India had already faced a lot of such problems when it was entirely dependent on US food imports to fulfill its domestic demands of food consumption before the famous green revolution.

Under the same considerations, Indonesia started laying much emphasis on prioritizing the domestic industries over the imports from other countries which can act as a headache in exigencies.

Besides this, by the reason of having a vast Muslim population, Indonesia also had to ensure Islamic lawfulness ie ‘Halal’ criteria of these imported products. It would be relevant to have a perusal of the broad principles of the Indonesian fool law titled as ‘Law concerning Protection and Empowerment of Farmers’-

Helping the Indonesian farmers in coping with the production and marketing-related challenges.
Besides one of the objectives being stabilization of Prices, the law aims at domestic self-self-sufficiency in food production and consumption.
In case domestic food reserves maintained by the government are full, then regulating and restricting imports from outside.
To permit food imports only through government-maintained check-points.
Establishing a licensing procedure for the import of agricultural products into Indonesia.
Makes provision for imposition of Penalties which are in the nature of criminal one on defaulters.

Indonesian Law on Horticulture-

• Achievement of self-sufficiency in this sector is also one of the aims.
• Imports under this sector can be made from outside but it is subject to domestic availability of the Horticulture products.
• It establishes a target in terms of consumption and production of Horticulture related products.
• To sum-up government along with industries had to balance domestic supply of horticulture products and demand for such products by controlling the import of such products from international markets.

Indonesian Law on Animal Products

• Similar restrictions were place on import of animal products as well like the horticulture products.
• The whole purpose was to make Indonesia self-sufficient in these categories of foods.
• Halal requirement was also one of the aim.

Ministry of Trade and Agriculture respectively set out the detailed procedure for imposition of restrictions such as the Import licensing regime. The characteristic common to both is the provision of API or Importer Registration Number. All importers had to obtain this IRN/APN.

This APN is further distinguished into two categories namely-

• API-U-When a company imports goods for further trade.
• API-P-When a company imports goods for its own consumption.

All imports whether in category 1 or 2 must complete the following requirements namely-

• To obtain a ‘Horticulture Food designation’ namely to ascertain whether it is for Human consumption (RI) or to be used as a raw material (PI)
• If its for both Human consumption and to be used as raw material than (RIPH) approval.
• To obtain a recommendation for Import of Horticulture from Agriculture Ministry.
• To obtain approval for such import of Horticultural Products from Trade Ministry.
• Undergoing an inquiry for technicalities by the Port Surveyor.

Licensing Requirements for Horticulture Products

• Limited application windows and validity Periods.
• Periodic and fixed import terms
• 80% realization requirements
• Harvest period requirement
• Storage ownership and capacity requirements
• Use, sale and distribution requirements for horticultural products
• Reference prices for chilies and fresh shallots for consumption.

Licensing Requirements for Horticulture Products

It includes the requirement under Horticulture imports plus some additional measures such as-

• Prohibition of importation of certain animals and animal products, except in emergency circumstances
• Use, sale and distribution of imported bovine meat and offal requirements
• Domestic purchase requirement
• Beef reference price
• Sufficiency of domestic production to fulfill domestic demand.

Complainants challenged all these measures imposed by Indonesia on horticulture and animal products alleging them to be violative of Article 4.2 of the Agreement on Agriculture and several GATT provisions.

The Panel and the Appellate Body findings

New Zealand raised the following concerns about these measures

• Indonesian import Licensing measures for such products is conflicting with Article 11.1 of the GATT 1994 and Article 4.2 of the Agreement on Agriculture (AoA hereinafter), when seen as a solitary measure and when its segments are seen as individual measures.
• Restrictions being inconsistent with Article 3.4 of GATT
• That the constrained application windows and legitimacy periods for Agriculture Ministry Recommendations and Import Approvals for such items are conflicting with Article 2.2(a) 3.2 of the Import Licensing Agreement.

US submissions

• Argued on almost same lines as New Zealand and says that Indonesian measures are not consistent with Article 11.1 of GATT and Article 4.2 of Agreement on Agriculture.
• It also requested the Panel to ask Indonesia to bring its measures in conformity with the WTO international trading norms.
• So both the countries alleged that all of Indonesian measures were against Article 11.1 of GATT and Article 4.2 of the AoA. They likewise asserted that the measures disregarded the national treatment commitment under 3.4 of the GATT 1994 and the necessities for non-programmed import authorizing under Article 3.2 of the Import Licensing Agreement.

Arguments of Indonesia in her defense

Indonesia claimed that due to large chunks of its population being Muslim, there was an obligation on the State to insure that all imported foods adhere to halal requirements.

Besides taking the resource of various defenses available under Article 20 of GATT 1994, Indonesia also claiming protection for its licensing regime under Article XI:2(c)(ii) of the GATT 1994 which allows certain forms of protectionists measures to overcome the temporary domestic surplus of like products.

Findings of the Panel

After long deliberation, the Panel found that all of the measures imposed by the Indonesian government on the import of animal products and horticulture were violative of the various provisions of GATT, Agreement on Agriculture and Import Licensing Agreement as claimed by the complainants. It discovered that every one of the 18 measures at issue was limiting importation into Indonesian Market and along these lines conflicting with Article 11.1 of the GATT 1994.

The Panel dismissed Indonesia’s guard under Article 20 of the GATT 1994 in light of the fact that Indonesia had not shown that its measures were supported under that arrangement. The Panel likewise dismissed Indonesia’s dependence on Article XI:2(c)(ii) of the GATT 1994 in light of the fact that this exclusion was rendered out of commission by uprightness of Article 4.2 of the Agreement on Agriculture.

Regarding the question of Article 11.1 of GATT, the Panel said that this provision restrains Members from instituting or maintaining restrictions, be it through quotas, import or export licenses, or other measures, on-

• the importation of any product from the territory of any other contracting party, or
• the exportation or sale for export of any product destined for the territory of any other contracting party.

The provision explicitly excludes prohibitions or restrictions imposed through duties, taxes or other charges. In Argentina – Import Measures held that Article 11.1 of the GATT 1994 prescribes an obligation to eliminate quantitative restrictions and prohibiting Members from “instituting or maintaining prohibitions or restrictions other than duties, taxes, or other charges, on the importation, exportation, or sale for export of any product destined for another Member.

The Panel also reiterated the two-step approach adopted by the Panels and Appellate body in previous cases such as Argentina – Import Measures, para. 5.216. As per this test, it has to be seen-

• Whether the complainant has demonstrated that the measure at issue is a measure of the type covered by Article XI:1, and if it has so demonstrated, then,
• Whether the complainant has demonstrated that the measure at issue constitutes a prohibition or restriction on importation (or exportation).

This scrutiny has to be done on a case-by-case approach and no hard and fast rule can be laid down for this. But as held in Brazil – Retreaded Tyres, the panel must examine the nature of the measure at issue.

In Argentina – Import Measures, Panel said that it has to be considered whether the measure at issue is prohibiting or restricting trade and if so in what manner.

If the first test has been satisfied, then complainants have to satisfy that Indonesian measures “prohibitions” or “restrictions” on importation within the scope of Article XI:1 of the GATT 1994.

As held in China – Raw Materials, The term ‘Quantitative’ used in the provision suggests that such measures should have the effect of restricting the quantity or amount of flow of imported items in a particular country (Indonesia in this case).

To examine whether a particular measure has the effect of limiting or restricting the number of imports, one has to also consider whether the opposite side is suffering a competitive disadvantage compared to the domestic players on account of such measures and if so, then such measures also violate the provision of ‘National Treatment’ as enshrined in the GATT 1994. The same was held in Argentina – Hides, and Leather.

After taking into these factors and case laws, the Panel held that the Indonesian position that complainants have to show that the measure is restricting the amount of imports by way of actually quantifying their trade flows, is not sustainable.

As held in Argentina-Import measures, complainants only have to show that structure and design of the Indonesian measure has the potential of restricting imports in such a manner as prohibited by Article 11.1 of GATT 1994.

The Panel also rejected Indonesian defenses under Article 20 of GATT 1994. As regards to Article 3.2 of the Import Licensing Agreement, Panel held that it need not have to go deeper into that as it has already decided that Indonesian measures are inconsistent with Article 11.1 of GATT.

On the question of Article 4.2, the Panel reiterated what it said regarding Article 3.2, that when it has already recorded a finding under Article 11.1 of GATT 1994, there is no need to go deeper into Article 4.2.

The panel said that Indonesia has also failed to substantially formulate its claims under various provisions of GATT, Import Licensing Agreement, DSU, Agreement on Agriculture, etc and therefore its contentions are rejected.

The Panel also said that there is no substantial basis for Indonesia’s claim of prejudice in the findings as recorded by the Panel on Various issues.

Aggrieved by these findings of the Panel, Indonesia chose to appeal in the Appellate body. And it invoked the following ground in its defense-

• That the Panel erred in law in finding that Article XI:1 of the GATT 1994 deals more specifically with quantitative import restrictions on agricultural goods than Article 4.2 of the Agreement on Agriculture. Because-
• The Panel failed to consider that quantity or number of measures is not determinative as to whether a measure is quantitative import restriction and regulates such in a more specific manner so as to say.
• Therefore the Panel erred in legal sense by considering that GATT provisions are more specific than provisions of agreement on Agriculture on the current issue.
• That the panel erred in law by placing the burden of proof on Indonesia in respect of footnote 1 of Article 4.2 of Agreement on Agriculture. The burden to prove that the restrictions were in the nature of duties which were required to be converted into Ordinary Custom Duties should have been on the complainants and also that those measures do not come under the exemptions provided under Article 20 of GATT 1994.
• That the Panel made a mistake of law by failing to make an objective assessment Article 11 of Dispute Settlement Understanding.
• That Indonesia thinks about the Panel’s decision that Article XI:2(c) of the GATT 1994 has been rendered out of commission by Article 4.2 of the Agreement on Agriculture has foundational implications for all WTO Members.
• That the Panel evaluated just the prerequisites under the chapeau to Article 20 of the GATT 1994. It didn’t evaluate any of the defences invoked by Indonesia under the material subparagraphs of Article 20 before making its discoveries.

The US and New Zealand respectively submitted that the Panel did not erred on any matter of law as is claimed by Indonesia. They urge that the findings of the Panel on relevant issues in question were absolutely correct and need not be altered by the Appellate Body.

They cited the following cases to strengthen their argument on the power and discretion available to the Panel to choose the sequence in which it wants to deal with the contentions-

EC Bananas III

In this case, the appellate body considered the sequence in which a Panel has to appreciate the measures at issue. Appellate body opined that Panel should ideally start with those measures which arise out of more specific agreements compared to those that arise out of general agreements such as GATT. But this was merely an opinion in the nature of an obiter and did not undermine the autonomy of the Panel to decide the issues in the matter it deems fit.

Chile Price Band System

In this, it was argued in the appeal that the Panel erred by considering Article 4.2 first rather than Article 2.1 of the Agreement on Agriculture. The appellate body said that it’s immaterial as so to what the panel considered first in this case as after considering both of them, the outcome will be the same.

Therefore, NZ and US argue that it is immaterial whether the Panel dealt first with the more specific agreement to the general agreement as the outcome will be the same if the provisions speak about the same thing.

And Panels choice to be first with either of the GATT provisions of Agreement on Agriculture provision will have no bearing on the outcome of the case as both Article 4.2 of AoA and Article 11.2 of GATT prohibits the imposition of certain import restricting measures.

Besides this, all panels who have interpreted Article 12.1 GATT and Article 4.2 AOA have discovered that the arrangements under them are free, combined lawful commitments. What’s more, boards and the Appellate Body have made discoveries under each arrangement independently. Hence, the “suitable importance of the two arrangements can be built up and can be given impact” regardless of the sequence of examination.

Appellate Body’s Ruling on Indonesian contentions

Appellate body rejected the contentions of Indonesia and ruled in the favour of Panel findings. ABR said that though Article 11.1 deals more specifically with Quantitative Restrictions, Agreement on Agriculture is a specific agreement compared to GATT, and Article 4.2 of AOA also deals with quantitative restrictions coupled with certain other restrictions as well.

Hence there is not much difference between the two in terms of their requirement for the elimination of all sorts of quantitative restrictions and there exists no mandatory sequence as to which has to be examined first in a dispute concerning both.

As to the question of whether the Panel had failed to make an objective analysis, the Appellate body rejected the contention of Indonesia for failing to substantially formulate its contention under Article 11 of DSU.

Conclusion

As is clear by the Appellate Body Report, Indonesia lost its case with the US and New Zealand. ABR asked Indonesia to bring all its measures in conformity with WTO provisions at the earliest failing which the US and other complainants have to right to put retaliatory measures against Indonesia.

WTO Agreement by and large are against trade protectionism. GATT explicitly mandates like treatments of all contracting parties by all other contracting parties in International Trade subject to some exceptions as incorporated under Article 20 of GATT.

Indonesia is a developing country and the failure of its domestic cultivators to compete with well-established markets of the US and New Zealand can be fairly understood.

To assuage the problems of its domestic producers especially relating to Horticulture and Animal Products, Indonesia though its food laws tried to place quantitative and other kinds of restrictions on the import of such goods from outside to benefit the local market.

The justification it gave for such measures included self-sufficiency, halal requirements, price stabilization, and other quality requirements. It failed to properly substantiate its claims and justifications under the provisions of GATT and its constituent agreements as well as under the exceptions envisioned under them.

Its trade adversaries such as the US and New Zealand were far more successful in proving Indonesian measures to be violative of many of the WTO provisions.

It is not the case that the US and other developed countries do not practice protectionism but due to their vast legal expertise and tactful diplomatic endeavors they are more successful to evade such measures than their developing counterparts such as Indonesia.

Indonesian concerns were legitimate and genuine but it failed to justify them properly in the WTO DSB due to improper formulation and substantiation of its arguments as noticed by both Panel and the Appellate Body.

The halal requirement is a major concern for Muslims all over the world, yet both the Panel and Appellate body reports failed to make proper deliberations on this issue. This case should be an eye-opener for all developing countries who need to work in tandem with each other and more tactfully to overcome the legal jargon posed by developed countries when it comes to Dispute Settlement in WTO.