APSN Banner

In shadow of scandal, US challenges a Suharto project

New York Times - June 14, 1997

David E. Sanger, Washington – In the first direct US challenge to the financial empire of President Suharto of Indonesia, the Clinton administration said Friday that it would ask the World Trade Organization to rule against Indonesia's national car project, a program run by Suharto's son that puts foreign companies at a disadvantage in the county's potentially huge automobile market.

The challenge comes after months of unsuccessful negotiations with Indonesia that have been the subject of extraordinary scrutiny in Washington because of campaign finance scandals.

In Clinton's first term, the Riady family of Indonesia, which is at the center of the investigations, repeatedly played an intermediary role in an effort to smooth relations between Suharto, Asia's longest-serving leader, and the White House.

Friday, however, the administration is under pressure to show that it is giving no special treatment to Indonesia, and in recent weeks relations have hit some new lows.

Reacting to sharp criticism in Congress of its treatment of dissidents in East Timor, Indonesia canceled the purchase of nine F-16 fighters last week. Suharto, in a letter to Clinton, complained of "wholly unjustified criticism" of Indonesia in Congress.

Separately, the State Department criticized recent election in Indonesia, declaring that its "electoral system severely limits political competition" and that "Indonesian citizens do not have the ability to change their government through democratic means."

Whether Washington would challenge the car project, however, was widely viewed as a test of the administration's willingness to confront Suharto over a business directly linked to his family's fortune. The project began in February 1996 by presidential decree. It is controlled and managed by Hutomo Mandala Putra, better known as Tommy Suharto, the president' son. And the cars it sells enjoy exclusive exemption from the huge tariffs and luxury-sales taxes applied to the import of foreign cars and parts.

Those tariffs have been a major point of contention because Indonesia, with 200 million people, is viewed as one of the most promising car markets in Southeast Asia.

The younger Suharto does not yet make any cars; he imports the Timor, as the car is known, tariff free from Kia Motors Corp. of South Korea. Other car makers pay tariffs and taxes of up to 200 percent, meaning that a $15,000 car costs $45,000 by the time it reaches an Indonesian consumer.

The arrangement so enraged the European Union and Japan that they have already challenged the program before the World Trade Organization, and the first hearings of a dispute resolution panel are expected to begin this summer.

By the accounts of most experts familiar with the General Agreement on Tariffs and Trade, the worldwide agreement that covers state subsidies, tariffs and other trade measures, Indonesia has little chance of winning its case before the World Trade Organization.

Yet the Suharto government has vowed to fight for the project, which is based on an experiment in neighboring Malaysia where a national car called the Proton is being built.

An administration official familiar with the case said Friday that he did not doubt the case would be difficult for the Indonesians. "They have to go back to the big boss and say 'no go' on this," he said.

The official said that the filing made in Geneva on Thursday was intended to preserve Washington's rights to join the European and Japanese case, and thus to help force Indonesia to reach a settlement that would avoid an embarrassing loss in front of the World Trade Organization.

The auto program is so sensitive an issue in Indonesia that when the country's trade minister, Tunky Ariwibowo, came to Washington last year he refused to discuss the project's links to the Suharto family. In an interview, he would not even confirm the involvement of Suharto's son, though that is a matter of public record in Indonesia.

The pressure to end the project's preferential treatment, however, is only one of the problems the Suharto family has run into as it ventures into the auto business. Indonesians appear to dislike the car itself.

Trade industry reports indicate that sales are running at only 2,000 cars a month, half of the initial target. To increase sales, the government recently said it was thinking of requiring government agencies to buy the Timor for their fleets.

Even The Jakarta Post wrote in a recent editorial that the project was "seemingly guided more by nationalistic sentiment and politics than by industrial logic."

If the United States, Japan and Europe win their case, Indonesia will be required either to end the preferential treatment for the project, or pay damages to foreign car makers.

But the precedent could be more damaging to the Suharto family: Suharto's other son and daughter have been involved in a range of business ventures that enjoy special government projection. Two of the children, in fact, fought for a role in the goldfield discovered by a Canadian company, Bre-X, before that find turned out to be a fraud.