2. India

38. India considered that the request of the United States for a finding on the inconsistency of India's import restrictions with Article XI:1 was a request either for a declaratory judgement or for a specific remedy and, therefore, should not be granted by the Panel.

India noted that, in its request for the establishment of a Panel, the United States had noted:

"The United States considered that quantitative restrictions maintained by India, including, but not limited to, the more than 2,700 agricultural and industrial product tariff lines notified to the WTO in Annex I, Part B of WT/BOP/N/21 dated 22 May 1997, appear to be inconsistent with India�s obligations under Article XI:1 and XVIII:11 of GATT 1994 and Article 4.2 of the Agreement on Agriculture. Furthermore, the import licensing procedures and practices of the Government of India are inconsistent with fundamental WTO requirements as provided in Article XIII of the GATT 1994 and Article 3 of the Agreement on Import Licensing Procedures."

Subsequently, the United States had narrowed both the factual and legal scope of the complaint significantly by stating:

This dispute concerns the 2,714 restrictions or prohibitions maintained under the Export and Import Policy, 1997-2002 which are listed in Annex I, Part B of document WT/BOP/N/24 dated 22 May 1997. The existence of these restrictions is not in dispute, as this document is a notification by India to the WTO Committee on Balance-of-Payments Restrictions . . ."

The United States thus referred only to those import restrictions which India had notified to the Committee as "quantitative restrictions" subject to Article XVIII:B of the GATT.

39. India further noted that, in its first submission, the United States also narrowed the legal scope of its complaint. It merely requested the Panel to find that "the quantitative restrictions at issue in this dispute violate Article XI:1 and Article XVIII:11 of the GATT and Article 4.2 of the Agriculture Agreement". Findings on the consistency of the Indian licensing procedures with Article XIII of the GATT and Article 3 of the Licensing Agreement were thus no longer requested by the United States. The United States had also specifically stated that it was not invoking the provisions of the 1994 Understanding dealing with the administration of India's import restrictions.
40. According to India, therefore, at issue before the Panel were thus the import restrictions notified under Article XVIII:B, whose status under Article XI:1 of the GATT, as the United States correctly noted, was not in dispute. Nevertheless, the United States made in its first submission detailed allegations about the manner in which the import restrictions were administered. However, Article XI:1 simply prohibited quantitative restrictions; it did not regulate how quantitative restrictions that Members were allowed to maintain under exceptions from Article XI:1 were to be administered. That question was regulated in other WTO provisions, such as Article XIII of the GATT, Article 3 of the Licensing Agreement and paragraphs 1 to 4 of the 1994 Understanding. However, the United States had not invoked any of these provisions - not even subsidiarily in case the Panel were to find India�s import restrictions to be covered by Article XVIII:B - , which implied that the scope of this proceeding did not include the administration of the import restrictions.
41. Since the United States had not requested the panel to make any findings on these matters. India, concluded that the United States invoked the dispute settlement procedures only with respect to the justification of the import restrictions and not in respect of matters arising from their application. India, therefore, reserved its position on the allegations of the United States with respect to the application of India's import restrictions, in terms of both their factual basis and their legal implications.
42. India recalled that the United States had explained at the first meeting why it had presented all these details as follows: "Clarification by the panel of the prohibited nature of each of these restrictions is appropriate and necessary. In particular, clear and unequivocal factual and legal findings in respect of each of these restrictions will greatly assist the parties in the implementation process of any ruling and recommendations." What the United States had described as issues related to the "prohibited nature" of the import restrictions were - as the United States pointed out itself - inconsistencies that might arise in the implementation of the findings the United States was requesting. For example, the United States had claimed that a ruling on the "actual user condition" for the grant of import licences was also necessary because: "Unless the Panel clarifies that the �actual user� condition itself is a quantitative restriction on imports banned by Article XI:1, India may simply expand this barrier to restrict imports of every item on its so-called liberalization list." The United States had also claimed that the Panel "must rule that SILs are import restrictions banned by Article XI:1. It is important to remove any doubt that liberalization of restrictions requires automatic import licensing and nothing less."
43. India pointed out that, in fact, India had notified all of its import restrictions at issue in this dispute including the restrictions on imports of items subject to the "actual user" condition and SILs as "quantitative restrictions" falling under Article XI:1. Further, as compared to 1991, when more than 11,000 items at the HS 8-digit level were subject to import restrictions under Article XVIII:B, India maintains import restrictions only on 2,296 items today. The items on which import restrictions had been removed had all been made freely importable and were not subject to the "actual user" condition or to SILs. Therefore, there was absolutely no factual basis for the apprehension of the United States that India would subject items on which import restrictions were removed to the "actual user" condition or SILs.
44. Moreover, in India�s view, in the guise of a request for findings on the "prohibited nature" of the import restrictions, the United States was in effect requesting the Panel to rule on the ways in which India was to implement an adverse finding of the Panel. However, Panels were not entitled to make declaratory judgements on potential future inconsistencies and had in practice never done so. The dispute settlement provisions of the GATT and the DSU defining the causes of action, the remedy available and the scope of the retaliation all presupposed the existence of a measure that was currently nullifying or impairing benefits and capable of being brought into conformity with the obligations under the WTO agreements. ⁶²
45. India added that panels may also not grant so-called specific remedies under Article 19:1, first sentence, of the DSU. The only recommendation that the Panel could make under this provision, if it were to find India�s import restrictions to be inconsistent with Article XVIII:B, was that India bring its import restrictions into conformity with the GATT and the Agreement on Agriculture. The background to Article 19:1 of the DSU was the following. Two adopted GATT panel reports recommended that anti-dumping or countervailing duties be repaid. However, when the panel on "United States - Imposition of Anti-dumping Duties on Imports of Seamless Stainless Steel Hollow Products from Sweden" submitted its report to the GATT Committee on Anti-Dumping Practices with such a recommendation, the United States objected to the "specific remedy" recommended by the panel. ⁶³ Since then the United States had consistently taken the position that panels should only provide the general, prospective remedy which GATT panels have traditionally accorded and leave the method of implementation to the party concerned. ⁶⁴ It was this view which was reflected in Article 19.1, first sentence, of the DSU.
46. India recalled further that, in the Patents case against India, the United States had also attempted to obtain a specific remedy in the guise of ruling on the nature of the inconsistency. In that case the United States had argued that India had failed to grant exclusive marketing rights in accordance with Article 70.9 of the TRIPS Agreement and that India had failed to grant exclusive marketing rights of a certain nature. ⁶⁵ That panel had reacted to this request as follows:

We consider a finding on the nature of the right to be granted under Article 70.9 unnecessary to settle this particular dispute, which concerns the current non-existence of an exclusive marketing rights system in India. Rather it is sufficient for the Panel to recommend that India bring itself into conformity with its obligations under the TRIPS Agreement. ⁶⁶ (Emphasis added).

In India's view, the reaction of the present Panel to the United States� request for a finding on "the prohibited nature of India�s restrictions" should be the same as the above ruling on the request for a finding on the "nature of the right to be granted under Article 70.9".

47. India noted that the United States had vigorously opposed panel rulings on how Members should implement findings on anti-dumping and countervailing duties - areas in which it resorts to trade-restrictive measures more frequently than any other Member of the WTO - but asks for rulings on how Members should implement panel findings in the fields of intellectual property rights and balance-of-payments measures- areas in which its investment and export interests were at stake. Therefore, India requested the Panel to note that the request for findings on "the prohibited nature" of India�s import restrictions was the United States� second attempt to introduce specific remedies selectively into WTO jurisprudence in a manner that suited the particular interests of one Member. With respect to the allegation by the United States of discretion in India's import licensing regime, India submitted that discretionary import licensing per se was not prohibited under the covered Agreements. It was true that the second and third sentences of paragraph 4 of the 1994 Understanding provided that

"in order to minimize any incidental protective effects, a Member shall administer restrictions in a transparent manner. The authorities of the importing Member shall provide adequate justification as to the criteria used to determine which products are subject to restriction".

48. However, the context made it clear that discretionary import licensing was not forbidden. Thus, the sixth sentence of paragraph 4 of the 1994 Understanding provided that:

"in the administration of quantitative restrictions, a Member shall use discretionary licensing only when unavoidable and shall phase it out progressively".

49. India said that it needed to use discretionary licensing on a case-by-case basis, inter alia, for the following reasons. India's economy had been almost totally closed to imports barely 15 years ago. Because of the size and structure of the economy, it was impossible for India to estimate precisely the level of demand for imports, the import elasticity of demand for a huge number of products, as well as the elasticity of substitution of domestic products by consumers, and the effective rate of protection for all these products. Accordingly, India considered recourse to discretionary licensing to be unavoidable. Further, India was progressively phasing out its import restrictions. As part of its autonomously initiated programme of economic liberalization, India had already reduced the number of items on which there were import restrictions to just 2,296 HS-lines at the 8-digit level, as of 13 April 1998, from about 11,000 HS-lines in 1991.
50. India stated that it was also important to note that, in any case, the footnote to the 1994 Understanding specifically stated that:

"nothing in this Understanding is intended to modify the rights and obligations of the Members under Articles XII or XVIII:B of the GATT 1994".

51. The effect of the footnote was that the 1994 Understanding could not limit a Member's right under Article XVIII:B, if any, to maintain discretionary licensing under Article XVIII:B. Article XVIII:B did not impose any restriction on a Member's right to implement import restrictions through discretionary licensing. Moreover, Article 3:3 of the Licensing Agreement specifically exempted Members implementing import restrictions through "non-automatic import licensing" from the requirement of publishing "sufficient information for other Members and traders to know the basis for granting and/or allocating licences".
52. Although the provisions of Article XVIII:B of the GATT 1994 and Article 3:3 of the Licensing Agreement might provide a legal basis for India not to publish the basis for allocation of licences, India sought to clarify that India's import licensing regime was a transparent, rule-based one. The basic regulatory framework for the administration of India's foreign trade had been described. Imports and exports were regulated, inter alia, under the Foreign Trade (Regulation and Development) Act, 1993 (the "FTDR Act"). Section 19 of the FTDR Act conferred rule-making power on the Government of India, pursuant to which the Government had notified the Foreign Trade (Regulation) Rules, 1993 (the "FTR Rules"). Section 5 of the FTDR Act authorized the Government of India to notify its policy relating to imports and exports, pursuant to which the Government had notified the Export and Import Policy, 1997-1992 (the "Exim Policy"). Pursuant to paragraph 4.11 of the Exim Policy, the Government had also notified the Handbook of Procedures, 1997-2002 (the "Handbook").
53. The FTDR Act not only laid down transparent criteria for grant of a licence, it also provided for an appellate process to ensure that the criteria employed in decision-making were consistent with those laid down under the FTDR Act, the FTR Rules, the Exim Policy and the Handbook. There was absolutely no basis in fact, therefore, for the allegation of the United States that India's import licensing regime was "arbitrary" or "non-transparent". Although India's import licensing regime was discretionary, the discretion conferred was not unbridled or unfettered but was guided and controlled in India's municipal law by an elaborate statutory and regulatory framework that was also overseen by the superior courts in India.
54. India explained that it did not announce quotas as required under Article XIII:2(a) because quotas were not practicable in the case of a relatively closed economy like India that was in the process of liberalizing its economy. As a developing country with a low standard of living, India simply did not have the financial and administrative resources to identify and administer the quotas for nearly 2,300 tariff lines. India noted that Article XIII:2(a) clearly permitted India to administer its import restrictions through import licenses or permits without specifying quotas.
55. India further noted that, in accordance with the general rules of treaty interpretation set forth in Article 31 of the Vienna Convention on the Law of Treaties, 1969, the terms of Article XIII:2(a) of GATT 1994 must be interpreted in good faith in accordance with their ordinary meaning as revealed by their context and in the light of the object and purpose of the GATT 1994. The context of Article XIII:2(a) made it clear that it was not intended to apply to an import licensing regime such as that of India. Article XIII:2 stated that the conditions in paragraphs (a) through (d) of Article XIII:2 are for the purpose of ensuring that trade in any product approaches "as closely as possible the shares which the various contracting parties might be expected to obtain in the absence of such [import] restrictions".
56. The administration of India's import licensing regime was wholly non-discriminatory. Paragraph 4.2 of the Handbook of Procedures, 1 April 1997 to 31 March 2002 applicable to exports and imports (notified in the Gazette of India pursuant to paragraph 4.11 of the Exim Policy) provided that imports would be valid to or from any country except Iraq (which was currently subject to international sanctions imposed by the United Nations). This was a legally enforceable obligation undertaken by the Government of India. If the Director-General refused to grant a licence for imports because the applicant wished to import goods from a particular country or granted a licence subject to the condition that goods must be imported from a particular country, an applicant might appeal against such a decision under Section 15 of the FTDR Act or request one of the superior courts (i.e., one of the High Courts or the Supreme Court) to invalidate such a decision.

Responding to a question by the Panel on the grant of licences to importers and exporters and the definition of "actual users", India stated that import licences might be granted to any person including an industrial user who was engaged in production solely for the domestic market. Licences, including Special Import Licences, for items on the Negative List were accessible also to persons other than actual users.

57. India clarified that the focus on consumer products in its import policy alluded to by the United States was consistent with Article XVIII:10 of the GATT 1994, which explicitly recognized that a Member "may determine [the] incidence of [import restrictions] on imports of different products or classes of products in such a way as to give priority to the importation of those products which are more essential in the light of its policy of economic development". India added that in the context of permitting the selective application of surcharge for balance-of-payments reasons, paragraph 4 of the Understanding on the Balance-of-Payments Provisions of the GATT 1994 also explicitly recognized that capital goods or inputs needed for production "contribute to the Member's efforts to improve its balance-of-payments situation".
58. In the light of the above, India therefore concluded that, under the DSU, a panel cannot rule on inconsistencies that have not yet arisen nor on the manner in which India should implement a finding of inconsistency. India, therefore, requested that Panel not to rule on the "prohibited nature of India's restrictions".
59. The United States replied to India's contention that the FTDR Act provided judicial review of licensing decision by recalling the report of the panel in "Argentina � Measures Affecting Imports of Footwear, Textiles, Apparel and Other Items". That panel had found that the existence of a remedy in a domestic court did not provide a defense to the violation of an obligation under the GATT 1994. ⁶⁷ India's review procedures therefore did not make its quantitative restrictions any less a violation of Article XI:1.

3. Nullification and Impairment

60. The United States contended that, as India was in violation of its WTO obligations, nullification or impairment of benefits was to be presumed.

"In cases where there is an infringement of the obligations assumed under a covered agreement, the action is considered prima facie to constitute a case of nullification or impairment. This means that there is normally a presumption that a breach of the rules has an adverse impact on other Members parties to that covered agreement, and in such cases, it shall be up to the Member against whom the complaint has been brought to rebut the charge." ⁶⁸

61. India�s violations of the GATT thus prima facie constituted a case of nullification or impairment. Moreover, past GATT panels had regarded violations of Article XI:1 in a special light with regard to nullification or impairment, because of the fundamentally trade-distorting nature of quantitative restrictions. The panel on "Japan - Restrictions on Imports of Certain Agricultural Products" found that "Article XI:1 protected expectations on competitive conditions . . . the presumption that a measure inconsistent with Article XI causes nullification or impairment could therefore not be refuted with arguments relating to export volumes". ⁶⁹ Moreover, the earlier panel on "Japanese Measures on Imports of Leather" stated that it "wished to stress that the existence of a quantitative restriction should be presumed to cause nullification or impairment not only because of any effect it had had on the volume of trade but also for other reasons e.g., it would lead to increased transaction costs and would create uncertainties which could affect investment plans". ⁷⁰
62. The United States stated that India�s quantitative restrictions and licensing regimes had damaged and continued to damage U.S. trade interests. While U.S. trade interests in the Indian market were substantial, they had been severely impaired by India�s extraordinary 50 years of import restrictions. In 1996, the United States exported US$1.3 billion to India in goods subject to quantitative restrictions. However, while the ASEAN area had a population half the size of India�s, U.S. exports to ASEAN were eight times the value of U.S. exports to India. As the panel on "Japanese Measures on Imports of Leather" noted, "the fact that the United States was able to export large quantities of leather to other markets [than Japan] . . . tended to confirm the assumption that the existence of the restrictions [on leather imports] had adversely affected United States� exports". ⁷¹
63. The nature and operation of India�s import licensing regimes also damaged and continued to damage U.S. trade interests. The uncertainty and limitations imposed by India�s licensing regime deterred or prevented exporters from undertaking the investments in planning, promotion and market development necessary to develop and expand markets in India for their products. No exporter would put resources into developing a product�s market in India without some assurance that it would be able to export some minimum amount per year, and the Indian system provided no such assurance -- only a guarantee of continuing uncertainty -- if the product in question was on the Negative List of Imports.
64. India�s restrictions had caused particularly severe damage to the trade of developing countries. The de facto ban on consumer goods imports hurt developing country exports most severely, since it was developing country products that would be most competitive in many consumer-goods sectors. Restricted items included many agricultural goods and among them many tropical products; since the licensing system was operated so as to protect domestic producers, these restrictions were most severe on their developing-country competitors. The canalization of imports, operated so as to subsidize and protect local agricultural producers, appears to operate as a de facto ban on the imports of some tropical products such as coconut oil and palm oil.
65. Most of all, India�s restrictive import regime had damaged the export potential and economic growth of India itself. For fifty years the Indian market had been protected with limited internal competition. As the economists Joshi and Little observed: "This has proved to be a recipe for high-cost, low-quality production, and lack of innovation". ⁷² The incentive structure produced by a highly protectionist trade regime had produced an Indian private sector that was, with only a few exceptions, oriented toward the protected home market. ⁷³ The Indian control regime had shifted business objectives away from competition toward rent seeking; "It became less important to compete successfully within a framework of regulation than to manipulate regulators so as to avoid competition. One consequence had been a strong nexus between businesses and politicians to create and divide monopoly rent". ⁷⁴ Professor Jagdish Bhagwati had observed that Indian trade policies had produced a "dismal export performance": he noted that "the inward-orientation of the trade-and-payments regime, in drastically impairing India�s export performance, simultaneously prevented the build-up of labour-intensive exports and hence a favourable impact on wages and employment and therefore ceteris paribus on poverty as well". ⁷⁵

To continue with Article 4.2 of the WTO Agreement on Agriculture

⁶² Article XXIII:1(a) of the GATT, Article 19.1 of the DSU and Article 22.8 of the DSU. India referred in this connection to the arguments it presented on this issue in the Patents case (Panel Report on India � Patent Protection for Pharmaceutical and Agricultural Chemical Products, 5 September 1997, WT/DS50/R, para. 4.32)

⁶³ ADP/117 and Corr.1, 24 February 1994; ADP/M/35, p. 25.

⁶⁴ This view was for instance expressed by the United States as third party in the Coconuts case (Panel Report on Brazil � Measures Affecting Dessicated Coconut,WT/DS22/R, 17 October 1996, paras. 220 and 221).

⁶⁵ WT/DS50/R, para. 3.1(d) and (e).

⁶⁶ Panel Report on India � Patent Protection for Pharmaceutical and Agricultural Chemical Products (hereafter Patents), WT/DS50/R, para. 7.64. India noted that the United States did not appeal this ruling.

⁶⁷ Panel Report on Argentina � Measures Affecting Imports of Footwear, Textiles, Apparel and Other Items (hereafter Argentina � Textiles), WT/DS56/R, 25 November 1997, paras. 6.66-6.69.

⁶⁸ DSU, Article 3.8.

⁶⁹ Panel Report on Japan � Restrictions on Imports of Certain Agricultural Products, Op. Cit, para. 5.4.3, citing also as support United States: - Taxes on Petroleum and Certain Imported Substances (BISD 34S/136, the Superfund case) and Japanese Measures on Imports of Leather (BISD 31S/94).

⁷⁰ Panel Report on Japanese Measures on Imports of Leather, L/5623, adopted on 15/16 May 1984, BISD 31S/94, 113, para. 55.

⁷¹ Ibid., para. 54.

⁷² Vijay Joshi and I.M.D. Little, India�s Economic Reforms 1991-2001 (Oxford, 1996), p. 68.

⁷³ Vincent Cable, "Indian Liberalization and the Private Sector," in Robert Cassen and Vijay Joshi, India: the Future of Economic Reform (Oxford, 1995), p. 214.

⁷⁴ Ibid., p. 212-213.

⁷⁵ Bhagwati, J. India in Transition: Freeing the Economy (Oxford, 1993), p. 57, 61.