(a) The relationship between Article XVIII:B and Article XXIII (Cont.)

83. The United States recalled that the DSU provided as follows:

"The dispute settlement system of the WTO is a central element in providing security and predictability to the multilateral trading system. The Members recognize that it serves to preserve the rights and obligations of Members under the covered agreements, and to clarify the existing provisions of those agreements in accordance with customary rules of interpretation of public international law." ⁸⁷

In the opinion of the United States, because the DSU was an "agreement to the [GATT 1994 and the 1994 Understanding] which was made between all the parties in connection with the conclusion of the [GATT 1994 and the 1994 Understanding]," ⁸⁸ it was part of the context for both Article XVIII:12 and the 1994 Understanding. In that light, India�s suggestion that the Committee that holds Article XVIII:12(c) consultations was the sole body able to decide the question before this Panel was an untenable interpretation of the GATT 1994.

84. The consultation process and dispute settlement were separate tracks serving different functions. For example, the panel in the Korea Beef case had pointed out that "[Article XXIII] provided for the detailed examination of the individual measures by a panel of independent experts whereas [Article XVIII:B] provided for a general review of the country's balance-of-payments situation by a committee of government representatives." ⁸⁹ The function of the dispute settlement system was to "preserve the rights and obligations of Members", as provided in Article 3.2 of the DSU; the consultation process was designed to assess the situation of, and measures taken by, Members that were in fact addressing balance-of-payments difficulties. India did not have such difficulties and could not rely on the consultation process to protect measures that were no longer justified. India had an obligation to remove those measures and Article XXIII was available to preserve and enforce that obligation.
85. The United States noted that India had argued that if panels could rule on balance-of-payments measures, inconsistencies with decisions of the General Council might arise, an argument which would lead to the untenable conclusion that no panel had any jurisdiction over any WTO agreement, because the General Council had the authority to adopt interpretations of all the WTO Agreements. ⁹⁰ Furthermore, since the General Council did not authorize restrictive measures taken for balance-of-payments purposes in advance, there was no danger of inconsistent decisions in this case.
86. Furthermore, according to the United States, the 1994 Understanding expressly contemplated (in paragraph 13) the possibility that the BOP Committee might not reach a decision:

"The Committee shall endeavour to include in its conclusions proposals for recommendations aimed at promoting the implementation of Articles XII and XVIII:B, the 1979 Declaration and this Understanding�. In the absence of specific proposals for recommendations by the General Council, the Committee's conclusions should record the different views expressed in the Committee."

Therefore, exclusive allocation of competence to the Committee would leave the rights of individual members hostage to the Committee decision process, because the practice of the Balance-of-Payments Committee is that it makes recommendations by consensus. In the absence of consensus, the Committee's conclusions record the different views expressed. ⁹¹ India's position, if adopted, would effectively give all Members the right to maintain measures without balance-of-payments justification.

87. The United States also noted that the first of the three examples given by India was clearly mistaken because arbitration under Article 8.5 of the Agreement on Subsidies and Countervailing Measures was one of the special and additional rules listed in Appendix 2 to the DSU since Appendix 2 of the DSU provided that arbitration was a special procedure within the context of the DSU. The United States further considered that this was not the proper case to examine any of those three examples as none of the examples involved fell within the Panel's terms of reference.
88. In the view of India, the United States' claim that India had attacked the ability of the WTO dispute settlement to even examine quantitative restrictions for which a BOP claim had been made, and that India was seeking to open a large gap in that rule of law, was based on a complete misunderstanding � or misrepresentation � of India's position. India had not claimed that special dispute settlement procedures applied in this case. India, in fact, was in complete agreement with the United States that nothing in the DSU nor in the 1994 Understanding precluded the examination of India's import restrictions by the Panel in accordance with the normal dispute settlement procedures. However, what India had argued in fact was the following:

1. The Panel, in accordance with the normal dispute settlement procedures, should conduct an objective assessment of India's import restrictions in light of the relevant provisions of the GATT and the 1994 Understanding, as mandated by Articles 7 and 11 of the DSU. The Panel should note that both parties agree that the import restrictions at issue fall under Article XI:1, but disagree on their justification under Article XVIII:B.
2. The Panel should note that, according to Articles XV:2 and XVIII:12 of the GATT and paragraph 13 of the 1994 Understanding, a Member invoking Article XVIII:B may maintain its import restrictions until the General Council, based on a recommendation of the Committee on Balance-of-Payments Restrictions, has reached its "final decision" and advised the Member that its import restrictions are inconsistent with Article XVIII:B.
3. The Panel should note that the footnote to the 1994 Understanding specifically confirms that nothing in the 1994 Understanding is intended to modify the above rights and obligations of Members under Article XVIII:B and that the United States has the right to invoke the dispute settlement procedures only with regard to the application of the import restrictions maintained by India.
4. The Panel should note that the balance-of-payments consultations with India did not conclude with a recommendation that because India's remaining import restrictions no longer have any justification, they should be eliminated. The Panel should find that India, therefore, retains the right under Article XVIII:B to progressively relax its import restrictions.
5. The Panel should find also that it cannot rule on the manner in which the import restrictions at issue are applied because the United States has not invoked, not even subsidiarily, any of the provisions of the GATT and the 1994 Understanding relevant to the application of import restrictions a Member may maintain under Article XVIII:B.

89. India added that it followed from the above that India was not claiming that the United States' access to the DSU was in any way limited, but that the Panel, in examining the import restrictions at issue under the normal procedures, must take into account the rights of India under Article XVIII:B.
90. In response to India's argument that the WTO system allocated decisions to specific bodies because issues "should be made definitively and in a manner binding for all Members by a body with expertise in that field," and that panels lacked expertise compared to the Balance-of-Payments Committee, the United States argued that the WTO dispute settlement system called on panels and the Appellate Body to assess many specialized questions, such as the scientific basis for SPS measures. If India�s argument were accepted, then the mere existence of any specialized body within the WTO with a review function would preclude dispute settlement under Article XXIII; for instance, the existence of the Committee on Antidumping Practices and the Committee on Safeguards would preclude review by panels of antidumping and safeguards measures. In any event, if India was concerned with ensuring that appropriate expertise be brought to bear on questions before the WTO, India should have no objection at all to having the IMF -- the institution with the most expertise in balance-of-payments matters and the access to the most complete and current information -- determine whether or not India had balance-of-payments difficulties within the meaning of Article XVIII:9.
91. The United States noted that India had also argued from an analogy to the relationship between specialized agencies and domestic courts: saying that domestic courts "respect" the agencies' expertise. But "respect" did not mean � as India intimated � that the courts had no rôle to play. To the contrary, India said that its courts could review decisions made by agencies to ensure that they were not arbitrary, irrational or discriminatory, a system used by many countries. For these reasons, India's analogy did not support its point.
92. The United States further argued that, contrary to India's assertions, India was not permitted to maintain its import restrictions until it had been informed of their inconsistency with the requirements of Article XVIII:B by the General Council. Article XVIII:11 did not say that Members "shall eliminate [their restrictions] when informed that conditions no longer justify their maintenance." It said that Members "shall eliminate [their restrictions] when conditions no longer justify their maintenance.
93. In addition, the United States contended that India had misread Paragraph 13 of the 1994 Understanding by claiming it entitled India to maintain balance-of-payment measures until a decision of the General Council. Paragraph 13 provided only that the Balance-of-Payments Committee might make recommendations to the General Council and the General Council might act on the recommendations of the Committee, but that in the absence of the specific proposals for recommendations by the General Council, the Committee's conclusions would record only the different views expressed in the Committee. Paragraph 13 further said that when a time schedule for the removal of restrictions has been presented, the General Council "may recommend" that a Member adhering to that time schedule shall be deemed to be in compliance with its GATT 1994 obligations. This necessarily implied that when the General Council had not made such a recommendation, the Member concerned � even if it adhered to a time schedule for removal of restrictions � could not thereby automatically be deemed to be in compliance with its GATT 1994 obligations. In this case the Committee had not made proposals for recommendations, and the General Council had therefore not made any recommendations in relation to a time schedule for removal of the challenged measures. Consequently, India's adherence to the time schedule that it unilaterally proposed did no ipso facto mean that it was complying with its GATT 1994 obligations.
94. For the United States, India's notion that it had a right to maintain measures inconsistent with the WTO Agreement until asked to remove them would undermine the legitimacy of the WTO as a rules-based institution. It also would quickly lead to an unravelling of the concessions that Members have made to one another, as Members waited to implement their own obligations until asked to do so while at the same time insisting that other Members carry out theirs. Such a result was not consistent with the terms of Article XVIII:B; it also would not be consistent with the object and purpose of the GATT 1994.
95. Any suggestion that a Member was entitled not to carry out its obligations to other Members � such as the obligation to remove quantitative restrictions when they were no longer justified � would be an interpretation of the GATT 1994 that contravened Article 26 of the Vienna Convention on the Law of Treaties: "Every treaty in force is binding upon the parties to it and must be performed by them in good faith." That Article stated the long-standing rule of customary international law, pacta sunt servanda: India was expected to carry out its obligations without waiting to be asked to do so.
96. The United States replied to India's argument that balance-of-payments matters were politically delicate, and therefore not to be handled by panels, by pointing out two flaws with this argument: First, this dispute was not in the least political. It had arisen because the facts were clear: India's balance-of-payments situation had improved and no longer qualified India to maintain import restrictions for balance-of-payments purposes. Second, even if this dispute could be described as, in some sense, "politically delicate", what made the justification of a balance-of-payments measure any more "politically delicate" than the justification of any trade measure that enjoyed wide domestic support, or the justification of a trade-related environmental measure? The United States noted that India's recourse to the WTO dispute settlement system in the ongoing "shrimp/turtles" dispute demonstrated that India recognizes the strength of the WTO system: it was a system of rules. The provisions of the WTO Agreement, and the rights and obligations of the Members, had been negotiated; the dispute settlement system served the purpose of enforcing those obligations and thereby protecting those rights. The fact that in "politically delicate" cases individual Members were not able to block adoption of decisions, but had to abide by the negotiated rules of the system, was one of the most important accomplishments of the Uruguay Round.
97. The United States added if any Member could institute a measure for balance-of-payments purposes and then prevent consensus in the BOP Committee concerning the BOP justification for the measure, the measure would be completely beyond control if it were exempt from panel review in the dispute settlement process. Such opportunistic behaviour by one Member would then shift the adjustment burden to others, who would be tempted to follow suit in a descending spiral. This example illustrated that placing measures off-limits to the rule of law, simply because a BOP claim had been made, was dangerous for the WTO system as a whole.

(b) Footnote 1 of the 1994 Understanding

"Nothing in this Understanding is intended to modify the rights and obligations of Members under Article XII or XVIII:B of GATT 1994. The provisions of Articles XXII and XXIII of GATT 1994 as elaborated and applied by the Dispute Settlement Understanding may be invoked with respect to any matters arising from the application of restrictive import measures taken for balance-of-payments purposes."

98. India contended that the reference in footnote 1 of the Understanding to "matters arising from the application of restrictive import measures" was to import restrictions that have a valid balance-of-payments justification. In contrast, the reference to "restrictions...being applied in a manner involving an inconsistency" in Article XVIII:12(c)(ii) must be interpreted to refer to import restrictions lacking balance-of-payments justification and import restrictions administered in a GATT-inconsistent manner because the provision referred to inconsistencies with Article XVIII:B and Article XIII. If the reference to application in the footnote were interpreted to comprise all the matters in Article XVIII:12(c)(ii) merely because the terms "being applied" were used, the footnote would have the effect of implementing, in a circuitous manner, the 1990 proposal of the United States to empower panels to render import restrictions illegal through their findings. The footnote, India contended, did not modify a Member's right to a determination of the justification of its import restrictions in accordance with the provisions of Article XVIII:B. India went on to say that the Panel's examination should not modify India's rights under Article XVIII:B, including India's right under paragraph 12(c)(ii) to be informed of any serious inconsistency of its import restrictions by the General Council. In India's view, the consistency of balance-of-payments measures with Articles I, II, X, and XIII of the GATT and the provisions of other WTO agreements, such as the Agreement on Import Licensing Procedures, could be examined by a panel but the question of their balance-of-payments justification should be determined in accordance with the procedures set out in Articles XV:2 and XVIII:B, the 1979 Declaration on Trade Measures Taken for Balance-of-Payments Purposes and the 1994 Understanding.
99. The United States responded that the text of footnote 1 confirmed rather than denied the availability of dispute settlement. Footnote 1 did not say "... but the provisions of Articles XXII and XXIII may not be invoked with respect to matters relating to justification of such measures," or that Articles XXII and XXIII "may be invoked only with respect to any matters arising from the application of restrictive import measures taken for balance-of-payments purposes." In the view of the United States, had the drafters of the GATT 1994 intended to impose restrictions on dispute settlement, they would have used words of prohibition or limitation, as they did in other places in the WTO Agreement, ⁹² not the words that they actually wrote in footnote 1.
100. The United States also noted that India had claimed that footnote 1 of the 1994 Understanding, for the first time, limited dispute settlement under Article XXIII in balance-of-payments matters to questions of "application" of measures. The United States replied that, even if India�s interpretation of footnote 1 were to be accepted (and it should not be), this dispute would be properly before this Panel since it had "arisen" precisely because of India�s "application" of quantitative restrictions that it originally instituted for balance-of-payments purposes, because India was applying the challenged measures in excess of what was necessary to address its balance-of-payments situation. The heading immediately before paragraph 1 of the 1994 Understanding, which covered paragraphs 1 to 4 of the 1994 Understanding, was "Application of Measures", and paragraph 4 included the requirement that "... measures taken for balance-of-payments purposes ... may not exceed what is necessary to address the balance-of-payments situation." Lawful application of measures taken for balance-of-payments purposes included the obligation not to apply measures in excess of what was necessary to address the balance-of-payments situation. The removal of unjustifiable measures thus was, to the drafters of the Understanding, a part of the "application" of such measures.
101. The United States added that a review of "restrictions[that]are being applied" (Article XVIII:12(c)(ii)) was a review of an application (footnote 1) of restrictive measures and the relationship between the two clauses confirmed that Article XVIII:12 procedures were not an exclusive means of addressing the rights and obligations of members under Article XVIII:B.
102. In response, India pointed out that the first sentence of paragraph 4 of the Understanding was not enforceable because it used "may" rather than the mandatory "shall", while every other sentence in the paragraph relating to the application of measures, except for the one exempting essential products from surcharges, used the mandatory "shall". In India's view this confirmed India's right to have justification of its import restrictions determined by the Committee in consultations.

(c) Negotiating history to footnote 1

103. India drew the attention of the Panel to the negotiating history which lay behind the 1994 Understanding and its footnote. It recalled that in June 1990, the delegations of the United States and Canada had formally proposed the adoption of a "Declaration on Trade Measures Taken for Balance-of-Payments Purposes. ⁹³ The provisions of the proposed Declaration relating to dispute settlement were as follows:

"In those cases in which the Council has approved specific recommendations by the Committee, the rights and obligations of contracting parties shall be assessed in the light of those recommendations. �In those cases in which the Committee has been unable to agree on a specific recommendation, the question of the consistency of the measures under review with the Articles and this Declaration has not been resolved. The consulting contracting party or affected contracting parties can, if they wish, attempt to resolve the question in the Council. Alternatively, affected contracting parties can, if they wish, pursue the matter through normal GATT dispute settlement procedures pursuant to Articles XXII and XXIII. "

104. In India's view, the objective of the United States and Canada had been to create an alternative procedural avenue for determining the justification of balance-of-payments restrictions. This notion was rejected and was not reflected in the final text of the Understanding. Moreover, the United States and Canada proposed that access to the normal dispute settlement procedures be unqualified, as in the case of the standard references to the DSU in the WTO agreements. This proposal also was not taken over into the final text. India added that while some of the elements of the 1990 proposal of the United States found their way into the final version of the 1994 Understanding, the proposal that matters left unresolved by the Committee and the General Council be settled under the normal dispute settlement procedures was not taken over into the 1994 Understanding. On the contrary, the footnote to the 1994 Understanding left no doubt that nothing in the 1994 Understanding changed the right under Article XVIII:B to maintain the import restrictions until the General Council, based on a recommendation by the Committee, had found them to be inconsistent. According to India, the reference to "matters arising from the application of restrictive import measures" in the footnote to the Understanding had not emerged by accident but was part of carefully negotiated compromise language and should be interpreted accordingly.
105. India was of the opinion that the footnote indirectly confirmed that disputes arising from the other matters regulated in the 1994 Understanding, in particular the matters regulated in paragraph 13 entitled "Conclusions of Balance-of-Payments Consultations", were not meant to be resolved by panels or the terms of the footnote would not have been explicitly limited to the application of the measures. Instead, the general, all-encompassing formulation chosen in the other GATT Understandings (except that for Article XXIV, where similar issues of competence arose) and in all WTO agreements would have been chosen, or the formulation proposed by the United States in 1990. In the view of India, these considerations suggested that the drafters referred to the application of the measures because they presumed that the final decision on their justification would continue to be taken by the General Council in accordance with the procedures set out in Articles XV:2 and XVIII:12 and paragraph 13 of the 1994 Understanding.
106. Therefore, in India's view, the United States' claim that India's arguments were "textually baseless", in fact, was itself not supported by the terms of Article XVIII:B and the 1994 Understanding. The United States had the right to resort to the dispute settlement procedures, but these procedures did not authorize panels to ignore the rights of the defendant party under the relevant provisions of the GATT. India accordingly invoked its right to a progressive relaxation and elimination of its import restrictions pending a decision by the General Council. India argued that this right had not disappeared simply because the United States had the right to resort to the DSU with respect to the application of India's import restrictions.
107. The United States responded that India had cited no explanation for the rejection of that text, and thus the mere fact that a different text served as the basis for the 1994 Understanding rather than the text proposed by the United States and Canada proved nothing. ⁹⁴
108. In addition, the United States recalled that the negotiators of the 1994 Understanding (and the negotiators of the Understanding on the Interpretation of Article XXIV of the GATT 1994) were well aware of the Panel report on European Community � Tariff Treatment on Imports of Citrus Products from Certain Countries in the Mediterranean Region ⁹⁵ (Citrus) and the more recently issued Panel report on Republic of Korea � Restrictions on Imports of Beef ⁹⁶ (Korea- Beef) and EEC � Member States' Import Regime for Bananas ⁹⁷ (Bananas I), and they were aware of the criticism of the finding in EC-Citrus In that context, the burden in the negotiations was on those contracting parties (such as, apparently, India) who wished to preclude recourse to dispute settlement. Thus, if India wished to achieve the result it now advocated � namely, that panels should be prevented from deciding balance-of-payments matters � India should have negotiated an explicit exception to Article XXIII. India obviously did not obtain such an exception. Negotiators were aware of the possibilities that panels would examine quantitative restrictions for which balance of payments cover had been claimed and intentionally did not exclude them from the scope of panel review in the WTO system. ⁹⁸

To continue with Relationship between Paragraph 12 and the footnote

⁸⁷ DSU, Article 3.2.

⁸⁸ Vienna Convention, Article 31(2)(a).

⁸⁹ Panel Reports on Korea � Restrictions on Imports of Beef, L/6504, adopted on 7 November 1989, BISD 36S/202, 227, para.96; L/6505, adopted on 7 November 1989, BISD 36S/234, 265, para.112; L/6503, adopted on 7 November 1989, BISD 36S/268, 303 para.118.

⁹⁰ Marrakesh Agreement Establishing the World Trade Organization, Article IX:2.

⁹¹ Rules of Procedure for Meetings of the Committee on Balance-of-Payments Restrictions, WT/BOP/10, 12 December 1995.

⁹² Such as, for example, the provisions of Article 64.2 of the Agreement on TRIPS.

⁹³ Proposal by Canada and the United States, Multilateral Trade Negotiations, The Uruguay Round, Group of Negotiations on Goods (GATT), Negotiating Group on GATT Articles, MTN.GNG/NG7/W/72, 15 June 1990.

⁹⁴ The United States considered that Article 32 of the Vienna Convention also required the Panel to disregard India�s argument. This isolated piece of negotiating history did not confirm the meaning of the provisions in question, and the interpretation of those provisions was not ambiguous, obscure, manifestly absurd or unreasonable.

⁹⁵ L/5776, Op. Cit.

⁹⁶ Panel Report on Republic of Korea � Restrictions on Imports of Beef, adopted on 7 November 1989, BISD 36S/202, 227; Panel Report on Republic of Korea � Restrictions on Imports of Beef, adopted on 7 November 1989, BISD 36S/234; Panel Report on Republic of Korea � Restrictions on Imports of Beef, adopted on 7 November 1989, BISD 36S/268, 303, hereafter Korea � Beef..

⁹⁷ DS/32/R, Op. Cit.

⁹⁸ In the view of the United States, footnote 1 served a function by confirming, shortly after the reports on Citrus, Bananas, and Korean Beef, the availability of dispute settlement under Article XXIII in balance-of-payments cases.