3. Article XVIII:9, XVIII:11 and the Note Ad Article XVIII:11 (Cont.)

160. India�s continued maintenance of these quantitative restrictions also violated India�s obligations under paragraph 11 of Article XVIII. Reflecting the limited and temporary nature of the exception provided in Article XVIII:B for developing members with balance-of-payments difficulties, paragraph 11 provided that WTO Members using this exception maintain quantitative restrictions only to the extent necessary under the terms of Article XVIII:9, and obligated Members to eliminate such restrictions when they were no longer necessary. Because the IMF had stated clearly that India�s reserve position no longer satisfied the conditions laid out in Article XVIII:9(a) and (b), and this determination must be accepted by the WTO and the Panel, the "terms of paragraph 9" were not satisfied and Article XVIII:11 required immediate elimination of the restrictions in question. The IMF had made it clear that India was not experiencing a serious decline in its monetary reserves; that there was no threat of such a decline; and that India�s monetary reserves were not inadequate. ¹³⁹ Therefore, quantitative restrictions could not be "necessary" in the sense of Article XVIII:9; any quantitative restrictions must "exceed those necessary." The IMF�s factual determinations made clear both that there was no balance-of-payments justification for maintenance of the challenged measures and that removal of the challenged measures would not produce conditions justifying the institution of such measures. Therefore, India could not establish that its balance-of-payments situation met the requirements of either Article XVIII:9 or of the Ad Note, and it therefore could not maintain the challenged measures.
161. The United States considered that an important context for interpreting the provisions of Article XVIII:B was the Understanding on the Balance-of-Payments Provisions of the General Agreement on Tariffs and Trade 1994 (the "1994 Understanding"). The 1994 Understanding reinforced India�s obligation to remove the challenged measures at the time when the justification for those measures lapsed. In the terminology of the Vienna Convention, the 1994 Understanding was an "agreement relating to [Article XVIII:B of the GATT 1994] which was made between all the parties in connection with the conclusion of [the GATT 1994]", and it therefore formed part of the context for the interpretation of Article XVIII:B. ¹⁴⁰
162. The 1994 Understanding was relevant to the application of balance-of-payments measures where there was a balance-of-payments justification. Paragraph 4 of the Understanding stated, in part:

"Members confirm that restrictive import measures taken for balance-of-payments purposes may only be applied to control the general level of imports and may not exceed what is necessary to address the balance-of-payments situation." ¹⁴¹

These words were similar to those used in Articles XVIII:9, 11, and the Ad Note to paragraph 11. Measures taken for balance-of-payments purposes may not exceed what is necessary. This notion, however, presupposed that any measures were necessary; if there were no balance-of-payment problem as defined by Article XVIII:9 and 11, then no measures could be deemed necessary.

163. The United States considered that paragraphs 1 and 11 of the 1994 Understanding also shed light on the meaning of Articles XVIII:9, 11, and the Ad Note. These paragraphs addressed, inter alia, the requirement for members invoking balance-of-payments provisions to provide a time schedule for the removal of restrictive import measures taken for balance-of-payment purposes. Paragraph 11 stated that Members invoking the balance-of-payments exceptions of the GATT 1994, at the first consultation after so doing, should provide the Balance-of-Payments Committee a "plan for the elimination and progressive relaxation of remaining restrictions". Similarly, paragraph 1 stated that Members invoking the balance-of-payments exceptions should make a public announcement of time-schedules for the removal of restrictive import measures "as soon as possible", and if no such announcement was made they should provide a justification as to why this was not possible. These provisions demonstrated that any phase-out should begin while a member was still experiencing balance of payments problems, or at a minimum as the balance-of-payments crisis was lessening.
164. For the United States, these paragraphs did not support India�s argument that it was entitled to phase out restrictions taken for balance-of-payments reasons years after there was no longer any balance-of-payments problem. Rather, they were consistent with the United States� reading of Article XVIII:B that India must remove all quantitative restrictions when there was no longer any threat of or actual serious decline in a Member�s monetary reserves.
165. The United States noted also that GATT practice demonstrated that contracting parties had been requested to remove their restrictions as their balance-of-payments improved. The Vienna Convention rules of interpretation provided for the examination of subsequent practice of parties to a treaty as an aid to the interpretation of that treaty. ¹⁴² The practice of the CONTRACTING PARTIES to the GATT 1947 subsequent to the adoption of Article XII and the present text of Article XVIII:B demonstrated that contracting parties had been required to remove their quantitative restrictions as their balance-of-payments positions improved. The examples of Germany, Italy and Spain were instructive.
166. In 1957, the IMF concluded that Germany�s restrictions on imports were no longer necessary to safeguard Germany�s monetary reserves and balance of payments. ¹⁴³ In light of this finding, Germany was requested by the CONTRACTING PARTIES to remove those restrictions. Germany objected to doing so; Germany made the argument that it would liberalize certain products over a two-year period, and would remove or relax certain discriminatory measures with respect to other products. ¹⁴⁴ The Report of the Working Party on German Import Restrictions records contracting parties� response to this argument:

"A number of delegations (Australia, Canada, Ceylon, Denmark, India, Japan, New Zealand, Norway, Pakistan, United Kingdom, United States) pointed out that under paragraph 2 of Article XII, restrictions should be eliminated when they are no longer justified under that paragraph. While the application of a liberal licensing policy was welcome in circumstances where restrictions could be legitimately maintained, it was no substitute for the elimination of restrictions required under the Agreement." ¹⁴⁵

Germany ultimately agreed to disinvoke Article XII and obtained a waiver of its obligations under Article XI:1 from the CONTRACTING PARTIES. ¹⁴⁶

167. The United States referred to a similar result involving Italy. In 1959, Italy's proposal to phase out gradually its quantitative restrictions was rejected by the Committee. ¹⁴⁷ The IMF made a statement at the November committee meeting stating its factual determination that Italy's balance of payments and reserve position no longer justified restrictions on imports. It further stated that Italy was in a position to make "rapid progress in the elimination of such restrictions." ¹⁴⁸ Italy argued that the complete elimination of quantitative restrictions would aggravate the structural disequilibrium of its economy, but it would do so progressively. The Committee disagreed, and said it would not hold further consultations under Article XII with Italy. Similarly, in 1973, the IMF concluded that quantitative restrictions maintained by Spain could no longer be justified on balance-of-payments grounds. Spain argued that it was undertaking various liberalization measures during the course of that year, and that Spain needed to follow a course of gradual liberalization. The Committee rejected the Spanish arguments in light of the IMF�s findings and invited the Spanish Government to reconsider its position with regard to its remaining import restrictions. ¹⁴⁹
168. India argued that its time-schedule for the removal of its import restrictions was consistent with Article XVIII:11 of the GATT and invoked its right to a progressive relaxation and elimination of its import restrictions pending a decision by the General Council.
169. India contended that an analysis of the provisions of Article XVIII:B confirmed that import restrictions maintained by a Member in good faith could not be considered inconsistent with Article XVIII:11 until the Committee determined that these import restrictions lacked justification. Under Article XVIII:9, a Member might impose import restrictions in order to safeguard its balance of payments without prior authorization by the WTO subject to the limitations contained in the proviso to paragraph 9 and paragraphs 10 and 11 of Article XVIII:B. The drafting history of Article XVIII:B recorded in the context of Article XII that:

After a detailed consideration of the various proposals put forward with a view to establishing stricter rules for the introduction and maintenance of quantitative restrictions through the institution of fixed time limits and approval by the CONTRACTING PARTIES, the Working Party came to the conclusion that such proposals would not find general acceptance among the contracting parties, but that, on the other hand, the general opinion was in favour of strengthening and widening the scope of consultations under Article XII, as well as under Article XIV. ¹⁵⁰

170. Article XVIII:11, second sentence, stated that import restrictions shall be eliminated when conditions no longer justified their maintenance in terms of the criteria set out in Article XVIII:9. An interpretative note to this provision made it clear that a WTO Member was not

"required to relax or remove restrictions if such relaxation or removal would thereupon produce conditions justifying the intensification or institution, respectively, of restrictions under paragraph 9 of Article XVIII".¹⁵¹

In arguing that:

"The text of Article XVIII:11 . . . closely parallels that used in Article XII:2(b) for developed countries. The term "phase-out" appears nowhere in the text of either provision. Once there is no BOP justification for restrictions, they must be "eliminated". . . . India now has no BOP problem justifying restrictions. If India should have a BOP problem in the future, it remains free to reinvoke Article XVIII:B �" .

India considered that the United States overlooked two important differences between Article XII and Article XVIII:B. The first was that, Article XII:2(a) stipulated that a developed country Member�s import restrictions "shall not exceed those necessary . . . to forestall the imminent threat of . . . a serious decline in its monetary reserves. . ." while there was no such requirement in Article XVIII:B. The GATT Working Party which drafted Article XVIII explained:

. . . paragraph 9 [of Article XVIII] recognizes that the reserve problems for [developing] countries is one of adequacy of the reserves in relation to their programme of economic development, that for this reason the word "imminent" which occurs in paragraph 2 (a) is inappropriate in this context, and that in order to safeguard their external financial position these countries may need over a period of time to control the general level of their imports in order to prevent that level from rising beyond the means available to pay for imports as the progress of development programmes creates new demands. ¹⁵²

The second important difference was that Article XVIII:11, unlike the corresponding provision in Article XII:2(b), was subject to the proviso that no developing country Member:

". . . is required to relax or remove restrictions if such relaxation or removal would thereupon produce conditions justifying the intensification or institution, respectively, of restrictions under paragraph 9 of Article XVIII."

The term "thereupon" in the text of this note left no doubt that it referred to a situation in which the sudden removal of the import restrictions would produce conditions justifying their reintroduction. The note thus made it clear that developing countries were not required to engage in a "stop-and-go" policy of the type suggested by the United States, immediately eliminating all import restrictions as soon as their reserve situation had improved and reinvoking Article XVIII:B after the removal gave rise to new balance-of-payments difficulties; rather, they might remove them gradually over time so as to avoid renewed balance-of-payments difficulties.

171. In India's view, Article XVIII:11 was intended to ensure that a Member had a right to maintain import restrictions even when there was no immediate balance-of-payments need in terms of Article XVIII:9 if their relaxation or removal would produce conditions justifying their intensification or reintroduction in terms of Article XVIII:9. Under the terms of Article XVIII:9, developing country Members might introduce, maintain or intensify import restrictions in order to forestall the threat of, or to stop, a decline of their reserves to a level that was inadequate for the implementation of their programmes of economic development. Consequently, irrespective of whether or not its import restrictions were currently necessary to address an existing crisis in its balance of payments, India was entitled to remove them gradually within a time-schedule designed to avoid balance-of-payments difficulties that would result in a serious decline in its monetary reserves and, thereby, jeopardize its programme of economic development.
172. In response to a question from the Panel as to what level or composition of reserves India would consider "adequate", India noted that as the drafters of Article XVIII:B had pointed out, this provision recognized that "the reserve problem for developing countries is one of adequacy of reserves in relation to their programme of economic development" and that these countries "need over a period of time to control the general level of their imports in order to pay for imports as the progress of development programmes creates new demands". ¹⁵³ In terms of Article XVIII:9, the adequacy of the level of reserves held by India thus would vary with its development policies and it was therefore not possible to indicate one level of reserves that would be adequate in all circumstances. For the reasons which India explained in detail to the Committee, and which all but one member of that Committee found convincing, a sudden removal of import restrictions covering one-third of imports would create considerable economic uncertainty and political opposition, which in turn would adversely affect India's investment climate and the external financial position. The schedule had not been drawn up with a particular target for the level of India�s reserves in mind; its purpose was rather to ensure that the liberalization, by itself, did not generate the risk of balance-of-payments problems difficult to resolve in the Indian context with macro-economic policies alone. According to Article XVIII:11, India was not required to withdraw its import restrictions on the ground that a change in its development policies would render them unnecessary. The issue raised by the argumentation of the United States thus was whether India�s current external financial position was such as to permit a sudden removal of all the remaining import restrictions affecting one third of imports without a change in other economic policies. India believed that its current reserve level was inadequate for that purpose.
173. For India, Article XVIII:11 and the note thereto specifically permitted the progressive relaxation rather than immediate elimination of import restrictions when their sudden removal would produce conditions justifying their intensification. India�s phase-out plan was nothing but a preannounced time-schedule for progressive relaxation and elimination of its remaining import restrictions designed to avoid such conditions. India did not claim that its balance-of-payments situation was such that it could simply maintain its import restrictions at their existing level; India claimed that its external financial constraints were such that it must relax its import restrictions progressively so as to avoid the creation of conditions jeopardizing its development policies and that its time-schedule for progressive relaxation and elimination of its remaining import restrictions was for this reason consistent with Article XVIII:11. India's remaining import restrictions could therefore only be evaluated against India�s proposed time-schedule for progressive relaxation and elimination of its remaining import restrictions. In India's view, the United States bore the burden of proving that the time-schedule currently being followed by India did not meet the conditions set out in the note to Article XVIII:11.
174. India was of the view that its economic and external financial position at the present time was such that the prompt removal of import restrictions on 2,714 HS tariff lines covering about one-third of total imports would produce conditions justifying their reintroduction in terms of Article XVIII:9, particularly when its programme of economic liberalization included liberalization measures in other sectors of its economy that could also have an adverse impact on its balance of payments. Accordingly, India considered that the progressive relaxation and elimination of its import restrictions within the remaining five years of its six-year time-schedule for removal of its import restrictions would avoid producing such conditions and that this plan, therefore, met the requirements of Article XVIII:11.
175. In response to a question from the Panel as to how India was addressing the first sentence of Article XVIII:11, India pointed out that the obligation under the first sentence of Article XVIII:11 was not absolute and unqualified. The first sentence of Article XVIII:11 did not state that a less-developed country Member "shall employ domestic policies that restore equilibrium in its balance of payments �". Rather, it enjoined that the Member "shall pay due regard to the need for restoring equilibrium in the balance of payments � and the desirability of assuring an economic employment of productive resources". Thus, it was clear that this obligation must be read in the context of the other provisions of Article XVIII:B and its object and purpose. In addition, the first sentence of Article XVIII:11 required a Member to pay due regard to two separate elements: (i) the need for restoring equilibrium in their balance of payments on a sound and lasting basis and (ii) the desirability of assuring an economic employment of productive resources. Both elements must be taken into account in interpreting the obligation imposed by the first sentence of Article XVIII:11.
176. India considered that the term "economic employment of productive resources" was capable of two interpretations. On one interpretation, the term could refer to the need to avoid the inefficient use of productive resources through indiscriminate protection of domestic industries from import competition. However, Article XVIII:11 did not refer to "economically efficient employment of productive resources". Therefore, it could also be interpreted to mean that policies designed to ensure balance-of-payments equilibrium could not be policies that cause contraction of a Member's economy, resulting in unused industrial capacity as well as high unemployment.
177. Theoretically, India continued, it was always possible to bring about a long term equilibrium in the balance of payments through macroeconomic policies such as currency devaluation, high interest rates and fiscal policies to lower government spending. The result, however, would be inconsistent with the ordinary meaning of the first sentence of Article XVIII:11 as well as the object and purpose of Article XVIII:B. First, such policies would severely retard economic growth. Not only would industrial capacity be left idle because of the resulting economic contraction but unemployment would also rise. This would be inconsistent with the second element of the first sentence of Article XVIII:11 which was to ensure the economic employment of productive resources. This was also clearly inconsistent with the purpose of Article XVIII:B, which was to facilitate the economic development of less-developed country Members. Second, such policies in general and, currency devaluation, in particular, would place an undue burden of restoring equilibrium in the balance of payments on a long-term basis on international trade. This was because the less-developed country Member in question would be unable to procure both essential goods that it deemed essential for economic development as well as non-essential goods. Accordingly, the first sentence of Article XVIII:11 could not be interpreted as requiring policies that would restore long-term equilibrium in the balance of payments at the cost of a significant decline in economic growth. India drew the attention of the Panel to the paper entitled "Proposals for a Review of GATT Article XVIII: An Assessment" by Frances Stewart, published in the Uruguay Round, Papers on Selected Issues by the United Nations, New York, 1989, a copy of which was made available to the Panel at its request on 23 June 1998.
178. Against this background, India wished to demonstrate that it was following responsible domestic policies that pursue long-term equilibrium in its balance of payments without placing the burden of adjustment on the trading interests of its fellow Members. In this connection, India referred to its Basic Document dated 8 January 1997 which it had presented to the Committee for the 1997 consultations with India. ¹⁵⁴ As discussed there, India had undertaken major economic reforms in 1991-92 designed to remove internal and external barriers to competition in the Indian economy. India began its economic reforms in 1991 with a substantial package of economic reforms consisting both of macroeconomic stabilization measures as well as structural reforms. For convenience, India would summarize the relevant reforms under the same heads as its 1997 Basic Document while updating them to take account of more recent developments: (i) industrial policy; (ii) exchange rate related reforms; (iii) fiscal reforms; and (iv) trade policy reforms. (The summary is attached as Annex 1).
179. In response to India's argument that, pursuant to the Ad Note, (1) it had the right to phase its import restrictions out gradually, and (2) because it had submitted a schedule for phasing out the challenged measures, it "need not comply with the criteria set forth in the proviso to Article XVIII:9", the United States stressed that this was not what the Ad Note said. What it said was that developing country Members were not "required to relax or remove restrictions if such relaxation or removal would thereupon produce conditions justifying the intensification or institution" of balance-of-payments measures. The Ad Note clarified that a developing country Member invoking balance-of-payment justification might continue to impose those restrictions which continued to be necessary to avoid, inter alia, a threat of a serious decline in monetary reserves. However, the corollary of the Ad Note was that where no such threat of or actual serious decline in monetary reserves existed, the provisions of paragraph 11, i.e., "shall eliminate them when conditions no longer justify such maintenance", required the immediate elimination of the restrictions. The Ad Note applied in only one possible case: if, and only if, removal of India�s import restrictions would result in balance-of-payments conditions meeting the specific criteria of the proviso in paragraph 9. Otherwise, India could not rely on the Ad Note to maintain its restrictions.
180. India had referred to the Ad Note 11 and alleged that Article XVIII:11 gave a Member a "right" to maintain import restrictions "even when there is no immediate balance-of-payments need in terms of Article XVIII:9". This interpretation would eviscerate Article XVIII:11 of any content. The Note Ad XVIII:11 referred only to the provisions in Article XVIII:9 concerning action to "forestall the threat of, or to stop, a serious decline in its monetary reserves, or in the case of a contracting party with inadequate monetary reserves, to achieve a reasonable rate of increase in its reserves". In other words, the Ad Note applied only when relaxation of restrictions would cause a "serious decline in monetary reserves". The IMF had already dealt with this issue, by finding that India could eliminate its import restrictions without creating any balance-of-payments problems or indeed any adjustment burden. Indeed, the IMF�s conclusion had been that elimination of import restrictions would only strengthen India�s balance-of-payments position. India now had no balance-of-payments problem justifying restrictions. If India were to have a balance-of-payments problem in the future, it remained free to reinvoke Article XVIII:B and impose price-based measures consistent with the provisions of the Understanding on the Balance-of-Payments Provisions of the GATT 1994. But India could not keep its existing, highly-restrictive import licensing scheme in the absence of any present balance-of-payments justification. If accepted, India�s interpretation of Article XVIII:11 would render the phrase "shall eliminate them when conditions no longer justify such maintenance" a nullity and any Member could claim it needed decades to phase out restrictions after its balance-of-payments justification had ended. Under India�s interpretation, it would never be possible to establish whether or not the test of the Ad Note had been met.
181. In the view of the United States, in order to rule that India had met the conditions set forth in the Ad Note, the Panel would need to make certain factual findings about India�s economy, such as a finding that India�s reserve position would be threatened with a serious decline. It was the position of the United States that India had the burden of proof on this issue and that India had not even established a prima facie case (let alone overcome the proof that the United States had submitted). In the event the Panel were to rule that the United States had the burden to make a prima facie case on the absence of such a threat from the removal of the restrictions, the United States would point, inter alia, to the findings of the IMF delivered at the January 1997 Committee consultation and the statements by India. India had provided no factual evidence from which the Panel could make findings that India was faced with such a threat or actual serious decline in its monetary reserves from the removal of the restrictions. India�s mere unsubstantiated assertions about the facts could not substitute for proof of the actual facts. ¹⁵⁵
182. With respect to India's invocation of an alleged right to progressive relaxation pending a decision by the General Council, the United States countered that Article XVIII:11 stated, with no ambiguity, that India "shall eliminate [its measures] when conditions no longer justify their maintenance." Article XVIII:11 did not say that India "shall eliminate [its measures] when advised to do so by the General Council." The absence of any textual support for India's position meant that, in the words of Article 31 of the Vienna Convention, India's position could not be supported by "the ordinary meaning to be given to the terms of the treaty in their context and in the light of its object and purpose."

To continue with Removal of Restrictions

¹³⁹ Report on the Consultation with India, WT/BOP/R/22, 3 March 1997, para. 8.

¹⁴⁰ Vienna Convention, Article 31(2)(a). The United States had noted India�s repeated references to the first sentence of Footnote 1 of the 1994 Understanding: "Nothing in this Understanding is intended to modify the rights and obligations of Members under Articles XII or XVIII:B of GATT 1994." To India, this sentence apparently meant that even when the 1994 Understanding mentioned such rights and obligations, it could not have an effect on them. This was not so. To give one example, the first sentence of the 1994 Understanding plainly said that the 1994 Understanding "clarifies" the provisions of those Articles. Uncertainties about the rights and obligations of Members under Articles XII and XVIII:B might be able to be resolved by reference to the Understanding. To give another example, it was also clear that provisions of the 1994 Understanding could qualify the exercise by Members of their Article XVIII:B rights; for example, in paragraph 3, Members� use of quantitative restrictions was conditioned on their justifying why price-based measures were inadequate.

¹⁴¹ 1994 Understanding, paragraph 4 (emphasis added).

¹⁴² Article 31(3)(b). Article XVI:1 of the Marrakesh Agreement Establishing the World Trade Organization also provides that the WTO shall be guided by the decisions, procedures and customary practices followed under the GATT 1947.

¹⁴³ Results of the International Monetary Fund Consultations, QRC/4/Add.2, 17 June 1957.

¹⁴⁴ Report of the Working Party on German Import Restrictions, BISD 6S/55, Op. Cit. page 11 (statement by the representative of the Federal Republic of Germany).

¹⁴⁵ Ibid., para. 5 (emphasis added).

¹⁴⁶ German Import Restrictions, Decision of 30 May 1959, BISD 8S/31.

¹⁴⁷ Report of the Committee on Balance-of-Payments Restrictions on Consultation Under Article XII:4(b) with Italy, L/1088, 3 November 1959, adopted at SR.15/13.

¹⁴⁸ Ibid., Annex I, para. 5.

¹⁴⁹ Report on the 1973 Consultation with Spain, BOP/R/63, 20 July 1973, adopted by the GATT Council on 19 October 1973 (C/M/90, page 2).

¹⁵⁰ Report of the Review Working Party on Quantitative Restrictions, BISD 3S/170, 171, para. 4.

¹⁵¹ Note Ad Article XVIII:11, General Agreement, 1947.

¹⁵² Ibid., BISD 3S/183.

¹⁵³ BISD 3S/183.

¹⁵⁴ WT/BOP/16, pp. 3-6.

¹⁵⁵ The United States referred to p. 14 of Wool Shirts, WT/DS33/AB/R, Op. Cit.