4. Removal of Restrictions According to Article XVIII:11, Article XVIII:12(c)(ii) and Paragraph 13 of the Understanding

183. At the request of the Panel, the Parties provided their views on the question of whether there should be a differentiation in legal terms between: on the one hand,

gradual relaxation which might be legal under Article XVIII:11 and the Note Ad Article XVIII:11, and, on the other hand

gradual removal of restrictions as provided for in Article XVIII:12(c)(ii) and paragraph 13 of the 1994 Understanding.

184. The United States argued that when measures were justified under Article XVIII:B, a time period in which to remove them -- for as long as those balance-of-payments difficulties continued -- was also justified by Article XVIII:B. With respect to measures for which there was no balance-of-payments justification the United States was of the view that Article XVIII:B did not apply, nor did Article XVIII:12(c) and Paragraph 13 of the 1994 Understanding. ¹⁵⁶ To the extent that a Member wished to retain measures for which there was no balance-of-payments justification, that Member must either meet the requirements of provisions of the GATT 1994 other than Article XVIII:B, or must obtain the consent of the WTO pursuant to the appropriate waiver provisions of the WTO Agreement (e.g., Article XXV:5 of GATT 1994 or Article IX:3 of the WTO Agreement).
185. India submitted that there were actually three separate situations with distinct legal consequences covered by the Panel's question:

1. Progressive relaxation and elimination of import restrictions maintained under Article XVIII:B in accordance with Article XVIII:11 of the GATT prior to a determination of an inconsistency by the Committee;
2. Gradual removal of import restrictions within a period specified by the Committee under Article XVIII:12(c)(ii); and
3. Progressive relaxation and elimination of import restrictions in accordance with a time-schedule presented pursuant to paragraphs 1 and 13 of the 1994 Understanding.

(a) Progressive relaxation and elimination under Article XVIII

186. India argued that an analysis of the provisions of Article XVIII:B confirms that import restrictions maintained by a Member in good faith cannot be considered inconsistent with Article XVIII:11 until the Committee determines that these import restrictions lack justification.

1. Under Article XVIII:9, a Member may 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. Thus, the agreed drafting history of Articles XVIII:B records 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. ¹⁵⁷

187. The only mechanism specifically referred to in Article XVIII:B for enforcing the limitations on import restrictions for balance-of-payments purposes (in the proviso to paragraph 9 and in paragraphs 10 and 11 of Article XVIII:B) was the consultation mechanism provided in Article XVIII:12. Under sub-paragraphs (c)(i) and (c)(ii) of Article XVIII:12, the Committee was under an affirmative obligation to inform the Member if it determined during consultations that its restrictions were inconsistent with Article XVIII:B or Article XIII.
188. A Member always ran the risk that the Committee would find that its import restrictions were inconsistent with Article XVIII:11 because they lacked balance-of-payments justification. As a result, a Member invoking Article XVIII:B had an incentive to progressively relax and eliminate its import restrictions as its balance-of-payments difficulties lessened. However, the Note Ad Article XVIII:11 provided that the Committee should not require relaxation or elimination of import restrictions where such relaxation or elimination could result in conditions justifying the intensification or introduction of import restrictions. Thus, the Note Ad Article XVIII:11 required the Committee to take considerations of prudence and precaution into account prior to requiring elimination.
189. In the case of India's import restrictions, a significant proportion of the membership of the Committee had found that India's time-schedule was justified precisely because they took into account the considerations referred to in the Note Ad Article XVIII:11. As a result, the Committee had not determined that India's residual import restrictions were inconsistent with Article XVIII:11 which the Committee was obligated to do either under sub-paragraph (i) or sub-paragraph (ii) of Article XVIII:12(c) if it found that India's residual import restrictions were not justified during consultations. India believed that the Panel must take this into account when reviewing the legal status of India's import restrictions after consultations. As the Appellate Body pointed out in EC Hormones, a precautionary principle cannot be introduced into a treaty provision on the ground that it is a customary principle of international law in the absence of a clear textual directive to do so. ¹⁵⁸ However, the Note Ad Article XVIII:11 definitely constituted such a clear textual directive. Accordingly, India should be permitted to phase out its import restrictions in accordance with its time-schedule for the progressive relaxation and elimination of its import restrictions.

(b) Article XVIII:12(c)(ii)

190. The United States considered that there were two reasons why Article XVIII:12(c)(ii) did not provide a basis for a gradual reduction of measures without balance-of-payments justification. First, Article XVIII:12(c)(ii) related to measures that were balance-of-payments-justified but impermissibly applied (e.g., in violation of Article XIII or Article XVIII:10). This interpretation was consistent with the text of the first sentence of Article XVIII:12(c)(ii) which used the phrase "restrictions are being applied in a manner involving an inconsistency of a serious nature with the provisions of this section or with those of Article XIII ... ." (emphasis supplied). Second, as a matter of GATT practice, the consultations provisions of Article XII:4(c) (the counterpart in Article XII to Article XVIII:12(c)) had not been applied when Germany and Italy were required to remove their balance-of-payments restrictions. In both those cases, the Balance-of-Payments Committee had taken the view, when the IMF declared that those countries� balance-of-payments situations no longer justified restrictions, that it would not be appropriate to continue consultations under Article XII. ¹⁵⁹
191. India contended that the periodic consultations process under Article XVIII:12 was intended to monitor issues relating to justification under Article XVIII:11 and Article XVIII:9 as well as application under Article XVIII:10 and Article XIII. Thus, paragraph (b) of Article XVIII:12 provided for periodic consultations -- of the type envisaged by Article XVIII:12(a) -- at roughly two-year intervals to review import restrictions maintained by each Member under Article XVIII:B. The issues to be reviewed included "the nature of [the Member's] balance of payments difficulties, alternative corrective measures which may be available, and the possible effect of the restrictions on the economies of other contracting parties". Paragraph (c) of Article XVIII:12 provided for the actions that the Committee might take in the course of and after consultations. When the Committee determined that the import restrictions involved a "minor or a technical" ¹⁶⁰ inconsistency, subparagraph (i) of Article XVIII:12 (c) provided that the Committee "shall indicate the nature of the inconsistency and may advise that the restrictions be suitably modified". Where the Committee determined that the import restrictions "are being applied in a manner involving an inconsistency of a serious nature with the provisions of [Article XVIII:B] or with those of Article XIII � and that damage to the trade of any contracting party is caused or threatened thereby", subparagraph (ii) provided that it "shall so inform the [Member invoking Article XVIII:B] and shall make appropriate recommendations for securing conformity with such provisions within a specified period". Thus, regardless of whether the inconsistency was of a minor or a serious nature, the Committee was under an affirmative obligation to inform the Member invoking Article XVIII:B of the inconsistency and to advise it how to bring its import restrictions into conformity with the relevant provision of Article XVIII:B or Article XIII.
192. India noted that the United States had argued that the power of the Committee under Article XVIII:12(c)(ii) to secure conformity with the provisions of Article XVIII:B "within a specified period" extended only to cases of inconsistency with Article XVIII:10 and Article XIII and not to cases where import restrictions lacked justification under Article XVIII:11. Therefore, according to the United States, a Member whose import restrictions lacked justification must eliminate its restrictions immediately. India presumed that the argument by the United States was because Article XVIII:12(c)(ii) referred to "restrictions � being applied in a manner involving an inconsistency of a serious nature with the provisions of this Section �". On the other hand, the United States had firmly denied that there was any distinction between "application" and "justification" with respect to the second sentence of the footnote to the 1994 Understanding. India expressed the view that the United States should be consistent in its arguments: either there was a distinction for purposes of both the footnote to the 1994 Understanding and Article XVIII:12(c)(ii) or there was none.
193. According to India, the United States' interpretation of Article XVIII:12(c)(ii) was not consistent with its context or the object and purpose of Article XVIII:B. Clearly, Article XVIII:12(b) -- read with Article XVIII:12(a) -- contemplated consultations with a Member on the justification of its import restrictions. However, on the United States' interpretation of Article XVIII:12(c)(ii), if the Committee determined during consultations that the Member's import restrictions lacked justification under Article XVIII:11, there were two possibilities: either the Committee could treat it as a minor inconsistency under Article XVIII:12(c)(i); alternatively, the Committee was not empowered to take action on justification issues under either of the sub-paragraphs of Article XVIII:12(c). The second was clearly not a plausible interpretation. The United States had admitted in this dispute that working parties and the Committee had been examining the justification of Members' import restrictions under Articles XII and XVIII:B for decades and had been requiring the elimination of restrictions. Moreover, this interpretation was inconsistent with the purpose of consultations as defined in the agreed drafting history of Article XVIII:B.
194. India suggested that the apparent view of the United States, that lack of justification under Article XVIII:12(c) was a minor inconsistency meriting action by the Committee only under Article XVIII:12(c)(i), would hardly be a credible legal characterization of the seriousness of the inconsistency. In any case, even under Article XVIII:12(c)(i), the Committee could still authorize a Member to "modify" its import restrictions over time rather than eliminating them immediately. The purpose of permitting a specified period to eliminate restrictions under Article XVIII:12(c)(i) would be the same as under Article XVIII:12(c)(ii), i.e., to take account of the need to mitigate the balance of payments effects of immediate elimination by permitting it to be done over time. India suggested that another plausible policy-based reason for giving a Member "a specified period" under Article XVIII:12(c)(ii) even in the case of a serious inconsistency with Article XIII, for example, was that domestic adjustment difficulties might render it extremely difficult for a Member to eliminate its import restrictions overnight. (India added that only the former consideration should apply when considering the justification of import restrictions under Article XVIII:11.)
195. India considered there were good reasons why Members should be permitted to eliminate their import restrictions over a period of time even in the case of a minor inconsistency. Whether the issue of justification fell under sub-paragraph (i) or (ii) of Article XVIII:12(c), the Committee had the power to recommend that the import restrictions be eliminated over a specified period rather than immediately even after determining that the import restrictions at issue lacked justification.

(c) Paragraph 13 of the 1994 Understanding

196. The United States argued that paragraph 13 of the 1994 Understanding related to measures that were balance-of-payments-justified at the time of consultations in the Committee but for which the balance-of-payments situation was improving. The United States considered that the text of the 1994 Understanding made clear that the Understanding applied only to measures for which a balance-of-payments justification was still present. Paragraph 4 made that point: "restrictive import measures taken for balance-of-payments purposes ... may not exceed what is necessary to address the balance-of-payments situation." Similarly, the text of Paragraph 11(a) provided that the plan for consultations should include "an overview of the balance-of-payments situation and prospects ... and the domestic policy measures taken in order to restore equilibrium on a sound and lasting basis." These words in paragraphs 4 and 11(a) would not have been used if measures were to be applied and consultations held after the end of a balance-of-payments "situation". Footnote 1 to the 1994 Understanding provided that the Understanding could not modify India's rights; therefore, the 1994 Understanding could not provide India with a right to phase out its restrictions gradually because that right did not exist under Article XVIII:12(c) (or any other provisions of Article XVIII:B). Paragraph 13 did provide that, if a consensus was reached with respect to a balance-of-payments situation that was easing, the Member applying balance-of-payments measures could be "deemed to be in compliance with its GATT 1994 obligations". That provision applied when a Member with current balance-of-payments difficulties proposed a plan to remove its restrictions over time; if the plan was accepted by a consensus within the Balance-of-Payments Committee and approved by the General Council, that Member might then carry out that plan even if its balance-of-payments difficulties came to an end sooner.
197. In India's view, the right to a time-schedule for the removal of import restrictions that did not meet the criteria set out in Article XVIII:9 within a period specified by the Council was reflected in paragraph 13 of the 1994 Understanding, which provided:

"In those cases in which a time-schedule has been presented for the removal of restrictive measures taken for balance-of-payments purposes, the General Council may recommend that in adhering to such a time-schedule, a Member shall be deemed to be in compliance with its GATT 1994 obligations. Whenever the General Council has made specific recommendations, the rights and obligations of Members shall be assessed in the light of such recommendations."

198. India considered that the 1994 Understanding represented an attempt by the Uruguay Round negotiators to introduce new disciplines with respect to balance-of-payments restrictions in the GATT 1994, and that paragraphs 1 and 11(d) of the 1994 Understanding appeared to impose an obligation on Members to publicly announce a time-schedule and to submit it to the Committee as a part of the consultations process. However, this obligation might not be legally enforceable because the first sentence of the footnote to the 1994 Understanding provides that "[n]othing in this Understanding is intended to modify the rights and obligations of Members under � Article XVIII:B �". Nevertheless, a Member could not refuse a request from the Committee to provide it with a time-schedule because the Committee could always recommend disinvocation of Article XVIII:B. For example, in the context of Sri Lanka's failure to properly notify its import restrictions under Article XVIII:B, the Analytical Index noted that:

"In its Report on the simplified consultation held with Sri Lanka in 1994, the Committee came to the following "interim conclusion": 'In the absence of precise information on import restrictions maintained for balance-of-payments purposes, the Committee was unable to conclude the simplified consultation with Sri Lanka. The Committee requested Sri Lanka to notify, by tariff line, import restrictions, if any, maintained for BOP purposes, or to disinvoke Article XVIII:B�.' Sri Lanka made the requested notification in October 1994." ¹⁶¹

199. Further, Members had an incentive to submit a time-schedule under paragraph 13 of the 1994 Understanding regardless of whether their import restrictions were currently justified under Article XVIII:B. The third sentence of this paragraph provided that in accepting a favourable recommendation from the Committee on a Member�s time-schedule under paragraph 13, the General Council "� may recommend that in adhering to such a time-schedule, a Member shall be deemed to be in compliance with its GATT 1994 obligations". Under paragraph 13, a Member�s rights and obligations would have to be assessed in the light of any of the General Council recommendation[s]. The effect of this provision was that, unlike under Article XVIII:12(c), a Member�s time-schedule could be insulated against potential challenges in the Committee on the basis of lack of justification under Article XVIII:11 for the period specified in the time-schedule regardless of its current balance-of-payments situation or changes therein. The only limitation on this legal protection was if the Member failed to adhere faithfully to its time-schedule.
200. India considered that paragraphs 1 and 13 of the 1994 Understanding represented an incentive to a Member maintaining import restrictions under Article XVIII:B to present a time-schedule regardless of its current balance-of-payments situation. Thus, the language of the third sentence of paragraph 13 could also be interpreted as providing immunity in cases where there might not be any current balance-of-payments justification. Therefore, as in the case of Article XVIII:12(c)(ii), paragraph 13 could be interpreted also as providing a period to eliminate import restrictions under Article XVIII:B in order to encourage Members to submit a time-schedule.
201. In India's view, paragraph 13 of the 1994 Understanding also clarified the legal status of different proposals for recommendations by the Committee to the General Council. The Committee was required to make "proposals for recommendations aimed at promoting implementation of Articles XII, XVIII:B, the 1979 Declaration and the 1994 Understanding". A proposal for a favourable recommendation by the General Council with respect to a Member's time-schedule would give the Member immunity from all challenges, current and future, to its import restrictions. However, the last sentence of paragraph 13 contemplated the possibility that there would be a divergence of opinion within the Committee resulting in the absence of a proposal from the Committee for a recommendation by the General Council. It was important to note that paragraph 13 specified the legal consequences only of explicit approval of a Member's time schedule -- not of absence of approval of a Member's time-schedule. Clearly, in such a situation the legal consequences would have to be based on an analysis of the provisions of Article XVIII:B. This was confirmed by the first sentence of the footnote to the 1994 Understanding which provided that nothing in the 1994 Understanding was intended to modify a Member�s rights and obligations under Article XVIII:B. Under Article XVIII:B, a Member�s import restrictions could be considered inconsistent with Article XVIII:B only if the Committee affirmatively determined that its residual import restrictions were inconsistent with its obligations under Article XVIII:B or Article XIII of the GATT 1994.
202. In this dispute, India stated that it clearly fell in the category of a divergence of opinion within the Committee on approval of its time-schedule. India gave the Committee a time-schedule in response to a request from the Committee. That request from the Committee was not premised on a finding of lack of justification for India�s residual import restrictions under Article XVIII:11. Rather, India viewed the request of the Committee as based upon the provisions of paragraphs 1 and 11(d) of the 1994 Understanding and submitted a time-schedule in the light of the incentive available in paragraph 13 for time-schedules which are approved by the General Council. After considering India's proposed time-schedule, the Committee did not either explicitly approve or disapprove India's time-schedule under Article XVIII:B. Therefore, no specific proposal for a recommendation of the General Council resulted. The General Council in turn did not make any specific recommendations in the light of which India's rights or obligations could be assessed.
203. Accordingly, India contended that the legal status of its residual import restrictions at this time must be assessed in light of the provisions of Article XVIII:B. Based on an analysis of India�s obligations under Article XVIII:11, the Note Ad Article XVIII:11, Article XVIII:12(c) and the provisions of the 1994 Understanding, it was clear that the divergence of opinion within the Committee on proposing that the General Council favourably recommend India�s time-schedule could not adversely affect the legal status of its residual import restrictions under Article XVIII:B. Under Article XVIII:12(c), if the Committee found that import restrictions were not justified under Article XVIII:11, the Committee was under an obligation to inform the Member of this inconsistency. The Committee had not done so in this case. In fact, a significant proportion of the Committee had found that India's residual import restrictions were justified. Therefore, in accordance with the reasoning of the Korea - Beef panel, India submitted that the Panel also should find that India's residual import restrictions were consistent with Article XVIII:B.
204. India added that Articles 19:1 and 21 of the DSU required that a Member must bring an illegal measure promptly into conformity with its obligations. This requirement applied to measures the Member concerned should never have introduced and it was only reasonable that Members should eliminate such measures promptly. In contrast, Article XVIII:12 and paragraph 13 of the 1994 Understanding provided that a Member having notified import restrictions under Article XVIII:B might be required to eliminate such measures within a period specified by the Council or a time-schedule approved by the Council. These rules and procedures applied to import restrictions that have been maintained legally. It would not be reasonable to require Members, in such a situation, to remove measures within the time-frame envisaged in Articles 19.1 and 21 of the DSU. ¹⁶²

To continue with Article XVIII:B: Special and Differential Treatment

¹⁵⁶ Accordingly, because the United States considered that India did not have balance-of-payments problems justifying the challenged measures, the United States did not invoke these provisions in its request for the establishment of a panel in this dispute.

¹⁵⁷ Report of the Review Working Party on Quantitative Restrictions, L/332/Rev.1 and Addenda, adopted on 2, 4 and 5 March 1955, BISD 3S/170, 171, paragraph 4.

¹⁵⁸ EC Measures Concerning Meat and Meat Products (Hormones), WT/DS26/AB/R, para. 124.

¹⁵⁹ L/644, approved 22 November 1957, para. 45 (Germany); L/1088, approved 17 November 1959 (Italy).

¹⁶⁰ Report of the Review Working Party on Quantitative Restrictions, Op. Cit. 1, para. 9.

¹⁶¹ Analytical Index: Guide to GATT Law and Practice, Vol. I, p. 381.

¹⁶² India considered that it was worth noting in this context that time-schedules for the gradual removal of restrictive import measures maintained for many years were negotiated in the Uruguay Round in the following areas: