5. Article XVIII:B: Special and Differential Treatment

205. According to India, Article XVIII:B was the most important expression of the principle of special and differential treatment of less-developed countries in the GATT. Article XVIII:9 permitted a less-developed country Member to resort to import restrictions in order to safeguard its balance of payments and to ensure adequate reserves to implement its programme of economic development. In assessing the reserves, or need for reserves, of a Member, Article XVIII:9 also required certain special factors to be taken into account including the availability of "special external credits or other resources�; and, the need to provide for the appropriate use of such credits or resources".
206. India noted that the above criteria in Article XVIII:9 were linked to the criteria prescribed in Article XVIII:11 for the progressive relaxation and removal of restrictions. The first sentence of Article XVIII:11 required a Member imposing import restrictions to keep in mind two objectives: first, the restoration of "equilibrium in its balance of payments on a sound and lasting basis"; and, second, "an economic employment of productive resources". However, as external and domestic conditions improved, a Member must progressively relax its import restrictions, maintaining them only to the extent necessary under the terms of Article XVIII:9, and must eliminate them when conditions no longer justified such maintenance. Thus, the right to maintain import restrictions under Article XVIII:11 was tied to the larger problem of balance-of-payments difficulties and the economic development needs of less-developed country Members but, at the same time, the extent of import restrictions was dependent upon the criteria for monetary reserves laid down in clauses (a) and (b) of Article XVIII:9.
207. India stated that Article XVIII:B provided explicitly for special and differential treatment of developing countries, in particular by permitting them to phase out their import restrictions gradually in accordance with the note to Article XVIII:11, an option not available to developed countries. Article XVIII:B recognized indirectly the applicability of the precautionary principle to the balance-of-payments policies of developing countries because, unlike Article XII, it did not require an imminent threat to the reserves and therefore permitted a progressive relaxation designed to forestall a more distant threat to the reserves.
208. India considered that the provisions of Article XVIII:B of the GATT 1994 embodied a presumption that less-developed country Members would face balance-of-payments difficulties on account of economic development. Thus, Article XVIII:2 explicitly recognized that less-developed country Members might need to apply import restrictions ". . . in order to implement programmes and policies of economic development designed to raise the general standard of living of their people". Further, Article XVIII:8 of the GATT 1994 explicitly recognized that less-developed country Members tend, during a ". . . rapid process of development, to experience balance-of-payments difficulties arising mainly from efforts to expand their internal markets as well as from the instability in their terms of trade". Moreover, the sequence of the terms of Article XVIII:11 suggested that there was a dynamic linkage between domestic policy reform and improvements in the balance of payments and that such improvements would enable Members to progressively relax and eliminate import restrictions as the balance-of-payments situation improved. Therefore, Article XVIII:11 was premised upon the notion that trade liberalization must follow upon improvements in the balance-of-payments situation and not vice versa. Again, although the preamble to the 1979 Declaration recognized the inefficiency inherent in import restrictions, it also emphasised the right of a less-developed country to maintain import restrictions to be evaluated in the context of its "individual development, financial and trade situation". Accordingly, there was no requirement in Article XVIII:B that a Member must provide evidence that maintaining import restrictions would result in improvements in its balance-of-payments or, conversely, that the removal of import restrictions would cause deterioration in its balance of payments. In view of the presumption underlying Article XVIII:B, the burden was on the United States to establish that maintaining import restrictions would not result in improvement, or would cause a deterioration, in India�s balance of payments.
209. In response, the United States noted that the text of Article XVIII (which contained provisions that Article XII did not) reflected the special and differential treatment that the negotiators of that Article agreed upon, and the 1955 Report made explicit that balance-of-payments measures under Article XVIII were to be used sparingly and within a legal framework of rights and obligations reflected in the text of Article XVIII. For example, within this legal framework, Article XVIII:C recognized policies such as protection for infant industries (as long as compensation was made available to other Members in accordance with the requirements of that Section), while Article XVIII:B was intended to address specific problems related to a Member�s balance-of-payments situation. India had both the benefits as well as the obligations that the text of Article XVIII reflected.
210. The United States noted that India had referred to the provisions of Article XVIII:2 and 8, which describe the special considerations applicable to developing country Members. There was no doubt that � if a balance-of-payments basis for trade measures existed � then those factors applied in assessing the measures adopted in response. This did not mean, however that India, or this Panel, could ignore the fundamental limitation on balance-of-payments measures: namely, that the proviso in Article XVIII:9 be met. The United States considered that one could see that this was the correct interpretation of Article XVIII:2 and 8 by considering the object and purpose of Article XVIII:B, as expressed in Article XVIII:8: to the extent that developing country Members tend to experience balance-of-payments difficulties in the course of development, and therefore Article XVIII:B is intended to provide a response to those difficulties. However, for a country such as India which did not have balance-of-payments difficulties, the question of how balance-of-payments measures should be applied did not arise.
211. With respect to India's argument about a precautionary principle, the United States considered that on the facts of this case � that India's balance-of-payments position was excellent in January of 1997, had remained excellent since that time, and in the view of the IMF would in fact be better if the quantitative restrictions under challenge were removed; and that there was no threat of a serious decline in India's monetary reserves � India was not a candidate for any "prudential or precautionary" measures.
212. As to India's argument that Article XVIII:11 set forth a "dynamic linkage" in which progressive relaxation of import restrictions led to an improvement in a Member's balance-of-payments position, which in turn led to more relaxation, which in turn led to balance-of-payments improvements, and so on, the flaw with this argument was that the IMF repeatedly had concluded that India could and should eliminate the restrictions at issue in this dispute in a short period of time. In fact, Article XVIII:11 expressly contemplated that a Member applying measures for balance-of-payments purposes would both relax them � as India had been doing � and would eliminate them. The IMF's determinations meant that the liberalizations initiated by India in 1991 had now led to a point where India no longer had balance-of-payments difficulties or the threat of them, and India's GATT 1994 obligations to its fellow Members, developed and developing, required that India take the step of eliminating its measures now.

6. Article XVIII:10 and the 1994 Understanding

213. India requested the Panel not to rule on the consistency of India's import restrictions with Article XVIII:10 of the GATT 1994 or any of the provisions of the 1994 Understanding. as the United States had not referred to these or any other provisions of GATT 1994 in its request.
214. India referred to India-Patent Protection for Agricultural and Pharmaceutical Chemical Products case (Patents) in which the Appellate Body found that a claim must be included in the request for establishment of a Panel. ¹⁶³ In this case, the Appellate Body found that the failure of the United States to refer specifically to Article 63 of the Agreement on Trade-Related Intellectual Property Rights (the "TRIPS Agreement") in its request for establishment of a panel disentitled it from raising this provision later. In that case, the Appellate Body also noted that a general reference by the United States in its request to the inconsistency of India's legal regime with "the obligations of the TRIPS Agreement including but not necessarily limited to Articles 27, 65 and 70" was not sufficient to permit it to challenge the measures at issue in that case as being inconsistent with Article 63. The Appellate Body reasoned that:

"With respect to Article 63, the convenient phrase, "including but not necessarily limited to", is simply not adequate to "identify the specific measures at issue and provide a brief summary of the legal basis of the complaint sufficient to present the problem clearly" as required by Article 6.2 of the DSU."

215. In the present case, the United States' request for the establishment of a panel cited specifically only Article XI:1 and Article XVIII:11 of the GATT and did not even contain the phrase "including, but not limited to, other provisions of the GATT". In the Patents case, the Appellate Body pointed out that even inclusion of such a phrase in the request for establishment of a panel did not authorize the panel to deal with claims not covered by the terms of reference. Accordingly, the United States could not make a legal claim that India's import restrictions were inconsistent with provisions of Article XVIII:B other than Article XVIII:11 or of any of the provisions of the 1994 Understanding.
216. India contended that the provisions of the 1994 Understanding were not mentioned in the terms of reference. According to the Appellate Body the request for the establishment of a panel must refer to the specific provisions on which the legal claims were based; otherwise it did not meet the requirement in Article 6:2 of the DSU that such a request identify the specific measures at issue. ¹⁶⁴ More importantly, the United States had, at the first meeting of the Panel, explicitly stated that it was not invoking the provisions of the 1994 Understanding. The provisions of the 1994 Understanding thus clearly did not form part of the complaint submitted by the United States. In this connection, India pointed out again that the Appellate Body recognized that panels could not make findings beyond those requested by the parties to the dispute. ¹⁶⁵
217. In response to a question from the Panel, India pointed out that the requirement to give preference to price-based measures was set out in paragraph 3 of the 1994 Understanding. The issue of the use of import restrictions on selected products was addressed in Article XVIII:10 and paragraph 4 of the 1994 Understanding. India noted that the United States had not only not referred specifically to any of these provisions in its request for establishment of a panel, it had not sought any findings on any of these provisions in its submission for the first meeting of the Panel. Therefore, India requested the Panel not to address these issues. India nevertheless wished to point out the following: all of India's remaining import restrictions predated the 1994 Understanding. Therefore, none of them were "new" import restrictions within the meaning of paragraph 3 of the 1994 Understanding. According to paragraph 3 of the 1994 Understanding, the obligations to give preference to price-based measures applied only when "new" import restrictions were imposed. The context suggested that import restrictions that were in place on 1 January 1995 were not "new" import restrictions within the meaning of that provision. This provision therefore did not apply to India�s import restrictions.
218. India recalled that it had explained its use of price-based measures to the Committee on Balance-of-Payments Restrictions (the "Committee") as follows: "Quantitative restrictions are inefficient, but guarantee, in the Indian context, a level of certainty which price-based measures cannot." ¹⁶⁶ In any case, the policy of India was to phase out the import restrictions progressively, replacing them by macro-economic policies rather than by price-based import controls which was in the interest of all Members. India had consistently pursued this policy since 1991 irrespective of its balance-of-payments situation.
219. To the knowledge of India, none of the restrictive regimes examined by the Committee applied across-the-board to all products. There was therefore nothing unusual about the product-selective nature of India�s import restrictions. About ten years earlier, Indian import restrictions had applied to most imports; at present, however, they covered only about one fourth of the HS-lines that were subject to import restrictions at that time. In any case, the product-selective nature of India's import restrictions was mainly a consequence of the decision of the Indian Government to progressively liberalize its import regime. Despite being product-selective, the import restrictions were nevertheless designed to control the level of total imports. The first part of India's movement from a policy of import-substitution industrialization to export-driven growth was based on structural reforms that required India to liberalize imports of capital goods and industrial intermediates and raw materials. Simultaneous liberalization of consumer goods imports would have detracted from India's ability to sustain its structural reforms on the balance-of-payments front. India also wished to place on record that, despite this dispute initiated by the United States, India continued to adhere to the time-schedule for progressive relaxation and elimination of its remaining import restrictions that it had proposed and negotiated with its trading partners.
220. The focus on consumer products was consistent with Article XVIII:10 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". In fact, in the context of permitting the selective application of surcharges for balance-of-payments reasons, paragraph 4 of the 1994 Understanding also explicitly recognized that capital goods or inputs needed for production "contribute to the Member's efforts to improve its balance-of-payments situation".
221. The United States pointed out that it had not claimed violation of Article XVIII:10 because the import restrictions re not restrictions with valid balance-of-payments justification. It considered that under Article 7.1 of the DSU, the terms of reference of the Panel were "to examine, in light of the relevant provisions in ... the covered agreement(s) cited by the parties to the dispute ... ". The United States cited the GATT 1994 in its request for establishment of a panel in this matter. ¹⁶⁷ Pursuant to the "Incorporation Clause," the 1994 Understanding formed an integral part of the GATT 1994 and was therefore part of the Panel�s terms of reference. The United States considered that the 1994 Understanding applied to measures in force on or after 1 January 1995. The GATT 1994 Incorporation Clause provided for only one general exemption from the GATT 1994, the exemption in paragraph 3 of the Incorporation Clause, which did not apply to the challenged measures. Furthermore, where drafters of the WTO Agreement wished to exempt measures, or to establish transitional arrangements, they had been able to do so expressly.

To continue with Arguments drawn from Consultations in the Committee

¹⁶³ Appellate Body Report on India-Patent Protection for Agricultural and Pharmaceutical Chemical Products, WT/DS50AB/R, 19 December 1997, Op. Cit.

¹⁶⁴ Ibid., para. 90.

¹⁶⁵ Appellate Body Report on EC Hormones, WT/DS26/AB/R; WT/DS48/AB/R, paras. 155-156.

¹⁶⁶ WT/BOP/R/22/ pp, 7 and 8.

¹⁶⁷ WT/DS90/8.