6 April 1999
India - Quantitative Restrictions on Imports of Agricultural, Textile and Industrial Products
Report of the Panel
7. Arguments drawn from Consultations in the Committee on Balance-of-Payments Restrictions
- The United States recalled that one of the fundamental principles of the GATT was that imports from WTO Members shall be free from prohibitions or restrictions other than duties, taxes and other charges. This rule, provided in Article XI:1 of the GATT 1994, applied to all prohibitions or restrictions, whether made effective through quotas, import licences or other measures. Article XVIII:4 and Article XVIII:B permitted a WTO Member "the economy of which can only support low standards of living and is in the early stages of development" to deviate temporarily from Article XI:1, if that Member satisfies certain substantive and procedural conditions. Any Member applying balance-of-payments import restrictions must consult in the WTO Committee on Balance-of-Payments Restrictions ("the Committee"); consultation and other procedural requirements were provided in GATT Articles XII and XVIII:B, the 1979 Declaration on Measures Taken for Balance-of-Payments Purposes, and the 1994 Understanding on the Balance-of-Payments Provisions of the GATT 1994.
- The United States recalled that, at the time of India’s simplified consultations with the Committee in 1994, India maintained the same highly restrictive import licensing system as it did at the time of the Panel proceedings, restricting (and effectively banning) imports of almost all consumer goods.
168 Recognizing the contradiction between the increasing strength of India’s reserve position and balance-of-payments restrictions, the Committee encouraged India to continue import liberalization: "The Committee noted that, if the balance of payments showed sustained improvement, India’s aim was to move to a regime by 1996/97, in which import licensing restrictions would only be maintained for environmental and safety reasons." 169 The balance of payments had indeed showed sustained improvement since 1994, but India still maintained thousands of tariff lines under licensing restrictions not maintained for environmental or safety reasons.
- During the next full consultations with India in the Committee, held in December 1995, the Committee invited the IMF to participate in the consultation in accordance with Article XV:2 of GATT 1994. The IMF reiterated the call for India to phase out its import restrictions in light of its improved level of monetary reserves. In an official statement approved by the Fund’s Executive Board and presented to the Committee, the IMF representative noted that India’s medium-term balance-of-payments prospects looked sound, and
"On the external front . . . the quantitative restrictions on imports of consumer goods need to be eliminated, and replaced by tariffs at moderate levels. Excessive protectionism has hindered the development of this important sector of the economy. Some phasing of this process may be appropriate in view of recent exchange market pressures, the potential volatility of private capital inflows, and the need to provide adequate time for adjustment of certain domestic industries. Nevertheless, the transition to a tariff-based import regime with no quantitative restrictions could reasonably be accomplished within a period of two years." 170
In the 1995 consultations, "[m]any Members expressed concerns about the consistency of the system and methods of India’s restrictive measures with the balance-of-payments provisions of GATT 1994. They had concerns about the sectoral scope of the measures in place, particularly the selective application of restrictions to consumer products". They asked for a consolidated notification of the restrictions at the HS 8-digit level. 171 The Committee "recalled India’s stated aim to move, by 1996/97, to a trade regime under which quantitative restrictions are maintained only for environmental, social, health and safety reasons, provided sustained improvement was shown in its balance of payments. They also took note of the statement by the IMF that, with continued prudent macro-economic management, the transition to a tariff-based import regime with no quantitative restrictions could reasonably be accomplished within a period of two years." 172 Statements by India concerning the purported need for import restrictions failed to convince the Committee, which did not conclude that India’s import restrictions were justified under Article XVIII:B. The Committee decided to resume full consultations with India in October 1996. 173
- The United States added that, during the January 1997 full consultations, the Committee again invited the IMF to participate, in accordance with Article XV:2 of GATT 1994. In a formal statement officially approved by the Executive Board of the Fund, the IMF representative stated the IMF’s finding that India’s balance-of-payments and reserve positions were sound, and that import restrictions were no longer needed:
"Early action and a clear timetable for removing the continuing QRs [quantitative restrictions] on consumer goods imports . . . would help reduce distortions to investment incentives and encourage the emergence of an efficient, export-oriented consumer goods industry. Moreover, in the Fund’s judgment, the external situation can be well managed using macroeconomic policy instruments without recourse to QRs. The Fund’s view, therefore, is that QRs should be removed over a relatively short period. . . ." 174
In the Committee, the IMF representative elaborated further on these comments in response to questions concerning the strengthening of India’s balance-of-payments and reserves positions. Using the language of Article XVIII:B, the IMF representative stated the IMF’s findings of fact:
"(i) there had not, over the past year, been a serious decline in India’s foreign exchange reserves: from end March 1996 to end December 1996 they had increased by US$2.7 billion and, in relation to imports, had remained relatively constant at around five months of import coverage;
"(ii) US$19.8 billion in reserves appeared a comfortable level in relation to imports and to the stock of short-term debt (US$5 billion), rather than an inadequate or very low level; with continued broadly sound macroeconomic policies, India should be able to meet all external payment requirements without difficulties, and to weather the consequences of possible external shocks without undue disruption;
"(iii) India was not faced with a threat of a serious decline in its monetary reserves; on the contrary, barring major unforeseen shocks India’s reserves should continue to increase in 1997 and in the medium term, and the balance of payments could be expected to benefit from a steep decline in amortization of the exceptional financing obtained to meet the 1990-91 crisis. While the current account deficit might widen as a result of import growth related to investment, this should be comfortably financed by rising private capital inflows;
"(iv) current quantitative restrictions imposed by India were not necessary to achieve a reasonable rate of increase in reserves; indeed, the removal of quantitative restrictions, in conjunction with other measures, could be expected to strengthen the external position over the medium term, reduce distortions to investment and encourage the emergence of an efficient consumer goods industry;
"(v) the replacement of quantitative restrictions by moderate tariffs would contribute to stability and economic success by providing revenue for deficit reduction, since the government would capture rents that now accrue to those able to obtain import licenses or bring goods into India illegally. Though the long run aim should be for Indian tariffs to fall to international levels, in the short run the replacement of quantitative restrictions by tariffs could be expected to help the revenue position." 175
- The United States added that, during the June 1997 consultations, the Committee again consulted with the IMF. The Fund representative "noted that his answers to the questions posed during the January 1997 consultations on India’s balance-of-payments situation had not changed during the interim period". 176 In a formal statement officially approved by the Executive Board of the Fund, the IMF representative noted that "[f]or 1997/98, the balance of payments is expected to register another sizable surplus . . . Gross official reserves are expected to increase by a further US$5 billion to over US$27 billion (six and a half months of imports)". 177 Based on these and other facts, the IMF statement again specifically found: "It remains the Fund’s view that the external situation can be well managed using macroeconomic policy instruments alone; quantitative restrictions are not needed for balance-of-payments adjustments and should be removed over a relatively short time period". 178
- On these facts, the United States was of the opinion that the provisions of Article XVIII:B therefore did not entitle India to continue to maintain the challenged measures. 179
- India submitted that the Committee's Report on Consultations with India recorded that a significant proportion of the membership of the Committee was not convinced by the IMF "factual determinations" that the United States had presented before the Panel. After considering the IMF's statement, there had been a divergence of opinion within the Committee on whether India's time-schedule was no longer justified under Article XVIII:11. India submitted, therefore, that this Panel should not treat the views of the IMF expressed in its statement before the Committee as conclusive on the issue of whether India's import restrictions did not meet the requirements of Article XVIII:11. In fact, there should be a presumption against giving it any probative value in this dispute.
- India submitted that the IMF's views as expressed in its statement to the Committee were not consistent with the criteria set forth in Article XVIII:11 and, therefore, could not discharge the burden of the United States under Article XVIII:B. As noted above, the first sentence of Article XVIII:11 stated that a Member imposing import restrictions under Article XVIII:B "shall pay due regard to the need to restore equilibrium in its balance-of-payments" in carrying out its domestic policies. The words "shall pay due regard to the need" indicate that this obligation to carry out particular domestic policies is not mandatory or enforceable. To impose an enforceable obligation, the first sentence of Article XVIII:11 would have used mandatory language such as "shall adopt domestic policies". Thereafter, the second sentence of Article XVIII:11 imposed the requirement that a Member must eliminate import restrictions when conditions no longer justify their maintenance. However, the proviso to this sentence made it clear that a Member could not be required to withdraw its import restrictions on the ground that a change in its development policy would render its import restrictions unnecessary. The findings of the IMF referred to by the United States were clearly inconsistent with this requirement because it stated that "the external situation can be well-managed using macroeconomic policy instruments without recourse to [import restrictions]". Macroeconomic instruments included a variety of development policy instruments such as interest rates and external policy instruments such as exchange rates. Paragraph 13 of the IMF Statement for the Committee in January 1997 contained a number of other developmental policy changes that alone would make it possible to manage India's external situation without import restrictions. Under the terms of Article XVIII:11, the determination that must be made to require elimination of QRs could not be made conditional on such changes in India's development policies. The penultimate sentence of the IMF Statement concluded that "[import restrictions] are not needed for balance-of-payments adjustment and should be removed over a relatively short time-period". Again, this did not constitute an unqualified determination that India could immediately eliminate its import restrictions without suffering any harm.
- As far as India was concerned, India’s time-schedule for the progressive relaxation and elimination of its remaining import restrictions was designed to avoid renewed balance-of-payments difficulties. As India's representative explained in the Committee in January 1997, the progressive relaxation and elimination of India's remaining import restrictions was important for three reasons:
"First, the balance-of-payments situation needs to be monitored, and the phasing should be done in a careful manner to avoid a balance-of-payments crisis... . Second, the fiscal stance of policies is still somewhat loose, and creates pressure on monetary policy as well as exchange markets. Trade liberalization has to be done in step with our fiscal consolidation. Third, there is popular democratic consensus behind reforms in India, and a gradual phase out without any risk of adverse fall out is the best guarantee for continuity of the popular support base for reforms... . Quantitative restrictions are inefficient, but guarantee, in the Indian context, a level of certainty which price-based measures cannot… . Any precipitous action on removal of quantitative restrictions which may undermine the stability of the Indian economy or the reform process itself, cannot only do great harm to India, but as well to the foreign investors and major trading partners who have a stake in the sustainable development of the Indian economy." 180
- When India presented its plan for the progressive relaxation of its import restrictions to the Committee, all members, including the United States, had accepted the principle of a progressive relaxation. The difference of views related only to the length of the phase-out period. When the Committee resumed consultations on 30 June – 1 July 1997, while other developed country Members of the Committee appeared to be willing to accept a six-year phase-out plan, the United States insisted on a shorter time-frame, suggesting that five years would be acceptable. The Committee was therefore unable to reach a consensus on India's time-schedule for the removal of its remaining import restrictions, and could not conclude the consultations with a finding on the legal status of India's import restrictions under Article XVIII:B and a recommendation to the General Council on the time-schedule for the removal of its remaining import restrictions in accordance with paragraph 13 of the 1994 Understanding. It was for this reason that a multilateral accommodation of India's phase-out plan has not yet occurred. At the origin of the dispute before the Panel was thus the insistence of a single member of the Committee that import restrictions maintained for almost 50 years be removed within a period of five rather than six years. 181
- India contended that the United States claim that the IMF had already disposed of the issue of the appropriate length of the phase-out period was both factually and legally incorrect. At the meeting of the Committee in June 1997, the representative of the IMF had made the following comments on the length of the phase-out period:
It remains the Fund’s view that the external situation can be well managed using macroeconomic policy instruments alone; QRs are not needed for balance-of-payments adjustment and should be removed over a relatively short time period. 182
For India, this statement was an economic truism. Of course, import restrictions were not "needed" for balance-of-payments adjustment, in a technical, economic sense. Trade controls were only one instrument among many that governments use to respond to an external financial constraint. Import restrictions could always be replaced by macro-economic policy instruments. If the abstract possibility to turn from import restrictions to macro-economic policy instruments determined the right to resort to import restrictions, Members could never resort to import restrictions, and if the speed of progressive relaxation and elimination of import restrictions were determined in this manner, import restrictions would always have to be eliminated immediately. However, this approach was clearly inconsistent with Article XVIII:11, which made it clear that
no [Member] shall be required to withdraw or modify restrictions on the ground that a change in its development policy would render unnecessary the restrictions which it is applying.
In the context of Article XVIII:11, the appropriate duration of India's time-schedule must thus be judged against the economic policies actually pursued by India, not in terms of a hypothetical change in those policies. The IMF had not provided views on that issue, wisely so because this was essentially a trade matter best judged by the Committee. India recalled that Article XVIII:11 provided that:
In carrying out its domestic policies, the contracting party concerned shall pay due regard to the need for restoring equilibrium in its balance of payments on a sound and lasting basis and to the desirability of assuring an economic employment of productive resources. It shall progressively relax any restrictions applied under this Section as conditions improve, maintaining them only to the extent necessary under the terms of paragraph 9 of this article, and shall eliminate them when conditions no longer justify such maintenance.
- For India, the context of the term "conditions" in the second sentence made it clear that it was intended to refer both to the limitations contained in Article XVIII:9 and the condition relating to equilibrium in its balance of payments on a sound and lasting basis referred to in the first sentence of Article XVIII:11. This approach to interpreting the term "conditions" was consistent with Article XVIII:9 which provided that a Member might impose import restrictions in order to safeguard its balance of payments. In addition, it was also consistent with the overall object and purpose of Article XVIII:B as set forth in Article XVIII:2, i.e., to facilitate the economic development of less-developed country Members.
- According to Article XVIII:11 and the Ad Note thereto, India might progressively relax its import restrictions as long as their sudden removal would jeopardize its external financial position within the framework of its existing policies. The United States had provided no evidence that these conditions were not met. The IMF statement did not support the United States’ position because, the elimination of the import restrictions "within a relatively short time period" according to the IMF would only be possible if India were to change simultaneously its macro-economic policies, which India was clearly not obliged to do given the proviso in Article XVIII:11. Moreover, the competence of the IMF did not extend to all of the matters required to be taken into account by the Committee and the General Council under Article XVIII:11 and Article XVIII:9.
- India noted that the IMF considered that India could remove the import restrictions in a relatively short period of time because the import restrictions could be replaced by macro-economic policy measures. However, the appropriate length of the phase-out period could not possibly be determined in that manner. Import restrictions were but one of many instruments governments used to adjust the balance-of-payments and could, in a technical or economic sense, always be replaced by macro-economic policies. If the abstract possibility to replace import restrictions with macro-economic policies were the criterion, import restrictions could never be imposed and existing import restrictions could not be progressively removed but would have to be eliminated immediately. However, both Article XII:3(d) and Article XVIII:11 made it clear that import restrictions might be maintained even if they could be replaced by other policies.
- For India, the body competent to decide whether India's time-schedule met the requirement set out in the note to Article XVIII:11 was the Committee on Balance-of-Payments Restrictions. All members of that Committee except the United States had, in effect, agreed with India’s time-schedule. However, even the United States accepted the principle of a progressive relaxation and elimination of restrictions. At one stage, in informal consultations of the members of the Committee, the United States indicated that a five-year phase-out period would be acceptable. India considered that the prevailing view in the Committee created a presumption that the time-schedule for the progressive relaxation and elimination of its remaining import restrictions proposed by India was consistent with Article XVIII:11. It was obvious, and therefore hardly required proof, that India could not maintain its existing development policies and eliminate, in one stroke, import restrictions affecting one-fourth of its HS-lines at the 8-digit level without a threat to its reserves. A sudden removal of the remaining import restrictions, applied mainly to consumer goods, would lead to an immediate surge of imports; the redeployment of resources for export production, however, inevitably took time because it depended on structural adjustments in India and the development of export markets. The United States still needed to explain the factual basis for the position now taken in these proceedings that India could eliminate all import restrictions immediately without a threat to its reserves.
- India pointed out that all members of the Committee, including the United States, accepted the principle of a progressive removal of India's import restrictions; the differences of view concerned only the appropriateness of the duration of the time-schedule. And all members, except the United States, agreed that India's time-schedule was acceptable. India believed that the near universal view among the members of the Committee created a presumption that the schedule of progressive relaxation met the requirements of the note to 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 argued 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 – Measures Concerning Meat and Meat Products, 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. 183 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.
- The United States countered that with respect to the Indian allegation that the United States joined in a consensus in January of 1997 to request a phase-out plan, in fact: the consultations began in 1995, at which time India anticipated removing these restrictions within two years. Furthermore, the 1997 report was clear that there was no consensus that a phase-out plan would be acceptable. Some Members (including the United States) made clear that India's restrictions should be eliminated immediately. 184 Furthermore, the report of that meeting also did not support India's allegation that a majority of the Committee were "not convinced" by the IMF's factual presentation. The Committee in fact took note of the IMF's determinations, nor did the report of the June 1997 meeting, which summarized individual Members' views, reflect that any Member challenged the findings of the IMF. 185 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 not ipso facto mean that it was complying with its GATT 1994 obligations.
- The United States also pointed out that it was not asking the Panel to consider the proper phasing-out period of the challenged measures. The United States considered that, under Article 19.1 of the DSU, the Panel was required, if it concluded that India's measures were inconsistent with the covered agreements, to recommend that India bring its measures into conformity with that agreement.
- With respect to India's arguments regarding the first sentence of Article XVIII:11, the United States contended that these provisions had to be considered in the context of Article XVIII:B, which addressed the concerns of a developing country Member faced with temporary balance-of-payments difficulties. More general development issues, such as the development of infant industries, were addressed by the entirely different provisions of Article XVIII:C. The words of Article XVIII:11 made clear that the ability to impose the restrictions authorized by Article XVIII:B was linked to an obligation to remove those restrictions.
- With respect to India's arguments regarding the proviso of Article XVIII:11, the United States was not suggesting that India should change its development policies. The point was that India did not have balance-of-payments difficulties, and, given its current policies, was not faced with the threat of such difficulties. India was in fact utilizing a set of macroeconomic tools to carry out a development policy of trade and investment liberalization. It was the existence of those policies and India's use of those tools – tools such as the introduction of current account convertibility, the reduction of the level of its short-term debt, and the use of measures to attract foreign direct investment – that had made it possible for India to emerge from the chronic balance-of-payments crises of the past.
- Moreover, the IMF's statements were not suggestions for changes in India's development policy, but expectations that India would continue along its current policy of liberalization. To quote the IMF:
- "With continued prudent macroeconomic management, India's medium-term balance-of-payments prospects look sound."
- "With continued broadly sound macroeconomic policies, India should be able to meet all external payment requirements without difficulties."
- "In January of 1997: "For 1996/97 as a whole, … [g]ross international reserves are expected to increase … [to] a comfortable 5 months of imports and a level that is sizable in comparison to the stock of short-term debt … and the cumulative stock of portfolio inflows. The present level of the exchange rate would seem to be broadly appropriate for current circumstances, but flexibility in exchange rate management, in close coordination with other macroeconomic policy instruments, should be maintained." In June of that year, the same point was expressed in slightly different words.
- "With continued prudent macroeconomic policies – and especially significant fiscal adjustment – a current account deficit rising to 3-4 per cent of GDP would be consistent with the authorities' target of maintaining a debt service ratio below 20 per cent." This appeared to be one basis for the Fund's view that "the external situation can be well managed using macroeconomic policy instruments alone."
To continue with Additional Evidence
168 "Background Paper by the Secretariat, BOP/W/159, 31 October 1994, paras. 10-12.
169 GATT document BOP/R/221, 1 December 1994, para. 4.
170 Report on the Consultation with India, WT/BOP/R/11, 23 January 1996, Annex II (Statement by the IMF Representative) (emphasis added).
171 Ibid., para. 17.
172 Ibid., para. 25.
173 Ibid., para. 27.
174 "Report on the Consultation with India," WT/BOP/R/22, 3 March 1997, Annex II, Statement by the IMF Representative, para. 12 (emphasis added)..
175 "WT/BOP/R/22, Op. Cit, p. 2, para. 8 (emphasis added).
176 "Report on the Consultations with India," WT/BOP/R/32, 18 September 1997, para. 4.
177 Ibid., Annex IV, Statement by the Representative of the International Monetary Fund, para. 10.
178 Ibid., para. 13.
179 India also noted that the proviso in Article XVIII:9 (unlike its counterpart in Article XII) did not require an "imminent" threat of a serious decline in reserves. It did of course still require a threat of a serious decline in reserves. In India’s case no such threat exists or is expected.
180 WT/BOP/R/22, Op. Cit., pp 7 and 8.
181 WT/BOP/R32, Op. Cit., para. 33.
182 WT/BOP/R32, Op. Cit., p. 29.
183 EC Measures Concerning Meat and Meat Products (Hormones), WT/DS26/AB/R, 16 January 1998, para. 124.
184 WT/BOP/R/22, Op. Cit., para. 9.
185 WT/BOP/R/32, Op. Cit..