6 April 1999
India - Quantitative Restrictions on Imports of Agricultural, Textile and Industrial Products
Report of the Panel
2. Canalization of imports through government agencies333
- The United States also claims that imports of goods specified as "Canalized Items" in Part III of the Negative List may in principle be imported only by designated canalizing (government) agencies. Among these items are petroleum products, certain fertilizers, various sorts of oil and certain cereals. The DGFT may grant import licences for canalized products to other entities than the designated canalizing agency, but this is subject to a "no objection" certificate from the canalizing agency normally entitled to import. According to the United States, the "canalization" of imports, i.e. the exclusive importation of certain goods through designated government agencies, constitutes restrictions within the meaning of Article XI:1. The United States refers to the Note Ad Articles XI, XII, XIII, XIV and XVIII and to a number of working party and panel reports under GATT 1947 in support of the proposition that import restrictions are no less subject to Article XI:1 when they are imposed through state trading. In this regard, the United States has produced tables indicating the quantities and values of imports of some "canalized" items, taken from India's notification to the State Trading Committee to show that canalization resulted in zero imports in 1992-1995 for wheat and rice.
- As to India, we note that it considers that the restrictions on canalized items are "restrictions" within the purview of Article XI:1, since it has notified them as balance-of-payments restrictions in WT/BOP/N/24.
- In analyzing the US claim, we note that violations of Article XI:1 can result from restrictions made effective through state trading operations. This is made very clear in the Note Ad Articles XI, XII, XIII, XIV and XVIII, which provides that "Throughout Article XI, XII; XIII; XIV; and XVIII, the terms ‘import restrictions’ or ‘export restrictions’ include restrictions made effective through state-trading operations." It should be noted however, that the mere fact that imports are effected through state trading enterprises would not in itself constitute a restriction. Rather, for a restriction to be found to exist, it should be shown that the operation of this state trading entity is such as to result in a restriction. 334
- As noted above, the United States has shown in some instances that there have been zero imports of products reserved to state trading enterprises by India. We note, however, that canalization per se will not necessarily result in the imposition of quantitative restrictions within the meaning of Article XI:1, since an absence of importation of a given product may not always be the result of the imposition of a prohibitive quantitative restriction. For instance, the absence of importation of snow ploughs into a tropical island cannot be taken as sufficient evidence of the existence of import restrictions, even if the right to import those products is granted to an entity with exclusive or special privileges.
- In this case, however, the inclusion by India of the canalized items as quantitative restrictions under Article XI:1 in its notification to the BOP Committee, combined with the evidence submitted by the United States, leads us to conclude that the "canalization" measures specified in Part III of the Negative List of Imports, to the extent that they apply to products specified in WT/BOP/N/24, Annex I, Part B, operate as a restriction on imports within the meaning of Article XI:1.
3. The Special Import Licence (SIL) system335
- The United States claims that imports of certain designated goods require a Special Import Licence (SIL) issued by the DGFT or an authorized licensing authority. SILs are granted in proportion to the applicant's exports or net foreign exchange earnings (Chapter 12 of India's Export and Import Policy 1997-2002). According to the United States, the SIL system is a non-automatic licensing regime under which approval of licence applications is not granted in all cases. The United States considers that the restrictive effect of the SIL system on imports is shown by the quota premium for purchase of special import licences (which may be transferred in certain cases). As such, the United States argues that the SIL system is equally in violation of Article XI:1.
- As for India, we note that it considers that the SIL system is a "restriction" within the purview of Article XI:1, since it has notified it as a balance-of-payments restriction in WT/BOP/N/24.
- It appears that the SIL system, like the general import licensing regime examined above, is a discretionary or non-automatic licensing regime. Licences under this regime can be granted only to certain categories of exporters and licences are not always granted. Accordingly, we find that the SIL system, to the extent that it applies to the products specified in WT/BOP/N/24, Annex 1, Part B, operates as a restriction on imports within the meaning of Article XI:1.
4. The Actual User requirement
- The United States also claims that under India's Export and Import Policy 1997-2002, import licences are generally available only to "Actual Users", which are defined in Chapter 3 thereof as follows: an "Actual User" means an actual user who may be either industrial or non-industrial. "Actual User (industrial)" means a person who utilises the imported goods for manufacturing in his own industrial unit or manufacturing for his own use in another unit including a jobbing unit. "Actual User (non-industrial)" means a person who utilises the imported goods for his own use in (i) any commercial establishment carrying on any business, trade or profession; or (ii) any laboratory, scientific or research and development institution, university or other educational institution or hospital; or (iii) any service industry.
- The United States argues that the granting of licences only to "Actual Users" also constitutes a restriction on imports, as it effectively prevents imports by intermediaries. Although India states that licences might be granted to any person "including an industrial user who was engaged in production solely for the domestic market", the definition of "actual user" quoted above appears to include only persons who will employ the imported goods "for their own use".
- As noted above, Article XI:1 is "comprehensive" in that it prohibits import restrictions "made effective through quotas, import or export licences or other measures"336, excluding from its coverage only "duties, taxes or other charges". In considering the scope of the prohibition, it is instructive to consider how it has been dealt with in prior panel reports. For example, a minimum import price system has been considered to be a restriction within the meaning of Article XI:1. 337 In a case involving limitations on the points of sale available to imported beer, a panel found that such limitations were restrictions within the meaning of Article XI:1. 338 These reports are in accord with the ordinary meaning of the term "restriction", which, as noted above, is "a limitation on action, a limiting condition or regulation". 339 Applied to the "Actual User" condition, they lead to the conclusion that it is a restriction on imports because it precludes imports of products for resale by intermediaries, i.e. distribution to consumers who are unable to import directly for their own immediate use is restricted.
- Accordingly, we find that the Actual User condition, to the extent that it applies to the products specified in WT/BOP/N/24, Annex I, Part B, operates as a restriction on imports within the meaning of Article XI:1.
- In conclusion, we find that the import licensing system applied by India to the importation of goods falling within the "Restricted Items" list found in Annex II of the Negative List of Imports, the canalization through government agencies of imports specified in Part III of the Negative List of Imports, the SIL system and the Actual User requirement, to the extent that they apply to the products specified in WT/BOP/N/24, Annex I, Part B, impose restrictions or prohibitions on imports within the meaning of Article XI:1 of GATT 1994 and therefore violate Article XI:1.
G. Article XVIII:B of GATT 1994
- Having determined that the measures at issue are quantitative restrictions within the meaning of Article XI:1 and therefore prohibited, we must examine the United States’ second claim, i.e. violation of Article XVIII:11, and India’s defence under the balance-of-payments provisions of GATT 1994 in order to determine whether India, by maintaining the measures at issue, violates Article XVIII:11.
- The claims of the parties can be summarized as follows: the United States claims that India's measures are in violation of Article XVIII:11 because they are not necessary under the terms of Article XVIII:9. In the view of the United States, Article XVIII:11 allows for progressive relaxation of balance-of-payments measures as the balance-of-payments situation improves, but this progressive relaxation is required to take place only during the period when the conditions of Article XVIII:9 are met, not afterwards. For the United States, the concept of a phase-out after that period is entirely absent from Article XVIII:B, and once there is no longer any balance-of-payments justification, the measures must be eliminated. India considers that it is allowed to maintain balance-of-payments measures until the General Council decides, upon recommendation by the BOP Committee, that they are no longer justified. India further claims that under the Note Ad Article XVIII:11, even if it is not currently experiencing balance-of-payments difficulties within the meaning of Article XVIII:9, it should not be 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. Moreover, India claims that, in any event, it is entitled, under the 1994 Understanding and other GATT 1994 provisions, to a gradual phase-out of its quantitative restrictions.
- Under the terms of Article XVIII:9,
"the import restrictions instituted, maintained or intensified shall not exceed those necessary:
(a) to forestall the threat of, or to stop, a serious decline in monetary reserves, or
(b) in the case of a Member with inadequate monetary reserves, to achieve a reasonable rate of increase in its reserves"
due regard being paid to any special factors that may be affecting the reserves of the Member or its need for reserves.
- The second sentence of Article XVIII:11 provides:
"[The Member concerned] 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; Provided 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 under this section.*"
- The Note Ad Article XVIII:11 provides:
"The second sentence in paragraph 11 shall not be interpreted to mean that a Member is required to relax or remove restrictions if such relaxation would thereupon produce conditions justifying the intensification or institution, respectively, of restrictions under paragraph 9 of Article XVIII."
- In light of these provisions and the arguments of the parties, it is therefore necessary to examine in the first instance whether India's balance-of-payments situation is such that the conditions foreseen in Article XVIII:9 are fulfilled. If this were the case, India would be in the situation in which the United States admits that it would be entitled to maintain and progressively relax any measures maintained for balance-of-payments purposes as the balance-of-payments situation improves, without being required to eliminate them. If we determine that this is not the case, however, we will need to consider India’s position that restrictions can be maintained on the basis of Article XVIII:11 even when the balance-of-payments situation does not meet the conditions of Article XVIII:9. Finally, we must consider whether India could claim a right to maintain the measures as long as the General Council has not determined them to be inconsistent with Article XVIII:B 341 or otherwise has a right to phase out its balance-of-payments measures.
- Before we address these claims and having regard to Article 12.11 of the DSU, we first consider the concept of special and differential treatment in relation to Article XVIII:B of GATT 1994, which is relevant to our examination under Article XVIII:B of GATT 1994 as a whole.
1. Special and differential treatment
- India argues that Article XVIII:B is the most important expression of the principle of special and differential treatment in the GATT. India further argues that the provisions of Article XVIII:B embody a presumption that developing country Members would face balance-of-payments difficulties on account of economic development and that the sequence of the terms of Article XVIII:11 suggested 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 on the notion that trade liberalization must follow upon improvements of the balance-of-payments situation and not vice-versa. In the view of India, 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. For India, 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.
- In Article XVIII:8, Members recognize that developing countries "tend, when they are in 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." In Article XVIII:2, it is recognized that
"it may be necessary for those Members, in order to implement programmes and policies of economic development designed to raise the general standard of living of their people, to take protective or other measures affecting imports, and that such measures are justified in so far as they facilitate the attainment of the objectives of this Agreement. [Members] agree, therefore, that those members should enjoy additional facilities to enable them […] (b) to apply quantitative restrictions for balance-of-payments purposes in a manner which takes full account of the continued high level of demand for imports likely to be generated by their programmes of economic development."
- Article XVIII:4(a) further provides that:
"Consequently, a Member, the economy of which can only support low standards of living and is in the early stages of development, shall be free to deviate temporarily from the provisions of the other Articles of this Agreement, as provided in Sections A, B and C of this Article." (emphasis added)
- It is clear from these provisions that Article XVIII, which allows developing countries to maintain, under certain conditions, temporary import restrictions for balance-of-payments purposes, is premised on the assumption that it "may be necessary" for them to adopt such measures in order to implement economic development programmes. It allows them to "deviate temporarily from the provisions of the other Articles" of GATT 1994, as provided for in, inter alia, Section B. These provisions reflect an acknowledgement of the specific needs of developing countries in relation to measures taken for balance-of-payments purposes. Article XVIII:B of GATT 1994 thus embodies the special and differential treatment foreseen for developing countries with regard to such measures. In our analysis, we take due account of these provisions. In particular, the conditions for taking balance-of-payments measures under Article XVIII are clearly distinct from the conditions applicable to developed countries under Article XII of GATT 1994. 343
- We also find that while Article XVIII:2 foresees the possibility that it "may" be "necessary" for developing countries to take restrictions for balance-of-payments purposes, such measures might not always be required. These restrictions must be adopted within specific conditions "as provided in" Section B of Article XVIII. The specific conditions to be respected for the institution and maintenance of such measures include Article XVIII:9, which specifies the circumstances under which such measures may be instituted and maintained, and Article XVIII:11 which sets out the requirements for progressive relaxation and elimination of balance-of-payments measures.
- Article 12.11 of the DSU requires us to indicate explicitly the form in which account was taken of relevant provisions on special and differential treatment for developing country Members that form part of the covered agreements which have been raised by the developing country Member in the course of the dispute settlement procedures. In this instance, we have noted that Article XVIII:B as a whole, on which our analysis throughout this section is based, embodies the principle of special and differential treatment in relation to measures taken for balance-of-payments purposes. This entire part G therefore reflects our consideration of relevant provisions on special and differential treatment, as does Section VII of our report (suggestions for implementation).
2. Is India experiencing balance-of-payments difficulties within the meaning of Article XVIII:9?
(a) Conditions under Article XVIII:9
- As noted above, Article XVIII:11 requires Members to "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 […]". We recall that, under the terms of Article XVIII:9, "the import restrictions instituted, maintained or intensified shall not exceed those necessary:
(a) to forestall the threat of, or to stop, a serious decline in monetary reserves, or
(b) in the case of a contracting party with inadequate monetary reserves, to achieve a reasonable rate of increase in its reserves"
due regard being paid to any special factors that may be affecting the reserves of the Member or its need for reserves.
(b) Date at which the situation of India's monetary reserves must be reviewed
- The United States argues that the dispute began with the United States' request for consultations on 15 July 1997 and that the DSU treats consultations as the initiation of a dispute. Therefore, in its view, 15 July 1997 is the date as of which this Panel should determine whether India's measures were justified under Article XVIII:B. If the Panel disagrees, the United States considers that the latest date should be the date of establishment of the Panel. India generally considers that the Panel must determine the legality of the import restrictions under India's obligations "as of the date the United States submitted this request". However, India also considers that taking into account external or internal developments affecting India's economy since the establishment of the Panel would be appropriate because much of the evidence introduced by the United States in the dispute relates to the period after the establishment of the Panel.
- With respect to the date at which India's balance-of-payments and reserve situation is to be assessed, we note that practice, both prior to the WTO and since its entry into force, limits the claims which panels address to those raised in the request for establishment of the panel, which is typically the basis of the panel's terms of reference (as is the case here). 345 In our opinion, this has consequences for the determination of the facts that can be taken into account by the Panel, since the complainant obviously bases the claims contained in its request for establishment of the panel on a given set of facts existing when it presents its request to the DSB.
- In the present situation, the United States primarily seeks a finding that, at the latest on the date of establishment of the Panel (18 November 1997), the measures at issue were not compatible with the WTO Agreement and were not justified under Article XVIII:11 of GATT 1994. Therefore, it would seem consistent with such a request and logical in the light of the constraints imposed by the Panel's terms of reference to limit our examination of the facts to those existing on the date the Panel was established.
- This result is also dictated by practical considerations. The determination of whether balance-of-payments measures are justified is tied to a Member's reserve situation as of a certain date. In fixing that date, it is important to consider that the relevant economic and reserve data will be available only with some time-lag, which may vary by type of data. This is unlikely to be a problem if the date of assessment is the date the panel is established, since the first written submission is typically filed at least two (and often more) months after establishment of a panel. However, using the first or second panel meetings as the assessment date is more problematic since data might not be available and, if the date of the second panel meeting were chosen, it could significantly reduce the utility of the first meeting.
- We note that, in the case on Korea - Beef, the panel relied on the conclusions of the BOP Committee reached before its establishment, but also considered "all available information", including information related to periods after the establishment of the panel. 346 In this case, the parties and the IMF have supplied information concerning the evolution of India's balance-of-payments and reserve situation until June 1998. To the extent that such information is relevant to our determination of the consistency of India's balance-of-payments measures with GATT rules as of the date of establishment of the Panel, we take it into account. 347
To continue with Information provided by the IMF
333 For a detailed description of the measures at issue and of the arguments of the parties, see: respectively, Sections II.B and III.B supra.
334 Panel Report on Korea - Beef, Op. Cit., para 115: "The mere existence of producer-controlled import monopolies could not be considered as a separate import restriction inconsistent with the General Agreement. The Panel noted, however, that the activities of such enterprises had to conform to a number of rules contained in the General Agreement, including those of Article XVII and Article XI:1".
335 For a detailed description of the measures at issue and of the arguments of the parties, see: respectively, Sections II.B and III.B supra.
336 (emphasis added).
337 Panel Report on EEC – Programmes of Minimum Import Prices, Licences and Surety Deposits for Certain Processed Fruits and Vegetables, adopted on 18 October 1978, BISD 25S/68, para. 4.9. Similarly, a panel found that a measure limiting exports below a certain price was within the scope of Article XI:1. Panel Report on Japan – Trade in Semiconductors, Op. Cit., para. 105.
338 Panel Report on Canada – Import, Distribution and Sale of Alcoholic Drinks by Canadian Provincial Marketing Agencies, adopted on 22 March 1988, BISD 35S/37, para. 4.24. This case involved state trading operations and the panel emphasized that the Note Ad Articles XI, XII, XIII, XIV and XVIII referred to "restrictions" generally and not to "import restrictions". It accordingly considered restrictions on distribution as within the meaning of "other measures" under Article XI:1, even though such measures might be examined also under Article III:4. Here the restrictions at issue, although related to distribution, are on importation.
339 New Shorter Oxford Dictionary (1993), p. 2569.
340 For a detailed description of the arguments of the parties, see Section III.D.3-4 supra.
341 This issue was already considered in paras. 5.76-5.80 supra, but as it is relevant to the analysis of India's defence under Article XVIII:B, we also address it in this context, with reference to our previous conclusions.
342 For a detailed description of the arguments of the parties, see Section III.D.5 supra.
343 In particular, the conditions to be met for the institution of balance-of-payments measures are different in Article XVIII:9 and Article XII, and an Ad Note which applies to the conditions for progressive relaxation and elimination of restrictions under Article XVIII:11 has no analogue in Article XII.
344 For a detailed description of the arguments of the parties, see Section III.D.9(c)(i) supra.
345 Appellate Body Report on European Communities – Regime for the Importation, Sale and Distribution of Bananas, adopted on 25 September 1997, WT/DS27/AB/R, para. 143 and Appellate Body Report on India – Patent Protection for Pharmaceutical and Agricultural Chemical Products, adopted on 16 January 1998, WT/DS50/AB/R, paras. 87-89.
346 Adopted on 7 November 1989, BISD 36S/268, paras. 122-123.
347 We note for instance that such information might be relevant to an examination of the existence of a threat of serious decline in monetary reserves under Article XVIII:9 or to an examination of the conditions contemplated in the Note Ad Article XVIII:11.