(b) Conditions to be met to allow for the maintenance of measures under the Ad Note

193. We recall that the Ad Note provides that the second sentence of Article XVIII:11 shall not be interpreted to require relaxation or removal of measures "if such relaxation or removal would thereupon produce conditions justifying the intensification or institution, respectively, of restrictions under paragraph 9 of Article XVIII."
194. Three elements thus appear to be contemplated in this text:

1. that conditions justifying the intensification or institution, respectively, of restrictions under paragraph 9 of Article XVIII would occur
2. that the relaxation or removal of the measures would produce occurrence of these conditions
3. the relaxation or removal would thereupon produce these conditions.

195. The first two conditions appear to be quite clear. The expression "conditions justifying the intensification or institution, respectively, of restrictions under paragraph 9 of Article XVIII" would seem to refer necessarily to the two situations envisaged in paragraph 9, i.e. (a) a threat of or a serious decline in monetary reserves or (b) inadequate monetary reserves. We have determined in the previous section that the Ad Note covers situations where these circumstances would not currently exist but would reoccur. The second element ("would produce") states the requirement of a causal link between the occurrence of these conditions and the removal. The assessment of the existence of the conditions foreseen in the Ad Note thus requires a prospective assessment of whether, if the measures were relaxed or removed, this relaxation or removal would result in the conditions of paragraph 9 reoccurring (in cases where they do not currently exist).
196. The text further foresees that the relaxation or removal would "thereupon" produce the conditions. This term requires further interpretation. Dictionary definitions of the term "thereupon" are "upon that or it", "on that being done or said", "(directly) after that", "in consequence of that"³⁵², "immediately" or "at once". ³⁵³ While several variations of meaning can be identified in those definitions, we are of the view that the most appropriate meaning should be "immediately". In particular, we note that this interpretation is consistent with, and arguably compelled by the Spanish and French versions of the Agreement ("inmediatamente" and "immédiatement", respectively). The context of the term tends to confirm this choice. If "thereupon" had been intended to mean only "in consequence of that", the word would not have been necessary. The causality between the removal of the measures and the occurrence of the "conditions" is clear without that word. ³⁵⁴
197. We conclude that, in order to give an effect to the word "thereupon", we have to interpret it as meaning "immediately". We do not consider that our interpretation would introduce an additional condition to Article XVIII:9, nor would it be contrary to the purpose of Article XVIII:B. In particular, bearing in mind that the conditions foreseen for the institution of balance-of-payments measures by developed countries under Article XII are not the same as those applicable to developing countries under Article XVIII:B, we note that saying that removal would thereupon produce the conditions of Article XVIII:9 does not imply that we would introduce in that paragraph the condition of "imminent" threat found in Article XII, but not in Article XVIII. ³⁵⁵ "Produce immediately conditions such that action is necessary to forestall a threat" is not the same as "produce conditions such that action is necessary to forestall an imminent threat". We mean that those conditions would have to appear immediately, and that they would have to be of the type and degree contemplated in Article XVIII:9. Our interpretation implies that not every balance-of-payments difficulty that might occur as the liberalisation process continues could be considered as falling within the scope of the Note Ad Article XVIII:11. The location of the term in the sentence shows in our opinion that "thereupon" refers to the situation where re-occurrence of the conditions justifying balance-of-payments measures would immediately follow removal of the measures.
198. This is in our view the only useful meaning possible for the word "thereupon". Other interpretations, in addition to being contrary to the principles of interpretation followed in this paragraph and the paragraphs above, could in practice turn the provision into providing a means to maintain balance-of-payments indefinitely, which would be contrary to the objective of Articles XVIII:4, XVIII:9 and the Ad Note, as well as contrary to the object and purpose of the WTO Agreement. Our interpretation of the term "thereupon" as a notion of time is also consistent with the structure of the sentence which deals with the moment when measures may have to be removed. We do not mean that the term "thereupon" should necessarily mean within the days or weeks following the relaxation or removal of the measures; this would be unrealistic, even though instances of very rapid deterioration of balance-of-payments conditions could occur. We consider that the purpose of this word is to ensure that measures are not maintained because of some distant possibility that a balance-of-payments difficulty may occur, which would be possible if India's interpretation was accepted.
199. We therefore conclude that, in order to be allowed to maintain the measures at issue, it must be determined that one of the conditions contemplated in sub-paragraphs (a) and (b) of Article XVIII:9 would appear immediately after the removal of the measures, and a causal link must be established between the anticipated reoccurrence of the conditions of Article XVIII:9 and the removal. It should be noted that the text requires more than a mere possibility of reoccurrence of the conditions ("would produce"). The Ad Note therefore allows for the maintenance of measures on the basis only of clearly identified circumstances, and not on the basis of a general possibility of worsening of balance-of-payments conditions after the measures have been removed. Such an interpretation could lead to the maintenance of balance-of-payments measures for indefinite periods, as it could almost always be argued that there exists a risk of worsening of balance-of-payments conditions at some time in the future. This would be in contradiction with the terms of the second sentence of Article XVIII:11 and the principle expressed in Article XVIII:4 that balance-of-payments measures should be temporary. Our interpretation is of course without prejudice to the possibility of institution of measures for balance-of-payments purposes if the circumstances should justify such measures again.
200. Having determined the conditions under which measures can be maintained in accordance with the Ad Note to Article XVIII:11, we now examine whether these conditions are fulfilled in this instance.

(c) Are the conditions contemplated in the Ad Note met in this case?

201. We have determined that under the Note Ad Article XVIII, three aspects have to be taken into account: (i) that a situation contemplated in Article XVIII:9 (a) or (b) would occur; (ii) that such situation would occur immediately after the removal or the relaxation of the measures at issue and (iii) that such a situation be causally linked to the removal. We recall that we have already determined that India did not face the situation foreseen in Article XVIII:9 as of the date of establishment of the panel. The question here is to determine whether the removal of the measures would immediately produce such conditions so as to justify India's maintenance of the measures at issue under this provision.
202. The United States' argument that India does not meet the conditions contained in the Ad Note and is not entitled to a phase-out period may be summarized as follows. First, it notes that India told the BOP Committee in 1994 that if its balance-of-payments showed sustained improvement, India's aim was to move by 1996/97 to a regime in which import licensing restrictions would only be maintained for environmental reasons. The United States notes that India's reserves increased from US$20.3 billion in 1994 to US$25.0 billion in 1997. Second, the United States recalls the statements by the IMF in the January 1997 BOP Committee consultations to the effect that India's "external situation can be well managed using macroeconomic policy instruments without recourse to QRs", that "India should be able to meet all external payments requirements without difficulties, and to weather the consequences of potential external shocks without undue disruption", and that "the removal of quantitative restrictions, in conjunction with other measures, could be expected [inter alia] to strengthen the external position over the medium term". Third, the United States notes the IMF statement at the June 1997 BOP Committee consultations that "[i]t 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 adjustment".
203. In addition, the United States notes that the IMF's answers to questions 3 and 5 of the Panel support its position that India does not meet the conditions in the Ad Note. In this regard, we note that in response to Panel Question 3 on whether relaxation or removal of India's restrictions as of 18 November 1997 would have been likely to produce thereupon the conditions specified in the Ad Note, the IMF repeated the view it had already expressed before the Committee and further stated:

"A time-bound program for eliminating the remaining QRs over a relatively short period would reduce distortions to investment and promote an efficient, export-oriented consumer goods sector."

204. In reply to Panel Question 5 concerning the impact of immediately removing quantitative restrictions on India's development policy, the IMF stated:

"Some problems in import substituting sectors and a temporary decline in reserves cannot be ruled out in the event India immediately removed the remaining QRs. � However, there would also be considerable benefits to such a move, if it were implemented in a phased manner over a relatively short period. First, increased customs revenue from the tariffs applied to previously restricted consumer goods imports would contribute toward deficit reduction and could provide the necessary resources for essential spending in infrastructure and the social sectors. Second, a more competitive, efficient, and quality-conscious consumer goods sector could contribute strongly to export growth. Finally, the structural measures advocated in response to question 3 would improve the allocation of investment, promote efficiency, and enhance the growth prospects of the economy."

205. In analyzing whether the United States has provided sufficient evidence to establish that the conditions foreseen in the Ad Note are not met in this case, we consider the US position in light of the responses thereto by India.
206. In commenting on the IMF answer to Question 3, India first notes that the IMF admits in answering Question 5 that there may be a temporary decline in reserves on removal of its balance-of-payments restrictions and that the IMF endorses removal of the restrictions in a "relatively short period of time", not immediately. As we noted earlier (paragraph 5.173), a decline in reserves does not necessarily mean that balance-of-payments restrictions may be imposed consistently with Article XVIII:9; one must examine the size of the decline in relation to the stock of reserves. We do not believe that the possibility of some decline in reserves calls into question the IMF's conclusion that the removal of the measures would not thereupon produce the conditions foreseen in the Ad Note. Nor does the IMF condition its conclusion on the use of a phase-out as opposed to an immediate lifting of the restrictions. However, we note that the IMF suggests that it would be advisable from the standpoint of adjustment in the Indian economy as a whole - as opposed to the standpoint of managing India's monetary reserves -, for the restrictions to be removed within a relatively short period of time, rather than immediately. We view this as a matter of how India should implement an adverse DSB ruling or recommendation, as opposed to a justification for maintaining its balance-of-payments restrictions. We discuss this issue below in Section VII.
207. Second, according to India, the removal of import restrictions would certainly lead to an increase in imports, although the magnitude of the increase would depend upon a number of factors. India notes, however, that if the percentage share of products that are currently subject to import restrictions rises to the level reached by products that are no longer subject to such restrictions, the additional import bill from the removal of import restrictions would have been approximately US$30.6 billion in 1996-1997, as compared to the total merchandise import bill for that year of US$ 43.5 billion. Moreover, India argues that private transfers and investment flows which in the recent past have helped to finance the increase in imports may not be adequate to do so in the future. While we agree that the removal of restrictions will lead to an increase in imports over time, we do not consider that the information presented by India about possible future problems establishes that conditions justifying reimposition of balance-of-payments measures would occur immediately on lifting the current balance-of-payments measures. We note in this respect that India does not appear always to take into account the distinction between a projected change in imports and a projected change in its reserves. Expecting a surge in imports is not sufficient to establish that the conditions of Article XVIII:9 will immediately reoccur. India does not give much attention to the potentially favourable effects on India's balance-of-payments following the removal of import restrictions, such as the attraction of foreign capital into the distribution of consumer goods and other service industries, stating instead that private transfers and investments flows may be inadequate in the future.
208. Third, India argues that the robust growth in non-oil imports in the past couple of years is partially attributable to the surge in consumer goods imports as a result of the removal of import restrictions on some consumer goods. In its comments to the IMF answers to Question 5, India expands on this point to note the problems of transitional adjustment that removal of balance-of-payments restrictions may cause in its consumer goods industry. We note, however, that problems of structural adjustment to import competition are not per se justifications for balance-of-payments measures. The WTO Agreement on Safeguards has established rules for dealing with such problems. Moreover, we note that Article XVIII:C of GATT 1994 also allows developing countries to adopt, under certain conditions, measures to promote the establishment of a particular industry.
209. Fourth, India notes that in response to Questions 3 and 5, the IMF suggests various other policy reforms that India should implement. We agree with India that pursuant to the proviso to the second sentence of Article XVIII:11, India cannot be required to change its development policy so as to render balance-of-payments measures unnecessary. Initially, we note that our finding that India's balance-of-payments measures are unnecessary in terms of Article XVIII:9 does not assume that there will be any change in India's development policy. Rather, that conclusion is based on our consideration of the factors specified in Article XVIII:9 (e.g., the level of India's reserves). In considering India's comments on the IMF's reply to our questions, we address in the next section (paragraphs 5.216-5.223) India's objections to the IMF 's statement that it could use macroeconomic policy instruments to avoid balance-of-payments problems. We address in this section India's arguments related to the IMF's reference in its reply to Question 3 to "structural measures". In that regard, we note that the IMF stated: "The macroeconomic policy instruments would need to be complemented by structural measures such as scaling back reservations on certain products for small-scale units and pushing ahead with agricultural reforms." It is not clear that the IMF has linked the structural measures to the balance-of-payments situation.
210. We note that India made general claims that implementation of the IMF's views would require a change in its development policy at several points in this proceeding. ³⁵⁶ Although invocation of the proviso is in the nature of an affirmative defence to be established by India, India's arguments on development policy have been expressed in very general terms. However, India addresses the issue in some more detail in its comments on the IMF's reply to Question 3. ³⁵⁷ In those comments, India states that it "has been autonomously engaged in a programme of economic reform". Thus, it appears that India's development policy now envisages some changes and reforms. However, India does not explain how the IMF's suggestions are not consistent with its development policy, except to say that the "pace of change cannot be forced" and that "a period of transition is necessary for structural reforms of this nature".
211. The IMF's suggestions on "structural measures" should not be taken in isolation from the context in which they are made. We recall that the IMF began its reply to Question 3 by stating that India's "external situation can be managed by using macroeconomic policy instruments alone". Its comments on structural measures appear only at the end of its answer after it has suggested other liberalization measures, such as tariff reductions. The adoption by India of "structural measures" is not suggested as a condition for preserving India's reserve position. Thus, we cannot conclude that the removal of India's balance-of-payment measures would thereupon lead to conditions justifying their reinstitution that could be avoided only by a change in India's development policy.
212. Finally, India points to several other factors that may lead to a worsening of its reserve position in the future. For example, it cites the South-East Asia currency crisis which it argues almost certainly will affect India's export competitiveness, as well as the legislatively mandated imposition of economic sanctions on India and the postponement of fresh approvals of bilateral and multilateral assistance as a result of its recent nuclear test which it argues will affect inflows of foreign capital. We note that the sanctions and assistance postponements had not occurred and were not foreseen as of the date of establishment of the Panel, which is the date at which we have assessed the consistency of India's measures with its GATT obligations. In addition, the magnitude and implications of the South-East Asia currency crisis were not fully developed or foreseen at that time. In this regard, we recall that we considered the evolution of India's reserve situation from November 1997 through June 1998 and concluded that it did not call into question our findings on Article XVIII:9 (see paragraphs 5.177-5.179).
213. We have weighed the foregoing evidence and considered the arguments of the parties. In determining whether the requirements of the Ad Note are met, we must bear in mind that it refers to prospective events, i.e., if a certain action is taken, will one of certain specified conditions occur. When dealing with the future, there can be no certainty. Instead, we must satisfy ourselves with probabilities. In order to meet the requirements of the Ad Note ("would produce"), the probability of occurrence of the conditions would have to be clear. We must also bear in mind our conclusion that the Ad Note requires the specified conditions (i.e., those specified in Article XVIII:9(a) and (b)) to manifest themselves immediately as a result of the removal.
214. In our view, on the basis of the evidence before the Panel, the immediate removal by India of the measures at issue may generate some potential decline of reserves and adjustment difficulties. In relation to such adjustment difficulties, we note that the IMF suggests a phase-out over a short period of time. However, with regard to the potential decline in reserves, there is no evidence that such a decline would be of the magnitude required by Article XVIII:9 to allow the imposition of balance-of-payments measures.
215. Consequently, we find that, while India could in principle invoke the Note Ad Article XVIII:11 even when the conditions contemplated in Article XVIII:9 are no longer met, the information available to the Panel leads to the conclusion that a removal of the measures at issue would not immediately produce conditions justifying the re-imposition of import restrictions for balance-of-payments reasons. We therefore find that the measures at issue maintained by India are not justified by reference to the Note Ad Article XVIII:11. However, we must now consider whether India is entitled under the proviso to Article XVIII:11 to maintain these measures.

To continue with Is India entitled to maintain its balance-of-payments measures?

³⁵² New Shorter Oxford English Dictionary (1993), p. 3275.

³⁵³ Webster's New Encyclopedic Dictionary (1993), p. 1075.

³⁵⁴ In this regard, we note that in its report on Japan-Taxes on Alcoholic Beverages, Op. Cit., at p. 12, the Appellate Body recalled that:

³⁵⁵ See India's argument highlighting the absence of requirement of an "imminent" threat under Article XVIII:11, Section III.D.3 supra, para. 3.180).

³⁵⁶ Section III.D.7 at paras. 3.232-3.235.

³⁵⁷ Section III.D.9(c)(iii) at paras. 3.398-3.401.