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World Trade
Organization

WT/DS90/R
6 April 1999
(99-1329)
Original: English

India - Quantitative Restrictions on Imports of Agricultural, Textile and Industrial Products

Report of the Panel

(Continued)


    4. Is India entitled to maintain its balance-of-payments measures on the basis of the proviso to Article XVIII:11?

  1. Article XVIII:11 contains a proviso as follows: "[n]o Member shall be required to withdraw or modify restrictions on the ground that a change it its development policy would render unnecessary the restrictions which it is applying under [Article XVIII:B]". India argues that some of the statements made by the IMF, in particular its response to Questions 3 and 5, suggest that the IMF position that there is no current justification for India's balance-of-payments measures is based on the assumption that India should change its development policy. We respond to certain aspects of this argument in paragraphs 5.209-5.211 supra. In this section, we address in particular India's arguments that the IMF's statement that its reserve levels can be managed through monetary policy instruments reflects the same assumption. India notes that while it is true that the Reserve Bank of India raised interest rates in 1997 in a successful defence of the value of the rupee, the increase had a negative impact on the Indian economy.
  2. In analyzing India's argument, we note that we must consider the proviso to Article XVIII:11 in light of the first sentence of Article XVIII:11, which provides that "[i]n carrying out its domestic policies, the Member 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."
  3. We recall 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). Here, we consider whether our conclusion in the preceding section that those measures are not justified either by reference to the Note Ad Article XVIII:11 is based on the assumption that conditions justifying reinstitution of those measures can be avoided by policies that would require changes in India's development policy, contrary to the proviso to Article XVIII:11.
  4. Since India's reference to the proviso to Article XVIII:11 is in the nature of an affirmative defence, we would have expected India to provide sufficient arguments and evidence to prove it. However, India did not supply convincing evidence that the removal of its balance-of-payments measures would generate balance-of-payments problems, within the meaning of Article XVIII:9, the avoidance or prevention of which would imply changes in its economic policy which, themselves, would require changes in its development policy in the sense of the proviso. India addresses the IMF replies and the impact of the removal of the measures only in general terms.
  5. In our consideration of India's argument, we note that India has in the past used macroeconomic policy instruments to defend the rupee (see paragraph 5.172), suggesting that the use of macroeconomic policy instruments as mentioned by the IMF would not necessarily constitute a change in India's development policy. Moreover, India has not been precise in specifying what it considers to be its development policy in the terms of the proviso.
  6. India argues in its reply of 6 July 1998 to Question 5 posed by the Panel that the removal of quantitative restrictions would cause decreased use of industrial capacity and increased unemployment. It argues that this result would be inconsistent with the "economic employment of productive resources" (Article XVIII:11, first sentence). This phrase in Article XVIII:11 refers to domestic policies: import restrictions cannot be regarded as domestic policies. Thus, Article XVIII:B does not allow the retention of balance-of-payments measures to support the use of industrial capacity or reduce unemployment. Furthermore, the Panel is not persuaded that the removal of import restrictions would, in fact, cause reduced use of industrial capacity in the economy as a whole, or cause increased unemployment. Reducing barriers to imports may lead to decreased activity in some domestic industries but to increased activity in others.
  7. We therefore conclude that India is not entitled to maintain its balance-of-payments measures on the basis of the proviso to Article XVIII:11. We note, however, that our findings do not preclude the possibility that adjustments to domestic policies (other than development policies) embraced by the first sentence of Article XVIII:11 may be necessary or prudent from time to time.
  8. Having determined that India's measures are not necessary under the terms of Article XVIII:9 and are not justified under the terms of the Note Ad Article XVIII:11, we must now examine the other potential justifications advanced by India for the maintenance of its measures.
  9. 5. Right to maintain balance-of-payments measures until they are found to be inconsistent by the General Council and the right to a phase-out of balance-of-payments measures

    (a) Article XVIII:12(c)(i) and (ii)

  10. India claims that a Member invoking a balance-of-payments justification is entitled to maintain the measures until the General Council, following a recommendation from the BOP Committee, requires it to modify or remove them under Article XVIII:12(c)(i) or (ii). India further claims that this provision confirms the existence of a "right to a phase-out" for measures which no longer meet the criteria set out in Article XVIII:9, by providing for a "specified period of time" to be granted to secure compliance with the relevant provisions when an inconsistency has been identified.
  11. The United States claims that Article XVIII:12(c)(ii) does not provide a basis for a gradual reduction of measures that do not have a balance of payments justification and that this interpretation is consistent with the wording of the first sentence of Article XVIII:12(c)(ii) which uses the phrase "restrictions are being applied in a manner involving an inconsistency".
  12. We have already considered India's argument that under Article XVIII:12 it is entitled to maintain its balance-of-payments measures until requested to remove them by the General Council, and for the reasons explained in Section D of these findings, we have not accepted it. 358
  13. India also argues that Article XVIII:12(c)(ii) confirms the existence of a right to a phase-out for measures no longer justified by current balance-of-payments difficulties. We note that Article XVIII.12(c)(ii), provides a specific mechanism in order for the BOP Committee to address possible violations of the provisions of, inter alia, Article XVIII:B and provides for a period of time to be granted to the Member in order to implement the requirement to remove or modify the inconsistent measures. In the situation envisaged by Article XVIII:12(c)(ii), a period of time is granted when an inconsistency with the provisions of either Article XVIII:B or Article XIII has been identified. The period of time which is allocated to the Member in order to bring its measures into conformity is thus comparable, but not identical, to an implementation period of the sort provided for in Article 21.3 of the DSU. However, this specific mode of determination of the "implementation" period applies to procedures initiated under Article XVIII:12(c), which is not the procedure under which this Panel is acting. We consider the issue of whether a phase-out would be appropriate in this case in our suggestions in respect of implementation, where we note this provision of Article XVIII:12(c)(ii).
  14. We therefore conclude that Article XVIII:12(c) does not entitle India to maintain measures which no longer meet the criteria of Article XVIII:9 and are not covered by the Note Ad Article XVIII:11.
  15. (b) Paragraphs 1 and 13 of the 1994 Understanding

  16. Paragraph 1 of the 1994 Understanding provides:
  17. "Members confirm their commitment to announce publicly, as soon as possible, time-schedules for the removal of restrictive import measures taken for balance-of-payments purposes. It is understood that such time-schedules may be modified as appropriate to take into account changes in the balance-of-payments situation. Whenever a time-schedule is not publicly announced by a Member, that Member shall provide justification as to the reasons therefor."

  18. Paragraph 13 of the 1994 Understanding further provides:
  19. "The Committee shall report on its consultations to the General Council. When full consultation procedures have been used, the report should indicate the Committee's conclusions on the different elements of the plan for consultations, as well as the facts and reasons on which they are based. The Committee shall endeavour to include in its conclusions proposals for recommendations aimed at promoting the implementation of Articles XII and XVIII:B, the 1979 Declaration and this Understanding. In those cases in which a time-schedule has been presented for the removal of restrictive measures taken for balance-of-payments purposes, the General Council may recommend that, in adhering to such a time-schedule, a Member shall be deemed to be in compliance with its GATT 1994 obligations. Whenever the General Council has made specific recommendations, the rights and obligations of Members shall be assessed in the light of such recommendations. In the absence of specific proposals for recommendations by the General Council, the Committee's conclusions should record the different views expressed in the Committee. When simplified consultation procedures have been used, the report shall include a summary of the main elements discussed in the Committee and a decision on whether full consultation procedures are required."

  20. During its 1997 consultations, India presented a time-schedule for the Committee to consider. This time-schedule was not approved, as consensus was not reached. 359 The commitment to present a time-schedule to the Committee and, the possibility, if it is approved, of obtaining from the General Council a specific recommendation that the member applying the schedule should be deemed to be in conformity with its obligations under GATT 1994 in carrying out the schedule, are an integral element of BOP Committee procedures. In this sense, it is a specific feature of balance-of-payments consultations, expressly provided for by the Understanding. Had India's time-schedule been approved by the Committee, together with a recommendation that India be deemed in conformity with its obligations in carrying it out, we would then have assessed India's rights and obligations in light of this important factor, in accordance with paragraph 13 of the 1994 Understanding. In this instance, however, although a time-schedule was presented, it was not approved.
  21. India argues that all members of the Committee, including the United States, accepted the principle of a progressive relaxation, and that all members, except the United States, consider the schedule of progressive relaxation followed by India to be satisfactory. In the view of India, this creates a presumption that India is in conformity with its obligations. We can agree with India that the absence of approval of its time schedule should not in itself adversely affect the status of its measures. However, in the absence of recommendations approving India's proposed time schedule, the Panel is not in a position to substitute its own assessment of the Committee's position for the Committee's absence of consensus. The rights and obligations of India must be assessed in the light of the relevant provisions of Article XVIII:B. 360 We are therefore not in a position to give a specific weight to the fact that India presented a time-schedule to the Committee, when this schedule was not approved by the Committee or Council.
  22. India further argues that paragraphs 1 and 13 of the Understanding provide an incentive for Members to present a time-schedule for removal even when there are no current balance-of-payments difficulties within the meaning of Article XVIII:9, thereby confirming the existence of a "right" to a phase out even in the absence of current balance-of-payments difficulties within the meaning of Article XVIIII:9. The text of paragraph 13 of the Understanding itself does not specify whether the balance-of-payments difficulties which justified the imposition of the measures should still be in existence when a time schedule is presented for their elimination. However, the notion of presentation of a time-schedule, starting when the balance-of-payments difficulties still exist, is consistent with the temporary nature of balance-of-payments measures and with the requirement for their gradual elimination. Also, the time-schedules referred to in paragraphs 1 and 13 of the 1994 Understanding are the same and paragraph 1 specifies that "such time-schedules may be modified as appropriate to take into account changes in the balance-of-payments situation." This suggests that a time-schedule would have to be presented before the balance-of-payments difficulties disappear, otherwise, the reference to "take into account changes in the balance-of-payments situation" would become redundant.
  23. This does not mean that the General Council has no margin of discretion in deciding whether or not to accept or not a time-schedule that would provide protection to the Member concerned. We have seen that the Ad Note suggests also that measures could, under certain circumstances, be maintained for a time when balance-of-payments difficulties which initially justified their institution are no longer in existence. In addition, paragraph 13 of the 1994 Understanding provides that "the General Council may recommend that, in adhering to such a time-schedule, a Member may be deemed to be in compliance with its GATT 1994 obligations" (emphasis added). There is no clear evidence that this phrase has to be interpreted as covering only situations under which a phase-out period would exactly coincide with the gradual disappearance of balance-of-payments difficulties.
  24. In light of the above, we conclude that the procedure for submission and approval of a time-schedule incorporated in the 1994 Understanding, which is specific to the Committee consultations, does not give WTO Members a "right" to a phase-out period which a panel would have to protect in the absence of balance-of-payments difficulties in the sense of Article XVIII:B. 361 Even assuming that such a "right" could be recognised under paragraph 13 of the 1994 Understanding, such a recognition would in any case require a prior decision of the General Council.
  25. 6. Conclusion

  26. In conclusion, with regard to our examination of the United States' claim of violation by India of Article XVIII:11 and India's defence that its measures are justified under Article XVIII:B, we have found that India's balance-of-payments situation was not such as to allow the maintenance of measures for balance-of-payments purposes under the terms of Article XVIII:9, that India was not justified in maintaining its existing measures under the terms of Article XVIII:11, and that it does not have a right to maintain or phase-out these measures on the basis of other provisions of Article XVIII:B which it invoked in its defence. We therefore conclude that India's measures are not justified under the terms of Article XVIII:B.
  27. It should be noted that our finding is without prejudice to any future developments in India's balance-of-payments situation which might justify India invoking the provisions Article XVIII:B and the Understanding, should one of the conditions contemplated in Article XVIII:9 be met. It is also without prejudice to the possible determination of a reasonable period of time under Article 21 of the DSU for India to bring its measures into conformity with its obligations under the WTO Agreement. 362
  28. H. Article 4.2 of the Agreement on Agriculture

  29. The United States claims that, of the 2,714 HS lines listed as subject to quantitative restrictions in Annex II, Part B of India’s 1997 notification of quantitative restrictions, 710 (26%) are products covered by the Agreement on Agriculture. Since processed food, fresh fruits and vegetables, coffee, poultry, and many other agricultural products are consumption goods which could directly satisfy human needs without further processing, India’s ban on imports of consumer goods also serves as a form of agricultural protectionism. For the United States, since the IMF has conclusively found that there is no balance-of-payments necessity for India’s import restrictions, with respect to these items, India is in violation of its obligations under Article 4.2 of the Agreement on Agriculture.
  30. India considers that footnote 1 to Article 4.2 of the Agreement on Agriculture makes it clear that Article 4.2 does not extend to measures imposed under the balance-of-payments provisions of GATT 1994. The question of the consistency of India's measures with Article 4.2 depends on their consistency with Article XVIII:B of the GATT 1994. The legal status of India's import restrictions under the Agreement on Agriculture is consequently identical to that under GATT 1994.
  31. Article 4.2 of the Agreement on Agriculture provides that "Members shall not maintain, resort to, or revert to any measures of the kind which have been required to be converted into ordinary customs duties [...] ". Footnote 1 to Article 4.2 clarifies that "These measures include quantitative import restrictions [...] discretionary import licensing, non-tariff measures maintained through state-trading enterprises [...] and similar border measures other than ordinary customs duties, whether or not the measures are maintained under country-specific derogations from the provisions of GATT 1947, but not measures maintained under balance-of-payments provisions or under other general, non-agriculture-specific provisions of GATT 1994 or of the other Multilateral Trade Agreements in Annex 1A to the WTO Agreement."
  32. In paragraph 5.139 above, we found that the measures at issue violate Article XI:1 of the GATT 1994, which is equally applicable to industrialized and agricultural products. In paragraph 5.223 above, we also found that the measures at issue were not justified under Article XVIII:B and violated Article XVIII:11. India did not contest that Article 4.2 was applicable to the agricultural products subject to the measures at issue. We agree with India's claims that the question of the consistency of India's import restrictions with Article 4.2 depends on their consistency with Article XVIII:B. We therefore conclude that the Indian restrictions are not "measures maintained under balance-of-payments provisions" within the meaning of footnote 1 to Article 4.2 of the Agreement on Agriculture.
  33. Since India does not invoke any of the other exceptions contained in the footnote to Article 4.2, we find that the measures at issue violate Article 4.2 of the Agreement on Agriculture.
  34. I. Article XIII Of GATT 1994

  35. In view of our findings that the measures at issue violate Article XI:1 of GATT 1994 and are not justified under Article XVIII:B, the United States does not request findings under Article XIII of GATT 1994.
  36. J. Nullification or Impairment

  37. The United States claims that, since India is in violation of its WTO obligations and is not excused by the exception for balance-of-payments import restrictions in Article XVIII:B, nullification or impairment of benefits is presumed, as provided in Article 3.8 of the DSU. In the view of the United States, past GATT panels have regarded violation of Article XI:1 in a special light with regard to nullification or impairment, because of the fundamentally trade-distorting nature of quantitative restrictions. 363
  38. India considers that its measures are justified under Article XVIII:B and applied pursuant to its development policy as it conceives it.
  39. We have found that India's measures at issue violate Articles XI:1 and XVIII:11 of GATT 1994 and Article 4.2 of the Agreement on Agriculture, and that they are not justified under Article XVIII:B of GATT 1994. Since Article 3.8 of the DSU provides that "[i]n cases where there is an infringement of the obligations assumed under a covered agreement, the action is considered prima facie to constitute a case of nullification or impairment", we conclude that India's measures have nullified or impaired benefits accruing to the United States under GATT 1994 and the Agreement on Agriculture.
  40. VI. Conclusions and Recommendations

  41. We conclude that
    1. the measures at issue 364 applied by India violate Articles XI:1 and XVIII:11 of GATT 1994 and are not justified by Article XVIII:B;
    2. the measures at issue, to the extent they apply to products subject to the Agreement on Agriculture, violate Article 4.2 of the Agreement on Agriculture; and
    3. the measures at issue nullify or impair the benefits of the United States under GATT 1994 and the Agreement on Agriculture.

  42. We therefore recommend that the DSB request India to bring the measures at issue into conformity with its obligations under the WTO Agreement.
  43. VII. Suggestions for Implementation

  44. Article 19.1 of the DSU provides that in addition to its findings and recommendations, the Panel may suggest ways in which the Member concerned could implement the recommendations. In the light of this provision, we wish to highlight some factors which , in our considered opinion, are relevant to the manner in which India should bring its measures into conformity with its obligations under the WTO Agreement.
  45. At the outset, we recall that the Preamble to the WTO Agreement recognizes both (i) the desirability of expanding international trade in goods and services and (ii) the need for positive efforts designed to ensure that developing countries secure a share in international trade commensurate with the needs of their economic development. In implementing these goals, WTO rules promote trade liberalization, but recognize the need for specific exceptions from the general rules to address special concerns, including those of developing countries.
  46. The process of trade liberalisation is often fragile and can be interrupted by balance-of-payments problems, even when these problems are not attributable to trade liberalisation. Liberalisation is also fragile with respect to internal adjustment problems. This fragility suggests an implementation period which is attuned to sustaining support for liberalisation in the presence of external shocks, and to the internal adjustment process.
  47. As reflected in our report, we have found that the balance-of-payments measures in question were inconsistent with India's obligations under Articles XI:1 and XVIII:11 of GATT 1994 and Article 4.2 of the Agreement on Agriculture, and therefore recommended that India bring those measures into conformity with its obligations under the WTO Agreement. India has claimed that it is entitled to a phase-out period in connection with the removal of those measures and that it should not be required to eliminate them immediately. We concluded that, under Article XVIII:B and in the circumstances of the case, India had no right to a phase-out of its balance-of-payments restrictions, which the dispute settlement system would have to "preserve" as provided by Article 3.2 of the DSU. However, we wish to stress that our findings and recommendations do not imply that the measures at issue must be removed instantly.
  48. The DSU provides for "prompt compliance" with recommendations of the DSB, but it contemplates the possibility that it might be impractical for a Member to comply immediately, in which case "the Member shall have a reasonable period of time in which to do so" (Article 21.3). This panel suggests that a reasonable period of time be granted to India in order to remove the import restrictions which are not justified under Article XVIII:B. Normally, the reasonable period of time to implement a panel recommendation, when determined through arbitration, should not exceed fifteen months from the date of adoption of a panel or Appellate Body report. However, this 15-month period is "a "guideline for the arbitrator", not a rule", 365 and as indicated in Article 21.3(c) of the DSU, "that time may be shorter or longer, depending upon the particular circumstances". In light of the factors mentioned above, the panel suggests that the "reasonable period" in this case could be longer than fifteen months. In this regard, the panel would also bring the following points to the attention of the DSB:
  49. First, while no agreement was reached in the BOP Committee as to the period in which India should remove its measures, we note that India has concluded bilateral agreements with a number of Members providing for a gradual elimination of the measures on an MFN basis. 366

    Second, in a proceeding under Article XVIII:12(c)(ii) or (d), it is provided that in the event that an inconsistency, even of a serious nature, is found, recommendations shall be made requiring the measure to be brought into conformity within a specified period. While not directly applicable in a panel proceeding, it is significant that immediate removal of even seriously inconsistent measures is not required.

    Third, the IMF has not recommended immediate removal, but rather a phase-out over a relatively short period of time. As an indication, in 1995, when the balance-of-payments situation of India was more uncertain, the IMF had suggested a transition period of two years.

    Fourth, in practice – both prior to and since the entry into force of the WTO Agreement: (a) in the Korea - Beef case, in 1989, the panel, following the BOP Committee, recommended that a time schedule be established, this in fact being done at the same time as Korea disinvoked Article XVIII367; (b) in a number of later cases where Members have disinvoked Article XVIII, the balance-of-payments measures at issue were phased-out. 368

  50. The foregoing factors take an added importance in light of the principle of special and differential treatment. This principle should be highlighted, given that Article 21.2 of the DSU requires that "Particular attention should be paid to matters affecting the interests of developing country Members with respect to measures which have been subject to dispute settlement".369
  51. Accordingly, we suggest that the parties negotiate an implementation/phase-out period. Should it be impossible for them to do so, we suggest that the reasonable period of time, whether determined by arbitration (Article 21.3(c) of the DSU) or other means, be set in light of the above-listed factors.

358 See supra in section V.D.4.(b)(ii) the discussion on the right to maintain balance-of-payments measures (paras. 5.76-5.80).

359 In accordance with the established practice, no vote was requested in the General Council pursuant to Article IX of the Agreement Establishing the World Trade Organization.

360 See supra in section V.D.4. (b) (ii) the discussion on potential conflicts (paras. 5.92-5.97).

361 As we note in our suggestions for implementation, a phase-out period typically has been negotiated (see text accompanying footnotes 366-368).

362 See infra Section VII on "suggestions for implementation."

363 The United States refer to the Panel Reports on Japan – Restrictions on Imports of Certain Agricultural Products, adopted on 2 February 1988, BISD 35S/163, para. 5.4.3, and on Japanese Measures on Imports of Leather, adopted on 15/16 May 1984, BISD 31S/94, para. 55.

364 The "measures at issue" are defined in paragraph 5.122 supra.

365 Award of the Arbitrator, Arbitration under Article 21.3 (c) of the DSU, EC Measures concerning Meat and Meat Products (Hormones), WT/DS26/15, WT/DS48/13, 28 May 1998, para. 25.

366 See India – Quantitative Restrictions on Imports of Agricultural, Textiles and Industrial Products, notifications of mutually agreed solutions, circulated pursuant to Article 3.6 of the DSU, WT/DS92/8 and WT/DS92/8/Corr.1, WT/DS93/8, WT/DS94/9 and WT/DS94/9/Corr.1; WT/DS96/8 and WT/DS96/8/Corr.1 and WT/DS90/2/Add.1, WT/DS91/2/Add.1, WT/DS92/2/Add.1, WT/DS93/2/Add.1, WT/DS94/2/Add.1, WT/DS96/2/Add.1.

367 Op. Cit., BISD 36S/268, para. 131. See also BOP/R/171 paras. 22-23. A seven-year phase-out period was applied (see BOP/R/183/Add.1, paras. 12-13).

368 Under the GATT: Brazil (1991) - one year phase-out (See BOP/R/194, 24 July 1991). Under the WTO: Egypt (1995) - three to five year phase-out (See WT/BOP/R/2, 30 June 1995); The Philippines (1995) - two year phase-out (WT/BOP/R/9, 24 November 1994). Two of these cases were dealt with under both Committees: GATT and WTO. See also the case of Tunisia (1997), where the Committee recommended to the General Council that, in adhering to its three year phase-out plan, Tunisia be deemed to be in compliance with its GATT 1994 obligations (see WT/BOP/R/31).

369 See Award of the Arbitrator in the case on Indonesia – Certain Measures Affecting the Automobile Industry, WT/DS54/15, WT/DS55/14, WT/DS59/13, WT/DS64/12, 7 December 1998, para. 24.