INDIA – QUANTITATIVE RESTRICTIONS ON IMPORT OF AGRICULTURAL

Request for consultations by the United States of America

30 July, 1997

Request by Japan to join in consultations

5 August, 1997

Request by Switzerland to join in consultations

5 August, 1997

Request by Australia to join in consultations

5 August, 1997

Request by Canada to join in consultations

5 August, 1997

Request by European Communities to join in consultations

8 August, 1997

Request by New Zealand to join in consultations

6 October, 1997

Request by the United States for the establishment of Panel

18 November, 1997

Establishment of Panel

20 February, 1998

Constitution of the Panel

24 February, 1998

Communication by Secretariat on the constitution of the Panel

14 January, 1999

Notification of Mutually Agreed Solution between India and Japan

6 April, 1999

Report of the Panel

25 May, 1999

Notification of appeal by India

23 August, 1999

Report of the Appellate Body

22 September, 1999

Adoption of recommendations and rulings

28 December, 1999

Agreement under Article 21:3(b) regarding “reasonable period of time" for implementation of DSB Ruling

14 July, 2000

Status report filed by India

Summary [1] 

Parties

Agreements

Time-line of Dispute

Complainant

United States

GATT Articles XI and XVII

Agreement on Agriculture Article 4.2

Agreement on Import Licensing Procedures Article 3

Panel

18 November 1997

Panel Report

6 April 1999

Respondent

India

Appeal Report

23 August 1999

Adoption

22 September 1999

Measure and Product at Issue

Measures at issue: India's import restrictions that India claimed were maintained to protect its balance-of-payments (BOP) situation under GATT Art. XVIII: import licensing system, imports canalization through government agencies and actual user requirement for import licences.

Products at issue: Imported products subject to India's import restrictions: 2,714 tariff lines within the eight-digit level of the HS (710 out of which were agricultural products).

Summary of Key Panel/AB Findings

GATT Art. XI:1 (quantitative restrictions): The Panel found, based on the broad scope of a general ban on import restrictions embodied in Art. XI:1, that India's measures, including its discretionary import licensing system, were quantitative restrictions inconsistent with GATT Art. XI:1.

GATT Art. XVIII:11 (balance-of-payment ("BOP")): The Panel found that as India's monetary reserves were adequate, and, thus, India's BOP measures were not necessary to forestall the threat of, or to stop, a serious decline in its monetary reserves within the meaning of Art. XVIII:9, India had violated Art. XVIII:11, second sentence, which provides that measures may only be maintained to the extent necessary under Art. XVIII:9.

Justifications under GATT Art. XVIII:11 (Ad Note and Proviso): Since a removal of India's BOP measures would not immediately produce the conditions contemplated in Art. XVIII:9 justifying the maintenance of import restrictions, the Appellate Body upheld the Panel's finding that India's measures were not justified under Note Ad Art. XVIII:11. Also, the Appellate Body upheld the Panel in finding that since India was not being required to change its development policy, it was not entitled to maintain its BOP measures on the basis of proviso to Art. XVIII:11.

AA Art. 4.2: The Panel found that the measures violated the obligation under Art. 4.2 not to maintain measures of the kind required to be converted into ordinary customs duties and that they could not be justified under footnote 1 to Art. 4.2 either since the measures were not "measures maintained under balance-of-payments provisions".

Other Issues

Burden of proof (GATT Art. XVIII): The Appellate Body upheld the Panel's findings that the burden of proof with respect to Art. XVIII:11 proviso is on the defending party (as an affirmative defence), and with respect to the Note Ad Art. XVIII:11 on the complaining party.

Competence of panels to review BOP measures: The Appellate Body held that dispute settlement panels are competent to review any matters concerning BOP restrictions, and rejected India's argument that a principle of institutional balance requires that matters relating to BOP restrictions be left to the relevant political organs – the BOP Committee and the General Council.

Introduction

International Trade

International trade has existed and flourished from time immemorial. But international trade as we understand today is of recent origin. The desire to dominate international trade is perhaps the most important factor behind colonisation and two of the most destructive wars in human history. Post the second world war, the prominent trading nations of that time came together to establish institutions and setup a regulatory regime to govern international trade with the objective of facilitating faster and more efficient trading system. The world came to understand that organised and systematised trade among nations is the key to world peace.

The Bretton Woods Conference, 1944 aimed at establishing the International Trade Organisation (ITO). However, due to various reasons, the ITO never came into existence. The 23 participating nations agreed on a stop gap arrangement, thus creating the General Agreement on Tariffs and Trade (GATT 1947). They also agreed to renegotiate on trade barriers and the regulation of international trade as when required. This manifested in the form of eight major rounds of trade negotiations at multilateral level. The lengthiest and the most important round of negotiations was the eighth round held at Uruguay. After seven long years of negotiations, the world community established the World Trade Organisation (WTO) on 1 January, 1995. The WTO has since changed trade among nations and the growing influence of the WTO system is going to redefine international law and international relations in the future to come.

Dispute Settlement

Enforcement of the obligations of the contracting parties is the key to success of any international agreement. The importance of settlement of disputes among nations that today covers around 95% of the total of the world trade needs no mention. The most significant achievement of the Uruguay Round of Multilateral Trade Negotiations is the Understanding on Rules and Procedures Governing the Settlement of Disputes (commonly referred to as Dispute Settlement Understanding and abbreviated as DSU) appended as Annex 2 of the WTO Agreement signed at Marrakesh. It should, however, be noted that the DSU is protected of evolution of rules, procedures and practices of over five decades under the GATT 1947.

Functions, Objectives and Key Features of the Dispute Settlement System

The DSU consists of 27 Articles and 4 Appendices. It established the forum for settlement and lays down the procedure to be followed to settle disputes. A Panel of Experts is constituted and this Panel makes its recommendations to the parties to bring their domestic law or arrangement in conformity with their obligations under international trade law. Appeal lies to the Appellate Body which again makes recommendations. While the DSU provides from forum to resolve disputes, mutually agreed solutions through negotiations between parties is the preferred form of solution under the WTO system. The Dispute Settlement Body (DSB) provides clarification of the rights and obligations of the members through interpretations. The disputes are settled in a time-bound and prompt manner. Thus, the dispute settlement system under the WTO provides the much needed security and predictability to the multilateral trading system. [2] 

Time-line of Settlement [3] 

These approximate periods for each stage of a dispute settlement procedure are target figures — the agreement is flexible. In addition, the countries can settle their dispute themselves at any stage. Totals are also approximate.

60 days

Consultations, mediation, etc

45 days

Panel set up and panellists appointed

6 months

Final panel report to parties

3 weeks

Final panel report to WTO members

60 days

Dispute Settlement Body adopts report (if no appeal)

Total = 1 year

(without appeal)

60-90 days

Appeals report

30 days

Dispute Settlement Body adopts appeals report

Total = 1y 3m

(with appeal)

Legal Status of Report of DSB

The member-States of the WTO implement the report of the DSB. However, the legal status of these “reports" is much in debate. Some jurists have opined that these reports are not legally binding and it is the ‘realpolitik’ that influences the States in implementing the findings of the Dispute Settlement Body. [4] At the same time, some jurists have argued that the dispute settlement under the WTO is a much improvised form of its predecessor and that the report of the DSB is legally binding on the States. [5] 

The main argument from those who decry that the reports of the Panel and Appellate Body are not legally binding springs from the kind of enforcement mechanism agreed among the member-States. The party against whom recommendations are made should express its intentions to implement them in the DSB meeting within thirty days after the report of the Panel/ Appellate Body is circulated. If immediate compliance with the recommendations is impractical, the member will be given “reasonable time period" to do so. If the State is unable to act within reasonable period, it can enter into negotiations with the complaining State in order to determine a mutually-acceptable compensation. If after 20 days, no satisfactory compensation is agreed, the complaining side may ask the Dispute Settlement Body for permission to impose limited trade sanctions (“suspend concessions or obligations") against the other side. The Dispute Settlement Body must grant this authorization within 30 days of the expiry of the “reasonable period of time" unless there is a consensus against the request. The existence of this option with the State to compensate and not comply with its obligations is the reason for suggesting that the recommendations are not binding.

However, Prof. John Jackson points out (reminding also the nature of “binding obligations" under international law) that the dispute settlement agreement stresses that “prompt compliance with recommendations or rulings of the DSB is essential in order to ensure effective resolution of disputes to the benefit of all Members". He further argues that the “practice" of States in complying with the recommendations in almost all cases is evidence enough of binding status accorded to them. [6] 

While the legal status of the “report" of DSB is much in debate, no one can deny the importance and the rate of success of the dispute resolution under WTO.

Background

Restrictions for the Purposes of Balance-of-Payments

The provisions of Articles XVIII and XII of the GATT 1994 enable the Members of the WTO to impose exceptionally restrictive import measures for balance-of-payments purposes, which are otherwise prohibited. Article XVIII deals with balance-of-payments restrictions imposed by developing countries, while Article XII deals with restrictions imposed by developed countries. These two provisions have to be read in conjunction with the Understanding on the Balance-of-Payments Provisions of the General Agreement on Tariffs and Trade 1994. This normative framework ensures that the restrictive import measures imposed for balance-of-payments purposes are imposed for such purposes, on a temporary basis, and strictly according to the terms specified. The restrictive measures need to be notified to the WTO. The notification of the restrictive measures is followed by consultation and review in the Balance-of-payments Committee. However, a Member has the right to impose balance-of-payments measures without prior approval of the WTO. Within the framework of the BOP Committee and the General Council the restrictions are reviewed collectively; and can also be reviewed at the instigation of individually affected Members of the WTO. Membership of the BOP Committee is open to all Members indicating their desire to serve on it. [7] 

The restrictive measures need to be eliminated when the balance-of-payments justification no longer exists. Where the measures are found to be inconsistently applied the Member may either be advised that the restrictions be removed, or receive appropriate recommendations for securing conformity with GATT. The General Council may recommend the phasing out of the measures. Where consultations with the Member imposing the restrictions have been instigated by an adversely affected Member, and the consultations prove to be unsuccessful, a recommendation for the withdrawal or modification of the measures can be obtained, or in the event of this not transpiring the affected party can be released from such appropriate obligations towards the party imposing the restrictions. [8] 

In conjunction with the review and challenge procedures through the BOP Committee and the General Council there also exists the opportunity for affected individual Members to challenge the measures under the WTO dispute settlement procedures as set out in the WTO Understanding on Rules and Procedures Governing the Settlement of Disputes. The challenge to India’s quantitative restrictions is the first under the WTO dispute settlement machinery for their conformity with the WTO normative framework. However, such measures have been challenged in the past under GATT 1947 from time to time, although not frequently. [9] The Panel and Appellate Body decisions of the WTO relating to India--Quantitative Restrictions on Imports of Agricultural, Textile and Industrial Products, involving mainly the United States and India, are particularly illuminating on the manner and the circumstances in which BOP import restrictions can be challenged.

Agreement on Agriculture

Agriculture has been and remains to be a very vital part of the overall economic activity of many nations. Therefore, including and liberalising trade in agricultural products, especially food products, was an important step forward under the WTO regime. The Agreement aims at developing investment, production and trade in agricultural products by a three pronged approach: [10] 

by making agricultural market access conditions more transparent, predictable and competitive;

by establishing or strengthening the link between national and international agricultural markets;

and thus, relying more prominently on the market for guiding scarce resources into their most productive uses both within the agricultural sector and economy-wide.

This agreement prohibited the use of non-tariff barriers as restrictions on market access which were prior to WTO used to protect the domestic agricultural products. Instead, “tariffication", that is, providing a level of tariff which would accord equivalent level of protection, was agreed upon by the Members.

Explain articles 4 and 5

Relevant Facts

Till the time of this dispute settlement, India had been imposing quantitative restrictions for balance-of-payments purposes. The particular quantitative restrictions imposed by India, the subject of challenge by the United States under the WTO dispute settlement mechanism, were notified by India to the WTO Balance of Payments Committee (BOP) in May 1997. India proposed to phase out these restrictions in nine years' time. In June 1997 consultations in BOP took place in relation to the measures notified.

Under Article XV:2 of GATT 1994 BOP consulted the IMF. The IMF representative took the view that India's current monetary reserves were not inadequate and "there was no serious decline in India's monetary reserves". During the consultations India revised its phase-out period to six years for most products notified, although some Members took the view that this period could be reduced to five years.

The United States took the view that the Indian restrictions inter alia were contrary to the prohibition on quantitative restrictions under GATT 1994, and could not be justified under Article XVIII:11 of GATT 1994. Thus, the U.S. view went to the very core of the measure, well beyond the issue as to the phase-out period. In these circumstances, the U.S. invoked the WTO dispute settlement procedure in relation to India. The Panel under Article 13.1 of the DSU sought information and expert advice from the IMF in relation to India's balance-of-payments position, and took the information provided into account in its deliberations.

Questions/ Issues

Competence of the Panel/ Jurisdiction

One of the main issues considered by the Panel was its competence to review the quantitative restrictions imposed by India for balance-of-panel purposes measures in the framework of GATT 1994.

Proceedings before the Panel

Arguments of the Parties in the Panel

Competence of the Panel/ Jurisdiction

India

India challenged the competence of the Panel mainly on two grounds. Firstly, it was argued by India that only the BOP Committee and the General Council under GATT 1994 had exclusive competence to review restrictions imposed for balance-of-payments purposes. India also claimed in particular that footnote 1 of the Understanding on the Balance-of-Payments Provisions of the GATT 1994 referred to the "application" of measures for balance-of-payments purposes and not to their “justification". As far as the justification of such measures was concerned, only the BOP Committee could review them under the procedures set out in Articles XV:2 and XVIII:B of GATT 1994. Secondly, India contended that the justification for measures for balance-of-payments purposes should be considered in a political setting rather than by dispute settlement panels. It was further contended that conflicts may arise due to review by panels and in such an event the process involved within the BOP Committee would become redundant.

United States

On the other hand, the United States argued that the said footnote 1 of the 1994 Understanding on Balance-of-Payments confirmed the availability of the dispute settlement procedures. The U.S. further claimed that, even if India was right, the particular measures imposed by India were in fact applied in excess of the purpose for which they were authorised and therefore covered by footnote 1.

Report of Panel

Competence of the Panel/ Jurisdiction

The Panel concluded that, with respect to footnote 1 "application" was used to refer simply to "use" of the measure and was not used in contrast to or to the exclusion of "justification". It held that "applied" is not limited to a focus on the administration of restrictions, which have been properly justified for balance-of-payments purposes. Further, that the procedure set out in Article XVIII:12 of GATT is not stated to be exclusive. Thus, India did not have a right to maintain BOP restrictions until the General Council invited it to modify or phase them out.

In addition, the Panel concluded that under the DSU panels can seek expert advice, for example from the IMF, and can therefore deliberate on sensitive political issues. It also rejected that there can be any danger in practice of the dispute settlement procedures making the BOP Committee and General Council procedures redundant, or cause conflicts. In fact, the BOP Committee process can influence the process of dispute settlement. Since the panels should respect the determinations of the BOP Committee and General Council, where these have been made, there was no threat of conflicts arising. The Panel observed that the collective process under BOP Committee and General Council would continue to be the basic process, and the dispute settlement process would only be complementary.

Substantive issues

The Panel concluded on the substantive question of whether the Indian measures were in conformity with GATT, having determined that it had jurisdiction to consider the complaint, that the Indian measures were not justified under the terms of Article XVIII:B.

Proceedings before the Appellate Body

Arguments of the Parties in the Appellate Body

India

India appealed to the Appellate Body against the report of the Panel. India continued to challenge the competence of panels in relation to BOP measures. Firstly, it was argued by India that the Panel failed to take into consideration that each of the organs of the WTO needs to exercise its powers having due regard to the powers attributed to the other organs of the WTO; that the objectives of the WTO can be achieved only if each organ of the WTO exercises its powers in deference to the authority of the other organs. In particular, it was argued, that the authority of the dispute settlement panels ought to be considered against the fact that jurisdiction to review balance-of-payments measures vests with the BOP Committee and the General Council. In support of this proposition India invoked the “principle of institutional balance" developed in the context of the European Communities. In short, India took the view that there should be a division of functions between the judicial and political organs insofar as balance-of-payments considerations are concerned.

Secondly, India argued that the Panel's view of the distribution of powers between the political organs and the judicial organs was inconsistent with the practice under the GATT 1947.

Thirdly, India repeated its point made earlier that the reference to footnote 1 of the 1994 Understanding on Balance-of-Payments referred to the application of a measure, and not its justification.

Finally, India argued that the BOP Committee dealt with consistency of the measures as it concerned the WTO Membership as a whole. On the other hand the dispute settlement process was limited to relations between two Members. In India's view Members could resort to the dispute settlement process only when they were particularly affected.

United States

The United States, on the other hand, took the view that the “principle of institutional balance" is neither enshrined in the WTO nor is it borne out the practice under GATT 1947. The U.S. further cited the Korea – Beef case to support the view that the Panel can review balance-of-payments related measures. The United States argued that the footnote to the BOP Understanding confirmed such jurisdiction of the Panel.

Report of Appellate Body

Competence of the Panel

The Appellate Body confirmed the competence of a panel to consider the justification of measures imposed for balance-of-payments purposes for the following reasons:

Firstly, the Appellate Body concluded that the Panel did not come to the conclusion that the dispute settlement body has unlimited competence in relation to justification of balance-of-payments restrictions. It also observed that the question of competence under the DSU was to be determined with reference to Article XXIII of the GATT 1994, "as elaborated and applied by the DSU, and footnote 1 to the BOP Understanding". Accordingly, it was held, that the U.S. was entitled to resort to the dispute settlement procedure as it considered that a benefit accruing to it under the WTO system, whether directly or indirectly, was being nullified or impaired as a result of restrictions by India and its failure to carry out its obligations under the WTO arrangements.

Secondly, the Appellate Body rejected the distinction between application and justification argued by India based on the following reasons: Firstly, that the footnote referred to "any matters" arising for the application of balance-of-payments restrictions. Secondly, that the footnote referred to any matters "arising from" the application of balance-of-payments restrictions. Thirdly, that the footnote refers to any matters arising from the "application" of balance-of-payments measures. Application means "use or employment". And fourthly, that these conclusions are also confirmed by GATT practice, in particular the Korea Beef case.

Thirdly, the Appellate Body took the view that parallel procedure (in dispute settlement body and the BOP Committee and General Council) would not impinge on the competence of the BOP Committee or the General Council in relation to matters arising from the application of Article XVIII:12. It further observed that the Panels and the BOP Committee have different functions and procedures. The Appellate Body agreed with the finding of the Panel that the BOP Committee's conclusions would influence the Panel, and thus the possibility of conflict was minimised. It was further observed, that the BOP Committee had a wider mandate and was concerned with a wider range of issues.

Finally, specifically in relation to the principle of institutional balance, the Appellate Body took the view that it was not a general principle of international law; and that the GATT practice relied upon by India was based on “unadopted reports". These reports addressed the relationship between other GATT Articles, namely Articles XVIII and XXIII.

Contribution to the Dispute Settlement to International Trade Law

Are the Panel and the Appellate Body reports ones which deserve to be applauded in so far as they formulate a two-track challenge system of balance-of-payments measures? Certainly, the reports clarify the circumstances in which appropriate challenges can be made. However, there are a number of questions, which either the reports raise or which ought to have been considered. First, from the perspective of developing economies the right to impose import restrictions for BOP purposes is an important expression of the special and differential treatment. This was India's contention and one which the Panel accepted. However, in allowing for a purely legal approach to be taken through a judicial forum this standard enshrined in the preamble of the Marrakesh Agreement Establishing the WTO has been impacted upon. Indeed, the decision may well inhibit developing Members in imposing BOP import restrictions. Second, neither the Panel nor the Appellate Body considered that a dual track system allowed a minority concern in the BOP, having failed to swing the decision in its favour in the BOP process, a second try in the dispute settlement process. Indeed, it is conceivable that a Member may well be absent in the BOP process but later decide to question the restrictions through the dispute settlement process. Third, already having to resort to BOP import restrictions because of the state of the developing economy, a developing Member now in addition has to meet the extra legal cost of defending its restriction through the dispute settlement process, when in fact in the context of the Article XVIII procedures no extra expenses are incurred. Fourth, BOP issues involve both in terms of the determination of its state and the mechanisms to alleviate it, questions of judgment. These are in part alleviated by the possibility of evidence from the IMF. But this does not assist in terms of the ability of the members of the Panel and the Appellate Body, selected essentially for their expertise in international trade matters (as opposed to monetary matters) to be able to critically appraise the IMF evidence obtained. Fifth, both the Panel and Appellate Body failed to address seriously the central question of whether BOP related questions lend themselves well to analysis from a hard law perspective. It is the case that in the context of IMF Conditionality the whole IMF apparatus is orientated such that it is very difficult, if possible at all, to consider questions of IMF Conditionality as justiciable. Members of the IMF are unable to question in a judicial forum the imposition of IMF Conditionality in accordance with IMF Articles of Agreement. Yet in the framework of the WTO, BOP questions are now justiciable. It would appear that in this case the WTO took the expert advice of the IMF but did not follow its example. Perhaps if the Panel had asked the IMF, drawing from its experience, whether questions related to BOP are properly justiciable or best dealt with in a political setting in the first instance, it may well have obtained a different response.