US, EC, Canada resist negotiations on BOP provisions

The major developed countries have opposed negotiations in the WTO to resolve a legal conundrum that could hinder developing countries from imposing import controls to safeguard their balance-of-payments position.

by Chakravarthi Raghavan

GENEVA: The United States, supported with some nuances by Canada, the EC and Japan, has opposed negotiations on the implementation issues relating to Article XVIII - on balance-of-payments (BOP) provisions and government assistance to economic development - of GATT 1994.

These two issues were referred to the WTO’s BOP Committee in terms of the Doha Ministerial Declaration and the commitment to address them through negotiations as part of the Doha work programme and the single undertaking.

The first issue relates to the jurisdiction for judging the overall justification of BOP measures taken under Article XVIII:B, namely, that only the BOP Committee shall have the authority to examine the overall justification of BOP measures. The BOP Committee was asked to look into the question and report to the WTO General Council.

The second issue referred to the BOP Committee was that a complete review of Article XVIII (Government Assistance to Economic Development) shall be undertaken with a view to ensuring that it subserves the original objective of facilitating the progressive development of economies in developing countries and allowing them to implement programmes and policies of economic development designed to raise the general standard of living of their people. The BOP Committee was asked to look into this and report to the Committee on Trade and Development.

The Doha Declaration (paragraph 12) said that where the work programme had set a specific mandate, the implementation issue concerned is to be dealt with as part of that mandate, and all other outstanding implementation issues are to be addressed as a matter of priority by the relevant WTO bodies, which shall report to the Trade Negotiations Committee by the end of 2002.

Question of jurisdiction

With regard to the jurisdiction for judging the justification for invoking the BOP provisions, while Article XVIII:B has vested this role in the BOP Committee, the WTO Appellate Body, in a dispute raised by the United States against India, ruled that in a dispute, a dispute settlement panel could consider the  justification.

The issue was then raised by developing countries as part of the range of implementation issues.

At the BOP Committee meeting in February, India had made a statement arguing that the BOP Committee alone should decide on the justification of BOP measures and that dispute settlement panels and the Appellate Body should only be able to rule on the application of such measures.

The BOP Committee meeting on 8 April saw the US and the other Quad members (the EC, Canada and Japan) more or less acting in tandem to oppose such a consideration. The discussion will be continued at the next meeting in June.

At the 8 April meeting, the US said that there had been an impasse on this implementation issue in the run-up to Doha and that the Ministers at Doha had not provided any mandate to negotiate on this, and hence it could not be tackled. As far as the US was concerned, it was satisfied with the present situation and the ability of panels and the Appellate Body to go into the adequacy claim and judge the issue. This type of “quality control” was needed, otherwise the BOP provisions would be used to get out of WTO obligations.

Brazil said that all implementation issues were subject to negotiations in terms of the Doha Declaration and work programme.

Canada said it was very uncomfortable with the two issues. The issue of the jurisdiction of the BOP Committee involved “serious system implications”. In Canada’s view, the BOP provisions functioned quite well and did not need to be fixed.

The EC was also sceptical over the chances of resolving the issue. Panels, it said, had the ability to review BOP provisions and the question raised by India had already been solved by jurisprudence.

Japan agreed with the EC and the US.

At the meeting of the BOP Committee on 27 February, India had referred to the Doha Ministerial mandate to the Committee on these two questions and looked forward to a “constructive dialogue” during the year to enable a successful outcome to be reported to the Trade Negotiations Committee.

The proposals of India and a group of developing countries in 1999 were already before the BOP Committee, and had been the subject of some formal and informal discussions already.

The provisions of Article XVIII:B of GATT and the 1994 Understanding on the Balance-of-Payments Provisions of GATT 1994, India said, were premised on the recognition that Member countries whose economy could only support low standards of living and which were in the early stages of development tend to experience BOP difficulties arising mainly from efforts to expand their internal markets as well as from the instability in their terms of trade when they are in the rapid process of development.

Thus, the provisions of the Article recognized the tendency of the development process to generate BOP difficulties, as well as the need to safeguard the external position of developing countries and to ensure a level of reserves adequate for implementation of programmes of economic development through control of the general level of imports over a period of time as the progress of development programmes creates new demands. 

The provisions of Article XVIII:B and the associated 1994 Understanding were intended to authorize protective or other measures affecting imports, including quantitative restrictions, for BOP purposes in a manner which took full account of the continued high level of demand for imports likely to be generated by programmes of economic development of developing countries.

The criteria set under Article XVIII.9 were intended to differ from those applied to developed-country Members under Article XII.2. 

However, the rulings and recommendations of the panel and the Appellate Body that were adopted by the Dispute Settlement Body (in the case brought against India by the US) involving BOP measures taken under Article XVIII:B, would appear to have made it extremely difficult for developing-country Members to take recourse to Article XVIII:B, besides vitiating the differences in the provisions intended through Articles XII and XVIII:B for developed- and developing-country Members respectively.

Another set of issues arising from the panel/Appellate Body decisions related to the respective competence of political and judicial organs of the WTO in all matters relating to import restrictions maintained under Article XVIII:B.  The provisions under the WTO agreements were intended to provide that only matters arising from the application of restrictive import measures, and not those arising from the overall justification of those measures, could be referred to panels, and that the dispute settlement process could not be invoked to modify any of the rights accorded to developing-country Members under Article XVIII:B, including procedural rights.

Yet, the judicial bodies in this dispute had made important rulings on the relationship between the judicial and political organs of the WTO in the area of BOP measures and, by implication, also in the area of regional trade agreements (which is governed by provisions similar to those on BOP measures).

The panel and the Appellate Body had ruled that the Dispute Settlement Understanding (DSU) could be invoked with respect to any matters relating to BOP restrictions - not only with regard to matters arising from the application of individual BOP measures but also with regard to overall justification of the BOP measures.

The effect of the ruling also was that though the provisions of Article XVIII.12 of GATT 1994 and paragraph 13 of the Understanding on BOP Provisions enabled the General Council to decide that BOP restrictions found to be inconsistent be removed within a “specified period” and to formally approve a time-schedule for the removal of restrictions, these need not be taken into account in the dispute settlement proceedings.

In India’s view, both on the issue of BOP justification under Article XVIII:B as well as on the consistency of regional trade agreements with Article XXIV, there were strong grounds to reinforce the view, on the basis of the relevant texts as well as GATT practice, that the judicial bodies would look into matters arising from the “application of” restrictive import measures taken for BOP purposes (or matters arising from the application of provisions of Article XXIV, as the case may be), and that they would not go into the overall justification of BOP measures (or consistency of a regional trade agreement with Article XXIV).

In the practice under GATT 1947, in the only case in which a panel was asked to review the BOP justification of a measure, the panel did not itself assess the external financial position of the country concerned but based itself on the decision that the GATT Contracting Parties, acting jointly, had already taken on this matter on the basis of a determination by the IMF. The panel limited its examination to the GATT-consistency of the individual measures imposed for BOP reasons.

Also, two panels that were asked to review the consistency of regional trade agreements notified under Article XXIV both refused to do so. Throughout the history of GATT 1947, not a single panel had decided to determine the BOP justification of measures notified under Articles XII and XVIII:B or the consistency of a regional trade agreement with Article XXIV.

The consistent practice was for the Contracting Parties, acting jointly, to assign these matters to bodies composed of the representatives of Contracting Parties.

During the Uruguay Round negotiations the US had presented a broad proposal for a reform of the BOP provisions relating to surveillance of BOP measures, which included provisions explicitly providing for resolution by panels of the question of consistency of the BOP measures under review in the BOP Committee. This particular proposal was strongly opposed by the developing countries and a compromise was found, after lengthy negotiations, in the form of a footnote to the Understanding on BOP Provisions.

The text of the footnote makes three matters clear: the dispute settlement procedure may be invoked in respect of restrictions notified under Article XVIII:B; the invoking of the dispute settlement procedure must relate to “matters arising from the application of restrictive import measures taken for balance-of-payments purposes”; and such an invocation could not entail a modification of the rights and obligations under Article XVIII:B.

The reference to the “application of” measures is identical to that in the text of paragraph 12 of the Understanding on the Interpretation of Article XXIV of GATT 1994.

None of the other clauses in the WTO agreements and understandings that define the causes of action under the DSU contain a similar reference to the application of measures. 

Same issue, opposite conclusions

While the dispute settlement proceedings on India’s BOP restrictions were under way, another panel examined, at the request of India, Turkey’s restrictions on imports of textiles and clothing products introduced under a trade arrangement with the EC that Turkey described as an agreement providing for the completion of a customs union. Turkey claimed that only the Committee on Regional Trade Agreements (CRTA) was competent to examine the matter.

That panel said it understood from the wording of paragraph 12 of the Understanding on Article XXIV that panels had jurisdiction to examine “any matters ‘arising from’ the application of those provisions of Article XXIV.” In that panel’s view, a panel could examine the WTO-compatibility of one or several measures “arising from” Article XXIV-types of agreement. This was also the position of the US as a third party.

On the question of the panel’s remit to examine the regional trade agreement underlying a measure taken under it, the panel noted that the WTO had established a Committee on Regional Trade Agreements and this committee was to assess the GATT/WTO-compatibility of regional trade agreements, a very complex undertaking, from the economic, legal and political perspectives of different Members. In that panel’s view, the issue of the GATT/WTO-compatibility of a customs union was generally a matter for the CRTA since it involved “a broad multilateral assessment of any such customs union, i.e., a matter which concerns the WTO membership as a whole.”

The panel hearing the Turkey dispute thus interpreted the terms “any matters arising from” (in the Understanding) as referring to specific measures taken in connection with the formation of an Article XXIV agreement, and ruled that the overall justification of that agreement was a matter to be generally left by panels to the CRTA.

However, the panel that examined India’s BOP-related quantitative restrictions specifically rejected the contention that the terms “any matters arising from” in the Understanding on Article XXIV had this implication. It ruled that this phrase plainly meant “the implementation of the provisions of Article XXIV ...” and did not allow for a distinction as proposed by India.

Thus it was that two concurrent WTO panels reached opposite conclusions on the same fundamental issue.

In this view, India argued that it was for the WTO membership to resolve this contrariness and to re-emphasize that the existing provisions provide that only the BOP Committee and the General Council have the authority to examine the overall justification of BOP measures. (SUNS5096)                          

From Third World Economics No. 278 (1-15 April 2002)