General Agreement on Tariffs and Trade 1994

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XVI. Article XIV 

A. Text of Article XIV

Article XIV*: Exceptions to the Rule of Non-discrimination

1.   A contracting party which applies restrictions under Article XII or under Section B of Article XVIII may, in the application of such restrictions, deviate from the provisions of Article XIII in a manner having equivalent effect to restrictions on payments and transfers for current international transactions which that contracting party may at that time apply under Article VIII or XIV of the Articles of Agreement of the International Monetary Fund, or under analogous provisions of a special exchange agreement entered into pursuant to paragraph 6 of Article XV.^*

 

2.   A contracting party which is applying import restrictions under Article XII or under Section B of Article XVIII may, with the consent of the CONTRACTING PARTIES, temporarily deviate from the provisions of Article XIII in respect of a small part of its external trade where the benefits to the contracting party or contracting parties concerned substantially outweigh any injury which may result to the trade of other contracting parties.*

 

3.   The provisions of Article XIII shall not preclude a group of territories having a common quota in the International Monetary Fund from applying against imports from other countries, but not among themselves, restrictions in accordance with the provisions of Article XII or of Section B of Article XVIII on condition that such restrictions are in all other respects consistent with the provisions of Article XIII.

 

4.   A contracting party applying import restrictions under Article XII or under Section B of Article XVIII shall not be precluded by Articles XI to XV or Section B of Article XVIII of this Agreement from applying measures to direct its exports in such a manner as to increase its earnings of currencies which it can use without deviation from the provisions of Article XIII.

 

5.   A contracting party shall not be precluded by Articles XI to XV, inclusive, or by Section B of Article XVIII, of this Agreement from applying quantitative restrictions:

 

(a)   having equivalent effect to exchange restrictions authorized under Section 3 (b) of Article VII of the Articles of Agreement of the International Monetary Fund, or

 

(b)   under the preferential arrangements provided for in Annex A of this Agreement, pending the outcome of the negotiations referred to therein.

B. Text of Notes Ad Article XIV

Ad Article XIV: Paragraph 1

   The provisions of this paragraph shall not be so construed as to preclude full consideration by the CONTRACTING PARTIES, in the consultations provided for in paragraph 4 of Article XII and in paragraph 12 of Article XVIII, of the nature, effects and reasons for discrimination in the field of import restrictions.

Paragraph 2

   One of the situations contemplated in paragraph 2 is that of a contracting party holding balances acquired as a result of current transactions which it finds itself unable to use without a measure of discrimination.

C. Interpretation and Application of Article XIV

692.   Paragraph 3 of the IMF–WTO Agreement referred to in paragraph 694 below requires the IMF to inform the WTO regarding any IMF decisions authorizing exchange restrictions, discriminatory currency arrangements or multiple currency practices pursuant to Articles VI or VIII of the IMF Articles of Agreement. Communications from the IMF to this effect are circulated in the WT/TF/IMF series.

693.   See GATT Analytical Index.

 

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XVII. Article XV  

A. Text of Article XV

Article XV: Exchange Arrangements

1.   The CONTRACTING PARTIES shall seek co-operation with the International Monetary Fund to the end that the CONTRACTING PARTIES and the Fund may pursue a co-ordinated policy with regard to exchange questions within the jurisdiction of the Fund and questions of quantitative restrictions and other trade measures within the jurisdiction of the CONTRACTING PARTIES.

 

2.   In all cases in which the CONTRACTING PARTIES are called upon to consider or deal with problems concerning monetary reserves, balances of payments or foreign exchange arrangements, they shall consult fully with the International Monetary Fund. In such consultations, the CONTRACTING PARTIES shall accept all findings of statistical and other facts presented by the Fund relating to foreign exchange, monetary reserves and balances of payments, and shall accept the determination of the Fund as to whether action by a contracting party in exchange matters is in accordance with the Articles of Agreement of the International Monetary Fund, or with the terms of a special exchange agreement between that contracting party and the CONTRACTING PARTIES. The CONTRACTING PARTIES in reaching their final decision in cases involving the criteria set forth in paragraph 2 (a) of Article XII or in paragraph 9 of Article XVIII, shall accept the determination of the Fund as to what constitutes a serious decline in the contracting party’s monetary reserves, a very low level of its monetary reserves or a reasonable rate of increase in its monetary reserves, and as to the financial aspects of other matters covered in consultation in such cases.

 

3.   The CONTRACTING PARTIES shall seek agreement with the Fund regarding procedures for consultation under paragraph 2 of this Article.

 

4.   Contracting parties shall not, by exchange action, frustrate* the intent of the provisions of this Agreement, nor, by trade action, the intent of the provisions of the Articles of Agreement of the International Monetary Fund.

 

5.   If the CONTRACTING PARTIES consider, at any time, that exchange restrictions on payments and transfers in connection with imports are being applied by a contracting party in a manner inconsistent with the exceptions provided for in this Agreement for quantitative restrictions, they shall report thereon to the Fund.

 

6.   Any contracting party which is not a member of the Fund shall, within a time to be determined by the CONTRACTING PARTIES after consultation with the Fund, become a member of the Fund, or, failing that, enter into a special exchange agreement with the CONTRACTING PARTIES. A contracting party which ceases to be a member of the Fund shall forthwith enter into a special exchange agreement with the CONTRACTING PARTIES. Any special exchange agreement entered into by a contracting party under this paragraph shall thereupon become part of its obligations under this Agreement.

 

7.   (a)   A special exchange agreement between a contracting party and the CONTRACTING PARTIES under paragraph 6 of this Article shall provide to the satisfaction of the CONTRACTING PARTIES that the objectives of this Agreement will not be frustrated as a result of action in exchange matters by the contracting party in question.

 

   (b)   The terms of any such agreement shall not impose obligations on the contracting party in exchange matters generally more restrictive than those imposed by the Articles of Agreement of the International Monetary Fund on members of the Fund.

 

8.   A contracting party which is not a member of the Fund shall furnish such information within the general scope of section 5 of Article VIII of the Articles of Agreement of the International Monetary Fund as the CONTRACTING PARTIES may require in order to carry out their functions under this Agreement.

 

9.   Nothing in this Agreement shall preclude:

 

(a)   the use by a contracting party of exchange controls or exchange restrictions in accordance with the Articles of Agreement of the International Monetary Fund or with that contracting party’s special exchange agreement with the CONTRACTING PARTIES, or

 

(b)   the use by a contracting party of restrictions or controls in imports or exports, the sole effect of which, additional to the effects permitted under Articles XI, XII, XIII and XIV, is to make effective such exchange controls or exchange restrictions.

B. Text of Note Ad Article XV

Ad Article XV: Paragraph 4

   The word “frustrate” is intended to indicate, for example, that infringements of the letter of any Article of this Agreement by exchange action shall not be regarded as a violation of that Article if, in practice, there is no appreciable departure from the intent of the Article. Thus, a contracting party which, as part of its exchange control operated in accordance with the Articles of Agreement of the International Monetary Fund, requires payment to be received for its exports in its own currency or in the currency of one or more members of the International Monetary Fund will not thereby be deemed to contravene Article XI or Article XIII. Another example would be that of a contracting party which specifies on an import licence the country from which the goods may be imported, for the purpose not of introducing any additional element of discrimination in its import licensing system but of enforcing permissible exchange controls.

C. Interpretation and Application of Article XV

1. Article XV:1: “cooperation with the International Monetary Fund”

694.   At its meeting on the 8, 9 and 13 November 1996, the General Council approved⁽⁹⁷³⁾ an Agreement between the International Monetary Fund and the World Trade Organization. This Agreement, signed on 9 December 1996, was accompanied by a letter from the Managing Director of the IMF and an agreed commentary on provisions of the Agreement.⁽⁹⁷⁴⁾

2. Article XV:2: Consultation with the Fund

(a) Participation by the Fund in balance-of-payments consultations

695.   Paragraph 4 of the IMF–WTO Agreement referred to above provides as follows:

“The Fund agrees to participate in consultations carried out by the WTO Committee on Balance-of-Payments Restrictions on measures taken by a WTO member to safeguard its balance of payments. For these consultations, existing procedures for Fund participation shall continue and may be adapted as appropriate in accordance with paragraph 14 below.”⁽⁹⁷⁵⁾

696.   The Agreed Commentary on this provision provides:

“Comment: The consultations would take place as requested by the WTO for the operation of its rules on trade-related measures taken for balance of payments reasons. This provision makes permanent the provisional agreement contained in a December 1994 exchange of letters between the Fund and the Chairman of the GATT Committee on Balance of Payments to apply to the WTO the procedures that existed vis-à-vis the GATT and to extend such procedures to services.

 

Under existing procedures, the WTO Secretariat and the Fund’s staff coordinate so that the timing of the consultations will be suitable to the consulting Member and the institutions, with a view to ensuring that the Fund is in a position to provide the requisite information. The Fund provides to the WTO Committee on Balance-of-Payments Restrictions the most recent RED, subject to consent of the member, and supplementary background information (in cases where the RED may require updating) and a statement on the Member’s balance of payments situation and external reserve position, which are approved by the Board, normally on a lapse of time basis. The Fund’s staff receives and comments on a background document that the WTO Secretariat prepares based in part on the Article IV Consultation Report and background papers that it receives routinely from the Fund (see paragraph 12 on provision of documents). The Fund’s representative participates in the discussions and is available to answer questions raised by Committee members.”⁽⁹⁷⁶⁾

697.   See also the discussion of balance-of-payments consultations below at the end of the material on Article XVIII.

(b) Consultation with the Fund in the context of dispute settlement

698.   Paragraph 8 of the IMF–WTO Agreement referred to in paragraph 694 above provides as follows:

“Each organization may communicate its views in writing on matters of mutual interest to the other organization or any of its organs or bodies (excluding the WTO’s dispute settlement panels) and such views shall become part of the official record of such organs and bodies. The Fund shall inform in writing the relevant WTO body (including dispute settlement panels) considering exchange measures within the Fund’s jurisdiction whether such measures are consistent with the Articles of Agreement of the Fund.”⁽⁹⁷⁷⁾

699.   The Agreed Commentary on this provision provides:

“Comment: This provision allows each organization to communicate its views to any organ or body of the other organization (other than the bodies specifically excluded). While these communications may cover all matters, in practice, they are expected to be used only for purposes of communicating views on important matters of policy and/or jurisdiction. As the views communicated would be views of the organization, they would be approved by the appropriate institutional body before their transmittal. The provision also requires that such views be included in the official record of the relevant body or organ, which means they must be noted, but are not binding on the other party.

 

Also, under this provision, the Fund is required to inform a WTO body considering exchange measures within the Fund’s jurisdiction (including a dispute settlement panel) whether such measures are consistent with the Fund’s Articles as is relevant for the application of certain provisions in the related agreements (GATT Article XV and GATS Article XI; see also comment on paragraph 3 above).

 

The scope of this communication is limited to jurisdictional matters and would not include views on policy matters. As the provision of ‘information’ will implement the requirement of consultation with the Fund on consistency of exchange measures with the Fund’s Articles, these communications will have official status in the proceedings, which could mean that they will be recorded, for instance, in the reports of the panels to the Dispute Settlement Body.”⁽⁹⁷⁸⁾

700.   In the dispute on Argentina — Textiles and Footwear, Argentina asserted that a 3 per cent ad valorem statistical tax on imports was imposed for fiscal performance purposes so as to obtain IMF financing to deal with a financial crisis. In response to Argentina’s claim that the Panel had erred by failing to consult with the IMF, the Appellate Body found that while “it might perhaps have been useful for the Panel to have consulted with the IMF on the legal character of the relationship or arrangement between Argentina and the IMF in this case”, the panel did not abuse its discretion by not seeking information or an opinion from the IMF:

“The only provision of the WTO Agreement that requires consultations with the IMF is Article XV:2 of the GATT 1994. This provision requires the WTO to consult with the IMF when dealing with ‘problems concerning monetary reserves, balances of payments or foreign exchange arrangements’. However, this case does not relate to these matters… .

 

As in the WTO Agreement, there are no provisions in the Agreement Between the IMF and the WTO that require a panel to consult with the IMF in a case such as this. Under paragraph 8 of this latter Agreement, in a case involving ‘exchange measures within the Fund’s jurisdiction’, the IMF ‘shall inform in writing the relevant WTO body (including dispute settlement panels) … whether such measures are consistent with the Articles of Agreement of the Fund.’ This case does not, however, involve ‘exchange measures within the Fund’s jurisdiction’. Paragraph 8 also provides that the IMF ‘may communicate its views in writing on matters of mutual interest to the [WTO] or any of its organs or bodies (excluding the WTO’s dispute settlement panels) …’ (emphasis added). Evidently, the IMF has not been authorized to provide its views to a WTO dispute settlement panel on matters not relating to exchange measures within its jurisdiction, unless it is requested to do so by a panel under Article 13 of the DSU.”⁽⁹⁷⁹⁾

701.   The Panel in India — Quantitative Restrictions submitted questions to the IMF by a letter, “having regard to Article 13 of the DSU and to Article XV:2 of the GATT 1994.”⁽⁹⁸⁰⁾ The Panel Report records that the Panel found that “whatever the interpretation of Article XV:2 of GATT 1994, Article 13.1 of the DSU entitles the Panel to consult with the IMF in order to obtain any relevant information relating to India’s monetary reserves and balance-of-payments situation which would assist us in assessing the claims submitted to us.” The Panel took this information into account in assessing the claims before it.⁽⁹⁸¹⁾

702.   The Panel Report on India — Autos discusses the issue of consultation with the IMF in that case:

“India has also indicated that it would expect the Panel to consult with the IMF in determining India’s balance-of-payments situation as of the dates of each claimant’s request for establishment of this Panel. The Panel does not rule on whether consultation with the IMF is compulsory or not before the final factual resolution by a panel of a balance-of-payments matter, where there is conflicting evidence presented. Whatever the proper view as to this question, such a consultation could not be used as a total substitute for asserting and providing a prima facie case as to a defence under Article XVIII:B, and in the absence of any indication of how the measures might fall within the terms foreseen in that provision. It is clear that a panel’s fact finding mandate should not be utilized so as to make out a prima facie case where that is not achieved by the relevant party. At an appropriate stage in proceedings, consultation of appropriate international experts or authorities could be helpful in establishing whether one of the specific situations foreseen in Article XVIII:B applied to India’s situation. As stated by the India — Quantitative Restrictions panel, such consultation could ‘assist in assessing the claims submitted’ to the Panel. However, the arguments presented did not even lead the Panel to that point.”⁽⁹⁸²⁾

703.   The Panel in Dominican Republic — Import and Sale of Cigarettes examined, inter alia, a “foreign exchange fee” of 10 per cent ad valorem on all imports. The Dominican Republic argued that this measure was an exchange restriction justified under Article XV:9(a), and that it had been approved by the IMF as part of a stand-by arrangement with the IMF, and therefore was in accordance with the IMF Articles of Agreement. The Panel requested information from the IMF on the following two issues: “(i) how the foreign exchange fee is being implemented by the Dominican Republic; (ii) whether the foreign exchange fee as currently applied by the Dominican Republic is an ‘exchange control’ or ‘exchange restriction’ under the Articles of Agreement of the IMF.”⁽⁹⁸³⁾ The letter by the Panel to the IMF and the IMF’s communication to the Panel are both attached to the Panel Report.⁽⁹⁸⁴⁾

(c) “findings of statistical and other facts presented by the Fund”

704.   The Panel Report on India — Quantitative Restrictions records that the parties to that dispute had divergent views on the role of the IMF. The United States argued that Article XV:2 required the WTO (including panels) to consult with the IMF, and to accept as dispositive the IMF’s determinations of fact on the matters of fact specified in Article XV:2 including whether India factually met the criteria in Article XVIII:9 based on the facts of its balance-of-payments and reserve situation. India argued that Article XV:2 required the WTO to accept certain IMF determinations “in reaching their final decision”, only the WTO could take final decisions on the status of restrictions in the WTO. The Panel refrained from deciding the extent to which panels must consult with the IMF or consider IMF determinations as dispositive, and noted:

“[W]hether or not the provisions of Article XV:2 extend to panels, the Panel has the responsibility of making an objective assessment of the facts of the case and the conformity with GATT 1994, as incorporated into the WTO Agreement, of the Indian measures at issue, in accordance with Article 11 of the DSU.”⁽⁹⁸⁵⁾

705.   The Panel Report on Dominican Republic — Import and Sale of Cigarettes states that the Panel made its own factual finding regarding the nature of the 10 per cent fee imposed by the Dominican Republic, based on its examination of the measure as currently applied and its interpretation of Article XV:9(a) below at paragraph XX, and considering the IMF’s communication to the Panel:

“The Panel fully agrees with the opinion of the IMF. For the reasons set out above by the Panel and considering the opinion expressed by the IMF, the Panel finds that the foreign exchange fee measure as it is currently applied by the Dominican Republic does not constitute an ‘exchange restriction’ within the meaning of Article XV: 9(a) of the GATT 1994.”⁽⁹⁸⁶⁾

3. Article XV:6: special exchange agreements

706.   The Working Party Report on the Accession of Chinese Taipei, which is not a member of the Fund, notes that “in order to comply with GATT 1994 Article XV, Chinese Taipei had negotiated a Special Exchange Agreement.”⁽⁹⁸⁷⁾ The Protocol of Accession of Chinese Taipei provides that the Special Exchange Agreement annexed thereto forms an integral part of that Protocol.⁽⁹⁸⁸⁾

4. Article XV:9(a)

(a) “exchange controls or exchange restrictions”

707.   The Panel in Dominican Republic — Import and Sale of Cigarettes found that Article XV:9(a) is an exception or an affirmative defence, and therefore the party invoking this exception “bears the burden to establish: (i) that the foreign exchange fee measure is an ‘exchange control or exchange restriction’ within the meaning of Article XV:9(a); and (ii) that the measure is ‘in accordance with’ the Articles of Agreement of the International Monetary Fund”, as required by Article XV:9(a).⁽⁹⁸⁹⁾

708.   The same Panel took note of a 1960 Decision of the Executive Directors of the Fund that the criterion for determining whether a measure is an “exchange restriction” is “whether it involves a direct governmental limitation on the availability or use of exchange as such”, and decided to apply this criterion to the measure before it.⁽⁹⁹⁰⁾ Interpreting this criterion, the Panel found:

“[T]he ordinary meaning of ‘direct limitation on availability or use of exchange … as such’ means a limitation directly on the use of exchange itself, which means the use of exchange for all purposes. It cannot be interpreted in a way so as to permit the restriction on the use of exchanges that only affects importation. To conclude otherwise would logically lead to the situation whereby any WTO Member could easily circumvent obligations under Article II:1(b) by imposing a foreign currency fee or charge on imports at the customs and then conveniently characterize it as an ‘exchange restriction’. Such types of measures would seriously discriminate against imports while not necessarily being effective in achieving the legitimate goals under the Articles of Agreement of the IMF… . because the fee as currently applied is imposed only on foreign exchange transactions that relate to the importation of goods, and not on other types of transactions, it is not ‘a direct limitation on the availability or use of exchange as such.’”⁽⁹⁹¹⁾

(b) “in accordance with the Articles of Agreement of the International Monetary Fund”

709.   Paragraph 3 of the IMF–WTO Agreement referred to in paragraph 694 above provides regarding IMF decisions authorizing exchange restrictions, discriminatory currency arrangements or multiple currency practices pursuant to Articles VI or VIII of the IMF Articles of Agreement:

“The Fund shall inform the WTO of any decisions approving restrictions on the making of payments or transfers for current international transactions, decisions approving discriminatory currency arrangements or multiple currency practices, and decisions requesting a Fund member to exercise controls to prevent a large or sustained outflow of capital.”⁽⁹⁹²⁾

710.   The Agreed Commentary on this provision provides as follows:

“Comment: This information on Fund decisions is relevant to the implementation of GATT and GATS because of certain consequences under these Agreements when a measure is consistent with the Fund’s Articles (Article XV of GATT 1994 and Article XI of the GATS). Additionally, under the GATS, members are allowed to impose controls on capital transactions related to their scheduled commitments under certain circumstances, including if such controls are imposed at the request of the Fund. In practice, the Fund’s authority to request capital controls (Article VI, Section 1(a) of the Fund’s Articles) has never been used.

 

Non-approval of exchange measures that constitute restrictions under the Fund’s Articles (and may be subject to consultation on their trade implications under WTO balance-of-payments provisions or action under WTO dispute settlement) would not be separately notified to the WTO. Information on these measures, however, is contained in staff reports on Article IV Consultations, which the WTO Secretariat will receive (see paragraph 11); additionally, the Fund’s staff would be ready to respond to the Secretariat’s requests for clarifications on their status.”⁽⁹⁹³⁾

711.   Communications from the IMF pursuant to Paragraph 3 of the IMF–WTO Agreement are circulated in the WT/TF/IMF series.⁽⁹⁹⁴⁾

712.   The Panel Report on Dominican Republic — Import and Sale of Cigarettes notes the Panel’s agreement with the IMF’s statement that because the measure at issue did not constitute an exchange restriction, “the issue of its consistency or inconsistency with the Fund Articles … does not arise”. The Panel also found that an IMF decision cited by the Dominican Republic did not constitute a legal basis for the application of the foreign exchange fee measure, and that the Dominican Republic had not demonstrated that this fee was applied “in accordance with” the IMF Articles of Agreement.⁽⁹⁹⁵⁾

5. GATT practice

713.   See GATT Analytical Index.

 

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XVIII. Article XVI   

A. Text of Article XVI

Article XVI*: Subsidies

Section A — Subsidies in General

1.   If any contracting party grants or maintains any subsidy, including any form of income or price support, which operates directly or indirectly to increase exports of any product from, or to reduce imports of any product into, its territory, it shall notify the CONTRACTING PARTIES in writing of the extent and nature of the subsidization, of the estimated effect of the subsidization on the quantity of the affected product or products imported into or exported from its territory and of the circumstances making the subsidization necessary. In any case in which it is determined that serious prejudice to the interests of any other contracting party is caused or threatened by any such subsidization, the contracting party granting the subsidy shall, upon request, discuss with the other contracting party or parties concerned, or with the CONTRACTING PARTIES, the possibility of limiting the subsidization.

Section B — Additional Provisions on Export Subsidies*

2.   The contracting parties recognize that the granting by a contracting party of a subsidy on the export of any product may have harmful effects for other contracting parties, both importing and exporting, may cause undue disturbance to their normal commercial interests, and may hinder the achievement of the objectives of this Agreement.

 

3.   Accordingly, contracting parties should seek to avoid the use of subsidies on the export of primary products. If, however, a contracting party grants directly or indirectly any form of subsidy which operates to increase the export of any primary product from its territory, such subsidy shall not be applied in a manner which results in that contracting party having more than an equitable share of world export trade in that product, account being taken of the shares of the contracting parties in such trade in the product during a previous representative period, and any special factors which may have affected or may be affecting such trade in the product.*

 

4.   Further, as from 1 January 1958 or the earliest practicable date thereafter, contracting parties shall cease to grant either directly or indirectly any form of subsidy on the export of any product other than a primary product which subsidy results in the sale of such product for export at a price lower than the comparable price charged for the like product to buyers in the domestic market. Until 31 December 1957 no contracting party shall extend the scope of any such subsidization beyond that existing on 1 January 1955 by the introduction of new, or the extension of existing, subsidies.*

 

5.   The CONTRACTING PARTIES shall review the operation of the provisions of this Article from time to time with a view to examining its effectiveness, in the light of actual experience, in promoting the objectives of this Agreement and avoiding subsidization seriously prejudicial to the trade or interests of contracting parties.

B. Text of Notes Ad Article XVI

Ad Article XVI

   The exemption of an exported product from duties or taxes borne by the like product when destined for domestic consumption, or the remission of such duties or taxes in amounts not in excess of those which have accrued, shall not be deemed to be a subsidy.

Section B

1.   Nothing in Section B shall preclude the use by a contracting party of multiple rates of exchange in accordance with the Articles of Agreement of the International Monetary Fund.

 

2.   For the purposes of Section B, a “primary product” is understood to be any product of farm, forest or fishery, or any mineral, in its natural form or which has undergone such processing as is customarily required to prepare it for marketing in substantial volume in international trade.

Paragraph 3

1.   The fact that a contracting party has not exported the product in question during the previous representative period would not in itself preclude that contracting party from establishing its right to obtain a share of the trade in the product concerned.

 

2.   A system for the stabilization of the domestic price or of the return to domestic producers of a primary product independently of the movements of export prices, which results at times in the sale of the product for export at a price lower than the comparable price charged for the like product to buyers in the domestic market, shall be considered not to involve a subsidy on exports within the meaning of Paragraph 3 if the CONTRACTING PARTIES determine that:

 

(a)   the system has also resulted, or is so designed as to result, in the sale of the product for export at a price higher than the comparable price charged for the like product to buyers in the domestic market; and

 

(b)   the system is so operated, or is designed so to operate, either because of the effective regulation of production or otherwise, as not to stimulate exports unduly or otherwise seriously to prejudice the interests of other contracting parties.

 

Notwithstanding such determination by the CONTRACTING PARTIES, operations under such a system shall be subject to the provisions of paragraph 3 where they are wholly or partly financed out of government funds in addition to the funds collected from producers in respect of the product concerned.

Paragraph 4

   The intention of paragraph 4 is that the contracting parties should seek before the end of 1957to reach agreement to abolish all remaining subsidies as from 1 January 1958; or, failing this, to reach agreement to extend the application of the standstill until the earliest date thereafter by which they can expect to reach such agreement.

C. Interpretation and Application of Article XVI

1. Article XVI:1

714.   The Panel in US — Upland Cotton found that because the term “serious prejudice” is used in Articles 5(c) and 6.3(c) of the SCM Agreement “in the same sense” as in Article XVI:1 of GATT 1994, its findings of “serious prejudice” under SCM Articles 5(c)/6.3(c) would also be conclusive for a finding of “serious prejudice” under GATT Article XVI:1:

“There is an explicit textual linkage between Article 6.3(d) and Article 5(c) of the SCM Agreement: the chapeau of Article 6.3 states that ‘[s]erious prejudice in the sense of paragraph (c) of Article 5 may arise where one of the following [including the elements in Article 6.3(d)] apply …’.

 

Following that cross-reference to Article 5(c), we see that footnote 13 to Article 5(c) explicitly refers to Article XVI:1 of the GATT 1994. It states: ‘The term “serious prejudice to the interests of another Member” is used in this Agreement in the same sense as it is used in paragraph 1 of Article XVI of GATT 1994, and includes threat of serious prejudice.’

 

As the term ‘serious prejudice’ in both provisions of the two agreements is used ‘in the same sense’, our findings of ‘serious prejudice’ under Articles 5(c)/6.3(c) of the SCM Agreement would also be conclusive for a finding of ‘serious prejudice’ under Article XVI:1 of the GATT 1994. That is, if the terms ‘serious prejudice’ are used ‘in the same sense’ in the two provisions, a finding of ‘serious prejudice’ under Article 5(c) must necessarily also constitute a finding of ‘serious prejudice’ also for the purposes of Article XVI:1. In addition, the remedies available under Part III of the SCM Agreement are at least as effective as those that would be available under Article 19.1 of the DSU in respect of an infringement of Article XVI:1 of the GATT 1994.”⁽⁹⁹⁶⁾

2. Article XVI:3

715.   The Panel in US — Upland Cotton found that “the text of Article XVI:3 itself indicates that the provision is limited to ‘export subsidies’ and does not address rights and obligations of Members relating to other types of subsidies”⁽⁹⁹⁷⁾ and that it did “not believe that it is appropriate to apply a separate or different definition of ‘export subsidies’ under Article XVI:3 than that which is now applicable for the purposes of Articles 3.3, 8, 9, 10 and 1(e) of the Agreement on Agriculture and Article 3.1(a) of the SCM Agreement.”⁽⁹⁹⁸⁾ Based on the ordinary meaning of the text of Article XVI:3 read in its context and in light of the object and purpose of the Agreement on Agriculture and the SCM Agreement, as confirmed by the drafting history of the Tokyo Round Subsidies Code, the Panel found that “Article XVI:3 applies only to export subsidies as that term is now defined in the Agreement on Agriculture and the SCM Agreement”.⁽⁹⁹⁹⁾

3. Article XVI:4

716.   In US — FSC, the Appellate Body discussed the relationship between Article XVI:4 of GATT 1994 and the SCM Agreement in interpreting Article 3.1(a) of the SCM Agreement. See the Chapter on the SCM Agreement.

4. Agreement on Agriculture

717.   See the Chapter on the Agreement on Agriculture. The Panel in US — Upland Cotton noted as follows regarding the relationship between Article XVI, the SCM Agreement and the Agreement on Agriculture:

“ … Article 21.1 of the Agreement on Agriculture stipulates: ‘The provisions of GATT 1994 and of other Multilateral Trade Agreements in Annex 1A of the WTO Agreement shall apply subject to the provisions of [the Agreement on Agriculture].’ Accordingly, the provisions of the SCM Agreement and the GATT 1994 apply subject to the provisions of the Agreement on Agriculture. In the event of a conflict between the provisions of the Agreement on Agriculture and a provision of the GATT 1994 or another covered agreement pertaining to multilateral trade in goods in Annex 1A of the WTO Agreement, the rights and obligations in the Agreement on Agriculture would prevail to the extent of that conflict.”⁽¹⁰⁰⁰⁾

5. SCM Agreement

718.   See the Chapter on the SCM Agreement.

6. GATT practice

719.   For GATT practice on Article XVI.

 

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XIX. Article XVII  

A. Text of Article XVII

Article XVII: State Trading Enterprises

1*  (a)   Each contracting party undertakes that if it establishes or maintains a State enterprise, wherever located, or grants to any enterprise, formally or in effect, exclusive or special privileges,* such enterprise shall, in its purchases or sales involving either imports or exports, act in a manner consistent with the general principles of nondiscriminatory treatment prescribed in this Agreement for governmental measures affecting imports and exports by private traders.

 

    (b)   The provisions of subparagraph (a) of this paragraph shall be understood to require that such enterprises shall, having due regard to the other provisions of this Agreement, make any such purchases or sales solely in accordance with commercial considerations,* including price, quality, availability, marketability, transportation and other conditions of purchase or sale, and shall afford the enterprises of the other contracting parties adequate opportunity, in accordance with customary business practice, to compete for participation in such purchases or sales.

 

   (c)   No contracting party shall prevent any enterprise (whether or not an enterprise described in subparagraph (a) of this paragraph) under its jurisdiction from acting in accordance with the principles of subparagraphs (a) and (b) of this paragraph.

 

2.   The provisions of paragraph 1 of this Article shall not apply to imports of products for immediate or ultimate consumption in governmental use and not otherwise for resale or use in the production of goods* for sale. With respect to such imports, each contracting party shall accord to the trade of the other contracting parties fair and equitable treatment.

 

3.   The contracting parties recognize that their enterprises of the kind described in paragraph 1 (a) of this article might be operated so as to create serious obstacles to trade; thus negotiations on a reciprocal and mutually advantageous basis designed to limit or reduce such obstacles are of importance to the expansion of international trade.*

 

4.   (a)   Contracting parties shall notify the CONTRACTING PARTIES of the products which are imported into or exported from their territories by enterprises of the kind described in paragraph 1 (a) of this article.

 

    (b)   A contracting party establishing, maintaining or authorizing an import monopoly of a product, which is not the subject of a concession under Article II, shall, on the request of another contracting party having a substantial trade in the product concerned, inform the CONTRACTING PARTIES of the import mark-up* on the product during a recent representative period, or when it is not possible to do so, of the price charged on the resale of the product.

 

    (c)   The CONTRACTING PARTIES may, at the request of a contracting party which has reason to believe that its interests under this Agreement are being adversely affected by the operations of an enterprise of the kind described in paragraph 1 (a), request the contracting party establishing, maintaining or authorizing such enterprise to supply information about its operations related to the carrying out of the provisions of this Agreement.

 

(d)   The provisions of this paragraph shall not require any contracting party to disclose confidential information which would impede law enforcement or otherwise be contrary to the public interest or would prejudice the legitimate commercial interests of particular enterprises.

B. Text of Notes Ad Article XVII

Ad Article XVII: Paragraph 1

   The operations of Marketing Boards, which are established by contracting parties and are engaged in purchasing or selling, are subject to the provisions of sub-paragraphs (a) and (b).

 

   The activities of Marketing Boards which are established by contracting parties and which do not purchase or sell but lay down regulations covering private trade are governed by the relevant Articles of this Agreement.

 

   The charging by a state enterprise of different prices for its sales of a product in different markets is not precluded by the provisions of this Article, provided that such different prices are charged for commercial reasons, to meet conditions of supply and demand in export markets.

Paragraph 1 (a)

   Governmental measures imposed to ensure standards of quality and efficiency in the operation of external trade, or privileges granted for the exploitation of national natural resources but which do not empower the government to exercise control over the trading activities of the enterprise in question, do not constitute “exclusive or special privileges”.

Paragraph 1(b)

   A country receiving a “tied loan” is free to take this loan into account as a “commercial consideration” when purchasing requirements abroad.

Paragraph 2

   The term “goods” is limited to products as understood in commercial practice, and is not intended to include the purchase or sale of services.

Paragraph 3

   Negotiations which contracting parties agree to conduct under this paragraph may be directed towards the reduction of duties and other charges on imports and exports or towards the conclusion of any other mutually satisfactory arrangement consistent with the provisions of this Agreement. (See paragraph 4 of Article II and the note to that paragraph.)

Paragraph 4 (b)

   The term “import mark-up” in this paragraph shall represent the margin by which the price charged by the import monopoly for the imported product (exclusive of internal taxes within the purview of Article III, transportation, distribution, and other expenses incident to the purchase, sale or further processing, and a reasonable margin of profit) exceeds the landed cost.

C. Understanding on the Interpretation of Article XVII of the General Agreement on Tariffs and Trade 1994

   Members,

 

   Noting that Article XVII provides for obligations on Members in respect of the activities of the state trading enterprises referred to in paragraph 1 of Article XVII, which are required to be consistent with the general principles of non-discriminatory treatment prescribed in GATT 1994 for governmental measures affecting imports or exports by private traders;

 

   Noting further that Members are subject to their GATT 1994 obligations in respect of those governmental measures affecting state trading enterprises;

 

   Recognizing that this Understanding is without prejudice to the substantive disciplines prescribed in Article XVII;

 

Hereby agree as follows:

 

1.   In order to ensure the transparency of the activities of state trading enterprises, Members shall notify such enterprises to the Council for Trade in Goods, for review by the working party to be set up under paragraph 5, in accordance with the following working definition:

 

   “Governmental and non-governmental enterprises, including marketing boards, which have been granted exclusive or special rights or privileges, including statutory or constitutional powers, in the exercise of which they influence through their purchases or sales the level or direction of imports or exports.”

 

   This notification requirement does not apply to imports of products for immediate or ultimate consumption in governmental use or in use by an enterprise as specified above and not otherwise for resale or use in the production of goods for sale.

 

2.   Each Member shall conduct a review of its policy with regard to the submission of notifications on state trading enterprises to the Council for Trade in Goods, taking account of the provisions of this Understanding. In carrying out such a review, each Member should have regard to the need to ensure the maximum transparency possible in its notifications so as to permit a clear appreciation of the manner of operation of the enterprises notified and the effect of their operations on international trade.

 

3.   Notifications shall be made in accordance with the questionnaire on state trading adopted on 24 May 1960 (BISD 9S/184–185), it being understood that Members shall notify the enterprises referred to in paragraph 1 whether or not imports or exports have in fact taken place.

 

4.   Any Member which has reason to believe that another Member has not adequately met its notification obligation may raise the matter with the Member concerned. If the matter is not satisfactorily resolved it may make a counter-notification to the Council for Trade in Goods, for consideration by the working party set up under paragraph 5, simultaneously informing the Member concerned.

 

5.   A working party shall be set up, on behalf of the Council for Trade in Goods, to review notifications and counter-notifications. In the light of this review and without prejudice to paragraph 4(c) of Article XVII, the Council for Trade in Goods may make recommendations with regard to the adequacy of notifications and the need for further information. The working party shall also review, in the light of the notifications received, the adequacy of the above-mentioned questionnaire on state trading and the coverage of state trading enterprises notified under paragraph 1. It shall also develop an illustrative list showing the kinds of relationships between governments and enterprises, and the kinds of activities, engaged in by these enterprises, which may be relevant for the purposes of Article XVII. It is understood that the Secretariat will provide a general background paper for the working party on the operations of state trading enterprises as they relate to international trade. Membership of the working party shall be open to all Members indicating their wish to serve on it. It shall meet within a year of the date of entry into force of the WTO Agreement and thereafter at least once a year. It shall report annually to the Council for Trade in Goods.

 

(footnote original) 1 The activities of this working party shall be coordinated with those of the working group provided for in Section III of the Ministerial Decision on Notification Procedures adopted on 15 April 1994.

D. Interpretation and Application of Article XVII

1. General

(a) State trading enterprises

720.   Noting that the Livestock Products Marketing Organization (LPMO), Korea’s state trading agency for meat, had exclusive rights of import for its 30 per cent share of Korea’s beef import quotas, the Panel in Korea — Various Measures on Beef, in a statement not reviewed by the Appellate Body, stated:

“Based on the panel findings in the Canada — Marketing Agencies (1988) case, the Panel considers that to the extent that LPMO fully controls both the importation and distribution of its 30 per cent share of Korean beef quota, the distinction normally made in the GATT between restrictions affecting the importation of products (i.e. border measures) and restrictions affecting imported products (i.e. internal measures) loses much of its significance.”⁽¹⁰⁰¹⁾

721.   The Panel in Canada — Wheat Exports and Grain Imports found generally regarding Article XVII:

“[S]ubparagraph (a) of Article XVII:1 imposes an obligation on Members establishing or maintaining STEs… . In Article XVII:1(a), Members therefore formally guarantee, pledge, or promise that their STEs shall act in the prescribed manner. That subparagraph (a) should be understood as imposing a legal obligation on Members using STEs is also supported by another consideration. If subparagraph (a) did not impose a legal obligation on Members, Members could create and use STEs to evade disciplines imposed by the GATT 1994 on governmental measures affecting imports or exports by private traders, since Members could not be brought to task in the event that their STEs did not abide by the disciplines imposed by Article XVII:1.”⁽¹⁰⁰²⁾

722.   The Appellate Body in Canada — Wheat Exports and Grain Imports also related Article XVII to other complementary WTO obligations:

“[E]ven in 1947, the negotiators of the GATT created a number of complementary requirements to address the different ways in which STEs could be used by a contracting party to seek to circumvent its obligations under the GATT. The existence of these other provisions of the GATT 1994 also supports the view that Article XVII was never intended to be the sole source of the disciplines imposed on STEs under that Agreement. This is also consistent with the view that Article XVII:1 was intended to impose disciplines on one particular type of STE behaviour, namely discriminatory behaviour, rather than to constitute a comprehensive code of conduct for STEs. Moreover, as the Panel observed, since the conclusion of the Uruguay Round, a number of additional obligations, under different covered agreements, operate to further constrain the behaviour of STEs.”⁽¹⁰⁰³⁾

(b) Note Ad Articles XI, XII, XIII, XIV and XVIII

723.   See also the discussion at paragraphs 621–622 above concerning the Note Ad Articles XI, XII, XIII, XIV and XVIII, which clarifies that the terms “import restrictions” or “export restrictions” used in the listed provisions include “restrictions made effective through state-trading operations”.

2. Article XVII:1(a)

(a) General: State trading enterprises

724.   The Appellate Body Report on Canada — Wheat Exports and Grain Imports found regarding Article XVII:1(a)

“Subparagraph (a) of Article XVII:1 … recognizes that Members may establish or maintain State enterprises or grant exclusive or special privileges to private enterprises, but requires that, if they do so, such enterprises must, when they are involved in certain types of transactions (‘purchases or sales involving either imports or exports’), comply with a specific requirement. That requirement is to act consistently with certain principles contained in the GATT 1994 (‘general principles of nondiscriminatory treatment … for governmental measures affecting imports or exports by private traders’). Subparagraph (a) seeks to ensure that a Member cannot, through the creation or maintenance of a State enterprise or the grant of exclusive or special privileges to any enterprise, engage in or facilitate conduct that would be condemned as discriminatory under the GATT 1994 if such conduct were undertaken directly by the Member itself. In other words, subparagraph (a) is an ‘anti-circumvention’ provision.”⁽¹⁰⁰⁴⁾

(b) “general principles of non-discriminatory treatment”

725.   The Panel in Korea — Various Measures on Beef, in a finding not reviewed by the Appellate Body, described the legal status of Article XVII:1(a) in the GATT framework in the following terms:

“Article XVII.1(a) establishes the general obligation on state trading enterprises to undertake their activities in accordance with the GATT principles of nondiscrimination. The Panel considers that this general principle of non-discrimination includes at least the provisions of Articles I and III of GATT.”⁽¹⁰⁰⁵⁾

726.   In Canada — Wheat Exports and Grain Imports, the Appellate Body held that Article XVII:1(a) sets out an obligation of non-discrimination, and Article XVII:1 (b) clarifies the scope of that obligation: as discussed below, “panels must identify the differential treatment alleged to be discriminatory under subparagraph (a) in order to ensure that they are undertaking a proper inquiry under subparagraph (b).”

727.   The Appellate Body Report in that case found regarding the non-discrimination requirement in Article XVII:1(a) that “This requirement, which lies at the core of subparagraph (a), is a requirement that STEs not engage in certain types of discriminatory conduct” ⁽¹⁰⁰⁶⁾ and that “through its reference to the ‘general principles of non-discriminatory treatment prescribed in this Agreement for governmental measures affecting imports or exports by private traders’, Article XVII:1 imposes an obligation on Members not to use STEs in order to discriminate in ways that would be prohibited if undertaken directly by Members.”⁽¹⁰⁰⁷⁾ Consequently, “ … determining the consistency or inconsistency of an STE’s conduct with Article XVII:1 will involve an examination of both differential treatment and of commercial considerations.”⁽¹⁰⁰⁸⁾

(c) GATT practice

728.   With respect to GATT practice under Article XVII:1.

3. Article XVII:1(b)

(a) “the provisions of subparagraph (a) … shall be understood to require”

729.   The Appellate Body Report on Canada — Wheat Exports and Grain Imports interpreted this phrase, and Article XVII:1(b), as follows:

“This phrase makes it abundantly clear that the remainder of subparagraph (b) is dependent upon the content of subparagraph (a), and operates to clarify the scope of the requirement not to discriminate in subparagraph (a)… .

 

Subparagraph (b) also refers to ‘such enterprises’, which can mean only the STEs defined in subparagraph (a). In addition, subparagraph (b) twice refers to ‘such purchases or sales’. It is clear that the word ‘such’ in this phrase must refer to the purchases and sales identified in subparagraph (a), namely the ‘purchases or sales [of STEs] involving either imports or exports’… .”⁽¹⁰⁰⁹⁾

 

“…Subparagraph (b) sets forth two specific conditions with which an STE must comply if allegedly discriminatory conduct falling, prima facie, within the scope of subparagraph (a) is to be found consistent with Article XVII:1. Yet, in order to know whether the conditions in (b) are satisfied, a panel must know what constitutes the conduct alleged to be inconsistent with the principles of nondiscriminatory treatment in the GATT 1994. A panel will need to identify at least the differential treatment at issue. The outcome of an assessment under subparagraph (b) of whether the differential treatment is consistent with commercial considerations may depend, in part, upon whether the alleged discrimination relates to pricing, quality, or conditions of sale, and whether it is discrimination between export markets or some other form of discrimination.

 

… we are not suggesting that panels are always obliged to make specific factual and legal findings with respect to each element of a claim of discrimination under subparagraph (a) before undertaking any analysis under subparagraph (b). Rather, because a panel’s analysis and application of subparagraph (b) to the facts of the case is, like subparagraph (b) itself, dependent on the obligation set forth in subparagraph (a), panels must identify the differential treatment alleged to be discriminatory under subparagraph (a) in order to ensure that they are undertaking a proper inquiry under subparagraph (b).” ⁽¹⁰¹⁰⁾

(b) “solely in accordance with commercial considerations”

730.   In Korea — Various Measures on Beef, the Panel discussed the general character of Article XVII:1(b). See paragraph 734 above.

731.   In Canada — Wheat Exports and Grain Imports, the Appellate Body clarified the Panel’s approach to “commercial considerations”:

“[T]he Panel’s interpretation of the term ‘commercial considerations’ necessarily implies that the determination of whether or not a particular STE’s conduct is consistent with the requirements of the first clause of subparagraph (b) of Article XVII:1 must be undertaken on a case-by-case basis, and must involve a careful analysis of the relevant market(s). We see no error in the Panel’s approach; only such an analysis will reveal the type and range of considerations properly considered ‘commercial’ as regards purchases and sales made in those markets, as well as how those considerations influence the actions of participants in the market(s).

 

At the same time, our interpretation of the relationship between subparagraphs (a) and (b) of Article XVII:1 necessarily implies that the scope of the inquiry to be undertaken under subparagraph (b) must be governed by the principles of subparagraph (a). In other words, a panel inquiring whether an STE has acted solely in accordance with commercial considerations must undertake this inquiry with respect to the market(s) in which the STE is alleged to be engaging in discriminatory conduct. Subparagraph (b) does not give panels a mandate to engage in a broader inquiry into whether, in the abstract, STEs are acting ‘commercially’. The disciplines of Article XVII:1 are aimed at preventing certain types of discriminatory behaviour. We see no basis for interpreting that provision as imposing comprehensive competition-law-type obligations on STEs, as the United States would have us do.”⁽¹⁰¹¹⁾

 

“…we cannot accept that the first clause of subparagraph (b) would, as a general rule, require STEs to refrain from using the privileges and advantages that they enjoy because such use might ‘disadvantage’ private enterprises. STEs, like private enterprises, are entitled to exploit the advantages they may enjoy to their economic benefit. Article XVII:1(b) merely prohibits STEs from making purchases or sales on the basis of noncommercial considerations.”⁽¹⁰¹²⁾

(c) “adequate opportunity … to compete for participation in such purchases or sales”

732.   In Canada — Wheat Exports and Grain Imports, the Appellate Body also clarified the meaning of this phrase:

“[T]he second clause of subparagraph (b) refers to purchases and sales transactions where: (i) one of the parties involved in the transaction is an STE; and (ii) the transaction involves imports to or exports from the Member maintaining the STE. Thus, the requirement to afford an adequate opportunity to compete for participation (i.e., taking part with others) in ‘such’ purchases and sales (import or export transactions involving an STE) must refer to the opportunity to become the STE’s counterpart in the transaction, not to an opportunity to replace the STE as a participant in the transaction… . Thus, in transactions involving two parties, one of whom is an STE seller, the word ‘enterprises’ in the second clause of Article XVII:1(b) can refer only to buyers.⁽¹⁰¹³⁾

(d) GATT practice

733.   With respect to GATT practice under Article XVII:1.

4. Relationship between Article XVII:1(a) and XVII:1(b)

734.   The Panel in Korea — Various Measures on Beef, examining the conduct of the Korean state trading agency for beef imports, examined the relationship between these two paragraphs and held that a violation of either paragraph would suffice to show a violation of the other:

“[T]he terms ‘general principle of non-discrimination treatment prescribed in this Agreement’ (Art. XVII:1(a)) should be equated with ‘make any such purchases or sales solely in accordance with commercial considerations’ (Art. XVII:1(b)). The list of variables that can be used to assess whether a state-trading action is based on commercial consideration (prices, availability etc… . ) are to be used to facilitate the assessment whether the state-trading enterprise has acted in respect of the general principles of non-discrimination. A conclusion that the principle of non-discrimination was violated would suffice to prove a violation of Article XVII; similarly, a conclusion that a decision to purchase or buy was not based on ‘commercial considerations’, would also suffice to show a violation of Article XVII.”⁽¹⁰¹⁴⁾

735.   However, in Canada — Wheat Exports and Grain Imports, the Appellate Body found that Article XVII:1(a) “sets out an obligation of non-discrimination, and [Article XVII:1(b)] clarifies the scope of that obligation.” ⁽¹⁰¹⁵⁾ The Appellate Body thus reversed the Panel findings of independent breach of Article XVII:1(b), because the Panel’s failure to first identify discriminatory conduct prior to examining conformity with Article XVII:1(b) was an error of law. The Appellate Body held:

“It follows that, logically, a panel cannot assess whether particular practices of an allegedly discriminatory nature accord with commercial considerations without first identifying the key elements of the alleged discrimination. We emphasize that we are not suggesting that panels are always obliged to make specific factual and legal findings with respect to each element of a claim of discrimination under subparagraph (a) before undertaking any analysis under subparagraph (b). Rather, because a panel’s analysis and application of subparagraph (b) to the facts of the case is, like subparagraph (b) itself, dependent on the obligation set forth in subparagraph (a), panels must identify the differential treatment alleged to be discriminatory under subparagraph (a) in order to ensure that they are undertaking a proper inquiry under subparagraph (b).

 

For these reasons, we are of the view that a failure to identify any conduct alleged to constitute discrimination contrary to the general principles of the GATT 1994 for governmental measures affecting imports or exports by private traders before undertaking an analysis of the consistency of an STE’s conduct with subparagraph (b) of Article XVII:1 would constitute an error of law. Had the Panel in this case simply ignored the issue of possible discrimination within the meaning of Article XVII:1(a) and passed immediately to its analysis under subparagraph (b), we would have no difficulty — based on our analysis above of the relationship between the two provisions — concluding that the Panel erred in its interpretative approach. Yet this does not appear to us to be what the Panel did….”⁽¹⁰¹⁶⁾

5. Article XVII:4

(a) Notification requirements

736.   At its meeting of 20 February 1995, the Council for Trade in Goods decided that “all new and full notifications dealt with under Article XVII of GATT 1994 and paragraph 1 of the Understanding on the Interpretation of Article XVII of GATT 1994, should be submitted not later than 30 June in every third year after 1995 and that the updating notifications due in each of the two intervening years should be submitted not later than 30 June of the respective year.”⁽¹⁰¹⁷⁾ The Council for Trade in Goods then clarified that the deadlines for future notifications would be established by the Working Party on State Trading Enterprises itself.⁽¹⁰¹⁸⁾

737.   See paragraph 740 below regarding the questionnaire used as a basis for notifications.

(b) GATT practice

738.   On GATT practice regarding notifications of state trading.

6. Understanding on the Interpretation of Article XVII of the General Agreement on Tariffs and Trade 1994

(a) Paragraph 1

739.   With respect to the notification requirements set forth in paragraph 1 of the Understanding, see paragraph 736 above.

(b) Paragraph 3

740.   At its meeting of 21 April 1998, the Council for Trade in Goods approved a revised questionnaire to be used as a basis for notifications on state trading.⁽¹⁰¹⁹⁾

(c) Paragraph 5

(i) Working Party on State Trading Enterprises

741.   As mandated in paragraph 5, the Council for Trade in Goods established a Working Party on State Trading Enterprises at its meeting of 20 February 1995, “to carry out the tasks described in paragraph 5 of the Understanding on the Interpretation of Article XVII of GATT 1994”.⁽¹⁰²⁰⁾ The Working Party reports annually on its work.⁽¹⁰²¹⁾

742.   On 26 November 2003, the Council for Trade in Goods adopted a recommendation modifying the frequency of state trading notifications⁽¹⁰²²⁾ so that new and full notifications on state trading are now due every two years instead of every three years, but there is no requirement to update notifications in the intervening years. This new frequency of notifications was implemented for a trial phase of four years ending 30 June 2008, extended for two years, and then extended again until 30 June 2012.⁽¹⁰²³⁾

(ii) “an illustrative list”

743.   At its meeting of 15 October 1999, the Council for Trade in Goods completed the mandate of paragraph 5 by adopting an illustrative list, prepared by the Working Party, “showing the kinds of relationships between governments and enterprises, and the kinds of activities, engaged in by these enterprises, which may be relevant for the purposes of Article XVII”.⁽¹⁰²⁴⁾ The illustrative list states that “[t]his list in no way affects the rights and obligations of Members under the Understanding and under Article XVII of GATT 1994 and its Interpretive Notes.”⁽¹⁰²⁵⁾ To assist this work, the Secretariat prepared and circulated a background note by the Secretariat, entitled “Operations of State Trading Enterprises as they Relate to International Trade.”⁽¹⁰²⁶⁾

7. Relationship with other GATT provisions

(a) Article I

744.   The Panel in Korea — Various Measures on Beef touched on the relationship between Articles I and XVII. See paragraph (a) above.

(b) Article II

745.   In Korea — Various Measures on Beef, after finding that the practice of the Korean state trading agency for beef of according different treatment to grass-fed beef and grain-fed beef was inconsistent with GATT Articles II:1(a) and XI, the Panel exercised judicial economy with respect to claims concerning the consistency of that practice with Articles III:4 and XVII.⁽¹⁰²⁷⁾

746.   On GATT practice on this issue, see the GATT Analytical Index.

(c) Article III

747.   The Panel in Korea — Various Measures on Beef discussed the relationship between Articles III and XVII. See paragraph (a) above.

748.   On GATT practice on this issue, see the GATT Analytical Index.

(d) Article XI

749.   Exercising judicial economy, the Panel in Korea — Various Measures on Beef did not examine claims regarding certain practices of the Korean state trading agency for beef under Articles III:4 and XVII, after it had found a violation of Articles XI and II:1(a) with respect to that practice. See also paragraph 745 above.

750.   In Korea — Various Measures on Beef, the Panel addressed the practice of the Korean state trading agency which controlled a 30 per cent share of Korea’s import quotas for certain products. See paragraph 720 above.

751.   With respect to the Note Ad Articles XI, XII, XIII, XIV and XVIII, see paragraph 723 above.

752.   With respect to GATT practice on this issue, see the GATT Analytical Index.

8. Relationship with other WTO Agreements

(a) Agreement on Agriculture

753.   Footnote 1 to Article 4.2 of the Agreement on Agriculture sets forth that “any measures of the kind which have been required to be converted into ordinary customary duties” under that Agreement, include “quantitative import restrictions, variable import levies, minimum import prices, discretionary import licensing, non-tariff measures maintained through state-trading enterprises …”. In Korea — Various Measures on Beef, the Panel found, and the Appellate Body agreed, that Korea was in violation of Article 4.2 of the Agreement on Agriculture and Article XI of the GATT in that despite the demand for imported beef, the Korean state trading agency for beef imports suspended its tenders for beef of foreign origin, and refused to sell imported beef from its stock, during a certain period of time. See Article 4.2 of the Chapter on the Agreement on Agriculture. In this context, the Appellate Body stated:

“Since the Panel has already reached the conclusion that the above measures are inconsistent with Article XI and the Ad Note to Articles XI, XII, XIII, XIV and XVIII relating to state-trading enterprises, the same measures are necessarily inconsistent with Article 4.2 of the Agreement on Agriculture and its footnote referring to non-tariff measures maintained through state-trading enterprises.”⁽¹⁰²⁸⁾

 

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XX. Article XVIII  

A. Text of Article XVIII

Article XVIII*: Governmental Assistance to Economic Development

1.   The contracting parties recognize that the attainment of the objectives of this Agreement will be facilitated by the progressive development of their economies, particularly of those contracting parties the economies of which can only support low standards of living* and are in the early stages of development.*

 

2.   The contracting parties recognize further that it may be necessary for those contracting parties, in order to implement programmes and policies of economic development designed to raise the general standard of living of their people, to take protective or other measures affecting imports, and that such measures are justified in so far as they facilitate the attainment of the objectives of this Agreement. They agree, therefore, that those contracting parties should enjoy additional facilities to enable them (a) to maintain sufficient flexibility in their tariff structure to be able to grant the tariff protection required for the establishment of a particular industry* and (b) to apply quantitative restrictions for balance of payments purposes in a manner which takes full account of the continued high level of demand for imports likely to be generated by their programmes of economic development.

 

3.   The contracting parties recognize finally that, with those additional facilities which are provided for in Sections A and B of this Article, the provisions of this Agreement would normally be sufficient to enable contracting parties to meet the requirements of their economic development. They agree, however, that there may be circumstances where no measure consistent with those provisions is practicable to permit a contracting party in the process of economic development to grant the governmental assistance required to promote the establishment of particular industries* with a view to raising the general standard of living of its people. Special procedures are laid down in Sections C and D of this Article to deal with those cases.

 

4.   (a)   Consequently, a contracting party, the economy of which can only support low standards of living* and is in the early stages of development,* shall be free to deviate temporarily from the provisions of the other Articles of this Agreement, as provided in Sections A, B and C of this Article.

 

    (b)   A contracting party, the economy of which is in the process of development, but which does not come within the scope of subparagraph (a) above, may submit applications to the CONTRACTING PARTIES under Section D of this Article.

 

5.   The contracting parties recognize that the export earnings of contracting parties, the economies of which are of the type described in paragraph 4 (a) and (b) above and which depend on exports of a small number of primary commodities, may be seriously reduced by a decline in the sale of such commodities. Accordingly, when the exports of primary commodities by such a contracting party are seriously affected by measures taken by another contracting party, it may have resort to the consultation provisions of Article XXII of this Agreement.

 

6.   The CONTRACTING PARTIES shall review annually all measures applied pursuant to the provisions of Sections C and D of this Article.

Section A

7.   (a)   If a contracting party coming within the scope of paragraph 4 (a) of this Article considers it desirable, in order to promote the establishment of a particular industry* with a view to raising the general standard of living of its people, to modify or withdraw a concession included in the appropriate Schedule annexed to this Agreement, it shall notify the CONTRACTING PARTIES to this effect and enter into negotiations with any contracting party with which such concession was initially negotiated, and with any other contracting party determined by the CONTRACTING PARTIES to have a substantial interest therein. If agreement is reached between such contracting parties concerned, they shall be free to modify or withdraw concessions under the appropriate Schedules to this Agreement in order to give effect to such agreement, including any compensatory adjustments involved.

 

   (b)   If agreement is not reached within sixty days after the notification provided for in subparagraph (a) above, the contracting party which proposes to modify or withdraw the concession may refer the matter to the CONTRACTING PARTIES which shall promptly examine it. If they find that the contracting party which proposes to modify or withdraw the concession has made every effort to reach an agreement and that the compensatory adjustment offered by it is adequate, that contracting party shall be free to modify or withdraw the concession if, at the same time, it gives effect to the compensatory adjustment. If the CONTRACTING PARTIES do not find that the compensation offered by a contracting party proposing to modify or withdraw the concession is adequate, but find that it has made every reasonable effort to offer adequate compensation, that contracting party shall be free to proceed with such modification or withdrawal. If such action is taken, any other contracting party referred to in subparagraph (a) above shall be free to modify or withdraw substantially equivalent concessions initially negotiated with the contracting party which has taken the action.*

Section B

8.   The contracting parties recognize that contracting parties coming within the scope of paragraph 4 (a) of this Article tend, when they are in rapid process of development, to experience balance of payments difficulties arising mainly from efforts to expand their internal markets as well as from the instability in their terms of trade.

 

9.   In order to safeguard its external financial position and to ensure a level of reserves adequate for the implementation of its programme of economic development, a contracting party coming within the scope of paragraph 4 (a) of this Article may, subject to the provisions of paragraphs 10 to 12, control the general level of its imports by restricting the quantity or value of merchandise permitted to be imported; Provided that the import restrictions instituted, maintained or intensified shall not exceed those necessary:

 

(a)   to forestall the threat of, or to stop, a serious decline in its monetary reserves, or

 

(b)   in the case of a contracting party with inadequate monetary reserves, to achieve a reasonable rate of increase in its reserves.

 

Due regard shall be paid in either case to any special factors which may be affecting the reserves of the contracting party or its need for reserves, including, where special external credits or other resources are available to it, the need to provide for the appropriate use of such credits or resources.

 

10.   In applying these restrictions, the contracting party may determine their incidence on imports of different products or classes of products in such a way as to give priority to the importation of those products which are more essential in the light of its policy of economic development; Provided that the restrictions are so applied as to avoid unnecessary damage to the commercial or economic interests of any other contracting party and not to prevent unreasonably the importation of any description of goods in minimum commercial quantities the exclusion of which would impair regular channels of trade; and Provided further that the restrictions are not so applied as to prevent the importation of commercial samples or to prevent compliance with patent, trade mark, copyright or similar procedures.

 

11.   In carrying out its domestic policies, the contracting party 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. It shall progressively relax any restrictions applied under this Section as conditions improve, maintaining them only to the extent necessary under the terms of paragraph 9 of this Article and shall eliminate them when conditions no longer justify such maintenance; Provided that no contracting party shall be required to withdraw or modify restrictions on the ground that a change in its development policy would render unnecessary the restrictions which it is applying under this Section.*

 

12.   (a)   Any contracting party applying new restrictions or raising the general level of its existing restrictions by a substantial intensification of the measures applied under this Section, shall immediately after instituting or intensifying such restrictions (or, in circumstances in which prior consultation is practicable, before doing so) consult with the CONTRACTING PARTIES as to the nature of its balance of payments difficulties, alternative corrective measures which may be available, and the possible effect of the restrictions on the economies of other contracting parties.

 

     (b)   On a date to be determined by them* the CONTRACTING PARTIES shall review all restrictions still applied under this Section on that date. Beginning two years after that date, contracting parties applying restrictions under this Section shall enter into consultations of the type provided for in subparagraph (a) above with the CONTRACTING PARTIES at intervals of approximately, but not less than, two years according to a programme to be drawn up each year by the CONTRACTING PARTIES; Provided that no consultation under this subparagraph shall take place within two years after the conclusion of a consultation of a general nature under any other provision of this paragraph.

 

     (c)   (i)   If, in the course of consultations with a contracting party under subparagraph (a) or (b) of this paragraph, the CONTRACTING PARTIES find that the restrictions are not consistent with the provisions of this Section or with those of Article XIII (subject to the provisions of Article XIV), they shall indicate the nature of the inconsistency and may advise that the restrictions be suitably modified.

 

        (ii)   If, however, as a result of the consultations, the CONTRACTING PARTIES determine that the restrictions are being applied in a manner involving an inconsistency of a serious nature with the provisions of this Section or with those of Article XIII (subject to the provisions of Article XIV) and that damage to the trade of any contracting party is caused or threatened thereby, they shall so inform the contracting party applying the restrictions and shall make appropriate recommendations for securing conformity with such provisions within a specified period. If such contracting party does not comply with these recommendations within the specified period, the CONTRACTING PARTIES may release any contracting party the trade of which is adversely affected by the restrictions from such obligations under this Agreement towards the contracting party applying the restrictions as they determine to be appropriate in the circumstances.

 

     (d)   The CONTRACTING PARTIES shall invite any contracting party which is applying restrictions under this Section to enter into consultations with them at the request of any contracting party which can establish a prima facie case that the restrictions are inconsistent with the provisions of this Section or with those of Article XIII (subject to the provisions of Article XIV) and that its trade is adversely affected thereby. However, no such invitation shall be issued unless the CONTRACTING PARTIES have ascertained that direct discussions between the contracting parties concerned have not been successful. If, as a result of the consultations with the CONTRACTING PARTIES no agreement is reached and they determine that the restrictions are being applied inconsistently with such provisions, and that damage to the trade of the contracting party initiating the procedure is caused or threatened thereby, they shall recommend the withdrawal or modification of the restrictions. If the restrictions are not withdrawn or modified within such time as the CONTRACTING PARTIES may prescribe, they may release the contracting party initiating the procedure from such obligations under this Agreement towards the contracting party applying the restrictions as they determine to be appropriate in the circumstances.

 

     (e)   If a contracting party against which action has been taken in accordance with the last sentence of subparagraph (c) (ii) or (d) of this paragraph, finds that the release of obligations authorized by the CONTRACTING PARTIES adversely affects the operation of its programme and policy of economic development, it shall be free, not later than sixty days after such action is taken, to give written notice to the Executive Secretary(1) to the Contracting Parties of its intention to withdraw from this Agreement and such withdrawal shall take effect on the sixtieth day following the day on which the notice is received by him.

 

(footnote original) 1 By the Decision of 23 March 1965, the CONTRACTING PARTIES changed the title of the head of the GATT secretariat from “Executive Secretary” to “Director-General”.

 

     (f)   In proceeding under this paragraph, the CONTRACTING PARTIES shall have due regard to the factors referred to in paragraph 2 of this Article. Determinations under this paragraph shall be rendered expeditiously and, if possible, within sixty days of the initiation of the consultations.

Section C

13.   If a contracting party coming within the scope of paragraph 4 (a) of this Article finds that governmental assistance is required to promote the establishment of a particular industry* with a view to raising the general standard of living of its people, but that no measure consistent with the other provisions of this Agreement is practicable to achieve that objective, it may have recourse to the provisions and procedures set out in this Section.*

 

14.   The contracting party concerned shall notify the CONTRACTING PARTIES of the special difficulties which it meets in the achievement of the objective outlined in paragraph 13 of this Article and shall indicate the specific measure affecting imports which it proposes to introduce in order to remedy these difficulties. It shall not introduce that measure before the expiration of the time-limit laid down in paragraph 15 or 17, as the case may be, or if the measure affects imports of a product which is the subject of a concession included in the appropriate Schedule annexed to this Agreement, unless it has secured the concurrence of the CONTRACTING PARTIES in accordance with provisions of paragraph 18; Provided that, if the industry receiving assistance has already started production, the contracting party may, after informing the CONTRACTING PARTIES, take such measures as may be necessary to prevent, during that period, imports of the product or products concerned from increasing substantially above a normal level.*

 

15.   If, within thirty days of the notification of the measure, the CONTRACTING PARTIES do not request the contracting party concerned to consult with them,* that contracting party shall be free to deviate from the relevant provisions of the other Articles of this Agreement to the extent necessary to apply the proposed measure.

 

16.   If it is requested by the CONTRACTING PARTIES to do so, *the contracting party concerned shall consult with them as to the purpose of the proposed measure, as to alternative measures which may be available under this Agreement, and as to the possible effect of the measure proposed on the commercial and economic interests of other contracting parties. If, as a result of such consultation, the CONTRACTING PARTIES agree that there is no measure consistent with the other provisions of this Agreement which is practicable in order to achieve the objective outlined in paragraph 13 of this Article, and concur* in the proposed measure, the contracting party concerned shall be released from its obligations under the relevant provisions of the other Articles of this Agreement to the extent necessary to apply that measure.

 

17.   If, within ninety days after the date of the notification of the proposed measure under paragraph 14 of this Article, the CONTRACTING PARTIES have not concurred in such measure, the contracting party concerned may introduce the measure proposed after informing the CONTRACTING PARTIES.

 

18.   If the proposed measure affects a product which is the subject of a concession included in the appropriate Schedule annexed to this Agreement, the contracting party concerned shall enter into consultations with any other contracting party with which the concession was initially negotiated, and with any other contracting party determined by the CONTRACTING PARTIES to have a substantial interest therein. The CONTRACTING PARTIES shall concur* in the measure if they agree that there is no measure consistent with the other provisions of this Agreement which is practicable in order to achieve the objective set forth in paragraph 13 of this Article, and if they are satisfied:

 

(a)   that agreement has been reached with such other contracting parties as a result of the consultations referred to above, or

 

(b)   if no such agreement has been reached within sixty days after the notification provided for in paragraph 14 has been received by the CONTRACTING PARTIES, that the contracting party having recourse to this Section has made all reasonable efforts to reach an agreement and that the interests of other contracting parties are adequately safeguarded.*

 

The contracting party having recourse to this Section shall thereupon be released from its obligations under the relevant provisions of the other Articles of this Agreement to the extent necessary to permit it to apply the measure.

 

19.   If a proposed measure of the type described in paragraph 13 of this Article concerns an industry the establishment of which has in the initial period been facilitated by incidental protection afforded by restrictions imposed by the contracting party concerned for balance of payments purposes under the relevant provisions of this Agreement, that contracting party may resort to the provisions and procedures of this Section; Provided that it shall not apply the proposed measure without the concurrence* of the CONTRACTING PARTIES.*

 

20.   Nothing in the preceding paragraphs of this Section shall authorize any deviation from the provisions of Articles I, II and XIII of this Agreement. The provisos to paragraph 10 of this Article shall also be applicable to any restriction under this Section.

 

21.   At any time while a measure is being applied under paragraph 17 of this Article any contracting party substantially affected by it may suspend the application to the trade of the contracting party having recourse to this Section of such substantially equivalent concessions or other obligations under this Agreement the suspension of which the CONTRACTING PARTIES do not disapprove;* Provided that sixty days’ notice of such suspension is given to the CONTRACTING PARTIES not later than six months after the measure has been introduced or changed substantially to the detriment of the contracting party affected. Any such contracting party shall afford adequate opportunity for consultation in accordance with the provisions of Article XXII of this Agreement.

Section D

22.   A contracting party coming within the scope of subparagraph 4 (b) of this Article desiring, in the interest of the development of its economy, to introduce a measure of the type described in paragraph 13 of this Article in respect of the establishment of a particular industry* may apply to the CONTRACTING PARTIES for approval of such measure. The CONTRACTING PARTIES shall promptly consult with such contracting party and shall, in making their decision, be guided by the considerations set out in paragraph 16. If the CONTRACTING PARTIES concur* in the proposed measure the contracting party concerned shall be released from its obligations under the relevant provisions of the other Articles of this Agreement to the extent necessary to permit it to apply the measure. If the proposed measure affects a product which is the subject of a concession included in the appropriate Schedule annexed to this Agreement, the provisions of paragraph 18 shall apply.*

 

23.   Any measure applied under this Section shall comply with the provisions of paragraph 20 of this Article.

B. Text of Notes Ad Article XVIII

Ad Article XVIII

   The CONTRACTING PARTIES and the contracting parties concerned shall preserve the utmost secrecy in respect of matters arising under this Article.

Paragraphs 1 and 4

1.   When they consider whether the economy of a contracting party “can only support low standards of living”, the CONTRACTING PARTIES shall take into consideration the normal position of that economy and shall not base their determination on exceptional circumstances such as those which may result from the temporary existence of exceptionally favourable conditions for the staple export product or products of such contracting party.

 

2.   The phrase “in the early stages of development” is not meant to apply only to contracting parties which have just started their economic development, but also to contracting parties the economies of which are undergoing a process of industrialization to correct an excessive dependence on primary production.

Paragraphs 2, 3, 7, 13 and 22

   The reference to the establishment of particular industries shall apply not only to the establishment of a new industry, but also to the establishment of a new branch of production in an existing industry and to the substantial transformation of an existing industry, and to the substantial expansion of an existing industry supplying a relatively small proportion of the domestic demand. It shall also cover the reconstruction of an industry destroyed or substantially damaged as a result of hostilities or natural disasters.

Paragraph 7 (b)

   A modification or withdrawal, pursuant to paragraph 7 (b), by a contracting party, other than the applicant contracting party, referred to in paragraph 7 (a), shall be made within six months of the day on which the action is taken by the applicant contracting party, and shall become effective on the thirtieth day following the day on which such modification or withdrawal has been notified to the CONTRACTING PARTIES.

Paragraph 11

   The second sentence in paragraph 11 shall not be interpreted to mean that a contracting party is required to relax or remove restrictions if such relaxation or removal would thereupon produce conditions justifying the intensification or institution, respectively, of restrictions under paragraph 9 of Article XVIII.

Paragraph 12 (b)

   The date referred to in paragraph 12 (b) shall be the date determined by the CONTRACTING PARTIES in accordance with the provisions of paragraph 4 (b) of Article XII of this Agreement.

Paragraphs 13 and 14

   It is recognized that, before deciding on the introduction of a measure and notifying the CONTRACTING PARTIES in accordance with paragraph 14, a contracting party may need a reasonable period of time to assess the competitive position of the industry concerned.

Paragraphs 15 and 16

   It is understood that the CONTRACTING PARTIES shall invite a contracting party proposing to apply a measure under Section C to consult with them pursuant to paragraph 16 if they are requested to do so by a contracting party the trade of which would be appreciably affected by the measure in question.

Paragraphs 16, 18, 19 and 22

1.   It is understood that the CONTRACTING PARTIES may concur in a proposed measure subject to specific conditions or limitations. If the measure as applied does not conform to the terms of the concurrence it will to that extent be deemed a measure in which the CONTRACTING PARTIES have not concurred. In cases in which the CONTRACTING PARTIES have concurred in a measure for a specified period, the contracting party concerned, if it finds that the maintenance of the measure for a further period of time is required to achieve the objective for which the measure was originally taken, may apply to the CONTRACTING PARTIES for an extension of that period in accordance with the provisions and procedures of Section C or D, as the case may be.

 

2.   It is expected that the CONTRACTING PARTIES will, as a rule, refrain from concurring in a measure which is likely to cause serious prejudice to exports of a commodity on which the economy of a contracting party is largely dependent.

Paragraphs 18 and 22

   The phrase “that the interests of other contracting parties are adequately safeguarded” is meant to provide latitude sufficient to permit consideration in each case of the most appropriate method of safeguarding those interests. The appropriate method may, for instance, take the form of an additional concession to be applied by the contracting party having recourse to Section C or D during such time as the deviation from the other Articles of the Agreement would remain in force or of the temporary suspension by any other contracting party referred to in paragraph 18 of a concession substantially equivalent to the impairment due to the introduction of the measure in question. Such contracting party would have the right to safeguard its interests through such a temporary suspension of a concession; Provided that this right will not be exercised when, in the case of a measure imposed by a contracting party coming within the scope of paragraph 4 (a), the CONTRACTING PARTIES have determined that the extent of the compensatory concession proposed was adequate.

Paragraph 19

   The provisions of paragraph 19 are intended to cover the cases where an industry has been in existence beyond the “reasonable period of time” referred to in the note to paragraphs 13 and 14, and should not be so construed as to deprive a contracting party coming within the scope of paragraph 4 (a) of Article XVIII, of its right to resort to the other provisions of Section C, including paragraph 17, with regard to a newly established industry even though it has benefited from incidental protection afforded by balance of payments import restrictions.

Paragraph 21

   Any measure taken pursuant to the provisions of paragraph 21 shall be withdrawn forthwith if the action taken in accordance with paragraph 17 is withdrawn or if the CONTRACTING PARTIES concur in the measure proposed after the expiration of the ninety-day time limit specified in paragraph 17.

C. Understanding on the Balance-of-Payments Provisions of the General Agreement on Tariffs and Trade 1994

Members,

 

   Recognizing the provisions of Articles XII and XVIII:B of GATT 1994 and of the Declaration on Trade Measures Taken for Balance-of-Payments Purposes adopted on 28 November 1979 (BISD 26S/205–209, referred to in this Understanding as the “1979 Declaration”) and in order to clarify such provisions(1).

 

(footnote original) 1 Nothing in this Understanding is intended to modify the rights and obligations of Members under Articles XII or XVIII:B of GATT 1994. The provisions of Articles XXII and XXIII of GATT 1994 as elaborated and applied by the Dispute Settlement Understanding may be invoked with respect to any matters arising from the application of restrictive import measures taken for balance-of-payments purposes.

 

   Hereby agree as follows:

Application of Measures

1.   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.

 

2.   Members confirm their commitment to give preference to those measures which have the least disruptive effect on trade. Such measures (referred to in this Understanding as “price-based measures”) shall be understood to include import surcharges, import deposit requirements or other equivalent trade measures with an impact on the price of imported goods. It is understood that, notwithstanding the provisions of Article II, price-based measures taken for balance-of-payments purposes may be applied by a Member in excess of the duties inscribed in the Schedule of that Member. Furthermore, that Member shall indicate the amount by which the price-based measure exceeds the bound duty clearly and separately under the notification procedures of this Understanding.

 

3.   Members shall seek to avoid the imposition of new quantitative restrictions for balance-of-payments purposes unless, because of a critical balance-of-payments situation, price-based measures cannot arrest a sharp deterioration in the external payments position. In those cases in which a Member applies quantitative restrictions, it shall provide justification as to the reasons why price-based measures are not an adequate instrument to deal with the balance-of-payments situation. A Member maintaining quantitative restrictions shall indicate in successive consultations the progress made in significantly reducing the incidence and restrictive effect of such measures. It is understood that not more than one type of restrictive import measure taken for balance-of-payments purposes may be applied on the same product.

 

4.   Members confirm that restrictive import measures taken for balance-of-payments purposes may only be applied to control the general level of imports and may not exceed what is necessary to address the balance-of-payments situation. In order to minimize any incidental protective effects, a Member shall administer restrictions in a transparent manner. The authorities of the importing Member shall provide adequate justification as to the criteria used to determine which products are subject to restriction. As provided in paragraph 3 of Article XII and paragraph 10 of Article XVIII, Members may, in the case of certain essential products, exclude or limit the application of surcharges applied across the board or other measures applied for balance-for-payments purposes. The term “essential products” shall be understood to mean products which meet basic consumption needs or which contribute to the Member’s effort to improve its balance-of-payments situation, such as capital goods or inputs needed for production. In the administration of quantitative restrictions, a Member shall use discretionary licensing only when unavoidable and shall phase it out progressively. Appropriate justification shall be provided as to the criteria used to determine allowable import quantities or values.

Procedures for Balance-of-Payments Consultations

5.   The Committee on Balance-of-Payments Restrictions (referred to in this Understanding as the “Committee”) shall carry out consultations in order to review all restrictive import measures taken for balance-of-payments purposes. The membership of the Committee is open to all Members indicating their wish to serve on it. The Committee shall follow the procedures for consultations on balance-of-payments restrictions approved on 28 April 1970 (BISD 18S/48–53, referred to in this Understanding as “full consultation procedures”), subject to the provisions set out below.

 

6.   A Member applying new restrictions or raising the general level of its existing restrictions by a substantial intensification of the measures shall enter into consultations with the Committee within four months of the adoption of such measures. The Member adopting such measures may request that a consultation be held under paragraph 4(a) of Article XII or paragraph 12(a) of Article XVIII as appropriate. If no such request has been made, the Chairman of the Committee shall invite the Member to hold such a consultation. Factors that may be examined in the consultation would include, inter alia, the introduction of new types of restrictive measures for balance-of-payments purposes, or an increase in the level or product coverage of restrictions.

 

7.   All restrictions applied for balance-of-payments purposes shall be subject to periodic review in the Committee under paragraph 4(b) of Article XII or under paragraph 12(b) of Article XVIII, subject to the possibility of altering the periodicity of consultations in agreement with the consulting Member or pursuant to any specific review procedure that may be recommended by the General Council.

 

8.   Consultations may be held under the simplified procedures approved on 19 December 1972 (BISD 20S/ 47–49, referred to in this Understanding as “simplified consultation procedures”) in the case of least-developed country Members or in the case of developing country Members which are pursuing liberalization efforts in conformity with the schedule presented to the Committee in previous consultations. Simplified consultations procedures may also be used when the Trade Policy Review of a developing country Member is scheduled for the same calendar year as the date fixed for the consultations. In such cases the decision as to whether full consultation procedures should be used will be made on the basis of the factors enumerated in paragraph 8 of the 1979 Declaration. Except in the case of least-developed country Members, no more than two successive consultations may be held under simplified consultation procedures.

Notification and Documentation

9.   A Member shall notify to the General Council the introduction of or any changes in the application of restrictive import measures taken for balance-of-payments purposes, as well as any modifications in time-schedules for the removal of such measures as announced under paragraph 1. Significant changes shall be notified to the General Council prior to or not later than 30 days after their announcement. On a yearly basis, each Member shall make available to the Secretariat a consolidated notification, including all changes in laws, regulations, policy statements or public notices, for examination by Members. Notifications shall include full information, as far as possible, at the tariff-line level, on the type of measures applied, the criteria used for their administration, product coverage and trade flows affected.

 

10.   At the request of any Member, notifications may be reviewed by the Committee. Such reviews would be limited to the clarification of specific issues raised by a notification or examination of whether a consultation under paragraph 4(a) of Article XII or paragraph 12(a) of Article XVIII is required. Members which have reasons to believe that a restrictive import measure applied by another Member was taken for balance-of-payments purposes may bring the matter to the attention of the Committee. The Chairman of the Committee shall request information on the measure and make it available to all Members. Without prejudice to the right of any member of the Committee to seek appropriate clarifications in the course of consultations, questions may be submitted in advance for consideration by the consulting Member.

 

11.   The consulting Member shall prepare a Basic Document for the consultations which, in addition to any other information considered to be relevant, should include: (a) an overview of the balance-of-payments situation and prospects, including a consideration of the internal and external factors having a bearing on the balance-of-payments situation and the domestic policy measures taken in order to restore equilibrium on a sound and lasting basis; (b) a full description of the restrictions applied for balance-of-payments purposes, their legal basis and steps taken to reduce incidental protective effects; (c) measures taken since the last consultation to liberalize import restrictions, in the light of the conclusions of the Committee; (d) a plan for the elimination and progressive relaxation of remaining restrictions. References may be made, when relevant, to the information provided in other notifications or reports made to the WTO. Under simplified consultation procedures, the consulting Member shall submit a written statement containing essential information on the elements covered by the Basic Document.

 

12.   The Secretariat shall, with a view to facilitating the consultations in the Committee, prepare a factual background paper dealing with the different aspects of the plan for consultations. In the case of developing country Members, the Secretariat document shall include relevant background and analytical material on the incidence of the external trading environment on the balance-of-payments situation and prospects of the consulting Member. The technical assistance services of the Secretariat shall, at the request of a developing country Member, assist in preparing the documentation for the consultations.

Conclusions of Balance-of-Payments Consultations

13.   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.”

D. Interpretation and Application of Article XVIII

1. Article XVIII:B

(a) General

754.   The Panel in India — Quantitative Restrictions, in a finding not addressed by the Appellate Body, explained the function of Article XVIII:B within the GATT framework. The Panel distinguished the conditions for taking balance-of-payments measures under Article XVIII from those applicable under Article XII of GATT and considered paragraphs 2, 4(a), 8 and 11 of Article XVIII:

“It is clear from these provisions that Article XVIII, which allows developing countries to maintain, under certain conditions, temporary import restrictions for balance-of payments purposes, is premised on the assumption that it ‘may be necessary’ for them to adopt such measures in order to implement economic development programmes. It allows them to ‘deviate temporarily from the provisions of the other Articles’ of GATT 1994, as provided for in, inter alia, Section B. These provisions reflect an acknowledgement of the specific needs of developing countries in relation to measures taken for balance-of-payments purposes. Article XVIII:B of GATT 1994 thus embodies the special and differential treatment foreseen for developing countries with regard to such measures. In our analysis, we take due account of these provisions. In particular, the conditions for taking balance-of-payments measures under Article XVIII are clearly distinct from the conditions applicable to developed countries under Article XII of GATT 1994.⁽¹⁰²⁹⁾

 

We also find that while Article XVIII:2 foresees the possibility that it ‘may’ be ‘necessary’ for developing countries to take restrictions for balance-of-payments purposes, such measures might not always be required. These restrictions must be adopted within specific conditions ‘as provided in’ Section B of Article XVIII. The specific conditions to be respected for the institution and maintenance of such measures include Article XVIII:9, which specifies the circumstances under which such measures may be instituted and maintained, and Article XVIII:11 which sets out the requirements for progressive relaxation and elimination of balance-of-payments measures.”

(b) Jurisdiction of panels

755.   In India — Quantitative Restrictions, the Appellate Body reviewed the Panel’s finding that India’s import restrictions for balance-of-payments reasons were inconsistent with Article XI:1 and that India was not entitled to maintain these balance-of-payments restrictions under the terms of Note Ad Article XVIII:11. India argued that panels have no authority to examine Members’ justifications of balance-of-payments restrictions, because footnote 1 to the Understanding on the Balance-of-Payments Provision of the GATT 1994 (the “BOP Understanding”) provides that the DSU may be invoked in respect of matters relating to the specific use or purpose of a balance-of-payments measure or to the manner in which a balance-of-payments measure is applied in a particular case, but not with respect to the question of balance-of-payments justification of these measures. Rejecting this argument, the Appellate Body stated as follows:

“Any doubts that may have existed in the past as to whether the dispute settlement procedures under Article XXIII were available for disputes relating to balance-of payments restrictions have been removed by the second sentence of footnote 1 to the BOP Understanding, …

 

In our opinion, this provision makes it clear that the dispute settlement procedures under Article XXIII, as elaborated and applied by the DSU, are available for disputes relating to any matters concerning balance-of-payments restrictions.

…

We note India’s arguments relating to the negotiating history of the BOP Understanding. However, in the absence of a record of the negotiations on footnote 1 to the BOP Understanding, we find it difficult to give weight to these arguments… .

 

Therefore, in light of footnote 1 to the BOP Understanding, a dispute relating to the justification of balance-of payments restrictions is clearly within the scope of matters to which the dispute settlement provisions of Article XXIII of the GATT 1994, as elaborated and applied by the DSU, are applicable.”⁽¹⁰³⁰⁾

756.   The Appellate Body also found that permitting panel review of balance-of-payments restrictions would not render redundant the competence of the BOP Committee and the General Council under GATT Article XVIII and the Understanding on the Balance-of-Payments Provisions of the GATT 1994:

“Recourse to the dispute settlement procedures does not call into question either the availability or the utility of the procedures under Article XVIII:12 and the BOP Understanding. On the contrary, if panels refrained from reviewing the justification of balance-of-payments restrictions, they would diminish the explicit procedural rights of Members under Article XXIII and footnote 1 to the BOP Understanding, as well as their substantive rights under Article XVIII:11.

 

We are cognizant of the competence of the BOP Committee and the General Council with respect to balance-of-payments restrictions under Article XVIII:12 of the GATT 1994 and the BOP Understanding. However, we see no conflict between that competence and the competence of panels. Moreover, we are convinced that, in considering the justification of balance-of payments restrictions, panels should take into account the deliberations and conclusions of the BOP Committee, as did the panel in Korea — Beef.

 

We agree with the Panel that the review by panels of the justification of balance-of-payments restrictions would not render redundant the competence of the BOP Committee and the General Council. The Panel correctly pointed out that the BOP Committee and panels have different functions, and that the BOP Committee procedures and the dispute settlement procedures differ in nature, scope, timing and type of outcome.”⁽¹⁰³¹⁾

757.   Further, in response to India’s argument that while panels did not lack jurisdiction with respect to balance-of-payments restrictions, they should nevertheless exercise judicial restraint, the Appellate Body stated:

“India clarified its claim of legal error by stating that although panels, in principle, have competence to review any matters relating to balance-of-payments restrictions, they should exercise judicial restraint with respect to these matters… .

…

[W]e note that, if the exercise of judicial restraint were to lead in practice, as India seems to suggest, to panels refraining from considering disputes regarding the justification of balance-of-payments restrictions, such exercise of judicial restraint would, as discussed above, be inconsistent with Article XXIII of the GATT 1994, as elaborated and applied by the DSU, and footnote 1 to the BOP Understanding.”⁽¹⁰³²⁾

(c) Right to maintain balance-of-payments measures

758.   In India — Quantitative Restrictions, India argued before the Panel that it had the right to maintain balance-of-payments measures until the BOP Committee or the General Council advised it to modify these measures under Article XVIII:12 or established a time-period for their removal under paragraph 13 of the BOP Understanding. The Panel, in a finding not specifically addressed by the Appellate Body, disagreed:

“We note at the outset that there is no explicit statement in Article XVIII:B or the 1994 Understanding that authorizes a Member to maintain its balance-of-payments measures in effect until the General Council or BOP Committee acts under one of the aforementioned provisions. Article XVIII:B, however, addresses the issue of the extent to which balance-of-payments measures may be maintained. Article XVIII:11, which is analysed in more detail in Part G below, specifies that a Member:

 

’shall progressively relax any restrictions applied under this Section [i.e., Article XVIII:B] as conditions improve, maintaining them only to the extent necessary under the terms of paragraph 9 of this Article [XVIII] and shall eliminate them when conditions no longer justify their maintenance.’

 

The obligation of Article XVIII:11 is not conditioned on any BOP Committee or General Council decision. If we were to interpret Article XVIII:11 to be so conditioned, we would be adding terms to Article XVIII:11 that it does not contain.

 

Moreover, the obligation in Article XVIII:11 requires action by the individual Member. It is qualified only by a proviso and Ad Note (which we discuss in Part G and which are not relevant here) and it is not made subject to the accomplishment of other procedures. In light of the unqualified nature of the Article XVIII:11 obligation, it would be inconsistent with the principle pacta sunt servanda to conclude that a WTO Member has a right to maintain balance-of-payments measures, even if unjustified under Article XVIII:B, in the absence of a Committee or General Council decision in respect thereof. Thus, we find that India does not have a right to maintain its balance-of-payments measures until the General Council advises it to modify them under Article XVIII:12 or establishes a time-period for their removal under paragraph 13 of the 1994 Understanding.”⁽¹⁰³³⁾

759.   In India — Quantitative Restrictions, India further argued that Article XVIII:12(c)(i) or (ii) 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. In this context, India also claimed 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 Panel rejected India’s arguments:

“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.

 

This does not mean that the General Council has no margin of discretion in deciding whether or not to accept 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.

 

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.⁽¹⁰³⁴⁾ Even assuming that such a ‘right’ could be recognized under paragraph 13 of the 1994 Understanding, such a recognition would in any case require a prior decision of the General Council.”⁽¹⁰³⁵⁾

(d) Burden of proof regarding measures justified by Article XVIII:B

760.   The Panel Report in India — Quantitative Restrictions applied the general rules on burden of proof to balance-of-payments measures as follows:

“In all instances, each party has to provide evidence in support of each of its particular assertions. This implies that the United States has to prove any of its claims in relation to the alleged violation of Article XI:1 and XVIII:11. Similarly, India has to support its assertion that its measures are justified under Article XVIII:B. We also view the rules stated by the Appellate Body as requiring that the United States as the complainant cannot limit itself to stating its claim. It must present a prima facie case that the Indian balance-of-payments measures are not justified by reference to Articles XI:1 and XVIII:11 of GATT 1994.”⁽¹⁰³⁶⁾

761.   In India — Autos, India asserted a defence under Article XVIII:B to the extent of any violation of Article XI. India presented no evidence regarding its balance-of-payments situation, and argued that the burden was on the complainants to establish that its measures were not justified on balance-of-payments grounds. The Panel rejected this argument, and found that “the burden is on India in relation to this defence. To successfully assert this defence it must at a minimum, present a prima facie case that these measures can be considered to be maintained under Article XVIII:B.”⁽¹⁰³⁷⁾ The Panel ruled that India failed to make such a prima facie case, because India presented no information on its actual balance-of-payments situation during the relevant period, and did not explain how it had met the substantive conditions of Article XVIII:9. The Panel declined to consult with the IMF because “the arguments presented did not even lead the Panel to that point.”⁽¹⁰³⁸⁾

(e) GATT practice

762.   On GATT practice under Article XVIII:B.

2. Article XVIII:9

(a) General

763.   In India — Quantitative Restrictions, the Panel decided that in its evaluation of the situation of India’s monetary reserves under Article XVIII:9, it would need to examine the facts existing on the date of its establishment. The Panel gave both legal and practical reasons for not focusing on the situation existing at a later point in time:

“With respect to the date at which India’s balance-of-payments and reserve situation is to be assessed, we note that practice, both prior to the WTO and since its entry into force, limits the claims which panels address to those raised in the request for establishment of the panel, which is typically the basis of the panel’s terms of reference (as is the case here).⁽¹⁰³⁹⁾ In our opinion, this has consequences for the determination of the facts that can be taken into account by the Panel, since the complainant obviously bases the claims contained in its request for establishment of the panel on a given set of facts existing when it presents its request to the DSB.

 

In the present situation, the United States primarily seeks a finding that, at the latest on the date of establishment of the Panel (18 November 1997), the measures at issue were not compatible with the WTO Agreement and were not justified under Article XVIII:11 of GATT 1994. Therefore, it would seem consistent with such a request and logical in the light of the constraints imposed by the Panel’s terms of reference to limit our examination of the facts to those existing on the date the Panel was established.

 

This result is also dictated by practical considerations. The determination of whether balance-of-payments measures are justified is tied to a Member’s reserve situation as of a certain date. In fixing that date, it is important to consider that the relevant economic and reserve data will be available only with some time-lag, which may vary by type of data. This is unlikely to be a problem if the date of assessment is the date the panel is established, since the first written submission is typically filed at least two (and often more) months after establishment of a panel. However, using the first or second panel meetings as the assessment date is more problematic since data might not be available and, if the date of the second panel meeting were chosen, it could significantly reduce the utility of the first meeting.

 

We note that, in the case on Korea — Beef, the panel relied on the conclusions of the BOP Committee reached before its establishment, but also considered ‘all available information’, including information related to periods after the establishment of the panel.⁽¹⁰⁴⁰⁾ In this case, the parties and the IMF have supplied information concerning the evolution of India’s balance-of-payments and reserve situation until June 1998. To the extent that such information is relevant to our determination of the consistency of India’s balance-of-payments measures with GATT rules as of the date of establishment of the Panel, we take it into account.⁽¹⁰⁴¹⁾”⁽¹⁰⁴²⁾

(b) Adequacy of reserves

764.   In India — Quantitative Restrictions, the Panel examined whether the Indian balance-of-payments measure met with the conditions set out in subparagraph (a) of Article XVIII:9. The Panel first made a general statement about its analytical approach and then held that it would consider the “adequacy” of India’s reserves for the purposes of both Articles XVIII:9(a) and XVIII:9(b):

“The issue to be decided under Article XVIII:9(a) is whether India’s balance-of-payments measures exceeded those ‘necessary … to forestall the threat of, or to stop, a serious decline in monetary reserves’. In deciding this issue, we must weigh the evidence favouring India against that favouring the United States and determine whether on the basis of all evidence before the Panel, the United States has established its claim under Article XVIII:11 that India does not meet the conditions specified in Article XVIII:9(a).

…

The question before us is whether India was facing a serious decline or threat thereof in its reserves (Article XVIII:9(a)) or had inadequate reserves (Article XVIII:9(b)). In analysing India’s situation in terms of Article XVIII:9(a), it is important to bear in mind that the issue is whether India was facing or threatened with a serious decline in its monetary reserves. Whether or not a decline of a given size is serious must be related to the initial state and adequacy of the reserves. A large decline need not necessarily be a serious one if the reserves are more than adequate. Accordingly, it is appropriate to consider the adequacy of India’s reserves for purposes of Article XVIII:9(a), as well as for Article XVIII:9(b).”⁽¹⁰⁴³⁾

765.   The Panel in India — Quantitative Restrictions then considered information supplied by the International Monetary Fund (IMF), which indicated the level of reserves which could be considered “adequate” for India:

“In this connection, we recall that the IMF reported that India’s reserves as of 21 November 1997 were US$25.1 billion and that an adequate level of reserves at that date would have been US$16 billion. While the Reserve Bank of India did not specify a precise level of what would constitute adequacy, it concluded only three months earlier in August 1997 that India’s reserves were ‘well above the thumb rule of reserve adequacy’ and although the Bank did not accept that thumb rule as the only measure of adequacy, it also found that ‘[b]y any criteria, the level of foreign exchange reserves appears comfortable’. It also stated that ‘the reserves would be adequate to withstand both cyclical and unanticipated shocks’.

…

Turning now to the question of whether India was facing a serious decline or threat thereof in its reserves, it is appropriate to consider the evolution of its reserves in the period prior to November 1997. As noted above, as of 31 March 1996, India’s reserves were US$17 billion; as of 31 March 1997, India’s reserves were US$22.4 billion. We note that at the time of the BOP Committee’s consultations with India in January and June 1997, the IMF reported that India did not face a serious decline in its reserves or a threat thereof. As of 21 November 1997, India’s reserves had risen to US$25.1 billion and the IMF continued to be of the view that India did not face a serious decline in its reserves or a threat thereof. In our view, in light of the foregoing evidence, and taking into account the provisions of Article XV:2, as of the date of establishment of the Panel, India was not facing a serious decline or a threat of a serious decline in monetary reserves as those terms are used in Article XVIII:9(a). In the event that it might be deemed relevant to add support to our findings concerning India’s reserves as of November 1997, we have also examined the evolution of India’s reserves after November 1997. We note that India’s reserves fluctuated around the November level in subsequent months, falling to a low of US$23.9 billion in December 1997 and rising to a high of US$26.2 billion in April 1998. They were US$24.1 billion as of the end of June 1998.”⁽¹⁰⁴⁴⁾

(c) “restricting the quantity or value of merchandise permitted to be imported”: quantitative versus price-based balance-of-payments measures

766.   Although Articles XII:1 and XVIII:9 originally provided only for balance-of-payments measures in the form of quantitative restrictions on imports, the Understanding on the Balance-of-Payments Provisions of the GATT 1994 provides, inter alia:

“2.   Members confirm their commitment to give preference to those measures which have the least disruptive effect on trade. Such measures (referred to in this Understanding as ‘price-based measures’) shall be understood to include import surcharges, import deposit measures or other equivalent trade measures with an impact on the price of imported goods. It is understood that, notwithstanding the provisions of Article II, price-based measures taken for balance-of-payments purposes may be applied by a Member in excess of the duties inscribed in the Schedule of that Member. Furthermore, that Member shall indicate the amount by which the price-based measure exceeds the bound duty clearly and separately under the notification procedures of this Understanding.

 

3.   Members shall seek to avoid the imposition of new quantitative restrictions for Balance-of-Payments purposes unless, because of a critical Balance-of-Payments situation, price-based measures cannot arrest a sharp deterioration in the external payments position. In those cases in which a Member applies quantitative restrictions, it shall provide justification as to the reasons why price-based measures are not an adequate instrument to deal with the Balance-of-Payments situation. A Member maintaining quantitative restrictions shall indicate in successive consultations the progress made in significantly reducing the incidence and restrictive effect of such measures. It is understood that not more than one type of restrictive import measure taken for Balance-of-Payments purposes may be applied on the same product.”

767.   Concerning the treatment under the GATT 1947 of balance-of-payments surcharges and other price-based balance-of-payments measures.

3. Article XVIII:11

(a) Burden of proof

768.   In India — Quantitative Restrictions, citing its statement in US — Wool Shirts and Blouses⁽¹⁰⁴⁵⁾, the Appellate Body agreed with the Panel that it is for the responding party to demonstrate that the complaining party violated its obligation not to require the responding party to change its development policy:

“The proviso precludes a Member, which is challenging the consistency of balance-of-payments restrictions, from arguing that such restrictions would be unnecessary if the developing country Member maintaining them were to change its development policy. In effect, the proviso places an obligation on Members not to require a developing country Member imposing balance-of-payments restrictions to change its development policy.

…

We consider that the invocation of the proviso to Article XVIII:11 does not give rise to a burden of proof issue insofar as it relates to the interpretation of what policies may constitute a ‘development policy’ within the meaning of the proviso. However, we do not exclude the possibility that a situation might arise in which an assertion regarding development policy does involve a burden of proof issue. Assuming that the complaining party has successfully established a prima facie case of inconsistency with Article XVIII:11 and the Ad Note, the responding party may, in its defence, either rebut the evidence adduced in support of the inconsistency or invoke the proviso. In the latter case, it would have to demonstrate that the complaining party violated its obligation not to require the responding party to change its development policy. This is an assertion with respect to which the responding party must bear the burden of proof. We, therefore, agree with the Panel that the burden of proof with respect to the proviso is on India.”⁽¹⁰⁴⁶⁾

769.   On the issue of the allocation of the burden of proof with respect to the Ad Note to the United States, India argued that the Panel had not applied the rules in accordance with the principles laid down by the Appellate Body in EC — Hormones. Specifically, India objected to the fact that the Panel had taken into account the responses of India in its assessment regarding whether the United States had made a prima facie case. The Appellate Body did not share India’s view:

“We do not interpret the … statement as requiring a panel to conclude that a prima facie case is made before it considers the views of the IMF or any other experts that it consults. Such consideration may be useful in order to determine whether a prima facie case has been made. Moreover, we do not find it objectionable that the Panel took into account, in assessing whether the United States had made a prima facie case, the responses of India to the arguments of the United States. This way of proceeding does not imply, in our view, that the Panel shifted the burden of proof to India.”⁽¹⁰⁴⁷⁾

(b) Note Ad Article XVIII:11

(i) General

770.   The Panel in India — Quantitative Restrictions, in a finding not reviewed by the Appellate Body, addressed the question whether Note Ad Article XVIII:11 permitted India to maintain balance-of-payments restrictions which did not meet the requirements of Article XVIII:9. India argued that it should not be required to remove its quantitative restrictions immediately, even if it were found that it currently did not experience balance-of-payments difficulties within the meaning of Article XVIII:9, because immediate removal would create the conditions for their reinstitution within the meaning of Note Ad Article XVIII:11. The Panel held that three questions had to be addressed in this context: namely (a) whether the Ad Note covered situations where the conditions of Article XVIII:9 were no longer met; (b) what conditions must be met in order to allow for the maintenance of measures under the Ad Note; and (c) whether these conditions were met in the present case. With respect to the first question — namely, whether the Ad Note covered situations where the conditions of Article XVIII:9 were no longer met — the Panel considered the wording of the Ad Note:

“It seems clear to us that the use of the word ‘respectively’ in this provision allows the sentence to be read to refer to two situations, so that the second sentence of paragraph 11 should not be interpreted to mean (i) that a Member is required to relax restrictions if such relaxation would thereupon produce conditions justifying the intensification of restrictions under paragraph 9 of Article XVIII or (ii) that a Member is required to remove restrictions if such removal would thereupon produce conditions justifying the institution of restrictions under paragraph 9 of Article XVIII.

 

The ordinary meaning of the words therefore suggests that the Ad Note could cover situations where the conditions of Article XVIII:9 are no longer met but are threatened. This would make it possible for a developing country having validly instituted measures for balance-of-payments purposes and whose situation has sufficiently improved so that the conditions of Article XVIII:9 are no longer fulfilled, not to eliminate the remaining measures if this would result in the reoccurrence of the conditions which had justified their institution in the first place.”⁽¹⁰⁴⁸⁾

771.   Having found that the ordinary meaning of the words of Note Ad Article XVIII:11 could extend to situations where the conditions of Article XVIII:9 no longer exist, but are threatened, the Panel considered also the context of the Ad Note and the notion of “gradual relaxation”:

“This appears consistent with the context of the provision, in particular with the general requirement of gradual relaxation of measures as balance-of-payments conditions improve, under Article XVIII:11. The notion of ‘gradual relaxation’ contained in Article XVIII:11 should itself be read in context, together with Article XVIII:9. Article XVIII:9 requires that the measures taken shall not ‘exceed those necessary’ to address the balance-of-payments situation justifying them. The institution and maintenance of balance-of-payments measures is only justified at the level necessary to address the concern, and cannot be more encompassing. Paragraph 11, in this context, confirms this requirement that the measures be limited to what is necessary and addresses more specifically the conditions of evolution of the measures as balance-of-payments conditions improve: at any given time, the restrictions should not exceed those necessary. This implies that as conditions improve, measures must be relaxed in proportion to the improvements. The logical conclusion of the process is that the measures will be eliminated when conditions no longer justify them.

 

The Ad Note clarifies that the relaxation or removal should not result in a worsening of the balance-of-payments situation such as to justify strengthened or new measures. It thus seeks to avoid a situation where a developing country would be required to remove the measures, foreseeing that in doing so, it will create the conditions for their reinstitution. In light also of the need to restore equilibrium of the balance-of-payments on a sound and lasting basis, acknowledged in the first sentence of Article XVIII:11, it appears that removal should be made when the conditions actually allow for it. In this sense, we can agree with India that the developing country Member applying the measures is not required to follow a ‘stop-and-go’ policy. It is worth noting, however, that in circumstances where the balance-of-payments situation has gradually improved, if measures have been gradually relaxed as conditions improved under the terms of Article XVIII:11 and maintained only to the extent necessary under the terms of Article XVIII:9, it could be anticipated that only a minor portion of the measures initially instituted would remain to be removed by the time the balance-of-payments conditions have improved to the extent that the country faces neither a serious decline in monetary reserves or a threat thereof, or inadequate reserves. The elimination of these measures would thus constitute the final stage of a gradual relaxation and elimination.

 

We therefore conclude that the Note Ad Article XVIII:11 could apply to both situations where balance-of-payments difficulties still exist and when they have ceased to exist but are threatened to return. It is therefore possible for India to invoke the existence of such risk in order to justify the maintenance of the measures. However, this possibility is available only to the extent that the conditions foreseen in the Ad Note are fulfilled. We must therefore determine what these conditions are before examining whether they are fulfilled in this instance.”⁽¹⁰⁴⁹⁾

772.   Having answered the first of the three questions listed in paragraph 770 above, the Panel then turned to the second question, namely which conditions had to be satisfied for a measure to be justified in the light of the Note Ad Article XVIII:11, although the conditions under Article XVIII:9 were no longer met. The Panel gave the following overview:

“Three elements thus appear to be contemplated in this text:

 

(i)   that conditions justifying the intensification or institution, respectively, of restrictions under paragraph 9 of Article XVIII would occur

 

(ii)   that the relaxation or removal of the measures would produce occurrence of these conditions

 

(iii)   the relaxation or removal would thereupon produce these conditions.”⁽¹⁰⁵⁰⁾

(ii)   “would thereupon produce”

773.   In its analysis of the conditions which a balance-of-payment measure, imposed by a developing country, had to comply with in the light of the Note Ad Article XVIII:11, the Panel in India — Quantitative Restrictions first addressed the term “would thereupon produce”:

“We agree with the Panel that the Ad Note, and, in particular, the words ‘would thereupon produce’, require a causal link of a certain directness between the removal of the balance-of-payments restrictions and the recurrence of one of the three conditions referred to in Article XVIII:9. As pointed out by the Panel, the Ad Note demands more than a mere possibility of recurrence of one of these three conditions and allows for the maintenance of balance-of-payments restrictions on the basis only of clearly identified circumstances. In order to meet the requirements of the Ad Note, the probability of occurrence of one of the conditions would have to be clear.”⁽¹⁰⁵¹⁾

774.   With respect to the term “thereupon” in the phrase “would thereupon produce”, the Appellate Body in India — Quantitative Restrictions rejected India’s argument that the Panel had erred in interpreting the term “thereupon” contained in Note Ad Article XVIII:11 to signify “immediately”:

“We also agree with the Panel that the Ad Note and, in particular, the word ‘thereupon’, expresses a notion of temporal sequence between the removal of the balance-of-payments restrictions and the recurrence of one of the conditions of Article XVIII:9. We share the Panel’s view that the purpose of the word ‘thereupon’ is to ensure that measures are not maintained because of some distant possibility that a balance-of-payments difficulty may occur.

…

We recall that balance-of-payments restrictions may be maintained under the Ad Note if their removal or relaxation would thereupon produce: (i) a threat of a serious decline in monetary reserves; (ii) a serious decline in monetary reserves; or (iii) inadequate monetary reserves. With regard to the first of these conditions, we agree with the Panel that the word ‘thereupon’ means ‘immediately’.

…

We agree with the Panel that it would be unrealistic to require that [the two other conditions, i.e.] a serious decline or inadequacy in monetary reserves should actually occur within days or weeks following the relaxation or removal of the balance-of-payments restrictions. The Panel was, therefore, correct to qualify its understanding of the word ‘thereupon’ with regard to these two conditions. While not explicitly stating so, the Panel in fact interpreted the word ‘thereupon’ for these two conditions as meaning ‘soon after’. This is also one of the possible dictionary meanings of the word ‘thereupon’. We are of the view that instead of using the word ‘immediately’, the Panel should have used the words ‘soon after’ to express the temporal sequence required by the word ‘thereupon’.” ⁽¹⁰⁵²⁾

(c) Proviso to Article XVIII:11

775.   In India — Quantitative Restrictions, the Appellate Body rejected India’s argument that, contrary to the proviso to Article VIII:11, the Panel required India to change its development policy by holding that India could manage its balance-of-payments situation using macroeconomic policy instruments alone, without maintaining quantitative restrictions:

“[W]e are of the opinion that the use of macroeconomic policy instruments is not related to any particular development policy, but is resorted to by all Members regardless of the type of development policy they pursue. The IMF statement that India can manage its balance-of-payments situation using macroeconomic policy instruments alone does not, therefore, imply a change in India’s development policy.

…

We believe structural measures are different from macroeconomic instruments with respect to their relationship to development policy. If India were asked to implement agricultural reform or to scale back reservations on certain products for small-scale units as indispensable policy changes in order to overcome its balance-of-payments difficulties, such a requirement would probably have involved a change in India’s development policy.”⁽¹⁰⁵³⁾

4. Article XVIII:12

(a) Article XVIII:12(c)

776.   The Panel in India — Quantitative Restrictions discussed Article XVIII:12(c)(i) and (ii) in rejecting India’s argument that panels have no authority to evaluate Members’ balance-of-payments justifications. See the excerpt referenced in paragraph 758 above.⁽¹⁰⁵⁴⁾

777.   Further, the Panel rejected India’s argument 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, stating as follows:

“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).”⁽¹⁰⁵⁵⁾

5. Article XVIII:C

778.   Secretariat Notes of July and September 2002, prepared in connection with a review of Article XVIII, discuss the three instances when Article XVIII:C had been invoked from 1995 through July 2002, and the use of Article XVIII:C under the GATT 1947.⁽¹⁰⁵⁶⁾

6. Understanding on the Balance-of-Payments Provisions of the General Agreement on Tariffs and Trade 1994

(a) General

779.   The Panel in India — Quantitative Restrictions, in a finding not addressed by the Appellate Body, explained the legal status of the BOP Understanding in relation to GATT Articles XII and XVIII:

“[The text of Article XVIII:B] should now be read in light of the 1994 Understanding, which clarifies the provisions of Articles XII and XVIII:B and of the 1979 Decision. The 1994 Understanding, which refers to the procedures for balance-of-payments consultations adopted in 1970 (‘full consultation procedures’) and 1972 (’simplified consultation procedures’) as well as the 1979 Decision, contains provisions on the application of balance-of-payments measures, as well as provisions relating to the procedures for balance-of-payments consultations and their conclusion, but it does not explicitly refer to Articles XVIII:12(c) and (d).”⁽¹⁰⁵⁷⁾

(b) Invocation and disinvocation of Articles XII and XVIII:B

780.   A table below lists invocations and disinvocations of Articles XII and XVIII:B since entry into force of the WTO Agreement. A similar table at pages 394–395 of the GATT Analytical Index lists invocations and disinvocations of Articles XII and XVIII:B, and records of balance-of-payments consultations, from 1979 through 1994.

(c) Footnote 1

781.   The Appellate Body, in India — Quantitative Restrictions, referred to footnote 1 of the BOP Understanding in considering a panel’s authority to examine the conformity with the WTO Agreement of Members’ measures taken for balance-of-payments purposes. See the excerpts referenced in paragraphs 755–757 above.

(d) Paragraph 1

782.   In India — Quantitative Restrictions, India argued 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 Panel rejected this argument. See the excerpt referenced in paragraph 759 above.

(e) Paragraph 5

(i) Committee on Balance-of-Payments Restrictions

Establishment of Committee

783.   At its meeting of 31 January 1995, the General Council established the WTO Committee on Balance-of-Payments Restrictions.⁽¹⁰⁵⁸⁾

Terms of reference

784.   At its meeting of 31 January 1995, the General Council adopted the following terms of reference for the Committee on Balance-of-Payments Restrictions:

“(a)   to conduct consultations, pursuant to Article XII:4, Article XVIII:12 and the Understanding on the Balance-of-Payments Provisions of the General Agreement on Tariffs and Trade 1994, on all restrictive import measures taken or maintained for balance-of-payments purposes and, pursuant to Article XII:5 of the General Agreement on Trade in Services, on all restrictions adopted or maintained for balance-of-payments purposes on trade in services on which specific commitments have been undertaken; and

 

(b)   to carry out any additional functions assigned to it by the General Council.”⁽¹⁰⁵⁹⁾

Rules of procedure

785.   At its meeting of 13 and 15 December 1995, the General Council approved the rules of procedure adopted by the Committee on the Balance-of-Payments Restrictions.⁽¹⁰⁶⁰⁾

Observer status

786.   At its meeting of 13 and 15 December 1995, the General Council took a decision with respect to participation in the meetings of the Committee on the Balance-of-Payments Restrictions.⁽¹⁰⁶¹⁾

(f) Paragraph 9

787.   At its meeting of 21 October 1996, the Committee on the Balance-of-Payments Restrictions adopted the format for the annual notification mandated under Paragraph 9 of the Understanding.⁽¹⁰⁶²⁾ In order for the Committee on the Balance-of-Payments Restrictions to have a basis for the following year’s schedule of consultations, it was proposed that notifications be completed and submitted to the Secretariat annually by 15 November.⁽¹⁰⁶³⁾

(g) Paragraph 13

(i) Conclusions

788.   In some instances, the Committee has recommended that a Member that had presented a time schedule for phase-out of BOP restrictions and was adhering to the schedule should be deemed to be in conformity with its GATT 1994 obligations.⁽¹⁰⁶⁴⁾ In some instances, the Committee has concluded that measures taken by a Member were not justified by its balance-of-payments situation and had not been applied in a manner consistent with the requirements set forth in the GATT 1994 and the Understanding.⁽¹⁰⁶⁵⁾

789.   In India — Quantitative Restrictions, India argued 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 Panel rejected this argument. See the excerpt referenced in paragraph 759 above.

(ii) Reporting by the Committee

790.   The Committee on Balance-of-Payments Restrictions submits reports on specific consultations in the WT/BOP/R series, as well as an annual report on its activities⁽¹⁰⁶⁶⁾ as required by the General Council.⁽¹⁰⁶⁷⁾

7. Relationship with other GATT provisions

(a) Article II

791.   The Understanding on the Balance-of-Payments Provisions of the GATT 1994 provides in its paragraph 2 for an exception from Article II:1(b) for “price-based measures taken for balance-of-payments purposes”:

“Members confirm their commitment to give preference to those measures which have the least disruptive effect on trade. Such measures (referred to in this Understanding as ‘price-based measures’) shall be understood to include import surcharges, import deposit measures or other equivalent trade measures with an impact on the price of imported goods. It is understood that, notwithstanding the provisions of Article II, price-based measures taken for balance-of-payments purposes may be applied by a Member in excess of the duties inscribed in the Schedule of that Member… .”

(b) Articles XI, XIII, XIV and XVII

792.   The Panels on India — Quantitative Restrictions and Korea — Various Measures on Beef discussed the interpretation and application of Note Ad Articles XI, XII, XIII, XIV and XVIII, which clarifies that the terms “import restrictions” or “export restrictions” as used in these Articles include “restrictions made effective through state-trading operations”. See paragraphs 621–622 above.

(c) Article XII

793.   In India — Quantitative Restrictions, the Panel explained the relationship between Articles XII and XVIII:B in clarifying the function of Article XVIII:B. See paragraph 754 above.

(d) GATT practice

794.   On GATT practice regarding the relationship between Article XVIII and other Articles.