Under the rules of the WTO, any trade restriction taken by a Member must be consistent, or in compliance, with the rules of the international trading system. Under the provisions of Article XII, XVIII:B and the “Understanding of the Balance-of-Payments Provisions of the GATT 1994”, a Member may apply import restrictions for balance-of-payments reasons.
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GATT: Articles XII and XVIII:B
Article XII and XVIII:B in their current form
were redrafted in 1957 by the Working Party on Quantitative Restrictions.
At that time, balance-of-payments measures referred to quantitative
restrictions and were an exception to Article XI which prohibits the use
of quantitative restrictions. Article XII can be invoked by all Members
and Article XVIII:B by the developing country Members (defined as those in
the early stages of development and with a low standard of living.
The basic condition for invoking Article XII is to “safeguard the [Member's] external financial position and its balance-of-payments”; Article XVIII:B mentions the need to “safeguard the [Member's] external financial position and ensure a level of reserves adequate for the implementation of its programme of economic development”. Both Articles refer to the need to “restore equilibrium on a sound and lasting basis”. While Article XII mentions the objective of “avoiding the uneconomic employment of resources”, Article XVIII:B refers to “assuring an economic employment of production resources”.
Article XVIII:B contains somewhat less stringent criteria than Article XII. Article XII (para. 2)states that import restrictions “shall not exceed those necessary (i) to forestall the imminent threat of, or to stop, a serious decline in its monetary reserves” or (ii) “...in the case of a contracting party with very low monetary reserves, to achieve a reasonable rate of increase in its reserves”.
Article XVIII:B (para. 9) omits the word “imminent” from the first condition and refers to an “inadequate” level rather than a “very low” level of reserves; “adequate” is defined as “adequate for the implementation of its programme of economic development”.
Both Articles require Members to progressively relax the restrictions as conditions improve and eliminate them when conditions no longer justify such maintenance.
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The 1979 Declaration
After the Tokyo Round, the 1979 Declaration on
Trade Measures Taken for Balance-of-Payments Purposes (BISD 26S/205)
extended the disciplines to all trade measures imposed for
balance-of-payments reasons, not just quantitative restrictions. Thus all
trade measures taken for balance-of-payments purposes come within the
purview of notification and consultation requirements.
The 1979 Declaration introduced three new conditions for the application of balance-of-payments measures: (i) that preference shall be given to the measure which has “the least disruptive effect on trade” while abiding by disciplines provided for in the GATT; (ii) that the simultaneous application of more than one trade measure for balance-of-payments purposes shall be avoided; and (iii) that “whenever practicable, contracting parties shall publicly announce a time schedule for the removal of the measures”. It also spelled out that measures should not be taken “for the purpose of protecting a particular industry or sector”.
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Strengthened provisions under the WTO
The “Understanding on the Balance-of-Payments
Provisions of the GATT 1994” is legally a part of the GATT 1994 itself. It
draws upon and clarifies the provisions of Article XII, XVIII: B and the 1979 Declaration. In the Understanding, Members confirm their commitment
(i) “announce publicly, as soon as possible, time-schedules for the removal of restrictive import measures taken for balance-of-payments purposes” and to explain why if they do not do so;
(ii) “give preference to those measures which have the least disruptive effect on trade”;
(iii) justify why price-based measures are not adequate if they have chosen to impose quantitative restrictions;
(iv) not apply more than one type of restrictive trade measure to the same product.
It has been clarified that price-based measures have the least disruptive effect on trade and such measures are understood to include import surcharges, import deposit requirements or other equivalent trade measures with an impact on the price of imported goods. It is expressly provided 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.
The Understanding also confirms 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, restrictions have to be administered in a transparent manner. Article XII authorizes Members to vary the incidence of import restrictions in such a way as to give priority to the importation of those products which are more essential and Article XVIII:B contains a similar authorization for developing country Members to give priority to the importation of those products which are more essential in the light of its policy of economic development. The Understanding elaborates that 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.
The new Understanding expressly refers to the WTO dispute settlement system; it is stated that “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”.
In sum, measures taken for balance-of-payments purposes have to be temporary, preferably price-based, administered in a transparent manner, and apply to the general level of imports (i.e. avoid sectoral specificity).
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To ensure that Members observe the disciplines envisaged for balance-of-payments restrictions, both Articles XII and XVIII impose almost identical consultation obligations. A Member applying new restrictions or substantially intensifying existing ones is obliged to consult with the Committee on Balance-of-Payments Restrictions immediately after taking action or before doing so if prior consultation is practicable [Articles XII:4(a) and XVIII:12(a)]. A Member maintaining such restrictions is required to consult annually [Article XII:4(b)] or biennially [Article XVIII:12(b)]. A third type of consultation may be initiated on the basis of a complaint by a Member adversely affected by restrictions maintained by another, if these are inconsistent with the relevant provisions relating to these restrictions [Articles XII:4(d) and XVIII:12(d)].
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Procedures for consultation
Detailed procedures for consultations, known as
“full consultation procedures” have been in existence since 1970. More
summary procedures, known as “simplified consultation procedures” are
provided for the least-developed country Members and, with some
limitations, for the developing country Members.
Full consultation procedures
The consultations are conducted in accordance
with the approved plan of discussions as set out in 1970 and described
later in the module. Article XV of GATT 1994 requires that in all cases in
which the WTO is called upon to consider or deal with problems concerning
monetary reserves, balance-of-payments or foreign exchange arrangements,
they shall consult fully with the International Monetary Fund. In all such
consultations the bodies are required to accept all findings of
statistical and other facts presented by the Fund relating to foreign
exchange, monetary reserves and balance-of-payments. Accordingly the Fund
participates in the consultations in the Committee on Balance-of-Payments
Restrictions, provides documentation and makes a formal statement.
Simplified procedures were first introduced in
1972 as a way to get developing countries to justify the use of import
restrictions in accordance with GATT provisions while relieving them of
the burden of periodic consultations. These streamlined procedures are
followed in order to determine whether the situation of the consulting
Member requires that a full consultation be held.
Since the WTO Understanding came into force, developing country Members that are pursuing liberalization efforts in conformity with a schedule agreed with the Committee in a previous consultation, may consult under simplified procedures, as may those which have undergone a Trade Policy Review in the same calendar year (para 8). Also, the Understanding stipulates that a developing country Member, with the exception of least-developed countries, may consult under simplified procedures only twice in succession, after which it must proceed to full consultations. In simplified consultations, the IMF does not make a formal statement to the Committee.
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The starting point for initial consultation (Article XII:4(a) or XVIII:12(a)), is the notification of the measures taken for balance-of-payments purposes. While it is expected that the Member adopting the measure will notify these to the General Council, reverse notification was made possible under the 1979 Declaration and reaffirmed in paragraph 10 of the “Understanding”. In general, rules under the WTO have enhanced transparency and strengthened the notification obligations of Members. Members are required to notify to the General Council the introduction of, or any changes to, restrictive import measures introduced for balance-of-payments purposes, as well as any modifications in time-schedules for the removal of such measures, no later than 30 days after their announcement. Consultations are expected to follow within four months of the notification. Further, according to paragraph 9 of the “Understanding”, in addition to such “ad hoc” notifications, a consolidated notification should be submitted on an annual basis.
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According to paragraph 11 of the Understanding,
the consulting Member is required to prepare a “Basic Document” for full
consultations covering the following topics:
(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 or progressive relaxation of remaining restrictions.
Under “simplified” procedures, the consulting country is required to submit a written statement containing essential information on the same elements as covered by the Basic Document.
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Secretariat: Background paper
The 1979 Declaration also institutionalized the
preparation of a background paper by the Secretariat. Before 1979, the
Secretariat did not provide a background paper: although the procedures
for consultations agreed in 1970 allowed for the “Basic Document” to be
provided by either the Secretariat or the consulting country, it was
always submitted by the country.
The background paper by the Secretariat for both full and simplified consultations currently covers two main fields: the trade and exchange policies introduced by a consulting Member to alleviate deterioration in the balance of payments, and the economic situation of the consulting Member. In the case of a developing country Member the Understanding requires the Secretariat document to include relevant background and analytical material on the incidence of the external trading environment on the balance-of-payments situation and prospects of the Member.
The section dealing with trade and exchange policies generally gives information on the direct trade measures introduced, including quantitative measures, tariff surcharges, import deposits, or any other relevant policy measure. It attempts to provide some assessment of the economic effects of the measures. To the extent possible, the Secretariat places measures taken for balance-of-payments purposes in the context of the general structure of the consulting country's trade policy. By also covering other measures taken to restore equilibrium, the background paper gives an opportunity to assess the domestic policies followed by the consulting country.
The “economic developments” section of the background paper is intended to cover all relevant economic and trade developments since the last full consultation, with a focus on those developments with longer term implications. These include developments in trade and payments which have led to the situation which the measures taken are intended to relieve; developments in domestic production, consumption, exports and imports; exchange rate policy and its effect on trade flows; and the evolution of the trade and current account balances and of reserves. Secretariat background papers are checked for accuracy with the consulting country and with the IMF before circulation.
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Contribution by the IMF
The IMF provides documentation, normally a paper on Recent Economic Developments including statistics covering the balance-of-payments, and makes a formal statement to the Committee. Under simplified consultations, the IMF provides documentation, but does not address the Committee.
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Plan of consultations
Consultations under Articles XII:4 and XVIII:12
cover the nature of the balance-of-payment difficulties of the Member in
question, alternative measures which may be available, and the possible
effect of the restrictions on the economies of other Members. They are
intended to provide an opportunity for a free exchange of views,
contributing to a better understanding of the problems facing the
consulting countries, of the various measures taken by them to deal with
these problems, and of the possibilities of further progress in the
direction of freer, multilateral trade.
Following an initial statement by the consulting Member and the statement by the IMF, the Committee members proceed to a discussion and “exchange of views” regarding the relevant elements. The plan of discussion for consultations was set out in 1970 (BISD 18S/52) and covers: (i) balance-of-payments position and prospects; (ii) alternative measures to restore equilibrium; (iii) system and methods of the restrictions and (iv) effects of the restrictions. In practice, the Committee typically addresses the first two subjects together and the second two in a further discussion.
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When discussing the balance-of-payments situation, special factors, internal and external, may be taken into consideration (cf. Article XII:2, XVIII:9, Understanding:11). In the case of developing economies, especially those which do not have a diversified export basket, these might consist of constraints to their exports in other markets, or a crisis in commodities markets, drought or other external shocks.
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The balance-of-payments provisions of the GATT have traditionally emphasized that import restrictions are but a temporary relief and not the optimal form of restoring equilibrium to the balance-of-payments position. Both Articles XII and XVIII state that Members undertake to pay due regard to the need for maintaining or restoring equilibrium in their balance-of-payments on a sound and lasting basis and to the desirability of avoiding an uneconomic employment of productive resources. Thus, the Committee addresses the issue, when discussing alternative measures, of the appropriate fiscal and monetary policies, other measures aimed at structural reform, including liberalization of the trade and investment regimes, and a correctly valued exchange rate. The IMF Articles of Agreement expressly prohibit currency depreciation for competitive purposes.
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The Committee may come to a consensus that the
balance-of-payments situation warrants the measures imposed, and that the
application of the measures is consistent with the balance-of-payments
provisions. If the Committee finds that the measures are not being applied
consistent with the accepted criteria, it will request the consulting
Member to make the necessary adjustments, e.g. convert quantitative
restrictions to price-based measures, or to disinvoke the
balance-of-payments provisions. If agreement can not be reached by the
Committee, e.g. Members find the measures inconsistent but the consulting
Member is not in a position to withdraw its balance-of-payments measures
or bring them into conformity with the provisions, consultations may
terminate without agreed conclusions. Members may also “reserve their
rights”, if they consider that the consulting country is not applying the
balance-of-payments provisions consistent with its obligations, to invoke
the consultation and dispute settlement provisions of Article XXII and
XXIII of GATT 1994.
The Chairman then drafts a report, which reflects the main points of the discussion and the recommendations made by the Committee. The Committee approves this report which is submitted to the next General Council for its adoption.