Law International Trade Law

Quantitative Regulations

PERSONAL DETAILS

DESCRIPTION OF MODULE

Items Description of Module Subject Name Law Paper Name International Trade Law Module Name/Title Quantitative Restrictions Module Id 8 Pre-requisites Article XI, XII, XIII and XVIII of the GATT, 1994

Prohibition of Quantitative Restrictions

Balance of Payment Exceptions

Special Provisions for Developing Countries

Objectives To understand the following:

To provide a practical outlook on the rules and

exceptions regarding quantitative restrictions under

the international trade law.

Keywords quantitative restrictions; non-tariff barriers; balance of payment; exceptions; tariffs; quotas; voluntary export restraints; import licensing; administration of quotas; balance of payments.

E-TEXT Topics & Sub-Topics covered

1. General Elimination of Quantitative Restriction 2. Tariffs versus Quotas

Role Name Affiliation Principal Investigator Dr. Ranbir Singh Vice Chancellor, National

Law University, Delhi Co.P.I Prof. Dr. G.S. Bajpai Registrar, NLU, Delhi Paper Coordinator Dr. Saloni Khanderia-Yadav

National Law University, Delhi

Content Writer/Author Mr. Rachit Ranjan Oval Observer Foundation Content Reviewer Prof. A. Jayagovind National Law University,

Delhi Language Editor Dr. Saloni Khanderia-Yadav National Law University,

Delhi

3. De Facto Quantitative Restrictions 4. Private Actions Attributable to Governments and Non-binding Measures 5. Restrictions made Effective Through “State-Trading Corporations” 6. Voluntary Export Restraint 7. Minimum Export/Import Prices/ Licensing 8. Relationship between Article III:4 and XI:1 9. Exceptions Under Article XI 10. Article XI:2 (a) 11. Article XI:2 (b) 12. Article XI:2 (c) 13. Article XII & XVIII: Balance of Payment Exceptions 14. Framework and Case Law 15. Infant Industry Protection 16. Administration of Quantitative Restrictions 17. Rule of Non-Discrimination 18. Rules on Distribution of Trade

A. INTRODUCTION As the course title suggests quantitative restrictions are those measures, applied by a country, which aim at limiting the access that a particular good has to a market. These restrictions may be placed through a restriction on imports or a restriction on exports. Under the General Agreement on Tariffs and Trade, 1994 (‘GATT’), this practice is prohibited subject to certain exceptions. The reasoning behind placing a ban on this practice is premised on the ideals of free trade theory. It is widely believed that such restrictions serve protectionist interests, thereby distorting free trade. In this regard, in order to understand the structure of the international trading regime, it is imperative to understand the provisions relating to quantitative restrictions under the GATT. B. LEARNING OUTCOME This module deals with the theoretical basis for quantitative restrictions as well as

Foster an understanding of the necessity of Article XI prohibition on quantitative

restrictions as well as exceptions under the GATT.

Foster an understanding of the theoretical concepts involved in the subject so as to be

able to apply them in practice.

Foster an understanding of the principal case laws dealing with quantitative

restrictions.

QUANTITATIVE RESTRICTIONS

I. BACKGROUND

Upon the onset of the Great Depression in the 1930s, countries started adopting non-tariff barriers with the objective of restricting access of foreign goods to their market and protecting their domestic industry. In fact, during the negotiation rounds for the formulation of ITO and GATT, the discussion provisions relating to elimination of quotas were the most difficult and contested phase.1 Four articles under the GATT lay down the rule with respect to quantitative restrictions. Article XI deals with the prohibition of quantitative restrictions, with certain exceptions. Article XII is an exception to the rule on quantitative restrictions to deal with issues regarding balance of payment (‘BOP’) problems. Article XIII deals with non-discriminatory administration of permissible quantitative restrictions. Article XIV creates an exception to Article XIII in certain BOP circumstances. These four articles are known as the “London Compromise” as they were the result of debates at the 1946 London Preparatory Conference. The Conference witnessed advocacy of elimination of quotas from western powers such as United States and Canada and opposition from war torn nations such as France, which wanted to protect their scarce foreign exchange reserves for the purposes of reconstruction (led to the drafting of Article XII).2 Apart from these provisions, Article XVIII creates an exception for less developed WTO Member States allowing them to impose quantitative restrictions for BOP reasons. The module shall deal with the theoretical underpinnings and judicial pronouncements with respect to the aforementioned provisions under separate sub-headings. TYPES OF QUANTITATIVE RESTRICTIONS

Prohibition: A ban on a product, which may be absolute or conditional.

Quota: measure indicating the quantity that may be imported or exported

Automatic and non-automatic licensing

Other QR made effective through State trading operations; Voluntary export restraint;

minimum price that triggers a QR or a mixing regulation. 3

II. ARTICLE XI: GENERAL ELIMINATION OF QUANTITATIVE

RESTRICTIONS

1 John H. Jackson, World Trade and The Law of GATT, (Lexis Law Publications 1969) 306-07

2 Raj Bhala, Modern GATT Law (Sweet and Maxwell, 2005) 352; See also for reservations placed by

India and Cuba on complete elimination of quotas. 3 Peter Van Den Bossche & Werner Zdouc, The Law and Policy of the WTO, (3rd edn, Cambridge

Press 2013) 482

Article XI:1: No prohibitions or restrictions other than duties, taxes or other charges, whether made effective through quotas, import or export licences or other measures, shall be instituted or maintained by any contracting party on the importation of any product of the territory of any other contracting party or on the exportation or sale for export of any product destined for the territory of any other contracting party.

II.1 TARIFFS VERSUS QUOTAS

Before proceeding to explain the aforementioned provision, it is important to address the distinction between tariffs/customs duties and quotas, particularly the reasoning behind differential treatment between the two, under the GATT. Although both forms of barriers may distort trade, economic theory portends to attach a greater degree of restriction to quotas because of the following reasons.

Quotas do not lead to any revenue gain for the importing country.

Quotas do not offer the predictability that tariffs offer due to the lack of a fixed rate

of protection. Unlike tariffs, quotas make the consumption of a dutiable good

impossible.

Quotas create problems of administration and transparency.

The value of removing quotas is difficult to measures and obstructs trade negotiations.

Quotas allow protected domestic producers to exercise greater monopoly powers.

Quotas encourage rent seeking by creating opportunities for bribing governments to

gain access to their market.4

In this regard, a tariff quota doesn’t qualify as a quantitative restriction as it only charges varying duties on a good after a certain quantity has entered the concerned market. For example, the duty levied on 1000 automobile engines would be 10% ad valorem and beyond that the duty will be 25% ad valorem. As these quotas do not restrict the entry of a good directly in terms of an absolute prohibition or a restriction on the quantity of imports. Further duties are transparent, provide revenue to the importing country and restrict rent-seeking opportunities. 5

Article XI doesn‟t define quantitative restrictions, however Article XI:1 does prohibit any

measure other than “duties, taxes or other charges”. 6 There may be instances, where it is easy

to identify a quantitative restriction such as an outright ban. The Panel addressed the scope of

restrictions in India-Quantitative Restrictions.

“We note that the text of Article XI:1 is very broad in scope, providing for a general ban on import or export restrictions or prohibitions "other than duties, taxes or other charges". As was noted by the panel in Japan - Trade in Semi-conductors, the wording of Article XI:1 is comprehensive: it applies "to all measures instituted or maintained by a [Member] prohibiting or restricting the importation, exportation, or sale for export of products other than measures that take the form of duties, taxes or other charges." The scope of the term

4 See Raj Bhala, Modern GATT Law, (Sweet and Maxwell, 2005) 344-350

5 Peter Van Den Bossche & Werner Zdouc, The Law and Policy of the WTO, (3rd edn, Cambridge

Press 2013) 446 6 The term quantitative restrictions may be used interchangeably with „quota‟, „restriction‟ and

„prohibition‟ in light of the text of Article XI

"restriction" is also broad, as seen in its ordinary meaning, which is "a limitation on action, a limiting condition or regulation".”7

Thus there may be many measures that can qualify as quantitative restrictions. These may be de jure or de facto. Over the years, many disputes have contributed towards shedding light on the contours of de jure and de facto quantitative restrictions. While de jure restrictions refer to measures, which explicitly establish a numerical quota on import or export8, de facto restrictions, attempt to establish the same numerical targets through implicit means.

II.2 DE FACTO QUANTITATIVE RESTRICTIONS

As observed in both India-Quantitative Restrictions and Japan- Semiconductors, Article XI:1 is very broad in scope. By virtue of this observation, we can deduce that the scope of the provision stretches beyond literal interpretation of the text. It includes within its ambit, measures which may not provide an explicit numerical target but results in a de facto restriction on imports and exports.9 To illustrate this, let us consider the facts of India-Autos. In this dispute, the point of contention was a regulation, which required automobile manufacturers to sign a Memorandum of Understanding (MOU) that their export would be equivalent to their exports in value over a certain period. The MOU did not stipulate any numerical target for the manufacturers. However, the Panel observed that a restriction may not always be in the form of a “ blanket prohibition or a precise numerical target”. 10 The Panel then went on to observe that since the trade balancing condition aimed at maintaining a complete balance between exports and imports, it naturally compelled the manufacturer to consider in numerical terms the amount of exports it could make, which in turn would determine the amount of imports that could be made. By applying this reasoning, the Panel concluded that the MOU amounted to an import restriction and thus contravenes Article XI:1. 11

7 WT/DS90/R, Para. 5.128

8 In Canada — Periodicals, the Panel found that a complete ban on imports of certain magazines was

inconsistent with Article XI:1 of GATT. “Since the importation of certain foreign products into Canada

is completely denied under Tariff Code 9958, it appears that this provision by its terms is inconsistent

with Article XI:1 of GATT 1994.” See GATT Analytical Index; Available at:

http://www.wto.org/english/res_e/booksp_e/analytic_index_e/gatt1994_05_e.htm#article12A; Last

visited: 17/7/2014

9 Mavroidis and Wu, Law of The WTO: Documents, Cases & Analysis, (2

nd edn, West Academic 2013)

63 10

WT/DS146/R, Para. 7.270 11

Id. Para. 7.277-7.278

Although de facto quantitative restrictions are prohibited within the framework of Article XI:1, the alleging party must present sufficient evidence to prove that the measure in question caused an export/import restriction. In Argentina-Hides and Leather the EC argued that the presence of domestic tanners’ representatives during the customs inspection procedures for export-oriented hides placed a de facto restriction on the exports. The Panel observed that there was insufficient evidence to label the presence of the representatives as an export restriction.12 It is important to remember here that the current jurisprudence doesn’t stipulate that the complainant must prove the actual trade effect of such a measure. Rather it only places emphasis on the potential for a measure to have a QR effect. In other words, the evidence presented must seek to establish a causal link between the measure and a potential trade restrictive effect.13

II.3 PRIVATE ACTIONS ATTRIBUTABLE TO GOVERNMENTS AND NON-BINDING MEASURES

The GATT, is an international agreement between governments. To that extent, only quantitative restrictions imposed by the government may come under the ambit of Article XI:1. Nevertheless as is the case under the Agreement on Subsidies and Countervailing Measures (ASCM), private enterprises, which have been entrusted or directed by the government to impose measures or have strong ties to some governmental actions may fall within the ambit of Article XI:1 of the GATT. The provision under Article XI:1, may also be attracted if non-mandatory measures or informal instructions are issued by a government, if they operate in a manner equivalent to mandatory measures.14

Example 1: Japan- Trade in Semi-Conductors (GATT Panel Report) Facts: In this dispute, the Japanese Government requested Japanese producers and exporters of semi-conductors not to export their products at prices below company costs to certain third countries. This request was carried out to accommodate the deal between Japan and US regarding trade in semi-conductors. Contention of Parties: EEC, the complainant alleged that these measures fell within the purview of Article XI: 1. However, Japan argued that since the

12

WT/DS155/R, Para 11.17; See also Peter Van Den Bossche & Werner Zdouc, The Law and Policy of

the WTO, (3rd edn, Cambridge Press 2013) 449 13

WT/DS398/R, Para 7.35 14

WTO E-Learning- Quantitative Restrictions, 11

<http://ecampus.wto.org/admin/files/Course_298/Module_1587/ModuleDocuments/QR-L2-R1-E.pdf>

accessed 17 July 2014.

measures imposed by the government they were not legally binding, they weren’t actionable under Article XI:1. Panel Report: The Panel observed that for a measure to be in contravention of Article XI:1 in this case, it is imperative to establish two important criteria. Firstly, there were reasonable grounds to believe that sufficient incentives or disincentives existed for non-mandatory measures to take effect. Secondly, the measure was dependent on government action or intervention.15 The Panel reviewed various factors relating to the Japanese exporting system of semi-conductors. These factors ranged from a statutory requirement to submit information on export prices to monitoring of companies and export prices. The Panel’s preliminary review of the legal provision under Article XI:1 led to the finding that since the provision did not refer to laws or regulations but more broadly to measures, it clearly indicated that a measure which establishes a quantitative restrictions is covered under the provision, regardless of the legal status of the measure.16 Finally, the Panel observed that an administrative structure was created by the Japanese government to impose pressure on the private sector to prohibit them from exporting at prices below the company-specific costs. After establishing that Article XI:1 did not require a measure to be legally binding , and the administrative structure prevented the export of semi-conductor at prices below company-specific costs, the Panel opined that the measure in dispute was inconsistent with Article XI:1.17

Although there is no rule of stare decisis under the WTO dispute settlement mechanism, much reliance has been placed on Japan-Semiconductors in cases where it is to be decided whether a particular measure should be attributed to a government. However, the Panel report in Japan- Semiconductor falls short of offering any precise criteria for establishing a measure as attributable to the government. In Argentina-Hides and Leather, the Panel reduced the scope of the findings in Japan-Semiconductors by observing that as per the text or context of Article XI:1 there isn’t any obligation upon Members to exclude provision of incentives by the government to private players in pursuance of a measure, which is essentially not trade-restrictive.18

II.4 RESTRICTIONS MADE EFFECTIVE THROUGH “STATE-TRADING OPERATIONS”

15

Japan Trade in Semi-Conductors; Para 108-109; GATT Panel Report 16

Id., Para. 106 17

Id., Para. 117 18

WT/DS155/R, Para. 11.19

As observed in India-Quantitative Restrictions, any restriction made effective through state-trading operations can also be inconsistent with Article XI:1. In such cases it is important to show the causal link between the restriction and the operation of the state trading entity.19

Example 2- India-Quantitative Restrictions (WT/DS90/R) Facts: India maintained quantitative restrictions on a large number of agricultural, textile and industrial products. These tariff lines were contended to be in violation of India’s commitment under Article XI:1, XVIII:1 of the GATT and Article 4.2 of the Agreement on Agriculture. These restrictions had been notified to the Committee on Balance-of- Payments Restrictions in May 1997 in the course of consultations being held with India. The restrictions that are within the scope of the dispute appear in Annex I, Part B of WT/BOP/N/24. A previous notification had been made in July 1996 (WT/BOP/N/11 and Corr.1) and included quantitative restrictions maintained for both balance of payments and other reasons.20 Panel Report (on the issue of restrictions made effective through state trading operations): The Panel observed that “In analyzing the US claim, we note that violations of Article XI:1 can result from restrictions made effective through state trading operations. This is made very clear in the Note Ad Articles XI, XII, XIII, XIV and XVIII, which provides that “Throughout Article XI, XII; XIII; XIV; and XVIII, the terms ‘import restrictions’ or ‘export restrictions’ include restrictions made effective through state-trading operations.” It should be noted however, that the mere fact that imports are effected through state trading enterprises would not in itself constitute a restriction. Rather, for a restriction to be found to exist, it should be shown that the operation of this state trading entity is such as to result in a restriction.”21 On basis of this finding the Panel concluded that the report submitted by India to the BOP committee coupled with evidence presented by the US indicated that “…the "canalization" measures specified in Part III of the Negative List of Imports, to the extent that they apply to products specified in WT/BOP/N/24, Annex I, Part B, operate as a restriction on imports within the meaning of Article XI:1.”22

19

WT/DS90/R, Para. 5.134 20

Id., Para 2.1 21

Id. 22

Id., Para 5.136

II.5 VOLUNTARY EXPORT RESTRAINT Voluntary export restraint (VER) actions are taken by exporting countries, where a Member levies a self-imposed restriction on exports of a product. Under the GATT 1947, the issue of VER remained a grey area. However, with the advent of WTO, the legality of such restraints was decided. Under the Agreement on Safeguards, Article 11.1(b) explicitly prohibits voluntary export restraints.23

Example 3- China-Rare Earths, (WT/DS432/R) Facts: The dispute arose because of China's use of export quotas and export duties on various forms of rare earths, tungsten, and molybdenum. In this regard, the complainants have also challenged the administration and allocation of the minerals through export licensing of the export quotas. Contention of the parties: The complainants (US, Japan ad European Union) argued that the export duties, quotas including its administration and allocation is inconsistent with certain commitments under China’s Accession Protocol as well as Article XI:1 of the GATT. China, in response, argued that its export duties and quotas are justified under the Article XX(b) and (g) exceptions respectively and thus it hasn’t deviated from its commitment under the Accession Protocol or the GATT. Panel Report (on the issue of inconsistency with Article XI:1 of the GATT): Upon examining the China’s defense under Article XX(g), The Panel concluded that China had failed to justify that the export quotas instituted by the government was done with the objective to conserve natural resources and that the measure were not invoked in an arbitrary, discriminatory and unjustifiable manner. The Panel observed that “In the Panel's view, China's has not met its burden of demonstrating that its export quota on rare earths is applied in a manner that does not result in unjustified or arbitrary discrimination or disguised restriction on trade against foreign users. In view of the above, the Panel concludes that China has not demonstrated that its 2012 export quota on rare earths was not applied in a manner that constitutes arbitrary or unjustifiable discrimination or a disguised restriction on international trade. For the reasons given above, the Panel concludes that China's export quota on rare earths is inconsistent with Article XI:1 of the GATT 1994 and Paragraphs 162 and 165 of China's Working Party Report. The Panel also concludes that China's export quota on rare earths is not justified under either subparagraph (g) or the chapeau of Article XX of the GATT 1994.”24

23

Peter Van Den Bossche & Werner Zdouc, The Law and Policy of the WTO, (3rd edn, Cambridge

Press 2013) 491 24

WT/DS432/R, Para. 7.678-680

*Why did China impose the VER on these minerals? “ Rare earth metals are used in all sophisticated modern electronic devices including computers, smart phones, cars, magnetic devices, and turbines. China produces an overwhelming majority of the world’s rare earth metal supply — 90 percent of all rare earth metals used in global industry originate in China. Beijing has taken advantage of its near-monopoly power in the past. In 2010, Beijing cut export quotas by 40 percent, causing prices to skyrocket.”25

II.6 MINIMUM EXPORT/IMPORT PRICES; LICENSING

The minimum export prices imposed by a Member may have effects similar to export taxes as “they both create a wedge between domestic and world prices.” 26 If this price is set at a certain level it may result in a restricted quantity of exports. In China-Raw Materials, the dispute concerned four types of export restraint that China imposed on export of certain raw materials. As China was the leading producer of these minerals, the complainants argued that the restraint resulted in higher prices of the products in the global markets. The arguments advanced by both parties in this case are similar to the arguments placed before the Panel in China-Rare Earth27. On the issue of minimum export prices established by China, the complainants argued that “such a requirement prohibits exportation if the price of the export is lower than the floor established by the minimum export price. In the complainants' view, this amounts to a "limiting condition" that is a restriction within the meaning of Article XI:1 of the GATT 1994.1517 They argue that China's system has an impact on prices and distorts world market conditions for the raw materials at issue because of China's alleged position as a leading producer of these materials.”28 The Panel relied on the findings of the Panel in EEC-Minimum Import Prices, Japan-Semiconductors and Colombia- Port of Entry, where the Panel members interpreted the term “restriction” under Article XI:1 “to mean that refers to measures that create uncertainties and affect investment plans, restrict market access for imports or make importation prohibitively costly.”29 In other words, previous Panels had already concluded that a measure, which prevents

25

Ankit Panda, “WTO Finds Chinese Rare Earth Export Restrictions in Violation of International

Trade Law”, The Diplomat Magazine <http://thediplomat.com/2014/03/wto-finds-chinese-rare-earth-

export-restrictions-in-violation-of-international-trade-law/> accessed 17 July 2014.

26 Mavroidis and Wu, Law of The WTO: Documents, Cases & Analysis, (2

nd edn, West Academic

2013) 62 27

China-Raw Materials was decided before China-Rare Earths 28

WT/DS398/R, Para. 7.1067 29

Id., Para 7.1078

exportation below a certain price level inherently constitutes “restriction” and is inconsistent with Article XI:1 of the GATT. In this regard, the Panel opined that “The Panel consider the very potential to limit trade is sufficient to constitute a "restriction ... on the exportation or sale for export of any product" within the meaning of Article XI:1 of the GATT 1994.1531 The Panel considers this view is consistent with the conclusion by the panel on Colombia – Ports of Entry that any measure that creates uncertainty as to the ability to import/export, and otherwise "compete" in the marketplace, violates Article XI:1.”30 The Panel also evaluated claims by the complainant relating to the licensing regime established by China and its alleged inconsistency with Article XI:1 of the GATT. The Panel observed that any license that is granted without condition or in pursuance of a measure justifiable under the exceptions to Article XI:1 are consistent with the framework of the provision as long as these measures do not by their nature have a limiting or a restrictive effect. However, in this case the Panel found that although the Chinese export-licensing regime wasn’t inconsistent with Article XI:1 per se but the requirement to submit an unqualified number of other documents of approval under the relevant regulations, resulted in an additional restriction inconsistent with Article XI:1.31

II.7 RELATIONSHIP BETWEEN ARTICLE III:4 & XI:1

The text of the aforementioned provision makes it clear that measures, which are applicable to both domestic and foreign products, even if they are applicable at the border32, will continue to be covered by the discipline enshrined in Article III GATT. In other words, the Ad Note to Article III, makes it possible for a measure, which is enforced at the time or point of importation to be treated as an internal measure, thus falling within the purview of Article III. The Panel in Canada-FIRA had observed that a distinction must be drawn between measures which fall under Article III:4 and XI:1 except for measures invoked by state trading operations as they are both the importers and the distributors. In India-Autos, India defended a claim brought against its trade 30

Id., Para 7.1081 31

Id., Para 7.957-7.958 32

Article XI:1 applies to border measures, whereas Article III:4 generally applies to internal measures,

which are in violation of the national treatment principle.

Interpretative Note Ad Article III from Annex I Any internal tax or other internal charge, or any law, regulation or requirement of the kind referred to in paragraph 1 which applies to an imported product and to the like domestic product and is collected or enforced in the case of the imported product at the time or point of importation, is nevertheless to be regarded as an internal tax or other internal charge, or a law, regulation or requirement of the kind referred to in paragraph 1, and is accordingly subject to the provisions of Article III.

balancing requirement by claiming that the matter fell under Article III and not Article XI:1.33 Owing to this defense, the Panel expounded the distinction in the nature and scope of both Articles. The Panel observed that “…it therefore cannot be excluded a priori that different aspects of a measure may affect the competitive opportunities of imports in different ways, making them fall within the scope either of Article III (where competitive opportunities on the domestic market are affected) or of Article XI (where the opportunities for importation itself, i.e. entering the market, are affected), or even that there may be, in perhaps exceptional circumstances, a potential for overlap between the two provisions, as was suggested in the case of state trading. Any analysis of the applicability of either Article III:4 or XI:1 should thus be based on the principles within Article 3.234 of the DSU.”35

II.8 EXCEPTIONS UNDER ARTICLE XI

As mentioned above, the London Compromise witnessed heated debates between western blocs and war torn/developing countries in order to reach a mutually agreeable on the issue of quantitative restrictions. The “compromise” reached, prohibited trade restrictive practices in the form of quantitative restrictions with certain exceptions found throughout the agreement. Among these, certain exceptions were agreed to be included within the framework of Article XI itself. Thus, Article XI:2 contains a list of exceptions to the general proscription against quantitative restrictions, contained in Article XI:1. a) Article XI (2) (a): “Critical Shortages” Exception

The legislative history of the 1946 London preparatory conference suggests that “other products”, refers to permission given to Members to permit imposition of 33

Petros C. Mavroidis, The General Agreement on Tariffs and Trade: A Commentary (OUP 2007) 46 34 Recommendations and rulings of the DSB cannot add to or diminish the rights and obligations provided in the covered agreements. 35

WT/DS175/R, Para. 7.224

Article XI (2): The provisions of paragraph 1 of this Article shall not extend to the following: (a) Export prohibitions or restrictions temporarily applied to prevent or relieve critical shortages of foodstuffs or other products essential to the exporting contracting party;

quota on exports for conservation of natural resources. 36 The provision also mentions that such a ban must be for “prevention” or “relief”. Professor Bhala argues that this wording suggests that a measure may be taken in light of an imminent critical shortage or during the course of such shortage.37 The defense under Article XI:2(a) may seem counter-intuitive as it goes against the basic principle of non-discrimination enshrined in the GATT. However, from an alternative moral lens it becomes a necessary evil to ward off companies from engaging in profit making initiatives in situations where supply of a concerned product is limited. b) Article XI:2 (b): “Clarification and Grading” Exception

It is imperative to differentiate the scope of the aforementioned provision from Article XX(d) of the GATT ( i.e. measures which are necessary to secure compliance with the laws and regulations, which are not inconsistent with the GATT). While Article XX(d) is invoked to address a policy concern which is specific to the imposing member, Article XI:2(b) is invoked to address the concerns of all trading nations.38 Although, a bare reading of the provision may indicate that Members may very well abuse this in order to invoke quantitative restrictions, the existence of the term “necessary” raises the evidentiary burden on the invoking member, thus making it difficult for a Member to take recourse to this provision without sufficient evidence. c) Article XI:2(c): “Agriculture or Fisheries” Exception

36

Raj Bhala, Modern GATT Law, (Sweet and Maxwell, 2005) 370 (citing U.N. Doc. EPCT/A/SR.40 st

1-2(1947)); Although this isn‟t clear from the text of the provision. 37

Id. 38

Id. 369

Article XI (2): The provisions of paragraph 1 of this Article shall not extend to the following: (b) Import and export prohibitions or restrictions necessary to the application of standards or regulations for the classification, grading or marketing of commodities in international trade;

The aforementioned exception is arguably the most technical one. As is clear from the text the exception does not permit a complete ban on importation on a product, rather it only permits a “restriction” on them. The negotiating history of this provision also reveals a very interesting debate that ensued between developed and developing Members. As Professor Jackson has explained, the exception was vehemently opposed by the developing Members, who perceived this provision as a medium to cater to the local producers of the developed nations.39 Nevertheless, it is important to remember that the exception has never been successfully used owing to high evidentiary standards set forth in the text of the convention. In order to successfully claim an Article XI:2(c) exception, the defendant Member must prove that import restriction is “necessary”.40Even upon meeting these criteria, the defendant must still prove that the measure has been invoked to achieve a purpose listed under Article XI;2(c). Moreover, in keeping with the transparency commitment under Article II, the defendant is also obliged to provide detailed accounts of the value or quantity of import restrictions as well as the timeline for such restrictions.41

39

John H. Jackson, World Trade and The Law of GATT, (Lexis Law Publications 1969) 317 40

The test for necessity is the same as used for Article XX exceptions, i.e. whether there is a less trade

restrictive measure available to ensure the implementation of same policy goals?; whether the

restriction is for the enforcement of a measure? Whether an official authority has invoked the measure? 41

Raj Bhala, Modern GATT Law, (Sweet and Maxwell, 2005) 371-372; See Canada-Import

Restrictions on Ice Cream and Yoghurt; B.I.S.D. (36th

Supp.) 68,93, Para.84 (1990) (adopted 5

December 1989)

Article XI (2): The provisions of paragraph 1 of this Article shall not extend to the following: (c) Import restrictions on any agricultural or fisheries product, imported in any form,* necessary to

the enforcement of governmental measures which operate: (i) to restrict the quantities of the like domestic product permitted to be marketed or produced, or, if there is no substantial domestic production of the like product, of a domestic product for which the imported product can be directly substituted; or

(ii) to remove a temporary surplus of the like domestic product, or, if there is no substantial domestic production of the like product, of a domestic product for which the imported product can be directly substituted, by making the surplus available to certain groups of domestic consumers free of charge or at prices below the current market level; or

(iii) to restrict the quantities permitted to be produced of any animal product the production of which is directly dependent, wholly or mainly, on the imported commodity, if the domestic production of that commodity is relatively negligible. Any contracting party applying restrictions on the importation of any product pursuant to subparagraph (c) of this paragraph shall give public notice of the total quantity or value of the product permitted to be imported during a specified future period and of any change in such quantity or value. Moreover, any restrictions applied under (i) above shall not be such as will reduce the total of imports relative to the total of domestic production, as compared with the proportion, which might reasonably be expected to rule between the two in the absence of restrictions. In determining this proportion, the contracting party shall pay due regard to the proportion prevailing during a previous representative period and to any special factors* which may have affected or may be affecting the trade in the product concerned.

III. ARTICLE XII & XVIII: BALANCE OF PAYMENT EXCEPTIONS

III.1 FRAMEWORK AND CASE LAW

As mentioned above, there are a number of exceptions to the prohibition on quantitative restrictions outside the framework of Article XI. Among these, Article XII, which allows imposition of quantitative restrictions if a Member State is facing balance of payment (BoP) problems, was specifically designed to accommodate countries having scarce foreign exchange reserves. A similar provision is contained under Article XVIII(b) with a less stringent burden of proof requirement on the imposing Member State. The following differences between the two provisions will assist in understanding the provisions in a comprehensive manner.

Article XVIII:B, protection is available to Member States with inadequate

monetary reserves, whereas Article XII is to used in situations, where a Member

has very low monetary reserves. The use of the term “inadequate” in Article

XVIII:B allows a Member State a greater level of deference in administering

restrictions with a higher deferential standard of review.

The Procedure for engaging in consultations with respect to invocation of BoP

exceptions is much more simplified under Article XVIII:B.

Article XII requires Member States to progressively relax the restrictions

imposed, whereas under Article XVIII:B, no Member is required to alter the

Other Exceptions to Article XI:1

1) General Exception- Article XX GATT, 1994 2) Security Exception- Article XXI GATT, 1994 3) Regional Trade Agreements- Article XXIV GATT, 1994 4) Balance of Payments Exception- Article XII/XVIII/XV GATT, 1994 5) Waivers- Article IX:3 Marrakesh Agreement 6) Safeguard- Article XIX GATT, 1994 and Agreement on Safeguards 7) Provisions relating to Special and Differential Treatment- e.g.

Article XVIII:2(b)

restrictions on account of any policy, which would render such restriction

unnecessary.42

Currently, any BoP restriction must be presented to the Balance of Payments Committee under the framework of WTO, before it is invoked. The requirement owed its development to the system of a prevailing system of fixed exchange rates. This precluded countries from devaluing their currency in order to maintain its foreign reserves, without a multilateral consensus on the issue.43 However, with a shift towards a system of flexible exchange rates countries are increasingly addressing BoP concerns through devaluation of currency. 44 The invocation of BoP restrictions must also pass the test of an IMF consultation process. This is duly recognized under Article XV:2 of the GATT.45 In India-Quantitative Restrictions46, India advanced its defence for maintaining certain quantitative restrictions under Article XVIII:B, arguing that owing to a BoP crisis in 1991, it was imperative to maintain these restrictions. The question before the Panel was whether India was facing a serious decline or threat thereof as listed under Article XVIII:9(a) or had inadequate reserves as listed under Article XVIII:9(b). Upon evaluating the evidence placed before the Panel, it came to the conclusion that as per the IMF and RBI reports, India’s reserves were rising at a consistent rate post 1996. Hence, the reserves were not inadequate or facing any serious decline or threat thereof.47 The Panel then moved on to address whether these measures could still be maintained under the Ad Note to Article XVIII:11. The Ad Note to Article XVIII:11 clarifies that any relaxation or removal should not result in a situation which worsens the BoP problems. The Panel observed that in order to “ …maintain the measures at issue, it must be determined that one of the conditions contemplated in sub-paragraphs (a) and (b) of Article XVIII:9 would appear immediately after the removal of the measures, and

42

Mavroidis and Wu, Law of The WTO: Documents, Cases & Analysis, (2nd

edn, West Academic

2013) 73 43

The devaluation of currency allows exports to become cheaper and imports more expensive. This in

turn, protects a country‟s foreign reserves and adds to the same. This is of course dependent on price

elasticity of the concerned market. 44

Mavroidis and Wu, Law of The WTO: Documents, Cases & Analysis, (2nd

edn, West Academic

2013) 74 45 Article XV: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. 46

Facts mentioned on page 6-7. 47

WT/DS 90/R, Para 5.158-5.184

a causal link must be established between the anticipated reoccurrence of the conditions of Article XVIII:9 and the removal. It should be noted that the text requires more than a mere possibility of reoccurrence of the conditions ("would produce"). The Ad Note therefore allows for the maintenance of measures on the basis only of clearly identified circumstances, and not on the basis of a general possibility of worsening of balance-of-payments conditions after the measures have been removed. Such an interpretation could lead to the maintenance of balance-of-payments measures for indefinite periods, as it could almost always be argued that there exists a risk of worsening of balance-of-payments conditions at some time in the future.” 48Consequently, the Panel decided that measures invoked by India couldn’t be justified because its removal wouldn’t immediately result in conditions requiring reinstitution of import restrictions. The Panel then moved to address the issue of whether India was entitled to maintain these measures under the proviso to Article XVIII:11. Article XVIII:11 contains a proviso as follows: "no Member shall be required to withdraw or modify restrictions on the ground that a change it its development policy would render unnecessary the restrictions which it is applying under Article XVIII:B". India argued that the IMF report has assumed that a change in India’s development policy would result in rendering the restrictions unnecessary. The Panel observed that India did not present sufficient evidence to justify this stance. Furthermore, the Panel clarified that there was no assumption either on part of the Panel or the IMF report on changes in India’s development policy. The Panel observed that usage of macro-economic policy instruments is not tantamount to amendments in development policies. Further, any changes could be made to domestic policies, which are not development policies. Since, India wasn’t clear on what it considered a development policy in this context, the Panel concluded that the measures were not justified under the proviso to Article XVIII:11. 49

III.2 INFANT INDUSTRY PROTECTION

Article XVIII was drafted with the objective of providing exceptions to developing economies so as to ease the constraints on their economy. In this regard, Article XIII:(C) was drafted to allow developing countries to deviate from their obligations in order to protect their infant industry. The threshold for allowing this exception is that such a measure should raise the general standard of living coupled with certain notification requirements and an obligation to engage in consultations if a certain product is subject to a tariff binding.50

48

WT/DS90/R, Para 5.199 49

WT/DS90/R, Para 5.216-5.223 50

Mavroidis and Wu, Law of The WTO: Documents, Cases & Analysis, (2nd

edn, West Academic

2013) 77

IV. ADMINISTRATION OF QUANTITATIVE RESTRICTIONS

IV.1 RULE OF NON-DISCRIMINATION

Article XIII:1 stipulates that no prohibition or restriction shall be applied in a discriminatory manner. In other words, it requires a Member imposing a QR on any product, to extend the same restriction to such product from all countries and not restrict to any particular country or a group of countries. In this regard, the provision creates an MFN-like obligation. The provision was discussed in a GATT Panel dispute, EEC-Apples (Chile 1). In this dispute, the EC attempted to execute a voluntary restraint agreement with Chile on the importation of apples but the negotiations failed. The EC had successfully executed these arrangements with Argentina, Australia, New Zealand and South Africa. Regardless of the outcome of the negotiation, the EEC imposed a quantitative ban on importation of apples from Chile. The Panel observed that since there was no correlation between the measures invoked against other countries as compared to Chile (essentially Chilean imports ban was an involuntary export restraint), there was a violation of Article XIII:1. 51

51

Peter Van Den Bossche & Werner Zdouc, The Law and Policy of the WTO, (3rd edn, Cambridge

Press 2013) 492; See Panel Report, EEC-Apples (Chile 1) (1980) at Para 4.11

Article XIII:1: No prohibition or restriction shall be applied by any contracting party on the importation of any product of the territory of any other contracting party or on the exportation of any product destined for the territory of any other contracting party, unless the importation of the like product of all third countries or the exportation of the like product to all third countries is similarly prohibited or restricted.

IV.2 RULES ON THE DISTRIBUTION OF TRADE

Article XIII:2 requires Members to make efforts to ensure that the distribution of trade with respect to a certain product is not hampered owing to a QR other than a prohibition or a ban. In EC-Bananas III, the EC’s regime for importation of bananas was applied in three categories: traditional imports from 12 ACP countries; non-traditional imports from ACP countries based on quantities and any export by ACP countries which are non-traditional supplier; imports from non-ACP countries. The Appellate Body observed that the allocation of non-utilised tariff quotas only among those countries that concluded a Framework Agreement with the EC did not factor the trade flows, which would exist in the absence of tariff quotas.52 This was inconsistent with Article XIII:2, whose object and purpose is to minimize the impact of QRs on trade flows. Further Article XIII:2(d) specifies that in allocating quotas among specific supplier countries, Members with a substantial interest in supplying the concerned product must be consulted and if that is not possible then they should be assigned quotas on basis of Article XIII:2(d), second sentence. In EC-Poultry, the Appellate Body held that such quotas must be calculated on basis of total imports, which would include imports coming from non-members also. 53

52

Peter Van Den Bossche & Werner Zdouc, The Law and Policy of the WTO, (3rd edn, Cambridge

Press 2013) 493; See WT/DS158/AB/R, Para 163 53

WT/DS389/AB/R, Para 106

Article XIII: 2: In applying import restrictions to any product, contracting parties shall aim at a distribution of trade in such product approaching as closely as possible the shares which the various contracting parties might be expected to obtain in the absence of such restrictions and to this end shall observe the following provisions: (a) Wherever practicable, quotas representing the total amount of permitted imports (whether allocated among

supplying countries or not) shall be fixed, and notice given of their amount in accordance with paragraph 3 (b) of this Article;

(b) In cases in which quotas are not practicable, the restrictions may be applied by means of import licences or

permits without a quota; (c) Contracting parties shall not, except for purposes of operating quotas allocated in accordance with

subparagraph (d) of this paragraph, require that import licences or permits be utilized for the importation of the product concerned from a particular country or source;

(d) In cases in which a quota is allocated among supplying countries the contracting party applying the restrictions

may seek agreement with respect to the allocation of shares in the quota with all other contracting parties having a substantial interest in supplying the product concerned. In cases in which this method is not reasonably practicable, the contracting party concerned shall allot to contracting parties having a substantial interest in supplying the product shares based upon the proportions, supplied by such contracting parties during a previous representative period, of the total quantity or value of imports of the product, due account being taken of any special factors which may have affected or may be affecting the trade in the product. No conditions or formalities shall be imposed which would prevent any contracting party from utilizing fully the share of any such total quantity or value which has been allotted to it, subject to importation being made within any prescribed period to which the quota may relate.*

… 5. The provisions of this Article shall apply to any tariff quota instituted or maintained by any contracting party, and, in so far as applicable, the principles of this Article shall also extend to export restrictions.