BOP, a special and differential right in WTO without substance?

A WTO panel ruling that India's import restrictions
maintained on balance-of-payments grounds are illegal has
potential systemic implications. Chakravarthi Raghavan
analyzes the legal intricacies and sifts through GATT
negotiating history in critiquing the ruling.

GENEVA: Article XVIII:B of GATT 1994 as a whole embodies the
principle of Special and Differential (S&D) treatment on
measures taken for balance-of-payments (BOP) reasons, agreed
the WTO panel on the Indian BOP case which, however, reflected
this only in its suggestions for India being given a longer
phase-out period than the normal 15-month time limit ordinarily
set by arbitrators as a "reasonable period" for implementation.
This may or may not help India, but the ruling appears to
have some serious implications for developing countries in the
run-up to the next Ministerial meeting and any negotiations
that may ensue. The ruling, as some others before, suggests
that S&D provisions (with various WTO bodies having to take
decisions and operating under the GATT consensus practices) can
be frustrated through the dispute settlement system.
There are varying views on the way the Uruguay Round Dispute
Settlement Understanding (DSU) was negotiated in the final
stages of the Round by a few key delegations, and the
agreements in goods, services and intellectual property, as
well as the overarching DSU, were packaged into the WTO
Agreement as annexes.
Both then and later, some of the negotiators, and some
outsiders who got access to official files, gave their
versions. But to those who observed the Geneva scene of those
days and talked to delegations, it was evident that the final
shape was one cobbled together in a rush to meet deadlines -
without any adequate scrutiny of the legal texts to see whether
they reflected what the negotiators had agreed upon.
To those raising questions at that time, some delegates
explained then that the internal contradictions between texts
on the same issue would be tackled during the scrutiny of the
legal texts (between December and March). But contrary to these
assurances, in fact, none of the texts were touched for fear
that everything might unravel.
Those who had concerns were told these could be redressed
subsequently through agreed interpretations and so on.
In the case between the US and India over the various import
restrictions and measures maintained by India on the basis of
its balance-of-payments situation (the India BOP case, as it
has become known) (see following article on p.10), the panel
has said that the consensus decision-making process of various
WTO bodies dealing with agreements and understandings
(decisions by consensus are presumed when no one present in the
relevant body of the WTO specifically objects, and thus there
is a "positive consensus") can coexist without conflict with
the DSU process requiring at every stage a "negative consensus"
- a proposal at every stage of the Dispute Settlement Body
(from reference to a panel through various stages to adoption
of panel rulings) being set aside only by consensus.

Negotiating history

The BOP provisions in the GATT have a long history. The
original GATT 1947, a provisional agreement pending entry into
force of the Havana Charter, was one drawn up at a time when
the US was the only "surplus" country. GATT 1947 had an Art.
XII (for special restrictions based on BOP considerations)
applicable to all.
There were less than a handful of developing countries in
the GATT at that time.
Subsequently, as more of them joined, and the political
economy and problems of development became clearer, Art. XVIII
was considerably revised and changed in the 1954-55 special
review process, and the present Art. XVIII (sections A, B and
C) came into effect in 1957.
Art XVIII:B had a carefully balanced approach, enabling BOP
restrictions by developing countries (on criteria different
from those governed by Art. XII), but forcing countries to
justify their case before the BOP Committee, which often
accepted their view, but sometimes did not and merely recorded
the views of various parties. And these reports were "taken
note of" by the GATT Council.
The BOP article itself (XVIII:B.12) provides for resolving
disputes in the BOP Committee and then in the General Council;
for the Council (as the Contracting Parties) making
recommendations for a phase-out of BOP restrictions when they
are not justified, and for authorizing retaliation by a
complaining party when the recommendations are not accepted by
the country applying the BOP restrictions. At the same time,
the article had provisions to enable a contracting party
against whom retaliation has been authorized to withdraw from
the GATT (effective on the 60th day after notice), similar to
the right of withdrawal when retaliation is authorized in an
Art. XXIII dispute settlement, rather than six months in the
GATT's general withdrawal in Art. XXXI. The scheme is one of
a self-contained provision, dealing with substantive and
procedural rights and obligations, resolving disputes,
"retaliation" and even withdrawal from the GATT.
The GATT also had provisions for customs unions, free-trade
areas and so on in Art. XXIV. When the Rome treaty for the EC
customs union (supported and encouraged by the US) was
concluded and came up before a working party in terms of Art.
XXIV, no agreement was reached on its compatibility or
otherwise (the US in those days was supporting the Rome treaty,
including its Common Agricultural Policy). The working party
merely recorded the views of various members without a
conclusion, and this was taken note of by the GATT Council. The
EC subsequently used this to argue that "no disapproval" meant
And with the GATT dispute settlement (Art. XXII and XXIII)
needing a positive consensus for adoption, and the EC
successfully blocking things, discontent was brewing,
ultimately resulting in the issue being taken up in the Uruguay
Round, and leading to the WTO "understanding" on Art. XXIV,
with its qualifications for the application of the dispute
settlement provisions.
The various Uruguay Round agreements and understandings
annexed to the WTO treaty provide for "consultations" and
"dispute settlement". In some (Art. 8 of the TRIMs Agreement,
for example), the relevant provision says that the provisions
of Art. XXII and XXIII of the GATT as elaborated by the DSU
apply. In others (as in the Agreement on Textiles and
Clothing), before XXII and XXIII can be invoked, a member has
to go through the Textiles Monitoring Body process first. In
still others, the recourse to XXII and XXIII is provided for,
but with some differing phraseology.

Uruguay Round understandings

The new conflicts over the BOP and XXIV that came up in the
1980s and in the early 1990s resulted in the two understandings
of the Uruguay Round.
The BOP understanding is an elaboration of the provisions in
Art. XII and XVIII of the GATT, which contains also XXII and
XXIII. As such, there was no need to refer to XXII and XXIII.
But the BOP Understanding does make such a reference in a
footnote. There is a similar type of reference and
qualification in the Understanding on Art. XXIV of the GATT
(free- trade areas, customs unions and so on).
The negotiations on these "understandings" took place in
parallel, and the compromise on how to apply the dispute
settlement to XXIV was brought into the BOP Understanding and
put in as a footnote. This is the real negotiating history, but
perhaps one not recorded in the GATT files (or is it a case of
information on record not cited for the panel?).
If the intention of the treaty makers was to provide an
unqualified right to use XXII and XXIII and the DSU for all
agreements, nothing would have been simpler than to put it in
the DSU and say that these provisions would be applicable to
all agreements, or elsewhere in the WTO.
But the treaty makers did not do this. They chose to make
references under individual agreements, and in varying
phraseology. And if the negotiators of the BOP Understanding
wanted an unqualified right, they could have stopped with the
first sentence of the footnote, or the first part of the second
sentence up to "matters". Why then did they add the subsequent
words if it was to mean the same?
Para 12 of XXIV:6 of the Understanding on Art. XXIV says:
"The provisions of Art. XXII and XXIII as elaborated and
applied by the DSU may be invoked with respect to any matters
arising from the application of those provisions of Art XXIV
relating to customs unions.... "
The footnote to the BOP Understanding says: "Nothing in this
Understanding is intended to modify the rights and obligations
of Members under Art. XII or XVIII:B of GATT 1994. The
provisions of Art. XXII and XXIII of GATT 1994 as elaborated
and applied by the DSU may be invoked with respect to any
matters arising from the application of restrictive import
measures taken for BOP purposes."
It is difficult to read a difference in the ordinary
meanings of the two wordings. But the qualification in the
footnote to the BOP Understanding has been interpreted in such
a way as to render redundant the second sentence in that
In the early stages of the GATT, until almost the mid-1970s,
except for the US perhaps, the industrialized world took a
benign view of import restrictions of the developing world to
deal with their BOP problems - and even the IMF, when
disbursing conditionality loans for BOP, required no more than
devaluation and other remedies (and not changes in trade
policy, for example).
It was only in the Tokyo Round (when the US and other
industrial nations, and their corporations, began eyeing the
markets of the developing world) that the assault on BOP rights
began. But it was resisted by all developing countries and
finally resulted in the 1979 Declaration in the Tokyo Round,
which sought to persuade developing countries to move to tariff
protection rather than QRs, and towards the theory of raising
tariffs generally as a BOP response rather than selectively on
individual sectors. But the 1979 Declaration essentially
preserved the rights of developing countries.

BOP claims before panels

But in ruling that the "application of restrictive import
measures" allows the justification of BOP claims (for which
XVIII:B. 12 provides a procedure for the Contracting Parties to
settle disputes) themselves to be challenged under the DSU, and
not merely the restrictive import measures, the panel has
provided some strange arguments and precedents, citing
secretariat notes and other references, without the parties (in
this case, India) having an opportunity to argue about it or
produce any contrary evidence (on the basis that no new
evidence can be allowed), excepting perhaps during the interim
review stage (by which time panels would have already reached
substantial conclusions).
The panel, though affirming XVIII:B as an important S&D
right of developing countries, has in effect wiped out the
rights therein by ruling that the entire range of BOP issues
could be agitated before the BOP Committee and/or through the
dispute settlement process.
In taking such a view about Art. XVIII:B and the DSU
enabling BOP claims to be justifiable before panels, the India
BOP panel has made references to a secretariat note to it on
the GATT practice from 1975-1988 on BOP issues. According to
the note, cited by the panel, the actual GATT practice has been
that the BOP Committee in some cases explicitly recognized
existence of a BOP situation (and hence the restrictions),
while in others, no conclusions were reached, with the views of
parties merely recorded.
The panel then cites a secretariat view from this that while
there was never an explicit determination that BOP restrictions
were unjustified, "various levels of tone" were used to
indicate the strength of the Committee's doubts concerning the
justification, and in other cases, the adoption of a BOP
Committee report on BOP justification was not blocked but some
contracting parties expressed regret at the continued existence
of restrictions and pressed for faster liberalization.
All these "points" of the secretariat note are drawn from
its notes to the Uruguay Round negotiating committee and, by
citing this (without any reference to India, in this case), the
panel has made the secretariat's views during the negotiations
a part of the negotiating history in interpreting the outcome -
the views of the "contracted party" (the GATT DG and his
staff) being equated to the views of the Contracting Parties
which negotiated the agreements.
But there was no approved negotiating history of the
negotiators at the end of the negotiations, and the only way to
draw any conclusions on the negotiating history has to be on
the basis of various proposals that led to the final text.
Without going through the various BOP reports and the
differing languages used to reach the conclusions it did, the
panel has adopted the secretariat's subjective view about
"various levels of tone".
Even stranger is the citation, at the instance of the
secretariat, in para 5.38 of the report, about the US
"consultations" with India on the BOP measures restricting
"almond imports", and the constitution of a panel, but with no
panel report, since the US and India reached a settlement
(which in fact involved resolving India-US trade and non-trade
The almond dispute is thus a case, not of an unadopted panel
report whose reasoning is used by a subsequent panel, but of a
panel report that was never made; but the very establishment of
a panel is cited as proof that a dispute could be raised!
The only GATT case on BOP that ever went to a panel (and
ended with a report) was the Korean beef case. India had
contended in its arguments that the panel on Korean beef did
not make its own finding on the BOP justification, since
conclusions on it had been reached by the BOP Committee which
the panel took into account.
In rejecting this Indian argument, the panel makes an
even more startling finding: "However, we find no evidence
in the report that the panel would have refused to
review the claims of the complainants as to the justification
of the balance-of-payments measures if the committee had not
issued any report."
This argument is really mind-boggling, and in any legal
proceedings in domestic courts functioning under a system of
rule of law (with or without the US "due process" right), such
citations, references and arguments of non-parties (like the
secretariat) would be ground enough to strike down in appeal
such a "speaking judgement".
The panel has gone into elaborate arguments to justify that
the added phrases in the footnote mean the same, but has made
no attempt to explain how the wording of a dispute settlement
right in one way in the TRIMs Agreement and in another in the
BOP Understanding both could mean the same.
The arguments are convoluted and thus unconvincing.
Even curiouser are the arguments used to rebut the Indian
argument that vesting a dispute settlement panel (whose
findings are automatically adopted through negative consensus)
with the same jurisdiction as that vested specifically in the
BOP Committee and the General Council (which need positive
consensus for a decision) could create systemic conflicts.
If the BOP Committee and the General Council have not
decided the issue at the time of reference of the dispute to a
panel, there is no conflict, says the India BOP panel - thus
opening the way in future for anyone to withhold consensus and
block adoption of reports in the BOP Committee or the General
Council, and then take the issue to the DSU (as the US has done
in this case).
The panel notes that the BOP Committee and the General
Council have reached no decision on India's contention, and
hence there is no conflict in the panel considering it.
If the report had stopped there, it would have brought out
the failures of the negotiators. But it has gone further.
In support of the view that there is no limitation on a
panel in BOP disputes, it cites that the Vienna Law of Treaties
requires words to be given their ordinary meaning, and treaties
interpreted as a whole (an ICJ advisory opinion about the ILO
is cited in support of this).
In fact, the ILO practice is of a 2-year period of extended
treaty-making and publication and consultation by governments
with unions and employers, with legal drafting expertise at
every stage. It is totally unlike the WTO's secret process, and
civil society everywhere would be happy for the open ILO
processes to become the WTO norm in any future rule-making.
This apart, the panel gives no explanation as to why the WTO
treaty makers have used different wordings in different
agreements, and why they did not just say that the provisions
of XXII and XXIII and the DSU can be invoked in all disputes on
all agreements.

Overstating the effect?

On the Indian argument that the panel's view will render
"inutile" the difference in wordings used in different
agreements, and that the panel's ruling on the meaning of the
footnote to the BOP Understanding would imply a complete
transfer of competence to determine the justification of BOP
restrictions - from the BOP Committee and the General Council
to the dispute settlement panels - and could create conflicts,
the panel says:
"India's argument overstates the effect of a decision that
dispute settlement panels may consider the justification of
balance-of-payments measures in individual cases. In most
cases, it is reasonable to assume that there will be no resort
to dispute settlement procedures on such issues. Past practice
supports that assumption."
One wonders what would be the "understated" effect. Also,
can past practice really support the panel's view that there
would be no conflict, when the "past" had no automatic dispute
settlement process?
The panel then says that even if some BOP issues are
considered in the dispute settlement system, "it is our view
that the BOP Committee procedures would play a significant role
in these cases." The issues will first be discussed in the BOP
Committee and the "results of the Committee process may
influence the results of the dispute settlement process."
The dispute settlement procedures and BOP Committee
consultation procedures differ in nature, scope, timing and
type of outcome, the panel says, citing the 1970 and 1979 (old)
GATT Declaration in support. (SUNS4416)

The above article first appeared in the South-North Development
Monitor (SUNS) of which Chakravarthi Raghavan is the Chief Editor.