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A.

Trade restrictions
B. Bop
C. Trade restriction on bop
D. Its effects
E. Provisions to safeguard(including wto)
F. Results
G. conclusions
“Are Trade Restrictions to protect B.O.P Becoming
Obsolete?”

Multilateral trade liberalization has been a major contributor to the world


economy’s growth over the past half century. Doha development agenda of the
world trade organization is tackling the restrictions on trade, so that all countries
get benefited. Though it have a positive effect over the time but countries still have
to adjust more with trade restrictions because of the opening of the world trading
environment. And under certain circumstances these adjustments could temporarily
reduce export revenues, increase import bills, or causes other shortfalls in the
external Balance of Payment.

According to the trade integration mechanism shortfall in balance of


payment might result from multilateral trade liberalization. The countries may have
to make some potential adjustment because of competitive condition in countries
export market.

With the removal of exchange controls and other restrictions to capital mobility
,the need for and the use of,import restrictions for balance of payment reasons,as
provide for under GATT Articles 12 and 18 ;B ,has diminished. Since a recent
WTO ruling also seems to have put a stop to developing countries ,using the
ambiguity of treating language to justify measures designed to protect their
domestic industries,there is reason to expect that trade restrictions justified with a
foreign exchange crisis will finally fall into disuse.

To understand the relationship between trade restrictions and balance of payment


we should know these terms separately as follows-
Trade restriction-
A trade restriction is an artificial restriction on the trade of goods between two
countries. It is the result of protectionism. However, the term is not uncontroversial
since what one part may see as a trade restriction another may see as a way to
protect consumers from inferior, harmful or dangerous products. For instance
Germany required the production of beer to adhere to its purity law. The law,
originally implemented in Bavaria in 1516 and eventually becoming law for newly
unified Germany in 1871, made many foreign beers unable to be sold in Germany
as "beer". This law was struck down in 1987 by the European Court of Justice, but
is still voluntarily followed by many German breweries.

The most common types of trade restrictions include tariffs, quotas, subsidies and
embargoes. Governments impose trade restrictions for a variety of reasons, often
under pressure from industries that lobby for protection from foreign competition.
Governments also cite national security and protecting domestic jobs as other
reasons for imposing limits on trade.

1. Tariffs: Typically, tariffs (or taxes) are imposed on imported goods. Tariff
rates usually vary according to the type of goods imported. Import tariffs
will increase the cost to importers, and increase the price of imported goods
in the local markets, thus lowering the quantity of goods imported. Tariffs
may also be imposed on exports, and in an economy with floating exchange
rates, export tariffs have similar effects as import tariffs. However, since
export tariffs are often perceived as 'hurting' local industries, while import
tariffs are perceived as 'helping' local industries, export tariffs are seldom
implemented.
2. Import quotas: To reduce the quantity and therefore increase the market
price of imported goods. The economic effects of an import quota is similar
to that of a tariff, except that the tax revenue gain from a tariff will instead
be distributed to those who receive import licenses. Economists often
suggest that import licenses be auctioned to the highest bidder, or that
import quotas be replaced by an equivalent tariff.
3. Administrative Barriers: Countries are sometimes accused of using their
various administrative rules (eg. regarding food safety, environmental
standards, electrical safety, etc.) as a way to introduce barriers to imports.
4. Anti-dumping legislation Supporters of anti-dumping laws argue that they
prevent "dumping" of cheaper foreign goods that would cause local firms to
close down. However, in practice, anti-dumping laws are usually used to
impose trade tariffs on foreign exporters.
5. Direct Subsidies: Government subsidies (in the form of lump-sum payments
or cheap loans) are sometimes given to local firms that cannot compete well
against foreign imports. These subsidies are purported to "protect" local
jobs, and to help local firms adjust to the world markets.
6. Export Subsidies: Export subsidies are often used by governments to
increase exports. Export subsidies are the opposite of export tariffs,
exporters are paid a percentage of the value of their exports. Export
subsidies increase the amount of trade, and in a country with floating
exchange rates, have effects similar to import subsidies.
7. Exchange Rate manipulation: A government may intervene in the foreign
exchange market to lower the value of its currency by selling its currency in
the foreign exchange market. Doing so will raise the cost of imports and
lower the cost of exports, leading to an improvement in its trade balance.
However, such a policy is only effective in the short run, as it will most
likely lead to inflation in the country, which will in turn raise the cost of
exports, and reduce the relative price of imports.

Balance Of Payments

Balance of payments is a systematic record of transactions between one


country and rest of the world during a period of time.
Balance of payments emerge as an important feature of modern international
trade, whereby the country can evaluate its position in terms of international trade,
currency movements, terms of trade and strength of the currency. Balance of
payments can also project the development status of the economy interms of
industrial growth, economic stability and national income.
Balance of payments is a record of transactions under two different heads

1. Current account :
It deals with the movements of merchandise (goods) by way of exports and
imports. The merchandise may be private or Governmental. Merchandise is
a major item on the current account. Other items appearing under current
account include :
Transportation, insurance, tourism, and foreign remittances are called
as the invisibles because it involves foreign exchange flows but has no
physical movement of goods. The remittances can be in or out of the
country. Other items are non-monetary gold and miscellaneous head for
non-classified current transactions.
Each one of these items have a credit or debit depending on the
principles of double entry book keeping.
On current account there can be deficit or surplus, depending on the
nature of transactions.
The position on the merchandise account is called the balance of
trade. The difference between exports and imports determine the position of
balance of trade. It is an important indicator because it will highlight the
foreign exchange commitments of the country with respect to each country
and currency.

2. Capital account :
It deals with capital movements between one country and rest of the
world. Capital movements can be private, governmental or institutional
( IMF, World Bank and others).It can be again classified as short term and
long term capital movements.
Other items include amortisation, debt servicing, monetary gold and
miscellaneous. Amortisation is the loan liquidated, debt servicing is the
repayment of principle and interest and non-monetary gold is the payments
made interms of gold.
These capital transactions will also have a debit or credit depending
on the directions of flows. Capital account can show a deficit or a surplus
revealing the strength of the economy. The deficits of the current account
will be financed by the capital account. So there is a spill over of deficits of
current acceptant into capital account.

Finally, the balance of payments will have the deficit or surplus,


reflecting the overall position of all the international transactions.

Does balance of payments always balance?


Balance of trade and balance of payments :
In the classical school of thought it was popularly believed that balance of
payments should always balance. It was backed by the idea that under barter
system of exchange, every import shall have a corresponding export. So exports
will always be equal to imports.
Further, with no capital flows the payments can not be differed. With this
there will not be any difference between balance of trade and balance of payments.
Hence it was felt that balance of payments shall always balance.
With monetised transactions, barter is ruled out. There are capital
movements which can always upset export-import equality. Moreover, what the
classical economics considered balance of payments was indeed balance of trade.
There is no need for the balance of payments to balance, not even the
balance of trade. There can be deficit or surplus in any of the measures. On the
other and the balance of payments position reveals the strength of the country and
currency.
It is desirable to have a surplus in the balance of payments . A deficit in
balance of payments is called disequilibrium. Continuous deficits lead to problems
of mounting external debt burden and unstable currency.

WHAT IS A BOP CRISIS?

An unsustainable BOP situation in a given country may arise for a number of


reasons and risks becoming a BOP crisis. One example of an unsustainable current
account position is when the current account is in deficit, and the net imports of
goods and services cannot be financed with a sufficient inflow of foreign capital or
a reduction in foreign reserves. This may lead to an unsustainable BOP situation.
The policy options available to the affected country include improving the current
account, for instance by expanding exports or restricting imports (provided these
restrictions are compatible with its international obligations and preferably not
counterproductive in terms of future developmental objectives), or improving the
capital account by encouraging capital inflows. The latter may be achieved by
attracting more FDI or portfolio inflows. Borrowing, if sustainable in terms of
future interest and capital repayments, from foreign banks, governments or
international institutions is another policy option. Countries may also need to
consider adjustments to their monetary and exchange rate policies.

In seeking to avoid serious BOP difficulties governments have sometimes taken


restrictive measures on current transfers as well as on capital movements.
However, such mechanisms involve costs and can introduce distortions for the
country imposing them. Their adoption, or even threats of their adoption, can also
provoke capital flight if investors want to “get out while they can”. A future
IDF covering FDI would necessarily have to preserve a possibility for safeguards
although within well-defined and internationally accepted criteria.
Causes of disequilibrium in developing countries :
BoP disequilibrium is common with most developing economies. Study of the
factors and nature of disequilibrium will help in correction and design of methods
of protection.
Following are the important causes of disequilibrium :
1. Large population, increasing growth rates of population.
2. Stagnant exports due to out dated products
3. Increasing demand for imports.
4. Low productivity and poor growth rates.
5. Lack of bargaining power.
6. Large external debt due to which the burden of debt servicing increases.
7. Adverse terms of trade.
8. Cyclical fluctuations in economic activity.
9. Problems of international liquidity.
10.Absence of ant trading association or regional block
11.Weak currency
12.Absence of trade ties with developed economies.
In addition all the problems of under development contribute to
disequilibrium in BoP. Since there is no effective mechanism to correct, the
disequilibrium becomes chronic.

Methods of correcting balance of payments disequilibrium


There are several methods to correct balance of payment disequilibrium.
The methods depend on the nature and causes of disequilibrium.
The methods can be classified into two groups : viz. monetary and non
monetary methods.
I) Monetary methods :
Monetary methods of correction affect the balance payments by changing
the value or flow of currencies ; both domestic and foreign. Indirectly, it affects the
volume and value of exports and imports.
With flexible exchange rate it is possible to affect the value and volume of exports
and imports.
Following are the various monetary methods of BoP correction :
1. Devaluation : Devaluation means decreasing the value of domestic currency
with respect to a foreign exchange. Devaluation is done by the Government of
the country of origin. Devaluation id done deliberately to get its advantages.
Export prices Volume of exports

Value of money BoP improve

Import prices Volume of imports

The Government officially declare the devaluation, indicating the extent of


decrease in the value of its currency. The Government can decide the time and the
amount of decrease.
Devaluation can determine a specific currency with which it is devalued. In
such case the trade with the target country improves. The devaluation is
irreversible. The country can not change the value of currency frequently.
With a decrease in the value of its currency, the country has to pay more in
exchange to a foreign currency
In case of exports the price show a decline to the extent of decrease. The exports
become cheaper.
At the same time the imports become expensive because more domestic
currency is payable.
With this the exports increase and the imports decrease.
This way the balance of payments position improves. The country gets better
terms of trade.
Devaluation is opted during such times when:
a. The imports are increasing rapidly,
b. The exports are stagnant,
c. The domestic currency has low demand
d. The foreign currency is in high demand

2. Depreciation : Depreciation is similar to devaluation but it is done by the


exchange market. The exchange market is made up of demand and supply of
currency. Depending on the demand and supply, the value of currency can be
appreciated or depreciated, Depreciation is similar to devaluation. It involves a
decrease in value.
Depreciation is done by the market, the Government has no control over the
value. Further, the value changes are small and reversible depending on the
demand and supply conditions.
3. Pegging operations. Pegging down the value of currency is done by the
Government. The Central bank depending on the need may artificially, increase or
decrease the value of currency, temporarily.
Pegging operations can be done any number of times. Since it is done by the
Government, it may be beneficial. It is reversible, it offers the Government the
flexibility to manage the value of the currency for its advantage.

4. Deflation: With flexible exchange rate mechanism, the domestic value of


currency affects the international value of currency. The domestic value of
currency can be improves by any of the anti-inflationary methods. By reducing the
domestic money stock, the value of money can be improved. It improves the
foreign exchange rate aswell.

5. Exchange controls : Deliberate management of exchange markets, value, and


volumes of currencies form the exchange controls. There are several methods of
exchange controls which can affect the value and flows of currencies for
improving the BoP position.

It can be seen that, monetary methods of correcting BoP disequilibrium aim at


solving the crisis on capital account and directly managing flow of foreign
exchange. Indirectly, the value of currency can bring equilibrium on current
account as well by changing volume of exports and imports.

II) Non-monetary methods : Non-monetary methods deal with real sector for
correcting BoP disequilibrium. All the non-monetary methods directly affect
exports and imports. Following are the important non-monetary methods :

1. Export Promotion : The country with deficits can take up export promotion
measures like providing fiscal incentives, financial aid, Infrastructural facilities,
marketing support and support of imported inputs.
The Government offers a package of tax incentives which will reduce the
costs and make exports competitive in the world market.
2. Import Substitution : The economy can progressively develop technology of
import substitution. A country produces those goods which were earlier
imported. It may require import of capital goods, technology or collaborations.
3. Import Licensing : The Government can have stringent controls over the usage
of imports. This can be done by licensing the users based on centralised
imports.
4. Quota : Import quotas are important non-tariff barriers. They are positive
restrictions on incoming goods.
5. Tariffs : Tariff is a tax duty levied on imports. The objective is to make imports
expensive, which will in turn produce domestic demand and make home
industry competitive.

Every country has to use a combination of monetary and non-monetary methods to


effectively correct balance of payment disequilibrium and also prevent retaliation
from any developed country.

What Are the Problems of Trade Restrictions?


Despite the growth in free trade agreements such as the North American Free
Trade Agreement (NAFTA), and organizations such as the World Trade
Organization, the majority of nations in the world continue to impose trade
restrictions, usually tariffs. Governments typically impose trade restrictions to
protect domestic industries. Most economists, however, argue that trade
restrictions are detrimental and that the benefits of free trade far outweigh the
negative effects it may have on some industries.

Trade Restrictions and Their Effects

When nations specialize and trade, total world output is increased. Companies
produce for foreign markets as well as domestic markets (markets in the home
country). Exports are the goods and services sold in foreign markets. Imports are
goods or services bought from foreign producers.

In spite of the benefits of international trade, many nations put limits on trade for
various reasons. The main types of trade restrictions are tariffs, quotas, embargoes,
licensing requirements, standards, and subsidies.

A tariff is a tax put on goods imported from abroad. The effect of a tariff is to raise
the price of the imported product. It helps domestic producers of similar products
to sell them at higher prices. The money received from the tariff is collected by the
domestic government.

A quota is a limit on the amount of goods that can be imported. Putting a quota on
a good creates a shortage, which causes the price of the good to rise and allows
domestic producers to raise their prices and to expand their production. A quota on
shoes, for example, might limit foreign-made shoes to 10,000,000 pairs a year. If
Americans buy 200,000,000 pairs of shoes each year, this would leave most of the
market to American producers.

An embargo stops exports or imports of a product or group of products to or from


another country. Sometimes all trade with a country is stopped, usually for political
reasons.

Some countries require import or export licenses. When domestic importers of


foreign goods are required to get licenses, imports can be restricted by not issuing
many licenses. Export licenses have been used to restrict trade with certain
countries or to keep domestic prices on agricultural products from rising.

Standards are laws or regulations that nations use to restrict imports. Sometimes
nations establish health and safety standards for imported goods that are higher
than those for goods produced domestically. These have become a major form of
trade restriction and are used in different amounts by many countries.

Subsidies can be thought of as tariffs in reverse. Instead of taxing the foreign


import, the government gives grants of money to domestic producers to encourage
exports. Those who receive such subsidies can use them to pay production costs
and can charge less for their goods than foreign producers. A tariff is paid for by
the buyers of the foreign goods and the buyers of domestic goods who pay higher
prices. But subsidies are paid for by taxpayers who may or may not use the good.
What are the effects of these trade restrictions?

They all limit world trade, which means a reduction in the total number of goods
and services produced. They shift production from more effective exporting
producers to less effective domestic producers.

When production is lowered, there are fewer workers earning income. Trade
restrictions also raise prices, which is usually their main purpose.

Trade limits in one country, moreover, usually lead to limits being imposed in
other countries. If the United States places a high tariff on cars made in Japan, for
example, Japan may then put tariffs on American goods sold in Japan.

In spite of these disadvantages, countries are tempted to use trade restrictions to


protect their own industries. Countries that are just getting started use tariffs, quota,
and subsidies to protect their industries until they can compete without government
help. The difficulty with this infant industry argument in support of trade
restrictions is that it is not always possible to predict which industries will succeed.
Protection frequently lasts long after the industry has matured.

Governments are eager to protect what are called strategic industries. These have
included industries, such as steel, cars, chemicals, and munitions, that are imported
during a war. Today, they are more often the high tech, high wage industries like
commercial aircraft production. One way of insuring that they remain strong is to
protect them from foreign competition. Agriculture is another area that many
governments try to protect. Tariffs and subsidies help make sure that domestic
farmers can earn enough profits to continue farming.

The decision to use trade restrictions like tariffs is an important one. Tariffs help
some domestic industries, but they mean higher prices for buyers. They help the
owners and workers in the protected industries. They hurt the people who have to
pay higher prices for the goods those industries make. Reducing imports reduces
the income of foreigners. They will reduce their foreign purchases, hurting
exporting industries and workers in the nation that put the tariff on the imports.
Without much competition, companies may also use less efficient production
methods. This can lead to poorer quality as well.

It is in the best interest of the world economy for each nation to trade freely with
all other nations. However, this practice does not always benefit every nation. For
example, exporters who control a large part of the world's supply of a product can
use trade restrictions to change the terms of trade, reducing the amount of their
goods and services they must give up to obtain imports. This was done by the
Organizations of Petroleum Exporting Countries (OPEC) when they restricted their
output of oil in the 1970s. By driving up the price of oil they were able to get more
imports for less oil.

Most arguments for trade restriction benefit protected industries and their workers.
They also create much greater losses for a nation's economy. In the long run, a
nation must import to export.
Trade Restrictions for Balance-of-Payments

Articles XII to XIV of the GATT elaborate a complex code designed to govern and
discipline the use of trade restrictions for balance of payments purposes. Article
XII:1 states the basic right of any Contracting Party to impose quantitative
restrictions in derogation from Article XI ‘in order to safeguard its external
financial position and its balance of payments’. Article XII:2 establishes that such
restrictions shall be limited to what is ‘necessary: (i) to forestall the imminent
threat of, or to stop, a serious decline in 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’. As well, such restrictions must be progressively relaxed as
the balance of payments improves.
Furthermore, Contracting Parties ‘undertake, in carrying out their domestic
policies, to pay due regard to the need for maintaining or restoring equilibrium in
their balance of payments on a sound and lasting basis’ (XII:3). At the same time,
no Contracting Party is obligated to take domestic balance of payments measures
that would threaten the objective of full employment (i.e. contracting the domestic
money supply to dampen demand for imports, XII:3(d)). A process of
consultations is envisaged with the GATT Council concerning any new restrictions
or increase in restrictions, with periodic review of the necessity of the trade
measures and their consistency with Articles XII–XIV. In addition, Article XII
contains provisions on dispute settlement, including the authorization of retaliation
where a Party persists in trade restrictions that have been found by the Contracting
Parties to violate the GATT.
Articles XIII and XIV contain, respectively, the requirement that measures taken
pursuant to Article XII:1 be implemented on a non-discriminatory basis and certain
narrow exceptions to this non-discrimination requirement, e.g. where
discriminatory exchange controls have been authorized by the IMF (see the
discussion of substitutability below).
In the case of developing countries, there is a much broader exemption for balance
of payments-based trade restrictions. Hence, Article XVII:2(b) states the principle
that developing countries should have additional flexibility ‘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’.
What this suggests is that even though a developing country could address its
balance of payments difficulties through exchange rate adjustments or tighter
macroeconomic policies, it should not be expected to do so given the harm to
development that may come from the resultant decline in needed imports. It is
recognized that quantitative restrictions will allow a developing country to
conserve its limited foreign currency resources for purchases of imports necessary
for development – whereas an exchange rate devaluation would result in all
imports becoming more expensive. In this connection, it bears emphasis that
balance of payments restrictions in general may be discriminatory with respect to
products although not with respect to countries. Indeed, it is explicitly stated that
‘the contracting party may determine (the) incidence (of restrictions) 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’ (XVIIIB(10)).
In 1979 the Contracting Parties, without formally amending the General
Agreement, made the ‘Declaration on Trade Measures taken for Balance-of-
Payments Purposes’,14] which expanded the ambit of Articles XII–XIV and XVIII
beyond quantitative restrictions to include ‘all import measures taken for balance
of payments purposes’. The Declaration also imposes an obligation on Contracting
Parties taking such measures to ‘give preference to the measure least restrictive of
trade.’ The Understanding on the Balance of Payments Provisions of the General
Agreement on Tariffs and Trade 1994, incorporated in the Uruguay Round Final
Act, is aimed at improving GATT/WTO discipline of trade measures taken for
balance of payments purposes. Members commit themselves to publish, as soon as
possible, time-schedules for the removal of such trade measures. Such schedules
may, however, be modified ‘to take into account changes in the balance-of-
payments situation’ (Article 1). Furthermore (and perhaps the most important
modification of the existing GATT regime), Members commit themselves to give
preference to trade measures of a price-based nature, such as tariff surcharges, and
to only resort to new quantitative restrictions where ‘because of a critical balance-
of-payments situation, price-based measures cannot arrest a sharp deterioration in
the external payments position’ (Articles 2, 3). The Understanding further sets out
an elaborate set of procedures for review by the Committee for Balance-of-
Payments Restrictions of both the time-schedules for elimination of existing
restrictions and notifications of any new restrictions. The overall intent appears to
be that of placing balance of payments trade restrictions under ongoing scrutiny,
with a view to their elimination as soon as possible. This is consistent with the
original GATT regime, where such restrictions are envisaged as temporary, and not
an appropriate longer-term solution to payments imbalances. It is also, however,
something of a retreat from the more permissive approach to such restrictions
reflected in the Tokyo Round declaration.
Pursuant to the Understanding, on 31 January 1995, the WTO General Council
established the WTO Committee on Balance-of-Payments Restrictions. From its
inception through 2003, the Committee has conducted consultations with
numerous Members concerning the existence and possible reduction and phase-out
of their balance of payments restrictions, including Brazil, South Africa, Slovakia,
Poland, Sri Lanka, India, Egypt, Turkey, Tunisia, Hungary, Nigeria, Bangladesh,
the Philippines, the Czech Republic, Bulgaria and Pakistan. In most cases,
Members made commitments to eliminate or reduce the restrictions in question,
which satisfied the Committee. In some instances, with respect for example to
India and Tunisia, there was some controversy within the Committee itself as to
how rapidly the balance of payments situation of the country would reasonably
permit the removal of measures.
Dissatisfied with the lack of consensus on India’s use of balance-of-payments
based trade restrictions, the United States challenged India’s continued use of
balance of payments-based trade restrictions in dispute settlement, claiming
violations of the GATT and the BOP Understanding. A key threshold issue was the
relationship between the mandate of the BOP Committee and the jurisdiction of the
WTO dispute settlement organs; India argued that, given the explicit role of the
Committee in the surveillance of the challenged measures, the dispute panel should
defer to that process. The panel below found that the competence of the BOP
Committee and that of the panel were not mutually exclusive in these matters.
India appealed this finding.

The Appellate Body (AB) first observed, in disposing of this appeal that, according
to Article 1.1 of the Dispute Settlement Understanding (DSU), the dispute
settlement procedures in the DSU apply generally to disputes brought under the
dispute settlement provisions of the covered agreements (in this case Article XXIII
of the 1994 GATT), and that furthermore the DSU rules and procedures are subject
only to special or additional rules identified in agreements as listed in Appendix 2
of the DSU. The AB noted that ‘Appendix 2 does not identify any special or
additional rules or procedures relating to balance of payments restrictions’ (para.
86). In particular, it did not mention Article XVIII:B of the GATT, which calls for
review by the CONTRACTING PARTIES of balance of payments restrictions
maintained on the basis of developmental considerations set out in XVIII:B. Thus,
one could not infer any limitation on the rights of access to dispute settlement
under the DSU, or on the competence of panels to interpret and apply the balance
of payments provisions of the GATT, from the grant of competence to review X
VIII:B justifications for such restrictions to the CONTRACTING PARTIES. India,
however, also argued that GATT practice with respect to Article XXIII precluded
access to dispute settlement for balance of payments purposes. Since Article XXIII
is the very basis on which DSU procedures may be invoked in the case of the
GATT, practice with respect to Article XXIII of the GATT is relevant to the
ultimate scope and limits of authority of panels and the AB when they are applying
the GATT. Here, however, whatever pre-existing GATT practice existed in this
matter was codified and perhaps also modified by the BOP Understanding
negotiated in the Uruguay Round. The second sentence of footnote 1 to the BOP
Understanding reads: ‘[t]he 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’. Here, India argued that
the expression ‘application’ somehow limited the competence of the dispute
settlement organs in balance of payments disputes, in favour of that of the
Membership, sitting as the BOP Committee. The distinction that India drew was
between disputes about the ‘application’ of balance of payments measures and
those that concerned the substantive justification of the measures.
The AB, however, held that the use of the word ‘application’ merely reflected
‘traditional GATT doctrine that, with the exception of mandatory rules, only
measures that are effectively applied can be the subject of dispute settlement
proceedings’ (para. 93). But, at first glance, this very interpretation would seem to
risk reducing the word to complete inutility – as that much, the AB is saying, has
already been established by GATT practice. However, the BOP Understanding is
intended to ‘clarify’ Articles XII and XVIII:B of the GATT. Such clarifications
provide greater legal certainty and security, but will amount in large measure to
restatements of what a sound treaty interpreter would already find to exist in the
status quo. The assumption in treaty interpretation developed in Reformulated
Gasoline and subsequent cases that each treaty provision should be assumed to
have a discrete, non-redundant legal meaning may have to be modified in cases
where the text being interpreted is an understanding that clarifies and largely
affirms other, existing legal provisions.

The following draws on R. Howse, “Mainstreaming the Right to Development


into International Trade Law and Policy at the World Trade Organization”,
E/CN.4/Sub.2/2004/17, 3-20. Geneva: United Nations, 2004.
The problem with the AB’s reading is with the semantic structure of the footnote.
The footnote first asserts that ‘[n]othing in this Understanding is intended to
modify the rights and obligations of Members under Articles XII or XVIII:B of
GATT 1994’. The footnote then goes on to express the situation with respect to
Articles XX and XXIII of the GATT in terms of the right to invoke these
procedures in matters arising from the application of balance of payments
measures. Now if, as the AB suggests, the effect is simply to confirm existing
rights under Article XXIII, then why was Article XXIII not added to the list of
GATT provisions containing rights and obligations that the BOP Understanding is
not intended to modify?
The AB’s interpretation of the word ‘application’ is also undermined by the
structure of Article XVIII:B of the GATT itself. XVIII:B (9) contains the criteria
for justification of balance of payments measures under XVIII:B, while XVIII:B
(10) states certain conditions that a Member must adhere to in the application of its
balance of payments measures, even if they are justified under XVIII:B (9). Thus,
the relationship between XVIII:B (9) and XVIII:B (10) is not dissimilar to the
relationship between the various lettered paragraphs of Article XX and the
chapeau. Thus, the most obvious interpretation of ‘application’ in the footnote is
that the BOP Understanding modifies rights and obligations under Article XXIII of
the GATT to the extent that it limits dispute settlement action under XXIII to
claims that the application of balance of payments measures is inconsistent with
the criteria for such application contained in XVIII:B (10), which would be
consistent with exclusive competence for the BOP Committee with respect to
review of justification of such measures under XVIII:B (9).
Despite all this, there may be good legal reasons why the AB came to the
conclusion that footnote 1, second sentence, of the BOP Understanding does not
oust the jurisdiction of the dispute settlement organs to consider complaints related
to the justification of balance of payments measures under XVIII:B (9). As the AB
noted, the DSU itself purports to provide transparency with respect to any special
procedures that might apply so as to modify or supplement DSU procedures in the
case of particular covered agreements, and the BOP Agreement is not on the list.
In the India-Balance of Payments case, the exception relied on by India required
that balance of payments restrictions be removed as soon as the crisis conditions to
which they were addressed had passed, unless the removal were likely to provoke
the return of those conditions. However, a further proviso was that, in any case, a
developing country should not be required to remove balance-of-payments import
restrictions, if doing so could require a change in that country’s development
policies.20India’s reliance on this provision required the Appellate Body to
determine what is a development policy and whether if India were to remove its
balance-of-payments restrictions it would be required to change its policies

What the Appellate Body did was to rely entirely on a judgment of the IMF
that India did not need to change its development policies because it could address
the consequences of removing its balance-of-payments-based import restrictions
through “macroeconomic” policies.
Had the Appellate Body considered development policy informed by a conception
of equity that includes the notion that development policy is a matter in the first
instance for participation of those who are affected, it would have analyzed the
legal issue quite differently.
First of all, the Appellate Body would not have accepted that one institution,
and particularly, the technocrats in that institution have “ownership” of the
meaning of a “development” policy. Secondly, the Appellate Body would not have
embraced the stark contrast between “development policy” and macroeconomic
policy. This implies that development policy is restricted to a series of techniques
that “experts” view as formulae for “development,” rather than including all those
policies that people—in this case, at a minimum, India and Indians—see as
affecting the fulfillment of their approach to development. From the perspective of
equity, as informed by the social and economic rights recognized in the UN
Covenant on Social, Economic and Cultural Rights, it would be obvious that
macroeconomic policies, which affect revenues available for government
programmes to fulfill social and economic rights, as well as the cost of imported
goods and services needed to fulfill such rights and the reserves of currency with
which to pay for them, are “development policies.”
Thirdly, on the question of whether India would be required to change its
development policy in order to be able to remove the balance of payments
restrictions without a return to the crisis conditions that led to their imposition, the
Appellate Body and the panel ought to have, for purposes of equity and coherence,
considered and indeed solicited the views of a broader range of institutions and
social actors—at a minimum the international organizations with express mandates
on development, such as UNCTAD and the UNDP.
Finally, the Appellate Body might have considered that the provision in question is
largely a matter of self-declaration—that it empowers India and above all Indians
to chart their own course in development policy, and therefore that the provision is
not intended to invite the dispute settlement organs to examine de novo India’s
judgment that if it removed the restrictions, it would have to change its
development policy.
In sum, even if the overall orthodox economic preference for macroeconomic
measures over trade restrictions is correct, in the realm of the second best, trade
restrictions at least of a temporary nature may be a desirable alternative to a
macroeconomic policy move that leaves very severe social and economic
consequences.
EXISTING BOP SAFEGUARDS IN INTERNATIONAL
AGREEMENTS

It has been noted that most BITs do not include explicit BOP safeguards. However,
somerecent bilateral and regional agreements, such as the NAFTA, allow
restrictions on capital movementsin cases where a Party “experiences serious
balance of payments difficulties, or the threat thereof...”.

The OECD Codes, Article 7 (c), provide that members may temporarily suspend
their measures of liberalisation “if the overall balance of payments of a member
develops adversely at a rate and in circumstances, including the state of its
monetary reserves, which it considers serious...”.

GATS Article XII also allows members to adopt or maintain restrictions on


payments or transfers for transactions related to its commitments “in the event of
serious balance-of-payments and external financial difficulties or threat thereof”.
The GATS also takes account of the need of members
in the process of economic development and economies in transition to maintain a
level of financial reserves adequate for the implementation of economic
development programmes.

The common features of most BOP safeguards is that restrictions should: be taken
in a nondiscriminatory manner; be applied for a limited period of time; and be
consistent with the IMF provisions.

Under the IMF Articles of Agreement, beyond the requirement for members to
obtain approval to maintain existing restrictions on current payments and transfers,
members may be allowed to take special exchange measures, including restrictions
on current transactions for BOP reasons.

These measures are usually included in the framework of actions aimed at


providing “temporary financial assistance to countries under adequate safeguards
to help ease balance of payments adjustment.
WTO Provisions related to the Balance-of-Payments

A. General Agreement on Tariffs and Trade

Article XII
XII:1: "Notwithstanding the provisions of paragraph 1 of Article XI, any
contracting party, in order to safeguard its external financial position and its
balance-of-payments, may restrict the quantity or value of merchandise
permitted to be imported".
XII:2(a): "Import restrictions instituted, maintained or intensified by a
contracting party under this Article 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.
* Due regard shall be paid in either case to any special factors which may
be affecting the reserves of such 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".

B. General Agreement on Trade in Services

Article XII
XII:1: "In the event of serious balance-of-payments and external financial
difficulties or threat thereof, a Member may adopt or maintain restrictions on
trade in services on which it has undertaken specific commitments, including on
payments or transfers for transactions related to such commitments. It is
recognized that particular pressures on the balance of payments of a Member in
the process of economic development or economic transition may necessitate the
use of restrictions to ensure, inter alia, the maintenance of a level of financial
reserves adequate for the implementation of its programme of economic
development or economic transition".
XII:5(e): "In consultations, all findings of statistical and other facts presented by
the International Monetary Fund relating to foreign exchange, monetary
reserves and balance of payments, shall be accepted and conclusions shall be
based on the assessment by the Fund of the balance-of-payments and the
external financial situation of the consulting Member".
Application of Measures
para. 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-
ofpayments
situation. Whenever a time-schedule is not publicly announced by a
Member, that Member shall provide justification as to the reasons therefor".
para. 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".
para. 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".
para. 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-
ofpayments
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-of-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".
Note 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".

How IMF helps in resolving bop crises

The IMF’s Trade Integration Mechanism (TIM) aims to mitigate concerns—


particularly in developing countries—about financing such balance of payments
shortfalls
IMF lending aims to give countries breathing room to implement adjustment
policies and reforms that will restore conditions for strong and sustainable growth,
employment, and social investment. These policies will vary depending upon the
country's circumstances, including the causes of the problems. For instance, a
country facing a sudden drop in the price of a key export may simply need
financial assistance to tide it over until prices recover and to help ease the pain of
an otherwise sudden and sharp adjustment. A country suffering from capital flight
needs to address the problems that led to the loss of investor confidence: perhaps
interest rates that are too low, a large government budget deficit and debt stock
that is growing too fast, or an inefficient, poorly regulated domestic banking
system.
Before a member country can receive a loan, the country's authorities and the IMF
must agree on a program of economic policies. A country's commitments to
undertake certain policy actions are an integral part of IMF lending. They are
designed to ensure that the funds will be used to resolve balance of payments
problems. They would also help to restore or create access to support from other
creditors and donors. A country's return to economic and financial health allows
the IMF to be repaid, making the funds available to other members.
In the absence of IMF financing, the adjustment process for the country would be
more difficult. For example, if investors become unwilling to provide new
financing, the country has no choice but to adjust—often though a painful
compression of imports and economic activity. IMF financing can facilitate a
more gradual and carefully considered adjustment.
IMF loan programs are tailored to the specific circumstances of individual
countries. In recent years, the largest number of loans has been made through the
Poverty Reduction and Growth Facility (PRGF), which provides funds at a
concessional interest rate to low-income countries to address protracted balance of
payments problems. However, the largest amount of funds is provided through
Stand-By Arrangements (SBA), which charge market-based interest rates on loans
to assist with short-term balance of payments problems. The IMF also provides
other types of loans including emergency assistance to countries that have
experienced a natural disaster or are emerging from armed conflict.
Globalization has vastly increased the size of private capital flows relative to
official flows and IMF quotas, albeit unevenly so. Many emerging market
countries currently see an unmet need for insurance against large and volatile
capital flows. In recent years, the IMF has been re-examining its instruments that
help prevent and respond to crises to ensure they continue to meet emerging-
market members’ needs. Low-income countries have differing needs. Some
require debt relief, and others concessional financing. Meanwhile, some no longer
need financing, but seek the reassurance of policy support and signaling.

NEW TRADE RESTRICTIONS HAVE VISIBLY REDUCED TRADE

With monitoring activities coming to quite different conclusions, the extent of


harm caused by trade restrictions has been unclear. None of the watchdogs
suggests that we have—or likely will—see an extreme protectionist surge as
witnessed in the 1930s. But characterizations differ markedly. The March 2010
joint OECD-WTO-UNCTAD report indicates that protectionism has not escalated
meaningfully, and suggests that new instances of measures have declined:
“Although some G-20 members continued to implement new trade restrictive
policies, in apparent contradiction to their pledges at London and Pittsburgh,
the overall extent of these restrictions has been limited and an escalation of
protectionism has continued to be avoided. There have been fewer instances than
in earlier [recent] periods of G-20 members taking potentially trade restrictive
measures, and more cases of trade opening measures….” In contrast, GTA’s 4th
Report,15 released a few weeks earlier, argues that as reporting and investigative
lags are being overcome, “the extent of anti-foreigner discrimination is much
higher than originally reported” and that despite improved macroeconomic
conditions the frequency of new measures taken in the fourth quarter of
2009 continued at pace with those taken at the height of the crisis, earlier in 2009.

Our analysis finds that newly implemented trade restrictions have already had a
strong negative impact; fortunately, they have covered only a small share of
trade.There is strong statistical evidence that trade in products targeted by
protectionist measures indeed declined significantly. And if protectionist measures
become widespread or are allowed to balloon, this would cause significant harm to
global trade and stifle the broader economic recovery. The impact on targeted
products is apparent from the raw data, as shown below, but we also use
econometric methods to confirm this rigorously and to estimate the
quantitative effect on aggregate trade.

We match data on measures from the monitoring activities with detailed data on
actual trade flows. For an intuitive sense of whether new measures have affected
aggregate trade, we examine how (within the same product category) bilateral
trade targeted by new measures has evolved as compared to bilateral trade that has
not been targeted by new measures. More specifically, we use monthly bilateral
(import and export) trade values at the 4-digit (HS) product level, as reported by
the largest trading countries through late 2009.16 To identify those trade flows
targeted by new measures, we then use information from the GTA
database on the 4-digit product category (or categories) and bilateral trade partners
targeted by a new measure and the month in which the measure was implemented.
A wide array of measures is considered (Figure 7), some of which restrict imports
and others that restrict or support exports. In total, we incorporate information on
184 measures identified by GTA as highly likely to be discriminatory (the so-
called “red measures”).

Figure 7. Types of Distortionary Trade Measures Implemented, Nov. 2008–Nov. 2009 1/


1/ Number of measures is lower because of missing information on implementing/targeted country or tariff line.

The negative impact of import restrictions is apparent in the raw data. To assess the
trade impact of new measures we must account for the uneven effect of the
demand shock caused by the global crisis. For example, the crisis affected trade in
some products (such as durables) more than others. To separate the effects of the
demand shock from those of the trade restrictions, we examine products in every
time period separately and compare howtrade performed in bilateral trading
relationships (“country-pairs”) targeted by new measures, relative to those not
targeted by new measures. Figure 8 illustrates the results of this comparison for
products on which new import-restrictive measures were introduced in aparticular
month, November 2008. It shows that, indeed, imports targeted by new restrictions
declined more than did world trade in the same products. Replicating Figure 8 for
importrestricting measures imposed in other months demonstrates that they also
generally had a negative impact (Figure 9).

Export subsidies and restrictions distorted trade as well. Analogous graphs for
export subsidies and export restrictions are also presented in Figure 9. As expected,
export subsidies seemingly increased targeted exports relative to world trade of the
same products. Export restrictions also seem to have led to increased trade. This
(initially puzzling) result is largely because the category includes measures that
reduce (as well as intensify) export restrictions.
Econometric analysis serves to quantify the impact of new trade restrictions on
actual trade (see Annex for more detail). Henn and McDonald (2010) analyze how
new trade restrictive measures have impacted detailed (4-digit) bilateral monthly
trade flows, after accounting, via different fixed effects, for changes in trade flows
due to other determinants than new trade restrictions. These determinants account
for the facts that: (i) the crisisinduced more severe changes in demand for some
types of products than for others; (ii) as thecrisis progressed, some countries faced
more severe declines in income than did other countries; and finally (iii) bilateral
exchange rates, inflation differentials, and the costs of
transport between any two countries may have varied as the crisis developed.

The statistical results confirm the distortionary effect of new trade restrictions
suggested in Figures 8 and 9. Across various econometric specifications, new
measures arefound—with a high degree of statistical confidence—to discriminate
against targeted trade flows. Our basic specification represents a close statistical
analogue to the figures. The statistical estimates emerging from this basic
specification suggest that a new restriction is associated with about an 8.5 percent
distortion to trade (Annex, Table 1). A refined specification finds that a part of this
8.5 percent impact is attributable to other trade
determinants. After accounting for these determinants, a new restriction is still
responsible for a 3 percent distortion to trade. The magnitude of this effect is
striking, as it applies to entire 4-digit product categories—although most trade
measures only cover a portion of these categories. This suggests that the impact on
the products specifically affected may be considerably larger. Detailed analysis in
the Annex separately quantifies the impact of different types of measures: import
restrictions, export restrictions, and export support measures.

Measures distorted aggregate world trade by about 0.25 percent.19 We obtain this
result by multiplying the refined product-level estimates (Annex, Table 2) by the
amount of trade subject to measures of each type. The estimates of various
specifications imply that measures distorted aggregate global trade by between 0.2
and 0.7 percent.
Balance of payment restrictions
The records of the Balance of Payment (BOP) Committee of the WTO and the
trade reviews show a considerable decline in the use of quantitative restrictions for
BOP reasons over the last decade. This development is largely due to the
tightening of existing GATT rules as a result of the Uruguay Round
and the stricter enforcement related to the use of these measures.

 The Uruguay Round Understanding on Balance of Payments Provisions


added a number of clarifications to Articles XII and XVIII dealing with
balance of payments in the GATT 1947 and the GATT 1994: price-based
measures, i.e. import surcharges, are preferred to quantitative restrictions,
the use of quantitative restrictions is allowed only under exceptional
circumstances, and measures taken for BOP reasons may only be allowed to
protect the general level of imports (i.e. they must be applied across-
theboard and should not protect specific sectors from competition).
Additionally, the Understanding established strict notification deadlines and
explicit documentation requirements, and permitted “reverse
notification” by Members concerned with measures instituted, but not
notified, by other Members.
 Pursuant to the GATT 1947 and the GATT 1994, any Member imposing
restrictions for balance of payments purposes is required to consult with the
BOP Committee to determine whether the use of restrictive measures is
necessary or desirable to address its balance of payments difficulties. In line
with BOP provisions, the BOP Committee works closely with the
International Monetary Fund (IMF) in conducting these consultations.
 These clarifications have played a significant part in ensuring that the BOP
provisions are used as originally intended: to enable countries undergoing a
balance of payments crisis to impose temporary measures until improvement
of the situation. Previously, countries often employed quantitative
restrictions or prohibitions selectively to specific sectors and maintained
them for a long period of time. At present, a smaller number of countries
resort to quantitative restrictions to safeguard their BOP position and keep
these in place for shorter periods of time.
 The examination of the TPRs and of the annual reports of the Committee on
Balance of Payments Restrictions reveals that in the last few years very few
countries have applied import restricting measures and that by now the
majority of these countries have discontinued these measures by now.
Typically, countries have used either import surcharges or quantitative
restrictions.14 Since 1995, only eight countries (Burundi, Nigeria,
Bangladesh, India Pakistan, Egypt, Philippines and Tunisia) have notified to
the WTO their use of import prohibitions for BOP purposes. The majority of
these countries have focused their restrictive measures on a few goods, most
frequently on agricultural products, textiles and clothing, and, to a lesser
extent, on automobiles.
 Currently, Bangladesh is the only WTO member applying notified BOP
measures. Bangladesh has long been using import restrictions for BOP
reasons. In 2000, about 2.2% of total HS 4-digit tariff lines were subject to
trade-related prohibitions or restrictions,16 but since progress has been made
in reducing the size of the banned and restricted lists. Trade-related
restrictions mainly applied or continue to apply to some agricultural
products packing materials, and textile industry products, while import bans
are in place on woven fabrics, and imports of grey cloth are restricted to the
ready-made garment industry.
 India presents an interesting case of the use of quantitative restrictions for
BOP reasons. India’s trade policy since the 1950s had featured quantitative
restrictions with economic aims. In 1991, India haslaunched a market
reform, but maintained restrictions on imports of 1,429 items, citing BOP
problems. Beginning in 1995, in the BOP Committee and continuing into
dispute settlement in 1997, the WTO members challenged India’s need to
maintain measures for balance of payments reasons. A 1999 WTO dispute
settlement decision, responding to a complaint filed by the US, ordered India
to end the curbs on all items by April 1, 2001, stating that the country’s BOP
situation had improved.17 The curbs of the last 714 items were lifted by the
date given above. Of the last 715 items covered by the latest liberalization,
342 were textiles products, 147 were agricultural products, and the
remaining 226 were manufactured products, including automobiles.
CONCLUSION

In light of the existing provisions discussed above, on transfers and BOP


safeguards, a future IDF in our view should provide:

- as a general rule, that members allow: all current and capital transfers related to
established
investments, and; as far as the making of new investments is concerned, all current
and capital
transfers related to those investments covered by the countries’ sectoral list of
commitments.
- as an exception, a safeguard clause to preserve members in case of serious BOP
difficulties.
This provision should allow temporary restrictions on the outflows of current and
capital
transfers related to those investments covered in the IDF.

As explained in the Note by the WTO Secretariat on Development Provisions, a


safeguard provision allowing the imposition of investment restrictions for BOP
reasons is an example of “escape clause” particularly relevant for developing
countries. In any case, a BOP safeguard clause, which allows members to take
restrictive measures should only be allowed under exceptional circumstances,
it should be clearly defined and include strict criteria. For instance, in our view,
restrictions should:
- be non-discriminatory;
- be consistent with other relevant international provisions;
- be limited in time and phased out progressively;
- be applied in a way that does not exceed what is necessary to deal with the
sudden difficulties;
- avoid unnecessary damages to the interests of other members;
- not be used to justify measures adopted to protect specific industries or sectors.

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