Are Trade Restrictions to Protect Bop right

8/8/2019 Are Trade Restrictions to Protect Bop right

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Trade restriction-

A trade restriction is an artificial restriction on the trade of goods between twocountries. 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 instanceGermany required the production of beer to adhere to its purity law. The law,originally implemented in Bavaria in 1516 and eventually becoming law for newlyunified Germany in 1871, made many foreign beers unable to be sold in Germanyas "beer". This law was struck down in 1987 by the European Court of Justice, butis still voluntarily followed by many German breweries.

The most common types of trade restrictions include tariffs, quotas, subsidies andembargoes. Governments impose trade restrictions for a variety of reasons, oftenunder 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 tariffswill increase the cost to importers, and increase the price of imported goodsin the local markets, thus lowering the quantity of goods imported. Tariffsmay also be imposed on exports, and in an economy with floating exchange

rates, export tariffs have similar effects as import tariffs. However, sinceexport tariffs are often perceived as 'hurting' local industries, while importtariffs are perceived as 'helping' local industries, export tariffs are seldomimplemented.

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 oftensuggest that import licenses be auctioned to the highest bidder, or that importquotas be replaced by an equivalent tariff.

3. Administrative Barriers: Countries are sometimes accused of using their various administrative rules (eg. regarding food safety, environmentalstandards, 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 toclose down. However, in practice, anti-dumping laws are usually used toimpose trade tariffs on foreign exporters.


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5. Direct Subsidies: Government subsidies (in the form of lump-sum paymentsor cheap loans) are sometimes given to local firms that cannot compete wellagainst 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. Exportsubsidies increase the amount of trade, and in a country with floatingexchange rates, have effects similar to import subsidies.

7. Exchange Rate manipulation: A government may intervene in the foreignexchange market to lower the value of its currency by selling its currency inthe foreign exchange market. Doing so will raise the cost of imports andlower 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 onecountry and rest of the world during a period of time.

Balance of payments emerge as an important feature of modern internationaltrade, 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 isa major item on the current account. Other items appearing under currentaccount include :

Transportation, insurance, tourism, and foreign remittances are calledas the invisibles because it involves foreign exchange flows but has no

physical movement of goods. The remittances can be in or out of the


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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 thenature 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 theforeign exchange commitments of the country with respect to each countryand 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 andlong term capital movements.

Other items include amortisation, debt servicing, monetary gold andmiscellaneous. Amortisation is the loan liquidated, debt servicing is therepayment of principle and interest and non-monetary gold is the paymentsmade interms of gold.

These capital transactions will also have a debit or credit dependingon the directions of flows. Capital account can show a deficit or a surplusrevealing the strength of the economy. The deficits of the current accountwill 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 exportswill always be equal to imports.

Further, with no capital flows the payments can not be differed. With thisthere will not be any difference between balance of trade and balance of payments.Hence it was felt that balance of payments shall always balance.


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With monetised transactions, barter is ruled out. There are capitalmovements which can always upset export-import equality. Moreover, what theclassical 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 theother and the balance of payments position reveals the strength of the country andcurrency.

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 problemsof 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 currentaccount 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 currentaccount, for instance by expanding exports or restricting imports (provided theserestrictions are compatible with its international obligations and preferably notcounterproductive in terms of future developmental objectives), or improving thecapital 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 toconsider adjustments to their monetary and exchange rate policies.

In seeking to avoid serious BOP difficulties governments have sometimes takenrestrictive measures on current transfers as well as on capital movements.However, such mechanisms involve costs and can introduce distortions for thecountry 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 futureIDF covering FDI would necessarily have to preserve a possibility for safeguardsalthough within well-defined and internationally accepted criteria.


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Causes of disequilibrium in developing countries :BoP disequilibrium is common with most developing economies. Study of thefactors and nature of disequilibrium will help in correction and design of methodsof protection.

Following are the important causes of disequilibrium :1. Large population, increasing growth rates of population.2. Stagnant exports due to out dated products3. 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 currency12. Absence of trade ties with developed economies.

In addition all the problems of under development contribute todisequilibrium in BoP. Since there is no effective mechanism to correct, thedisequilibrium becomes chronic.

Methods of correcting balance of payments disequilibriumThere 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 changingthe value or flow of currencies ; both domestic and foreign. Indirectly, it affects thevolume and value of exports and imports.With flexible exchange rate it is possible to affect the value and volume of exportsand imports.

Following are the various monetary methods of BoP correction :


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1. Devaluation : Devaluation means decreasing the value of domestic currencywith 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 theamount of decrease.

Devaluation can determine a specific currency with which it is devalued. Insuch 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 currencyIn 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 demandd. The foreign currency is in high demand

2. Depreciation : Depreciation is similar to devaluation but it is done by theexchange market. The exchange market is made up of demand and supply of

currency. Depending on the demand and supply, the value of currency can beappreciated or depreciated, Depreciation is similar to devaluation. It involves adecrease in value.

Depreciation is done by the market, the Government has no control over thevalue. Further, the value changes are small and reversible depending on thedemand and supply conditions.


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3. Pegging operations. Pegging down the value of currency is done by theGovernment. 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 theGovernment, it may be beneficial. It is reversible, it offers the Government theflexibility 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 thedomestic money stock, the value of money can be improved. It improves theforeign 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 atsolving the crisis on capital account and directly managing flow of foreignexchange. Indirectly, the value of currency can bring equilibrium on currentaccount 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 affectexports and imports. Following are the important non-monetary methods :

1. Export Promotion : The country with deficits can take up export promotionmeasures 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 thecosts 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 usageof imports. This can be done by licensing the users based on centralisedimports.

4. Quota : Import quotas are important non-tariff barriers. They are positiverestrictions on incoming goods.


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Americans buy 200,000,000 pairs of shoes each year, this would leave most of themarket to American producers.

An embargo stops exports or imports of a product or group of products to or fromanother country. Sometimes all trade with a country is stopped, usually for politicalreasons.

Some countries require import or export licenses. When domestic importers of foreign goods are required to get licenses, imports can be restricted by not issuingmany licenses. Export licenses have been used to restrict trade with certaincountries or to keep domestic prices on agricultural products from rising.

Standards are laws or regulations that nations use to restrict imports. Sometimesnations 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 foreignimport, the government gives grants of money to domestic producers to encourageexports. Those who receive such subsidies can use them to pay production costsand can charge less for their goods than foreign producers. A tariff is paid for bythe 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 goodsand 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. Traderestrictions also raise prices, which is usually their main purpose.

Trade limits in one country, moreover, usually lead to limits being imposed inother 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 governmenthelp. The difficulty with this infant industry argument in support of trade


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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 haveincluded industries, such as steel, cars, chemicals, and munitions, that are importedduring a war. Today, they are more often the high tech, high wage industries likecommercial aircraft production. One way of insuring that they remain strong is to

protect them from foreign competition. Agriculture is another area that manygovernments try to protect. Tariffs and subsidies help make sure that domesticfarmers can earn enough profits to continue farming.

The decision to use trade restrictions like tariffs is an important one. Tariffs helpsome domestic industries, but they mean higher prices for buyers. They help theowners and workers in the protected industries. They hurt the people who have to

pay higher prices for the goods those industries make. Reducing imports reducesthe income of foreigners. They will reduce their foreign purchases, hurtingexporting industries and workers in the nation that put the tariff on the imports.Without much competition, companies may also use less efficient productionmethods. This can lead to poorer quality as well.

It is in the best interest of the world economy for each nation to trade freely withall 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 canuse 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 theOrganizations 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 moreimports 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, anation must import to export.


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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. ArticleXII:1 states the basic right of any Contracting Party to impose quantitativerestrictions in derogation from Article XI in order to safeguard its externalfinancial position and its balance of payments. Article XII:2 establishes that suchrestrictions shall be limited to what is necessary: (i) to forestall the imminentthreat of, or to stop, a serious decline in monetary reserves, or (ii) in the case of aContracting Party with very low monetary reserves to achieve a reasonable rate of increase in its reserves. As well, such restrictions must be progressively relaxed asthe 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 intheir 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 measuresthat would threaten the objective of full employment (i.e. contracting the domesticmoney supply to dampen demand for imports, XII:3(d)). A process of consultations is envisaged with the GATT Council concerning any new restrictionsor increase in restrictions, with periodic review of the necessity of the trademeasures and their consistency with Articles XIIXIV. In addition, Article XIIcontains provisions on dispute settlement, including the authorization of retaliation

where a Party persists in trade restrictions that have been found by the ContractingParties 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 certainnarrow exceptions to this non-discrimination requirement, e.g. wherediscriminatory exchange controls have been authorized by the IMF (see thediscussion of substitutability below).In the case of developing countries, there is a much broader exemption for balanceof payments-based trade restrictions. Hence, Article XVII:2(b) states the principlethat developing countries should have additional flexibility to apply quantitativerestrictions for balance of payments purposes in a manner which takes full accountof 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


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development that may come from the resultant decline in needed imports. It isrecognized that quantitative restrictions will allow a developing country toconserve its limited foreign currency resources for purchases of imports necessaryfor development whereas an exchange rate devaluation would result in allimports 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 thatthe 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 theimportation 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 GeneralAgreement, made the Declaration on Trade Measures taken for Balance-of-Payments Purposes,14] which expanded the ambit of Articles XIIXIV and XVIII

beyond quantitative restrictions to include all import measures taken for balanceof payments purposes. The Declaration also imposes an obligation on ContractingParties taking such measures to give preference to the measure least restrictive of trade. The Understanding on the Balance of Payments Provisions of the GeneralAgreement on Tariffs and Trade 1994, incorporated in the Uruguay Round FinalAct, 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 schedulesmay, however, be modified to take into account changes in the balance-of-

payments situation (Article 1). Furthermore (and perhaps the most importantmodification of the existing GATT regime), Members commit themselves to give

preference to trade measures of a price-based nature, such as tariff surcharges, andto only resort to new quantitative restrictions where because of a critical balance-of-payments situation, price-based measures cannot arrest a sharp deterioration inthe external payments position (Articles 2, 3). The Understanding further sets outan elaborate set of procedures for review by the Committee for Balance-of-Payments Restrictions of both the time-schedules for elimination of existingrestrictions 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 theoriginal GATT regime, where such restrictions are envisaged as temporary, and notan appropriate longer-term solution to payments imbalances. It is also, however,something of a retreat from the more permissive approach to such restrictionsreflected in the Tokyo Round declaration.Pursuant to the Understanding, on 31 January 1995, the WTO General Councilestablished the WTO Committee on Balance-of-Payments Restrictions. From its


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inception through 2003, the Committee has conducted consultations withnumerous Members concerning the existence and possible reduction and phase-outof 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 toIndia and Tunisia, there was some controversy within the Committee itself as tohow rapidly the balance of payments situation of the country would reasonably

permit the removal of measures.Dissatisfied with the lack of consensus on Indias use of balance-of-payments

based trade restrictions, the United States challenged Indias continued use of balance of payments-based trade restrictions in dispute settlement, claimingviolations 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 theWTO dispute settlement organs; India argued that, given the explicit role of theCommittee in the surveillance of the challenged measures, the dispute panel shoulddefer to that process. The panel below found that the competence of the BOPCommittee 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, accordingto Article 1.1 of the Dispute Settlement Understanding (DSU), the disputesettlement procedures in the DSU apply generally to disputes brought under thedispute settlement provisions of the covered agreements (in this case Article XXIIIof the 1994 GATT), and that furthermore the DSU rules and procedures are subjectonly to special or additional rules identified in agreements as listed in Appendix 2of 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 restrictionsmaintained 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 balanceof payments provisions of the GATT, from the grant of competence to review XVIII:B justifications for such restrictions to the CONTRACTING PARTIES. India,however, also argued that GATT practice with respect to Article XXIII precludedaccess to dispute settlement for balance of payments purposes. Since Article XXIIIis the very basis on which DSU procedures may be invoked in the case of theGATT, practice with respect to Article XXIII of the GATT is relevant to the


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ultimate scope and limits of authority of panels and the AB when they are applyingthe GATT. Here, however, whatever pre-existing GATT practice existed in thismatter was codified and perhaps also modified by the BOP Understandingnegotiated in the Uruguay Round. The second sentence of footnote 1 to the BOPUnderstanding reads: [t]he provisions of Articles XXII and XXIII of GATT 1994as elaborated and applied by the Dispute Settlement Understanding may beinvoked with respect to any matters arising from the application of restrictiveimport measures taken for balance-of-payments purposes. Here, India argued thatthe expression application somehow limited the competence of the disputesettlement organs in balance of payments disputes, in favour of that of theMembership, sitting as the BOP Committee. The distinction that India drew was

between disputes about the application of balance of payments measures andthose 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, onlymeasures that are effectively applied can be the subject of dispute settlement

proceedings (para. 93). But, at first glance, this very interpretation would seem torisk reducing the word to complete inutility as that much, the AB is saying, hasalready been established by GATT practice. However, the BOP Understanding isintended to clarify Articles XII and XVIII:B of the GATT. Such clarifications

provide greater legal certainty and security, but will amount in large measure torestatements of what a sound treaty interpreter would already find to exist in thestatus quo. The assumption in treaty interpretation developed in ReformulatedGasoline and subsequent cases that each treaty provision should be assumed tohave a discrete, non-redundant legal meaning may have to be modified in caseswhere the text being interpreted is an understanding that clarifies and largelyaffirms other, existing legal provisions.

The following draws on R. Howse, Mainstreaming the Right to Developmentinto 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 ABs 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 toArticles XX and XXIII of the GATT in terms of the right to invoke these

procedures in matters arising from the application of balance of paymentsmeasures. Now if, as the AB suggests, the effect is simply to confirm existingrights under Article XXIII, then why was Article XXIII not added to the list of


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GATT provisions containing rights and obligations that the BOP Understanding isnot intended to modify?The ABs interpretation of the word application is also undermined by thestructure of Article XVIII:B of the GATT itself. XVIII:B (9) contains the criteriafor 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 therelationship between the various lettered paragraphs of Article XX and thechapeau. Thus, the most obvious interpretation of application in the footnote isthat the BOP Understanding modifies rights and obligations under Article XXIII of the GATT to the extent that it limits dispute settlement action under XXIII toclaims that the application of balance of payments measures is inconsistent withthe criteria for such application contained in XVIII:B (10), which would be

consistent with exclusive competence for the BOP Committee with respect toreview of justification of such measures under XVIII:B (9).Despite all this, there may be good legal reasons why the AB came to theconclusion that footnote 1, second sentence, of the BOP Understanding does notoust the jurisdiction of the dispute settlement organs to consider complaints relatedto the justification of balance of payments measures under XVIII:B (9). As the ABnoted, 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 thecase 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 requiredthat balance of payments restrictions be removed as soon as the crisis conditions towhich they were addressed had passed, unless the removal were likely to provokethe return of those conditions. However, a further proviso was that, in any case, adeveloping country should not be required to remove balance-of-payments importrestrictions, if doing so could require a change in that countrys development

policies.20Indias reliance on this provision required the Appellate Body todetermine 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 IMFthat India did not need to change its development policies because it could addressthe consequences of removing its balance-of-payments-based import restrictionsthrough macroeconomic policies.Had the Appellate Body considered development policy informed by a conceptionof equity that includes the notion that development policy is a matter in the first


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instance for participation of those who are affected, it would have analyzed thelegal 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 themeaning of a development policy. Secondly, the Appellate Body would not haveembraced the stark contrast between development policy and macroeconomic

policy. This implies that development policy is restricted to a series of techniquesthat experts view as formulae for development, rather than including all those

policies that peoplein this case, at a minimum, India and Indianssee asaffecting the fulfillment of their approach to development. From the perspective of equity, as informed by the social and economic rights recognized in the UNCovenant on Social, Economic and Cultural Rights, it would be obvious thatmacroeconomic 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 withwhich to pay for them, are development policies.

Thirdly, on the question of whether India would be required to change itsdevelopment policy in order to be able to remove the balance of paymentsrestrictions without a return to the crisis conditions that led to their imposition, theAppellate 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 andsocial actorsat a minimum the international organizations with express mandateson development, such as UNCTAD and the UNDP.Finally, the Appellate Body might have considered that the provision in question islargely a matter of self-declarationthat it empowers India and above all Indiansto chart their own course in development policy, and therefore that the provision isnot intended to invite the dispute settlement organs to examine de novo Indias

judgment that if it removed the restrictions, it would have to change itsdevelopment policy.In sum, even if the overall orthodox economic preference for macroeconomicmeasures over trade restrictions is correct, in the realm of the second best, traderestrictions at least of a temporary nature may be a desirable alternative to amacroeconomic policy move that leaves very severe social and economic

consequences.


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WTO Provisions related to the Balance-of-Payments

A. General Agreement on Tariffs and Trade

Article XIIXII:1: "Notwithstanding the provisions of paragraph 1 of Article XI, anycontracting 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 acontracting party under this Article shall not exceed those necessary:(i) to forestall the imminent threat of, or to stop, a serious decline in itsmonetary 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, theneed to provide for the appropriate use of such credits or resources".

B. General Agreement on Trade in Services

Article XIIXII:1: "In the event of serious balance-of-payments and external financialdifficulties or threat thereof, a Member may adopt or maintain restrictions ontrade in services on which it has undertaken specific commitments, including on

payments or transfers for transactions related to such commitments. It isrecognized that particular pressures on the balance of payments of a Member inthe process of economic development or economic transition may necessitate theuse of restrictions to ensure, inter alia, the maintenance of a level of financialreserves adequate for the implementation of its programme of economicdevelopment or economic transition".

XII:5(e): "In consultations, all findings of statistical and other facts presented bythe International Monetary Fund relating to foreign exchange, monetaryreserves and balance of payments, shall be accepted and conclusions shall be

based on the assessment by the Fund of the balance-of-payments and theexternal financial situation of the consulting Member".


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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 takenfor balance-of-payments purposes. It is understood that such time-schedulesmay be modified as appropriate to take into account changes in the balance-ofpaymentssituation. Whenever a time-schedule is not publicly announced by aMember, that Member shall provide justification as to the reasons therefor".

para. 2: "Members confirm their commitment to give preference to thosemeasures which have the least disruptive effect on trade. Such measures(referred to in this Understanding as "price-based measures") shall be understoodto include import surcharges, import deposit requirements or other equivalent trade measures with an impact on the price of imported goods. It isunderstood that, notwithstanding the provisions of Article II, price-based

measures taken for balance-of-payments purposes may be applied by aMember in excess of the duties inscribed in the Schedule of that Member.Furthermore, that Member shall indicate the amount by which the price-basedmeasure 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 quantitativerestrictions for balance-of-payments purposes unless, because of a critical

balance-of-payments situation, price-based measures cannot arrest a sharpdeterioration in the external payments position. In those cases in which aMember applies quantitative restrictions, it shall provide justification as to thereasons why price-based measures are not an adequate instrument to deal withthe balance-of-payments situation. A Member maintaining quantitativerestrictions shall indicate in successive consultations the progress made insignificantly reducing the incidence and restrictive effect of such measures. It isunderstood 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 levelof imports and may not exceed what is necessary to address the balance-

ofpaymentssituation. In order to minimize any incidental protective effects, aMember shall administer restrictions in a transparent manner. The authorities of the importing Member shall provide adequate justification as to the criteria usedto determine which products are subject to restriction. As provided in paragraph3 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


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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 improveits balance-of-payments situation, such as capital goods or inputs needed for

production. In the administration of quantitative restrictions, a Member shall usediscretionary licensing only when unavoidable and shall phase it out

progressively. Appropriate justification shall be provided as to the criteria used todetermine allowable import quantities or values".

Note 1: "Nothing in this understanding is intended to modify the rights andobligations 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 anymatters arising from the application of restrictive import measures taken for

balance-of-payments purposes".

How IMF helps in resolving bop crises

The IMFs Trade Integration Mechanism (TIM) aims to mitigate concerns particularly in developing countriesabout financing such balance of paymentsshortfalls

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 thecountry's circumstances, including the causes of the problems. For instance, acountry facing a sudden drop in the price of a key export may simply needfinancial 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 flightneeds to address the problems that led to the loss of investor confidence: perhapsinterest 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 IMFmust agree on a program of economic policies. A country's commitments toundertake certain policy actions are an integral part of IMF lending. They aredesigned 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


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creditors and donors. A country's return to economic and financial health allowsthe IMF to be repaid, making the funds available to other members.

In the absence of IMF financing, the adjustment process for the country would bemore difficult. For example, if investors become unwilling to provide newfinancing, the country has no choice but to adjustoften though a painfulcompression of imports and economic activity. IMF financing can facilitate a moregradual and carefully considered adjustment.

IMF loan programs are tailored to the specific circumstances of individualcountries. In recent years, the largest number of loans has been made through thePoverty Reduction and Growth Facility (PRGF), which provides funds at aconcessional 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 loansto assist with short-term balance of payments problems. The IMF also providesother types of loans including emergency assistance to countries that haveexperienced a natural disaster or are emerging from armed conflict.

Globalization has vastly increased the size of private capital flows relative toofficial flows and IMF quotas, albeit unevenly so. Many emerging marketcountries currently see an unmet need for insurance against large and volatilecapital 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. Somerequire 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 watchdogssuggests that we haveor likely willsee an extreme protectionist surge aswitnessed in the 1930s. But characterizations differ markedly. The March 2010

joint OECD-WTO-UNCTAD report indicates that protectionism has not escalated


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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 thanin earlier [recent] periods of G-20 members taking potentially trade restrictivemeasures, and more cases of trade opening measures. In contrast, GTAs 4thReport,15 released a few weeks earlier, argues that as reporting and investigativelags are being overcome, the extent of anti-foreigner discrimination is muchhigher than originally reported and that despite improved macroeconomicconditions 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 toglobal trade and stifle the broader economic recovery. The impact on targeted

products is apparent from the raw data, as shown below, but we also useeconometric methods to confirm this rigorously and to estimate thequantitative effect on aggregate trade.

We match data on measures from the monitoring activities with detailed data onactual trade flows. For an intuitive sense of whether new measures have affectedaggregate trade, we examine how (within the same product category) bilateraltrade targeted by new measures has evolved as compared to bilateral trade that hasnot 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 bythe largest trading countries through late 2009.16 To identify those trade flowstargeted by new measures, we then use information from the GTAdatabase on the 4-digit product category (or categories) and bilateral trade partnerstargeted 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 importsand others that restrict or support exports. In total, we incorporate information on184 measures identified by GTA as highly likely to be discriminatory (the so-called red measures).

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


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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 thetrade impact of new measures we must account for the uneven effect of thedemand shock caused by the global crisis. For example, the crisis affected trade insome products (such as durables) more than others. To separate the effects of thedemand shock from those of the trade restrictions, we examine products in everytime period separately and compare howtrade performed in bilateral tradingrelationships ( country-pairs) targeted by new measures, relative to those nottargeted 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 restrictionsdeclined more than did world trade in the same products. Replicating Figure 8 for importrestricting measures imposed in other months demonstrates that they alsogenerally 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 thatreduce (as well as intensify) export restrictions.


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Econometric analysis serves to quantify the impact of new trade restrictions onactual trade (see Annex for more detail). Henn and McDonald (2010) analyze hownew trade restrictive measures have impacted detailed (4-digit) bilateral monthlytrade flows, after accounting, via different fixed effects, for changes in trade flowsdue to other determinants than new trade restrictions. These determinants accountfor the facts that: (i) the crisisinduced more severe changes in demand for some


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types of products than for others; (ii) as thecrisis progressed, some countries facedmore severe declines in income than did other countries; and finally (iii) bilateralexchange 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 restrictionssuggested in Figures 8 and 9. Across various econometric specifications, newmeasures arefoundwith a high degree of statistical confidenceto discriminateagainst targeted trade flows. Our basic specification represents a close statisticalanalogue to the figures. The statistical estimates emerging from this basicspecification suggest that a new restriction is associated with about an 8.5 percentdistortion to trade (Annex, Table 1). A refined specification finds that a part of this8.5 percent impact is attributable to other tradedeterminants. After accounting for these determinants, a new restriction is still

responsible for a 3 percent distortion to trade. The magnitude of this effect isstriking, as it applies to entire 4-digit product categoriesalthough most trademeasures only cover a portion of these categories. This suggests that the impact onthe products specifically affected may be considerably larger. Detailed analysis inthe Annex separately quantifies the impact of different types of measures: importrestrictions, export restrictions, and export support measures.

Measures distorted aggregate world trade by about 0.25 percent.19 We obtain thisresult by multiplying the refined product-level estimates (Annex, Table 2) by theamount of trade subject to measures of each type. The estimates of variousspecifications imply that measures distorted aggregate global trade by between 0.2and 0.7 percent.


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Balance of payment restrictions

The records of the Balance of Payment (BOP) Committee of the WTO and thetrade reviews show a considerable decline in the use of quantitative restrictions for

BOP reasons over the last decade. This development is largely due to thetightening of existing GATT rules as a result of the Uruguay Roundand the stricter enforcement related to the use of these measures.

y The Uruguay Round Understanding on Balance of Payments Provisionsadded a number of clarifications to Articles XII and XVIII dealing with

balance of payments in the GATT 1947 and the GATT 1994: price-basedmeasures, i.e. import surcharges, are preferred to quantitative restrictions,the use of quantitative restrictions is allowed only under exceptionalcircumstances, 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 andexplicit documentation requirements, and permitted reversenotification by Members concerned with measures instituted, but notnotified, by other Members.

y Pursuant to the GATT 1947 and the GATT 1994, any Member imposingrestrictions for balance of payments purposes is required to consult with theBOP Committee to determine whether the use of restrictive measures is

necessary or desirable to address its balance of payments difficulties. In linewith BOP provisions, the BOP Committee works closely with theInternational Monetary Fund (IMF) in conducting these consultations.

y 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 improvementof the situation. Previously, countries often employed quantitativerestrictions or prohibitions selectively to specific sectors and maintainedthem for a long period of time. At present, a smaller number of countriesresort to quantitative restrictions to safeguard their BOP position and keepthese in place for shorter periods of time.

y The examination of the TPRs and of the annual reports of the Committee onBalance of Payments Restrictions reveals that in the last few years very fewcountries have applied import restricting measures and that by now themajority of these countries have discontinued these measures by now.Typically, countries have used either import surcharges or quantitative


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restrictions.14 Since 1995, only eight countries (Burundi, Nigeria,Bangladesh, India Pakistan, Egypt, Philippines and Tunisia) have notified tothe WTO their use of import prohibitions for BOP purposes. The majority of these countries have focused their restrictive measures on a few goods, mostfrequently on agricultural products, textiles and clothing, and, to a lesser extent, on automobiles.

y Currently, Bangladesh is the only WTO member applying notified BOPmeasures. Bangladesh has long been using import restrictions for BOPreasons. In 2000, about 2.2% of total HS 4-digit tariff lines were subject totrade-related prohibitions or restrictions,16 but since progress has been madein reducing the size of the banned and restricted lists. Trade-relatedrestrictions mainly applied or continue to apply to some agricultural

products packing materials, and textile industry products, while import bansare in place on woven fabrics, and imports of grey cloth are restricted to theready-made garment industry.

y India presents an interesting case of the use of quantitative restrictions for BOP reasons. Indias trade policy since the 1950s had featured quantitativerestrictions with economic aims. In 1991, India haslaunched a marketreform, but maintained restrictions on imports of 1,429 items, citing BOP

problems. Beginning in 1995, in the BOP Committee and continuing intodispute settlement in 1997, the WTO members challenged Indias need tomaintain measures for balance of payments reasons. A 1999 WTO disputesettlement 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 countrys BOPsituation had improved.17 The curbs of the last 714 items were lifted by thedate given above. Of the last 715 items covered by the latest liberalization,342 were textiles products, 147 were agricultural products, and theremaining 226 were manufactured products, including automobiles.


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CONCLUSION

In light of the existing provisions discussed above, on transfers and BOPsafeguards, a future IDF in our view should provide:

- as a general rule, that members allow: all current and capital transfers related toestablishedinvestments, and; as far as the making of new investments is concerned, all currentand capitaltransfers 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 BOPdifficulties.This provision should allow temporary restrictions on the outflows of current andcapitaltransfers related to those investments covered in the IDF.

As explained in the Note by the WTO Secretariat on Development Provisions, asafeguard provision allowing the imposition of investment restrictions for BOPreasons is an example of escape clause particularly relevant for developingcountries. In any case, a BOP safeguard clause, which allows members to takerestrictive 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 thesudden difficulties;

- avoid unnecessary damages to the interests of other members;- not be used to justify measures adopted to protect specific industries or sectors.

Are Trade Restrictions to Protect Bop right

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