A. Trade restrictions B. Bop C. Trade restriction on bop D. Its effects E. Provisions to safeguard(including wto) F. Results G.
³Are 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 restrictionA 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 ³get 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 Import prices Volume of imports BoP improve
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 µin 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 µnecessary: (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 µundertake, 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 µto 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 µthe 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 µDeclaration on Trade Measures taken for Balance-ofPayments Purposes¶,14] which expanded the ambit of Articles XII±XIV and XVIII beyond quantitative restrictions to include µall import measures taken for balance of payments purposes¶. The Declaration also imposes an obligation on Contracting Parties taking such measures to µgive 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 µto take into account changes in the balance-ofpayments 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 µbecause of a critical balanceof-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-ofPayments 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 µAppendix 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: µ[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 µapplication¶ 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 µapplication¶ 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 µapplication¶ merely reflected µtraditional 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 µclarify¶ 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, ³Mainstreaming 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 µ[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 µapplication¶ 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 µapplication¶ 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 ³macroeconomic´ 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 ³ownership´ of the meaning of a ³development´ policy. Secondly, the Appellate Body would not have embraced the stark contrast between ³development policy´ and macroeconomic policy. This implies that development policy is restricted to a series of techniques that ³experts´ view as formulae for ³development,´ rather than including all those policies that people²in this case, at a minimum, India and Indians²see 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 ³development 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 actors²at 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-declaration²that 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 ³experiences 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 ³if 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 ³in 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 ³temporary 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 balanceofpayments 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 balanceofpayments 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 concerns² particularly in developing countries²about 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 adjust²often 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 emergingmarket 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 have²or likely will²see 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: ³Although 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, ³the 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 socalled ³red 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 (³country-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 arefound²with a high degree of statistical confidence²to 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 categories²although 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. y 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 acrosstheboard and should not protect specific sectors from competition). Additionally, the Understanding established strict notification deadlines and explicit documentation requirements, and permitted ³reverse notification´ by Members concerned with measures instituted, but not notified, by other Members. y 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. 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 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. y 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. y 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. y 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.
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 ³escape 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.