The Balance-of-Payments Exceptions: Articles XII, XIV, XV and XVIII:B
Chapter Thirty-Five
Syllabus topic 2, "Trade in Good"
Pages 146 to 149 of 533
In one line
A member running out of foreign exchange may restrict imports, temporarily, under conditions, and the conditions are what the litigation is about.
In exam wording: Articles XII and XVIII:B of GATT 1994 permit a member to restrict the quantity or value of merchandise permitted to be imported in order to safeguard its external financial position and balance of payments, Article XIV governs departures from non-discrimination in doing so, and Article XV allocates the monetary questions to the International Monetary Fund.
Why the exception exists
Because the alternative is default or devaluation. A country whose reserves are exhausted must reduce its imports somehow. The system's preference is that it borrow from the Fund and adjust; the exception recognises that this is not always enough, and that a member forced to choose between breaching GATT and abandoning convertibility will breach GATT.
And because the drafters had watched it happen. In the 1930s every country in payments difficulty imposed exchange control and import licensing, and the system that had no lawful route to restriction got restriction anyway, without discipline.
The two articles, and which applies to whom
| Article XII | Article XVIII:B | |
|---|---|---|
| Available to | Any member | A member in the early stages of development whose economy can only support low standards of living |
| Trigger | To forestall the imminent threat of, or to stop, a serious decline in monetary reserves, or to achieve a reasonable rate of increase in very low reserves | To safeguard the external financial position and ensure a level of reserves adequate for the implementation of its programme of economic development |
| Standard | Stricter | Deliberately easier, and expressly linked to development |
| Consultation | Annual, with the Committee | Every two years, with the Committee |
The difference is the phrase about development, and it is why India used XVIII:B rather than XII: the provision permits restrictions to protect a reserve level adequate for a development programme, not merely to arrest a decline.
The conditions common to both
Restrictions must not exceed those necessary to address the position. They must be progressively relaxed as conditions improve and eliminated when conditions no longer justify them. They must avoid unnecessary damage to the commercial or economic interests of other members. And they are subject to consultation with the Committee on Balance-of-Payments Restrictions.
The Understanding on the Balance-of-Payments Provisions of GATT 1994 tightened all of that. It records a preference for price based measures, that is import surcharges or deposit requirements, over quantitative restrictions, because they are less trade distorting; requires publication of time schedules for removal; requires the member to justify the measures; and provides a simplified consultation procedure. It also confirms that dispute settlement is available.
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