Balance-of-Payments Provisions

The Balance of Payment is a summary statement in which, in principle, all the transactions of the residents of a nation with the residents of all other nations are recorded during a particular period of time, usually a calendar year. Obviously, the millions of transactions of the residents of a nation with the rest of the world cannot appear individually in the balance of payments. As a summary statement, the balance of payments aggregates all merchandise trade into a few major categories. The balance of payments includes some transactions in which the residents of foreign nations are not directly involved, for example, when a nation’s central bank sells a portion of its foreign currency holdings to the nation’s commercial banks. Gifts are also included in a nation’s balance of payments. Diplomats, military personnel, tourists, and workers who temporarily migrate are residents of the nation in which they hold citizenship. International institutions such as the United Nations, IMF, the World Bank, and the WTO are not residents of the nation in which they are located.

Article XII of GATT 1994 allows a Member to restrict the quantity or value of merchandise permitted to be imported in order to safeguard its external financial position and its balance of payments. Article XVIII sets out a separate provision on restrictions for balance-of-payments purposes in relation to developing countries.

In the 1979 Tokyo Round Declaration on Trade Measures Taken for Balance-of-Payment Purposes, it was recognized that restrictive trade measures are in general an inefficient means to maintain or restore the balance-of-payments equilibrium. It was also provided that in applying restrictive import measures preference should be given to the measure which has the least disruptive effect on trade.

Article XVIII:B of GATT 1994 permits the use by developing countries of measures to control the general level of imports by restricting the quantity or value of merchandise permitted to be imported in order to safeguard their external financial position and to ensure a level of reserves adequate for the implementation of their programs of economic development. The Uruguay Understanding on Balance-of-Payments Provisions of GATT 1994 encourages all Members, including developing countries, to give preference to “price-based measures” such as import surcharges, import deposit requirements or other equivalent trade measures with an impact on the price of imported goods.

Members adopting, maintaining or intensifying such measures have the obligation to notify and to consult with the Committee on Balance-of-Payments Restrictions. Consultations with Members maintaining balance-of-payments restrictions under Article XII have to be held annually; for those maintained under Article XVIII: B, they are held every two years. The IMF also participates in these consultations and presents findings of statistical and other facts relating to foreign exchange, monetary reserves and balance of payments.

Purpose: To provide developing countries with some relief and flexibility when they face problems of low inflow and small reserves of foreign exchange.

Provisions: Article XVIIIB permits limiting the quantity or value of imports in order to:

· safeguard the country’s external financial position, and

· ensure a level of reserves needed for economic development programs.

Permissible actions:

Price-based measures: The Uruguay Understanding on Balance-of-Payments Provisions of GATT 1994 encourages all Members, including developing countries, to give preference to “price-based measures” such as import surcharges, import deposit requirements or other equivalent trade measures with an impact on the price of imported goods. If the duty on a product is not bound, a Member is free to raise the duty.

Quantitative restrictions: A Member may totally stop the import of a product or limit the import of a product to a specified volume or value. While applying quantitative restrictions on imports, Members have to justify why price-based measures are not adequate to deal with the problem.

Choice of products: A Member has to justify which products should be covered by the measures. Essential products such as basic consumption goods, capital goods should normally be out of the coverage.

Limitations on BOP:

· Not more than one type of restrictive measure may be applied on the same product.

· The restrictions should not be excessive.

· The measure for BOP reasons should not be taken to protect domestic production.

· Unnecessary damage to the commercial or economic interests of any other Member should be avoided.

· The restriction should not be applied to prevent the import of commercial samples or the import of any product in minimum commercial quantities.

· A member must progressively relax the restrictions as conditions improve and must eliminate the measures when conditions no longer justify their existence.

Notification: A Member applying measures because of BOP difficulties has to send notifications to the WTO Secretariat every year to indicate the types of measure applied, the criteria used for their application, the product coverage of the measures and the trade flows affected by the measures. Besides, a Member must notify the General Council when a new measure is introduced or any change is made in the application of existing measures or any modification is made in the time schedule for the elimination of the measures taken to address BOP difficulties. Significant changes must be notified prior to or not later than 30 days after their announcement.

Consultation: The Member explains the details of the measures and the justification for taking these measures. Other Members ask questions, seek clarifications and make comments.

Simplified consultation: this process may be applied when

· least developed country Members are involved;

· other developing country Members are pursuing liberalization efforts in conformity with the schedule presented in previous consultations;

· the trade policy review of a developing country Member is scheduled for the same calendar year in which the consultation is fixed.

Full consultation: more detailed Plan of Consultations is needed, including BOP position and prospects, alternative methods to restore equilibrium, system and methods of restriction and effects of the restrictions.