For 50 years prior to this case, India had placed complex restrictions on the import of agricultural, industrial, and consumer goods from other countries. Goods placed on the "negative list" could only be imported by special license, which was generally only granted to the "actual user," rather than to firms in the normal chain of distribution. Many goods could only be imported by state agencies. The restrictions were, in many cases, applied arbitrarily and in the discretion of Indian government officials on a case by- case basis. As a result, it was often impossible to know at any given time what goods might be allowed into the country. Goods imported with a license were subject to confiscation or a fine of five times the value of the goods. In 1997, the United States brought this complaint at the WTO against India requesting that restrictions on thousands of products be removed. India claimed that without restrictions its foreign exchange would leave the country, upsetting its balance of payments and inhibiting its economic development.
1. Compare the system of import licensing in effect in India during that time to what you know in the United States today. Are there any industries you can think of in the United States that are subjected to import licensing? What industries are so highly regulated?
2. Why did the licensing scheme violate Article XI?
3. What causes a balance-of-payments problem, and why can this be a critical problem for many developing countries?
4. Why did the panel not accept India's balance-of-payments argument?