India’s Export Ban on Cotton under International Law

On 5 March 2012, the Indian Central Government notified an immediate ban on the export of cotton from India. What’s more, the ban was given a retrospective effect such that export against registration certificates already issue was also prohibited. Although the official notification does not state the reason for the ban, it appears from news reports that the justification offered by the central government was based upon “the trend of domestic consumption and depletion of domestic availability”. The ban generated several sharp responses. Indian farmers and politicians, particularly from Maharashtra, Gujarat, Andhra Pradesh and Karnataka opposed the ban as it led to a decline in domestic cotton prices from INR 4,200 (per 100 kgs) last month to INR 3,000. The China Cotton Association also came down heavily upon the ban, hoping that “the Indian government will rectify this market-disrupting and mistaken policy in a timely fashion and comply with global trade rules”. China is the largest importer of Indian cotton. The Chinese government also seems to have taken the matter up formally with its Indian counterpart.

With all these voices against the ban, the (empowered) group of ministers of the Government of India today revisited the ban, and decided that it will be removed. So, of course, the ban will be revoked soon and the sun will shine again (soon). Nevertheless, this incident provides a useful instance to analyze Indian practice on export bans under international law. Specifically, India, as  a party to the WTO Agreement and the GATT 1994, has undertaken several commitments under WTO law. Also, this incident provides an apt opportunity to revisit the WTO Appellate Body’s report ruling on the inconsistency of China’s restrictions on the export of certain raw materials (China — Raw Materials).

Article XI:1 of the GATT 1994, titled “general restrictions on quantitative restrictions”, states:

1.       No prohibitions or restrictions other than duties, taxes or other charges, whether made effective through quotas, import or export licences or other measures, shall be instituted or maintained by any contracting party on the importation of any product of the territory of any other contracting party or on the exportation or sale for export of any product destined for the territory of any other contracting party.

Now clearly, this seems to apply to India’s prohibition on the export of cotton.

As the AB noted in China — Raw Materials (para. 320), the title of Article XI “suggests that Article XI of the GATT 1994 covers those prohibitions and restrictions that have a limiting effect on the quantity or amount of a product being imported or exported.”

However, although this is a general obligation, its scope is delimited by Article XI:2, which lays down situations in which export and/or import restrictions may be imposed. Importantly, Article XI:2 begins with the chapeau that the “provisions of paragraph 1 of this Article shall not extend to the following…”, suggesting that it does not carve out an exception (like Article XX, e.g.), but instead circumscribes the scope of the obligation contained in Article XI:1 above.

Returning to the scenario at hand, as noted earlier, even though the notification itself does not provide any reasons, it appears that the ban was imposed as a result of rising domestic demand and decreasing supply. Article XI:2, in fact, contemplates such a situation by permitting

(a)      Export prohibitions or restrictions temporarily applied to prevent or relieve critical shortages of foodstuffs or other products essential to the exporting contracting party;

At first, the ban may then seem consistent with India’s obligation under international law: The prohibition on imposing export restrictions contained in Article XI:1 does not extend to situations where such restrictions are applied “temporarily”, “to prevent or relieve critical shortages of foodstuffs or other products essential to the exporting contracting party”. Clearly, this would be India’s justification for the ban under international law.

There are several problems with such a justification, however. In particular, I am not sure if the domestic conditions in India amounted to a critical shortage. I am not concerned so much about the non-temporary nature of the ban (the notification itself doesn’t prescribe an end date, but that may instead flow from the quantitative restriction provision in the Foreign Trade (Development & Regulation) Act of 1992, as amended in 2010), or even the essentiality of cotton (as the AB noted in para. 326: “[b]y including, in particular, the word “foodstuffs”, Article XI:2(a) provides a measure of what might be considered a product “essential to the exporting Member” but it does not limit the scope of other essential products to only foodstuffs.”).

On the issue of whether the shortage cited by India amounts to a “critical shortage” as used under Article XI:2(a), it is important to remember that the phrase is only self-judging in the first instance. In other words, India cannot finally decide what constitutes critical shortage for it, for WTO law shall decide this question. And indeed this is exactly what the Appellate Body did in China — Raw Materials, wherein it assessed the consistency of an export ban on raw materials imposed by China. China sought to justify the need for the ban as a critical shortage. On the meaning of a critical shortage the AB noted:

Taken together, “critical shortage” thus refers to those deficiencies in quantity that are crucial, that amount to a situation of decisive importance, or that reach a vitally important or decisive stage, or a turning point.

Importantly, according to the AB, the kind of shortages that fall under Article XI:2(a) are “narrower” than “general or local short supply” (para. 325). As an example, the AB noted:

It would seem that Article XI:2(a) measures could be imposed, for example, if a natural disaster caused a “critical shortage” of an exhaustible natural resource, which, at the same time, constituted a foodstuff or other essential product.

Thus, the definition of “critical shortages” under Article XI:2(a) is quite narrow, and does not include shortages resulting from regular fluctuations of domestic demand and supply. It seems that a critical shortage signifies a degree of acuteness.

With this definition as the standard, India’s export ban on cotton seems inconsistent with its obligation under Article XI:1 of the GATT 1994 not to impose quantitative restrictions simply because the shortage does not seem to be acute, out of the ordinary, or of decisive importance. The fact that the shortage sought to be fulfilled by the export ban is not critical or severe is confirmed by the steep decline in domestic prices and estimates that 30 per cent of the cotton produced is still lying with the farmers and an equal amount with the local ginners and traders after the ban. This means that there’s very little domestic demand. If there was a critical shortage, there certainly wouldn’t have been surplus lying around in warehouses. Of course, even with this, it would still need to be analyzed whether the ban could be justified under Article XX of the GATT 1994, which contains the general exceptions to the obligations under the GATT 1994. Let’s save that for another day, though.

All said, the export ban seems to have been a hasty and ill-advised step on part of the Indian government. Everyone, including the domestic constituencies and industry, as well as foreign industries and governments opposed the ban, which was promptly revoked by the government almost within a week of its notification. In the light of what WTO law has to say on such bans, let’s hope that India at least fully considers the AB’s guidance on export restrictions, before imposing another. Predictability, stability and certainty, are the catch words : )


2 thoughts on “India’s Export Ban on Cotton under International Law

  1. Quite true, Srikar. In fact, I would go on a little further and even say that the situation here was such that all stakeholders, both domestic and international (China, its industry, and even the WTO), except the Indian government opposed the ban. At least in international trade, where all politics is local and all economics global, it is not often that you see a government acting without the support of the majority of the local industry and producers. This was one such case, suggesting that the government had neither a sound economic nor political reason for imposing the ban. All this seem to be confirmed by its prompt revocation.

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )


Connecting to %s