3.92 For the foregoing reasons, the United States requests that the Panel find that India has failed to establish that section 334 of the URAA and section 405 of the Trade and Development Act of 2000 are inconsistent with Article 2(b)-(e) of the Agreement on Rules of Origin.

3. Oral statement of India at the first meeting of the Panel

3.93 It is my honour to represent India before you today. My name is K.M. Chandrasekhar, and I am the Ambassador of India. The members of the Indian delegation are our officials, Mr M. K. Rao, First Secretary (Legal), Mr Sudhakar Dalela, First Secretary (WTO), Mrs Alka Bhatia, First Secretary, Geneva, all with the Permanent Mission of India to the WTO, Mr S. Rajagopal from the Cotton Textile Export Promotion Council of India, and our advisers, Mr Frieder Roessler, Executive Director, Advisory Centre on WTO Law, and Ms. Cherise Valles, Counsel, Advisory Centre on WTO Law.

3.94 Exports of textile and apparel products are of critical importance to India and other developing countries. We have initiated these dispute settlement proceedings because the United States is using rules of origin to undermine India's market access rights for these products. India also has a systemic interest to ensure that rules of origin are prepared and applied in accordance with the obligations assumed by all WTO Members. We are aware that the outcome of this dispute will be watched closely by all of those who support the trade-neutral application of rules of origin.

3.95 The RO Agreement exists because rules of origin need to be used correctly. The RO Agreement exists in order to prevent the abuse of rules of origin. Rules of origin can be used as a perfectly legitimate instrument to define the national origin of products in order to determine the treatment to be accorded to that product. Rules of origin can also be used to determine the products eligible for preferential treatment. Every WTO Member that applies non-preferential but country-specific trade policy instruments needs rules that determine in which country a product is deemed to originate. Article 2 of the RO Agreement reserves each Member�s right to determine the criteria that confer origin pending the adoption of harmonized disciplines after the transition period. The use of rules of origin is therefore at present in no way curtailed. However, rules of origin can also be abused for the purpose of impairing the benefits of market access rights and the right to non-discriminatory treatment and arbitrary origin requirements can create unnecessary obstacles to trade. Article 2 therefore obliges Members not to use rules of origin to pursue trade objectives and not to impose origin requirements that create restrictive, distorting and disruptive effects on international trade or that discriminate between WTO Members. The abuse of rules of origin is therefore clearly prohibited.

3.96 Contrary to the assertion of the United States, India is not asking you to adopt interpretations of Article 2 that would curtail the right of Members to determine the criteria which confer origin, or to change such criteria over time or to apply different criteria to different products. A Member may do so. However, a Member may not have rules of origin that are adopted and applied in a manner inconsistent with its obligations under Article 2 of the RO Agreement. It is clear that the United States has exercised its right to determine criteria for rules of origin for purposes for which such rules may not be used and, in a manner, which cannot be reconciled with its obligations under the RO Agreement. India brought this case because the United States is clearly abusing its right to determine the criteria that confer origin for the purpose of protecting its domestic industry and of favouring products of export interest of one other Member of the WTO over others. In fact, the abuse is so serious that it is difficult to imagine what measures would be subject to the disciplines of Article 2 of the RO Agreement if measures of the type imposed by the United States were considered to be consistent with that provision. A finding that the United States measures at issue are consistent with Article 2 of the RO Agreement would render that provision a nullity.

3.97 It is now clear that the harmonisation of rules of origin is likely to take much longer than the drafters of the RO Agreement had anticipated. As a result, the disciplines to be observed pending the harmonisation have become more important than ever. All Members, not only India, have an interest in ensuring that these disciplines are interpreted in a manner that is consistent with the objectives of the RO Agreement. All Members, not only India, have an interest in ensuring that the market access commitments they have already negotiated and those that they will negotiate in the Doha Work Programme are not rendered meaningless through the manipulation of rules of origin. The United States was the main promoter of the RO Agreement. India would therefore like to encourage the United States to look beyond the application of its rules of origin during the remaining years of the Agreement on Textiles and Clothing and assist the Panel in developing constructive interpretations fully consistent with the objectives of the RO Agreement.

3.98 India�s main legal claims are that the United States is using its rules of origin to pursue trade objectives and that its rules of origin themselves restrict, distort or disrupt international trade. The "fabric forward" rule of section 334 meant that more textile and apparel products were conferred the origin of countries that were under quota restraints. Section 405 provided exceptions to the "fabric forward" rule for certain products of export interest to the European Communities, but then also provided a further exception that if those products were made from certain fibres, such as cotton, they would be subject to the "fabric forward" rule. These latter products were once again conferred the origin of the countries that were under quota restraints.

3.99 India demonstrated in our first submission that sections 334 and 405 were adopted to pursue trade objectives, that they create restrictive, distorting and disruptive effects on international trade and that they entail a de facto discrimination between exports of the European Communities and those of other Members of the WTO and that they consequently violate Article 2(b), (c) and (d) of the RO Agreement. However, the United States fails to rebut in any meaningful way the claims and argument that India made.

3.100 Contrary to what is stated in the United States' submission, India does not seek to have the Panel "prescribe�what specific rules of origin Members must use." Nor does India seek to "impose a system in which there are no rules." India has not, and would not, make such claims. Rather, India is making a claim as to what the United States rules of origin should not be.

3.101 The term "trade objectives" is not defined in the RO Agreement. As noted in India�s submission, the ordinary meaning of "trade objectives" in the context of Article 2(b) is an aim, goal, or object related to trade. We similarly argued that one way of assessing whether a rule of origin is being used as an instrument to pursue a trade objective is to assess whether it achieves the same results as a measure or instrument of commercial policy would. Trade objectives include the objective of protecting the domestic industry against import competition, or of favouring imports from one WTO member over imports from another. Any rule of origin that does so is, by definition, used as an instrument to pursue trade objectives.

3.102 The United States' submission (see para. 3.79 above) provides the important acknowledgement that "the United States accepts India �s contention that protection of a domestic industry is an �impermissible� trade objective for the purposes of Article 2(b)." The European Communities submission adds that "the European Communities can join the consensus among the parties that in any event, the objective of protecting domestic industry would come under Article 2(b) of the RO Agreement (see European Communities' submission, para. 11). Furthermore, the European Communities is also ready to accept India�s contention that favouring one Member over another would, in principle, be a trade objective covered by that provision."

3.103 For the purposes of this dispute, it is not necessary for the Panel to develop a general definition of the term "trade objectives." India�s view is that it would be sufficient for the Panel to find that the United States measures at issue have as their objective the protection of the domestic industry against import competition or the favouring of imports from one WTO Member over imports from another.

3.104 The United States explains that section 334 was passed "to prevent quota circumvention and address illegal transhipment to advance harmonization and to more accurately reflect where the most significant production activity occurs." The definition of "circumvention" was provided by the United States in its first submission. It cites with approval a commentary that the United States was addressing circumvention through section 334 because "some new industrialized countries of Southeast Asia could otherwise try to circumvent the quantitative restrictions applied to their exports of textile products. They could do so by exporting semi-finished products (in casu dyed or printed cloths) to third countries, in the hope that the origin of those countries (for which no quantitative restrictions for exports of textile products are applied) would be attributed to the finished cloths." However, this is not circumvention. Circumvention is a term which implies a violation of the applicable origin rules through false declarations and other illegitimate means. The reaction of the market to the incentives and disincentives created by country-specific quotas cannot be described as circumvention. These newly industrialized countries of Southeast Asia were not "circumventing" origin rules but were adapting their production to their market access conditions. Since the origin determinations of the products in these new trade patterns were conducted in conformity with the then applicable section 12.130 regulations, as a matter of definition, they could not constitute "circumvention."

3.105 In its submission, the European Communities rightly points out that if the expression "circumvention of quotas" was used to describe the changing of trade patterns in response to quotas, the intent to pursue a trade objective could be established through the legislative history itself. The United States' intention to combat "circumvention" corresponds, in the words of the European Communities, to an intention to "re-apply quantitative restrictions where these have lost their bite through changes in trade patterns and regulations." As noted by the European Communities and China, this is precisely the type of trade objective that Members are not to achieve through the use of rules of origin.

3.106 India has demonstrated in its submission that the trade objective of section 334 was the protection of the United States domestic industry. The effect of section 334, especially its fabric forward provision, was that a range of textiles and clothing products imported into the United States were subjected to the strict quotas of the developing countries whereas previously they had been under no quota or a more generous quota. India noted that the United States has not provided any explanations in its submission that would justify the conclusion that section 334 was meant to be trade neutral. We therefore believe that we have made a prima facie case of violation that the United States has failed to rebut.

3.107 The United States submits that the main purpose of section 405 was the same as that of section 334, namely to prevent circumvention or transhipment. However, the changes effected through section 405 did not address circumvention or transhipment concerns. As noted by China, the United States' arguments that these concerns were a legitimate basis for the changes to its textile origin rules are inapposite with respect to section 405. We note that also with respect to section 405 the United States has failed to give any explanations that would support its claim that section 405 does not reveal the intent to favour exports of the European Communities over those from other Members of the WTO. It merely asserted that the main objective of section 405 was to prevent circumvention and transhipment. However, as noted by the European Communities in its submission, the Appellate Body made clear in Chile - Alcoholic Beverages that the mere stating of objectives does not constitute effective rebuttal by a respondent.

3.108 The United States passed section 405 to amend certain provisions in section 334. India has argued that the sole objective of section 405 was to favour the exports of the European Communities, while maintaining the restraints for non-European Communities countries. The United States has not responded adequately to this argument. The only point the United States makes is that Members should not be discouraged from achieving mutually agreed solutions. India agrees that Members should not be discouraged from arriving at mutually agreed solutions. However, India is challenging the discriminatory terms of the legislation implementing the settlement.

3.109 Article 2(b) of the RO Agreement is violated if rules of origin are used as instruments "to pursue trade objectives. " The legal status of a rule of origin under this provision thus depends on the purpose it serves. If its only objective is to determine the origin of products, it is consistent with Article 2(b). If it is used, directly or indirectly, to pursue a trade objective, it is not. The principal remaining interpretative issue is how the objective of rules of origin at issue should be determined. One approach would be to look at the declared intent of the legislators and to ask: what objective did Congress declare to pursue when adopting the rules? Another approach would be to examine the objective that is expressed in the legislation and ask: what is the objective revealed by the terms of the legislation?

3.110 The Appellate Body has clearly indicated its preference for latter approach. Article III:2 of the GATT prohibits the application of internal taxes on products "so as to afford protection to domestic production". In Japan - Alcoholic Beverages, the Appellate Body ruled that the question of whether internal taxes were being applied so as to afford protection had to be determined by examining the objectives revealed by the legislation�s design, architecture and structure rather than the reasons given by the legislators.

3.111 The approach adopted by the Appellate Body in respect of Article III:2 can be transposed to the case before the Panel. WTO law leaves Members in principle free to determine the criteria on the basis of which they tax products and determine their origin. However, neither internal taxes nor rules of origin must serve trade policy purposes. The consistency of both internal taxes and rules of origin with WTO law thus depends on the objective pursued. The obligations governing internal taxes have, of course, a different rationale than the obligations governing rules of origin. However, since both sets of obligations distinguish between legal and illegal measures on the basis of the objective pursued, there is no reason why the Appellate Body�s approach to Article III:2 of the GATT should not be applied to Article 2(b) of the RO Agreement.

3.112 In its submission, the European Communities states that a difference in the test to be applied might be justified because in its view "Article 2(b) of the RO Agreement is exclusively about intent whereas Article III of the GATT is rather about showing effects through intent". However, both the wording of Article III of the GATT ("so as to afford protection") interpreted by the Appellate Body and the wording at issue in this case ("to pursue trade objectives") refer to intent ("so as to" and "to") and effect ("protection" and "trade objectives"). There is consequently no textual justification for the distinction made by the European Communities. It would in our view be too far-reaching to conclude that "Article 2(b) of the RO Agreement is exclusively about intent", as asserted by the European Communities. There is no reason to declare a rule of origin illegal merely because it was intended to be used as an instrument to pursue trade objectives; it must also be capable of achieving those objectives. The Panel would for these reasons be on more solid ground if it were to apply the conceptual framework developed by the Appellate Body for Article III:2 of the GATT also to Article 2 (b) of the RO Agreement.

3.113 In India�s first written submission, we adopted a two-pronged approach to this interpretative issue. We demonstrated that the objective features of the rules of origin at issue in this dispute all point in one direction: they were adopted to protect the United States textiles and apparel industry and to single out products of export interest to the European Communities for more favourable treatment. We fully recognise that the intentions expressed during the legislative history, by themselves, cannot constitute a violation of Article 2(b). However, we believe it can reasonably be assumed that the domestic industry and the Administration knew what the impact of their proposals would be and that the rules of origin finally adopted produce the desired result. We are therefore of the view that our presentation of the legislative history of the rules of origin at issue justifies, given the absence of alternative explanations by the United States, the conclusion that the measures are in effect used as instruments to pursue trade objectives.

3.114 Let me now turn to the meaning of the phrase "rules of origin shall not themselves create restrictive, distorting or disruptive effects on international trade" in Article 2(c) of the RO Agreement. Unlike Article 2(b), this provision does not refer to the "use" of rules of origin (that is, their link to a particular commercial policy instrument) but to the rules of origin "themselves". This indicates that Article 2(c) obliges Members to ensure that that the rules of origin as such (whatever the commercial policy instrument to which they are linked) do not create restrictive and other adverse effects on international trade.

3.115 The basic interpretative issue is whether the words "create restrictive . . . effects" refer to the effects that the rules of origin are capable of creating or whether they refer to the effects they actually create in the market place. If the former were true, it would be sufficient for India to demonstrate that the incentives and disincentives faced by traders as a result of the rules of origin at issue are such so as to create restrictive effects. If the latter were true, India would have to demonstrate that the regulatory framework imposed by the United States has actually produced those effects.

3.116 The parties to this proceeding take different positions on this issue. In the view of India, a Member violates Article 2(c) if it adopts rules of origin creating restrictive effects. What is relevant, according to India, under Article 2(c) is the nature of the rules of origin that the Member adopted, not the reaction of the market to those rules. As a result, the other Members could therefore challenge the rules of origin under Article 2(c) as soon as they enter into force. The United States takes the position that a violation of Article 2(c) has to be proven through trade data showing adverse effects. The implication of the United States� position is that Members wishing to challenge rules of origin under Article 2(c) would have to wait until the rules of origin have actually produced an adverse impact and trade data are available to demonstrate this. A further implication is that the consistency of a rule of origin would depend on the market�s reaction to it and consequently on factors that normally escape the control of Members.

3.117 The question of whether the rules of international trade regulate conduct or effects has been an issue on many previous occasions. In EC - Oilseeds, the CONTRACTING PARTIES to the GATT 1947 had to decide whether a quota restriction can be deemed to have been "made effective" within the meaning Article XI:1 even if the quota is not exhausted and therefore did not actually restrict imports. They decided that the mere imposition of a quota violated Article XI. The CONTRACTING PARTIES also had to decide whether a tax was "applied" to imported products within the meaning of Article III:2 of the GATT even if there had not yet been any imported product on which the tax had actually been imposed. The CONTRACTING PARTIES decided that the actual impact of a tax was irrelevant under Article III:2. The Appellate Body noted the CONTRACTING PARTIES� jurisprudence approvingly in Japan - Alcoholic Beverages and ruled that "Article III protects expectations not of any particular trade volume but rather of the equal competitive relationship between imported and domestic products and that it is irrelevant that �the trade effects� of the tax differential between imported and domestic products, as reflected in the volumes of imports, are insignificant or even non-existent."

3.118 Articles III and XI of the GATT have thus never been interpreted to require the attainment or avoidance of particular effects on international trade. They have been interpreted to require the establishment of a regulatory framework that enables investors and traders to foresee under what condition they will have to compete with the products of the importing country. The purpose of Articles III and XI of the GATT is to prevent the impairment of market access concessions through non-tariff measures imposed internally or at the border. As noted in the Preamble, the purpose of Article 2 of the RO Agreement is to prevent the impairment "of the rights of Members under GATT 1994" through rules of origin. Given that the basic rationale of these provisions is the same, the approach to their interpretation should be the same. Just like the terms "made effective" in Article XI of the GATT and "applied" in Article III:2 of the GATT, the terms "create effects" in Article 2(c) must be given a meaning consistent with the basic function of the world trade order, which is to create predictability for traders and investors.

3.119 The only logical conclusion that one can draw from these considerations is that Article 2(c) of the RO Agreement, just as all the other provisions in WTO law designed to prevent the circumvention of market access commitments through non-tariff measures, must be interpreted as a provision prescribing conditions of competition, not the avoidance of certain trade results. What is thus relevant is whether the rules of origin create conditions of competition with restrictive, distorting and disruptive effects, and not whether the actual application of these rules to a specific commercial policy instrument has produced such effects.

3.120 If, as the United States advocates, a claim of violation of Article 2(c) could only be made if and when trade data are available and it had to be demonstrated that the change in trade flows was caused by the rules of origin and not other factors, this important provision in the RO Agreement would become for all practical purposes unenforceable because the effect of the rules of origin and the effect of the policy instrument to which they linked could, in practice, not be segregated. India believes that the approach to the interpretation of Article 2(c) advocated by the United States is therefore not only inconsistent with the GATT and WTO jurisprudence and the basic function of the world trade order but also with the fundamental principle of interpretation that each provision of a treaty must be given effect.

3.121 In response to India�s claim that the United States rules of origin have restrictive, distorting or disruptive effects on international trade, the United States argues that a modification of trade is not sufficient to rise to the level of "restriction, distortion or disruption". This is no doubt true. Rules of origin, by their very nature, change patterns of trade and this consequence, by itself, can therefore not be deemed to be "restrictive, distorting or disruptive" within the meaning of Article 2(c). The meaning of these terms has to be examined in the context in which they appear. Their immediate context is the second sentence of Article 2(c) according to which rules of origin shall not impose requirements that are unduly strict or unrelated to manufacturing or processing. This suggests that Article 2(c) is meant to ensure that Members do not include in their rules of origin requirements that need not be imposed to determine in which country a sufficient amount of economic activity has taken place to justify the conferral of origin. In other words, Article 2(c) is meant to ensure that the conferral of origin does not depend on the fulfilment by producers and traders of conditions creating restrictive, distorting or disruptive effects that are not necessary to determine the origin of products and that consequently go beyond those inevitably created by any rule of origin. This conclusion is supported by the fourth clause of the preamble of the RO Agreement according to which this Agreement is "to ensure that rules of origin themselves do not create unnecessary obstacles to trade".

3.122 The United States, supported by the European Communities, argues that section 405 is not discriminatory within the meaning of Article 2(d) because the rules of origin in that section apply to all Members equally. This argument implies that Article 2(d) covers only cases of formal discrimination, that is rules of origin that explicitly distinguish between different WTO Members. In the view of India, this is an untenable position.

3.123 The most-favoured-nation provisions of Article I of the GATT have been applied in past practice to measures involving de facto discrimination. For instance, tariff treatment less favourable for Arabica and Robusta coffee than for other groups of coffee was deemed to be inconsistent with Article I. In EC - Bananas, the Appellate Body noted this jurisprudence approvingly and concluded that also the most-favoured-nation provisions of Article II of the General Agreement on Trade in Services (GATS) applied to both de facto and de jure discrimination. The Appellate Body considered that, "if Article II of the GATS was not applicable to de facto discrimination, � it would not be difficult to devise discriminatory measures aimed at circumventing the basic purpose of that Article." There is no reason why the approach to the principle of non-discrimination laid down in the RO Agreement should be different. The danger of circumventing the purpose of Article 2(d) through product distinctions is just as great as the danger of circumventing the most-favoured-nation provisions of the GATT and the GATS through product or service-specific distinctions. Indeed, the case before you is a clear demonstration that arbitrary distinctions between closely related products can be used to achieve the objective of favouring one WTO Member over others.