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WORLD TRADE
ORGANIZATION

WT/DS243/R
20 June 2003

(03-3200)

Original: English

UNITED STATES - RULES OF ORIGIN
FOR TEXTILES AND APPAREL PRODUCTS

Report of the Panel

(Continued)


  1. Oral statement of the United States at the first meeting of the Panel

1. Introduction

3.124 Mr Chairman and members of the Panel. We are pleased to have this opportunity to appear before you to present the arguments of the United States in defence of the rules of origin found in section 334 of the Uruguay Round Agreements Act and section 405 of the Trade and Development Act of 2000. As we discussed in our first submission, the United States rules of origin are consistent with the RO Agreement and advance its objectives. India bears the burden of making a showing, based on more than mere allegations, that the United States rules of origin are inconsistent with the provisions of the RO Agreement. India has not done so, not in its first submission, and not at the first meeting of the Panel with the parties.

3.125 Let�s begin by taking a step back. The RO Agreement was drafted because Uruguay Round negotiators wanted to ensure that rules of origin: (a) were clear and predictable and would through their application facilitate the flow of international trade; (b) were implemented through transparent laws, regulations and practices; and (c) were prepared and administered in an impartial, transparent, predictable, consistent and neutral manner. The RO Agreement prescribes a set of obligations that are guided by these principles. At the same time, while setting out the program for harmonization, the RO Agreement drafters did not impose a single set of rules of origin at the close of the Uruguay Round. Instead, the RO Agreement left policy flexibility in the hands of individual Members (both in Members� design of rules of origin, and in Members� right to alter those rules of origin from time to time), and specifically set out various mechanisms that could be used (see Article 2(a)). In addition, the RO Agreement provides for changes to origin regimes in Article 2(i) and allows varying origin criteria to be used until harmonization is completed.

3.126 When it looks at the United States measures, the Panel will see that the United States rules of origin for textiles and apparel products were drafted in such a way that they advance the RO Agreement�s objectives. And, when the Panel looks at India�s arguments, it will see that, at bottom, India is hoping to impose a single set of rules of origin on the United States (and, implicitly, on all other Members) - notwithstanding the fact that the RO Agreement was intended to leave flexibility in the hands of Members. Of course, we recognize that the RO Agreement imposed disciplines on Members. But not the ones that India would like you to believe exist. India appears to argue that the RO Agreement prescribes a specific determination of origin for, say, bedsheets, or that a particular outcome resulting from the application of rules of origin is somehow less than neutral because it is not a determination of origin that India agrees with.

3.127 The United States cannot help but note that India�s approach to its own measures helps to demonstrate the benefits of the approach of the United States measures at issue. India has notified the WTO that it does not have non-preferential rules of origin for textiles, apparel or other products, even though India maintains non-preferential commercial policy regimes that would appear to be implemented through origin determinations.

3.128 With that background, let us take a look at the legal arguments that India has put before the Panel. India asserts that the United States rules of origin were enacted to pursue protectionist trade objectives; that they restrict, distort, and disrupt trade; and that they are discriminatory and administered in an unfair manner, all in violation of Article 2 of the RO Agreement. India also claims that section 405 is discriminatory and similarly inconsistent with Article 2. India�s problem is that it does not like the certain and specific origin determinations that result from the product-specific rules of origin which the United States promulgated in order to bring greater certainty to the textile and apparel trade. India, in effect, is asking the Panel to read into the RO Agreement certain specific criteria and, indeed, interpretations of what constitutes an operation that confers origin.

3.129 The rules of origin regime established in section 334 and section 405 are not inconsistent with Article 2(b)-(e), as read in good faith in accordance with the ordinary meaning to be given to their terms in their context and in the light of the object and purpose of the RO Agreement. These rules were enacted to combat circumvention of established quotas, prevent transshipment, facilitate harmonization and best capture where a new product is formed. Furthermore, both section 334 and its modification section 405 are maintained on an MFN basis, in accordance with WTO rules. As such, these rules are not inconsistent with the RO Agreement. Rather, they facilitate the flow of international trade.49

(a) The Agreement on Rules of Origin

3.130 Article 2 of the RO Agreement prescribes a set of disciplines on Members to promote transparency and prevent trade distortion through rules of origin until the work programme for the harmonization of origin rules is completed.

(b) Section 334 of the Uruguay Round Agreement Act

3.131 Section 334 established a body of rules that are based on the principle that the origin of fabric and certain textile products is derived where the fabric is woven, knitted or otherwise formed; and that the origin for any other textile or apparel product is where that product is wholly produced or assembled. If production or assembly occurs in more than one country, origin is conferred where the most important assembly, or manufacturing process, takes place. The United States system is based on the conclusion that origin is conferred where the most important assembly or manufacturing process takes place. This reflects the United States� judgment that assembly is generally the most important step in the manufacturing of assembled apparel and that fabric formation is the most important step in manufacturing fabric or flat goods.

(c) Section 405 of the Trade and Development Act of 2000

3.132 Section 405 amended section 334 in order to settle a WTO dispute brought by the European Communities alleging that section 334's provisions had negatively affected trade in specific exporting sectors of the European Communities, most notably Italian silk products.50 In order to settle the European Communities dispute, the United States agreed to amend section 334, creating two exceptions to section 334's "fabric formation rule": 1) for silk, cotton, man-made and vegetable fiber fabric, origin would once again be conferred by dyeing and printing and two or more finishing operations; and 2) for certain textile products excepted from the assembly rule, origin would be conferred where dyeing and printing and two or more finishing operations took place, with exceptions. These amendments apply to all WTO Members, not just the European Communities.

2. Legal analysis

3.133 The text of Article 2, read in its context and in light of the RO Agreement�s object and purpose, does not preclude Members from determining the origin of goods based on assembly, type of material, or type of product. To require the United States to utilize a particular rule for a specific product, as India advocates, would be to add an obligation not contained in the RO Agreement during the current transition phase.

(a) Section 334 is consistent with Article 2(b)

3.134 The United States submits that India�s interpretation of a "trade objective" is incorrect, as it is overly broad. If "trade objective" is understood to be any objective related to trade, rules of origin could not be used to pursue transparency or predictability, two trade-related goals. Such an interpretation would be at odds with both the object and purpose of the RO Agreement and the context of this provision.

3.135 As we discussed in our first submission, the section 334 rules of origin do not have as their objective the protection of domestic industry. Instead, the purpose of these rules of origin is found in the Statement of Administrative Action (the "SAA"). The SAA is clear on what its objectives were: to prevent quota circumvention and address illegal transshipment, to advance harmonization, and to more accurately reflect where the most significant production activity occurs. In the United States' experience, the type of finishing operations presented to the Customs Service for determination of origin and application of quotas had grown, and under the increasing number of case-by-case applications by the Customs Service of the substantial transformation criteria, the list of processes that were deemed to confer origin also expanded, sometimes including processes that in retrospect were understood not to be significant. Section 334 was designed to remedy these errors. India points to no evidence to support its assertion that section 334 has been used to achieve protection of the domestic industry.

3.136 Not only is there nothing in the text of the RO Agreement that says that Members must confer certain origin determinations, there is nothing in Article 2(b) that indicates that if a Member does not include certain finishing operations in a determination of origin the Member is thereby using its rules of origin to pursue trade objectives. It is the policy decision of the United States that origin conferring production is based on manufacturing or formation of either fabric or apparel, not a finishing operation. The United States rules take into account which operations merit changing origin, and that may vary based on the type of product. Moreover, as we have noted, Article 2(a) sets forth a range of criteria that can be used by a Member in formulating its rules of origin, and the United States rules of origin for textile and apparel products are consistent with these criteria.

(b) Section 405 is consistent with Article 2(b)

3.137 India�s arguments that section 405's amendment of section 334 constitutes an impermissible use of rules of origin fail.51 First, the modifications in section 405 apply to all Members on an MFN basis. And while we do not wish to belabor the point today, we have also explained in our first submission that it would be absurd to penalize a Member for reaching a mutually satisfactory settlement of a dispute with another Member, pursuant to the provisions of the DSU, where the benefits of the settlement accrue to all Members. Yet that is precisely what India asks of this Panel.52 Does India perhaps wish to discourage Members from achieving mutually satisfactory solutions? That would be the likely consequence of accepting the logical leap that India urges on the Panel.

(c) Section 334 and section 405 are consistent with Article 2(c)

3.138 India has also failed to meet its burden of showing that section 334 and section 405, in and of themselves, restrict, distort and disrupt trade. To begin with, India presents no textual support in the RO Agreement for its argument that rules favoring one product over another, or one fabric over another, for that reason alone, restrict, distort or disrupt trade.53 The single exhibit presented by India to support its allegations is a letter from the Cotton Textiles Export Promotion Council, which does not help India establish a prima facie case in this dispute.54 India does not address the possibility that Sri Lankan producers may have decided to weave their own fabric or to source it from elsewhere. There is simply no causal connection between section 334 and either the rise or fall of Indian fabric exports to Sri Lanka.

3.139 In fact, data on India's exports of cotton woven fabric, available from the United Nations, indicates that quite to the contrary, India's exports to the world (as well as to the United States) increased between 1995 and 1996 (from $959.6 million to $1 billion), and while exports declined slightly in 1997 (to $974.5 million), the 1997 value of exports was higher than that in 1995. Similarly, again according to United Nations data, India�s exports of bed linen to the world increased between 1995 and 1996 (from $3.2 million to $4.7 million), and increased again in 1997 (to $5.3 million). These statistics do not bear out a claim of trade disruption.

3.140 India also argues that the rules disrupt trade by "their sheer complexity." Importantly, India has not demonstrated that �complexity� is a prohibited criterion, nor has India demonstrated that the United States rules are inordinately complex. In addition, India presents no evidence that the rules have discouraged exporters from shipping their products to the United States because they simply could not understand them. Indeed, India supplies nearly $3 billion in textiles and apparel products to the United States, which strongly suggests that Indian exporters have not had too much difficulty understanding the rules.

(d) Consistent with Article 2(d), the rules are not discriminatory

3.141 As a preliminary matter, it appears that India is making a claim regarding Article 2(d) only with respect to section 405, and that the applicable provision of Article 2(d) India claims is being violated is that rules "shall not discriminate between other Members irrespective of the affiliation of the manufacturers [sic] of the goods concerned."55 In respect of this claim regarding Article 2(d), however, India makes no attempt to show how the settlement with the European Communities, which is applicable to India and all other Members on an MFN basis, is discriminatory. Accordingly, India has failed to meet its burden to establish that sections 334 and 405 are inconsistent with Article 2(d).

(e) The administration of the rules is consistent with Article 2(e)

3.142 Similarly, India makes no effort to show how the administration of section 334 and section 405 is inconsistent with Article 2(e)�s instruction that Members ensure that "rules of origin are administered in a consistent, uniform, impartial and reasonable manner" (emphasis added). Rather, India attempts to recast this obligation in order to challenge attributes of the rule itself, rather than of its administration. However, just as claims under Article X:3 of the GATT 1994 must fail if they are based on challenges to aspects of the laws themselves, rather than their administration,56 so too must claims under Article 2(e) fail if they are based on perceived infirmities of the rules themselves, rather than their administration.

3. Conclusion

3.143 Where then do India�s arguments lead? They lead to one of two impermissible results: 1) that the United States should have no rules of origin for textile and apparel products and instead simply make case-by-case determinations of origin, or 2) that the Panel should determine what the specific rules of origin should be. Neither of these results is allowed under the RO Agreement, nor do they advance the goals of the RO Agreement - to provide transparency, clarity and predictability in a rules of origin regime.

  1. Second written submission of India

1. Introduction

3.144 The purpose of this submission is to further elaborate India�s claims and arguments in this proceeding, taking into consideration the questions from the Panel as well as the points raised by the United States and the third parties in their submissions and in their replies to the questions from the Panel.

2. Legal argument

(a) The measures at issue

3.145 The measures at issue in this dispute are (i) section 334 of the Uruguay Round Agreements Act, (i) its clarification contained in section 405 of the Trade and Development Act57, and the implementing customs regulations set out in 19 C.F.R. � 102.21.58

(i) The fabric forward rule

3.146 Section 334 (b)(1)(C) (consolidated as section 3592(b)(1)(C)) sets out the criteria to determine the origin of a fabric. It establishes the "fabric forward rule" whereby the country of origin of a fabric is where its constituent fibres, filaments or yarns are woven, knitted, needled, tufted, felted, or transformed by any other fabric-making process. It disregards further manufacturing operations, such as dyeing, printing as well as two or more finishing operations (DP2), as relevant transformation processes that could determine the country of origin of a fabric.

3.147 The fabric forward rule is implemented through specific customs regulations contained in 19 C.F.R. � 102.21. Paragraph (C)(1) provides that origin will be conferred where the textile or apparel product has been wholly obtained or produced. Paragraph (C)(2) establishes that when origin cannot be established by the application of (C)(1) then the country of origin of the good is where each foreign material incorporated in the textile or apparel product underwent an applicable change in tariff classification and/or "met any other requirement, specified for the good in paragraph (e) of this section."

3.148 19 C.F.R �102.21(e) provides for specific rules by tariff classification. According to some of these rules, a transformation or change that is the result of a fabric-making process entails an automatic tariff shift for the good at issue.

(ii) The DP2 rule for fabric of silk, cotton, man-made fibre or vegetable fibre

3.149 Section 405 (a)(3)(B) (consolidated as section 3592 (b)(2)(B)) amends the fabric forward rule and establishes that a fabric classified under the HTS as of silk, cotton, man-made fibre, or vegetable shall be considered to originate in, and be the growth, product, or manufacture of, the country, territory, or possession in which the fabric is dyed and printed when accompanied by two or more of the following finishing operations: bleaching, shrinking, fulling, napping, decating, permanent stiffening, weighting, permanent embossing, or moireing (hereafter the "DP2").

3.150 It is important to note that the amendment does not contemplate a comparable change in the criterion to determine origin for all types of fabrics.

3.151 Customs regulations implementing this statutory provision are contained in � 102.21 (e). By virtue of it, tariff shifts originally envisaged to implement the fabric forward rule were modified only for certain HTS headings.

(iii) The DP2 rule for products of 7 HTS headings

3.152 Section 405 (a)(3)(C) (consolidated as section 3592(b)(2)(C)) sets out a departure from the application of the "wholly-assembled rule" as contained in section 334 (b)(1)(D), and the special rule to the wholly-assembled rule, provided for by section 334(b)(2)(A) (consolidated as section 3592 (b)(2)(A)(i)). Pursuant to section 405 (a)(3)(C), only for 7 HTS 4-digit headings out of 16 that were originally subjected to the special rule of section 334(b)(2)(A), and except for goods classified under such headings made of cotton or of wool or consisting of fibre blends containing 16 percent or more by weight of cotton, origin is conferred where the fabric is both dyed and printed, and subjected to two or more further finishing operations. This provision is implemented through � 102.21(e)(2).

(iv) The fabric forward rule for products of 7 HTS headings made of cotton, wool or fibre blend with more than 16% cotton

3.153 Section 405 (a)(3)(C) (consolidated as section 3592(b)(2)(C)) exempts products of the 7 HTS headings which are made of cotton, wool or consisting of fibre blends containing 16 percent or more by weight cotton from the application of the DP2 rule. For these specific products, origin is conferred in accordance with the fabric forward rule as defined in section 334 (b)(1)(C).

3.154 This provision is implemented through � 102.21(e)(1) which includes specific rules to determine origin where the fabric comprising the good was formed by a fabric-making process.

(b) The measures at issue are inconsistent with Article 2(b) of the RO Agreement

(i) Definition of the terms "trade objectives"

3.155 The terms "trade objectives", contained in Article 2(b), are not defined in the RO Agreement. The ordinary meaning of "trade objectives" in the context of Article 2(b) is an aim, goal, or object related to trade. 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.59 Trade objectives include the objective of protecting the domestic industry against import competition, or of favouring imports from a WTO Member over imports from another. Any rule of origin that does so is, by definition, used as an instrument to pursue trade objectives.

3.156 Paragraph 27 of the United States' first 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)." Paragraph 11 of 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. 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."

3.157 For the purposes of this dispute, it is not necessary for the Panel to develop a general definition of "trade objectives." India�s view is that it would be sufficient for the Panel to find that the objectives of protecting the domestic industry and favouring imports from one WTO Member over imports from another are trade objectives within the meaning of Article 2(b).

(ii) The prevention of quota circumvention as defined by the United States is the pursuit of a trade objective

3.158 The United States explained 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."60 The definition of "circumvention" was provided by the United States in its first submission. However, this is not circumvention. Circumvention is a term that 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.

3.159 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." This is precisely the type of trade objective that Members are not to achieve through the use of rules of origin.61

(iii) The Senate Report shows that section 333, not section 334, was passed to implement the anti-circumvention provisions of the ATC

3.160 India notes that in the Senate Report (Exhibit IND-10), under the heading "Textile transshipments" (section 333), there is a reference to Article 5.1 of the ATC. Specifically, the Report states that the section 333 of the URAA adds a new section to Title IV to address specifically the problem of textile transhipments.

3.161 Article 5.1 of the ATC provides that circumvention "frustrates the implementation of this Agreement to integrate the textiles and clothing sector into GATT 1994. Accordingly, Members should establish the necessary legal provisions and/or administrative procedures to address and take action against such circumvention�".

3.162 From a review of the term "circumvention" as defined in the Article 5.1 of the ATC, it would seem that section 333, rather than section 334, was enacted to implement Article 5.1 since it tracks the language of Article 5.1 more directly, and addresses more specifically the type of circumvention noted in Article 5 of the ATC. This would imply that section 334 was passed for reasons other than to prevent circumvention within the meaning of Article 5.1 of the ATC. India�s argument is that section 334 was passed to pursue trade objectives.

(iv) Section 334 is being used as an instrument to protect the United States domestic industry

3.163 Section 334 is inconsistent with Article 2 (b) because it is being used to pursue the trade objective of protecting the United States domestic industry. The United States did not adequately respond to this claim in its first submission. Instead, it argued that section 334 was enacted in conformity with other provisions of the RO Agreement, namely Article 2(a) which sets forth a range of criteria that can be used by a Member in formulating its rules of origin and Article 2(i) which allows a Member to change its rules of origin. India�s view is that a Member�s compliance with Articles 2(a) or 2(i) does not provide a justification for inconsistencies with Articles 2(b), 2(c) or 2(d) of the RO Agreement.

3.164 In the context of country-specific quotas, such as those permitted under the ATC, the concept of origin is critical. The United States changed its rules of origin in section 334 by introducing, inter alia, the "fabric forward" rule, i.e., to determine origin for certain made-up article where the greige fabric was formed. The clearly protectionist objective of section 334 can be demonstrated by its effect on the determination of origin for such products. 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 notes that the United States has not provided any explanations in its submission that would justify the conclusion that the objective of section 334 was not to protect the domestic industry. India therefore believes that it has made a prima facie case of violation that the United States has failed to rebut.

3.165 India notes that its view on this matter is shared by certain third parties, notably, China. It notes that the circumstances and purposes that underlie the United States changes to its textiles origin rules in section 334 amount to an impermissible pursuit of trade policy objectives: the United States changed the definition of a product�s origin by applying per se rules that no longer took into account the nature and degree of subsequent processing in a third country, thereby increasing the quantities of textile imports that would be subject to a country�s limited quota and thus protecting the United States domestic textiles and apparel industry.62

(v) Section 405 is being used as an instrument to favour the European Communities

3.166 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.

3.167 In its submission, the European Communities has accepted that "favouring one Member over another would, in principle, be a trade objective covered by Article 2 (b)."63 China has stated that section 405 was a unilateral action taken by the United States, to the detriment of China and other Members, in order to appease one particular Member -- the EU - and to avoid the difficulty of defending the provisions of section 334 before the WTO.64 India agrees with China�s views: the purpose of section 405 was to settle the case with the European Communities in a manner that favours the products of export interest to the European Communities.

3.168 As the United States itself admitted at the first hearing and in its responses to the Panel�s questions, "the purpose of the exceptions to the rules contained in section 405 were (sic) to settle the WTO dispute with the European Communities"65, in a manner that favours the European Communities. The United States has indicated that it bases its rules of origin on criteria set out in Article 2(a). However, the exceptions as set out in section 405 are not based on any of these criteria. Therefore, section 405 is being used to pursue the objective of favouring the European Communities.

(c) The measures at issue are inconsistent with the second sentence of Article 2(c) of the RO Agreement

(i) The measures at issue require the fulfilment of a condition not related to manufacturing or processing

3.169 The second clause of the second sentence of Article 2(c) makes clear that a Member cannot require the fulfilment of a condition not related to manufacturing or processing, as a prerequisite to determine origin. Both Articles 2(a) and 2(c) reflect the significance that manufacturing or processing of a product has upon the determination of origin for that product.

3.170 The United States rules of origin require the fulfilment of conditions not related to manufacturing or processing in three situations. First, when there is a distinction made between fabric of silk, cotton, man-made fibre, or vegetable fibre and fabric made of other fibres, such as wool in determining when the fabric forward rule will be applied.66 Second, when there is a distinction made between products classified under 7 HTS 4-digit headings listed in section 405 (a) (3) (C) and the products classified under the remaining 16 HTS headings in section 334 (b) (2) in determining when origin will be conferred by dyeing, printing and two or more finishing operations.67 Third, when within those 7 HTS 4-digit headings, there is a distinction made between products made of cotton, wool, or a fibre blend with more than 16% cotton and products made of other fibres in determining when the fabric forward rule will be applied.

3.171 Based on these distinctions, different determinations of origin are made for each situation, which are not at all related to manufacturing or processing, and therefore are clearly inconsistent with the obligation in the second clause of the second sentence of Article 2(c).

3.172 A United States attorney, expert in the textiles and apparel sector, has noted the absurdity of these distinctions68 and concluded that the United States rules of origin containing the distinctions between fabrics, products and fibre blends were "far more motivated by a desire to protect United States wool and cotton producers than by any desire to create genuinely logical changes to rules of origin."69 India agrees with this interpretation, and considers that the United States rules of origin require the fulfilment of conditions not related to manufacturing or processing as a prerequisite to the determination of country of origin, which is inconsistent with the second clause of the second sentence of Article 2(c).

(ii) The measures at issue pose unduly strict requirements

3.173 If the Panel were to conclude that the distinctions between fabrics, products and fibre blends are related to manufacturing or processing, India is of the view, that the Panel should find that these distinctions impose "unduly strict" requirements within the meaning of the first clause of the second sentence of Article 2(c).

3.174 The first clause of the second sentence of Article 2(c) prohibits the imposition of "unduly strict" requirements. The text of this provision supports the view that 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 also 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".

3.175 It is clear from the wording of Article 2(a) and Article 2(c) that the conferral of origin upon a product must be based on the determination of the country with which that product has a significant economic link. It follows that the first clause of the sentence of Article 2(c) is violated if a Member confers origin on the basis of requirements that are burdensome and need not be imposed to determine that economic link between the product and the country seeking to be conferred origin for that product.70 In its replies to India's questions, the United States has declared that it does not use criteria for the determination of origin other than those listed in Article 2(a).71 However, none of these criteria would require the imposition of requirements as strict as those applied by the United States.

3.176 India considers that the United States measures at issue impose strict requirements that do not assist the United States in determining the country with which the product has the most significant economic link.

(d) The measures at issue are inconsistent with the first sentence of Article 2(c) of the RO Agreement

(i) The basic interpretative issue

3.177 Article 2(c) of the RO Agreement could be interpreted to require Members to prevent rules of origin from having a restrictive or distorting impact on international trade flows. According to this "result-oriented" interpretation, the restrictive and distorting effects referred to in this provision would be the effects that occur after producers and traders have adjusted their business plans to the new rules.

3.178 Article 2(c) of the RO Agreement could also be interpreted as requiring Members to refrain from adopting and maintaining rules of origin which create conditions of competition with restrictive, distorting or disruptive effects on international trade. According to this "conduct-oriented" interpretation, the incentives and disincentives created by the rules of origin themselves, not their actual impact in the market, would be decisive. For the reasons set out below, India is of the view that the "conduct-oriented" interpretation is the correct one.

(ii) Article 2 (c) does not require the showing of an actual restrictive, distorting and disruptive impact on international trade reflected in trade statistics

3.179 According to the "result-oriented" interpretation, it is not the nature of the rule of origin but its actual impact in the marketplace that counts. The only obligation of the Members under the first sentence of Article 2(c) would be to modify the rules of origin if they generate a restrictive or distorting impact on international trade as reflected in trade statistics. According to the result-oriented interpretation, the purpose of this provision would be to protect expectations on the volume, direction and product-composition of trade. A complaint could therefore not be brought against rules of origin themselves immediately upon their adoption, but only against the trade impact generated by them after some time. Moreover, the complainant would have to bear the burden of demonstrating that the change in the volume, direction and product-composition of trade was attributable to the rule of origin, and not to other factors. The interpretation presupposes that Members know and control what the actual impact of changes in their rules of origin in the market will be. A violation of Article 2(c) would thus not depend exclusively on what the Member does, but would be triggered by what producers and traders do.

3.180 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. The effects of the rules of origin themselves on the one hand and the effects of other commercial policy instruments to which they are linked (as well as those to which they were not linked) and market factors 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.72

3.181 For these reasons, India does not believe that a violation of Article 2(c) requires a showing of actual restrictive or distorting effects demonstrated through trade statistics.

(iii) Article 2 (c) requires Members to refrain from adopting and maintaining rules of origin which create conditions of competition with restrictive, distorting and disruptive effects on international trade

3.182 The "conduct-oriented" approach to the interpretation of Article 2(c) would take into account that a new rule of origin changes immediately the incentives and disincentives for producers and traders and, as a result, also their investment and other business plans. According to this approach, the immediate impact of the rule of origin on the decisions of producers and traders involved in international trade would be taken into account in assessing whether a rule of origin creates restrictive or distorting effects on international trade. It thus takes into account that the very adoption of a rule of origin can have serious restrictive or distorting effects on international trade.

3.183 According to this interpretation, the purpose of the provision would be to ensure that Members do not adopt and maintain rules of origin creating conditions of competition that operate to restrict or distort trade. A complaint could, therefore, be brought against new rules of origin immediately upon their adoption, and not only when the producers and traders have actually reacted to the new conditions of competition. Members would be held responsible for the rules of origin they adopted, not for the reactions of the market to their rules of origin. Their obligation under Article 2(c) would thus not go beyond what they can control or foresee. Given that market conditions constantly change and that rules of origin are only one of many factors that determine trade flows, a Member cannot foresee how precisely producers and traders will react to a new rule of origin. Members control and foresee only the conditions of competition that they impose. If the Panel were to rule that the actual trade effects of a rule of origin were to determine its legal status under Article 2(c), it would therefore have to presume Article 2(c) does not regulate the rules of origin adopted by Members, but the reaction of producers and traders to those rules. However, so far, all rules of conduct governing non-tariff measures have consistently been interpreted to regulate what Members should do, not what producers or traders have done.

3.184 Therefore, it cannot reasonably be assumed that the drafters meant to exclude from the coverage of Article 2(c), the immediate restrictive or distorting effects that rules of origin can create by forcing enterprises to change their business plans. The purpose of the RO Agreement is, according to its Preamble, to "further the objectives of the GATT 1994" and to "ensure that rules of origin do not nullify or impair the rights of Members under the GATT 1944". The drafters of the RO Agreement therefore expected the rules of the RO Agreement to be interpreted in a manner consistent with the basic objectives of the GATT, in general, and the market access rights accorded under it, in particular.

3.185 The European Communities adopted this conduct-oriented approach to Article 2(c) in its dispute with United States on measures affecting textiles and apparel products.73 The European Communities twice brought claims under Article 2(c) immediately upon the adoption of new rules of origin by the United States, without awaiting the impact of the new rules to show up in trade statistics. Why? Because the Italian producers of silk scarves and other manufacturers in the European Communities felt the restrictive effects of the new rules of origin immediately and urged the European Communities to intervene before the new rules had caused actual trade damage.

3.186 GATT and WTO jurisprudence support the conduct-oriented interpretation of Article 2 (c). All GATT and WTO panels and the Appellate Body have interpreted the rules governing tariff concessions and non-tariff measures as rules requiring the establishment of conditions of competition.74

3.187 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. 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 producers and traders.

3.188 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 a certain trade impact. What is thus relevant is whether the rules of origin create conditions of competition with restrictive, distorting and disruptive effects, and not whether the application of these rules to a specific commercial policy instrument has actually produced such effects.

(iv) The measures at issue establish conditions of competition with restrictive, distorting or disruptive effects on international trade

3.189 The measures at issue provide for distinctions between types of fabrics or fibre blends. These distinctions restrict, distort and disrupt trade flows between countries supplying different fabrics and fibres. India notes that the United States has failed to give any reasons as to why the differentiation between products made of different fabrics or fibre blends is required to determine in which country a sufficient amount of manufacturing, processing or other economic activity took place to justify the conferral of origin. Both China and the Philippines have given concrete examples of the trade distorting, disruptive and restrictive effects that the United States rules of origin themselves have on international trade.75

(e) The measures at issue are inconsistent with Article 2(d) of the RO Agreement

(i) Provisions that prohibit discrimination (treatment no less favourable) have been interpreted as prohibiting both de jure and de facto discrimination

3.190 Both GATT and WTO jurisprudence confirm that provisions that prohibit discrimination (treatment less favourable) have been interpreted as prohibiting de jure and de facto discrimination.76

3.191 The concept of de facto discrimination was described by the Panel in Canada-Pharmaceutical Patents in the following terms:

de facto discrimination is a general term describing the legal conclusion that an ostensibly neutral measure transgresses a non-discrimination norm because its actual effect is to impose differentially disadvantageous consequences on certain parties, and because those differential effects are found to be wrong or unjustifiable.77

3.192 [Void]

(ii) De facto discrimination is covered by Article 2 (d) of the RO Agreement

3.193 With respect to the concept of discrimination in Article 2(d), 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. There is no reason why the approach to the principle of non-discrimination laid down by the Appellate Body in the context of the non-discrimination provisions of the GATT and the GATS should not also apply to the prohibition of discrimination in the RO Agreement. 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 the Panel 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.78

(iii) Section 405 discriminates on a de facto basis in favour of the European Communities

3.194 Applying the test in Canada - Pharmaceutical Patents, the Panel will need to examine section 405 in order to assess whether it imposes differentially disadvantageous consequences and if these different effects are unjustifiable. India submits that both these elements are present in section 405.

(a) The effect of section 405 is to impose differentially disadvantageous consequences

3.195 Section 405 provides exemptions to the general rules for determining origin for certain fabrics, certain products and certain fibre blends. These exemptions are, de jure, applied on an origin-neutral basis. However, the type of exceptions indicates that the United States is providing a de facto advantage to those products of export concern to the European Communities. In response to the request of the European Communities, the United States re-worked the section 334 origin rules specifically for the products that were of concern to the European Communities, but not for any other products. The United States committed to change back to its prior rules with regard to silk accessories, silk fabrics, dyed and printed cotton fabrics, dyed and printed man-made fibre fabrics, and dyed and printed vegetable fibre fabrics.79 This solution, of course, addressed those products of most concern to the European Communities: silk scarves, silk accessories, dyed and printed cotton fabrics.

3.196 Section 405 does not make a formal distinction between Members. However, it de facto favours products from the European Communities since the fabrics, products or fibre blends that benefit from the exemptions are mainly the type of textile and apparel products which undergo "value-added" or substantial transformation operations in the European Communities. Those products singled out for exemptions from the fabric-forward rule and the wholly-assembled rule can, therefore, enter the United States without being subject to any quota restraints. However, when these products are made of certain fibres such as cotton, those products will be conferred origin where the greige fabric is woven. It is mainly developing countries under quota restraints that export cotton fabric. The effect of section 405 is clearly to impose differentially disadvantageous consequences.

(b) The differential effects created by section 405 are unjustifiable

3.197 As noted in India�s first submission, the United States Congress passed section 405 in May 2000, containing text that was virtually identical to the text agreed upon by the United States and the European Communities in their second proc�s-verbal settling the WTO dispute resolution proceeding. Indeed, the United States has acknowledged that as a result of its agreement with the European Communities, it passed section 405 which provides exceptions to the rules in section 334 for certain specific products and for certain fabrics and fibre blends.80 It is, therefore, indisputable that the United States modified its rules of origin in 2000 for the sole purpose of providing favourable market access for particular textile products that were of special concern to the European Communities.

3.198 The United States has stated that it "does not use criteria for the determination of origin other than those listed in Article 2 (a)."81 However, the exemptions provided for in section 405 do not bear any relation to the criteria for determining origin as set out in Article 2 (a). The amendments in section 405 thus created arbitrary and inconsistent reversions to the pre-section 334 rules of origin for a group of selected textile products, without any particular regard for the degree of further processing, assembly or other operations and how the extent of those further operations would change the nature of the products. Rather, the exceptions created by section 405 - a reversion to the pre-section 334 rules - were defined solely by the types of end products imported into the United States from the European Communities and for which the European Communities expressed concern.

3.199 It follows from the above that the United States rules of origin are unjustifiable because they were only enacted to favour one Member over another, and because the exemptions in section 405 (which makes distinctions between certain products) bears no relation to the manufacturing or processing of those products.

3. Findings and recommendations requested

3.200 For the reasons indicated above, India respectfully requests the Panel to find that the United States rules of origin set out in section 334 of the Uruguay Round Agreements Act and modified in section 405 of the Trade and Development Act of 2000 and the customs regulations implementing these statutory provisions, and the application of these sections and regulations, are inconsistent with:

  • Article 2(b) of the RO Agreement because they are being used as instruments to pursue trade objectives;

  • The second sentence of Article 2(c) of the RO Agreement because (a) they require the fulfilment of a certain condition not related to manufacturing or processing and (b) they pose unduly strict requirements;

  • The first sentence of Article 2(c) of the RO Agreement because they create restrictive, distorting and disruptive effects on international trade; and

  • Article 2(d) of the RO Agreement because they discriminate between other Members.82

3.201 In cases where there is an infringement of the obligations assumed under a covered agreement, the action is considered, according to Article 3:8 of the DSU, to constitute a prima facie case of nullification or impairment of benefits under that agreement. Accordingly, India requests the Panel to find that the measure at issue has nullified or impaired the benefits accruing to India under the RO Agreement.

3.202 India requests that the Panel recommend that the United States bring its measures into conformity with its obligations under the RO Agreement.

  1. Second written submission of the United States

1. Introduction

3.203 The issues for resolution in this dispute are clear and call for a straightforward reading of the provisions of Article 2 of the Agreement on Rules of Origin ("RO Agreement"). Through its first submission, oral statement, and answers to questions from the Panel, India urges the Panel to ignore the words of Article 2 and instead adopt its novel interpretations that at their core are simply India�s disagreement with the determinations of origin for certain products. Starting with India�s first claim - that section 334 was enacted to pursue trade objectives in violation of Article 2(b), India has latched on to the idea that one of the goals of section 334, preventing circumvention of quotas, is impermissible because circumvention must involve fraud. However, there is no consensus among Members as to whether any type of circumvention is legitimate, and therefore no basis for India�s claim under Article 2(b). It is ironic that India seeks to sanction the United States for identifying, as one of four goals, addressing circumvention, when Article 5.1 of the Agreement on Textiles and Clothing ("ATC") calls on Members to take action against circumvention. Moreover, it would be unfortunate for a Member to be penalized for doing just what the RO Agreement mandates - enacting clear, concise, and transparent rules.

3.204 India bases its claim under Article 2(c) on analyses imported from dissimilar GATT provisions. Unable or unwilling to meet the standard plainly set out in the text of the provision, India instead attempts to convince the Panel to substitute a GATT analysis for discrimination. However, once again, India fails to meet its burden under that GATT standard. The words of Article 2(b) cannot be read to require an analysis of assumed "changed competitive conditions" upon the adoption of a rule of origin. Rather, this argument reveals India�s true intent - it would simply like section 334 to go away and either force the United States to reach the specific origin determinations it seeks for particular products, or revert to a system with no product-specific rules of origin (by utilizing a case-by-case administrative system that India appears to favor). This is somewhat curious since trade data reveals that Indian exporters, and indeed international trade in the products at issue, have not been restricted, distorted or disrupted, but, on the contrary, have grown significantly. It is also curious since India appears to be contesting specific instances (section 405) where origin rules reverted to pre-section 334 principles.

3.205 Finally, India�s claims with respect to section 405 center on the idea that because it was a the result of a settlement, and as such its terms reflect changes that the European Communities requested, section 405 impermissibly "favours" the European Communities and discriminates against India. Here again, however, not only does India make little effort to support its allegations, the analysis it offers for the basis of its allegations is also faulty.

2. India has failed to establish that section 334 of the URAA is inconsistent with United States obligations under the RO Agreement

3.206 India�s allegations regarding section 334 are essentially that the United States rules of origin were enacted to protect the domestic textile industry and that they have restricted, distorted and disrupted trade. India�s arguments in support of its allegations, however, are confused and sometimes contradictory. The only clear thread running through them is India�s desire to operate in an environment in which section 334 does not exist.

3.207 India is the complainant in this dispute, and as such India bears the burden of coming forward with argument and evidence sufficient to establish a prima facie case of a breach of a Member�s WTO obligations.83 If the balance of evidence and argument is inconclusive with respect to a particular claim, India, as the complaining party, must be found to have failed to establish that claim.84 India has not established a prima facie case that section 334 breaches United States obligations under the RO Agreement.

(a) The goals of section 334 are not impermissible trade objectives in the context of Article 2(b)

3.208 The Statement of Administrative Action ("SAA") lists four objectives for section 334: i) to reflect the important role assembly plays in the manufacture of apparel products; ii) to combat transshipment; iii) to harmonize United States rules with those of major trading partners and major textile and apparel importing countries such as the European Communities and Canada; and iv) to advance the RO Agreement goal of harmonization.85 India has focused its allegations on a charge that section 334 is an impermissible "trade objective" in breach of Article 2(b) by arguing that, because it disagrees with the United States as to what constitutes circumvention, the United States effort to prevent circumvention through having clear, concise and transparent rules is a hoax.

3.209 What India is asking the Panel to do is to disregard what the SAA says about section 334 and make a subjective judgment that one of section 334�s goals, preventing circumvention, is somehow illegitimate and that this one "illegitimate goal" makes all of section 334 inconsistent with the RO Agreement. However, as India noted in its first submission, and as was affirmed in the United States first submission, WTO dispute settlement panels have acknowledged that the SAA expresses an authoritative expression of the purpose of United States legislation.86 The SAA stated that section 334 would combat circumvention87 by: lessening confusion resulting from differences between United States practices and the practices of other major trading partners; facilitating the use of more effective labeling requirements; and focusing on practices more easily subject to inspection by the United States Customs Service.88 The United States has explained in its submissions and in answers to questions from the Panel what practices could be harmonized (cutting would no longer confer origin) and how these changes would prevent circumvention (clear guidance for importers and customs officers), and so will not repeat those explanations here.89

3.210 India�s complaint is not so much with whether or how the United States was going to deter circumvention but with whether trying to address circumvention was acceptable. In its answers to Panel questions 2 and 17 (answers 17(b) and 17(d)) India sets a standard for judging whether preventing circumvention is legitimate - such circumvention must only be clearly fraudulent. India also makes the bald claim that the United States was not seeking to prevent fraudulent circumvention, but rather "legal circumvention" and that this was therefore illegitimate. India�s arguments, however, fail for several reasons. First, as India itself acknowledges, and as noted by the European Communities, there is no consensus as to what constitutes "circumvention." The ATC provides examples of circumvention practices that frustrate the effective integration of textiles into the GATT, but does not define circumvention and there is no consensus among Members on the concept of legitimate vs. illegitimate circumvention (See India answer 17(a), European Communities answer to question 43(a), and United States answer to question 18(a) (paras. 27-32) (and exhibit US-7).). India is therefore asking the Panel to make a subjective determination, that the United States goal of preventing circumvention is a trade objective, without proving that there is an understanding among Members as to what "circumvention" means.

3.211 Moreover, if preventing quota circumvention were determined to be a "trade objective" for purposes of Article 2(b), then Members would be severely hampered in their ability to ensure compliance with textile and apparel quotas and to comply with Article 5 of the ATC. What India so easily objects to as "protectionism" is a methodology for implementing measures sanctioned under the ATC. Rules of origin designed to simplify and provide certainty in origin determinations ensure transparency and predictability, and allow importers, exporters, and Members to work together to prevent circumvention, as directed by ATC Articles 5.1 and 5.5. Such a design is clearly consistent with the purpose of Article 2 of the RO Agreement.90

3.212 Finally, even assuming arguendo that the Panel would elect to disregard the statements in the SAA as "untrue," India would still have the burden of proving that the true purpose of section 334 was a trade objective - protection of the domestic industry. India has presented no evidence to support this allegation, not in its first submission, oral statement or answers to panel questions. The United States already has a regime in place for the purpose of protecting its domestic industry during the ATC transition period, i.e., a quota regime, and it does not need to use additional measures or subterfuge for such purposes. The quota regime that is in place under the transitional ATC agreement provides effective protection for the domestic industry. Indeed this is why this dispute exists - - even though India�s quotas are increased annually by a scheduled factor, India requested but did not receive additional increases in their quota, beyond those agreed to by India and the United States, and commenced these proceedings within days of United States textile officials rejecting their request. It would indeed be a leap of legal logic, WTO or otherwise, to then find by "implication," as India urges, that the true purpose of section 334 was to protect the United States domestic industry. See India answer to panel question 17(a).91

3.213 Moreover, India has not met its burden under its proposed standard of showing that the design, structure and architecture of section 334 "reveals," prima facie, that the United States� "true objective" in enacting section 334 was protection of its domestic industry. India cites to the conclusions of the Appellate Body in the Japan - Taxes on Alcoholic Beverages and Chile - Taxes on Alcoholic Beverages disputes,92 in which this interpretative standard was developed, but makes little effort to discuss the factors identified by the Appellate Body in those disputes to determine whether the design, structure and architecture of section 334 reveals a discriminatory intent. While the United States does not consider that this analysis is necessary or relevant, or that it is the United States burden to make and rebut India�s case, the United States would like to point out one instance where India has failed to meet its burden of proof under this standard - the "applied so as to afford protection " standard identified in these disputes.

3.214 One factor reviewed in this determination is the connection between the stated objectives and the results of the measure.93 In section 334, the United States has achieved what it set out to do - the rules reflect where the most important manufacturing process takes place, there is closer harmonization with our major trading partners, and the clear, concise rules have resulted in a greater ability to identify circumvention. In addition, section 334 has facilitated an enormous increase in trade in textile and apparel products to the United States market. Accordingly, a conclusion that section 334 was enacted to protect the United States textile industry, and is therefore a trade objective in the context of Article 2(b), would not be based on any legal or factual foundation.94 The United States urges the Panel not to adopt India�s "trade objective by implication" standard95

(b) India has not shown that section 334 restricts, distorts or disrupts international trade

(i) India's analytical framework is inconsistent with Article 2(c)

3.215 India, in its first submission and in answers to panel questions, seems to suggest that the Panel may assess whether section 334 "creates restrictive, distorting, or disruptive effects on international trade" by looking at the effect on one single Member�s trade.96 This reading simply cannot be found in the words of Article 2(c). If the Members wanted to proscribe rules of origin that affected only one Member (or a couple for that matter) it would have been easy: the provision could have read: "Members shall ensure that their rules of origin shall not themselves create restrictive, distorting or disruptive effects on another Member�s trade." However, even this provision would require some presentation of trade effects data and India is not, apparently, prepared to discuss actual effects on its trade. Rather, India seems to argue that the Panel should instead adopt a GATT product discrimination analysis, which would assess, India claims, "whether the rules of origin create conditions of competition with restrictive, distorting and disruptive effects."97 India calls this a "conduct-oriented" approach (preamble to India answer 26) and urges that it should be pre-supposed that mere adoption of a rule of origin will have an "immediate impact" that distorts or restricts trade. This argument is, at best, circular and contradicted by India�s own behavior. As a preliminary matter, it seems strange that India would advocate a legal position not in accordance with its behavior in this dispute. India, advocate today of a finding that says, essentially, "upon adoption assume impact [read effect]," waited eight years to bring this dispute, and its case is founded upon the basis that its trade has suffered as a result of the change in the United States rules of origin. This necessarily involves a backward look at the effect of the change. Indeed, the only evidence that India has so far presented to this Panel regarding its Article 2(c) claim is the charge by one of its exporting associations that its members have lost business since section 334,98 (a claim that stands in stark contrast to actual United States import statistics).

3.216 India�s interpretation is inconsistent with the text of Article 2(c) and unnecessary. The drafters of the RO Agreement must certainly have been aware of GATT Articles I and III and if they had wanted to adopt a product discrimination standard for Article 2(c), perhaps they could have done so -- although that, again, would contradict the RO Agreement�s sanctioning of product-specific rules. The United States submits that they chose not to do that because product differentiation is allowed under the RO Agreement (India seems to confuse differentiation with discrimination). There is no need for the Panel to resort to adopting this analysis when, in addition to the terms of the provision, there is other WTO guidance, more similar to Article 2(c) on which to rely. Further, as India itself notes, this analysis presumes an element of intent, which is not found in Article 2(c).

3.217 India makes a laborious argument that the panel should look at the effects of a change in rules of origin on conditions of competition in its answer to Panel question 26. This argument is misguided. As a preliminary matter, the United States notes again that the text of Article 2(c) does not discipline changes in rules of origin per se; instead, it applies to rules of origin "themselves." Thus, the type of comparative argument suggested by India is precluded by the text of Article 2(c) itself. Moreover, the fact that Article 2(i) sets forth specific disciplines on changes in rules of origin and does so expressly further indicates that 2(c) was not meant to discipline changes per se. The panel must examine whether the United States rules, as enacted, "create restrictive, distorting, or disruptive effects on international trade," not whether the change in United States rules altered conditions of competition.

3.218 In its questions to India (question 26(e)), the panel correctly noted that under India�s interpretation of 2(c), "Members cannot introduce changes to their rules of origin, given that different rules of origin are almost bound to produce different trade effects." India�s response, that changes are permitted provided they comply with Article 2, does not answer the panel�s implied objection. Furthermore, at no time does India present analysis, pursuant to the WTO jurisprudence that it cites, of how section 334 "changed the competitive conditions."

3.219 India suggests in its answer to question 11(b) that the Panel should follow the reasoning of the panel in United States - Section 337 of the Tariff Act of 193099 and consider conditions of competition. Doing so, however, would misinterpret that report. India�s approach to Section 337 would mean by definition that there could be no changes in rules of origin because somebody always benefits and somebody always loses. In Section 337, the panel rejected the proposition that Article III allows "balancing more favourable treatment of some imported products against less favourable treatment of other imported products . . ." because such an interpretation would "lead to great uncertainties about the conditions of competition between imported and domestic products."100 Finally, and most significantly, in neither Section 337 nor in the Oilseeds101 case (cited by India in its answer to the panel question 26) did the panel conclude that a measure was inconsistent with the GATT solely because it had an impact on conditions of competition. In Section 337, the panel did not find the United States measure inconsistent with Article III because the measure had an impact on conditions of competition; instead, it first found that the measure subjected imported products to legal provisions that are different from those applicable to products of domestic origin, and it relied on the conditions of competition test to determine whether this differential treatment accorded to imported products less favorable treatment.102 In the Oilseeds case, the panel was considering whether the benefits to the United States under the European Communities' tariff concession for oilseeds were being nullified or impaired by subsidies granted by the European Communities.103 The panel did not look to conditions of competition to determine whether Article II had been violated; instead, it looked to conditions of competition to determine if benefits under Article II were being nullified or impaired, despite no violation of Article II. India�s reading would in essence make this a non-violation claim.

(ii) The interpretation of "restrictive, distorting, disruptive effects"

3.220 Article 2(c) itself gives guidance on how rules of origin might themselves create restrictive, distorting, or disruptive effects on international trade, for example by imposing "unduly strict requirements" as a "prerequisite for the determination of the country of origin" or by requiring "the fulfilment of a certain condition not related to manufacturing or processing as a prerequisite for the determination of the country of origin." India had the correct interpretation earlier, when it noted that the meaning of Article 2(c) could be ascertained from the "immediate context [of] the second sentence of Article 2(c) according to which rules shall not impose requirements that are unduly strict or unrelated to manufacturing or processing."104

3.221 The determination of whether section 334 creates restrictions or distortions or disruption on international trade can be made simply, by looking at trade flows. As India acknowledges, the drafters of the RO Agreement gave us a specific example of how rules of origin can create the prohibited effects - through unduly strict requirements or the imposition of conditions not related to origin determinations. In the second sentence, the drafters also were clear that some effects would occur from simply having requirements and would not be considered to rise to the level of "distortions" of international trade. This also makes common sense, as the RO Agreement does not operate to address constant disputes about specific origin determinations for particular products which may have an uneven effect on one Member versus another.105

3.222 A reading of Article 2(c) that does not require some showing of actual effects on international trade would render the provision meaningless and would mean that a complainant would never have to prove, in a case where it was specifically alleging that a provision had been violated, that there actually was a violation. As was noted in the United States response to the Panel�s questions, in a given case, a change to rules of origin could eliminate restrictive, distorting, or disruptive effects produced by the former rules; or, it could be that, while the change in rules had an impact on trade, the result was a more transparent and more easily administered system, with benefits to trade, and rules that more accurately reflect commercial realities (i.e., reflect the important role of assembly).

3.223 The United States submits that, despite India�s claims to the contrary, the Panel will not make history by looking for actual effects on international trade in its assessment of "restrictive effects," as India suggests, because an important principle of treaty interpretation is sufficient in this case. The Vienna Convention on the Law of Treaties directs that examiners of a treaty provision determine the ordinary meaning of the provision from its words and in its context, as well as the object and purpose of the agreement.106

3.224 This interpretation is further supported by similar provisions in other WTO agreements. As the Panel correctly noted in question 26(b) to India, Article 6.3 of the SCM Agreement, which addresses effects of subsidies on imports and exports is at least equally relevant to an analysis of Article 2(c) (effects on international trade) as GATT cases that address discrimination among like products. This is especially so if India is correct that the term "trade effects" does not appear anywhere in the GATT, because it does appear in RO Agreement Article 2(c), as well as in Articles 2(a) and 3.2 of the Agreement on Import Licensing Procedures, as the Panel noted.

3.225 Far from being restrictive, our clear and transparent rules of origin have facilitated a significant expansion of international trade, from India and the rest of the world. As shown in the attached Exhibit US-8, trade in the HTS classifications that India has identified as being affected by section 334 and 405 (footnotes 23, 25 and 56 of India�s first submission) cannot be said to show a pattern of effects of a "restrictive, distorting or disruptive" action; in fact, the contrary is the case. Therefore, India has not shown how section 334 breaches the United States WTO obligations in Article 2(b) and 2(c). Finally, the United States notes that India has not made any specific allegations regarding an Article 2(d) discrimination claim with respect to section 334.

(c) India has not shown that section 405 is discriminatory or that it restricts, distorts and disrupts international trade

3.226 India appears to have three claims with respect to section 405 - that section 405, enacted to settle a WTO dispute with the European Communities, "favours" the European Communities in violation of Article 2(b) and 2(d), and that section 405 has restricted, distorted or disrupted trade in violation of Article 2(c). India made a vague argument in its first submission that because the settlement was reached to end a US-EC dispute, that was a "trade objective." However, as we explained in the first submission and oral statement of the United States, it would be absurd to find that a settlement, which furthers the goals of the WTO, is an impermissible trade objective under Article 2(b).107

3.227 Similarly, with respect to India�s charge that section 405 restricts, distorts, and disrupts international trade, the United States first notes that India has made little effort to develop this claim, either legally or factually. In addition, changes in rules of origin for quota goods will usually have quota implications that will be different for different Members, depending on their quota levels and the nature of their exports. In accordance with the terms of bilateral textile agreements incorporated into the ATC, there are several examples where United States textile and apparel quotas appear to treat imports from India more favorably than those of other WTO Members, for example with respect to duck fabric, skirts, cotton terry towels, as well as the annual growth rates for certain categories.

3.228 Finally, trade statistics do not bear out India�s claims of a disruption of its trade. Section 405 was effective in May, 2000 and in 2001, a year in which overall United States imports of textile and apparel products contracted, United States imports of products affected by section 405 demonstrated no particular pattern that would indicate trade restriction, disruption or distortion. In fact, in several categories of section 405 products, United States imports from the world and from India instead showed healthy increases, for example, HTS 6213 (imports from world up 44 percent; imports from India up 57 percent); 6302.59 (imports from world up 21 percent; imports from India up 5 percent); 6302.93 (imports from world up 16 percent; imports from India up 70 percent); and 6303.99 (imports from the world up 35 percent; imports from India up 142 percent).

3.229 India�s primary claim with respect to section 405 is its charge that because the exceptions to section 334 took into account specific products of interest to the European Communities, this "favoured" the European Communities and is discriminatory. Of course, any settlement has to be satisfactory to the complaining party. But if the settlement is applicable to all Members on an MFN basis, it will in all likelihood benefit all exporting Members. Neither can India rely on Canada - Certain Measures Affecting the Automotive Industry to substantiate a claim of de facto advantage in favor of the European Communities. In that dispute the Appellate Body was addressing an advantage given to some products that was based on the country of affiliation of the producers. However, in that case, the de facto discrimination resulted because Canada was giving advantage to some of the same (like) products based on nationality. In this dispute, India�s charges in respect of the United States rules of origin relate to different products.108 Furthermore, while it is true that in that report the Appellate Body made a reference to "de facto advantage," GATT Article I:1 is not at issue in this case. If India had wished to make such a claim, it could have brought a dispute under that provision. India did not do so.

3. Conclusion

3.230 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 Articles 2(b)-(e) of the RO Agreement.

  1. Oral statement of India at the second meeting of the Panel

3.231 In the light of the arguments and evidence presented by India in our first and second submissions, in our oral statement at the first meeting of the panel, and in our answers to the questions from the Panel, India considers it has met its burden of proof in this case. India has clearly established that the United States rules of origin at issue are prima facie inconsistent with the obligations of the United States under Articles 2(b), 2(c), and 2(d) of the Agreement on Rules of Origin (RO Agreement).

3.232 India accepts that as the complaining party we bear the burden of establishing the prima facie case of violation. In each and every claim that India is making, we have established a prima facie violation of the specific RO Agreement provisions being challenged. Therefore, it was up to the United States to rebut India�s case. However, the United States has failed to do so. It failed to rebut India�s arguments in its first submission. It did not rebut India�s arguments in its oral statement at the first hearing. It also did not avail itself of the opportunity to effectively rebut India�s case in its responses to the questions from the Panel or to the questions from India. The United States has also not rebutted India�s claims in its second submission.

3.233 The main arguments that India has put forward in this case are addressed below and within the context of each of these claims, the points that have been made in the second submission of the United States will be addressed specifically.

3.234 With respect to the Article 2(b) claim, India has demonstrated throughout the proceedings that the United States measures at issue are being used as instruments to pursue trade objectives. In its second submission on page 8, the United States notes, that even if the Panel were to disregard the objectives listed in the Statement of Administrative Action (SAA) as "untrue," India would still have to prove that true purpose of section 334 was a trade objective. India believes that it has already done so.

3.235 The United States claims it already has a regime in place for the "purpose of protecting its domestic industry" and that this "quota regime under the transitional ATC agreement provides effective protection for the domestic industry." The fabric forward rule, by definition, increases the quantities of textile imports that would be conferred the origin of the countries that are under quota. This measure strengthens the impact of its quota regime under the ATC which - as the United States admits - was put in place to protect the domestic industry. The fabric forward rule is thus clearly being used to pursue a trade objective.

3.236 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, this is precisely the type of trade objective that Members are not to achieve through the use of rules of origin.109

3.237 The United States argues, moreover, that it would be unfortunate for a Member to be "penalized for doing just what the RO Agreement mandates - enacting clear, concise, and transparent rules." India is not convinced that the rules of origin of the United States are clear and concise. We would like to note that in any event clear, concise, and transparent rules of origin must also be consistent with Articles 2(b), 2(c) and 2(d) of the RO Agreement. The argument of the United States therefore does not respond to India�s claims.

3.238 With respect to section 405, India has demonstrated that it is being used as an instrument to pursue the trade objective of favouring one WTO Member, namely the European Communities, over others. India has shown that the only reason why section 405 was enacted was to settle the rules of origin dispute with the European Communities, and that the only products that benefited from this settlement were those of export interest to the European Communities. India notes that the United States has not offered any justification that section 405 is consistent with its obligations under Article 2(b). Therefore, the United States has not discharged its burden of rebuttal on this argument.

3.239 India has presented a prima facie case of violation of the first sentence of Article 2(c) of the RO Agreement based on a conduct-oriented interpretation of this provision. India has demonstrated that this interpretation is supported by the text of Article 2(c) and its context and by the object and purpose of the RO Agreement. As India noted in its answer 26(e) to the Panel�s questions, the second sentence of Article 2(c) is an elaboration of the first sentence. The United States has agreed with this approach in its answers to the panel�s questions.110 It thus acknowledged that, according to the second sentence, the imposition of unduly strict requirement and conditions unrelated to manufacturing or processing as such is inconsistent with Article 2(c), irrespective of the actual trade impact. It cannot reasonably be presumed that the drafters of the RO Agreement chose to employ a conduct-oriented approach for the second sentence of Article 2(c) while seeking to adopt a result-oriented approach for the first sentence of Article 2(c). The interpretation of the first sentence of Article 2(c) that has been put forward by the United States can therefore not be reconciled with its own interpretation of the second sentence of that provision.

3.240 India would like to add that support for the conduct-oriented approach to Article 2(c) is also found in the negotiating history of the RO Agreement. The text of the first sentence of Article 2(c) reflects negotiating proposals originally made by Japan and Hong Kong. Japan proposed that "the rules of origin should not be prepared or used as a means of restricting or distorting international trade."111 Hong Kong suggested that "rules of origin should not be prepared, adopted or applied in such a manner as to create trade distorting, restrictive or disruptive effects on international trade."112 In the view of the original proponents of the norm incorporated into the first sentence of Article 2(c), it was thus not only the application of rules of origin that could create distorting, restrictive and disruptive effects on international trade, but also their preparation. That idea is now reflected in the final version of the RO Agreement in the seventh recital of the Preamble of the RO Agreement, which states that Members desire "to ensure that rules of origin are prepared and applied in an impartial, transparent, predictable, consistent, and neutral manner." The reference to the "rules of origin themselves" in Article 2(c) must therefore be understood to be a reference to the rules both as applied and as prepared. The United States� claim that the first sentence of Article 2(c) refers exclusively to the adverse effects created by the application of the rules therefore is untenable.

3.241 The United States, in its second submission, notes that India has waited eight years to bring this case, and therefore, implies that looking "backwards" at the effects of the change, India should have trade data available to prove that our trade has suffered. However, the United States fails to address the interpretative issue before the Panel. The interpretation of Article 2(c) should not depend on the interval between the adoption of a rule of origin and its challenge by another WTO Member.

3.242 Indeed, the United States has implicitly accepted the conduct-oriented approach because it agreed to provide "compensation" for the adverse trade effects caused by its new rules of origin on various countries such as the Philippines, Pakistan and Indonesia,113 and reached a settlement agreement with the European Communities before any of these WTO Members were in a position to demonstrate adverse trade effects through trade statistics.

3.243 The United States has said, "[i]ndications of whether rules restrict, distort or disrupt trade would be if they are overly burdensome to comply with �. or cause confusion in the market place."114 India agrees with the United States that these are relevant criteria. Furthermore, India notes that the United States rules of origin requirements relating to type of fabrics and fibre blends are overly burdensome to comply with. The differences between the type of fabrics and fibre blends impose stricter requirements. The rules of origin definitively cause confusion because the conferral of origin will differ depending on the fibre composition of the fabrics used to produce the end-products. Therefore, using the very test set out by the United States in its second submission, the United States rules of origin restrict, distort, or disrupt trade.

3.244 The United States has devoted a large part of its second submission (and has referred today in paragraph 21 of its oral statement) to referring to statistics that textile trade from India to the United States increased in specific years, and therefore, argues that India has not suffered adverse effects. However, India would argue that this result is precisely what section 334 was designed to achieve, namely to bring more finished products under the quota of the country where the greige fabric was woven. As we have pointed out in paragraph 90 of our first submission, the effects of the challenged measure have to be on international trade and not only on imports in the United States. For example, India has asserted that its exports of greige fabric to Sri Lanka for further processing into products such as cotton bed linen before onward export to the United States have been adversely affected by the "chilling effect" of the United States rules of origin.

3.245 With respect to Article 2(d), the United States has argued in its second submission that India has abandoned its claims with respect to section 334. India notes that we never made a claim under this provision with respect to section 334.

3.246 India has made a claim that section 405 and its implementing customs regulations are inconsistent with Article 2(d). In response, the United States argues that section 405 was enacted on an MFN basis. India agrees that section 405 does not make a formal distinction between Members. However, it de facto favours products from the European Communities since the fabrics, products or fibre blends that benefit from the exemptions are mainly the type of textile and apparel products which undergo "value-added" or substantial transformation operations in the European Communities. Therefore, these products can enter the United States without being subject to any quota restraints. However, when these products are made of certain fibres such as cotton, those products will be conferred origin where the greige fabric is woven. It is mainly developing countries under quota restraints that export cotton fabric. The effect of section 405 is clearly to impose differentially disadvantageous consequences for developing countries such as India which export cotton fabric and products thereof. In addition, India would note that the United States refers to its Harmonized Tariff Schedule (general note 22) which defines "wholly of" as meaning "that the goods are �completely of the named material." However, for section 405, the United States arbitrarily made more than 16% cotton as the criterion to determine the applicable rule of origin (i.e., that origin would be conferred where the greige fabric is woven.) Indeed, as the United States has noted in paragraph 8 of its response to the Panel�s questions, "by establishing a rule of certain goods containing 16% or more of weight of cotton, we ensured that we would cover the products defined in our settlement agreement." By reducing the threshold of the definition of a cotton product from one that is composed completely of cotton to one that is merely 16% and above of cotton, the United States effectively brought more items under the definition of cotton, which according to section 405, would be conferred origin where the greige fabric was woven.115

3.247 In addition, India notes that the manufacturing and assembly of a product such as bed linen is the same whether it is made of silk or cotton. If, however, it was made of silk, it would be conferred origin where it was subjected to DP2. If, however, it was made of cotton, it would be conferred origin where the fabric was formed. In its reply to question 4 from India, the United States answered that India�s concerns with respect to the differential treatment provided by the "exceptions in section 405 are based on a disagreement with the United States as to where the most significant or important manufacturing or assembly takes place." India considers that there should be no disagreement as to where the most significant or important manufacturing or assembly takes place between those products singled out for exemption and those that are not. It is the same for both types of products, as the products are the same. We consider in this respect that there are no technical reasons to discriminate in terms of rules of origin between identical products (which by definition are competitive or substitutable in the market) and that undergo the same manufacturing and processing. However, the different rules of origin that the United States applies to such products are unjustifiable.

  1. Oral statement of the United States at the second meeting of the Panel

1. Introduction

3.248 Good afternoon, Mr Chairman and members of the Panel. We are pleased to have this opportunity to once again appear before you to present the arguments of the United States in defense of the rules of origin found in section 334 of the Uruguay Round Agreements Act and section 405 of the Trade and Development Act of 2000. We will concentrate our remarks on responding to India�s second submission, but note that our second submission and our responses to the questions by the Panel also address India�s current iteration of its claims. We welcome any questions you may have, and we look forward to responding to them. The United States rules of origin are not only consistent with the Agreement on Rules of Origin (the "RO Agreement"), they advance its objectives. India bears the burden of demonstrating why the Panel should adopt its interpretive theories and determine, by implication, that the United States rules of origin are inconsistent with the provisions of the RO Agreement. India has not done so and instead attempts to shift its burden of proof to the United States.

3.249 As we have previously discussed, the RO Agreement was drafted because Uruguay Round negotiators wanted to ensure that rules of origin: a) were clear and predictable and would through their application facilitate the flow of international trade; b) were implemented through transparent laws, regulations and practices; and c) were prepared and administered in an impartial, transparent, predictable, consistent and neutral manner. The RO Agreement prescribes a set of obligations that are guided by these principles. At the same time, while setting out the program for harmonization, the RO Agreement drafters did not impose a single set of rules of origin at the close of the Uruguay Round. Instead, the RO Agreement left policy flexibility in the hands of individual Members until harmonization is completed, and specifically set out various mechanisms that could be used. Moreover, the RO Agreement gave Members the right to alter those rules of origin from time to time in Article 2(i). The Panel should bear these Member decisions in mind as it evaluates both the United States rules of origin and India�s legal arguments in this dispute.

3.250 India�s answers to questions from the Panel and its second submission confirm that what India is hoping for is to impose a single set of rules of origin on the United States (and, implicitly, on all other Members) -- notwithstanding the fact that the RO Agreement was intended to leave flexibility in the hands of Members. This is shown by India�s attempts to convince the Panel to adopt a per se rule that mere adoption of rules of origin creates effects prohibited by the RO Agreement. India is seeking to unilaterally change the RO Agreement by introducing GATT provisions not relevant in this dispute.

3.251 Has the United States "used" its rules of origin in an impermissible manner? Have those rules created restrictions, distortions and disruptions of international trade? Have those rules discriminated against India? These concepts would appear to be relatively straightforward and the answer, in each instance, an equally straightforward "no." Yet India tries to introduce complicated theories to distract the Panel from its real purpose in bringing this case - to impose on the United States its preferred rules of origin. India would have the Panel believe that it is concerned about the "serious abuse" of the RO Agreement on the part of the United States, yet if that were so, India would have brought this case eight years ago, when the rules were adopted. No, India�s apparent motivation in bringing this case was the rejection by the United States of an unrelated request for greater access to the United States market. However, there is no "serious abuse" of the RO Agreement here, whether from a literal or practical standpoint. As the United States has noted before, the codification of the rules in section 334 largely clarified what was already existing practice under pre-334 customs regulations. Thus, it is unclear how the withdrawal of section 334 or section 405 (the "first objective" of the dispute settlement mechanism) would meet India�s wishes.

2. Section 334

3.252 India ignores its burden to show that section 334 was enacted to pursue trade objectives and instead raises several ineffectual and somewhat puzzling arguments. First, India attempts to shift the burden of proof to the United States by arguing that the United States has not addressed its claim of protectionism. Of course, the United States has indeed argued throughout these proceedings that the purpose of section 334 was not to protect the United States textile industry, and, more importantly, that India has not shown that one of section 334's four stated objectives, preventing circumvention, was a smokescreen for protectionism.

3.253 Now, in its second submission, India "refines" its claim to be one of inferring protectionism from "quota effect." Not surprisingly, India�s contention is a gross oversimplification of a complex worldwide production and trade network. Section 334 did not always shift origin to developing countries under tight quotas. In fact, at the time the rules of origin were implemented, and thereafter, six out of the top ten world exporters of cotton fabrics, accounting for 50 percent of world trade in cotton fabric, were countries that were not subject to quantitative restraints on fabric or bed linen in the United States. Thus, depending on particular and company-specific sourcing patterns, the application of section 334 rules was as likely to result in goods falling outside of quotas as it was to goods migrating into quotas. Neither is India helped by China�s position that changes in rules of origin per se are inconsistent with Article 2(b) because the changes create effects that render them protective of the domestic industry, because clearly such an effect has not been demonstrated by China. Furthermore, even before section 334, most cotton bed linen imported into the United States originated in the country where the greige fabric was formed because bed linen is normally either dyed or printed, but rarely dyed and printed. Moreover, no amount of arguments focused on creating a debate about what circumvention may or may not mean to different Members, or attempts at redrafting the ATC, can change the fact that the United States has been quite clear regarding the "use" of section 334 - it was to further goals set forth in the SAA, which are entirely consistent with and supportive of the objectives of the RO Agreement itself.

3.254 India therefore asks the Panel to make a determination that the objectives stated in the SAA are not true and instead imply that the real reason was protectionism. Such a conclusion would be unsupported by WTO jurisprudence and any reading of Article 2(b) of the RO Agreement. India claims, the "design, structure and architecture" of section 334 reveals the protectionist intent. But India apparently does not feel that it should bear the burden of showing how the design, structure and architecture of section 334 reveals such an intent, but rather claims that it is the United States� burden to rebut an assertion that it has not established. Moreover, it is simply not credible to interpret this provision as meaning that whenever new rules come into force they should be presumed to have a restrictive, distorting or disruptive trade effect when there is no agreement on what the specific rules should be, such that a variation could be assumed to have these effects. India wants a standard that presumes an adverse effect on trade anytime a rule of origin is changed, in direct contravention of the words of the RO Agreement. Such a standard is not acceptable.

3.255 India has not made a case as to why a GATT Article I, III, or XI analysis should be relevant here, rather than looking to the ordinary meaning of the text (that is, within the "four corners" of the RO Agreement). Accordingly, the United States will only briefly review the arguments we made in our second submission. First, as the United States explained in its second submission, India�s "conduct oriented approach" pre-supposes that mere adoption of a rule of origin will have an "immediate impact" that distorts or restricts trade. This argument is, at best, circular. As is the case with each of its claims, India�s argument appears to envision either that Members adopt product-specific rules which result in outcomes it agrees with, or that Members may never change their rules or institute a product-specific origin regime. India�s argument reads out of Article 2(c) its primary element "restrictive, distorting or disruptive effects on international trade." India�s case is founded upon an unsupported claim that its trade has suffered as a result of the change in the United States rules of origin. The only evidence that India has so far presented to this Panel regarding its Article 2(c) claim is a facsimile message from one of its exporting associations claiming that its members have been "adversely impacted by section 334."116 Not only does this claim stand in stark contrast to actual United States import statistics, but the second example in the fax seems to indicate that Indian fabric exporters actually benefitted from section 334, as they were able to develop new business opportunities in China.

3.256 India�s interpretation is inconsistent with the text of Article 2(c) and is unnecessary. If the drafters of the RO Agreement had wanted a per se rule, they would have adopted one, but they did not. In addition, with respect to India�s attempt to import into the RO Agreement the product discrimination standard of GATT Articles I and III, the drafters must certainly have been aware of GATT Articles I and III and if they had wanted to adopt a product discrimination standard for Article 2(c), they could have done so -- but they did not. The United States submits that Members chose not to adopt such a standard because product differentiation is allowed under the RO Agreement (India seems to confuse differentiation with discrimination).

3.257 India argues that the Panel should look at the effects of a change in rules of origin on conditions of competition in its answer to Panel question 26. This argument is misguided. As a preliminary matter, the United States notes again that the text of Article 2(c) does not discipline changes in rules of origin per se; instead, it applies to rules of origin "themselves." Thus, the type of comparative argument suggested by India is precluded by the text of Article 2(c) itself. Moreover, the fact that Article 2(i) sets forth specific disciplines on changes in rules of origin and does so expressly further indicates that 2(c) was not meant to discipline changes per se. The panel must examine whether the United States rules, as enacted, "create restrictive, distorting, or disruptive effects on international trade," not whether the change in United States rules altered conditions of competition. In its questions to India (question 28(e)), the Panel correctly noted that under India�s interpretation of 2(c), "Members cannot introduce changes to their rules of origin, given that different rules of origin are almost bound to produce different trade effects. " Furthermore, at no time does India present analysis, pursuant to the WTO jurisprudence that it claims supports its interpretation of Article 2(c), of how section 334 "changed the competitive conditions."

3.258 Even if the Panel, in our view mistakenly, were to decide to adopt India�s argument equating "effects on international trade" with "effects on conditions of competition created by a Member�s conduct," the United States must emphasize that the question is whether the United States rules, themselves, had such effects, not whether the changes in the United States rules had such effect. As the United States rules reflect common international practice, are based on criteria related to production, and reflect where the most recent substantial transformation took place, the rules themselves cannot be found to create restrictive, distorting, or disruptive effects on international trade. Finally, the United States wonders, under India�s analysis, what do the words "create effects" mean in Article 2(c)? If the drafters used that term instead of the terms found in GATT Articles III and XI, is not the logical conclusion that the drafters did not intend to draw from those articles? And how is the Panel to assess how a rule creates an "immediate impact"?

3.259 In addition to our arguments in our second submission, the United States calls the attention of the Panel to Exhibit US-9, which we are submitting today, and which shows year after year of steady increases in United States imports from India and from the world (mostly double-digit increases) in the categories that seem to be of core interest to India in this dispute, i.e., those under the "fabric formation" rule ( identified in footnote 23 of India�s first submission). These include bed linens, table linens and bath (toilet) linens classified in HTS heading 6302. For these categories, the trade data do not bear out any claim of disruption, distortion or restriction. Indeed, the data show increases in imports in the period 1995 - 1997 that are especially steep.

3.260 Again, it appears to be India�s opinion, which it is not free under the RO Agreement to impose on the United States, that no distinction should be made in determining the origin of silk versus wool fabrics, and that the distinction that is made by the United States is unrelated to the "economic link" between the country claiming origin and the country where the product underwent the most significant processing. Neither does India even make an attempt to support its allegations that the rules impose "unduly strict requirements," other than for the Panel to assume that the rules set out in section 334 are burdensome. India has similarly not met its burden under Article 2(d) with respect to either section 334 or section 405. Indeed, the United States notes that this claim appears to relate only to section 405.

3. Section 405

3.261 Turning then to India�s claims under section 405, we will first address India�s claim at paragraph 34 of its second submission that the United States has cited circumvention as the reason for section 405. This claim is at best disingenuous. The United States has always been clear that the purpose of section 405 was to implement an agreement between the United States and the European Communities. And how else, since we were changing rules, would we implement a settlement agreement on its terms other than with the specific terms of the agreement reached with the European Communities? As we have also made clear, we do not accept that settling a dispute with another Member, on the terms agreed to, is an illegitimate "trade objective" for purposes of Article 2(b).

3.262 India also appears to argue one theory for both its Article 2(c) and 2(d) claims in respect of section 405 - "differential treatment." India begins with a discussion of WTO "like product" discrimination jurisprudence. With respect to India�s arguments that its Article 2(c) claim is supported by the Appellate Body�s findings in EC - Bananas II and Canada - Autos, as the United States explained in our second submission at paragraph 19, we are not proposing that the Panel balance more favorable treatment for some products with less favorable treatment for others. In addition, as the United States has previously noted, Article 2(d) addresses discrimination among Members - that is, applying different rules to different Members with respect to the same product - not discrimination between domestic versus imported products, or among imported products. Moreover, the issue for India here is not a showing of de jure as opposed to de facto discrimination. India makes no effort to meet either test. Neither does the panel report in Canada- Pharmaceuticals Patents save India�s case. As the United States has previously noted, this dispute is not a product-discrimination case and Article 2(d) is not about product discrimination. Even if the United States were to accept that the panel report in that dispute were relevant here, India has not shown that the "actual effect" of section 405 is to impose "differentially disadvantageous consequences" on India, or China or the Philippines and that those differential effects are wrong or unjustifiable, as is the basis for the panel�s reasoning in Canada - Pharmaceuticals Patents.

4. Conclusion

3.263 India spins a confusing web of theories in its effort to find some legal basis for its claims that section 334 and section 405 were adopted for impermissible reasons; restrict, distort and disrupt trade; and that section 405 is discriminatory. However, supposition or the ascribing by implication of nefarious purposes cannot give India the proof it lacks that the United States rules of origin are inconsistent with Article 2(b) of the RO Agreement. Neither can complicated linkages to WTO like product discrimination jurisprudence save India from its failure to show, based on even its theories, a factual foundation for its claim that the rules adversely affect trade. Finally, India makes an attempt to transfer a variation of its "competitive conditions" analysis to its claims that the rules discriminate in favor of the European Communities in violation of Article 2(d). Sweeping interpretive statements, without applying the facts of this case, barely rise to the level of assertion, much less a rebuttable prima facie showing. None of this analysis demonstrates inconsistency with Article 2(d). India�s case was and always has been totally without merit.



49See RO Agreement preamble.

50H.R. Conf. Rep. 106-606, section 405, Clarification of section 334 of the Uruguay Round Agreements Act, p. 232 (2000). Exhibit US-3.

51See India First Submission, paras.69-85 (supra, paras. 3.41-3.51).

52See India First Submission, para. 84 (supra, para. 3.51).

53Id.

54See India First Submission, para.93, exhibit INDIA-15.

55See India First Submission, paras. 98-9 (supra, paras. 3.58-3.59).

56Appellate Body Report, European Communities - Regime for the Importation, Sale and Distribution of Bananas, supra, para. 200. A similar provision is found in Article 1.3 of the Agreement on Import Licensing Procedures. para. 203.

57Both United States provisions are codified in 19 U.S.C. section 3592.

58India wishes to clarify its claims under the Customs regulations. In its response to question 10 from the Panel, the United States notes that "India has not made any claim with respect to the regulations in either its first submission or its oral statement." India notes that its claims and arguments with respect to the WTO-inconsistency of the customs regulations were made in its request for the establishment of the Panel and in paragraphs 7 and 53, inter alia, of its first submission. India also notes that the challenge of the customs regulations is in no way dependent upon its bringing a challenge under Article 2(e) of the RO Agreement.

59India�s first submission, 30 October 2002, para. 46 (supra, para. 3.23).

60First submission of the United States, 27 November 2002, para. 29. India notes there is a bilateral textile and apparel agreement between the United States and India which has been notified under Article 2.17 of the Agreement on Textile and Clothing, G/TMB/N/274, 22 July 1997.

61Third party submission by the European Communities, 5 December 2002, para. 24 (infra, para. 4.280).

62Responses of China to questions by the Panel, 3 January 2003. Answer 39.

63Third party submission by the European Communities, 5 December 2002, para. 11 (infra, para. 4.276).

64Responses of China to questions by the Panel, 3 January 2003, Answer 42.

65Responses of United States to questions by the Panel, 6 January 2002, Answer 45 to Question 37.

66Section 405 (a) (3) (B), consolidated as �19 U.S.C.3592 (b) (2) (B).

67Section 405 (a) (3) (C), which provided exceptions to section 334 (b) (2) and consolidated as �19 U.S.C.3592 (b) (2) (C).

68John Peterson, "Rules of Origin: The textile mess gets messier", Journal of Commerce, July 2000 (Exhibit INDIA-13).

69Ibid.

70Responses of India to questions by the Panel, 6 January 2003, Answer 11 (c).

71Responses of the United States to questions by India, 6 January 2003, Answer to Question 1.

72See e.g. Appellate Body Report, United States - Standards for Reformulated and Conventional Gasoline ("US - Gasoline "), WT/DS2/AB/R, adopted 20 May 1996, DSR 1996:I, 3, p. 23.

73United States - Measures Affecting Textiles and Apparel Products, WT/DS85/1, G/RO/D/1, G/TBT/D/13, 3 June 1997 and United States - Measures Affecting Textiles and Apparel Products (II) WT/DS151/1, G/TMB/N/341, G/RO/D/3, G/TBT/D/19, G/L/279, 25 November 1998.

74See for instance, BISD, 37/S/130-131.

75Responses of the Philippines to the questions by the Panel, Answer to Question 41 (e).

76See for instance, Appellate Body Report, (EC - Bananas III ), supra, paras. 233 to 234; Appellate Body Report, Canada - Certain Measures Affecting the Automotive Industry ("Canada - Autos "), WT/DS139/AB/R, WT/DS142/AB/R, adopted 19 June 2000, DSR 2000:VI, 2995, para 63.

77Panel Report, Canada - Patent Protection of Pharmaceutical Products ("Canada - Pharmaceutical Patents "), WT/DS114/R, adopted 7 April 2000, DSR 2000:V, 2295, para 7.101.

78India notes that the United States has replied in its answer 9 to the questions from India, that "Article 2(c) does not prescribe that Members must use the same rules to determine the origin of different products" India considers that a Member cannot apply different rules of origin to the same products just because they comprised of types of fabrics or different type of fibre blends.

79United States - Measures Affecting Textiles and Apparel Products, (I), WT/DS85/9, Notification of Mutually-Agreed Solution, 25 February 1998.

80Responses of the United States to questions from India, 6 January 2003, Answer 7 to Question 8.

81Ibid, Answer 1 to Question 1.

82India has decided to refrain from further pursuing its claim that the administration of the United States rules of origin is inconsistent with Article 2(e) of the RO Agreement because India considers that the DSU does not provide an effective remedy against WTO-inconsistent actions that have been taken in the past. Therefore, any finding of violation of this provision would not result in an effective remedy for India.

83See, e.g., Appellate Body Report, US - Wool Shirts and Blouses, supra, page 14; Appellate Body Report, EC - Hormones, supra, para. 104; Panel Report, Korea - Dairy, supra, para. 7.24.

84See, e.g., Panel Report, India - Quantitative Restrictions, supra, para. 5.120.

85Statement of Administrative Action in "Message of the President of the United States Transmitting the Uruguay Round Agreement, Text of Agreements, Implementing Bill, Statement of Administrative Action and Required Supporting Documents," H.R. Doc. No. 316, 103d Cong. 2d Sess., Vol. 1(1994) at 656, et. seq., Exhibit US-6 at 119.

86See India first submission, para. 58 (supra, para. 3.33), United States' first submission, para. 29, United States - section 129(c)(1) of the Uruguay Round Agreements Act, WT/DS221/R, 30 August 2002, paras. 6.36-6.38.

87As the United States noted in answer to panel question 14 (para. 22), the reference in the SAA to transshipment has the same meaning as "circumvention" as that term is used in the ATC.

88SAA, Exhibit US-6 at 119.

89See United States' answers to panel questions 14 (para. 22) and 19.

90It should also be noted that India�s contention regarding the true purpose of section 333 of the URAA being to prevent circumvention, rather than section 334, suggests that India has mis-read or is mis-representing section 333. (See India answer to question by the panel 17(a).) Section 333 establishes new and more rigorous customs measures to counteract circumvention, once circumvention is uncovered (such as the publication of names of violators, additional "reasonable care" measures for importers to take when doing business with published violators, etc.). Thus, the purpose of section 333 is to establish "after the fact" remedies, which is different from section 334, the purpose of which is to prevent circumvention from happening in the first instance. Both are valid measures to counteract and deter circumvention.

91In addition, the United States would like to be clear that nothing it has ever said amounts to, or should be construed as, an "admission," as India claims, that the true goal of section 334 was protection of the United States domestic industry. See India answer to question from the panel, question 2.

92Appellate Body Report, Japan - Alcoholic Beverages II, supra, pages 26-29, Appellate Body Report, Chile - Taxes on Alcoholic Beverages ("Chile - Alcoholic Beverages "), WT/DS87/AB/R, WT/DS110/AB/R, adopted 12 January 2000, DSR 2000:I, 281, paras. 62, 69-71.

93See Appellate Body Report, Chile-Alcohol, supra, paras. 56-57, 69-71.

94In addition, contrary to India�s assertions, the United States has not advocated that a claim under Article 2(b) can only be made "if and when trade data are available . . ." India oral statement paras.43-44. That point is relevant only to Article 2(c).

95See India answer 17(a) to questions from the Panel.

96India answer to question 11(b) from the panel and India first submission, para. 93.

97India oral statement paras. 39-45 (supra, paras. 3.116-3.121) and answers to panel questions 11 and 28 (India answers 14 and 26).

98In addition, as noted above, India only commenced these proceedings when it did not get an increase in its United States quota, and after India apparently decided not to pursue its claim under ATC procedures.

99Panel Report on United States - Section 337 of the Tariff Act of 1930 ("US-Section 337"), L/6439, BISD 36S/345, adopted 7 November 1989.

100Ibid, para. 5.14.

101Panel Report on EEC - Payments and Subsidies to Processors and Producers of Oilseeds and Related Animal Feed Proteins ("EEC-Oilseeds" ), L/6627, BISD 37S/86, adopted 25 January 1990.

102See Ibid, paras. 5.19-5.20.

103See Ibid, paras. 142-144.

104See India oral statement para. 45 (supra, para.3.121).

105See United States' answer to question 11 from the panel, paras. 10-16. In response to question 11(b), India speaks of Article 2(c) as serving "to protect expectations regarding the level of imports: and "expectations regarding the trade between the third countries." Setting aside India�s dismissal of the need to show the Panel hard data to satisfy its allegations, nothing in the RO Agreement suggests that it was designed to protect expectations of levels of imports.

106See Vienna Convention, Article 31.

107See also Third Party Submission of the European Communities, paras. 26-27 (infra, para. 4.282).

108Appellate Body Report, Canada - Certain Measures Affecting the Automotive Industry ("Canada - Autos "), WT/DS139/AB/R, WT/DS142/AB/R, adopted 19 June 2000, DSR 2000:VI, 2995, paras. 81 and 85.

109Third party submission by the European Communities, 5 December 2002, para. 24 (infra, para. 4.280).

110Responses of the United States to the questions from the Panel, 6 January 2003, paragraph 16.

111MTN.GNG/NG2/W/52, 17 January 1990.

112MTN.GNG/NG2/W/41, 15 September 1989.

113Third party submission by the Philippines, 5 December 2002, para. 5. See also, for example, the MOU between Pakistan and the United States, G/TMB/N/328, 27 July 1998.

114Second submission of the United States, 6 January 2003, para. XXIII.

115This "16% and more" definition is also not consistent with the definitions as set out in Chapters 50 to 55 of the Harmonized System which provides for a definition of "85% or more", as pointed out by the United States in paragraph 8 of its replies to the Panel�s questions.

116In addition, as noted above, India only commenced these proceedings when it did not get an increase in its United States quota, and after India apparently decided not to pursue its claim under ATC procedures.