IV. ARGUMENTS OF THE THIRD PARTIES

4.1 The arguments presented by China, the European Communities, and the Philippines in their written submissions and oral statements are reflected in the integrated summaries below.¹¹⁷ The third parties' answers to questions and comments on each other's responses are reproduced in Annex [�].

1. Third-party submission of China

4.2 China believes that United States rules of origin set forth in section 334 of the United States Uruguay Round Agreements Act and certain modifications thereto contained in section 405 of the United States Trade and Development Act of 2000 are inconsistent with the obligations of the United States under Article 2 of the Agreement on Rules of Origin (RO Agreement). These United States enactments undermine one of the primary achievements of the Uruguay Round - the commitment by Members to trade-neutral rules of origin that are not used as instruments to pursue trade objectives and that do not create restrictive, distorting and disruptive effects on international trade.

4.3 First, the United States, by changing its rules to confer origin on the basis of criteria that are unrelated to value added and to changes in the nature of the product, but instead were explicitly intended to assuage the concerns of the United States textile industry, violated its obligations under Article 2(b) of the RO Agreement. This Article prohibits Members from pursuing, directly or indirectly, their trade objectives by using rules of origin as an instrument in that pursuit. A textual analysis of Article 2(b), as well as its objective and purpose, shows that while Members may use measures or commercial policy instruments to pursue trade objectives, they are prohibited from using their rules of origin to achieve such trade objectives.

4.4 The structure, legislative history and text of section 334 establish that the United States is pursuing its trade objectives - namely, the protection of its domestic textile industry - by changing pre-existing origin rules that were based on an examination of whether the product was "substantially transformed," to a new regime that confers origin on the basis of per se criteria that take no account of the value added or significance of the change in characteristics of the product as a result of subsequent processing, assembly or manufacturing that occurs in a third country. The new rules of origin provided for in section 334 move the United States position away from those of its major trading partners, such as the European Communities and Canada. In contrast to the United States origin rules as they existed prior to the enactment of section 334, the new United States determination of origin of a given textile product no longer considers the nature and extent of the processing operations in a third country - it rests instead on a per se rule regarding the nature of the underlying fabric. The United States change in the definition of a product�s origin by applying per se rules that fail to account for the nature and degree of subsequent processing in a third country serves no other purpose than that of protecting the United States domestic textiles and apparel industry. Indeed, the United States position that changes to its rules of origin were necessary "to reduce circumvention of quota limits through illegal transshipment" amounts to an admission that the modifications to its rules of origin were used as an instrument to pursue trade objectives. Rather than enacting means to ensure true and correct information on the source of materials and processes under its previous origin rules, the United States simply changed the substantive origin rules so that such information was no longer relevant.

4.5 Second, by further modifying its origin rules to create exceptions for certain articles of special interest to the European Communities, and for the sole purpose of providing favorable market access in order to settle an existing WTO dispute settlement proceeding with the European Communities, the United States violated its obligations under Article 2(b) of the RO Agreement. The structure, legislative history and text of section 405 shows that it was carefully drafted to favor imports from the European Communities over those from other countries, thus operating as an instrument to pursue United States trade objectives.

4.6 As a result of the European Communities�s challenge to the new rules of section 334, and the consultations that followed, it is apparent that the United States was prepared to re-work its 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 solely with regard to those products of most concern to the European Communities: silk scarves, silk accessories, dyed and printed cotton fabrics. Accordingly, the United States modified section 334 by enacting section 405 in 2000, creating 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. The exceptions created by section 405 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. The arbitrary result demonstrates that the rules of origin changes enacted in section 405 were used as an instrument to pursue the trade policy objectives of the United States, i.e. resolving its dispute with the European Communities.

4.7 Third, by enacting complex new rules of origin in section 334, and selective modifications thereto in section 405, that in and of themselves create restrictive, distorting and disruptive effects on international trade, the United States violated its obligations under Article 2(c),(d) and (e) of the RO Agreement. Article 2(c) of the RO Agreement prohibits Members from imposing rules of origin that "themselves create restrictive, distorting or disruptive effects on international trade." In addition, Article 2(d) provides that rules of origin "shall not discriminate between other Members irrespective of the affiliation of the goods concerned." Finally, Article 2(e) provides that rules of origin should be administered "in a consistent, uniform, impartial and reasonable manner."

4.8 The rules of origin enacted by the United States in section 334, as modified by section 405, are inconsistent with the obligations of the United States under Article 2(c),(d) and (e). Trade is distorted, disrupted and restricted as a result of arbitrary and differential treatment under rules of origin that reflect specific exemptions based on the type of fibre, rather than any criteria regarding the nature and extent of further processing and assembly in a third country. Furthermore, the section 405 modifications to section 334 discriminate among textiles imported from different Members, providing a de facto advantage to textile products of specific interest to the European Communities, to the disadvantage of textile products of interest to other Members. Finally, the complex and arbitrary nature of the section 334 rules of origin on textile and apparel products, particularly as modified by section 405, renders it virtually impossible that these rules can be applied in a consistent, uniform, impartial and reasonable manner.

2. Third-party submission of The European Communities

1. Disciplines under Article 2 of the RO Agreement and their effect on Members� freedom to choose their rules of origin

4.9 Contrary to what the Unites States claims, if the Panel were to reach the conclusion that the United States rules are inconsistent with Article 2, its recommendation would neither be that the United States should not have any rules at all nor that it should adopt a specific set of rules. Its recommendation would simply be that the United States bring its rules of origin into conformity with its obligations under the RO Agreement.

4.10 The argument, however raises a general question, namely to what extent the disciplines under Article 2 of the RO Agreement restrict the freedom of Members to make determinations of origin and rules of origin. That question can best be approached through stating what Article 2 does not do. First, Article 2, in principle, does not oblige Members to have legislation on rules of origin. However, a Member that does not have any written rules and proceeds on a case-by-case basis, is much more vulnerable to claims under Article 2(e).

4.11 Second, Article 2 of the RO Agreement does not, as the United States rightly states, prevent Member from changing their rules of origin.¹¹⁸ Third, again as rightly stated by the United States,¹¹⁹ Article 2 of the RO Agreement does not prescribe any specific rules of origin. One might raise the question, in this context, whether the concept of substantial transformation is not an overall principle governing the RO Agreement and thus also inherent in Article 2. If this were the case, there would be, at least within certain limits, a substantive review of rules of origin of WTO Members during the transitional period. However, while the concept of substantial transformation was made the cornerstone of harmonisation (see Article 9 of the RO Agreement), it was intentionally left out of the disciplines to be applied during the transitional period.

4.12 While Members, thus, are not obliged to have a specific set of rules of origin under Article 2 of the RO Agreement, they are not entirely free to adopt/apply any kind of rules they like. The disciplines contained in Article 2 set limits to their sovereign right to freely choose their own rules. The rationale underlying the findings of the Appellate Body regarding Article III of the General Agreement on Tariffs and Trade 1994 (hereinafter "GATT 1994") is fully relevant here.¹²⁰

2. Article 2(b) of the RO Agreement

(a) "Trade objective"

4.13 The concept of "trade objectives" in this provision is unclear. The European Communities agrees with the United States that it cannot just mean any objective related to trade, including all those that are in the interest and to the benefit of all.

4.14 It is worth briefly commenting on the issue of multiple objectives in this context. Where it is established that a measure pursues several distinct objectives, the fact that one part of that measure pursues a legitimate objective (i.e. not covered by Article 2(b)) does not cure the inconsistency of other parts of the measure with Article 2(b) if the objectives pursued through those fall under that provision.

(b) "Used as instrument to pursue trade objectives directly or indirectly"

4.15 Article 2(b) clearly is about intent, not effect. Indeed, the subjective element of intent is triply present in the wording of Article 2(b). First, there is the expression "used", which can be found in the dictionary to mean "make use of (a thing), esp. for a particular end or purposes."¹²¹ The use of that word is then reinforced through the words "as instrument" which the parties have rightly identified to signify "as a means, tool or device". Second, the provision uses the expression "to pursue" which the dictionary identifies to mean, "try to obtain or accomplish, aim at."¹²² And finally, what is sought to be achieved is an "objective" which India rightly translates to signify a "goal". That conclusion is confirmed by a contextual interpretation of Article 2(b). If that provision were about effect, Article 2(c) would be devoid of substance. This would be contrary to the principle of effective treaty interpretation.¹²³

4.16 India takes a two-pronged approach based on the one hand, on the design, architecture and structure of the contested rules and, on the other hand, on the legislative history of these rules, relying on the Appellate Body�s findings in the above-mentioned cases on taxation of alcoholic beverages.¹²⁴ The European Communities believes that the test applied in these cases to the interpretation of Article III of the GATT 1994, is also pertinent for the purposes of interpreting Article 2(b) of the RO Agreement.

(i) Section 334 - Protection of domestic industry

4.17 India�s main contention is that section 334 confers origin on the basis of criteria that are unrelated to the value-added operations or the change in the nature of the product.¹²⁵ The European Communities questions the pertinence of this argument given that, in its view, Members are under no obligation during the transitional period to base their origin rules on the concept of substantial transformation, of which the "value added" idea is one facet. Arguing that a rule does not correspond to that idea amounts to imposing specific substantive criteria on origin rules during the transitional period, which, in the European Communities� view, cannot be read into Article 2(b) of the RO Agreement.

4.18 What is pertinent, on the other hand, is to show what the application of the "fabric forward" rule is designed to achieve in this specific case. Protectionist intent or an intent to increase the severity of a quota regime would be indicated if it could be demonstrated that through the switch in origin, achieved by the "fabric forward" rule, products imported into the United States now come under a strict quota, where previously they had been under no quota at all or under a more generous quota.¹²⁶ Such a "quota-effect" would show that origin rules are used to "re-apply" quantitative restrictions where these have lost their "bite" through changes in trade patterns or trade regulation. Indeed trade patterns may - and may legitimately so - change in order to "avoid" quotas by outsourcing origin-conferring processes to countries that have better market access conditions in a given country. To use origin rules to counter such changes is precisely what Article 2(b) prohibits.

4.19 As regards the legislative history, the United States legislator refers to the need to reduce circumvention of quotas. That reference would seem ambiguous. If it were used here to describe the above discussed phenomenon of changing trade patterns in order to avoid quotas, the intent to pursue a trade objective under Article 2(b) could already be established through the legislative history itself. For, as seen above, such re-organisation of trade is legitimate and Article 2(b) is precisely about preventing that origin rules be used to counter its effects. If, on the other hand, the expression were used in the sense of illegitimate circumvention, i.e. fraud on origin requirements, that objective, per se, would not come under Article 2(b). It would then be a matter of establishing whether, through changing origin rules in the way it was done here, the objective of preventing such fraud could indeed be achieved.

(ii) Section 405 - Favouring the European Communities over other countries

4.20 India seems to want to prove that the sole objective of section 405 was to settle the US/EC trade dispute.¹²⁷ Neither the United States nor the European Communities would deny that section 405 reflects the terms of the settlement reached between them. To equal settling a dispute with favouring one country over another, however, is absurd, quite apart from the fact it is contrary to the declared preference of the DSU for amicable settlements of disputes (Article 3.7). The fact that a settlement quite naturally focuses on the specific interests of the parties involved does not mean that those parties are favoured over other WTO Members. The "favouring" needs to be in the terms of the settlement themselves.

3. Article 2(c)

(a) Points related to the meaning of certain elements

4.21 For the European Communities, Article 2 (c) is about showing actual, not potential effects. Several arguments support this view. First, if Article 2(c) were about potential effects, the drafting could have been different to reflect this idea more clearly. The provision could for example have spoken of rules being "susceptible of creating effects�". Second, if Article 2(c) were about potential effects, then there would be a considerable overlap with Article 2(b). And finally, nothing in the negotiating history indicates that Article 2(c) was intended to cover potential effects. India points to the difference between the wording used in Article 2 (c) ("effects on international trade") and that used in Article 3.2 of the Import Licensing Agreement ("effects on imports"). To the European Communities it would seem logical that Article 2(c) does not refer to effects on imports. Were Article 2 (c) restricted to effects on imports only, only the direct exporter would be protected.

(b) Existence of a de minimis threshold regarding restrictive, distorting or disruptive effects

4.22 The United States, when contending that the effect demonstrated by India does not "rise to the level of �restriction�, �distortion� or �disruption�" (para. 40), seems to hint to the existence of a de minimis threshold in Article 2(c). De minimis requirements where they are intended are usually spelled out by an Agreement¹²⁸ with the exception of the de minimis requirement read into Article III:2 second sentence of the GATT 1994 by the Appellate Body. However, proving differential treatment cannot be compared to proving an effect on trade. Therefore, the Appellate Body�s findings on Article III, in this respect, cannot be applied to Article 2 (c) of the RO Agreement.

(c) How to demonstrate effect

4.23 It is obvious that where effects are not only different in nature (restrictive, distortive or disruptive), but are also felt on different levels of trade (up- or downstream in the chain of production/manufacture), there must be different ways of demonstrating them. There exists no single and unique standard of proof. The question of what kind of proof is required and sufficient has to be answered on a case-by-case basis. India has not presented any trade statistics. There would seem to be a number of possibilities for India to show "effects", be it on the level of exports of greige fabric, or on the level of direct exports of third countries to the United States.

4.24 Regarding the letter of the Cotton Textiles Export Promotion Council (First Submission India, Exhibit 15), the fact that the export activity ceased within the two years after section 334 has become effective is a coincidence in trends that has an indicative value. The more there are such coincidences, the stronger the indication that there is a causal link with the adoption of section 334. India, however, has only shown one such coincidence and there does not seem to be any indication that this is representative of the situation in Sri Lanka. Thus, this may not be enough to establish a prima facie case of violation of Article 2(c).

4.25 Finally, it is not enough to claim that the sheer complexity of rules has disruptive effects. While it is true that unnecessary complexity could lead to such effects, it still remains that those effects would have to be proven under Article 2(c) of the RO Agreement.

4. Article 2(d)

4.26 India argues that section 405 is providing a de facto advantage to European Communities products without, however, offering any evidence for this claim. Section 405 does not distinguish between products on the basis of their origin. The "advantage" it offers is that it gives up on the fabric forward rule for a number of products. That "advantage" is accruing to all countries involved in the production of the products covered: those that produce the finished product as well as those that provide the greige fabric. Contrary to what India seems to say, there is a great number of countries that currently operate under section 405, including India itself.¹²⁹ In addition, any "new" country can engage in trade in these kinds of products and thus also benefit from the "advantage" provided in section 405.

4.27 Thus, the European Communities fails to see how the findings of the Appellate Body in Canada - Automotive Industry could apply to the present case.¹³⁰ Neither is there a "closed list" situation as in that case;¹³¹ nor could it be said that the advantage accruing from section 405 in practice ends up being granted only or mostly to a small number of countries.¹³²

4.28 In fact, India�s problem does not lie in what has been enacted through section 405, it lies in what still remains of the fabric forward rule under section 334. Indeed, if section 405 were found to be inconsistent with Article 2 of the RO Agreement and were to be abolished, the "fabric forward" rule would fully apply again.

3. Third-party submission of the Philippines

4.29 In the succinct Third Party submission of the Philippines, the following claims are made:

4.30 Section 334 of the United States' Uruguay Round Agreements Act (URAA) and, subsequently, section 405 of the Trade and Development Act of 2000 (TADA), and the customs regulations implementing these legislations (the "disputed measures") create inter alia restrictive, distorting or disruptive effects on international trade, including on the Philippines' ability to effectively participate in the trade of these products.

4.31 The disputed measures constitute a violation of Article 2(b) of the WTO Agreement on Rules of Origin (the "Agreement") because they provide for extraordinarily complex rules of origin for textiles and apparel products under which the criteria that confer origin vary between similar products and processing operations. The Philippines agrees with India that the structure of the disputed measures, their implementation and administration, including especially the circumstances under which they were adopted, and their effect on the conditions of competition for textiles and apparel products demonstrate that they are used as instruments to pursue trade objectives, in this particular case, directly. Even if, for the sake of argument, the purposes outlined in the United States' Statement of Administrative Action could be taken as conclusive for this case, the same would still not qualify to absolve the United States of the need to amend the disputed measures and bring them into conformity with the Agreement.

4.32 It must emphasized that the United States, in recognition of the unjustifiable adverse effects of the disputed measures on Philippine trade in textiles and apparel products, entered into a series of Memorandums of Understandings (MOUs) beginning in 1997 in order to compensate the Philippines for the difficulties and adverse effects caused by the disputed measures. These MOUs, on their face, were clearly not intended to serve as a transition mechanism.

4.33 The disputed measures also constitute a violation of Article 2(c) of the Agreement because they create restrictive, distorting, and disruptive effects on international trade, posing unduly strict requirements, requiring the fulfilment of certain conditions not related to manufacturing or processing as a pre-requisite for the determination of the country of origin. While the United States argues on the basis of its understanding of what "restrictive, distorting, or disruptive effects on international trade" mean, these concepts need to be understood not in terms of the United States' understanding, but rather with regard to the known and proven effects of the disputed measures on international trade, that is, on the trade of other countries.

4.34 Furthermore, Article 2(c) likewise requires that the rules of origin do not pose unduly strict requirements or require the fulfilment of certain conditions not related to manufacturing or processing as a prerequisite for the determination of the country of origin. Also, Article 2(d) states that the rules of origin they apply to imports (and exports) be not more stringent than the rules of origin they apply to determine whether or not a good is domestic and shall not discriminate between other Members. On its face, the disputed measures fail on these counts because they, strangely, bifurcate the current "special rule" of origin for certain non-apparel textiles articles, with the result that some goods will have their origin determined according to where their constituent fabrics were formed (knitted or woven), while others will continue to have their origin determined according to the country where the constituent fabric was converted (by dyeing, printing, and two or more additional operations). In contrast, paragraph (4) of the URAA reveal less stringent rules in determining whether a good is domestic.

4.35 Finally, the disputed measures are a violation of Article 2(e) of the Agreement as they are not being administered in a consistent, uniform, impartial, and reasonable manner and thus discriminate between Members. Contrary to the United States' assertions, one cannot segregate the language of law from that of its administration. If the language of the law is violative then its administration cannot be any different; otherwise, such administration would have the absurd consequence of being violative of the very law supposed to be administered. In any event, under Article XVI:4 of the Marrakesh Agreement Establishing the WTO, the United States has the obligation to ensure the conformity of its laws, regulations and administrative procedures with its obligations. If the disputed measures do not and cannot on their face lend themselves to proper administration in a consistent, uniform, impartial and reasonable manner, any attempt at discussing the fine differences between the rule itself and its administration is futile and could not have been the intention of Article 2(e).

4.36 Accordingly, the Philippines requests the Panel to find that the disputed measures as set out in section 334 of the URAA and modified in section 405 of the TADA, and the customs regulations implementing these statutory provisions, and the application of these measures, are inconsistent with the obligations of the United States under Article 2, paragraphs (b), (c), (d) and (e) of the Agreement on Rules of Origin. In this light, the Philippines respectfully requests that the Panel recommend that the United States bring the disputed measures and their implementing measures into conformity with the Agreement on Rules of Origin.

V. interim review

5.1 In letters dated 23 April 2003, India and the United States informed the Panel that they had no comments on the interim report issued to the parties on 11 April 2003. India and the United States also informed the Panel that they did not wish to request a meeting with the Panel on the interim report. Accordingly, consistent with Article 15.2 of the DSU, the Panel's interim report became the Panel's final report. The Panel corrected several typographical errors.

VI. FINDINGS

1. Measures at issue

6.1 The measures at issue in this dispute are:

(a) Section 334 of the US Uruguay Round Agreements Act¹³³ (hereafter "section 334"), which entered into force on 1 July 1996,

(b) the clarification of section 334 contained in section 405 of the United States Trade and Development Act¹³⁴ (hereafter "section 405"), which entered into force on 18 May 2000, and

(c) the customs regulations contained in 19 C.F.R. � 102.21¹³⁵, which implement the aforementioned statutory provisions.

6.2 Section 334, as amended, is codified at 19 U.S.C. � 3592. In this Report, we will use the term "section 334" to refer to those parts of section 334, as amended, which were not affected by the amendments made by section 405. Similarly, we will use the term "section 405" to refer to those parts of section 334, as amended, which incorporate the amendments made by section 405.

6.3 Section 334 and section 405 lay down rules of origin, inter alia, for fabrics and certain made-up non-apparel articles assembled in a single country from single country fabric. The latter category of goods, also referred to in this Report as "flat goods", include goods of export interest to India, notably bedding articles (bed linen, quilts, comforters, blankets, etc.) and home furnishing articles (wall hangings, table linens, etc.).

6.4 Section 334 provides, in relevant part, that fabrics and made-up non-apparel articles falling under 16 specified HTS 4-digit headings¹³⁶ - essentially flat goods - are considered to originate in the country where the fabric is woven, knitted or otherwise formed, regardless of any further finishing operations which may have been performed in respect of the fabrics or articles concerned.¹³⁷ The parties have in some instances referred to this rule of origin as the "fabric forward" rule. We prefer to use the term "fabric formation" rule.

6.5 Section 405 provides, in relevant part, for two exceptions from the fabric formation rule established by section 334. The first exception created by section 405 is that fabric classified under the relevant HTS headings as of silk, cotton, man-made or vegetable fibre are considered to originate in the country in which the fabric is both 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. We will refer to this rule as the "DP2" rule, and to the relevant operations as "DP2 operations". The DP2 rule does not apply to wool fabric, which, therefore, remains subject to the fabric formation rule established by section 334.

6.6 The second exception created by section 405 is that made-up non-apparel articles classified under seven of the 16 HTS 4-digit headings specified in section 334¹³⁸ are subject to the DP2 rule, except where such articles are classified under the relevant headings as of cotton or of wool or consisting of fibre blends containing 16 percent or more by weight of cotton. The articles classified under the relevant headings as of cotton or of wool or consisting of fibre blends containing 16% or more by weight of cotton remain subject to the fabric formation rule established by section 334.¹³⁹

6.7 The two tables reproduced below reflect in simplified form our understanding of the relevant provisions of section 334 and section 405.

Table 1 - Origin of Fabrics

6.8 It should be noted that the rules of origin contained in section 334, as amended, are used by the United States "for purposes of the customs laws and the administration of quantitative restrictions".¹⁴⁰ They are, accordingly, used not only for the administration of quantitative restrictions, but also for such purposes as the gathering of trade statistics, origin marking and administering MFN customs duties.¹⁴¹ However, the present dispute primarily arises from the application of section 334, as amended, for the purpose of administering the textile quota regime maintained by the United States pursuant to the provisions of the Agreement on Textiles and Clothing.¹⁴² Thus, this dispute concerns the use of rules of origin in support of a trade policy instrument - quotas - which, by definition, is trade-restrictive. The United States even acknowledges that the textile quota regime has been put in place "for the purpose of protecting its domestic industry during the [�] transition period [provided for in the Agreement on Textiles and Clothing]".¹⁴³

6.9 Regarding the customs regulations contained in 19 C.F.R. � 102.21, it is sufficient to note that they were promulgated pursuant to section 334(a) and amended, on an interim basis, to take account of the amendments made to section 334 by section 405. The regulations contained in 19 C.F.R. � 102.21, including the interim amendments, are legally binding.¹⁴⁴

2. Overview of the parties' claims and arguments

6.10 India claims that the United States rules of origin set out in section 334 and modified in section 405 and the customs regulations implementing these statutory provisions, and the application of these statutory provisions and implementing regulations:¹⁴⁵

(a) are being used by the United States as instruments to pursue trade objectives, thereby violating Article 2(b) of the RO Agreement. Section 334 is being used as an instrument to protect the United States' textile and apparel industry. Section 405 is being used as an instrument to favour imports of the products of concern to the European Communities;

(b) create restrictive, distorting and disruptive effects on international trade and are, therefore, inconsistent with the United States' obligations under Article 2(c), first sentence, of the RO Agreement;

(c) require the fulfilment of a certain condition not related to manufacturing or processing and pose unduly strict requirements and are, therefore, inconsistent with Article 2(c), second sentence, of the RO Agreement; and

(d) with respect to section 405, discriminate between Members, and in particular, discriminate in favour of the European Communities and are, therefore, inconsistent with the United States' obligations under Article 2(d) of the RO Agreement.¹⁴⁶

6.11 Based on these claims, India requests that the Panel find that the measures at issue, and their application, are inconsistent with the United States' obligations under Article 2(b), (c) and (d) of the RO Agreement, and that the Panel recommend that the United States bring its measures into conformity with its obligations under the RO Agreement.¹⁴⁷

6.12 The United States argues that the rules of origin at issue are not inconsistent with Article 2(b), (c) or (d). According to the United States, these rules were enacted to combat circumvention of established quotas, prevent transshipment, facilitate harmonization and best capture where a new product is formed. The United States further argues that these rules of origin were offered on an MFN basis, in accordance with WTO rules. In the view of the United States, the measures at issue are therefore not inconsistent with the RO Agreement. Rather, they facilitate the flow of international trade, consistent with the terms of the preamble to the RO Agreement.

6.13 Based on these arguments, the United States requests that the Panel find that India has failed to establish that the measures at issue are inconsistent with Article 2(b), (c) and (d) of the RO Agreement.

6.14 The Panel notes that, in response to its questions, India has clarified that its claims concern the imposition and maintenance by the United States of the rules of origin set out in section 334 and section 405, and implemented through customs regulations, not the fact that the United States changed its rules of origin in 1996 and 2000.¹⁴⁸ As a result, we understand India's complaint to be in respect of the results of the United States' legislative changes made in 1996 and 2000, not the fact that changes were made.¹⁴⁹

3. Preliminary remarks

6.15 This is the first time a panel has been called upon to interpret and apply the provisions of the RO Agreement. It is therefore appropriate, briefly to address, as a preliminary matter, the general issues of the allocation of the burden of proof, the applicable rules of interpretation and the nature of the disciplines prescribed by the provision at issue in this dispute, Article 2 of the RO Agreement.

1. Burden of proof

4.16 The rules concerning burden of proof are well established in WTO jurisprudence. In United States - Measure Affecting Imports of Woven Wool Shirts and Blouses, the Appellate Body stated that:

"[�] the burden of proof rests upon the party, whether complaining or defending, who asserts the affirmative of a particular claim or defence. If that party adduces evidence sufficient to raise a presumption that what is claimed is true, the burden then shifts to the other party, who will fail unless it adduces sufficient evidence to rebut the presumption."¹⁵⁰

6.17 Once the Panel determines that the party asserting the affirmative of a particular claim or defence has succeeded in raising a presumption that its claim is true, it is incumbent on the Panel to assess the merits of all the arguments made and the admissibility, relevance and weight of all the factual evidence submitted with a view to establishing whether the party contesting a particular claim has successfully rebutted the presumption raised. If the arguments and evidence adduced by the parties remain in equipoise, the Panel must, as a matter of law, find against the party who bears the burden of proof.

6.18 In this case, it is for India as the complaining party to establish the violations of the RO Agreement it alleges. Specifically, it is for India to submit arguments and evidence sufficient to raise a presumption that the measures at issue are inconsistent with the United States' obligations under the RO Agreement. Once it has done so, it is for the United States to rebut that presumption.

2. Applicable rules of interpretation

6.19 Article 3.2 of the DSU provides that panels are to clarify the provisions of "covered agreements" in accordance with customary rules of interpretation of public international law. The RO Agreement is one of the "covered agreements" subject to the DSU.¹⁵¹ It is clear from Appellate Body jurisprudence that Articles 31 and 32 of the Vienna Convention on the Law of Treaties (the "Vienna Convention")¹⁵² are part of the customary rules of interpretation of public international law.¹⁵³ Pursuant to Article 31(1) of the Vienna Convention, the duty of a treaty interpreter is to interpret a treaty in accordance with the ordinary meaning to be given to the terms of the treaty in their context and in the light of its object and purpose. If, after applying the rules of interpretation set out in Article 31(1), the meaning of the treaty remains ambiguous or obscure or leads to a result that is manifestly absurd or unreasonable, Article 32 allows the treaty interpreter to have recourse to supplementary means of interpretation, including the preparatory work of the treaty and the circumstances of its conclusion.

6.20 These rules of interpretation are equally applicable to the provisions of the RO Agreement.

3. Disciplines prescribed by Article 2 of the RO Agreement

6.21 All of India's claims are based on the provisions of Article 2 of the RO Agreement. Article 2 lays down disciplines governing Members' application of non-preferential rules of origin "[u]ntil the work programme for the harmonization of rules of origin set out in Part IV [of the RO Agreement] is completed".¹⁵⁴ After this "transition period"¹⁵⁵, i.e., "upon implementation of the results of the harmonization work programme"¹⁵⁶, Members will apply harmonized rules of origin and the application of those rules will be subject to the provisions of Article 3 of the RO Agreement.

6.22 As of the date of establishment of this Panel, the work programme for the harmonization of rules of origin set out in Part IV of the RO Agreement had not been completed. As a result, India is entitled to invoke the provisions of Article 2 of the RO Agreement.

6.23 With regard to the provisions of Article 2 at issue in this case - subparagraphs (b) through (d) - we note that they set out what rules of origin should not do: rules of origin should not pursue trade objectives directly or indirectly¹⁵⁷; they should not themselves create restrictive, distorting or disruptive effects on international trade¹⁵⁸; they should not pose unduly strict requirements or require the fulfilment of a condition unrelated to manufacturing or processing¹⁵⁹; and they should not discriminate between other Members¹⁶⁰. These provisions do not prescribe what a Member must do.

6.24 By setting out what Members cannot do, these provisions leave for Members themselves discretion to decide what, within those bounds, they can do. In this regard, it is common ground between the parties that Article 2 does not prevent Members from determining the criteria which confer origin¹⁶¹, changing those criteria over time¹⁶², or applying different criteria to different goods¹⁶³.

6.25 Accordingly, in assessing whether the relevant United States rules of origin are inconsistent with the provisions of Article 2, we will bear in mind that, while during the post-harmonization period Members will be constrained by the result of the harmonization work programme, during the transition period, Members retain considerable discretion in designing and applying their rules of origin.

4. India's claims in respect of section 334 and section 405

6.26 In this Section, the Panel will assess India's claims in respect of the statutory provisions at issue in this dispute, i.e., section 334 and section 405. In the next Section, the Panel will assess India's claims in respect of the customs regulations implementing these statutory provisions.

1. India's claims under Article 2(b) of the RO Agreement

6.27 India claims that both section 334 and section 405 are inconsistent with Article 2(b) of the RO Agreement. The Panel will examine these claims in turn. Before doing so, however, it is necessary to address the parties' interpretation of Article 2(b).

(a) Article 2(b) of the RO Agreement

3.28 Article 2(b) provides as follows:

"Until the work programme for the harmonization of rules of origin set out in Part IV is completed, Members shall ensure that:

[�]

(b) notwithstanding the measure or instrument of commercial policy to which they are linked, their rules of origin are not used as instruments to pursue trade objectives directly or indirectly[.]"

6.29 India considers that the operative clause of Article 2(b) is the obligation that rules of origin must not be used "as instruments to pursue trade objectives". India points out that the New Shorter Oxford English Dictionary defines "instrument" as "a thing used in or for performing an action; a means" and "objective" as the "thing aimed at or sought; a target, a goal, an aim". India considers, therefore, that the ordinary meaning of the term "trade objective" in the context of Article 2(b) is an aim, goal, or object related to trade. According to India, for the purposes of this dispute, it is not necessary to develop a general definition of the term "trade objectives". In India's view, it is sufficient for the Panel to find that trade objectives include the objective of protecting the domestic industry against import competition or of favouring imports from one country over imports from another. India maintains that any rule of origin that is used as an instrument to protect a domestic industry or to favour imports from one country over imports from another country is an instrument to pursue "trade objectives" as that term is used in Article 2(b).

6.30 India considers that its interpretation of Article 2(b) is supported by the context. The use of the term "notwithstanding" in the preceding clause - "notwithstanding the measure or instrument of commercial policy to which they are linked" - implies a contrast between this clause and the prohibition that rules of origin must not be used to pursue trade objectives. Thus, in India's view, measures or commercial policy instruments may pursue aims, goals or objects related to trade, or trade objectives, but rules of origin may not do so either directly or indirectly. In other words, WTO Members may use rules of origin to implement commercial policy instruments of the kind listed in Article 1.2 of the RO Agreement, but they may not use rules of origin to pursue policy objectives of the kind commonly pursued with these policy instruments.

6.31 India contends that the object and purpose of the RO Agreement also supports its interpretive approach. Specifically, India notes that the seventh recital of the preamble states that Members desire, through the RO Agreement, "[�] to ensure that rules of origin are prepared and applied in an impartial, transparent, predictable, consistent and neutral manner". India also notes that, according to its preamble, the RO Agreement is "to further the objectives of the GATT 1994". According to the preamble of the GATT 1994, the GATT 1994 is to expand the production and exchange of goods through the reduction of tariffs and other barriers to trade. In India's view, one of the fundamental purposes of the RO Agreement thus is to ensure that the barriers to trade Members agreed to reduce in the framework of the GATT 1994 are not indirectly re-established through the use of rules of origin protecting domestic industries.

6.32 Finally, with respect to how to assess whether a rule of origin is being used as an instrument to pursue a trade objective, India submits that one way is to assess whether the rule of origin in question achieves the same results as a measure or instrument of commercial policy. India also considers it useful to examine the design, architecture, and structure of the relevant rule of origin. India recalls that the Appellate Body has noted that "[a]lthough it is true that the aim of a measure may not be easily ascertained, nevertheless its protective application can most often be discerned from the design, the architecture, and the revealing structure of a measure".¹⁶⁴

6.33 The United States agrees with India that the operative clause in Article 2(b) is the obligation that rules of origin are not to be used "as instruments to pursue trade objectives". The United States also agrees that "instrument" can be defined as "tool", "device", or "means" and that "objective" is a goal. Likewise, the United States agrees that the preamble to the RO Agreement provides the relevant "object and purpose" of the RO Agreement. However, the United States submits that India's interpretation of a "trade objective" is overly broad. The United States argues that 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. According to the United States, such an interpretation would be at odds with both the object and purpose of the RO Agreement and the context of Article 2(b).

6.34 As for India's contention that the protection of a domestic industry and the favouring of imports from one Member over imports from another would constitute "trade objectives" within the meaning of Article 2(b), 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). Concerning the other objective identified by India as a "trade objective" - the favouring of imports from one Member over imports from another - the United States cautions that rules of origin might have the practical effect of favouring one Member over another and that such rules could not, on that basis alone, be considered to pursue a "trade objective".¹⁶⁵ Apart from this, the United States does not raise concerns with respect to the second trade objective referred to by India. In fact, the United States suggests that "discrimination" in favour of one Member could be considered to be a "trade objective".¹⁶⁶

6.35 Regarding the issue of how it can be assessed whether a rule of origin is being used as an instrument to pursue a trade objective, unlike India, the United States does not consider that it is necessary or relevant to analyse whether the design, structure and architecture of a contested rule of origin measure reveals an "impermissible" trade objective.

6.36 The Panel agrees with the parties that the operative part of Article 2(b) is the phrase "rules of origin are not [to be] used as instruments to pursue trade objectives directly or indirectly". It is clear from this phrase that in order to establish a violation of Article 2(b), a Member needs to demonstrate that another Member is using rules of origin for a specified purpose, viz., to pursue trade objectives. As noted by India, this interpretation of Article 2(b), which is not in dispute, confronts the Panel with the following two issues. First, how is the Panel to determine whether a Member's rules of origin are used for the purpose specified in Article 2(b)? And second, what are "trade objectives"?

6.37 Beginning with the first issue, we agree with India that the Appellate Body has already taken a position on how panels should conduct an inquiry into the objectives of a measure. The Appellate Body did so in the context of an analysis under Article III:2, second sentence, of the GATT 1994. In examining whether a tax measure was applied "so as to afford protection to domestic production", the Appellate Body stated that:

"[�] it is not necessary for a panel to sort through the many reasons legislators and regulators often have for what they do and weigh the relative significance of those reasons to establish legislative or regulatory intent." The subjective intentions inhabiting the minds of individual legislators or regulators do not bear upon the inquiry, if only because they are not accessible to treaty interpreters. It does not follow, however, that the statutory purposes or objectives - that is, the purpose or objectives of a Member's legislature and government as a whole - to the extent that they are given objective expression in the statute itself, are not pertinent. To the contrary, as we also stated in Japan - Alcoholic Beverages:

Although it is true that the aim of a measure may not be easily ascertained, nevertheless its protective application can most often be discerned from the design, the architecture, and the revealing structure of a measure. (emphasis added)"¹⁶⁷

6.38 The reasons cited by the Appellate Body in support of its view do not appear to be specific to the provisions of Article III:2, second sentence, of the GATT 1994. Hence, these reasons apply with equal force in the context of Article 2(b) of the RO Agreement. Accordingly, in applying Article 2(b), we will follow the above-quoted statement by the Appellate Body.

6.39 In respect of the second issue, the meaning of the term "trade objectives" as it appears in Article 2(b), we recall the statement by India that, for the purposes of the present dispute, it is not necessary for the Panel to develop a general definition of the term "trade objectives". India considers that it would be sufficient for the Panel to find that the objectives of protecting the domestic industry against import competition and favouring imports from one Member over imports from another are "trade objectives" within the meaning of Article 2(b).¹⁶⁸ The United States has not objected to the Panel proceeding in this way.

6.40 In seeking to determine whether the objectives of "protecting the domestic industry against import competition" and "favouring imports from one Member over imports from another" are "trade objectives" within the meaning of Article 2(b), the Panel begins by noting that, as a textual matter, these objectives are clearly related to trade. In that sense, they could certainly be covered by the ordinary meaning of the term "trade objectives", which, as India has identified, is "goals" or "aims" related to trade.¹⁶⁹

6.41 The relevant context supports this reading of the term "trade objectives". Article 2(c), first sentence, of the RO Agreement provides that "rules of origin shall not themselves create restrictive, distorting, or disruptive effects on international trade". This provision reveals a concern about rules of origin inhibiting trade. Reading Article 2(b) in this context supports the interpretation that Article 2(b) prohibits the use of rules of origin for the purpose of protecting the domestic industry against import competition and of favouring imports of one Member over imports from another.

6.42 More importantly, we note that the operative clause of Article 2(b) - to the effect that rules of origin should not be used as instruments to pursue trade objectives - is preceded by the phrase "notwithstanding the measure or commercial policy instrument to which they are linked". This phrase implies that, whereas rules of origin may not pursue "trade objectives", commercial policy measures or instruments may do so. It follows that the "trade objectives" mentioned in the operative clause of Article 2(b) would include the kind of policy objectives which trade policy measures or instruments typically pursue. Plainly, the objectives of "protecting the domestic industry against import competition" and "favouring imports from one Member over imports from another" fit within this category.

6.43 Finally, we believe that interpreting the term "trade objectives" as suggested by India is consistent with the objective of Article 2(b). In our view, Article 2(b) is intended to ensure that rules of origin are used to implement and support trade policy instruments, rather than to substitute for, or to supplement, the intended effect of trade policy instruments. Allowing Members to use rules of origin to pursue the objectives of "protecting the domestic industry against import competition" or "favouring imports from one Member over imports from another" would be to substitute for, or supplement, the intended effect of a trade policy instrument and, hence, be contrary to the objective of Article 2(b).

6.44 Taken together, the foregoing considerations lead us to the conclusion that the objectives identified by India - i.e., the objectives of "protecting the domestic industry against import competition" and of "favouring imports from one Member over imports from another" - may, in principle, be considered to constitute "trade objectives" in pursuit of which rules of origin may not be used.

6.45 Bearing in mind the above conclusions, we now turn to examine whether section 334 is inconsistent with Article 2(b), as claimed by India.

(b) Consistency of section 334 with Article 2(b) of the RO Agreement

6.46 India argues that an examination of the design, architecture, and structure of section 334 shows that it is used as an instrument to pursue the objective of protecting the domestic textiles and apparel industry. India submits that section 334 confers origin on the basis of criteria that are unrelated to the value added operations or the change in the nature of the product. Instead, the criteria are those that are commonly used in the application of commercial policy instruments.

6.47 India considers that the new rules of origin moved the United States away from those used by its major trading partners such as the European Communities and Canada. To India's knowledge, no other country determines origin on the basis of the place where the greige fabric was formed, if that fabric was further processed and made into a flat good, thereby reflecting the importance of cutting and sewing to produce a finished product. India notes that greige fabric, and even dyed and printed greige fabric, can be put to a variety of uses. India points out that, in contrast, once the fabric is cut and sewn into a pillowcase, no one can use that fabric for anything other than a pillow case.

6.48 India argues that the fact that the "fabric forward" rule set out in section 334 is used for a wide variety of non-apparel flat textile articles, such as bedding articles (quilts, comforters, mattresses, blankets), home furnishings (wall hangings, table linens) and fashion accessories such as scarves, shows that the section 334 rules are being used as instruments to pursue trade objectives. India notes in this respect that, for home textiles, bedding articles, furnishings, and miscellaneous made up articles, the section 334 rules work a significant change in the determination of the country of origin. India notes that under the "fabric forward" rule, these products are deemed to originate in the country where their constituent fabric is formed (woven or knitted) in the greige state and no account is taken of any subsequent value-added operations such as the dyeing, printing or finishing of the fabric, the cutting of the fabric into components, the assembly of those components into finished articles or any other operations. India offers the example of down-filled comforters, which are classified under HTS subheading 9404.90 and subject to the fabric forward rule. According to India, this means that if the down-filled comforter was cut, sewn and assembled in country A and had a value of US $200, it would be nevertheless determined as a product of country B if the greige fabric used in its manufacture, which cost only a few dollars, was woven in country B.

6.49 India submits that the clearly protectionist objective of section 334 can be demonstrated by its effect on the determination of origin for the products subject to section 334. India points out that 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. In India's view, the fabric forward rule increases the quantities of textile imports that are conferred the origin of the countries that are under quota.¹⁷⁰ India argues that this strengthens the impact of the United States' quota regime under the Agreement on Textiles and Clothing which - as the United States admits - was put in place to protect the domestic industry. According to India, the fabric forward rule is thus clearly being used to pursue a trade objective.

6.50 India further notes that, according to the Statement of Administrative Action (the "SAA") that accompanied the Uruguay Round Agreements Act¹⁷¹, the purpose of section 334 was to:

- help combat transhipment and other circumvention of textile and apparel quotas;

- bring the United States' rules of origin in line with the rules employed by other major textile and apparel importing countries;

- advance the goal of harmonizing international rules of origin set out in the WTO RO Agreement;

- more accurately reflect where the most significant production activity occurs.¹⁷²

6.51 With respect to the first objective listed in the SAA, India notes that there is a specific provision in Article 5 of the Agreement on Textiles and Clothing which enables countries to address the problem of "circumvention by transhipment, re-routing, false declaration concerning country or place of origin, and falsification of official documents". India points out that Article 5.2 specifically provides that "should any Member believe that [the Agreement on Textiles and Clothing] is being circumvented by transhipment, re-routing, false declaration concerning country or place of origin, and falsification of official documents, and that no, or inadequate, measures are being applied to address and/or take action against such circumvention, that Member should consult with the Member or Members concerned with a view to seeking a mutually satisfactory solution". In the view of India, the section 334 changes in determining the rules of origin do not assist the United States in combating transhipment and other circumvention of textile and apparel quotas.¹⁷³

6.52 India further notes that Article 5.1 of the Agreement on Textiles and Clothing 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 [�]". India submits that section 333 of the URAA¹⁷⁴, 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 Agreement on Textiles and Clothing.¹⁷⁵ According to India, this implies that section 334 was passed for reasons other than to prevent circumvention within the meaning of Article 5.1 of the Agreement on Textiles and Clothing.

6.53 India points out that, notwithstanding this, the United States insists that section 334 was passed, inter alia, "to prevent quota circumvention and address illegal transhipment [�]".¹⁷⁶ India points out that the definition of "circumvention" was provided by the United States when it cited with approval a commentary that the United States was addressing circumvention through section 334 because "some new industrialized countries of Southeast Asia could otherwise try to circumvent the quantitative restrictions applied to their exports of textile products. They could do so by exporting semi-finished products (in casu dyed or printed cloths) to third countries, in the hope that the origin of those countries (for which no quantitative restrictions for exports of textile products are applied) would be attributed to the finished cloths". India submits that this is not circumvention. India recalls its view that circumvention is a term which implies a violation of the applicable origin rules through false declarations and other illegitimate means. India considers that the reaction of the market to the incentives and disincentives created by country-specific quotas cannot be described as circumvention. The newly industrialized countries of Southeast Asia were not, in the view of India, "circumventing" origin rules, but were adapting their production to their market access conditions. India considers that since the origin determinations of the products in these new trade patterns were conducted in conformity with the pre-section 334 rules of origin, as a matter of definition, they could not constitute "circumvention".

6.54 India further notes that the European Communities rightly points out that if the expression "circumvention of quotas" was used by the United States 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. India considers that 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".¹⁷⁷ In India's view, this is precisely the type of trade objective that Members are not to achieve through the use of rules of origin.¹⁷⁸ India submits that the prevention of quota circumvention as defined by the United States is the pursuit of a trade objective.

6.55 Regarding the second objective of section 334 as described in the SAA, India asserts that the section 334 rules on fabric did not bring the United States' rules of origin in line with the rules employed by other major textile and apparel importing countries or United States trading partners. India considers that, to the contrary, section 334 was the subject of criticism in the WTO Committee on Rules of Origin. India notes, for example, that at the 1 February 1996 meeting, the representatives of Canada, the European Communities and Switzerland expressed concern with respect to the unilateral changes of origin rules for certain textiles and apparel by the United States.¹⁷⁹ India submits that if United States had in effect changed its rules of origin in order to harmonize them with those of its major trading partners such as the European Communities and Canada, those very trading partners would not have expressed concern over those changes. India argues that the fact that the European Communities challenged the United States rules of origin in the WTO indicated that it considered the United States' rules to be fundamentally different from those of the European Communities.

6.56 With regard to the third objective listed in the SAA, India contends that section 334 did not advance the goal of harmonizing the international rules of origin set out in the RO Agreement. India points out that Article 3 of the RO Agreement recognises the aim of Members to achieve the establishment of harmonized rules of origin, and, in this regard, sets forth in subparagraph (b) that "Members shall ensure, upon the implementation of the results of the harmonization work programme, that: [�] (b) under their rules of origin, the country to be determined as the origin of a particular good is either the country where the good has been wholly obtained or, when more than one country is concerned in the production of the good, the country where the last substantial transformation has been carried out". In India's view, section 334 represents a step away from the basis of substantial transformation.

6.57 With regard to the fourth objective listed in the SAA, India considers that it is unclear how the principle of determining origin as set out in section 334(b)(2)(A), i.e., that the origin for certain made-up articles is determined where the greige fabric is woven, would help the United States "more accurately reflect where the production activity takes place". In India's view, the production activity would more accurately be determined where the value is added or the last substantial transformation takes place, rather than where the greige fabric is woven.

6.58 The United States notes that India makes three arguments with respect to its claim that section 334 is inconsistent with Article 2(b): (1) the objective of the United States in formulating its rules of origin was to protect its domestic industry; (2) the Panel should look to the measures or instruments of commercial policy listed in Article 1.2 of the RO Agreement and assess whether the United States' rule of origin "achieves the same results"; and (3) "the design, architecture and structure" of section 334 "demonstrate that it was adopted to protect the domestic textile industry".¹⁸⁰

6.59 With respect to the objectives of the United States in formulating section 334, the United States argues that section 334 rules of origin do not have as their objective the protection of domestic industry. The United States notes that the SAA is clear on what the objectives of section 334 were: (i) to prevent quota circumvention and address illegal transshipment, to advance harmonization, and (ii) to more accurately reflect where the most significant production activity occurs.¹⁸¹ According to the United States, the United States Congress concluded that greater clarity needed to be brought into determinations of origin in this area, which the United States says was of great interest to the United States'' trading community - whether from the standpoint of seeking to import textiles and apparel or from the standpoint of deterring circumvention of commercial instruments. The United States points out that 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.¹⁸²

6.60 The United States asserts that India has not shown that preventing circumvention, one of the four stated objectives of section 334, was a smokescreen for protectionism. The United States notes in this regard that the commentaries referenced by India acknowledge that the United States was trying to prevent circumvention: "Some new industrialized countries of Southeast Asia could otherwise try to circumvent the quantitative restrictions applied to their exports of textile products. They could do so by exporting semi-finished products (in casu dyed or printed cloths) to third countries, in the hope that the origin of those countries (for which no quantitative restrictions for exports of textile products are applied) would be attributed to the finished cloths."¹⁸³ The United States further argues that what India is asking the Panel to do is to disregard what the SAA says about section 334 and make a subjective judgment that preventing circumvention is somehow illegitimate and that this one "illegitimate goal" makes all of section 334 inconsistent with the RO Agreement. The United States recalls in this regard that WTO dispute settlement panels have acknowledged that the SAA contains an authoritative expression of the purpose of United States legislation.¹⁸⁴ The United States notes that the SAA stated that section 334 would combat circumvention¹⁸⁵ by: lessening confusion resulting from differences between United States' practices and the practices of other major trading partners (cutting would no longer confer origin); facilitating the use of more effective labelling requirements; and focusing on practices more easily subject to inspection by the United States Customs Service.

6.61 The United States further argues that India's complaint is not so much whether or how the United States was going to deter circumvention but whether trying to address circumvention was acceptable. The United States notes that, in its answers to Panel questions Nos. 2 and 17, India sets a standard for judging whether preventing circumvention is legitimate - such circumvention must only be clearly fraudulent. The United States further notes that India also makes the claim that the United States was not seeking to prevent fraudulent circumvention, but rather "legal circumvention" and that this was therefore illegitimate. In the view of the United States, India's arguments fail for several reasons.

6.62 The United States points out, first, that, as India itself acknowledges and as also noted by the European Communities, there is no consensus as to what constitutes "circumvention". The United States believes that the Agreement on Textiles and Clothing provides examples of circumvention practices that frustrate the effective integration of textiles into the GATT 1994, but does not define circumvention and there is no consensus among Members on the concept of legitimate versus illegitimate circumvention. The United States considers, therefore, that India has not proven that there is an understanding among Members as to what "circumvention" means.

6.63 The United States argues, secondly, that 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 Agreement on Textiles and Clothing. The United States contends that what India so easily objects to as "protectionism" is a methodology for implementing measures sanctioned under the Agreement on Textiles and Clothing. In the view of the United States, rules of origin designed to simplify and provide certainty in origin determinations help prevent circumvention.

6.64 The United States notes, thirdly, that India's contention regarding section 333 of the Uruguay Round Agreements Act suggests that India has misread or is misrepresenting section 333. According to the United States, 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.). The United States argues that the purpose of section 333 is thus 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. The United States submits that both are valid measures to counteract and deter circumvention.

6.65 The United States argues, finally, that 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, namely, the protection of the domestic industry. The United States submits that India has presented no evidence to support this allegation. The United States recalls that it already has a regime in place for the purpose of protecting its domestic industry during the Agreement on Textiles and Clothing transition period, i.e., a quota regime, and it does not need to use additional measures or subterfuge for such purposes. According to the United States, it would, therefore, be a leap of legal logic to then find by "implication", as India urges, that the true purpose of section 334 was to protect the United States' domestic industry.¹⁸⁶

6.66 With respect to the results which section 334 achieves, the United States notes that India points to no evidence to support its assertion that section 334 has been used to achieve protection of the domestic industry. The United States argues that, in section 334, it has achieved what it set out to do, i.e., the rules reflect where the most important manufacturing process takes place, there is closer harmonization with major trading partners, and the clear, concise rules have resulted in a greater ability to identify circumvention. The United States claims, in addition, that section 334 has "facilitated an enormous increase" in trade in textile and apparel products to the United States' market.¹⁸⁷ Accordingly, in the view of the United States, a conclusion that section 334 was enacted to protect the United States' textile industry and is therefore pursuing a trade objective in the context of Article 2(b) would not be based on any legal or factual foundation.

6.67 The United States also rejects India's claim that a protectionist objective can be inferred from "quota effect". In the view of the United States, India's contention is a gross oversimplification of a complex worldwide production and trade network. The United States contends that section 334 did not always shift origin to developing countries under tight quotas. In fact, according to the United States, 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. The United States maintains that, as a result, 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. The United States further points out that, 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.

6.68 With respect to the issue of the design, structure and architecture of section 334, the United States submits that India has not met its burden of showing that the design, structure and architecture of section 334 "reveals" that the United States' "true objective" in enacting section 334 was protection of its domestic industry.

6.69 The United States notes that 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. The United States notes that 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 contends that its system is based on the conclusion that origin is conferred where the most important assembly or manufacturing process takes place. According to the United States, 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.

6.70 The United States notes that India disagrees with the judgment of the United States that certain processes constitute sufficient "transformation" to merit changing the origin of a product (except in certain circumstances). The United States argues that there is nothing in the text of the RO Agreement that says that Members must confer certain origin determinations¹⁸⁸, and that 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 using its rules of origin to pursue trade objectives. The United States submits that it is the policy decision of the United States that origin-conferring production is based on assembly, not a finishing operation. The United States notes that its rules take into account which finishing operations merit changing origin, and that that may vary based on the type of product. In the view of the United States, Article 2 does not preclude Members from determining the origin of goods based on assembly, type of material, or type of product.

6.71 Moreover, the United States argues that Article 2(a) sets forth a range of criteria that can be used by a Member in formulating its rules of origin, and that United States' rules of origin for textile and apparel products are consistent with these criteria. According to the United States, India's arguments that the United States should not confer origin based on where the product is formed or assembled essentially renders Article 2(a) a nullity in view of India's sweeping view of the subsequent provisions of Article 2. The United States believes, furthermore, that 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 Articles 5.1 and 5.5 of the Agreement on Textiles and Clothing. Such a design, the United States argues, is clearly consistent with the purpose of Article 2 of the RO Agreement.

6.72 The Panel begins by recalling India's claim that the United States is using the fabric formation rule set forth in section 334 as an instrument to pursue the objective of protecting its domestic textile industry. This is clear, in India's view, from the features, or design, of the fabric formation rule as well as from its effect.

6.73 We first address the features, or design, of the fabric formation rule. India seeks to cast doubt on the validity of this rule. Specifically, India asserts that no other country uses a fabric formation rule for flat textile goods. Since we have not been provided with information on the rules of origin employed by Members other than the United States, we are not in a position to determine whether Indian's assertion is correct. However, we note en passant that, within the framework of the harmonization work programme, a significant number of those Members expressing a view on the issue have indicated support for a fabric formation rule for flat textile goods.¹⁸⁹ In any event, even if the United States was using an unusual rule of origin, that would be irrelevant. There is no requirement in Article 2 of the RO Agreement to use a particular type of rule. Instead, as pointed out earlier¹⁹⁰, Article 2 simply provides broad parameters for the use of rules of origin.

6.74 India also appears to question the rationality of a fabric formation rule. India argues, first of all, that a fabric formation rule does not reflect the importance of cutting and sewing to the making of a final article. India notes in this regard that, whereas greige fabric has a variety of uses, once the fabric is cut and sewn into a pillow case, the fabric can only be used as a pillow case. The United States, on the other hand, states that its rules of origin are based on where the most important assembly or manufacturing process takes place and that, in its judgment, fabric formation is the most important step in manufacturing flat goods. We are not aware of any basis in Article 2 of the RO Agreement on which to resolve the parties' disagreement regarding what is the most important manufacturing process. The silence of Article 2 on this issue suggests that Members are, subject to the disciplines contained in Article 2(b) and (c), free to make this determination as they deem fit.¹⁹¹ At any rate, we do not find the United States' view that the flat goods in question (e.g., bedsheets) are basically fabric to be on its face unreasonable.¹⁹² Indeed, as we have noted, the fabric formation rule commands substantial support within the framework of the harmonization work programme. In these circumstances, we are not persuaded that the fabric formation rule is inherently unsound.

6.75 The other feature of the fabric formation rule which India finds revealing is that the fabric formation rule takes no account of any subsequent value-added operations, such as a DP2 operation, cutting, etc. India notes that, under a fabric formation rule, an article which has undergone value-added operations worth almost US$200 may be determined to originate in a country where the fabric was formed at a cost of only a few US dollars. However, India points to no legal provision which would require that, during the transition period, origin determinations must reflect the importance of the various value-added operations performed in the manufacture of a good. We see no requirement in Article 2 that Members need to confer origin on the country where a significant, or even the most significant, economic contribution to a final good has been made.¹⁹³ Nor do we consider that the fact that an origin-conferring operation may not be the one which adds the most value to the final good necessarily indicates an objective on the part of the United States to use its rules of origin to protect its domestic textile industry.

6.76 In sum, India has not persuaded us that the mere fact that the United States is using a fabric formation rule requires us to conclude that it is doing so in order to protect its domestic textile industry.

6.77 We now turn to examine whether the effect of the fabric formation rule demonstrates that the United States is using section 334 to protect its textile industry. India contends that the application of the fabric formation rule as of mid-1996 meant that a range of flat goods "were subjected to the strict quotas of the developing countries whereas previously they had been under no quota or a more generous quota".¹⁹⁴ Similarly, India asserts that the fabric formation rule, "by definition", increases the quantities of textile imports that would be conferred the origin of the countries that are under quota.¹⁹⁵ India argues that this "strengthens the impact"¹⁹⁶ of the United States' quota regime and renders it "more restrictive"¹⁹⁷.

6.78 It is clear that applying a fabric formation rule will result in flat articles subject to that rule being conferred the origin of the fabric-forming country. Also, if the relevant fabric-forming country is under quota in the United States for the article concerned, the article will be subjected to that country's quota. However, the Panel was not provided with any evidence and/or data regarding:

� which countries are under quota in the United States with respect to the articles in question;

� the quota levels of those countries;

� the quota utilization by those countries;

� which countries are important suppliers of relevant fabric (e.g., cotton); and

� the price and quality of the fabric made by those countries and their production capacity.

6.79 In these circumstances, i.e., without specific information on the design of the United States' quota system, the market in the relevant final and intermediate goods and the relationship between the two, it is very difficult to assess the correctness, weight and implications of India's factual assertions.¹⁹⁸

6.80 It may well be that articles subject to the fabric formation rule became subjected to quotas as of mid-1996, when previously they were not under quota because origin was conferred on a country which was not under quota or on a country which was under a more generous quota. However, in the absence of relevant factual information, it is equally possible that, as a result of the application of the fabric formation rule, certain articles:

� could be exported to the United States quota-free because their fabric was formed in a country that was not under quota, when previously such articles were under quota; and/or

� could be exported to the United States under a more generous quota because the quota levels of the fabric-forming country might be higher than those of the previous origin-conferring country.

6.81 Likewise, it is not apparent that, as a general matter, the fabric formation rule set out in section 334 "by definition" increases the quantities of textile imports that would be conferred the origin of the countries that are under quota. It would certainly not do so if:

� countries producing made-up articles (including fabric-forming countries which export such articles under quota) could source fabric from countries not subject to quota in the United States¹⁹⁹; and/or if

� countries not under quota in the United States start a fabric-forming industry and export the fabric to countries producing made-up articles.

6.82 Moreover, if more articles would be conferred the origin of quota-countries, this would arguably matter only if the quota utilization of the fabric-forming countries is such that they have no, or insufficient, quota available for countries using fabric made by the quota-countries.²⁰⁰ In the absence of relevant factual information, we are reluctant simply to conclude that all of these alternative "effects" of the fabric formation rule are hypothetical or irrelevant.

6.83 In conclusion, we consider that the evidence and argument adduced by India do not support the conclusion that the fabric formation rule necessarily, or in fact, brings more imports of made-up articles under quota in the United States.

6.84 In any event, if India had established to our satisfaction that, under the fabric formation rule, more imports would be under quota in the United States, this would only prove that there would be more restrained imports than under the pre-section 334 rules of origin. This circumstance would not prove, however, that the fabric formation rule is being used as an instrument to protect the United States' textile industry rather than as an instrument to implement United States' textile quotas and other commercial policy instruments. Article 2(b) is intended to preclude Members from using rules of origin to substitute for, or supplement, the intended effect of a trade policy instrument. Accordingly, where a rule of origin is linked, inter alia, to a quota, the rule of origin should not add to the protection already afforded by the quota.²⁰¹ India's argument is that if a rule of origin makes a quota regime more restrictive, the quota regime automatically becomes too restrictive in the sense that it would add to the protective effect of the quota regime, thus indicating the use of rules of origin in pursuit of the trade objective of protecting the domestic textile industry. But, India's argument focuses on the direction of a change in rules of origin, not the end point of the change. That is to say, India ignores the distinction between the use of rules of origin to implement and support a quota regime and the use of rules of origin to supplement the protective effect of the quota regime. Using rules of origin which render a quota regime more restrictive may be consistent with using rules of origin to implement and support such a regime.

6.85 Moreover, we note that the mere fact of making the quota system more restrictive could not, ipso facto, condemn the fabric formation rule. A restrictive fabric formation rule may have been adopted in pursuit of legitimate objectives.

6.86 One of the objectives claimed by the United States in using the fabric formation rule is "to more accurately reflect where the most significant production activity occurs".²⁰² Since we have already found that the fabric formation rule is not an unsound rule for the United States to apply to the made-up articles in question, we see no justification for determining that the stated United States objective of reflecting where the most important manufacturing process takes place is a pretext for protecting the United States' textile industry.²⁰³

6.87 Another objective claimed by the United States to underlie the fabric formation rule is to prevent quota circumvention. The United States has stated that the fabric formation rule helps prevent quota circumvention in two respects. First, the United States argues that a clear, simple and precise rule such as the fabric formation rule ensures transparency and predictability for traders and enhances the ability of customs officials to determine the origin of goods and, in that sense, identify circumvention.²⁰⁴ Second, the United States maintains that the clearly stated fabric formation rule removed ambiguity and uncertainty which the United States says existed under the pre-section 334 rules of origin, inasmuch as for most fabrics and flat goods (specifically towels and linens) manufacturing processes were analysed on a case-by-case basis to determine whether they were significant enough to confer origin.²⁰⁵ India has identified no provision in the RO Agreement, or the Agreement on Textiles and Clothing, which would preclude Members from taking appropriate preventative action against quota circumvention.²⁰⁶

6.88 In India's view, circumvention, properly understood, necessarily implies illegal behaviour. India contends, however, that the United States' notion of preventing quota circumvention is unduly broad, in that it encompasses not only action taken to prevent the illegal evasion of quotas by traders, but also action taken to prevent the legitimate avoidance of quotas.²⁰⁷ India submits that, in contrast, evasive and adaptive action taken by producers in response to country-specific quotas (e.g., through reallocation of production) is not circumvention. India argues that rules of origin used to counteract such action must be considered to pursue a trade objective. The United States counters India's contention by noting that there is no consensus among Members regarding the constituent elements of the concept of "circumvention". The United States also points out that India's view would undermine Members' ability to ensure compliance with textile quotas.

6.89 Even if we were to accept India's contention that the concept of "circumvention" does not include legal quota avoidance strategies, this would not detract from the fact that the United States has offered a plausible explanation of how the fabric formation rule promotes the objective of preventing illegal quota circumvention. In these circumstances, we see no reason to dismiss the United States' contention that one of the objectives of the fabric formation rule is the prevention of quota circumvention.

6.90 This does not dispose, however, of the issue, raised by India, whether the fabric formation rule is, in addition or even primarily, being used by the United States to prevent "legal" circumvention. India argues that, if the fabric formation rule is being used for that purpose, this would demonstrate that it is being used to afford protection to the United States' textile industry by making the quota regime "more restrictive".²⁰⁸ We do not consider that there is an inherent link between the possible objective of preventing circumvention - defined here as the prevention of quota avoidance through legal means - and the objective of protecting the United States' textile industry, such that the two objectives could invariably be viewed as one and the same. The rationale for seeking to prevent quota avoidance may be to maintain the integrity and effectiveness of trade policy instruments, in this case textile quotas sanctioned by the Agreement on Textiles and Clothing.²⁰⁹ Maintaining integrity and effectiveness is a valid concern for Members implementing country-specific quotas. For that reason, we cannot accept that using rules of origin in pursuit, inter alia, of the objective of maintaining the integrity and effectiveness of country-specific textile quotas would, a priori and without exception, constitute an illegitimate objective.²¹⁰

6.91 The issue, then, is more appropriately framed as follows: Has India established that the fabric formation rule cannot be said to pursue the objective of maintaining the integrity and effectiveness of country-specific United States' textile quotas? In other words, has India established that this is an instance where the United States is using rules of origin to supplement the protective effect of its quota regime?

6.92 India argues that if the United States considered that its previous rules of origin did not protect the integrity and effectiveness of various trade policy instruments, it would have introduced changes for all products, and not just for textile and apparel products.²¹¹ We are not persuaded by this argument. As we have noted above, trade in textile and apparel products is governed by a special WTO agreement, the Agreement on Textiles and Clothing, which, unlike most other WTO agreements, sanctions the use of country-specific quotas. Against this background, in this case, the use of sector-specific rules of origin would tend to confirm, rather than disprove, that the rules of origin in question are designed to implement and support sector-specific trade instruments. India further argues that the fine product distinctions drawn by the United States are "completely unrelated" to the objective of protecting the integrity and effectiveness of the United States' textile quotas. India does not, however, examine, and elaborate on, why the United States' product distinctions cannot be said to support the aforementioned objective.²¹² In the light of the foregoing, we consider that India has failed to establish that the fabric formation rule cannot be said to pursue the objective of maintaining the integrity and effectiveness of country-specific United States' textile quotas.

6.93 We note in this regard that India has adduced other evidence which it considers demonstrates that the "real" objective of the fabric formation rule is to afford protection to the United States' textile industry by making the relevant quotas "more restrictive". These elements include the legislative history of section 334, notably the House and Senate reports²¹³; post-enactment statements by two United States senators²¹⁴; a statement by a United States textile importer association²¹⁵; and publications by academics and a practising lawyer²¹⁶. It should be noted that these elements are not part of section 334 itself, nor can they be said to "objectively manifest"²¹⁷ the objective of the fabric formation rule. Under the test established by the Appellate Body in Chile - Alcoholic Beverages²¹⁸, we are not to base our inquiry into the objective of the fabric formation rule on such elements.²¹⁹ In any event, we have carefully reviewed each of these elements. We do not consider that, individually or taken together, they are sufficient to support the conclusion that the United States is using the fabric formation rule to afford protection to its textile industry, over and above the protection it already enjoys as a result of the United States' quota regime. With respect to the legislative history, India has provided no support for its assertion that the House and Senate reports reveal that section 334 was intended by the United States Congress as an instrument to pursue trade objectives.²²⁰ With respect to the post-enactment statements by two United States senators, India states that the senators in question referred to section 334 as a "very significant change in rules of origin".²²¹ However, such a characterization would not demonstrate that section 334 is "protectionist"²²². Finally, with respect to the opinions expressed by a United States' textile importer association, academics and a practising lawyer, we do not think they are particularly probative.²²³ Indeed, the Panel was struck by the paucity of public and critical comment on the legislative changes.

6.94 In sum, India has not persuaded us that the fabric formation rule does not pursue any legitimate objectives, or that any such objectives are a sham. Therefore, even assuming that the fabric formation rule rendered relevant United States textile quotas more restrictive, India has failed to establish that any restrictive effects of the fabric formation rule are not incidental to the pursuit of legitimate objectives.

6.95 Up to this point, we have focused on the fabric formation rule as it applies to certain non-apparel made-up articles. Based on certain replies given to questions from the Panel, India could be understood to challenge the fabric formation rule also as it applies to fabrics subjected to further finishing operations.²²⁴ However, neither in its written submissions nor in its oral statements has India offered specific legal arguments with respect to fabrics.²²⁵ At any rate, mutatis mutandis, our reasoning with respect to made-up articles applies to fabrics as well. For these reasons, we find that India has not demonstrated that the fabric formation rule as it applies to fabrics is inconsistent with Article 2(b).

6.96 In the light of the above, we find that India has failed to establish that section 334 is being used as an instrument to pursue the objective of protecting the United States' textile industry.²²⁶ Accordingly, we conclude that India has failed to establish that section 334 is inconsistent with Article 2(b).

(c) Consistency of section 405 with Article 2(b) of the RO Agreement

6.97 The Panel now proceeds to examine India's second claim under Article 2(b), viz., that section 405 is inconsistent with Article 2(b).

6.98 India considers that section 405 was designed and structured to favour imports from the European Communities over imports from developing countries such as India. India recalls that section 405 amended section 334 to create certain exceptions to the general rules on determining origin for fabrics and made-up articles. India notes that section 405 provides that certain products would be conferred origin, based on where they are subjected to a DP2 operation. India submits that the products that were chosen for specific exemptions and therefore, special treatment, were those products of export concern to the European Communities: bed linen, scarves and table linen. According to India, these products comprised the bulk of the European Communities textile and apparel exports to the United States. Thus, when the United States provided exceptions from the general rule for these products so that their origin would be conferred on where the product was subjected to a DP2 operation, in India's view, the United States was providing a de facto advantage to products from the European Communities. India notes that these products, which traditionally had been subjected to DP2 operations in the European Communities, could now continue to be exported to the United States without being conferred the origin of the country where the greige fabric was woven, and without being subject to the quantitative restrictions imposed on those countries which made the greige fabric.

6.99 India considers that section 405 created arbitrary reversions to the pre-section 334 rules of origin. First, section 334 established origin based on the country where the greige fabric was formed by weaving or knitting, regardless of any further finishing operations, such as dyeing and printing. India notes that, in order to address the European Communities' concerns, section 405 provided an exception to this rule for fabrics classified under the HTS as silk, cotton, man-made fibres or vegetable fibres. Such fabrics are now considered to originate in the country in which the fabric is subjected to a DP2 operation. India points out, however, that the same rule does not apply to fabrics made of wool. India notes that the origin of fabrics made of wool, whether or not they are subject to two or more finishing operations, will be determined where the basic wool fabric is formed.

6.100 Second, India notes that, for the products of concern to the European Communities, the United States provided in section 405 that the rule for determining their origin would revert to the pre-section 334 rules for seven out of the 16 HTS 4-digit headings. India submits that these seven HTS 4-digit headings are for those products that are of particular export interest to the European Communities.²²⁷ India recalls that for products under these seven 4-digit headings, the origin will be determined where the product is subjected to a DP2 operation.

3.101 Third, although section 405 provides that the determination of origin for certain products under the aforementioned seven HTS headings is based on where the product was subjected to a DP2 operation, certain exceptions have been made. India notes that the DP2 rule does not apply to products under these seven HTS headings where they are made of (a) cotton, (b) wool or (c) fibre blends with more than 16% cotton. For the products under these HTS headings made of cotton, wool, and fibre blends with over 16% of cotton, the country of origin will be the country where the greige fabric is formed.

6.102 India notes that, under the amended section 334, origin can now vary based solely on the fibre content of a product. To India's knowledge, no other country uses such a distinction to determine origin. India submits that this criterion is arbitrary and leads to absurd results. A different determination of origin results depending on the fibre content of the product that is subject to further processing. If cotton fabric is woven in India and exported to Portugal where it is subjected to a DP2 operation, that fabric is now considered a product of Portugal. However, if the same cotton fabric is now used in Portugal to produce a finished sheet (which, according to India, has more value-added operations), the origin reverts back to India. The absurdity of this case, India claims, is that the determination of origin differs depending on the type of product.

6.103 India submits that the origin of section 405 confirms that it was used as an instrument to favour imports from the European Communities. India notes that, on 22 May 1997, the European Communities requested WTO consultations with the United States on section 334. India recalls that the European Communities stated in its request for consultations that the United States' rules of origin "adversely affect exports of European Community fabrics, scarves and other flat textile products to the United States of America. As a result of this change, European Community products are no longer recognized in the United States as being of European Communities origin and lose the free access to the United States market that they enjoyed before".²²⁸ India notes that, prior to the holding of formal WTO dispute settlement consultations, the United States and the European Communities entered into a bilateral agreement (proc�s-verbal). According to India, the United States Administration agreed to propose an amendment to Congress for its rules of origin for those products of concern to the European Communities, namely, silk scarves, silk accessories, and dyed and printed cotton fabrics.²²⁹ India notes that, in July 1998, at the request of the United States Administration, draft legislation was introduced in the United States Senate to implement the EC-US proc�s-verbal.²³⁰ However, according to India, the European Communities claimed the draft legislation did not meet the terms of the proc�s-verbal, and therefore initiated new dispute settlement proceedings against the United States.²³¹

6.104 India considers that, in order to avoid WTO dispute settlement, the United States once again agreed to settle. In August 1999, an amendment to the proc�s-verbal was concluded whereby the United States Administration agreed to submit legislation to Congress to amend the rules of origin set out in section 334. According to India, in order to ensure that there were no gaps between what the proc�s-verbal called for and what the draft legislation would actually include, the European Communities and the United States agreed upon specific language that the United States Administration would propose to Congress.²³² India notes that, in May 2000, the United States Congress passed section 405 of the Trade and Development Act. India points out that section 405 was virtually identical to the text agreed in the second proc�s-verbal between the European Communities and the United States.

117The summaries of the third parties' arguments are based on the executive summaries submitted by the third parties to the Panel.

118Para. 4 First Submission United States (see, supra, para. 3.64).

119In particular in para. 8 First Submission United States (see, supra, para. 3.64).

120Appellate Body Report, Japan - Alcoholic Beverages II, supra, page 16; that finding was confirmed and further elaborated in Appellate Body Report, Chile - Alcoholic Beverages, supra, paras. 59 and 60; see also Appellate Body Report, United States - Tax Treatment for "Foreign Sales Corporations" ("US - FSC "), WT/DS108/AB/R, adopted 20 March 2000, DSR 2000:III, 1619, para. 100.

121The New Shorter Oxford English Dictionary, L. Brown (ed.) (Clarendon Press, 1993), Vol. II, p. 3531.

122The New Shorter Oxford Dictionary, supra footnote 9, p. 2422.

123On the principle of effective treaty interpretation see in particular Appellate Body Report, United States - Gasoline, supra, page 23.

124See, supra, footnote 121.

125See para. 51 First Submission India (supra, para. 3.28).

126This is a matter of showing which countries were traditionally the "countries of origin" for a given product in United States imports before the introduction of the "fabric forward" rule and what conditions applied to them regarding quota; and then compare to the quota conditions of those "fabric" producing countries that are now considered to be the origin of these same products.

127Para. 84 First Submission India (supra, para. 3.51).

128For example Article 5.8 of the Agreement on Implementation of Article VI of the General Agreement on Tariffs and Trade 1994; Articles 27.10, 27.11 and 27.12 of the Agreement on Subsidies and Countervailing Measures; Article 6.4 of the Agreement on Agriculture; Article 9.1. of the Agreement on Safeguards.

129The United States imports statistics for the HS codes covered by section 405 are available on the internet at the following address: http://dataweb.usitc.gov/scripts/user_set.asp

130Appellate Body Report, Canada - Autos .

131Ibidem, para. 73.

132Ibidem, para. 81.

133Pub. Law 103-465, 108 Stat 4809, enacted on 8 December 1994, and codified at 19 U.S.C. � 3592. For the text of section 334, see, supra, para. 2.2.

134Pub. Law 106-200, entitled "Clarification of Section 334 of the Uruguay Round Agreements Act", enacted on 18 May 2000, and codified at 19 U.S.C. � 3592. For the text of section 405, see, supra, para. 2.5.

135Reproduced, in relevant part, in Annex C.

136For a list of the goods concerned, see supra, para. 2.3. India notes that one of the 16 HTS headings refers to goods which are deemed to originate where the yarn was produced. India's first written submission, para. 36.

137United States' reply to Panel question No. 7.

138For a list of the goods concerned, see supra, para. 2.7.

139It is our understanding from the parties' submissions that, under the United States' regulations applicable before section 334 entered into force, DP2 operations were normally considered significant enough, for fabrics and certain flat goods, to confer origin. United States' replies to Panel questions Nos. 33 and 47(a); India's first written submission, paras. 14-15.

140Section 334(b)(1).

141United States' reply to Panel question No. 34.

142India's first oral statement, paras. 8 and 11.

143United States' second written submission, para. 10.

144United States' reply to Panel question No. 54(a); India's reply to Panel question No. 54(a); supra, para. 2.8.

145India's first written submission, para. 8; India's second written submission, para. 75.

146India's second oral statement, para. 18.

147India initially also claimed that the criteria used in section 334 and section 405 are so complex and arbitrary that it is nearly impossible to administer these statutory provisions in a consistent, uniform, impartial and reasonable manner and that these provisions are, therefore, inconsistent with Article 2(e) of the RO Agreement. India's first written submission, para. 101. India later abandoned this claim. India's second written submission, footnote 37.

148India's reply to Panel questions Nos. 15 and 18.

149Ibid.

150Appellate Body Report, United States - Measure Affecting Imports of Woven Wool Shirts and Blouses from India ("United States - Wool Shirts and Blouses "), WT/DS33/AB/R and Corr.1, adopted 23 May 1997, DSR 1997:I, 323; at 335.

151Appendix 1 of the DSU.

152Vienna Convention on the Law of Treaties, done at Vienna, 23 May 1969, 1155 U.N.T.S. 331; (1969) 8 International Legal Materials 679.

153See, e.g., Appellate Body Reports, United States - Standards for Reformulated and Conventional Gasoline ("United States - Gasoline"), adopted 20 May 1996, DSR 1996:I, p. 16; Japan - Taxes on Alcoholic Beverages ("Japan - Alcoholic Beverages II") WT/DS8/AB/R, WT/DS10/AB/R, WT/DS11/AB/R, adopted 1 November 1996, DSR 1996:I, p. 104; India - Patent Protection for Pharmaceutical and Agricultural Chemical Products ("India - Patents (United States)"), WT/DS50/AB/R, adopted 16 January 1998, DSR 1998:I, para. 46; European Communities - Customs Classification of Certain Computer Equipment ("EC - Computer Equipment"), WT/DS62/AB/R, WT/DS67/AB/R, WT/DS68/AB/R, adopted 22 June 1998, DSR 1998:V, para. 84; and United States - Shrimp, para. 114.

154Chapeau of Article 2 of the RO Agreement.

155Title of Article 2 of the RO Agreement.

156Article 3 of the RO Agreement.

157Article 2(b) of the RO Agreement.

158Article 2(c), first sentence, of the RO Agreement.

159Article 2(c), second sentence, of the RO Agreement.

160Article 2(d) of the RO Agreement.

161India's first oral statement, para. 5; India's reply to Panel question No. 4; United States' first oral statement, para. 3.

162India's first oral statement, para. 6; United States' first oral statement, para. 3

163India's first oral statement, para. 6; United States' first written submission, para. 8.

164Appellate Body Report, Japan - Taxes on Alcoholic Beverages ("Japan - Alcoholic Beverages II "), WT/DS8/AB/R, WT/DS10/AB/R, WT/DS11/AB/R, adopted 1 November 1996, DSR 1996:I, 97, at 120 (emphasis added by India).

165United States' reply to Panel question No. 6; United States' second written submission, para. 31.

166United States' second written submission, para. 29.

167Appellate 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, para. 62 (footnotes omitted).

168India's second written submission, para. 24; India's first oral statement, para. 18.

169Supra, para. 6.29.

170In its second oral statement, India went further and said that the fabric forward rule "by definition" increases the quantities of textile imports that are conferred the origin of the countries that are under quota. India's second oral statement, para. 8.

171The SAA may be found 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.

172SAA, supra, pp. 118-119.

173According to India, the question arises here that if the United States believed the application of the principle of substantial transformation did not discourage transhipment or other circumvention of textile and apparel quotas and sought therefore to move away from this principle in section 334, why did it revert to the substantial transformation principle to determine origin for some of the products listed in the specified HTS heading in section 405, but not all products, when it settled the dispute with the European Communities?

174Exhibit INDIA-5.

175Referring to the negotiating history, India notes that in the Senate Report, under the heading "Textile transshipments" (section 333), there is a reference to Article 5.1 of the Agreement on Textiles and Clothing. Specifically, India notes that the Report states that section 333 of the URAA adds a new section to Title IV to address specifically the problem of textile transshipments.

176India refers to United States' first written submission, para. 29.

177India refers to European Communities' written third-party submission, para. 24.

178India refers to ibid.

179India refers to document G/RO/M/5, para. 1.6.

180The United States refers to paras. 46-49 of India's first written submission.

181The United States considers that these objectives are entirely consistent with and supportive of the objectives of the RO Agreement itself.

182As one example of these processes the United States cites cutting. According to the United States, some traders successfully argued that the location of cutting of a product that could receive further finishing conferred origin. The United States notes that Congress acted to harmonize United States rules in this respect with those of the United States' major trading partners

183The United States refers to exhibit INDIA-12.

184The United States refers, inter alia, to Panel Report, United States - Section 129(c)(1) of the Uruguay Round Agreements Act ("United States - Section 129(c)(1) URAA"), WT/DS221/R, adopted 30 August 2002, paras. 6.36-6.38.

185The United States notes that the reference in the SAA to "transshipment" has the same meaning as "circumvention" as that term is used in the Agreement on Textiles and Clothing.

186The United States refers to India's reply to Panel question No. 17(a).

187United States' second written submission, para. 12.

188The United States argues that, to require it to utilize a particular rule for a specific product, as it claims India advocates, would be to add an obligation not contained in the RO Agreement during the transition phase.

189Document G/RO/52, p. 69.

190Supra, para. 6.25.

191Of course, the disciplines in Articles 2(b) and (c) may bar a Member from using particular rules of origin in a given case. Indeed, this is precisely what we need to examine in this case.

192United States' reply to Panel question No. 14.

193Indeed, it is our understanding that, under the widely recognized substantial transformation criterion, a substantial transformation may, in some instances, be said to occur in situations where the transforming process adds little value, or even where it decreases the value of the transformed good.

194ndia's first oral statement, para. 22.

195India's second oral statement, para. 8.

196bid.

197India's reply to Panel question No. 72.

198The Panel does not believe that it would have been difficult for the parties to have provided this information. For instance, some of it is available from notifications to the WTO Textiles Monitoring Body ("TMB"). Without that information and arguments of the parties on its legal significance, the Panel is unable to draw any conclusion.

199India itself acknowledges this possibility. India's reply to Panel question No. 61. We also note the United States' assertion that, 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 quota on fabric or bed linen in the United States. United States' second oral statement, para. 6. The United States has not, however, provided any evidence in support of its statement.

200India appears to acknowledges this. India's reply to Panel question No. 64.

201We think a rule of origin which has the effect of discouraging the full utilization of a quota could be one example of a rule of origin which affords extra protection to the Member maintaining the quota in question.

202United States' first written submission, para. 29; United States' replies to Panel questions Nos. 14 and 19.

203Merely that the United States changed its substantive rules of origin in 1996 for some of the made-up articles in question does not, in our view, suggest that the fabric formation rule is not intended to "more accurately reflect where the most significant production activity occurs". It seems pertinent to note, in this regard, that the pre-section 334 rules, found at 12 C.F.R. 130, originated with the Administration, specifically the United States Customs Service, whereas section 334 was prescribed by Congress. India's first written submission, paras. 14 and 16. Nor do we think that the "clarification of section 334", enshrined in section 405, undermines the United States' assertion that the fabric formation rule is not intended to "more accurately reflect where the most significant production activity occurs". We note that, with respect to this clarification, the United States has stated that it was persuaded by the European Communities that, for the goods at issue, the most important manufacturing process would be better reflected by a DP2 rule. United States' reply to Panel question No. 76.

204United States' replies to Panel questions Nos. 2, 14 and 19.

205United States' replies to Panel questions Nos. 2, 19, 33 and 47(a).

206India asserts that the fabric formation rule cannot be said to serve the purpose of preventing circumvention, given that another section of the URAA, section 333, was enacted for that purpose. The United States rebuts that assertion by pointing out that section 333 is designed to counteract circumvention by establishing certain measures to be taken once circumvention is found to have occurred, while section 334 is designed to prevent circumvention from occurring in the first place.

207United States' first written submission, para. 32.

208India's reply to Panel question No. 2.

209See also United States' reply to India's question No. 10.

210Indeed, India itself has stated that "[i]n the context of country-specific quotas, such as those permitted under the Agreement on Textiles and Clothing (ATC), the concept of origin is critical". India's first oral statement, para. 22.

211India's reply to Panel question No. 72.

212Ibid.

213India's first written submission, para. 57.

214Ibid., paras. 66-68.

215Ibid., para. 64.

216Ibid., para. 65.

217Appellate Body Report, Chile - Alcoholic Beverages, supra, para. 71.

218Supra, para. 6.37.

219We also note that, as a matter of United States law, the legislative history, for instance, is less authoritative than the SAA. United States' reply to Panel question No. 31.

220India's first written submission, para. 57.

221India's first written submission, para. 66; exhibit INDIA-3.

222India's first written submission, para. 66.

223We note that the comments by the United States textile importer association were made at the time of the Congressional deliberations on what later became section 405 and sought to convince United States legislators to revisit the fabric formation rule in section 334. Exhibit INDIA-11, p. 14. The academic publication referred to by India is authored by members of an association which has prepared a report on obstacles to textile trade for the European Commission. Exhibit INDIA-12, opening footnote. The other publication referred to by India is by a private lawyer who, according to the United States, often represents importers. United States' second oral statement, para. 22.

224India's replies to Panel questions Nos. 19 and 61.

225We note, for instance, India's first oral statement, para. 22, and India's second written submission, para. 32, which only refer to made-up articles, not fabrics.

226In response to question 55(b) from the Panel, India briefly addressed some of the other purposes for which section 334 is used, that is to say, purposes other than the administration of quantitative restrictions. However, India's response does not establish that, when used for one of these purposes, section 334 is used to pursue a trade objective. With respect to origin marking, the mere fact that the fabric formation rule in section 334 may mean that some goods have to be marked as originating in a different country and that this may, in some cases, affect the marketability of these goods, would not, in and of itself, warrant the conclusion that the fabric formation rule is designed to protect the United States' textile industry. Also, the example mentioned by India, silk scarves, is not subject to the fabric formation rule, but to the DP2 rule provided for in section 405. With respect to the purpose of gathering trade statistics, we are not persuaded by India's argument that the fabric formation rule is intended to protect the United States' textile industry because it skews import statistics. India's argument is based on its disagreement with the United States as to where finished fabrics and flat goods should be deemed to originate, an argument which we have already dealt with.

227India notes that the seven products were the following: HTS 6213 - handkerchiefs, HTS 6214 - shawls, scarves, mufflers, HTS 6302 - bed, table, toilet, kitchen linen (changed with respect to HTS 6302.22, 29, 52, 53, 59, 92, 93, 99), HTS 6303 - curtains and bed valances (changed with respect to 6303.92 and 99), HTS 6304 - other furnishing article (changed with respect to 6304.19, 93 and 99), HTS 9404.90 - quilts, cushions, comforters (changed with respect to 9404.90.85, 95). In addition, HTS 6117.10 - shawls, scarves, mufflers, knit, was affected by section 405. India notes that this HTS number was not referred to in section 334.

228India refers to document WT/DS85/1.

229India refers to document WT/DS85/9.

230105th Congress, 2d Session. S. 2394. Introduced by Senator Roth and Senator Daniel P. Moynihan; exhibit INDIA-14.

231India refers to document WT/DS151/1.

232India refers to document WT/DS151/10.

233The United States refers to document WT/DS85/9.

234India's first written submission, paras. 69 and 84.

235India's reply to Panel question No. 58(a).

236United States' first written submission, para. 17.

237It should be noted, as well, that India has presented no evidence which would demonstrate that section 405, in practice, can only benefit relevant goods imported from the European Communities.

238United States' second oral statement, para. 23.

239India's first written submission, para. 71.

240Ibid., para. 74.

241The United States emphasises that not all of the European Communities' requests are reflected in section 405. United States' reply to Panel question No. 76. See also European Communities' oral third-party statement, para. 21. This tends to confirm that the United States did not intend to "favour" the European Communities, but rather to do what was necessary and acceptable to settle the bilateral WTO dispute.

242United States' first written submission, para. 37; United States' first oral statement, para. 16.

243United States' reply to Panel question No. 79 (emphasis added); United States' reply to Panel question No. 76.