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WORLD TRADE
ORGANIZATION

WT/DS243/R
20 June 2003

(03-3200)

Original: English

UNITED STATES - RULES OF ORIGIN
FOR TEXTILES AND APPAREL PRODUCTS

Report of the Panel

(Continued)


ANNEX A  
 

Annex A Answers of parties to questions
  A-1 Answers of India to questions from the Panel following the first meeting
  A-2 Answers of the United States to questions from the Panel following the first meeting
  A-3 Answers of the United States to questions from India following the first meeting
  A-4 Answers of India to questions from the Panel following the second meeting
  A-5 Answers of the United States to questions from the Panel following the second meeting
  A-6 Answers of India to questions from the United States following the second meeting
  A-7 Comments of India on answers of the United States to questions from the Panel following the second meeting
  A-8 Comments of the United States on answers of India to questions from the Panel and to questions from the United States following the second meeting

ANNEX A-1

answers of india to questions from the panel following the first
 meeting

Question 1

Do you agree with the European Communities that the concept of substantial transformation "was intentionally left out of the disciplines to be applied during the transitional period" and that, therefore, "Members are under no obligation during the transitional period to base their origin rules on the concept of substantial transformation"? (European Communities' written submission, paras. 9 and 22)

Answer 1

India�s claims and arguments do not presuppose that Members must apply the concept of substantial transformation during the transitional period. Therefore, the European Communities' point is not germane to India�s claims and arguments in this case.

Question 2

With reference to Article 2(b) of the RO Agreement, do you consider that the prevention of quota circumvention as that term is used by the United States would need to be viewed as a "trade objective"?

Answer 2

Yes. In the United States' first submission (para. 32) and in the oral responses of the United States delegation provided at the First Hearing, the United States used the term "prevention of quota circumvention" to refer to a situation where certain countries attempted to avoid the quotas placed on their textile and apparel products by exporting semi-finished products to third countries (not under quota or under a more generous quota) to be subjected to finishing operations, in order that those products could be conferred the origin of the third country, when they were exported to the United States.

However, this situation cannot be described as "quota circumvention." Circumvention is a term which connotes a violation of existing rules. In the context of rules of origin, quota circumvention describes situations where traders are making make false declarations about the origin of their products or using other illegal means in order to evade the application of quotas. The United States has not shown any instances of illegal circumvention of section 12.130 rules. India notes that, pre-section 334, United States Customs was applying and enforcing its section 12.130 regulations. The United States' determinations of origin for such products (e.g., those exported to third countries for DP2 before being exported to the United States) were therefore reached in conformity with the then applicable section 12.130 customs regulations.

What the United States describes as "quota circumvention" is a perfectly legitimate reaction of the market to the existence of country-specific quotas, which resulted in increased quantities of textile and apparel products entering the United States. In the case before the Panel, the United States changed its rules of origin to prevent perfectly legitimate market reactions in order to maintain the protective impact of its own quota regime on textile and apparel products. The new rules of origin are therefore being used by the United States, by its own admission, to pursue the trade objective of protecting the domestic industry. They are consequently inconsistent with Article 2 (b) of the RO Agreement.

(DP2 refers to dyeing and printing plus two finishing operations.)

Question 3

Does Article 2(d) of the RO Agreement cover discrimination between the products of "other Members"? If so, what kind of products, i.e., identical products, like products, directly competitive or substitutable products, etc.?

Answer 3

Article 2(d) of the RO Agreement, unlike Articles I and III of the GATT, does not refer to measures distinguishing between products of other Members but to discrimination between other Members. The wording of Article 2(d) of the RO Agreement reflects the fact that the very purpose of the measures regulated by this provision is to determine whether a product is a product originating in another Member. Article 2(d) can therefore be violated by denying a product the status of originating in a Member.

Unlike Article III of the GATT, Article 2(d) of the RO Agreement does not refer to discrimination between "like" products originating in different countries or to discrimination between imported and domestic products that are "directly competitive or substitutable". This suggests that Article 2(d) can be violated even if the products distinguished in the rules of origin are neither like nor directly competitive or substitutable. The Appellate Body decided that the question of whether two products are "like" or "directly competitive or substitutable" within the meaning of Articles III:2 and III:4, must be answered by examining them from the perspective of the consumer in the market of the importing country. However, two products that are "like" or "directly competitive or substitutable" from the perspective of the consumer should be accorded a different origin if they were produced in different countries. The criteria for determining whether two products are "like" or "directly competitive or substitutable" within the meaning of Article III of the GATT can therefore not be transposed to Article 2(d) of the RO Agreement.

It would be equally inappropriate to transpose to Article 2(d) of the RO Agreement the concept of "like" products used in Article I of the GATT. Tariffs are a negotiable (and hence legitimate) instrument of protection, while rules of origin are not. Under the GATT, Members are therefore permitted to make very fine product distinctions in their tariff classifications designed to protect specific domestic industries. However, under the RO Agreement, Members are not to use rules of origin to pursue trade objectives. It would, for this reason, not be logical to determine the scope of the prohibition of discrimination under the RO Agreement by using concepts that determine the scope of discrimination under Article I of the GATT.

Question 4

With reference to Article 2(a) of the RO Agreement, could Members use criteria for determining origin other than those specified in indents (i)-(iii)?

Answer 4

The general obligation in Article 2(a) is that Members must ensure that when issuing "administrative guidelines of general application, the requirements to be fulfilled are clearly defined." The words "in particular" preceding the three examples in indents (i) to (iii) support the interpretation that when one of those three types of administrative guidelines is used, then the specific requirements listed in that indent must be used. It is conceivable that a Member could use other criteria other than those set out in the three indents to determine origin provided those criteria comply with the general obligation in the first sentence of Article 2(a).

However, India has not made any claims based on Article 2(a). India�s claims and arguments do not require the Panel to address the question whether a Member may or may not apply criteria other than those specified in Article 2(a). India�s view is that a Member�s compliance with Article 2 (a) does not provide a justification for inconsistencies with Article 2(b), 2(c) and 2(d) of the RO Agreement.

Question 5

Could India elaborate on the type of quotas to which Indian exports become subject pursuant to section 334? (India's first written submission, paras. 54 and 91). Are those quotas for (i) India's fabric exports, (ii) quotas for finished products (e.g., bed linen) made of Indian fabric or (iii) other quotas?

Answer 5

Section 334 establishes origin for fabrics and certain made-up articles based on the country where the greige fabrics are formed by weaving or knitting, regardless of any further finishing operations, such as dyeing and printing. In view of this change in origin criteria under section 334, India�s exports of greige fabrics become subject to quotas, as further finishing operations like dyeing and printing are not recognized for conferring origin. For example, India�s exports of greige fabrics to Portugal, when subjected to dyeing, printing and two finishing operations in Portugal and exported to the United States, would attract debits to India�s quotas on greige fabrics under the provisions of the "fabric forward" rule established by section 334.

Exports of finished products (e.g. bed linen) made of Indian fabric are also subjected to quotas as section 334 (b)(2) provides the special rule that "notwithstanding the wholly assembled rule", the origin of certain flat goods under certain headings such as bedding articles (quilts, comforters, bed linen, mattresses, blankets), home furnishing (wall hangings, table linens), would be determined where the greige fabric was woven.

These items when made from Indian fabrics and exported from a third country after finishing to the United States become subject to quota limits set out for these products by the United States for India.

The range of restrictions imposed on Indian exports of fabrics or finished products by the United States were notified in the Memorandum of Understanding signed between the Governments of United States of America and India on December 31, 1994. These were subsequently notified to the WTO within 60 days as mandated by the ATC.

The imposition of quotas on greige fabrics under the "fabric forward rule" were made pursuant to the implementation of section 334(b)(2). The quota limits for greige fabrics and for finished products are however set out in the MOU referred to above.

(Questions 6 to 10 for the United States only)

Questions 11 (a) to (d)

With reference to Article 2(c) of the RO Agreement, could the parties answer the following questions:

(a) Does Article 2(c) prohibit rules of origin which create the specified effects even in cases where those effects are entirely unintentional?

Answer 11 (a)

Yes. There is no intent requirement in Article 2(c). It establishes criteria that the rules of origin themselves must meet. It contains no wording that could be construed to require the Panel to distinguish between effects that were intended and those were not.

(b) Does the phrase "restrictive [ � ] effects on international trade" mean that a complaining Member must show a net restrictive effect on international trade? Or would it be sufficient to show that the trade of one Member has been adversely affected, even if the trade of another Member has been favourably affected? In the latter case, could that one Member be a Member other than the complaining Member?

Answer 11 (b)

For the reasons explained at the First Hearing and further elaborated in the response to question 26 below, India does not believe that Article 2(c) requires a showing of actual restrictive or distorting effects demonstrated through trade statistics and therefore does not believe that the task before the Panel is to determine whether trade statistics show a net effect of the United States' rules on international trade.

Moreover, Article 2(c) does not refer to the effect on imports but the effect on international trade. As correctly pointed out by the European Communities, this implies that the restrictive or distorting effects covered by Article 2(c) include those that affect third Members. The reference of international trade makes clear that the rationale of Article 2(c) is not merely to protect expectations regarding the level of imports but also expectations regarding the trade between third countries. Therefore, even if a mere shift of the benefits of the conferral of origin from one Member to another without an overall reduction in trade were not deemed to be "restrictive" within the meaning of Article 2(c), the resulting change in the pattern of trade would nevertheless have to be regarded as "distorting" within the meaning of that provision.

For the reasons indicated by the GATT panel on United States - Section 337 of the Tariff Act of 1930 (BISD 36/387, para.5.14), each instance of a restrictive or distorting effect must be considered separately, not the net effect of all effects taken together. India is therefore of the view that it is sufficient for the complainant to show that the rule of origin creates restrictive or distorting effects for one Member, which could be a Member other than the complaining Member.

(c) Could it be said that rules of origin inherently create "restrictive" effects on international trade, inasmuch as they may require traders to fulfil certain requirements (e.g., the preparation of certificates of origin, etc.)? If so, would this suggest that Article 2(c) implies some sort of a de minimis exception? If so, what would constitute a de minimis restrictive effect? In answering this question, please address the relevance of the second sentence of Article 2(c) ("unduly strict requirements") and the fourth preambular paragraph of the RO Agreement ("unnecessary obstacles to trade")

Answer 11 ( c )

It may be said that rules of origin, by their very nature, have effects on international trade. These effects are mainly administrative, as described in the example in the question. However, it is not correct to say that rules of origin inherently create "restrictive" effects on international trade. Such an interpretation would render meaningless the prohibition against rules of origin having "restrictive � effects on international trade", unless there were a de minimis exception.

However, there is no de minimis exception in Article 2 (c). The de minimis concept, when it appears in WTO law, is usually spelled out in the Agreement. For example, in the rules governing trade remedies, that is the rules which accord Members the right to prevent injury to their domestic industry by offsetting the impact of increased imports, dumping or subsidization, it makes sense to curtail the right to react to changes in the market to prevent injury by a de minimis exception. However, Article 2(c) of the RO Agreement is a rule governing trade policy conduct. Such rules have consistently been interpreted to require the establishment of conditions of competition for trade permitting producers and traders to plan, not the attainment or prevention of a particular impact in the market. It does not make sense to provide a de minimis exemption for actions that are inconsistent with a rule of trade policy.

As noted by two GATT panels, if a government considers that a measure inconsistent with a rule of conduct has no impact in the market, it should have no difficulty bringing that measure into consistency with that rule (See GATT cases: Italian Discrimination against Imported Agricultural Machinery in BISD 7S/66-67 and Canada - Administration of Foreign Investment Review Act in BISD 30S/168).

The second sentence of Article 2(c) requires that rules of origin shall not impose requirements that are unduly strict or require the fulfilment of a condition not related to manufacturing or processing. This suggests that the aim of Article 2(c) is to ensure that Members do not confer origin on the basis of unnecessary requirements that create adverse trade effects. This conclusion is supported by the fourth recital of the preamble of the RO Agreement, according to which this Agreement is "to ensure that rules of origin themselves do not create unnecessary obstacles to trade".

It is clear from Article 2 (a) and Article 2 (c) that the process of conferring origin upon a product is the process of determining with which country a product presented to customs has a significant economic link according to the origin criterion chosen by the importing Member. It follows that Article 2(c) is violated if a Member confers origin on the basis of requirements with restrictive or distorting effects on international trade that need not be imposed to determine the degree or nature of the link between a product and the economy of the WTO Member seeking the conferral of origin for that product.

(d) How should the Panel assess whether particular rules of origin create "distorting" effects on international trade? What do you compare the existing rules of origin with?

Answer 11 (d)

In economics, a governmental measure is generally considered to be "distorting" if it creates incentives or disincentives for economic operators that modify the operation of the market. In evaluating whether a rule of origin creates distorting effects, it is therefore necessary to determine whether it creates incentives or disincentives for producers or traders that modify the pattern of production or trade.

Question 12

In their submissions, the parties have referred to "visa requirements". Could the parties provide information regarding the legal basis in United States law for these requirements and how they operate? Also, please address whether these requirements are imposed in order to administer textile and apparel quotas or textile and apparel rules of origin.

Answer 12

The legal basis in the United States law for the visa requirements was clarified by the United States delegation at the First Hearing of the parties. The visa and certification system is part of an administrative arrangement to monitor the textile and apparel quotas.

Each shipment of textile and textile products subject to specific and group restraints are required to be visaed by the Government of India with a circular shaped stamp (the visa) before entry or withdrawal from warehouse for consumption into the United States.

The shipment is visaed or certified by the placing of original stamped markings (the visa or exempt certification) in blue ink on the front of the invoice (Special Customs Invoice Form 5515, successor document or commercial invoice when such form is used). Each visa includes its number and date and the signature of the issuing official. The visa numbers are in a standardized nine digit letter format beginning with one numeric digit for the last digit of the year of export followed by the two character alpha country code specified by the international organization for which the visa was issued. Each visa also states the correct categories and quantities in the shipment in applicable categories and units. Any amendment to the visa stamp will be done by mutual agreement. The visa systems are published in the Federal Register.

Any shipment which is not accompanied by a visa in accordance with the foregoing provisions is denied entry by the United States Government unless the Government of India specifically authorizes entry and appropriate charges to its quota.

As explained above the visa requirements have been imposed to administer the textile and apparel quotas. However, customs invoice No. 5515 on which the visa stamp is placed provides for a column (Sr.No.7) referring to the origin of the goods. The visa requirements also help identify the origin of the goods.

Question 13 for the United States only

Question 14

With reference to Article 2(c) of the RO Agreement, could the parties answer the following additional questions:

(e) What is the relationship between the first and second sentences of Article 2(c)? Do they provide for distinct and independent obligations, such that the second sentence adds an obligation which is not already covered by the first sentence? Or does the second sentence simply spell out one aspect, or consequence, of the obligation set out in the first sentence?

Answer 14 (e)

The second sentence elaborates upon and spells out specific aspects of the obligation set out in the first sentence. The first sentence provides that the rules of origin shall not themselves have restrictive, distorting or disruptive effects on international trade whereas the second sentence provides that they shall not pose unduly strict requirements or require the fulfilment of a certain condition to manufacturing or processing, as a pre-requisite for the determination of the country of origin.

(f) Is it appropriate to evaluate the trade effects of rules of origin introduced by a Member after the entry into force of the RO Agreement by comparing those rules with rules of origin applied by the same Member before the entry into force of the RO Agreement, i.e., with rules of origin which were not subject to the RO Agreement?

Answer 14 (f)

For the reasons elaborated at the First Hearing of the Panel and further elaborated in the response to question 26 below, India does not consider that a comparison of trade volumes in a pre-RO Agreement and post-RO Agreement context has to be made. The rules of origin of the Member introduced or maintained by the Member after the entry into force of the WTO Agreement need to be assessed in the light of the obligation set out in Article 2(c) of the RO Agreement not to establish conditions of competition with restrictive or distorting effects on international trade. What is relevant is therefore whether the United States rules of origin adopted and maintained after the entry into force of the RO Agreement establish such conditions of competition.

Question 15

Do the parties consider that Article 2(b)-(e) of the RO Agreement could be relied on to challenge a change in rules of origin per se, as opposed to the specific rules of origin in force at the time a challenge is brought? In other words, could a panel uphold claims under Article 2(b)-(e) that a change in rules of origin of itself is contrary to these provisions?

Answer 15

There is nothing in Article 2(b)-(e) that prevents Members from changing their rules of origin provided they meet the requirements set out in these provisions. India does not claim that the United States violated these provisions merely because it changed its rules of origin. India claims that the United States violated these provisions because it imposed and maintained rules of origin inconsistent with these provisions.

Question 16

With reference to Article 2(b) of the RO Agreement, do the parties consider that the term "used" should be interpreted to mean that a panel should assess whether rules of origin are used as instruments to pursue trade objectives as of the time they were adopted or as of the time of establishment of the panel?

Answer 16

The Panel should assess the consistency of the United States rules of origin as maintained at the date of the establishment of the Panel. In the case before the Panel, the United States rules of origin were originally adopted, and subsequently maintained, to pursue trade objectives.

Question 16 bis

The European Communities suggests that Article 2(c) of the RO Agreement requires a showing of actual restrictive or distorting effects and that such actual effects would need to be demonstrated through trade statistics (European Communities' written submission, paras. 28 and 32). At the same time, the European Communities argues that protectionist intent would be indicated if what the EC calls a "quota-effect" could be demonstrated, i.e., if it could be demonstrated, for instance, that certain products which used to be quota-free before certain rules of origin entered into force are subject to a quota after the entry into force of those rules (European Communities' written submission, paras. 23-24). Would a clear demonstration of such a (potential) "quota-effect", when there is no demonstration of actual adverse impact on the trade of a Member, be sufficient to establish restrictive or distorting effects under Article 2(c)?

Answer 16bis

Paragraphs 23 and 24 of the European Communities' written submission refer to the "quota-effect" in the context of determining protectionist intent under Article 2 (b) of the RO Agreement, not in the context of "trade effects" under Article 2 (c). For the reasons explained at the First Hearing and further elaborated in the response to question 26 below, India does not believe that Article 2(c) requires a showing of actual restrictive or distorting effects demonstrated through trade statistics.

The immediate impact of a restrictive rule of origin is to change the investment and other business plans of producers and investors engaged in international trade. Once these plans have been changed and carried out, this impact may be reflected in the trade statistics. It is completely artificial to claim that rules of origin create restrictive or distorting effects within the meaning of Article 2(c) only after the decisions of producers and traders are reflected in the trade statistics, after, say, a period of one or two years. A new rule of origin can stop all production and trade for a particular market on the day on which the rule is adopted. There would be no rationale for excluding such immediate effects on international trade from the coverage of Article 2(c).

Given that market conditions constantly change and that rules of origin are only one of many factors that determine trade flows, the Member cannot foresee how precisely producers and traders will react to a new rule of origin. Members control and foresee only the conditions of competition that they impose. If the Panel were to rule that the actual trade effects of a rule of origin were to determine its legal status under Article 2(c), it would therefore have to presume Article 2(c) does not regulate the rules of origin adopted by Members, but the reaction of producers and traders to those rules. However, so far, all rules of conduct governing non-tariff measures have always been interpreted to regulate what Members should do, not what producers or traders have done.

The European Communities' interpretative approach to Article 2 (c) can also not be reconciled with its own behaviour. In its dispute with United States on measures affecting textiles and apparel products, the European Communities twice brought claims under Article 2(c) immediately upon the adoption of new rules of origin by the United States, without awaiting the impact of the new rules to show up in trade statistics. Why? Because the Italian producers of silk scarves and other manufacturers in the European Communities felt the restrictive effects of the new rules of origin immediately and urged the European Communities to intervene before the new rules had caused actual trade damage.

Question 17

With reference to Article 5.1 of the Agreement on Textiles and Clothing, which is referenced in the Senate Report (exhibit IND-10, p. 125), could the parties please answer the following questions:

(a) What is the meaning of the term "circumvention" as that term is used in Article 5.1? Please provide documentary support if available (e.g., WTO documents, negotiating documents, views of experts, etc.)?

Answer 17 (a)

A useful reference guide to responding to questions at 17 (a), (b), & (d) is the "Drafting History of the Agreement on Textiles & Clothing" by Marcelo Raffaelli and Tripti Jenkins published by the ITCB, Geneva.

At page 101 of the above referenced volume, it is stated that "circumvention has never been defined". References to circumvention were included in the Short Term Agreement (STA) at paragraph D, Long Term Agreement (LTA) (Article 6), MFA �74 (Article 8) and in the 1981 and 1986 Protocols of Extension of the MFA (paras 14 & 16 respectively).

The Agreements, as well as the two Protocols mentioned above, only stated "how" circumvention could occur, not "what" is circumvention. Under the STA, the arrangement could be circumvented or frustrated "by non participants, or by transshipment or by substitution of directly competitive textiles". The drafting history of the ATC points out that the STA was mainly concerned with circumvention by the "replacement of cotton by other fibres" i.e., through the substitution of directly competitive textiles.

Article 6 of the LTA explains the problems in each case viz. (i) "trans-shipment; (ii) substitution of directly competitive textiles", and (iii) Non-participants. An important element brought out while discussing "the deliberate substitution for cotton of directly competitive fibres" under Article 6(b) of the LTA, is the matter of "intention".

The argument regarding "intention" according to the drafting history of ATC (Page 104) was revisited in the Protocol of Extension 1981 which introduced the concept of "where evidence is available regarding the country of true origin and "the circumstances of circumvention."

However, the drafting history also records that the opening offered in paragraph 14 of 1981 Protocol viz. "adjustment of charges to existing quotas" enabled the European Communities to "negotiate" provisions which gave the importing country, the right to take measures unilaterally, if it concluded that circumvention (as defined by the importing country) had taken place".

As the drafting history points out (Page 105) "Both the European Community and the United States chose to interpret circumvention as occurring when imports of a restricted product from a certain country of origin entered their respective customs territory through another country, irrespective of the existence or not of will on the part of the restrained party, of exceeding its quota. Even a re-routing done entirely under the responsibility of a third party and/or of an importer in the United States or European Communities was considered by them as circumvention because their view was that since the economic benefit accrued to the producers in the country of origin, an adjustment should be made to the country�s quota".

In the ATC, the drafting history points out, the "element of intention" continues to be relevant in paragraph 3 of Article 5, where the paragraph ends stating "Members should endeavour to clarify the circumstances of any such instances of circumvention or alleged circumvention including the respective roles of the exporters or importers involved". The drafting history further argues that (i) origin of the (above) phrase, (ii) its inclusion, (iii) the reference to role of importers (the first ever of its kind) make "the matter of intention (very) relevant".

The mention of the role importers may have played in circumvention in Article 5.3 "might prove there was no intention to circumvent the Agreement on the part of the restrained member or of its exporters".

The above discussion and the forms of cooperation mentioned in Article 5.3 of the ATC gives a clear indication that acts of circumvention must be examined in the context of their circumstances which can be verified with reference to forms of cooperation like "plant visits and contacts", case by case basis" and "respective roles of the exporters or importers involved".

While circumvention may have never been formally defined, Articles 5.3 and 5.4 of ATC set out that "intention is recognized as relevant when taking action to address cases of circumvention". Due regard in Article 5.4 of the ATC must be given to "the actual circumstances and the involvement of the country or place of true origin" while taking appropriate action like "denial of entry of goods" and "adjustment of charges to restraint levels to reflect the true country or place of origin".

India also notes that in the Senate Report (Exhibit IND-10), under the heading "Rules of Origin for Textile and Apparel Products" (section 334), the following reference is made to Article 5.1 of the Agreement on Textiles and Clothing (ATC): "In light of the emphasis in Article 5 of the Textiles Agreement, on preventing circumvention of textile and apparel quotas � the Committee believes that it is appropriate to establish a definitive rule of origin for textile and apparel products. The Committee believes that the new rules, once promulgated, will more accurately reflect where the most significant production activity occurs, providing the United States with a more accurate indication of the source of textile and apparel products�"

However, on page 123 of the same Senate Report, under the heading "Textile transshipments" (section 333), another reference is made to Article 5.1 of the ATC. Specifically, the Report states that the section 333 of the URAA adds a new section to Title IV to address specifically the problem of textile transshipments: "Article 5 of the Textiles Agreement provides that Members should establish legal and administrative procedures to take action against the circumvention of textile quotas by transshipment, re-routing, false declarations of origin or falsification of official documents and obligates Members to cooperate fully to address the circumvention problems�."

Article 5.1 of the ATC provides that: "Members agree that circumvention by transshipment, re-routing, false declaration concerning country or place of origin, and falsification of official documents, 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�."

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

(b) Does "circumvention" as that term is used in Article 5.1 cover both quota "evasion" (i.e., illegal action such as fraud, etc.) as well as quota "avoidance" (i.e., legal action intended to minimise the impact of a quota, etc.)?

Answer 17 (b)

The term "circumvention" as used in Article 5.1 only covers quota evasion, not quota avoidance. The New Shorter Oxford English Dictionary defines "circumvention" as a "deceitful or fraudulent conduct perpetrated against a person." Therefore, there must be an element of fraud present in an act of circumvention. Quota avoidance which is defined above as a legal action intended to minimize the impact of a quota does not involve fraud, and therefore, cannot, be correctly considered to be circumvention.

The term "circumvention" has not been specifically defined but is referred to in Article 5 of the ATC in the following contexts: (i) occurrence of circumvention (Art. 5.1), (ii) relevance of intention (Art. 5.3), (iii) presence of "sufficient evidence" (as a result of investigation) (Art. 5.4), (iv) circumstances of the circumvention (Art. 5.4) (v) Appropriate remedies (Art. 5.4) like "denial of entry of goods" or "where goods have been entered, having due regard to the actual circumstances and the involvement of the country or place of true origin, the adjustment of charges to restraint levels to reflect the true country or place or origin".

Given its reference to "false declarations concerning country or place of origin" and "falsification of official documents," Article 5.1 makes its intentions clear regarding the type or form of circumvention it is addressing.

The requirement to prevent false declarations of the "real origin of the goods" also implies the attempts to check "illegal evasion" rather than "legal avoidance".

(c) Does outward processing -- e.g., the shipment of Indian greige fabric to Sri Lanka, where the fabric is converted to bed linen and then exported to the United States -- constitute quota "circumvention" within the meaning of Article 5.1, in cases where no fraud, false declaration, etc. is involved?

Answer 17 ( c )

In the light of the reasoning in its answer to question 17 (a), India considers the answer to question 17 (c) to be no. Clearly, outward processing does not constitute quota circumvention.

Circumvention within the meaning of Article 5.1 of the ATC is conduct involving "transshipment, re-routing, false declaration, concerning country or place of origin and falsification of official documents". The example relating to export of Indian greige fabrics to Sri Lanka where the fabric is converted to bed linen and then exported to the United States is a legitimate trade activity carried out on the basis of "comparative advantage". The operations were based on investments made in the processing sector in Sri Lanka. This activity cannot be termed as quota circumvention within the meaning of Article 5.1 as no fraud or false declaration etc. was involved. The intention of the circumvention provisions in Article 5.1 is not to prevent legitimate changes in trade patterns based on investment decisions but rather to prevent deliberate efforts to get RO Agreementund the provisions of the ATC by false declarations or false documents with a view "to frustrating the implementation of the ATC."

(d) What is "circumvention by transshipment"? Would this necessarily involve some illegal action such as fraud, false declaration, etc., or could the mere fact that shipments are transiting through third countries with or without alterations made to the goods concerned be considered "circumvention"?

Answer 17 (d)

Circumvention by transshipment necessarily involves some fraud. However, such fraud could be carried out by shipments transiting through third countries without any alterations being made to the goods themselves. In recognition of this, Article 5.5 of the ATC provides that "some cases of circumvention may involve shipments transiting through countries or places with no changes or alterations made to the goods contained in such shipments in the place of transit."

"Circumvention by transshipment" seen in the context of Article 5.1 and in relation to the other forms of circumvention mentioned therein such as resorting to "false declaration", "falsification of official documents" would indicate that there must be an intention or an attempt to get RO Agreementund the provisions of the ATC with a view to frustrate or �cheat� its implementation.

There is an implicit recognition that even though circumvention could take place through "mere transit of goods without altering or changing" the "circumstances of such circumvention" may have to be examined in relation to "evidence available regarding the country of true origin" as mentioned in Article 5.4 of the ATC.

Question 17 bis

At p. 118, under the heading "Rules of Origin", the SAA appears to provide the objectives which the "country-of-assembly rule" "will serve". Could the parties address whether, and if so why, the four objectives mentioned thereafter, at pp. 118 and 119, also apply to the fabric formation rule in section 334? (US-6; para. 58 of India's first written submission; para. 29 of the United States' first written submission) If the four objectives mentioned in the SAA do not apply to the fabric formation rule, what are its objectives?

Answer 17 bis

The four objectives listed in the SAA can only reasonably apply to the country of assembly rule. In India�s view, these objectives cannot be met through the fabric formation rule, and therefore they cannot be said to apply to that rule. As the four objectives do not apply to the fabric formation rule, the fabric formation rule must be said to have been passed to achieve different objectives. As India has explained in its first submission and in its oral statement, the rule was passed to bring more products under quota whereas previously they had been quota free or subject to more generous quota. This rule of origin was therefore used to protect the United States' domestic industry.

Question 18

Is India challenging sections 334 and 405, per se, or the 1996 and 2000 changes in rules of origin?

Answer 18

India is challenging section 334 and section 405 per se. The sections are part of United States legislative changes made in 1996 and 2000.

Question 19

Could India please indicate, for each of its claims under Article 2 of the RO Agreement, which aspects of section 334 and/or section 405 and the implementing customs regulations it is challenging? (Example: With respect to the claim under Article 2(b), the aspect of section 334 which is being challenged is the fabric formation rule as provided for in section 334(b)(�)(�), etc.) It would be appreciated if India could reference not only the relevant subsections of section 334 and/or section 405 but also of 19 U.S.C. � 3592 (exhibit IND-7).

Answer 19

With respect to the claim under Article 2 (b), India is challenging the following specific provisions of the legislation and customs regulations:

Section 334 (b) (1) (C) - the fabric formation rule. The country of origin of a fabric is where the fabric is woven, knitted, needled, tufted, felted, entangled or created by any other fabric-making process.

Section 405 (a) (3) (B) - amendment to fabric formation rule

19 U.S.C. �3592 (b) (1) (C) - consolidated fabric formation rule

19 C.F.R. �102.21

Section 334 (b) (1) (D) - the wholly assembled rule. The country of origin of a product is the country where the components of the product are wholly assembled.

Section 405 (a) (3) (C) - amendments to the wholly assembled rule to exempt products of concern to the European Communities and providing exceptions for goods made of cotton, wool or fibre blends consisting of 16% or more of cotton.

19 U.S.C. �3592 (b) (1) (D) - consolidated wholly assembled rule

19 C.F.R. �102.21

Section 334 (b) (2) - "special rules" - Articles under certain HTS headings will be classified where yarn or fabric formed, not where article is assembled.

Section 405 (a) (3) (B) - Certain fabrics such as silk, cotton, wool, MMF or vegetable fibre deemed to originate where subject to DP2

19 U.S.C. �3592 (b) (2) (B) - Certain fabrics such as silk, cotton, wool, MMF or vegetable fibre deemed to originate where subject to DP2

Section 405 (a) (3) (C) - Products classified under certain HTS headings deemed to originate where subjected to DP2 not where greige fabric formed, except for cotton, wool, fibre blends with more than 16% cotton.

19 U.S.C. �3592 (b) (2) (C) - Products classified under certain HTS headings deemed to originate where subjected to DP2 not where greige fabric formed, except for cotton, wool, fibre blends with more than 16% cotton.

19 C.F.R. 102.21

With respect to the claim under Article 2(c), India is challenging the following specific provisions of the United States legislation and customs regulations:

Section 334 (b) (1) (C) - the fabric formation rule. The country of origin of a fabric is where the fabric is woven, knitted, needled, tufted, felted, entangled or created by any other fabric-making process.

Section 405 (a) (3) (B) - amendment to fabric formation rule

19 U.S.C. �3592 (b) (1) (C) - consolidated fabric formation rule

19 C.F.R. �102.21

Section 334 (b) (1) (D) - the wholly assembled rule. The country of origin of a product is the country where the components of the product are wholly assembled.

Section 405 (a) (3) (C) - amendments to the wholly assembled rule to exempt products of concern to the European Communities and providing exceptions for goods made of cotton, wool or fibre blends consisting of 16% or more of cotton.

19 U.S.C. �3592 (b) (1) (D) - consolidated wholly assembled rule

19 C.F.R. �102.21

Section 334 (b) (2) - "special rules" - Articles under certain HTS headings will be deemed to originate where yarn or fabric formed, not where article is assembled.

Section 405 (a) (3) (B) - Certain fabrics such as silk, cotton, wool, MMF or vegetable fibre deemed to originate where subject to DP2

19 U.S.C. �3592 (b) (2) (B) - Certain fabrics such as silk, cotton, wool, MMF or vegetable fibre deemed to originate where subject to DP2

Section 405 (a) (3) (C) - Products classified under certain HTS headings deemed to originate where subjected to DP2 not where greige fabric formed, except for cotton, wool, fibre blends with more than 16% cotton.

19 U.S.C. �3592 (b) (2) (C) - Products classified under certain HTS headings deemed to originate where subjected to DP2 not where greige fabric formed, except for cotton, wool, fibre blends with more than 16% cotton.

19 C.F.R. 102.21

With respect to the claim under Article 2 (d), India is challenging the following specific provisions of the United States legislation and customs regulations:

Section 405 (a) (3) (B) - Certain fabrics such as silk, cotton, wool, MMF or vegetable fibre deemed to originate where subject to DP2

19 U.S.C. �3592 (b) (2) (B) - Certain fabrics such as silk, cotton, wool, MMF or vegetable fibre deemed to originate where subject to DP2

Section 405 (a) (3) (C) - Products classified under certain HTS headings deemed to originate where subjected to DP2 not where greige fabric formed, except for cotton, wool, fibre blends with more than 16% cotton.

19 U.S.C. �3592 (b) (2) (C) - Products classified under certain HTS headings deemed to originate where subjected to DP2 not where greige fabric formed, except for cotton, wool, fibre blends with more than 16% cotton.

19 C.F.R. 102.21

India will further elaborate upon the specific aspects of the challenged provisions in the second written submission.

In addition, please indicate whether your claims concern all qualifying products or only some (Example: Claim X concerns only made-up non-apparel textile articles made from vegetable fibre). Also, please indicate what aspects of the "application" of section 334 and/or section 405 as well as the customs regulations India is challenging..

India�s claims cover all qualifying products which have been impacted by the United States' rules of origin in section 334 and section 405 (as consolidated in 19 U.S.C. �3592) and the customs regulations.

With respect to the application of section 334 and/or section 405, India notes the following:

1. Under section 334 the "fabric forward" rule enshrined in sec.334 (b)(1)(c), 334(b)(2)(a) is applicable to all fabrics, made-up articles.

2. Under section 405, the application of "fabric forward" rule to fabrics made from wool.

3. Application of the "fabric forward" rule under section 405 to products falling under HTS Nos. 5609, 5807, 5811,6209.00, 5040, 6301, 6305, 6306, 6307.10, 6307.90, 6308 and 9404.90 - other than 940490.85, 95.

4. Application of "fabric forward" rule under section 405 to cotton and wool items contained in HS Lines in Chapter 63 other than 6302.22, 6302.29, 6302.52, 6303.92, 6302.99, 6304.19, 6304.93, 6304.99.

5. Application of "fabric forward" rule to blended made-up articles where the cotton component is 16% or more by weight.

6.

Question 20

Specifically with respect to India's claim under Article 2(c) of the RO Agreement, could India clarify whether that claim relates to the first sentence thereof, the second sentence, or both?

Answer 20

India�s claims cover both sentences. As noted in its request for the establishment of the Panel, India considers that the rules of origin at issue (a) require the fulfilment of certain conditions not related to manufacturing or processing, (b) pose unduly strict requirements and (c) create restrictive, distorting and disruptive effects on international trade. India will elaborate these claims in its second submission.

Question 21

Could India submit a complete version of the customs regulations (exhibit IND-17)? It seems that 19 C.F.R. section 102.21(e) is missing from the document submitted (see India's written submission, para. 53)? Could India elaborate on the relevance of 19 C.F.R. section 102.21(e) to this dispute?

Answer 21

The complete version of the customs regulations is attached.

The relevance of 19 C.F.R. section 102.21 (e) - which addresses the tariff shift rules - to this dispute is best explained in the following excerpt from the Informed Compliance Publication on Textiles and Apparel Rules of Origin by United States Customs. The underlined section, in particular, addresses one of India�s main complaints in this dispute.

"All textile and apparel products are listed by 4-digit to 10-digit HTS classifications or groups of classifications in the tariff shift rules. The tariff shift rules simply explain the requirements to change the country of origin of textile and apparel products (as shown in the preceding section) by using tariff classifications rather than textile or apparel product descriptions. A tariff shift states that, for any given classification, to change the country of origin of a textile or apparel product there must be a shift from one Harmonized Tariff Schedule (HTS) classification to another as listed in the tariff shift rules and/or the processing which occurs must meet any other requirement that is specified in the tariff shift rules in customs regulation �102.21(e).

One group of classifications in the tariff shift rules is 5208 through 5212, which contain the classifications for cotton woven fabrics. The tariff shift rule for classifications 5208-5212 (as amended in interim regulations) states that:

a) A change from greige fabric of heading 5208 through 5212 to finished fabric of heading 5208 through 5212 by both dyeing and printing when accompanied by two or more of the following finishing operations:

bleaching, shrinking, fulling, napping, decating, permanent stiffening, weighting, permanent embossing, or moireing; or

b) If the country of origin cannot be determined under (1) above, a change to heading 5208 through 5212 from any classification outside that group, provided that the change is the result of a fabric forming-making process.

To confer country of origin to a cotton woven fabric, a greige fabric must have been dyed and printed and accompanied by two or more specified finishing operations. For example, a greige fabric formed in China which is imported into Pakistan where it is dyed, printed, shrunk and permanently embossed will be country of origin Pakistan.

In the alternative, the creation of the fabric must be from some product other than another cotton woven fabric; for example, the fabric could be formed from cotton yarns, or from polyester and cotton yarns, from fibers or any other product except cotton woven fabric (e.g., joining two narrow fabrics). The second requirement of creating a fabric from a fabric forming process must also be met. This tariff shift rule merely restates the fabric rule (in the section above) using tariff classification terms or definitions.

The result is that the determination of the country of origin is defined in objective tariff classification shifts rather than subjective terms such as "substantial assembly" or "new commercial product". By using HTS classifications, there is no doubt when a change in the country of origin occurs. If a shipper knows the classification of a textile product he is exporting, he merely has to locate the classification in the tariff shift rules to see if the required change of classifications occurred when the product was produced or manufactured. If the tariff shift has occurred and any other listed requirement is met, then the country of origin is changed by the processing.

For example, the tariff classification for 5204 through 5207 (cotton yarns) states that the tariff shift must be from any other heading provided that the change or shift results from a spinning process. This defines the country of origin for spun yarns (see above). The tariff shifts for 5208 through 5212 require a shift from classifications for yarns, fibers or filaments that results from a fabric making process, or a change from greige fabric to finished fabric that is both dyed and printed when accompanied by two or more specified finishing operations. Similarly, shifts for 6302 require that the country of origin of certain linens must be from the fabric forming process, i.e., the country in which the fabric was woven and not the country in which the fabric for the linens were cut and sewn, while certain other linens may originate in the country where the fabric comprising the good was both dyed and printed when accompanied by two or more specified finishing operations." (emphasis added.)

Question 22

Does India agree with the United States' statement that section 334 was intended, in part, to bring about greater certainty and clarity as compared to the previous practice of interpreting substantial transformation on a case-by-case basis" (United States' first written submission, paras. 25 and 29)?

Answer 22

India does not agree with the United States' statement that section 334 was intended, in part, to bring about greater certainty and clarity as compared to the previous practice of interpreting substantial transformation on a case-by-case basis. In this regard, India would note that the case-by-case determination process, as evidenced by the Cardinal Glove case, was abandoned by the enactment of the section 12.130 regulations. The section 12.130 regulations were a set of "concise, predictable, published rules." The United States did have regulations in effect through section 12.130, plus a large body of customs rulings, which applied to virtually every production scenario. It is India�s understanding that the section 12.130 regulations were promulgated in accordance with the requirements of the United States Administrative Procedure Act (APA) and that interpretative customs regulations issued pursuant to the APA are presumed to be correct, unless clearly arbitrary, capricious, an abuse of discretion or otherwise not in accordance with the law.

Question 23

Could India elaborate on how para. 53 of its first written submission supports its conclusion that section 334 is used as an instrument to pursue trade objectives?

Answer 23

Paragraph 53 of India�s first submission, read together with paragraph 54, explains how the fabric forward rule operated to protect the domestic industry of the United States. The paragraph is part of India�s demonstration that the design, structure and architecture of section 334 reveal the objective of protecting the domestic industry.

Question 24

Please address the United States' argument that "India does not address the possibility that Sri Lankan producers may have decided to weave their own fabric or to source it from elsewhere". (United States' first written submission, para. 41)

Answer 24

One has to acknowledge that changing the rule of origin to a fabric forward rule will confer origin on those countries that have loom capacity. However, looms are not inexpensive items that can be moved RO Agreementund easily. It is not as if the Sri Lankans can "simply snap their fingers" and decide to weave their own fabric. Setting up weaving mills is a capital intensive project. One may conclude that countries with loom capabilities would be "winners" in such an arrangement. But the United States never amended its quota allotments to account for the fact that the change in origin to the location of the looms (i.e., to where the fabric was formed) would impact on origin for quota purposes.

Countries such as Sri Lanka, with a low loom capacity and a growing sewing/dyeing business were adversely affected by the United States' change in rules of origin because they were limited as to the amount of Indian fabric they could use because of the quota allotments. The restrictions on which country Sri Lanka could source or input materials from decreased the amount of goods Sri Lanka could send to the United States, thereby resulting in protection to the United States industry.

In addition, India notes that the United States' argument as to the Sri Lankan response is effectively an acknowledgement by the United States that section 334 did restrict and distort trade. It acknowledges that the likely response to section 334 would either be (a) to force a shift of investment in loom facilities from other countries into Sri Lanka or (b) to shift the supply of fabric from India to other countries whose quota remained open and who would still be willing to issue visas for goods not produced in their country.

Question 25

With reference to Article 2(b) of the RO Agreement, could India please answer the following questions:

(a) Does India consider that the prevention of quota circumvention as that term is used by the United States would need to be viewed as a "trade objective"?

Answer 25 (a)

Yes. See answer to Question 2.

(b) At para. 35 of its oral statement, India appears to reject the European Communities' approach to the interpretation of Article 2(b) which India understands as being based purely on intent and suggests that the Panel should follow the approach adopted by the Appellate Body in interpreting Article III:2 of the GATT 1994. But India then goes on, at para. 36 of its oral statement, to say that " [ w ] e fully recognise that the intentions expressed during the legislative history, by themselves, cannot constitute a violation of Article 2(b)." (emphasis added) Is India suggesting then that a qualified Article III:2 approach should be adopted, which looks both at intent of legislators and the design and structure of rules of origin?

Answer 25 (b)

India believes that the objectives that a Member pursues with rules of origin should be determined by examining their design, structure and architecture. If, as in the case before the Panel, the statements by those that participated in the drafting of the legislation confirm the objectives revealed by the legislation�s design, structure and architecture, those statements can be taken as additional evidence. This is justified because, in the absence of any indications to the contrary, it can reasonably be assumed that the intentions of those who promoted the legislation are reflected in the legislation�s design, structure and architecture.

In the statements cited by the Panel, India rejects the idea expressed by the European Communities that Article 2(b) is exclusively about intent. In the view of India, this provision is violated by the adoption of rules of origin that reveal through their design, structure and architecture that a trade objective is being pursued. Article 2(b) is thus not about intent as such, but about the intent revealed in the legislation. India believes that its approach is fully consistent with the approach adopted the Appellate Body (see for instance, Chile - Taxes on Alcoholic Beverages, WT/DS87/AB, WT/DS110/AB, paras. 69-71).

Question 26

Preface to the answers to questions 26 (a)-(e)

The obligation set out in Article 2(c) of the RO Agreement to refrain from adopting rules of origin that create restrictive or distorting effects can be interpreted in two ways.

First, Article 2(c) of the RO Agreement could be interpreted to require Members to prevent rules of origin from having a restrictive or distorting impact on international trade flows. The restrictive and distorting effects referred to in this provision would then be the effects that occur after producers and traders have adjusted to the new rules. The impact of the new rules on the investment and other business plans of producers and traders affected by the rules would not be taken into account in determining whether they have a restrictive or distorting effect on international trade.

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

Second, Article 2(c) of the RO Agreement could be interpreted as requiring Members to refrain from adopting and maintaining rules of origin which establish conditions of competition with restrictive or distorting effects on international trade. According to this "conduct-oriented" interpretation, the incentives and disincentives created by the rules of origin themselves, not their actual impact in the market would be decisive. The immediate consequence of a new rule of origin changing the incentives and disincentives for producers and traders is to change their investment and other business plans. Only later on, after the new investment and business plans are carried out, will the rule of origin change the actual pattern of trade. According to the conduct-oriented interpretation the immediate impact of the rule of origin on the decisions of producers and traders involved in international trade would be taken into account in assessing whether a rule of origin creates restrictive or distorting effects on international trade.

According to this interpretation, the purpose of the provision would be to ensure that Members do not adopt and maintain rules of origin creating conditions of competition that operate to restrict or distort trade. A complaint could therefore be brought against new rules of origin immediately upon their adoption, and not only when the producers and traders have actually reacted to the new conditions of competition. Members would be held responsible for the rules of origin they adopted, not for the reactions of the market to their rules of origin. Their obligation under Article 2(c) would thus not go beyond what they can control or foresee.

All GATT and WTO panels and the Appellate Body have interpreted the rules governing tariff concessions and non-tariff measures as rules requiring the establishment of conditions of competition. The 1990 Panel on EEC - Payments and Subsidies to Processors and Producers of Oilseeds and Related Animal-Feed Proteins summarised the GATT jurisprudence on this issue as follows:

The CONTRACTING PARTIES have consistently interpreted the basic provisions of the General Agreement on restrictive trade measures as provisions establishing conditions of competition. Thus they decided that an import quota constitutes an import restrictions within the meaning of Article XI:1 whether or not it actually impeded imports and that an internal tax on imported products does not meet the national treatment requirement of Article III whether or not the tax is actually applied to imports. A previous panel pointed out that Articles III and XI are "to protect expectations of the contracting parties as the competitive relationship between their products and those of other contracting parties. Both Articles are not only to protect current trade but also create predictability to plan future trade". In past Article XXIII:1(b) cases, the CONTRACTING PARTIES have adopted the same approach . . .In none of these cases did they consider the trade impact of the change in competitive conditions to be determining. It is of course true that, in the tariff negotiations in the framework of the GATT, contracting parties seek tariff concessions in the hope of expanding their exports, but the commitments they exchange in such negotiations are commitments on conditions of competition for trade, not volumes of trade.

The approach of the CONTRACTING PARTIES reflects the fact that governments can often not predict with precision what the impact of their interventions on import volumes will be. If a finding of nullification or impairment depended not only on whether an adverse change in competitive conditions took place but also on whether that change resulted in a decline in imports, the exposure of the contracting parties to claims under Article XXIII:1(b) would depend on factors they do not control� Moreover, the contracting parties facing an adverse change in policies could make a claim of nullification or impairment only after that change has produced effects. . . The Panel further noted that changes in trade volumes result not only from governmental policies but also from other factors, and that, in most circumstances, it is not possible to determine whether a decline in imports following a change in policies is attributable to that change or to other factors. (BISD 37S/130-131).

If the Panel were to interpret Article 2(c) as to require Members to prevent rules of origin from having an actual restrictive or distorting impact on the volume, direction or composition of international trade, it would be the first panel in the history of the multilateral trade order to interpret a rule governing a non-tariff measure to require the attainment or avoidance of specific trade results.

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

Question 26

With reference to Article 2(c) of the RO Agreement, could India please answer the following questions:

(a) Regarding the term "create" as it appears in Article 2(c), is there a difference in meaning between the phrase "origin rule X has a trade-restrictive effect" and the phrase "origin rule X creates a trade-restrictive effect"?

Answer 26 (a)

Article 2 (c) refers to effects, not an effect. Article 2 (c) refers to effects on international trade, not on imports or on trade. Article 2 (c) refers to the rules of origin themselves and not to their application to a particular commercial policy instrument. All of these differences with Article 3.2 of the Agreement on Import Licensing are signposts for the interpretation that Article 2 (c) prohibits rules of origin creating conditions of competition entailing restrictive, distorting or disruptive effects on international trade. India�s response in the preface to answer 26 (a) to (e) clearly shows that Members should not, and cannot, be held to violate WTO law because of the response of the market to their regulations.

(b) Following on from the previous sub-question, if there were a difference, what would be the rationale for using the term "create" in Article 2(c) of the RO Agreement and the term "have" in Articles 2(a) and 3.2 of the Agreement on Import Licensing Procedures? What would justify regulating Members' use of rules of origin differently from Members' use of import licensing?

Answer 26 (b)

India considers that both Article 2(c) of the RO Agreement and Article 3.2 of the Agreement on Import Licensing Procedures require Members to establish certain conditions of competition, not merely certain trade results because Members neither control the actual market impact of their rules of origin nor that of their licensing procedures. However, India believes that the term "create" in Article 2(c) of the RO Agreement brings this idea out more clearly than the term "have" in Article 3.2 of the Agreement on Import Licensing Procedures.

(c) Would India agree that Article 6.3 of the SCM Agreement contemplates a showing of "actual" adverse effects? If so, is there any reason why the Panel, when interpreting the phrase "create [�] effects", should not seek inspiration from the provisions of Article 6.3 as well as the case law on Articles III and XI of the GATT 1994? (India's oral statement, paras. 40-42)

Answer 26 ( c )

India agrees that Article 6.3 of the SCM Agreement contemplates the showing of actual adverse effects. However, this provision does not require Members to attain or avoid any particular market impact. It merely describes various market situations caused by a subsidy that trigger the right of adversely affected Members to request authorisation to take countermeasures. In other words, Article 6.3 of the SCM Agreement is a provision according a trade remedy once a subsidy has caused serious prejudice. It cannot inspire the interpretation of a provision that does not accord a remedy against restrictive or distorting effects caused by rules of origin but establishes the obligation to refrain from adopting rules of origin bound to create restricting or distorting effects.

Article 6.3 is comparable to the provisions governing safeguard measures, anti-dumping duties and countervailing measures according to which Members are permitted to offset the impact of increased imports, dumping and subsidisation in their domestic market. However these provisions do not regulate which market impact Members must achieve or avoid. They permit Members to react to a market impact that has already occurred.

Article 2 (c) of the RO Agreement does not require the demonstration of actual adverse effects. For the reasons described above, it is difficult to see on what grounds provisions that regulate the right of redress when increased imports, dumping and subsidisation cause injury or serious prejudice could inspire an interpretation of Article 2(c) of the RO Agreement, which does not set out a right of redress against rules of origin having caused restrictive or distorting effects but an obligation to refrain from adopting rules of origin that create restricting or distorting effects.

(d) India argues that Article 2 of the RO Agreement "must be interpreted as a provision prescribing conditions of competition, not the avoidance of certain trade results". (India's oral statement, para. 43) Inter alia, India supports this position by reference to the case law on Article III of the GATT 1994. The GATT Panel in US - Superfund (BISD34S/136), para. 5.1.9) stated that "Article III:2, first sentence, obliges contracting parties to establish certain competitive conditions for imported products in relation to domestic products. Unlike some other provisions in the General Agreement, it does not refer to trade effects." (emphasis added) Thus, assuming the case law on Article III were relevant, could it not be said that Article 2(c) of the RO Agreement constitutes a provision which refers to trade effects?

Answer 26 (d)

The issue is not whether Article 2(c) refers to trade effects or not. The issue is whether the effects on international trade referred to in this provision include the immediate effects created by the rules of origin themselves (including their effects on investment decisions and other business plans) or whether this provision covers only their indirect impact on trade flows reflected in trade statistics. All the considerations set out in paragraph 5.19 of the panel report cited by the Panel point to the conclusion that the relevant effects are those caused by rules themselves. The panel report therefore, notwithstanding its reference to trade effects, therefore clearly supports India�s position.

The terms "trade effects" do not appear in the GATT. Actual trade effects are relevant under GATT and WTO law only in the field of trade remedies. The reference in the US- Superfund panel report to the other provisions in the GATT referring to trade effects must therefore be understood to be a reference to provisions of Article VI of the GATT, which refer to the injurious effects caused by dumping and subsidisation. As pointed out above, a provision permitting reactions to measures having caused injurious effects cannot inspire the interpretation of a rule establishing an obligation not to create certain effects.

(e) India claims that the United States' rules of origin at issue in this dispute create distorting effects because they "shifted origin from a third country where the fabric was dyed and printed and subjected to two further finishing operations to the country where the greige fabric was formed" (India's first written submission, para. 96, emphasis added). Does this not imply that Members cannot introduce changes to their rules of origin, given that different rules of origin are almost bound to produce different trade effects?

Answer 26 (e)

India is not arguing that Members cannot change their rules of origin. India is arguing that Members may not change their rules of origin for purposes and in a manner inconsistent with Articles 2(b), 2(c) and 2(d).

Question 27

With reference to a statement made at the meeting by counsel for India in which a distinction was drawn between concessions made in tariff negotiations and the adjustment made to rules of origin at the request of another Member, can India comment on the following hypothetical example? Assume that in the framework of multilateral tariff negotiations Member X requests Member Y to grant a tariff concession with respect to product Z (of which Member X is the principal supplier) and Member X obtains that concession on an MFN basis. Assume further that Member Y refuses to grant a tariff concession with respect to product Q (of which Member R is the principal supplier). In those circumstances, could it be said that Member X has obtained from Member Y a de facto advantage contrary to Article I of the GATT 1994? Is this different from the United States providing, at the request of the European Communities, for exceptions from the fabric formation rule with respect to specified products and regardless of the "origin" of those products?

Answer 27

According to the provisions of the GATT, tariffs may be used as instruments to pursue trade objectives. They may in particular be structured so as to afford protection to a domestic industry and to favour a supplier offering a counter-concession in trade negotiations. The GATT panel on Japan - Tariff on Imports of Spruce, Pine, Fir (SPF) Dimension Lumber therefore found that a tariff classification going beyond the Harmonized System�s structure is "a legitimate means of adapting the tariff scheme to each contracting party�s trade policy interests, comprising both its protection needs and its requirements for the purposes of tariff-and trade negotiations" (BISD 36S/198, para. 5.9).

According to the provisions of the RO Agreement, rules of origin may not be used as instruments to pursue trade objectives. Members may therefore not adapt their rules of origin for their protection needs and their requirements for the purposes of tariff-and trade negotiations. The RO Agreement resembles in that respect the WTO agreements governing technical regulations, import licensing procedures, SPS measures and the GATT provisions on internal taxes and regulations and quantitative restrictions. All of these agreements and provisions are to ensure that Members do not use non-tariff measures to pursue trade objectives.

It follows from the above that the scope of prohibition to discriminate between other Members in Article 2(d) cannot be determined in the light of the GATT rules governing tariff concessions. If rules of origin could be used for the same purposes as tariffs, Members would have to negotiate not only tariff concessions but also commitments on to the rules of origin applicable to the products for which the tariff concession is granted. The RO Agreement is to ensure that this is not necessary. The scope of prohibition to discriminate between other Members in Article 2(d) of the RO Agreement must consequently be determined in the light of the objectives of this Agreement.

Question 28

With reference to a comment made at the meeting by counsel for India in which mention was made of Article 4.1 of the ATC, how does India administer the quotas affected by the rules of origin at issue in this case? Does it allocate those quotas on a first-come, first-served basis or does it use a different method?

Answer 28

India allocates the quotas in different country/categories under restraint on the basis of specified systems of allotment. These systems of allotments are:

(i) Past Performance Entitlement (PPE) System

(ii) Manufacturer Exporters Entitlement (MEE) System

(iii) First-come-first-served Ready Goods Entitlement (RGE) System

(iv) Powerloom Exporters Entitlement (PEE) System

The annual level for each country/category is distributed for allocation under the above systems of allotment as per the table below:

    DISTRIBUTION OF ANNUAL LEVEL

  Percentage of Annual level distribution for
 
System Yarn Fabrics Made-ups Millmade/ Powerloom Madeup Handloom
Past Performance
Entitlement (PPE)

Manufacturer Exporters
Entitlement (MEE)

Ready Goods Exporters
Entitlement (RGE)

Powerloom Exporters
Entitlement (PEE)
55%


15%


30%
55%


15%


15%


15%
55%


15%


15%


15%
55%


 -


45%


 -
Total 100% 100% 100% 100%

Each of the above systems of allotment is briefly explained below:

PAST PERFORMANCE ENTITLEMENT (PPE) SYSTEM

PPE System is based on export performance in a calendar year preceding the year immediately before the allotment year. Thus the "base period" for allotment of PPE in the year 2003 is the export performance in the year 2001. Exporters who have export performance by way of actual shipments in the relevant country/category, (in this case in US Group II made-ups) during the Base period are eligible to get allotment under this system. Entitlements are calculated pro rata based on the value of exports during the base year by the applicants in each country/category. The allotments are restricted to the average annual export performance of India in the country/category during the base period. Quota allotted under this system is transferable to fellow exporters.

MANUFACTURER EXPORTERS ENTITLEMENT (MEE) SYSTEM

Allotments under the MEE system are made to manufacturer exporters who have undertaken substantial modernisation and upgrade of technology in their plant and machinery during the base period. The base period for MEE allotment for the year 2003 is 1-7-1999 to 30-6-2002. Allotments under the system are made in respect of goods manufactured in the modernised and upgraded production units and quantity is distributed on the basis of level of investment made by the applicant. Eligible applicants can opt for allotments in a maximum of 5 country/categories.

The investment made in the spinning, weaving, processing and state of the art processing machinery for the purpose of allotment of the MEE quota are given weightage as follows:

Sr. No. Section Weightage

a)

Spinning, stitching machines/other machines

1
b) Weaving Machines  
  i) Machines other than shuttleless looms 2
  ii) Shuttleless looms 3
c) Knitting Machines 2
d) Processing machines, effluent treatment plant and  
  Air pollution control equipment. 3
e) State-of-the-art processing machines and  
  State-of-the-art effluent treatment plant 4

Processing machinery used for fibre/yarn dyeing/processing is given weightage of its value coupled with the spinning section machinery weightage for the allotment of yarn quota.

These allotments are non-transferable.

READY GOODS EXPORTERS ENTITLEMENT (RGE) SYSTEM

Quota under this system of distribution is allotted on a first-come-first-served basis and is opened for distribution 4 times in a year i.e. during January, April, July and October, on pre-determined dates. On a particular day when available quantities are over subscribed, eligibility for allotment is decided on the basis of higher unit value realisation among the applications received on that day.

Quotas are also opened under the system on dates other than the pre-determined dates in case substantial quantities become available by way of surrenders/non-shipment flexibilities.

These allotments are non-transferable.

POWERLOOM EXPORTERS ENTITLEMENT (PPE) SYSTEM

The quotas under the PEE system are allotted to applicant powerloom manufacturers in the small scale sector each owning at least 12 powerlooms by himself or along with his family members in the same village/town/city. The units are required to establish their identity on the basis of their having obtained or applied for powerloom permit. Allottee powerloom manufacturers are permitted a choice up to 7 countries/categories. Allotments are also determined under this system on the basis of differential weightage depending on the size of the loom holdings.

These quotas are not transferable but the quotas can be "clubbed" by the shippers for exports.

Questions 19 to 36 for the United States only and Question 37 to 41 et seq. for the Third Parties.


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