Answers of the united states to questions from the panel
 FOLLOWING THE FIRST MEETING

For both parties:

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)

1. Yes. There is no basis for a Member to challenge another Member�s rules of origin because it disagrees with the substance of those rules. It is specifically the substance of rules of origin that is the subject of negotiations during the current harmonization process (and including the parameters of substantial transformation).

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"?

2. No. Limits on textile and apparel imports are, under the WTO Agreement on Textiles and Clothing (ATC), entirely consistent with WTO obligations, and Members are entitled to take steps to ensure that they are not circumvented. In fact, Article 5.1 of the ATC requires Members to establish legal provisions and administrative procedures to address and take action against such circumvention. If preventing quota circumvention were determined to be a "trade objective" for purposes of Article 2(b), then Members would be severely hampered in their ability to ensure compliance with textile and apparel quotas and to comply with Article 5 of the ATC. Origin determinations that allow traders and customs officials to draw bright lines ensure transparency and predictability, and allow importers, exporters, and Members to work together to prevent circumvention. The United States, in enacting section 334, sought to address growing uncertainty in country of origin determinations caused by the myriad of origin claims which differed only slightly from each other, and that United States Customs officials were addressing on a case by case basis in different offices. Addressing such uncertainty also addressed circumvention of textile and apparel quotas.

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.?

3. In Article 2(d), the RO Agreement mandates, in relevant part, that Members ensure that "the rules of origin that they apply . . . shall not discriminate between other members, irrespective of the affiliation of the manufacturers of the good concerned." This provision does not speak of discrimination "between products." The first clause of Article 2(d) is aimed at ensuring that rules applied to imported goods are not more stringent than those used to determine domestic origin. The second clause is directed at precluding the type of discrimination, in the form of non-preferential rules, that would include a criterion based on the national affiliation of a company or nationality of is employees. The RO Agreement clearly allows for differentiation of rules between products, as can be seen in the harmonization work program, where Members are addressing thousands of subheadings in the tariff schedule.

For the United States

6. Does the United States agree that "favouring one Member over another" would qualify as a "trade objective" within the meaning of Article 2(b) (India's first written submission, para. 69; European Communities' written submission, para. 11)?

4. As the United States indicated at the meeting with the Panel the United States believes that the phrase "favouring one Member over another" begs the question posed by Article 2(b). Rules of origin may favor one Member over another just by their existence, and thus cannot, on that basis alone, be considered a "trade objective" within the meaning of Article 2(b). For example, some Members may believe that a coffee product should originate based on where it is grown, while others may believe it should originate based on where the coffee beans are roasted. Whichever rule is chosen will "favor" some Members over others. Similarly, with watches, some Members may believe that origin should be conferred by assembly, others by the origin of certain components. Again, whichever rule is chosen will, in some Member�s view, "favor" some Members over others.

5. Similarly, changes in rules of origin for quota goods will usually have quota implications that will be different for different Members, depending on their quota levels and the nature of their exports. In accordance with the terms of bilateral textile agreements incorporated into the ATC, there are several examples where United States textile and apparel quotas appear to treat imports from India more favorably than those of other WTO Members, for example with respect to duck fabric, skirts, cotton terry towels, as well as the annual growth rates for certain categories. However, Members are clearly allowed to change rules of origin during the transition period, and any interpretation of the RO Agreement that would prohibit such changes for any product, including products subject to quantitative restrictions authorized by the WTO Agreement, can therefore not be correct.

7. Could the United States confirm that wherever the fabric formation rule is applicable pursuant to section 334 and section 405, operations subsequent the formation of the greige fabric, such as dyeing, printing and two or more finishing operations, as well as cutting, sewing and assembly, will not confer origin? (see paras. 23, 35 and 53 of India's first written submission)

6. No. Under section 334 this is true. However, where section 405 applies, this is not true. Section 405 modifies the fabric formation rule. If a fabric or textile product is one of the products identified in section 405, four or more operations subsequent to formation of the greige fabric does confer origin (dyeing and printing and two or more finishing operations).

8. With reference to the United States' statement that "United States' rules take into account which finishing operations merit changing origin, and that may vary based on the type of product" (United States' first written submission, para. 34), could the United States explain why the origin criteria for, e.g., silk scarves are different from the origin criteria for cotton scarves? Why is it that dyeing and printing of the fabric along with at least two finishing operations are considered as origin-conferring in the case of silk scarves, but not in the case of cotton scarves?

7. Silk scarves and cotton scarves are different products, with different rules that reflect -- as is the case with all product-specific rules -- a determination based on assessing the relative importance of various operations or inputs to the final product. Consultations with the European Communities led to the conclusion as reflected in section 405, providing an exception to the rules in section 334 for certain specific products.

9. What is the rationale for using different origin criteria for cotton blends with more than 16% cotton and those with 16% or less? (see India's first written submission, paras. 81-82)

8. In Chapters 50 through 55 of the Harmonized System, there are distinct provisions for yarns and fabrics containing 85 % or more of a particular fiber. These provisions generally define such products as "wholly of" any given fiber. The Harmonized Tariff Schedule of the United States (HTSUS), general note 22 defines "wholly of" as meaning "that the goods are, except for negligible or insignificant quantities of some other material or materials, composed completely of the named material. By establishing a rule for certain goods containing 16% or more by weight of cotton, we ensured that we would cover the products defined in our settlement agreement. In negotiating the settlement agreement, the United States and the European Communities agreed, in order to resolve the dispute, to a definition of blends containing cotton that is consistent with the structure of the Harmonized System.

10. What is the basis for the United States' contention that the "customs regulations implementing [sections 334 and 405]" are not measures which are before this Panel (United States' first written submission, note 15)? WT/DS243/5/Rev.1 refers to "the customs regulations implementing these Acts" (second paragraph).

9. In stating that India�s claims regarding the customs regulations implementing section 334 and 405 should not form part of this dispute, the United States intended to indicate that India has not attempted to meet its burden with respect to these regulations. India has not made any claims with respect to the regulations in either its first submission or its oral statement. Moreover, India indicated at the meeting with the Panel that it was reconsidering its Article 2(e) claims relating to the administration of the rules of origin.

For both parties:

11. 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?

10. At the meeting with the Panel, the United States indicated there has to be a clear causal connection between the effects and the rules, because rules of origin will always have an effect on international trade. Article 2(c) recognizes that rules may create unintentional effects, but directs Members to ensure that their rules do not impose unduly strict requirements, or require the fulfilment of conditions not related to the basis for the origin determination. See also, answer to question 11(c).

11. In addition, as was discussed in the United States' answer to question 6, any change to a rule of origin may, in the view of the exporting Members concerned, affect different Members differently, or "more favorably." It is for just this reason that Members have had difficulty in reaching agreement on harmonized rules of origin. With respect to products subject to quota, this is particularly true. However, the RO Agreement cannot be interpreted to prevent changes to rules of origin of products subject to such restrictions, as the RO Agreement clearly authorizes such changes. A "trade effects" analysis would result in a de facto standstill requirement, a result that is clearly inconsistent with the RO Agreement.

(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?

12. Yes, the plain language of the provision indicates that there has to be a restrictive effect on international trade. As such it would not be sufficient to show a trade effect on only one Member. If the Members had intended to make the standard Member-specific, they would have made that clear. They did not because to adopt a standard where a party merely had to allege that there was a negative impact on its industry alone is not realistic. It does not take into consideration many factors such as natural changes in trading patterns, competition among companies and countries, migration of industries and newly developing industries (based on labor rates, availability of natural resources, etc.). Instead, Members agreed to require actual demonstration of alleged effects. As noted in the United States' answer to question 6, any change in a rule of origin may be viewed as favoring one Member over another, so a Member-specific analysis is not appropriate.

(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").

13. As indicated above, rules of origin inherently create "restrictive" effects on international trade. For example, ascertaining the origin of a product for purposes of trading with countries without clear origin rules can be extremely burdensome and trade restrictive. However, the United States does not believe that this suggests a de minimis standard for evaluating whether rules have a restrictive effect. Furthermore, we believe that this evaluation has to be qualitative as well as quantitative. As Article 2(c) indicates, rules of origin may impose strict requirements, and the preamble recognizes that rules may pose obstacles. This implies that for rules to be inconsistent with 2(c), a "de minimis" standard is inappropriate; a far higher standard must be met. This is borne out by the fact that Article 2(a) provides that Members may maintain rules of origin that will have some effect.

14. For example, the United States holds the view that the use of ad valorem percentages as a criterion in nonpreferential rules of origin, is inherently unstable and distortive because it can operate to "punish" inexpensive labor costs, is greatly affected by currency shifts, and requires excessive administrative burdens. Nonetheless, the RO Agreement sanctions the use of ad valorem percentages as nonpreferential rules of origin and does not even place a limit on the percentage that could be used for such a rule. Therefore with terms like "unduly" and "unnecessary" and the lack of limitations in Article 2(a), Article 2(c) would imply a standard far greater than "de minimis."

15. Whether particular rules create "distorting" effects on international trade can only be assessed by determining if there is a causal connection between the rules and international trade flows. That causal connection has to have an effect on international trade that reaches the level of a distortion. This is necessary because many elements, including changes in consumer preference, can cause changes in trade patterns that could be mistaken for distortions. At the very least, it can be concluded that if imports in the products at issue are unchanged or have increased, it cannot be said that trade has been restricted or distorted. The existing rules do not have to be compared to any other factor.

16. The second sentence clarifies and provides an example of the conduct proscribed by the first sentence. Imposing "unduly strict requirements" as a "prerequisite for the determination of the country of origin" would be one way to "create restrictive effects on international trade" through rules of origin. Thus, the first clause of the second sentence is an instance of a violation of the first sentence. Similarly, to "require the fulfilment of a certain condition not related to manufacturing or processing as a prerequisite for the determination of the country of origin" would be one way to "create restrictive effects on international trade" through rules of origin. Thus, the second clause of the second sentence is another example of a violation of the first sentence. The second sentence also makes clear that "strict requirements" are allowed; it is only "unduly strict" requirements that are prohibited.

17. No. First, such an analysis would necessarily presume that the rules in place prior to the RO Agreement did not themselves create restrictive, disruptive or distorting effects on trade, and that therefore any country that changed its rules adversely affected international trade. (It also creates the improper inference that countries that have not "changed" their rules are in compliance with this provision.) This was clearly not the intent of Article 2(c). Second, with respect to the United States change, such an analysis would be an "apples to oranges" comparison, since the old system called for a case-by-case determination, which did not always produce identical conclusions and similar results were not always based on identical fact patterns. Moreover, since Article 2(c) addresses the " rules themselves" it is clear that the appropriate subject of examination is the rules under their own terms, not in comparison to prior rules, or other Members� rules.

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.

18. The legal basis in United States law for "visa requirements" is section 204 of the Agricultural Act of 1956. Visa requirements were originally developed to assist in the administration of quantitative restrictions established under the Multifiber Arrangement (MFA), in force from January 1, 1974 to December 31, 1994. Generally, whenever a quantitative restriction was established, the United States offered to establish a visa arrangement with the affected exporting country. An effective visa arrangement allows the authorities of the exporting country to control and allocate the export rights for goods subject to a quantitative restriction in the United States. Generally, once a visa arrangement is established, the United States will not allow entry, and will not debit applicable quantitative restrictions, unless the importer has secured and can produce a valid visa issued by the authorities of the exporting country. Under the terms of the visa arrangement, the visa is a certification from the authorities of the exporting country that the goods covered by the visa originate in the territory of that country, and that the exporter is authorized to export goods subject to the relevant quantitative restriction. A separate document, the Special Textile Declaration, is required for importations of textile products for United States Customs to determine the proper country of origin for those products. In certain cases, visa arrangements are established at the request of an exporting country, even in the absence of a quota restriction, in order to control exports and help deter illegal circumvention.

19. Visa arrangements for WTO members were notified to the Textile Monitoring Body as administrative arrangements pursuant to Article 2.17 of the Agreement on Textiles and Clothing.

For the United States

13. Could the United States please submit relevant portions of the SAA? Exhibit US-5 appears to contain the Senate Report, and not the SAA.

20. Exhibit US-6 was distributed at the meeting with the Panel on December 13, 2002.

14. Could the United States elaborate further on how the fabric formation rule in section 334 advances each of the objectives stated by the United States at paras. 5, 11 and 29 of its first written submission as well as in exhibits US-5, IND-9 and IND-10? Please address "circumvention" and "transshipment" separately.

21. As we noted at the meeting with the Panel and as is discussed in the United States Answers to Preliminary questions by the Panel, question 2, the objectives outlined in the SAA with respect to section 334 largely addressed problems that the United States Customs Service was encountering with respect to origin determinations for textile and apparel products - assembled products, not fabrics and fibers. See SAA at 769/113 ("The principles set forth in section 334 will have the greatest significance for the rules of origin applicable to textile and apparel products other than fibers, yarns, or fabrics.") The fabric formation rule is applicable to fabrics and fibers. The fabric formation rule reflects the United States' judgment that the most substantial transformation in manufacturing fabric is the transformation from yarn to fabric. India would apparently prefer that the United States maintain rules allowing minor processing to change the origin of what is basically fabric - as in a bedsheet.

22. In addition, section 334 addressed circumvention by not recognizing cutting (as in cutting the edges of a bedsheet) as conferring origin; it prevents transhipment by setting an objective and predictable standard for identifying the origin of the product and making it more difficult to falsify documentation from importers; and it facilitates harmonization by having a clearly published standard and by bringing the practice in line with that of the European Communities and Canada (where cutting did not confer origin). The reference in the SAA to transshipment has the same meaning as "circumvention" as that term is used in the ATC; it is common in the United States to refer to circumvention as transhipment. Thus, it is not possible to address the terms separately.

For both parties:

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?

23. No. As the United States noted in answer to question 11(f), it is not the change that must be examined under Article 2(b)-(e), but rather the rules in force at the time of the challenge. Indeed, Article 2(i) demonstrates that when the RO Agreement imposes a specific obligation on changes in rules of origin it did so explicitly. Article 2(b)-(e) applies to the rules themselves, and 2(i) to changes.

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?

24. The United States does not consider that the determination of whether the rules at issue are used as instruments to pursue trade objectives depends on the timing of the examination of those rules. However, as we explained in answer to question 15, the issues in Article 2(b)-(e) are generally best addressed at the time of challenge, or establishment of the Panel. However, this would not preclude an examination of prior events to the extent that they offer relevant evidence. In considering Article 2(b), additional analysis as of the time of adoption may be relevant.

17. 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 European Communities 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)?

25. No. As discussed in the United States Answers to Preliminary questions by the Panel, question 6, changes in rules of origin for quota goods will usually have quota implications that will be different for different Members, depending on their quota levels and the nature of their exports. The "quota effect" analysis would mean that any origin determinations that have a "quota effect" are impermissible, with the result of forcing a country to make no determinations at all, or at very least make no changes to existing rules (for the United States, that would mean a case by case determination). Or, in the alternative, a Member changing its rules of origin would be forced to exempt products subject to quota from those rules. The resulting case by case determination for the "quota protected" products would be burdensome and defeat the purpose of implementing uniform transparent written rules of origin for such products, as encouraged by the RO Agreement.

26. The European Communities' analysis is based on an assumption that the appropriate topic for comparison is the market before and after changes to rules. The United States does not accept this comparison. In a given case, a change to rules of origin could eliminate disruptive, distorting, or disruptive effects produced by the former rules; or, it could be that, while the change in rules had an impact on trade, the result was a more transparent and more easily administered system, with benefits to trade, and rules that more accurately reflect commercial realities (i.e., reflect the important role of assembly). As a result, such changes would facilitate trade, and would not restrict, distort, or disrupt it. Indications of whether rules restrict, distort, or disrupt trade would be if they are overly burdensome to comply with; impose more strict requirements on some countries than on others; cause confusion in the market place (e.g., for coffee, if a country were to prohibit coffee grown in a particular country from being so marked, despite consumer reliance on this as an indication of quality, resulting in a dramatic decrease in exports from that country, disrupting the coffee market).

18. 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.)?

(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.)?

27. The ATC does not define the term "circumvention" but provides illustrative examples of practices aimed at evading quotas that can result in circumvention of the ATC in Article 5.1 and Article 5.5: transshipment, re-routing, false declaration concerning country of origin and falsification of official documents.

28. Outward processing resulting in products that meet United States rules of origin is not circumvention, provided that the products undergo substantial processing, in accordance with United States rules, in the second country.

29. "Circumvention by transshipment" means shipping goods through a third country in order to disguise their true country of origin.

30. In The Drafting History of The Agreement on Textiles and Clothing, commissioned by the textile exporting country caucus, the International Textiles and Clothing Bureau, authors Marcelo Raffaelli and Tripti Jenkins trace the development of the concept of circumvention through the ATC�s predecessor agreements, the Multifiber Arrangement (and its protocols of extension), the Long Term Arrangement on International Trade in Cotton Textiles, and the Short Term Arrangement on International Trade in Cotton Textiles.

31. In their commentary on ATC Article 5, they explain that the concept of circumvention, as used in that provision, was based on the previous experience of these predecessor agreements, and entails a very broad description of the concept of circumvention - violations of customs law (such as illegal transshipment) are only one way that circumvention could occur. Other ways that circumvention could occur include "substitution of directly competitive textiles" for restrained textiles; and acts of omission by an importing country, if it did not take measures to restrain non-participants whose exports were causing market disruption, while at the same time subjecting participating exporters to restraints. Raffaelli and Jenkins also note that the element of "intention" was, at least originally, an important element, including with respect to "legal" circumvention.

32. Indeed, in discussing the negotiations which led to the 1986 Protocol of Extension to the Multifiber Arrangement, another expert observer recounted how the expansion of the MFA (to include restraints on products of silk-blend and non-cotton vegetable -- SBOV - fibers in addition to cotton, wool and man-made fibers) was done in response to the growing substitution of directly competitive SBOV articles for their cotton or man-made counterpart. Brenda Jacobs, in Renewal and Expansion of the Multifiber Arrangement, notes the growing use of "blends engineered to avoid the application of cotton, wool, and man-made fiber quotas." She recounts that the Long-Term Arrangement on International Trade in Cotton Textiles, which preceded the MFA, contained a provision, "Substitution of directly competitive textiles," which allows an importing country to restrain imports whenever it had "reason to believe that imports of products in which this substitution has taken place to have increased abnormally, that is that this substitution has taken place solely in order to circumvent the provisions of this Arrangement."

19. 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?

33. The objectives do apply to the fabric formation rule but were specifically aimed at textile and apparel products, where the primary issue of concern was where significant assembly of those products took place. Combating circumvention through illegal transshipment is furthered by having a clearly stated fabric formation rule. This removed uncertainty and ambiguity which existed under the previous case by case determination of origin, specifically with respect to goods such as towels, linens or fabrics.

For the United States:

31. As a matter of United States law and for purposes of determining the purpose of section 334, is there a difference in the weight to be accorded to the SAA, on the one hand, and the House and Senate Reports, on the other hand?

34. The SAA is the definitive statement of the United States government, reflecting the views of both the Executive and Legislative branches of government with authority in enacting legislation, and as such is more authoritative than the House and Senate reports. The legislative history in those reports demonstrates only the intent of one house of Congress, while the SAA reflects the position of the Administration, a position which has been approved by the Congress.

32. Does it matter, for purposes of United States law or otherwise, whether the Panel conducts its examination in terms of sections 334 and 405, taken together, or in terms of 19 U.S.C. � 3592 (exhibit IND-7)?

35. While the United States is not aware that it makes a difference, in terms of United States law or otherwise, as noted in answer to question 37, section 334 and section 405 have different purposes, so to the extent that the Panel considers those purposes/objectives relevant, they should be examined separately.

33. Does the United States agree with India's statement that "the following are practical examples of the application of the section 12.130 rules of origin for certain products such as silk scarves or bed linen. Silk fabric was woven in China and then exported to a third country, for example, Italy, where it was dyed and printed and subjected to two specified finishing operations. If that fabric was then made into a silk scarf and exported to the United States, that scarf would be determined of Italian origin" (India's first submission, para. 15)? Were such origin determinations made on a case-by-case basis or by direct application of section 12.130?

36. Origin determinations were case by case, but also based on CFR 12.130. Although not elaborated upon in the question, bed linens are a good example of how origin was determined in the past. On a case by case basis, production processes and finishing processes were evaluated to decide if they were significant enough to constitute a substantial transformation.

34. Section 334(b) incorporates the following provisions: "Except as otherwise provided for by statute, a textile and apparel product, for purposes of the customs laws and the administration of quantitative restrictions, originates in a country [�]." (emphasis added). Could the United States please identify relevant commercial policy instruments (e.g. trade statistics, origin marking, application of MFN tariff rates, etc.) for which the rules of origin provided for in section 334 are used?

37. Section 334 is used to determine country of origin for purposes of gathering trade statistics, determining the appropriate country of origin for marking purposes, administering most favored nation rates of duties (NTR), and administering quota and visa requirements.

35. Could the United States submit a copy of the following publication: United States International Trade Commission, Pub. No. 1695, The Impact of Rules of Origin on United States Imports and Exports (1985)? Is there a later government publication of this type?

38. While this publication is out of print, we have located a copy that is now being transmitted to Geneva. The United States will provide it to the Panel and India as soon as possible.

36. Regarding the anti-circumvention rationale of section 334, could the United States answer the following questions:

39. The fabric formation rule is linked to all of the commercial policy instruments identified in the United States' answer to question 34, and reflects the United States determination of when/where the most important or significant process or transformation takes place. See also answers to questions 2, 18 and 19.

40. "Circumvention of quota limits through outward processing" refers to the concern with shippers/exporters trying to perform as little as possible processing in a third country to confer origin and still avoid a particular quota restraint. Many of these operations were minor to the production of the textile good. See also answer to question 18.

41. The reduction of all forms of circumvention was a goal of section 334. So were improving transparency and predictability, and advancing international rules of origin harmonization.

42. The United States has never maintained quotas on silk scarves or silk fabric from China. Combating circumvention was a goal expressed with respect to section 334, which was intended to prevent circumvention, in general, by providing greater certainty and predictability, rather than being directed at specific cases of circumvention.

43. No. Quota utilization is generally the primary factor in assessing whether a quota is "prone to circumvention." This can change from year to year, as utilization rises or falls according to market demand. However, the current assembly rules make it harder for importers to circumvent and make it easier for customs officers to detect circumvention.

44. The United States cannot say that this statement is necessarily true. Generally, any product that is subject to quota restrictions that are filled, i.e., any product that quota restrictions effectively limit imports of, is the most likely candidate for circumvention (these are usually products that are in high demand).

37. Please elaborate on how section 405 advances the purposes asserted in the SAA -- which does not address section 405 - for section 334? (United States' oral statement, paras. 9 and 22)

45. The purpose of the exceptions to the rules in section 334, contained in section 405, were to settle the WTO dispute with the European Communities. At the same time, we do believe that section 405 advances the purposes expressed in the SAA.

38. With reference to Article 2(c) of the RO Agreement, could the United States provide its views as to how the phrase "create [�] disruptive effects on international trade" should be interpreted? Could the United States give examples of cases where rules of origin might create such effects?

46. See answers to questions 11 and 17.

ANNEX A-3

answers of the united states to questions from india FOLLOWING
 THE FIRST MEETING

1. Does the United States use criteria for the determination of origin other than those listed in Article 2(a) of the RO Agreement? If so, what are those criteria?

1. No, the United States does not use criteria for the determination of origin other than those listed in Article 2(a), although clearly Article 2(a) is not an exclusive list, either for origin determinations of textile and apparel products, or any other products.

2. Please indicate the criterion or criteria for the determination of origin on which the "fabric forward rule" set out in section 334 is based.

2. The determination of origin in section 334 is based on the third criteria in Article 2(a), manufacturing or processing operations.

3. Please indicate on which criterion or criteria for the determination of origin the following product distinctions foreseen in sections 334 and 405 are based:

� Articles made from cotton and articles made from wool;

� Articles made from fabrics with different fibre blends; and

� The HTS headings listed in section 334 and the HTS headings listed in section 405.

3. See United States Answer to Panel questions, question 9.

4. As explained paragraph 28 of India�s oral statement, under sections 334 and 405, a country may forego the status of originating country by further processing a product in its territory, depending on the type of product or the fibre content of the product. Please indicate on which criterion or criteria for the determination of origin the United States based the rule that leads to this result.

4. As the United States explained at the meeting with the Panel, India�s assertions in paragraph 28 regarding the exceptions in section 405 are based on a disagreement with the United States as to where the most significant or important manufacturing or assembly of a product has taken place.

5. Is the United States aware of any other Member of the WTO that:

� Applies the "fabric forward" rule,

� Makes distinctions of the type referred to in question 3,

� Does not recognize further processing of a product as origin-conferring.

If so, who are these Members and what are their practices?

5. Of the approximately 38 Members that have submitted rules to the WTO and that have non-preferential rules of origin, as the United States has indicated in its submissions, to our knowledge the European Communities and Canada have rules similar to the United States rules for assembled textile products. The United States has not surveyed other Members� rules of origin regimes.

6. Does the United States itself use rules of origin for products other than textiles and apparel products according to which:

� The further processing on an input cannot change the origin of a product under any circumstances,

� The origin depends on the blend of raw materials used in the production of an input, and

� The further processing of a product deprives the processing country of its status of originating country?

6. The United States does not agree with India�s interpretation of its rules of origin for textile and apparel products. Subject to this caveat, United States rules of origin for non-textile and apparel products are not based on any of the factors listed above. As we have noted before, sometimes further processing of an input will not change origin - it depends on whether that further processing causes a substantial transformation.

7. Is the United States of the view that requirements to be met by producers and traders as a result of the "fabric forward" rule and the different treatment of (a) articles made from cotton and articles made from wool and (b) articles made from fabrics with different fibre blends are "unduly strict requirements" within the meaning of Article 2(c). If not, why not?

7. No. In the first place, we note that the rules of origin for the two products referenced are consistent with the requirements of Article 2, and a comparison of the two rules is irrelevant for purposes of Article 2(c). These rules relate to different products. See also, United States Answers to Panel questions, question 11.

8. According to Article 2(c), "rules of origin . . . shall not require the fulfillment of certain conditions not related to manufacturing or processing". In relation to this provision India has the following questions:

8. No, there is no basis in the text for India�s suggestion.

9. As the United States has explained, Article 2(c) does not prescribe that Members must use the same rules to determine the origin of different products. See also United States Answers to Panel questions, question 9, and our response to question 7 above.

9. Would the United States agree that conferring origin on the basis of narrow product distinctions designed to favour the exports from one Member over those from others would, in principle, be a trade objective covered by Article 2(b) of the RO Agreement and discrimination within the meaning of Article 2(d) of the RO Agreement? If not, why not?

10. No. See United States Answers to Panel questions, question 6.

10. Would the United States agree that, for the purpose of determining whether a rule of origin is used as an instrument to pursue trade objectives within the meaning of Article 2(b) of the RO Agreement, the circumvention of quota limits through transshipments, false declarations and other illegal means should be distinguished from the avoidance quota limits through the reallocation of production and other legal means and that rules of origin designed to prevent the avoidance of quota limits should be deemed to pursue trade objectives? If not, why not?

11. Assessing whether a distinction exists between circumvention and "reallocation of production" cannot be undertaken in a vacuum, without a fact pattern as a context. Experience shows that "reallocation of production" encompasses a broad spectrum of activity in the trading world, ranging from complete production to merely sewing on labels - - with numerous points in between. Maintaining the integrity of trade instruments is also a matter that can extend beyond merely making direct actions at addressing illegal behavior, and can include providing certainty through the establishment of product-specific rules of origin. See also United States Answers to Panel questions, question 18.

ANNEX A-4

ANSWERS OF INDIA TO QUESTIONS FROM THE PANEL FOLLOWING the SECOND
MEETING

For both parties:

46. Could the parties please indicate whether the attached tables accurately reflect the United States rules of origin at issue in this dispute?

Answer 46: Yes, the attached tables accurately reflect the United States rules of origin at issue in this dispute.

47. The parties have offered slightly different descriptions of the rules or origin regime applied to textile products before section 334 was enacted. India suggested that that regime, set out in CFR 12.130, was a DP2 regime. The United States, on the other hand, seems to suggest that origin determinations were made based on CFR 12.130, but also case by case. In the light of this, the Panel would appreciate it if the parties could provide clarification with respect to the following two points:

Answer 48: The WTO agreements contain many provisions in which the plural is meant to include the singular. For instance, the references to "price undertakings" in Article 8.5 of the Anti-Dumping Agreement, "import restrictions" in Article XIII:2 of the GATT and "phytosanitary measures" in Article 3:1 of the SPS Agreement are meant to extend to each individual undertaking, restrictions and measure that a WTO Member may take. In the view of India, the obligations set out in Articles 2(b), 2(c) and 2(d) therefore apply both to an individual rule of origin as well as to the Member�s system of rules of origin.

49. Both parties have argued that the protection of a domestic industry would be a trade objective within the meaning of Article 2(b) of the RO Agreement. On what basis do you reach this conclusion?

Answer 49: The basis for India�s argument that the protection of a domestic industry against import competition is a trade objective within the meaning of Article 2 (b) of the RO Agreement is the textual interpretation of the words. India�s interpretation was set forth in paragraphs 41 to 48 of India�s first submission. In particular, in paragraph 46, we stated that "one way to assess whether a rule of origin is being used as an instrument to pursue a trade objective is to assess whether it achieves the same results as a measure or instrument of commercial policy." A measure or instrument of commercial policy could be used to regulate foreign trade so as to protect the domestic industry. Therefore, any rule of origin that was being used as an instrument to regulate foreign trade so as to protect the domestic industry would be a trade objective.

The Panel on European Communities - Trade Description of Sardines determined the meaning of the terms "legitimate objectives" in Article 2.4 of the TBT Agreement in their context and in the light of the objectives set out in the Preamble of that Agreement (WT/DS231/R, paras. 7.118-7.122). In the present case, a similar approach would support the conclusion that the protection of a domestic industry is a "trade objective" within the meaning of Article 2(b) of the RO Agreement. According to its Preamble, the RO Agreement is "to further the objectives of the GATT 1994". The GATT 1994, in turn, is according to its Preamble, to expand the production and exchange of goods through the reduction of tariffs and other barriers to trade. One of the fundamental purposes of the RO Agreement thus is to ensure that the barriers to trade that 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.

50. For purposes of the application of Article 2(b), does it make a difference whether rules of origin are adopted by a Member of its own volition or at the request of a trading partner?

Answer 50: India considers that it does not make a difference whether a rule of origin is adopted by a Member on its own volition or at the request of a trading partner. For example, a rule of origin that is being used as an instrument to pursue trade objectives may either be developed by a Member on its own volition or to address a request made by a trading partner. However, the issue is whether the rule of origin is being used to pursue a trade objective.

In any case, an agreement between two Members cannot affect the rights of third Members (see Article 3.5 of the DSU and Article 34 of the Vienna Convention on the Law of Treaties).

51. With reference to Article 2(d) of the RO Agreement, please elaborate on the meaning and purpose of the first clause ("the rules of origin that they apply to imports and exports are not more stringent than the rules of origin they apply to determine whether or not a good is domestic"). Please provide an example of a typical situation which the first clause is meant to address.

Answer 51: India�s claim with respect to Article 2(d) refers to the second clause of Article 2(d), that is, "�Members shall ensure that � the rules of origin � shall not discriminate between other Members, irrespective of the affiliation of the manufacturers of the good concerned." India considers that the first clause of Article 2(d) ("the rules of origin that they apply to imports and exports are not more stringent than the rules of origin they apply to determine whether or not a good is domestic") is not at issue in this dispute.

52. Why is a provision equivalent to (i) Article 2(b) of the RO Agreement and (ii) to Article 2(c) of the RO Agreement no longer necessary after the transition period? (see Article 3 of the RO Agreement)

Answer 52: India notes that the obligations set out in Article 2 (a), Article 2 (b) and Article 2 (c) are no longer included in Article 3 following the harmonization period. This is presumably because the harmonized rules would be those agreed upon by all WTO Members. The process of arriving at a harmonized system of rules of origin must entail the elimination of those rules which are being used to pursue trade objectives or that create adverse effects on international trade. Such agreed rules would, therefore, by definition, be those that are not used to pursue trade objectives and which do not create restrictive, distorting or disruptive effects on international trade. Indeed, it would be difficult for a Member to be able to challenge an agreed rule of origin in a post-HWP period as being used to pursue trade objectives or creating restrictive, distorting or disruptive effects.

53. Why is a provision equivalent to Article 2(d) necessary after the transition period? (see Article 3(c) of the RO Agreement)

Answer 53: This is because even with harmonized rules it would still be possible to discriminate between Members. After the transition period, it might be possible a Member could prescribe more stringent conditions for imports in terms of labelling as compared to products made by domestic producers. In addition, a Member could apply a harmonized rule such as DP2 but exclude products from a specific Member from the application of this rule.

54. With reference to 19 C.F.R. � 102.21, please answer the following questions:

(a) What is the legal status and nature of the regulations set forth in 19 C.F.R. �. 102.21 in United States law?

Answer: Section 102.21 has the force and effect of law. It was enacted following "notice and comment" rulemaking under the Administrative Procedure Act, pursuant to a specific statutory directive contained in the statute it implements. It is a regulation entitled to judicial deference. See Chevron USA Inc. v. National Resources Defense Council, 467 US 837 (1984).

Regulations having the force and effect of law are binding on both the importer and the government alike. For practical purposes, they have the same legally binding effect as a law enacted by Congress, and United States Customs is not free to depart from them.

(b) Would the Panel have the authority to find that 19 C.F.R. �102.21, as such, is contrary to the United States' WTO obligations?

Answer: Yes, section 102.21 implements statutes passed by Congress, and because that regulation includes provisions which are inconsistent with the United States� WTO obligations, the Panel should have the authority to find that the regulation is contrary to the United States WTO obligations, just as if it were a law enacted by Congress in violation of those obligations. In addition, the customs regulations are within the terms of reference of the Panel.

(c) If the Panel were to find that sections 334 and/or 405 are inconsistent with Article 2 of the RO Agreement, would the Panel need to make additional findings in respect of 19 C.F.R. � 102.21?

Answer: If section 334 and section 405 (as consolidated in 19 USC. 3592) are found to be inconsistent, then their implementing regulations would be of no legal validity. However, India has specifically challenged the WTO-consistency of the customs regulations. Therefore, for the sake of completeness, India considers that the Panel should also find that the customs regulations are WTO-inconsistent.

In Article 2 (c) , the term "themselves" makes clear that fundamental purpose of Article 2(c) is to set standards that rules of origin must meet irrespective of the specific commercial policy instruments to which they are being linked. India has demonstrated, and the United States has failed to refute, that the fabric formation rule and the production distinctions made under the DP2 rule "require the fulfilment of a certain condition not related to processing", "impose unduly strict requirements" and "create restrictive, distorting or disruptive effects on international trade" whether they applied to the current quota regime or any other instrument of commercial policy. It is thus the rules in and themselves or as such that fail to meet the standards set out in the two first sentences of Article 2(c).

It has to be kept in mind that the rules of origin determine the conditions of competition for producers and traders under the quota regime currently in place, under other instruments of commercial policy currently being applied by the United States and commercial policy instruments that the United States might adopt in the future. For instance, if the United States were to apply in 2004 a safeguard measure in the form of an import quota allocated among supplying countries in accordance with Article XIII:2(d) of the GATT, the production distinctions made under the DP2 rule would determine the allocation of the quota shares among supplying countries.

(b) Are designed to pursue trade objectives?

The reference to the "use" of rules of origin as instruments to pursue trade objectives in Article 2(b) makes clear that this provision sets standards that rules of origin must meet when linked to a particular instrument of commercial policy. India has demonstrated that the fabric formation rule served to make the this regime more protectionist and that product distinctions made under the DP2 rule served to single out products of export interest to the European Communities for more favourable treatment.

Obviously, the major restrictions, distortions and disruptions resulting from the United States� adoption of the section 334 and 405 rules of origin are observed in the operation of the United States� textile quota regimes. However, in our judgment, there are other ways in which these new rules could be viewed as serving trade objectives.

The United States marking requirement is intended, at least in part, for the protection of domestic manufacturers, by advising the purchaser of the origin of an imported good lest that information influence his or her purchasing decision. As the fabric formation and DP2 rules are used for marking purposes as well as quota administration, they can create restrictive or distorting effects on international trade.

Thus, for example, one of the European Communities' complaints directed at the origin rules dealt with the treatment of hand-painted silk scarves. The silk fabric was formed in China, but set to Europe, where it was cut and sewn into scarves which were hand-painted and sold by design houses such as Hermes. Before section 334 was adopted, these goods were marked as "Product of France", or whichever country the decorating was performed in. Silk scarves were not subject to United States textile quotas. However, the adoption of section 334's "fabric formation" rule required manufacturers to mark those scarves as "Products of China", rather than "Product of France", a change which affected the products� marketability and value. Arguable, the required change in marking disrupted trade in these goods, even though no quotas were involved.

Furthermore, since goods which are not properly marked with country of origin are considered "restricted" goods under United States law, subject to exclusion from the country and subject to the assessment of a 10% ad valorem special "marking duty", the adoption of these rules could be seen as forcing a change in country of origin, admissibility, and marking requirements for certain products, and creating or changing restrictions on trade.

In addition, the country of origin, as determined under section 334 and 405, is used to designate the country of origin on United States Customs entry forms; entry data, in turn, is used to compile United States import statistics. Thus, assume that an imported fabric not subject to the DP2 rule is valued at $100 when it enters the United States. It is made with $10 worth of Chinese-formed "greige" fabric, with an additional $90 in added value generated in Spain, where dyeing, printing and other value added processes are performed. Where the origin of the product is determined under the "fabric formation" rule, the goods will be recorded, for United States statistical reporting purposes, as being $100 worth of fabric made in and imported from China.

There are a number of ways in which this type of statistical reporting could have a distorting effect on international trade. Obviously, it skews import statistics. For example, if an antidumping investigation were being conducted with respect to Chinese-origin finished fabrics, and it became necessary to determine the level of imports of such fabric, the import statistics would report as being of Chinese origin the fabrics which had undergone value-added operations in Spain, and would ascribe the entire value of the import to China. Statistical reporting of this kind might make it appear as if imports from a given country, say, India, were increasing, when in fact, they might not be.

56. Could the parties please address whether, and if so, how the following statement by the Appellate Body is relevant to the present dispute:

Answer 56: The ruling of the Appellate Body quoted by the Panel clarifies two issues. First, it clarifies that the trade distortions that Article 1.2 and 3.2 of the Licensing Agreement are intended to prevent include the distortions caused by the introduction of licensing procedures, not only those caused by their operation. If a provision in the Licensing Agreement prohibiting licensing procedures with "trade-restrictive or -distortive effects" is interpreted to cover also the effects caused by the introduction of the procedures, the provision in the RO Agreement prohibiting rules of origin that "create restrictive, distorting or disruptive effects" should similarly be interpreted to cover also effects that the introduction of rules of origin creates (rather than just the effects caused by the operation of the rules). The ruling thus supports the view of India that restrictive and distorting effects within the meaning of Article 2(c) of the RO Agreement include effects that are not reflected in trade statistics.

Second, the ruling of the Appellate Body makes clear that the terms "trade distortions" have to be interpreted broadly to cover also the impact of a licensing procedure on that part of international trade that is not strictly subject to the licensing procedures. The Appellate Body's approach confirms the view of India that the terms "distorting effects on international trade" in Article 2(c) have to be interpreted to cover also the adverse effects of a rule of origin on the trade between the exporting Member and a Member other than the Member applying the rule of origin.

57. Please recall the following headings and subheadings of the HS96 for bed linen:

(a) Based on HS96 above, is it correct that the most widely traded bed linen is made of either cotton or man-made fibres?

Answer: It is true that, on a year-to-year basis, United States trade in bed linen primarily involves bed linens of cotton or man-made fibres. However, this conclusion flows from the trade patterns themselves, rather than the structure of the HS.

(b) Since cotton bed linen is normally bleached or white-dyed, but not dyed and printed, is the DP2 rule appropriate?

Answer: It is not true that bed linen is either dyed or printed but not both dyed and printed. In some situations, cotton bed linen is both dyed and printed, especially in pastel shades other than white and printed with motifs like flowers, geometrical patterns and cartoon characters etc. Moreover, the Harmonized System HS96 provides for a separate HS classification for printed bed linen like 6302.21 - other bed linen printed - of cotton piece; 6302.31 - other bed linen of cotton (i.e., other than printed).

Dyeing and printing along with at least two finishing operations may be carried out on all cotton products. For example, the following products (other than bed linen) are subject to DP2 operations:

- pillow covers
- cushion covers
- bed covers
- table linen
- kitchen linen
- curtains and,
- napkins.

(a) India claims that section 405 favours products of export interest to the European Communities over products of export interest to developing countries (e.g., paras. 69 and 84 of India's first written submission). Would section 405 not favour products of export interest to any country, not just developing countries?

Answer: Section 405 would disfavour products of export interest to other countries if those countries had a strong production base in cotton products, wool products, or blended products where cotton was more than 16%. The reference to developing countries was made because these countries have a large capacity in cotton related products, and in most cases, are subjected to the quota regime for these products.

(b) How did the legislative changes effected through section 405 adversely affect India, or India's conditions of competition?

The legislative changes effected by section 405 adversely impact on India�s market access and have also changed the conditions of competition by conferring origin for a specific set of products based on the DP2 rule and excluding from the DP2 rule finished products made from cotton, wool or fibre blends with more than 16% of cotton. This rule and its exceptions have adversely affected India because India is a cotton-producing country. Exports of fabric sent to third countries and converted into made-up items through the DP2 rule were being determined as Indian for origin purposes. This further restricted the negotiated access to the United States market enjoyed by these products prior to the implementation of section 334 and section 405.

The conditions of competition were affected as processed and finished goods from Indian products in third countries could only be exported to the United States if India were in a position to supply the relevant quotas on an unlimited basis. As quotas were limited, India�s trade opportunities were limited to the same extent as the quotas.

By excluding wool and cotton related products from the coverage of the DP2 rule, the United States effectively distorted the international trading system, thus, disadvantaging certain countries with cotton capacity, such as India. This adversely affected India�s conditions of competition.

Answer 59: India included the reference to the wholly assembled rule, as set out in section 334(b)(I)(D) in its reply to question No. 19 in order to provide the general context of the measures at issue. India is not challenging the "wholly assembled rule." However, the Panel needs to be aware of the wholly assembled in order to understand the exceptions to this rule as set out in section 334 (b)(2) and section 405 (a) (3) (c) which India is challenging. See paragraph 16 of India�s Second Submission.

60. With reference to India's claim under RO Agreement 2(d) of the RO Agreement, is India claiming that section 405 violates Article 2(d) because it results in (unjustifiably) differential treatment of "closely related [Indian and European Communities] products"? (para. 68 of India's Second Submission). If not, please clarify further on what is India's claim under Article 2(d).

Answer 60: India�s claim is that section 405 violates Article 2(d) because it results in (unjustifiably) differential treatment of closely related (Indian and European Communities) products. We used the term closely related because the goods concerned are made of fabrics of different fibres. When a scarf is made of silk, it is conferred origin where subjected to DP2, however, when it is made of cotton, it is conferred origin where the greige fabric is formed. From the perspective of production techniques, the products are virtually identical, and it is completely arbitrary to distinguish them for the purpose of determining their origin.

61. With reference to para. 8 of India's second oral statement, could India please elaborate on its statement that "the fabric forward rule, by definition, increases the quantities of textile imports that would be conferred the origin of the countries that are under quota"?

Answer 61: This statement is certainly true with respect to "countries having a textile-making industry that are under quota". If Country A has a fabric-forming industry, then the "fabric forward rule" ascribes that country as the country of origin for:

Prior to the adoption of the section 334 rules, only products in (1) would have been recognised as being products of Country A. Following section 334, countries with fabric-making capacity would, by definition, tend to have their quota allocations consumed more quickly, if they issued textile visas covering the products described in (2) and (3) above. On the other hand, if fabric-producing countries declined or refused to issue textile documents for products in categories (2) and (3), then those products would be refused admission into the United States. In such a case, fabric finishers and producers of made-up articles who wish to ship to the United States would presumably stop sourcing fabric from Country A, and look for fabric from another country not subject to quota restrictions.

By the same token, where a country had value-added manufacturing facilities (cut & sew) but no fabric-forming facilities, the extension of the "fabric forward" rule to cover made-up goods essentially meant that none of the made-up goods that these countries had formerly shipped to the United States would be recognized as originating in the countries in question. Accordingly, certain countries which did not have fabric forming industries [(e.g. the Philippines, Hong Kong, Macau)] often found themselves in a situation where the United States had allocated them a quota for the shipment of certain quantities of made-up textile products to the United States, but the United States would not recognize any such products as originating in those countries! The quota allocations given to these countries therefore became useless.

62. With reference to India's reply to question No. 19, does India's per se challenge to sections 334 and 405 concern all quantifying products? Does India's challenge to the application of sections 334 and 405 cover only the products explicitly or implicitly specified in India's reply to question No. 19. If so, why is there such a difference? (e.g., under point 3, why is HTS 6302.53 covered, but not HTS 6302.52?)

Answer 62: As noted in India�s reply to question No. 19:

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. That is our claim.

In order to provide more detail, India noted certain specific provisions and HTS headings in the paragraph which followed the setting out of our claims. This listing was provided for illustrative purposes without any intention to circumscribe the qualifying products to the HTS headings listed.

Therefore, the omission of 6302.52 and 6302.53 should not be considered determinative of the scope of India�s challenge.

63. With reference to India's reply to question No. 5 (3d para.), does the reference to "these products" mean that it would be the quota for bed linen which is debited?

Answer 63: In the reply to question No. 5, India used bed linen as an example. So, the reference to "these products" is not only a reference to the quota for bed linen, but rather to any finished product that was subject to a quota.

To clarify, wherever finished products are manufactured out of Indian fabrics by a third country and exported to the United States, the quotas for the finished products under the "fabric forward rule" are applied to India. Both greige fabric and the finished product (say, bed linen of 100% cotton or polyester cotton with 80% polyester and 20% cotton) are under quotas by the United States.

64. India claims that section 334 is being used "to protect the United States domestic industry". Could India be more specific regarding which part of the United States domestic industry would benefit from any protection? For instance, would it be the United States producers (if any) of cotton fabric, the United States producers (if any) of bed linen, etc.?

Answer 64: Section 334 protected United States domestic textile manufacturing interest in a variety of ways.

First of all, it protected United States manufacturers of fabric from competition by foreign fabric manufacturers. Assume, for instance, that an Indian fabric maker sold cotton cloth to an Indian manufacturer of bed sheets and to a Philippine manufacturer of bed sheets, both of whom exported their products to the United States. Under section 12.130, the Indian-produced bed sheet would enter the United States under an Indian quota while the Philippines-manufactured bed sheets would enter under a Philippine quota. Under section 334, however, both sets of bed sheets would have had Indian origin. If India had already used up its quota for the bed sheets in question, the Philippine bed sheets, made from Indian fabric could not be shipped to the United States. The United States fabric producer thus received a measure of protection from Indian-made fabrics.

American fabric producers were also conferred a competitive advantage, over other fabric producers, in supplying the Philippine manufacturer of bed sheets in the example given above. If that manufacturer sourced fabric from China or Turkey, etc., it would become subject to the quota limits placed on bed sheets from those countries. The only way the Philippine producer could have manufactured bed sheets which would be recognized as having "Philippine" origin, and thus eligible to use the "Philippine" quota allocation, would be to manufacture those products using United States-origin fabrics. As previously indicated, the United States did not follow its "fabric forward" rule when dealing with products made with United States-origin fabric, but held such goods to originate in the last country where they underwent processing.

Thus, United States fabric makers and producers of non-apparel textile articles were both protected from import competition, and given a competitive advantage, by virtue of the enactment of the section 334 Rules.

65. Do you agree with the United States statement that "any change in a rule of origin may be viewed as favouring one Member over another, so a member-specific analysis is not appropriate."(see United States' reply to question No. 11(b) (emphasis added), but also para. 19 of the United States' Second Submission)

Answer 65: India does not agree with the United States' statement. A change in a rule of origin may be carried out for various reasons. For example, during the transition period, a Member may move from a system based on Article 2 (a) (i) to one based on Article 2 (a) (iii). This would be a WTO-consistent change that would not favour one WTO Member over another. A Member-specific analysis is certainly appropriate, especially under Article 2 (d). Of course, any changes must be consistent with the other provisions of Article 2.

66. Does any modification of trade flows or patterns, or any creation of incentives to modify trade flows or patterns, amount, ipso facto, to a "distortion" of international trade within the meaning of Article 2(c) (see United States' first written submission, para. 14)?

Answer 66: No, not as a general rule. However, in this fact situation, the United States rules of origin as set out in section 334 and section 405 and the implementing customs regulations do distort trade.

India notes that the terms "distorting effects on international trade" have to be interpreted in their context and in the light of the objectives of the RO Agreement. The context makes clear that the first sentence of Article 2(c) is not intended to prevent the adoption of all rules of origin changing trade pattern but only the adoption of rules of origin with features comparable to those referred to in the second sentence of that provision. The Preamble of the RO Agreement makes clear that one of the purposes of the RO Agreement is to ensure that rules of origin do not create "unnecessary obstacles to trade" and are prepared in a "consistent and neutral" manner. A distortive effect can therefore not be deemed to arise from a rule of origin that is necessary, consistent and neutral.

The Dictionary of Economics (edited by John Eatwell and published in 1987 by Macmillan Press) notes that "the failure to achieve aggregate production efficiency, in the sense of not producing on the boundary of the set of production possibilities given available resources and technology, is deemed a distortion." The United States' rules of origin reduce aggregate production efficiency by creating artificial incentives to modify inputs, the sourcing of inputs and methods of production. In the view of India, these distortions are created by rules of origin that are not necessary, consistent and neutral. Article 2(c) first sentence prohibits such rules.

67. China stated that the effects of a Member's rule of origin could be that "trade between two particular Members is "restricted" or "disrupted" while trade between one of those Members and a third Member is correspondingly enhanced and liberalized"? (China's reply to question No. 41(b)). Does such a redistribution of trade constitute a trade "restriction" within the meaning of Article 2(c) of the RO Agreement?

Answer 67: China�s point refers to distortion, rather than restriction or disruption. The complete sentence in China�s reply to question No. 41(b) is "[a] "distorting" effect on international trade, therefore, must reasonably encompass a scenario in which trade between two particular Members is "restricted" or "disrupted" while trade between one of those Members and a third Member is correspondingly enhanced and liberalized." Such an example of trade redistribution is being cited as an example of trade distortion, and not trade restriction.

68. With reference to para. 45 of India's Second Submission, could India elaborate further on why "conferral of origin upon a product must be based on the determination of the country with which that product has a significant economic link"?

Answer 68: As noted by rules of origin commentators, there are essentially three different methods for determining origin: "the technical test (i.e. the product resulting from a process or operation in the exporting country must have its own specific properties and composition that it did not have before the process or operation), the economic test (i.e. work done, expenditure, or material, added value), and the custom classification test (i.e. the process or operation in the exporting country results in a product that is classified under a different heading of the custom tariff classification than before the process or operation)."³⁴⁹ All of these methods have one common element, namely, that the product is conferred the origin of the country where value is added and the nature of the product is modified. The three examples set out in Article 2(a) are all examples that reflect this common element. This is the basis for India�s statement that there must be recognition of the country with which the product has a significant economic link.

69. With reference to India's reply to question No. 28, could India address whether foreign producers operating outside India's territories (e.g., European Communities producers) could have access to India's textile quotas for imports into the United States? If so, are foreign producers making use of such possibility?

Answer 69: Indian textile quotas are allotted to exporters having operations in India and which are registered with the relevant authorities. To that extent, foreign producers operating outside India�s territory, like European Communities producers, cannot have access to Indian textile quotas for imports into the United States, except through registered exporting firms in India.

70. With reference to exhibit IND-17, it appears that the panel still does not have a complete version of 19 C.F.R. � 102.21 (at paras. 14, 17 and 20 of its Second Submission, India references sub-sections (e)(1) and (e)(2), for instance, which do not appear to be included in IND-17). If that is correct, could India please submit a complete version of 19 C.F.R �102.21 (if available, please also submit an electronic version)?

Answer 70: India has attached the complete version of 19 C.F.R. �102.21. We also attach the customs regulations in pdf format.

71. Does India wish to comment on the new United States exhibit US-7bis?

India notes that the Panel had asked the following question to the United States:

Could the United States submit a copy of the following publication: United States International Trade Commission, Pub. No. 1695, The Impact of Rules of Origin on United States Imports and Exports (1985)? Is there a later government publication of this type? (emphasis added.)

India notes that the United States has instead provided the following report: "Standardization of Rules of Origin, Report to the Committee on Ways and Means, US House of Representatives on Investigation No. 332 - 239 under section 332 of the Tariff Act of 1930," USITC Publication [19�unreadable]. May 1987.

This is a completely different report. It does not include the quotation referred to by India in footnote 5 of India�s First Submission. Nor does it include other very useful information with respect to the economic impact of rules of origin.

However, India has obtained a copy of the USITC Pub. No. 1695 directly from the US International Trade Commission. We attach this Report as India EXHIBIT - 20.

India wishes to comment on Report Pub. No. 1695, which is the Report actually requested by the Panel.

With respect to the substance of the No. 1695 report, India notes that it contains very useful information with respect to the predictability and clarity that the 19. C.F.R. 12.130 regulations would bring (see page 30 et seq.) as well as the difficulty in quantifying the economic impact of rules of origin.

India has made clear throughout these proceedings that it does not consider that the Panel is required to address the trade data cited in order to examine the adverse trade effects, and that Article 2(c) would be reduced to inutility if it were interpreted to required the complainant to demonstrate the economic impact of rules of origin through trade statistics. In this regard, India would note that the US ITC has itself acknowledged the difficulty associated with quantifying the economic impact of a rule of origin. The US ITC has noted:

Answer 72: In the view of India, the United States is not using its rules of origin to protect "the integrity and effectiveness" of its quota system but to render that system more restrictive.

As the Preamble of the RO Agreement makes clear, "clear and predictable" rules of origin are desirable. However, the Preamble also makes clear that it is not sufficient for rules of origin to be clear and predictable. They must also not "impair rights of Members under the GATT" and be "prepared and applied in an impartial, transparent, predictable, consistent and neutral manner". In the case before the Panel, the United States did not adopt rules of origin to protect the integrity and effectiveness of its textiles quota system but to render it more restrictive and skew its operation in favour of the European Communities. If the considered opinion of the United States were that its previous rules of origin did not ensure the integrity and effectiveness of the various commercial policy instruments that it may apply consistently with its WTO obligations, it would presumably have introduced changes not only for textiles and clothing products but for all products. The sector-specific nature of the United States' legislation und the fine product distinctions made in that legislation are completely unrelated to the objective of protecting the integrity and effectiveness of the restrictive import measures that the United States may apply under WTO law. The United States has failed to explain this obvious discrepancy between the declared objective and the instrument allegedly used to implement that objective.

For the United States:

73. With reference to the second sentence of Article 2 (c), if one establishes the existence of "unduly strict requirements" for example, is it then necessary in your view to show that such requirements created actual effects on international trade?

India�s comment:

Answer 73: India considers that the United States has already explained itself clearly on this point. India has presented a prima facie case of violation of the first sentence of Article 2(c) of the RO Agreement based on a conduct-oriented interpretation of this provision. India has demonstrated that this interpretation is supported by the text of Article 2(c) and its context and by the object and purpose of the RO Agreement. As India noted in its answer 26(e) to the Panel�s questions, the second sentence of Article 2(c) is an elaboration of the first sentence. The United States has agreed with this approach in its answers to the panel�s questions.³⁵² It thus acknowledged that, according to the second sentence, the imposition of unduly strict requirement and conditions unrelated to manufacturing or processing as such is inconsistent with Article 2(c), irrespective of the actual trade impact.

ANNEX A-5

ANSWERS OF THE UNITED STATES TO QUESTIONS FROM the PANEL FOLLOWING
 THE SECOND MEETING

For both parties:

46. Could the parties please indicate whether the attached tables accurately reflects the United States rules of origin at issue in this dispute?

1. The United States has made changes to the Panel�s tables, indicated in bolded double underline, and has also attached an explanation of its changes.

47. The parties have offered slightly different descriptions of the rules of origin regime applied to textile products before section 334 was enacted. India suggested that that regime, set out in CFR 12.130, was a DP2 regime. The United States, on the other hand, seems to suggest that origin determinations were made based on CFR 12.130, but also case by case. In the light of this, the Panel would appreciate it if the parties could provide clarification with respect to the following two points:

(a) What discretion, if any, did United States Customs officer enjoy in applying the DP2 rule apparently established by CFR 12.130?

2. Before section 334 was effective, 12.130 rules listed manufacturing processes that were considered significant enough to confer origin to a textile product. It also listed certain manufacturing processes that were not sufficient to confer or change the country of origin of a textile product. With respect to fabrics, both DP2 and fabric formation were considered significant enough to confer origin, and provided DP2 was actually performed on a fabric, United States Customs Officers had little discretion in the application of this rule.

3. As the United States indicated at the second meeting with the Panel, United States Customs Officers had some discretion in applying these rules to determine origin. The rules did not directly address every conceivable manufacturing scenario for specific goods and therefore some discretion was a natural consequence of the rules. The United States characterization of origin determinations under 12.130 as "case-by-case," refers primarily to determinations concerning country of origin of apparel and certain flat goods and other made-up products.

4. In the case of most fabrics, flat goods and other made-up products, which normally were not subjected to DP2, the actual manufacturing processes performed in a country were reviewed to determine the proper origin. That is, United States Customs Officers had discretion to determine, on a case-by-case basis, where origin would be conferred.

(b) If there was discretion under CFR 12.130, could it be said that, by the same token, United States Customs officers currently enjoy the same discretion in applying the DP2 rule as provided for section 405?

5. United States Customs Officers have the same level of discretion in applying the DP2 rule now under section 405 as they had under 12.130. However, United States Customs Officers are constrained by section 334 in exercising discretion when determining country of origin for those products that do not meet section 405�s guidelines.

48. Article 2(b), (c) and (d) of the RO Agreement refers to "rules of origin" in the plural. Do the parties agree that, notwithstanding the use of the plural, the provisions in question reflect a concern with individual rules of origin as they apply to individual products, rather than with a Member's system of rules of origin?

6. No. As indicated by the use of the plural "rules," Article 2(b), (c) and (d) are concerned with a Member�s system (its methods) of rules of origin. Analysis of compliance with this Article requires an examination of a Member�s system of rules of origin and its administration. The drafters chose to address the system of rules in these provisions rather than focusing on individual rules.

49. Both parties have argued that the protection of a domestic industry would be a trade objective within the meaning of Article 2(b) of the RO Agreement. On what basis do you reach this conclusion?

7. The United States accepted, for purposes of this dispute and in order to avoid confusion given India�s failure to make a prima facie case on its claims, India�s contention that protection of a domestic industry would be a trade objective within the meaning of Article 2(b) of the RO Agreement. As such, the United States� arguments with respect to whether protectionism could be a trade objective have been responsive only to India�s contentions regarding alleged United States motivations and behavior. Moreover, the United States notes that Article 2(b), in its first clause, recognizes that rules of origin may be linked to measures or instruments of commercial policies that may have a protectionist effect, and that the objective and effect of these measures and instruments should not be confused with or attributed to that of the rules themselves. The United States does not support a general proposition that protection of a domestic industry is ipso facto an impermissible trade objective within the meaning of Article 2(b).

50. For purposes of the application of Article 2(b), does it make a difference whether rules of origin are adopted by a Member of its own volition or at the request of a trading partner?

8. All rules of origin are adopted by a Member of its own volition, regardless of whether adoption followed consultation with another Member. Either way, the question of whether rules are used as instruments to pursue trade objectives will depend on the particular facts of the case. Further, as the United States has indicated in this dispute, settling a WTO dispute on particular terms as a result of negotiation, pursuant to the goals and objectives of the Dispute Settlement Understanding and the WTO framework, cannot be a prohibited trade objective within the context of Article 2(b).

51. With reference to Article 2(d) of the RO Agreement, please elaborate on the meaning and purpose of the first clause ("the rules of origin that they apply to imports and exports are not more stringent than the rules of origin they apply to determine whether or not a good is domestic"). Please provide an example of a typical situation which the first clause is meant to address.

9. The first clause of Article 2(d) is intended to prohibit Members from using rules of origin to favor domestic production by applying more stringent requirements to imports than to domestic goods. For example, this would preclude a Member that uses an ad valorem percentage criterion in its government procurement rules of origin from requiring a higher percentage to determine the country of origin of an imported product than the percentage used to determine the country of origin of a domestic product. However, the first clause recognizes that a determination of domestic origin may involve a more rigorous standard than that applied to imported goods.

52. Why is a provision equivalent to (i) Article 2(b) of the RO Agreement and (ii) to Article 2(c) of the RO Agreement no longer necessary after the transition period? (see Article 3 of the RO Agreement)

10. The construction of Article 3 of the RO Agreement further underscores that the analysis in this dispute must focus on the rules of origin themselves, and must not involve or be affected by any analysis or assumptions relating to the objectives or effects of the measures to which the rules of origin may be linked. Upon implementation of the results of the harmonization work program, all Members will be using the same rules of origin. The RO Agreement recognizes that, at that time, it would simply be implausible to make a determination that a single Member�s rules of origin are themselves - considered apart from any measure or instrument of commercial policy to which they are linked - either an instrument to pursue a trade objective or otherwise creating restrictive, distorting, or disruptive effects on international trade. Notably, once Article 3 applies, measures or instruments of commercial policy creating restrictive, distorting or disruptive effects on international trade will continue to be introduced and implemented through rules of origin. The absence within Article 3 of the equivalent of Article 2(b) and Article 2(c) underscores that the standard that is to be applied under Article 2 should not confuse either the objectives and effects of a particular measure or instrument of commercial policy with the objectives and effects of the rules of origin themselves.

53. Why is a provision equivalent to Article 2(d) necessary after the transition period? (see Article 3(c) of the RO Agreement)

11. The Article 3 provision equivalent to Article 2(d) will remain necessary because, as the RO Agreement recognizes, notwithstanding completion and implementation of harmonization, Members will continue to be able to apply more stringent rules for determining whether a good is domestic, than the harmonized rules of origin applied to imports and exports.

54. With reference to 19 C.F.R. � 102.21, please answer the following questions:

12. Paragraph (a) of section 334 directed the Secretary of Treasury to prescribe rules to implement the principles contained in section 334 of the Uruguay Round Agreements Act (URAA) for determining the origin of textiles and apparel products. The regulations set forth in 19 C.F.R.�102.21 reflect the exercise of that authority and were promulgated in accordance with the US Administrative Procedures Act and, as such, have the force and effect of law in the United States. The section 102.21 regulations contain amendments, adopted on an interim basis, to align the regulatory text with the statutory amendments to section 334 of the URAA as set forth in section 405 of the Trade and Development Act of 2000. These amendments were the subject of public comment and are in effect pending issuance of final regulations. Therefore, the regulations contained in 19 C.F.R. �102.21, including the interim amendments, are legally binding.

(b) Would the Panel have the authority to find that 19 C.F.R. � 102.21, as such, is contrary to the United States' WTO obligations?

13. The Panel has the authority to find that any claim that properly falls within the terms of reference of this dispute, and for which India has established a prima facie case that the United States has not rebutted, is contrary to the United States� WTO obligations. However, India has failed to establish a prima facie case that section 102.21 breaches United States' obligations, having failed to cite section 102.21 in its first submission, and having provided non-substantive arguments in its second submission.

(c) If the Panel were to find that sections 334 and/or 405 are inconsistent with Article 2 of the RO Agreement, would the Panel need to make additional findings in respect of 19 C.F.R. � 102.21?

14. The Panel could not conclude that section 102.21 is inconsistent with United States' obligations unless India has established a prima facie case with respect to each of the measures at issue in this dispute, and it may not be assumed that one measure is inconsistent with United States' obligations because another has been found to be. A finding that 19 C.F.R. � 102.21 is inconsistent with United States' obligations under Articles 2(b)-(e) would have to be based on a prima facie case of how the regulations contained therein are inconsistent with the obligations found in each of those provisions.

55. If there were no United States quota regime, could it be said that (i) the fabric formation and (ii) the DP2 rule, in and of themselves, or as such:

(a) create restrictive, distorting or disruptive effects on international trade?

15. No. As the United States has explained, the fabric formation rule in section 334 and the DP2 rule in section 405 were enacted to best capture where a new product is formed and to facilitate harmonization of rules of origin, in addition to combatting circumvention of quotas through preventing illegal transshipment. The first two of these objectives are valid whether or not a quota regime is in place (and indeed, both section 334 and section 405 will continue in force after the ATC regime expires in 2005). The United States would not agree, and more importantly, India has not shown, that either the fabric formation rule or the DP2 rule in and of themselves have created restrictive, distorting or disruptive effects on international trade. Indeed, the data submitted by the United States in Exhibits US-8 and US-9 would strongly disprove such a conclusion. (The Indian delegation commented at the second meeting with the Panel, in respect of Exhibit US-9, that import data in volume would have been more relevant for assessing trade effects than import data in value. Thus, in Exhibit US-10, attached, the United States presents United States' imports of bed, table and bath (toilet) linen in HTS headings 6302 in volume (kilograms). In volume as well as in value, United States' imports of these products from the world and from India show steady, significant yearly increases, including in the period 1995 to 1997, where the rate of increase in imports from the world and from India in volume is comparable to the rate of increase in value. The import data in volume or value therefore equally refute India�s claim of trade restriction, distortion or disruption.)

(b) are designed to pursue trade objectives?

16. No. Both the fabric formation rule and the DP2 rule facilitate the achievement of trade objectives such as transparency and predictability. Having rules of origin which are based on economically rational principles and which are harmonized with trading partners; and settling disputes in a mutually satisfactory manner, furthers rather than detracts from the principles of the RO Agreement.

56. Could the parties please address whether, and if so, how the following statement by the Appellate Body is relevant to the present dispute:

The requirement to prevent trade distortion found in Articles 1.2 and 3.2 of the Licensing Agreement refers to any trade distortion that may be caused by the introduction or operation of licensing procedures, and is not necessarily limited to that part of trade to which the licensing procedures themselves apply. There may be situations where the operation of licensing procedures, in fact, have restrictive or distortive effects on that part of trade that is not strictly subject to those procedures.³⁵³

17. The Appellate Body�s statement, and the context in which it was made, are relevant in that they underscore that there has to be a causal connection between a measure that is alleged to be trade distortive and any trade distortion.

18. The Licensing Agreement provisions in EC - Poultry required an examination of whether Brazil�s licensing procedures had trade restrictive or distortive effects in breach of Licensing Agreement Articles 1.2 and 3.2. The Appellate Body agreed with the panel that since Brazil had fully utilized its TRQ and "the absolute volume of Brazilian exports of the relevant product to the European Communities ha[d] been increasing since the opening of the TRQ," Brazil had not shown that the licensing procedures had caused a decline in its market share that could be labeled "trade distortive."³⁵⁴ The Appellate Body noted that Brazil needed to establish "a causal relationship between imposition of the European Communities licensing procedure and the claimed trade distortion."³⁵⁵

19. It is also this "essential element of causation"³⁵⁶ that is missing in the present dispute. India has failed to show how its vague allegation of disruption of some exporter�s business, shows that the United States' rules of origin are distorting trade, especially when these allegations are considered against the backdrop of concrete evidence presented by the United States that trade with India in the specific products complained of has actually increased since the rules were enacted (exhibits US-8 and US-9), in addition to the fact that India�s quotas have increased over this time. Despite India�s assertions to the contrary, it is clear that prior WTO panels and the Appellate Body have required a claimant to make a causal connection between the measure it alleges has distorted its trade and trade data.

20. Beyond this, the Appellate Body�s statement has little relevance. It stands for the proposition that the Licensing Agreement obligations at issue in EC - Poultry apply to more than in-quota trade. The statement was made in the specific context of addressing Brazil�s complaint that it was improper for the EC - Poultry panel, in assessing the effects of the European Communities' licensing procedures, to have made the broad finding that the Licensing Agreement provisions, "as applied to [that] particular case, only relates to in-quota trade." While the Appellate Body sought through the above statement to counter any mis-impression that the Licensing Agreement somehow limits the examination of trade distortion to in-quota trade, it nevertheless went on, in paragraph 122, to find that, by its terms, the relevant measure applied only to "in quota" trade. Accordingly, the Appellate Body concluded that the panel was merely pointing out "this obvious fact," and upheld the panel�s finding. Therefore, it is difficult to draw any relevant conclusion from the Appellate Body�s statement other than that there has to be a causal connection between a measure that is alleged to be trade distorting and any trade distortion.

57. Please recall the following headings and subheadings of the HS96 for bed linen:

21. According to United States import data compiled by the US International Trade Commission, cotton is the most widely traded bed linen, followed by manmade fibers and "other." In calendar year 2001, cotton accounted for 85.4% of United States imports by value in these HS96 subheadings. Man-made fibers accounted for 13.4%, and "other" accounted for 1.2%.

22. The United States notes that in addition to being bleached or white-dyed, cotton bed linen may also be printed, but as we have also noted, it is not normally dyed and printed (just as wool is not normally used for bed sheets and pillowcases). Therefore, the DP2 rule would be neither "appropriate" nor meaningful for these products. Because these products are normally cut to length and hemmed, the application of the "fabric formation" rule under section 334 and section 405 results in the same origin as the application of 19 CFR 12.130.

For the United States:

73. With reference to the second sentence of Article 2(c), if one establishes the existence of "unduly strict requirements", for example, is it then necessary, in your view, to show that such requirements created actual effects on international trade?

23. Yes, it would be necessary to show that the existence of the elements of Article 2(c) created actual effects on international trade. The second sentence of Article 2(c) does not stand alone, but operates to articulate the type of rules of origin that "themselves" could meet the requirement of the first sentence- as opposed to a situation where "actual effects on international trade" are created merely by the implementation of a measure through application of a particular rule of origin. Article 2(c) does not bar "requirements," "strict requirements," or "unduly strict requirements." As is discussed in the United States answer to question 74, Article 2(c) bars "unduly strict requirements . . . as a prerequisite for the determination of country of origin." In determining whether such a requirement is "unduly strict," in the United States view, it is necessary to examine the actual effects on international trade. If such a requirement had a significant impact on international trade, it would support a Member's claim that the requirement is "unduly strict." Similarly, if there were no trade impact, it would support a Member's position that such a requirement is not "unduly strict." On the other hand, as is discussed below in the United States' answer to question 74, there are some such requirements that on their face would, in the United States view, be correctly characterized as "unduly strict," even in the absence of a trade effect. However, even if a measure could be characterized as "unduly strict" in the absence of a trade effect, it would only be inconsistent with Article 2(c) if the complaining Member established that the measure created actual effects on international trade in violation of the first sentence of Article 2(c).

24. When applied in the implementation of a particular measure, any rule of origin - and most certainly any change in a rule of origin - could probably be viewed as having an effect on international trade. However, in the context of such a situation, the application of a non-preferential rule of origin that is merely �strict� (e.g., a 60 percent ad valorem criterion) would most likely not be viewed as a rule of origin that itself creates "restrictive, distorting, or disruptive effects on international trade." By contrast, a nonpreferential rule of origin that, for example, involves an even higher ad valorem criterion, combined with mandating a particular technology for manufacture may be viewed as "unduly strict," and, if so, could lead to a conclusion that such a rule of origin itself, creates "restrictive, distorting, or disruptive effects on international trade" - assuming the latter situation has also been established.

74. With reference to Article 2(c) of the RO Agreement, please elaborate on how the second clause of the second sentence of Article 2(c) could be understood as describing a situation which creates restrictive effects on international trade?

25. Article 2(c) provides: "Rules of origin shall not themselves create restrictive, distorting, or disruptive effects on international trade. They shall not pose unduly strict requirements or require the fulfilment of a certain condition not related to manufacturing or processing, as a prerequisite for the determination of the country of origin. However, costs not directly related to manufacturing or processing may be included for the purposes of the application of an ad valorem percentage criterion consistent with subparagraph (a)". The second sentence demonstrates one manner in which rules of origin can create restrictive, distorting, or disruptive effects on international trade, and the second clause of the second sentence qualifies the first clause. In other words, Article 2(c) does not bar "unduly strict requirements"; it bars "unduly strict requirements � as a prerequisite for the determination of the country of origin." Similarly, Article 2(c) does not bar "requiring the fulfilment of a certain condition not related to manufacturing or process" except "as a prerequisite for the determination of country of origin."

26. A rule of origin implementing a particular measure that requires the fulfilment of a manufacturing process (e.g., "assembly" as a criterion) may have an effect on international trade, but would not necessarily be seen as a rule of origin that itself creates "restrictive, distorting, or disruptive effects on international trade." By contrast, a rule of origin that requires the fulfilment of a condition not related to manufacturing or processing (e.g., nationality of company ownership, or requiring the use of personnel of a certain religious order to achieve a certain determination of origin) could be viewed as a rule of origin that itself creates "restrictive, distorting, or disruptive effects on international trade"- if the latter situation has also been established.

27. An example of the fulfilment of a certain condition not related to manufacturing or processing as a prerequisite for the determination of the country of origin would be a rule of origin that requires a particular nationality of company ownership, or a requirement that a good be certified by several authorities through a time consuming process in the exporting country in order to be declared as originating in that country. As noted above, such a rule could be viewed as itself creating "restrictive, distorting, or disruptive effects on international trade," if the latter situation has also been established.

75. Could the United States elaborate further on why it thinks that Article 2 of the RO Agreement permits Members to apply rules of origin which are based on narrow product distinctions?

28. Article 2 sets out certain disciplines on Members during the transition period until the work program leading to the implementation of harmonized product-specific rules of origin is completed. Thus, the United States understands the Panel to be asking whether Article 2 bars Members from applying rules of origin which are based on "narrow" product distinctions. It does not. United States rules of origin are product-specific, and as explained below, operate based on distinctions among products. The United States is not familiar with an RO Agreement criterion that would establish whether certain product distinctions (that are captured in a Member�s tariff schedule) are deemed "narrow" while other distinctions in a Member�s tariff schedule presumably are not.

29. First, rules of origin will necessarily make distinctions between products based on the characteristics of the products and the nature of the industry involved. A single rule for all products would either be so vague as to require case-by-case elaboration (e.g., "substantial transformation") or be administered arbitrarily. This dispute has clearly demonstrated the complexity of determining the origin of certain textile products. The RO Agreement clearly envisions that Members could impose product-specific rules, as is demonstrated by Article 2(a)(iii), which authorizes Member to use criterion related to manufacturing or processing to confer origin; as different products undergo different manufacturing/processing, different criterion (and different rules) would be required for different products.

30. If a Member may have different rules for different products, what disciplines does the RO Agreement impose on a Member in distinguishing products? Certainly, the RO Agreement does not require the same rule for all "like" or "directly competitive" products. Such a requirement is not found in the RO Agreement and cannot be inferred from any provision of Article 2, nor has India made a case that it should be so inferred. Moreover, the RO Agreement does not require the same rules for all products that are similar in some other sense. Again, such a requirement is not spelled out in the RO Agreement and cannot be inferred from any provision of the RO Agreement. Thus, it would be incorrect to interpret the RO Agreement as barring Members from distinguishing in their rules between products - regardless of whether these products are "like," "directly competitive" or similar in some other manner, and even if such product-specific rules are perceived to be based on distinctions deemed in some sense "narrow."

76. Did meeting the European Communities requests and the consequent enactment of section 405 compromise the objectives stated in the SAA for the adoption of section 334?

31. No. The objectives stated in the SAA for section 334 were not compromised by section 405. It should first be noted that while section 405 emerged from consultations with the European Communities, not all of the "European Communities requests" are reflected in the rules which the United States adopted in section 405. Moreover, those which are reflected in section 405 were adopted in a manner that the United States considered appropriate so as not to undermine the core principles of section 334. The objectives of 334 were to reflect the important role assembly plays in the manufacture of an apparel product; to prevent circumvention by illegal transshipment, to harmonize United States practice with that of our major trading partners and to advance the goals of the RO Agreement. Two of these objectives were unaffected by the changes in section 405. First, harmonization referred primarily to eliminating the conference of origin by cutting, and this was unchanged by section 405. Second, advancing the goals of the RO Agreement is accomplished by having clear, concise predictable rules, and this too remained unchanged. Similarly, it was felt that having clear guidance for importers and United States Customs Service officers would make it more difficult to circumvent the rules and easier to detect circumvention. This was unchanged because section 405, like section 334, provides concise direction regarding origin determination.

32. In addition, as the United States has indicated before, one reason for the changes in section 405 was that we were persuaded that, for the products at issue, such as silk scarves, the most important manufacturing process would be better reflected by a change in the rule of origin back to DP2. Also, as the United States has previously noted, a primary goal of section 334 was to address assembly of apparel products, whereas section 405 addresses fabric formation and flat goods. See also United States answers to panel questions 14 and 19.

77. Why does the United States apply the fabric formation rule to wool fabric, when all other fabrics appear to be subject to DP2?

33. In section 405, the United States amended section 334 to reflect the terms of our settlement agreement with the European Communities. In all other respects, we retained the section 334 rules. For 95% of the trade, all non-wool fabrics are treated the same as wool fabrics. The European Communities, which is one of the world�s leading manufacturers and exporters of wool fabric, found the solution to its dispute with the United States satisfactory, even though it excluded wool.

78. With reference to para. 73 of India's Second Submission, does the United States agree that "the exemptions provided for in section 405 do not bear any relation to the criteria for determining origin as set out in Article 2(a)?

34. No. We would first note that India did not make an allegation in its panel request that section 405 is inconsistent with any part of Article 2(a). As the United States has made clear during its submissions and answers to questions, the exemptions in section 405 are in accordance with all relevant provisions of the RO Agreement. The relevant provision in Article 2(a) is subparagraph (iii). To the extent that the United States understands India�s argument in paragraph 73 with respect to "end products" and Article 2(a)(iii), these arguments seem to be based on India�s desire to return to a pre-section 334 world. The issue in this dispute is not about end products, it is about India�s desire to have specific rules or no rules or vague rules which would produce an origin determination that India favours for certain end products. Article 2(a)(iii) prescribes that where manufacturing or processing operations determine origin, they should be precisely specified. The determinations of fabric or product origin in section 405 could not be more precisely specified. Indeed, it is those precise specifications which India does not appreciate.

79. On the one hand, the United States says that the purpose of section 405 was to settle a WTO dispute with the European Communities. On the other hand, the United States says that, "as a result of extensive consultations with the European Communities, as well as representatives of its textile industry, the United States agreed that, at least with respect to goods of silk, certain cotton blends, and fabrics made of man-made and vegetable fibers (specifically silk scarves and flat products such as linens), dyeing and printing along with two or more finishing operations were significant enough to confer origin". Could the United States please explain the relationship of these two statements?

answers of india to questions from the united stateS FOLLOWING THE
 SECOND MEETING

Could India clarify what "comparative advantage," other than the lack of a quota, would drive Indian exports of greige fabrics to Sri Lanka, where they are "converted" into bed linen? (India answer to panel question 17(c)). Can India clarify exactly what activities are being performed in Sri Lanka to "convert" the fabric into bed linens?

Answer: Sri Lanka has emerged as a major conversion centre for producing made-up articles and garments. Unlike India, Sri Lanka has a low fabric base and mainly depends on imports of fabrics from various fabric producing countries including India for producing value added cotton made-ups like bed sheets/pillow cases, shop towels etc. Studies benchmarking costs of production between competing countries like India, Sri Lanka, China, Indonesia, Pakistan show that Sri Lanka has the following advantages giving it an edge over other supplying countries in Asia.

(i) Cost of Power

(ii) Cost of Steam

(iii) Wage Costs.

In view of the above advantages, rather than lack of quota Sri Lanka has emerged as a major manufacturing centre for made-up articles and garments and an important market for export of greige fabrics from India.

As regards "lack of quota", India notes that it needs to be clarified that the United States imposes "quotas" on imports of "pillow cases" (Cat. 360) from Sri Lanka which were debited to India�s quota levels under the "fabric forward" rule by the United States.

With reference to India�s statement in paragraph 52 of its second submission that the "very adoption" of changes has an immediate impact on producers, could India please explain how this standard is different from a per se rule that changes are inconsistent with Article 2(c)?

Answer: The "very adoption" of changes to rules of origin differs from the per se rule in the following way. The "very adoption" of the rule connotes a temporal aspect, whereby as soon as the rule of origin is made effective, it can impact on business plans. India has explained this approach as the "conduct-oriented approach." For example, in paragraph 52 of its second submission, India has clarified the impact of a "conduct oriented" approach could be seen in terms of "the incentives and disincentives for producers and traders and as a result also on their investment and other business plans". The per se rule requires an examination of the rules themselves. The common element with the per se rule is that there is no requirement to demonstrate the actual adverse effects through trade statistics.

In the present situation, India notes that the United States' rules of origin have restrictive, distorting or disruptive effects on international trade for the following reasons:

(i) Section 334 had the dual effect of moving the origin of dyed, printed and finished fabrics back to the country where the fabric was woven and making products such as bed sheets/duvet covers subject to DP2 operations cut and sewn in Sri Lanka from India greige fabrics subjected to quotas whereas they had never previously been subject to quotas.

(ii) Importers have to switch to new suppliers as traditional suppliers lost their access to the United States' market because of the new rules, thereby distorting historical trade patterns.

(iii) The new rules undermine informed compliance by foreign producers thereby exacerbating the disruptive effects as the same product undergoing the same production operations in Sri Lanka may be a product of Sri Lanka or India depending on the product�s fibre content.

(iv) As China argued in its reply to question No. 41(d) "If the patterns of trade - the "shape" of the trading relationship among the subject countries for the products in question - have been "twisted" as a consequence of the changes in the origin rules themselves", the very adoption of a rule of origin can be an example of the serious restrictive or distorting effects on international trade.

Can India clarify if in India�s second submission, paragraph 43, it is saying that it is an "unduly strict requirement" to conform to Harmonized Tariff Schedule (HTS) classifications for cotton, wool or silk?

Answer: In paragraph 43, India is not implying that it is an "unduly strict requirement" to conform to Harmonized Tariff Schedule (HTS) classifications for cotton, wool, silk. India is claiming that it is completely arbitrary and burdensome for producers and traders if the criteria for determining origin vary with these HTS classifications.

With respect to the situation described in India�s answer to Panel question No. 5, does India have any documentary evidence, such as contracts, invoices, bills of lading, etc. indicating that a) India exported greige fabric to Portugal, or b) that the fabric was subjected to "DP2" in Portugal?

Answer: India considers that it is not required to provide such information. Nevertheless, India has provided the attached bills of lading (INDIA-EXHIBIT 21). Furthermore, India notes the following. Portugal is an important market for export of greige fabric from India. India�s exports of greige fabrics to Portugal are as follows:

Can India provide a general estimate of the percentage of world trade in fabrics that are actually subject to "DP2?" An estimate of world trade in bed sheets that are actually subject to "DP2?"

Answer: The harmonized system of classification provides separate tariff headings for bleached, dyed, printed fabrics. An estimated 70% of the fabrics in the world are traded in the form of DP2. As regards world trade in bed sheets, it is estimated that in the year 1999 world trade in bed wear was approximately US $ 3.2 billion. Out of this trade around 70% is subject to DP2. Nevertheless, India notes that these trade statistics are not relevant in the determination of whether the United States' rules of origin are WTO-inconsistent.

Could India give examples of wool products that are actually subject to DP2? Could they also estimate the amount of trade in those items?

Answer: India notes that wool is spun into yarn and woven into a greige fabric which is subsequently subjected to DP2 operations. Woollen scarves, shawls, mufflers, mantillas, veils and the like are made from greige fabrics after DP2 operations. India notes that with respect to woollen products, while generally yarn dyeing takes place, piece dyeing (e.g., dyeing after the fabric is woven) also takes place. In very rare cases, printing takes place in woollen products.

Besides silk scarves and cotton/man-made fibre bed linens, can India give examples of other flat goods subject to DP2?

Answer: There are many examples of DP2 flat goods besides silk scarves and cotton/manmade fibre bed linens. These include, table linen, toilet linen, curtains/interior blinds, other furnishing articles like cushion covers, quilt covers etc.

348Appellate Body Report, European Communities - Measures Affecting the Importation of Certain Poultry Products ("EC - Poultry "), WT/DS69/AB/R, adopted 23 July 1998, DSR 1998:V, 2031, para. 121.

349J. Bourgeois, "Rules of Origin: An introduction," in Rules of Origin in International Trade: A Comparative Study, Edited by Edwin Vermulst, Paul Waer and Jacques Bourgeois (University of Michigan Press, 1994) at pp 1-2.

350United States International Trade Commission, "The Impact of Rules of Origin on US Imports and Exports," Report to the President on Investigation No. 332-192 under section 332 of the Tariff Act of 1930, Publication No. 1695, May 1985, p. 7.

351Ibid. page 77.

352Responses of the United States to the questions from the Panel, 6 January 2003, paragraph 16.

353Appellate Body Report, EC- Poultry, supra, para. 121.

354Ibid, paras. 125-126.

355Ibid. para. 127.

356Ibid. para. 127.