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WORLD TRADE
ORGANIZATION

WT/DS243/R
20 June 2003

(03-3200)

Original: English

UNITED STATES - RULES OF ORIGIN
FOR TEXTILES AND APPAREL PRODUCTS

Report of the Panel

(Continued)


ANNEX A-7

Comments of india on answers of the United states to questions
 from the panel following the second meeting

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.

COMMENT: India has attached a table which sets out its understanding of the scope and coverage of both Section 334 and Section 405. We have not included the customs regulations 102.21 as they are only subordinate to the statutory provisions. India has also commented in redline on the U.S. comments on the panel�s tables.

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?

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.

Comment: India does not agree with this interpretation, which is not borne out by the text of Article 2. In this particular case, the United States' rules of origin apply to textile and apparel products (which are individual products.) A panel must be able to examine the WTO-consistency of rules of origin as they apply to individual products. Otherwise, a large body of rules of origin that only apply to individual products could escape examination by a panel. This would be especially true if a Member�s overall system of rules of origin were WTO-consistent, but the rules of origin it applied to individual products, such as textiles and apparel products were WTO-inconsistent. This cannot be what the drafters of the RO Agreement intended.

Indeed, in Answer 28, the United States has itself recognised that 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." This is an acknowledgement that the HWP will lead to product-specific rules of origin. India notes that Article 3 also refers to "rules of origin" in the plural. Therefore, the interpretation proffered by the United States cannot be correct.

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

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.

Comment: As previously noted by India in its answer to this question, a provision equivalent to Article 2(d) is also necessary after the transition period because a Member can still discriminate in favour of another Member.

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?

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?

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.

COMENT: India has cited the customs regulations in its request for the establishment of a panel. India has referred to the customs regulations in its first submission (para. 7, inter alia). In footnote 12 of the first submission, India noted that "we will use Section 334 and 405 to refer to the rules as set out in both the statutes and the customs implementing regulations." Therefore, all the claims and arguments that India made in its submissions and other documents submitted to the Panel have covered the customs regulations as well.

(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?

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.

COMENT: India considers that if the panel were to find that Section 334 and Section 405 are WTO-inconsistent then it follows that 19 C.F.R. � 102.21 (which are the implementing for these sections) would have to be found WTO-inconsistent as well.

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?

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.)

COMENT: In India�s view, these trade statistics are not germane. These trade statistics could be interpreted in different ways. As noted in paragraph 17 of India�s oral statement at the second meeting, India would argue that this result is precisely what Section 334 was designed to achieve, namely to bring more finished products under the quota of the country where the greige fabric was woven.

(b) are designed to pursue trade objectives?

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.

COMENT: In India�s view, transparency and predictability are not trade objectives, but rather public policy objectives.

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

"63.02 (bed linen, table linen, toilet linen and kitchen linen)
6302.10 - bed linen, knitted or crocheted

- other bed linen, printed;

6302.21 - - of cotton
6302.22 - - of man-made fibres
6302.29 - - of other textile materials

- other bed linen

6302.31 - - of cotton
6302.32 - - of man-made fibres
6302.39 - - of other textile materials"

Please answer the following questions:

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

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%.

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

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.

COMMENT: India does not agree with this view. Insofar as there are some cotton bed linen that are both dyed and printed, then the DP2 rule would be appropriate.

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?

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).

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 nonpreferential 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.

COMMENT: Please see India�s comments on Panel question No. 73 to the United States. It is reproduced below for ease of reference.

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.357 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.

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)?

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 favors 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.

COMMENT: India made this point - that Section 405 did not bear any relation to the criteria for determining origin as set out in Article 2(a) - in response to the United States' argument in its first submission that its rules of origin were promulgated in accordance with the criteria set out in Article 2(a). That is why this claim was not included in the panel request.

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?

14. These statements form the basis for Section 405 and there is no conflict between the two. The purpose of Section 405 was to settle the European Communities dispute. The terms upon which the settlement was arrived at, and which ultimately formed the basis of the text of Section 405, resulted from the consultations with the European Communities, during which, for example, the United States was persuaded that it would be appropriate to amend Section 334 and return to DP2 for the cited products.

General comment: India notes that in the United States consolidated exhibit list (circulated at the second meeting of the parties), the United States referred to US-7 bis as the USITC Pub. No. 1695 (1985). However, the United States attached the 1987 USITC Report as US -7 bis. It did not indicate that it was circulating the 1987 report as an update to the 1985 report it had circulated earlier as US Exhibit-7. (India notes that the United States did attach the 1985 USITC report as Exhibit - 7 in its second submission.) It is unclear whether the omission of the correct document in the United States' consolidated exhibit list would mean that the 1985 report is not properly before the panel. In order to avoid any question in this respect, India has filed the 1985 report as India Exhibit - 20.

ORIGIN OF FABRICS


ORIGIN-CONFERRING PROCESS

FABRIC- MAKING

(KNITTING,          WEAVING,
 ETC.)

PRINTING & DYEING
OF FABRIC & 2 OR MORE SPECIFIED FINISHING OPERATIONS
Wool fabrics

YES (section 334(b)(2))
YES, but Section 334 (b) (1)
(C) as it is fabric

NO

Other fabrics (silk, cotton, man-made fibres and vegetable fibres)

YES
(Section 334 (b)(2), unless subsequently subjected to DP2 under Section 405)
We agree with the Panel�s original classification. In any event, it is not Section 334 (b) (2) which only deals with finished products not fabrics.

YES (section 405(a)(3)(B))

Note: Empty cells should be understood as saying �no�. That is to say, the relevant processes do not confer origin for the articles in question.
 

  ORIGIN OF MADE-UP ARTICLES ASSEMBLED IN SINGLE COUNTRY FROM SINGLE
COUNTRY FABRIC(S)

ORIGIN-CONFERRING
PROCESS
FABRIC-
MAKING
(KNITTING, WEAVING, ETC.)
PRINTING & DYEING OF FABRIC & 2 OR MORE SPECIFIED FINISHING OPERATIONS "WHOLLY ASSEMBLED"
Articles (scarves, bed linen, etc.) specified in section 334(b)(2)(A) and section 405(a)(3)(C) and made of:      
  - Wool

YES
 (Section 405(a)(3)(C) Section 334 (b)(2)(A) India considers that the Panel�s original classification was correct. The origin for wool, cotton and fibre blends with 16%+ cotton is determined by virtue of Section 405 (a) (3)(C)

NO

NO

  - Cotton

YES
 (section 405(a)(3)(C)) Section 334(b)(2)(A)

See India�s comment above

NO

NO

  - Cotton blends (more than 16% cotton by weight)

YES
 (section 405(a)(3)(C))) Section 334(b)(2)(A)

See India�s comment above

NO

NO 

  - Other (silk, man-made fibres, vegetable fibres)

YES
(Section 334(b)(2)(A), unless DP2)

YES
(section 334(b)(2)(A) and section 405(a)(3)(C))

NO

Articles which are "knit to shape" (e.g., stockings)

YES
(section 334(b)(2)(B) (Not considered fabric making, considered component or article formation)

NO

NO

Other articles (including apparels)

NO

NO

YES (section 334(b)(1)(D))

Summary of United States changes to the Panel�s chart:

- Inserted "no" in the applicable blocks to be clear.

Origin of Fabrics:

- On other fabrics (silk, etc) indicated "yes,� unless subsequently subjected to DP2 pursuant to Section 405

Origin of Made-up Articles Assembled in a Single Country from Single Country Fabric(s)

- In the title added "from single country fabric(s)" to better reflect conclusions

- For other articles (silk, etc.), specified in 334(b)(2)(A), we indicated "yes,� the origin would be conferred by fabric making.

- For articles which are "knit-to-shape", we clarified the fact that the process of �knitting to shape� is not a fabric making process. The process of "knitting-to-shape" involves making a component or an article directly without the formation of a fabric.


 


ANNEX A-8

comments of the united states on answers of india to questions
 from the panel and to questions from the united states following
 the second meeting

Answer to Panel question No. 57(b)

1. The United States notes that India�s response is somewhat misleading. The harmonized system provides for a separate classification of printed bed linen, but that does not necessarily mean that the linens are also dyed and subject to 2 or more finishing operations. Therefore, not everything that would be classified under this printed bed linen subheading would qualify for DP2.

Answer to Panel question No. 61

2. India�s statement that "Prior to the adoption of the Section 334 rules, only products in (1) would have been recognised as being products of Country A," is misleading. For example, towels could fall within the description of (3), but towels generally were deemed to originate in the country in which the towels were woven unless subjected to dyeing and printing plus 2 finishing operations. Prior to Section 334, since most towels are not dyed and printed, towels normally originated in the country in which they were formed. This is also true of fabrics.

Answer to Panel question No. 71

3. The United States is puzzled by India�s representations in this response. First, the United States submitted the 1985 document (exhibit India-20) that the Panel requested on January 15, 2003 as exhibit US-7. India was forwarded a copy of the document, despite its notice to the United States mission in Geneva that it already had a copy of this document. At the second meeting with the Panel on January 23rd, the United States presented exhibit US-7bis, the 1987 document, and noted that both the 1985 and 1987 documents should be considered exhibit US-7bis. As to India�s more specific comments, the EC-Poultry dispute, at the very least, makes it clear that it is possible for a claimant to present, and a panel to evaluate, economic data to assess trade effects.

Answer to United States' question No. 4

4. India has supplied (Exhibit India -21) an invoice from 2002 which indicates a single shipment of "drill" fabric to Portugal, which responds to the first part of the United States' question, but India has provided no documentary evidence in response to the second part of the United States' question (which was could India support its assertion that Indian greige fabric was subject to DP2 in Portugal).

5. Furthermore, the type of fabric on India�s invoice, is, according to industry experts, one of the very last fabrics anyone would try to dye and print, and a far cry from the Hermes-type silk scarves that were the subject of the EU settlement agreement. Fairchild�s Dictionary of Textiles defines "drill" fabric as:

A strong, warp-faced, twilled, cotton fabric, medium to heavy weight generally made with coarse carded yarns in a two up, one down left-hand twill, in a dense construction. Resembles denim. � A variety of uses, e.g., work clothes, pocketings, shoe linings, uniforms, book bindings, corsets, backing for coated fabric, industrial fabric, ticking, etc.358

6. Printing (alone) is usually not done on "drill" fabric because it is heavy and the twill design will make a uniform pattern or design very difficult to achieve. In addition, if such a fabric had been subject to DP2 in Portugal and then exported to the United States, it would have been classified in HTS heading 5209.52.0020. According to statistics available on the Department of Commerce�s Office of Textiles and Apparel website, there were no United States imports of fabrics in HTS heading 5209.52.0020 from Portugal in 2002.

7. Thus, India�s example in its answer to Panel question 5 of January 6, 2003 remains unsupported, and India has still not introduced any evidence to show that either Section 334 or Section 405 actually resulted in goods being charged to India�s quotas or that India�s trade was restricted, distorted or disrupted by the introduction of Section 334 or 405.

Answer to United States' question No. 5

8. India�s statement that the Harmonized System provides separate classifications for bleached, dyed and printed fabrics is partially correct, but India�s estimates of the amount of world trade in fabric and bed sheets that are subject to DP2 are grossly exaggerated. Under the Harmonized System, fabric and bed linen which are DP2�d would fall in the classifications for printed fabric and printed bed linen, respectively.

9. Using official statistics for United States imports as a proxy, since the United States is the world�s largest import market, we found that 5.3 percent of our imports of fabric were printed and 41.2 percent of our imports of bed linen were printed (in quantity). These percentages would include all imports of woven fabric and woven bed linen that were either printed or DP2�d, and are not even remotely close to the estimate of 70 percent (for each) offered by India. DP2 is expensive and rarely done. While we can show that DP2�d fabric and bed linen could not have been more than 5.3 percent and 41.2 percent of total United States imports of fabric and bed linen, customs experts strongly believe that the actual shares of fabric and bed linen that had actually been DP2�d are substantially lower.


To continue with Annex B

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357Responses of the United States to the questions from the Panel, 6 January 2003, paragraph 16.

358Wingate, Dr. Isabel B. (ed), Fairchild�s Dictionary of Textiles, Fairchild Publications, Inc., New York, 1970, Page 197 (emphasis added).