ANNEX B

 

  ANNEX B-1

answers of china to questions from the panel

For all third parties:

39. 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?

REPLY: China believes that Members� obligations as specified in Article 2(b)-(e) of the RO Agreement encompass both the substantive content of particular rules of origin as well as the circumstances and purposes that underlie any changes that Members might choose to make in such rules. Thus, Article 2(b) prohibits Members from "using" their rules of origin as instruments "to pursue" trade objectives. This language expressly imposes obligations on Members with respect to the purpose and use of their rules of origin, obligations that necessarily encompass the circumstances and purposes of any changes to such rules in addition to the particular substantive content of the revised rules.

A Member, therefore, may change its rules of origin and then attempt to defend such change on the basis that the specific substantive provisions of the new rules are not inconsistent with its obligations under the RO Agreement. Notwithstanding the merits of that Member�s argument as to the consistency of specific substantive provisions, however, the circumstances and purposes that underlie that Member�s revision to its origin rules may establish that the Member has used the change to its rules as an instrument to pursue trade objectives. To this extent, therefore, a change in rules of origin may be challenged under Article 2(b) of the RO Agreement, apart from a challenge to the consistency of specific substantive provisions of such rules under other provisions of the RO Agreement.

In this case it has been established that the history, design and structure of section 334 show that it was used by the United States as an instrument to pursue trade objectives, in contravention of the United States� obligations under Article 2(b) of the RO Agreement. The Complainant and the Third Parties in support of the Complainant have demonstrated that the circumstances and purposes that underlay the United States changes to its textiles origin rules in section 334 amounted to an impermissible pursuit of trade policy objectives: the United States changed the definition of a product�s origin by applying per se rules that no longer took into account the nature and degree of subsequent processing in a third country, thereby increasing the quantities of textile imports that would be subject to China�s limited quota and thus protecting the United States domestic textiles and apparel industry.

40. 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?

REPLY: China believes that the proper focus of this Panel is the issue as framed by Complainant India in its Request for the Establishment of a Panel: "The structure of the [US] rules of origin, their implementation and administration, the circumstances under which they were adopted and their effect on the conditions of competition for textiles and apparel products demonstrate that they are used as instruments to pursue trade objectives."³⁵⁹ The request of India specifically refers to "the changes introduced by legislation adopted in 1994 and 2000."³⁶⁰ This Panel�s Terms of Reference are "[t]o examine, in the light of the relevant provisions of the covered agreements cited by India in document WT/DS243/5/Rev.1, the matter referred to the DSB by India in that document . . . ."³⁶¹

Therefore, it is appropriate for this Panel to interpret the term "used," as contained in Article 2(b) of the RO Agreement, with reference to circumstances and purposes that underlay the enactment by the United States of changes to its rules of origin in 1994 and 2000, as well as the implementation and administration of such revised rules since that time, up until the initiation of this Panel proceeding by Complainant India.

41. With reference to Article 2(c) of the RO Agreement, could the third 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?

REPLY: China believes that Article 2(c) of the RO Agreement, by its plain language, does not provide for a determination of whether the prohibited effects were "intended" by the Member. Rather, the prefatory language in Article 2 provides that "Members shall ensure that" their rules of origin do not create the prohibited effects specified in Article 2(c). If a Member�s rules of origin are found to create such prohibited effects, it must be concluded that the Member has failed to ensure that this does not happen and that this failure constitutes a violation of that Member�s obligation under Article 2.

(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 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?

REPLY: China submits that the plain language of Article 2(c) of the RO Agreement does not impose any condition that the "net" effect on all multilateral trade be restrictive. Trade between any two sovereign Nations is necessarily "international trade"; it is sufficient, therefore, to show that trade between two individual Members has been adversely affected in order to demonstrate the creation of "restrictive effects" on "international trade," the circumstance prohibited by Article 2(c).

Further, China notes that Article 2(c) of the RO Agreement refers to "restrictive, distorting, or disruptive effects on international trade." China believes that, while the terms "restrictive," "distorting" and "disruptive" are listed in the disjunctive -- suggesting that any one of these effects is sufficient to constitute a violation -- these three terms should be read together as connoting a comprehensive concern by Members over the effects of origin rules on multilateral trade. The term "distortion," for example, denotes a multidimensional change, one that "twist[s] out of shape" the pre-existing condition.³⁶² 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.

REPLY: China believes that Article 2(c), taken together with the fourth preambular paragraph of the RO Agreement, addresses the overarching concern of Members that rules of origin themselves do not create distorting effects on international trade or otherwise create unnecessary obstacles to the free flow of international trade. One may distinguish between the "restrictive, distorting or disruptive" effects that may flow from the specific substantive provisions of a given set of rules, and the more general administrative obstacles that may flow from the procedural requirements of a given set of origin rules. In the former case, there is no de minimis threshold; the first sentence of Article 2(c) does not speak of "unnecessarily" restrictive effects or "unduly" distorting effects. If rules of origin themselves create restrictive, distorting or disruptive effects on international trade, they do so as a result of their specific substantive provisions, and no degree of such effects are acceptable under a "de minimis exemption."

The second sentence of Article 2(c), on the other hand, may be read to refer to the administrative obstacles that naturally flow from any system in which exporters and importers are asked to document the origin of goods. It is reasonable to conclude that Members accepted a certain level of administrative burden (e.g., filing certificates of origin) as the natural consequence of trade with any Member that imposes a rules of origin regime (as most if not all Members did at the time of adoption of the RO Agreement). Such burdens are recognized as acceptable if they are not "unduly strict" and do not require the fulfillment of conditions not related to manufacturing or processing. A Member that imposes "unduly strict" requirements, however, has violated its obligations by failing to ensure that the rules of origin themselves do not create "unnecessary obstacles to trade."

REPLY: As noted in China�s response to question No. 41(b) above, the term "distortion" denotes a multidimensional change, one that "twist[s] out of shape" the pre-existing condition. 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. The Panel should assess, therefore, the patterns of trade that existed prior to the changes to the rules of origin in question and compare that to the "shape" of the trade patterns that followed from the rules changes. 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, this must be found to be a distorting effect prohibited by Article 2(c).

REPLY: China believes that the Panel should interpret the phrase "create . . . disruptive effects on international trade" in the context of the entire first sentence of Article 2(c). As noted in China�s answer to question No. 41(b) above, Article 2(c) of the RO Agreement refers to "restrictive, distorting, or disruptive effects on international trade." China believes that, while the terms "restrictive," "distorting" and "disruptive" are listed in the disjunctive -- suggesting that any one of these effects is sufficient to constitute a violation -- these three terms should be read together as connoting a comprehensive concern by Members over the effects of origin rules on multilateral trade.

Literally, an effect that "disrupts" is one that "break[s] apart, burst[s], shatter[s]; separate[s] forcibly."³⁶³ In that sense, there is some overlap with the notion of "restrictive" and "distorting" effects on international trade, since origin rules that "break apart" pre-existing patterns of trade can be said also to "restrict" trade as to a given bilateral trade relationship or to "twist out of shape" the interlocking patterns of a multilateral trade relationship.

In this case, the Complainant and certain Third Parties have provided the Panel with specific examples in which the United States changes to its origin rules, of themselves, have created disruptive effects (and, to a certain degree, restrictive and distorting effects) on international trade. As discussed in China�s Third-Party Submission at 3-4, the result of the enactment of section 334, with its subsequent modifications in section 405, is a patchwork of United States origin rules for textile and apparel products that arbitrarily give no consideration - except for certain fabrics of particular interest to the European Communities - to the value added or changes in the nature and characteristics of the product that are incurred and conferred in subsequent assembly and manufacturing operations outside the initial country in which the fabric was first woven, knitted or otherwise formed in the "greige" state. For example, certain types of fabrics have their origin determined on the basis of where the greige fabric was first woven or knitted, without regard to any subsequent processing, assembly or other manufacturing; but there is an exception to this rule for fabrics classified as silk, cotton, man-made fibres or vegetable fibres - the particular fibres of interest to the European Communities - which will have origin determined by consideration of the subsequent processing operations (such as dyeing, printing, bleaching, napping, etc.). A web of other exceptions and modifications results in a situation in which some non-apparel textile products are conferred origin based on the country in which the fabric was created in its greige state, while other non-apparel textile products will be conferred origin based on the location of certain subsequent processes and finishing operations; yet other exceptions and modifications result in different origin determinations depending upon whether a fibre blend contains less than or more than 16% cotton.³⁶⁴

REPLY: As noted in China�s answer to question No. 41(c) above, China believes that the second sentence of Article 2(c) provides for a distinct and independent obligation on the part of Members, which relates to the Members� concerns over the administrative obstacles that naturally flow from any system in which exporters and importers are required to document the origin of goods. This reflects a distinction between the "restrictive, distorting or disruptive" effects that may flow from the specific substantive provisions of a given set of rules, and the more general administrative obstacles that may flow from the procedural requirements of a given set of origin rules. In the former case, there is no relative notion of "unnecessarily" restrictive effects or "unduly" distorting effects. If rules of origin themselves create restrictive, distorting or disruptive effects on international trade, they do so as a result of their specific substantive provisions, and no degree of such effects are acceptable.

The use of the relative concept of "unduly strict" in the second sentence of Article 2(c), on the other hand, suggests that Members accepted a certain level of administrative burden (e.g., filing certificates of origin) as the natural consequence of trade with any Member that imposes a rules of origin regime (as most if not all Members did at the time of adoption of the RO Agreement). Such burdens are recognized as acceptable if they are not "unduly strict" and do not require the fulfillment of conditions not related to manufacturing or processing. A Member that imposes "unduly strict" requirements, however, has violated its obligations by failing to ensure that the rules of origin themselves do not create "unnecessary obstacles to trade," as referred to in the fourth preambular paragraph of the RO Agreement.

42. Assume that in the framework of multilateral tariff negotiations Member X requests Member Y to grant a tariff concession with respect to product Z (of which Member X is the principal supplier) and Member X obtains that concession on an MFN basis. Assume further that Member Y refuses to grant a tariff concession with respect to product Q (of which Member R is the principal supplier). In those circumstances, could it be said that Member X has obtained from Member Y a de facto advantage contrary to Article I of the GATT 1994? Why (not)? Is this different from the United States providing, at the request of the European Communities, for exceptions from the fabric formation rule with respect to specified products and regardless of the "origin" of those products?

REPLY: China believes that concessions granted (or withheld) in the context of multilateral tariff negotiations are quite distinct from unilateral action by one Member to change its rules of origin in a way that disadvantages particular Members with respect to particular products. Multilateral negotiations over concessions in tariff levels span -- virtually by definition -- all Members and (potentially) all products. The results of such multilateral negotiations, which involve the give and take of all Members, are made final and enforceable only after the agreement of all Members. It is well within the prerogative of a given Member to endorse a multilateral tariff concession agreement that may put that Member at a disadvantage vis-�-vis other Members with respect to certain products, if that Member has concluded that other provisions in the multilateral agreement provide advantages to the Member that equal or outweigh the disadvantages.

It is quite a different matter when, as in this case, the United States has unilaterally changed its rules of origin -- not once, but twice -- such that the modified rules of origin themselves restrict, distort and disrupt trade to the disadvantage of particular Members. The actions by the United States in 1994 and 2000 were not the result of any multilateral tariff concession negotiations. As demonstrated in the Third-Party Submission of China and in the First Submission of India to this Panel, the changes wrought by the United States to its rules of origin in section 334 were not the result of any multilateral agreement on particular changes to textile and apparel origin rules; likewise, the changes enacted by the United States in section 405 were not the result of multilateral negotiations. Rather, section 405 was a unilateral action taken by the United States, to the detriment of China and other Members, in order to appease one particular Member -- the EU -- and to avoid the difficulty of defending the provisions of section 334 before the WTO. In this respect, it can be said that the United States has granted the EU a de facto advantage over certain other Members, contrary to the requirements of Article 1 of GATT 1994, and contrary to the obligation under Article 2(d) that rules of origin not discriminate between other Members.

43. With reference to Article 5.1 of the Agreement on Textiles and Clothing, could the parties please answer the following questions:

REPLY: China believes that a textual analysis of Article 5.1 makes clear that "circumvention" as defined therein is limited to a specified set of activities that involves either the evasive movement of goods, false documentation, or both. Specifically, Article 5.1 refers to "circumvention by transshipment, re-routing, false declaration concerning country or place of origin, and falsification of official documents." Article 5.1 further provides that Members should take necessary action again "such circumvention." Thus, even if "circumvention" in a general sense can be considered to encompass circumstances or activities other than the ones expressly listed in Article 5.1, the text and structure of Article 5.1 clearly show that only the four specified activities constitute "circumvention" within the meaning of that Article.³⁶⁵

China notes, furthermore, that none of the four specified activities that constitute "circumvention" under Article 5.1 involves any activity related to manufacturing or processing. Each of the four specified activities relates either to the evasive movement of goods from the original country of manufacture to other locations prior to import ("transshipment," "re-routing"), or to the falsification of documents that are relevant to the determination of origin ("false declarations concerning country or place of origin," "falsification of official documents"). In either case, the condition and characteristics of the goods after leaving the original place of manufacture have not physically changed through any subsequent manufacturing or processing activity. Therefore, to the extent that any Member takes the position that physical alteration of the condition and characteristics of the goods, as a result of subsequent manufacturing or processing activity, constitutes "circumvention," that Member has exceeded its authority under Article 5.1 to address "such circumvention."

REPLY: As noted in China�s answer to question No. 43(a), "circumvention" as defined in Article 5.1 is limited to a specified set of activities that involves either the evasive movement of goods, false documentation, or both. In either case, false representations and/or false documentation (i.e., illegal action) must be present to frustrate the purposes of the Agreement. Any other interpretation would render the references in Article 5.1 to "transshipment" and "re-routing" overly broad and essentially meaningless.

For example, a producer may wish, for whatever reason, to ship his products from the original country of manufacture to a third country, where the products will be stored and then re-shipped to the ultimate country of end-use. So long as the parties to the transactions accurately report the true (original) country of manufacture, there would be no difference in duty assessment, application of quotas, statistical reporting or other aspects of the importing Member�s treatment of those products. This type of "transshipment," therefore, cannot be considered the type of activity that Members believed would frustrate the implementation of the Agreement. Thus, the type of "transshipments" envisioned as "circumvention" in Article 5.1 must contain an element of misrepresentation, deception, or other falsification that would enable the parties involved to obtain some advantage in the importing Member�s treatment of the products for duty assessment, quota application or other aspects.³⁶⁶

In this regard, quota "avoidance" - legal action intended to minimize the impact of a quota - is not within the ambit of "circumvention" as defined in Article 5.1. At the same time, the options available for legal "avoidance" of quotas by way of "transshipment" or "re-routing" are limited, if they indeed exist at all. So long as a quota is defined with reference to a given product�s original country of manufacture, it would seem that no amount of "transshipment" or "re-routing" of the product would result in avoidance of the quota, unless an element of misrepresentation, deception or other falsification were included. At that point, of course, the activity no longer qualifies as "legal avoidance" and instead must be considered "circumvention" within the meaning of Article 5.1.

Again, China wishes to stress that the definition of "circumvention" in Article 5.1 nowhere refers to any activity related to manufacturing or processing. Each of the four specified activities in Article 5.1 relates either to the evasive movement of goods from the original country of manufacture to other locations prior to import, or to the falsification of documents that are relevant to the determination of origin. In either case, the condition and characteristics of the goods after leaving the original place of manufacture have not physically changed through any subsequent manufacturing or processing activity.

(c) Does outward processing involving no fraud, false declaration, etc. constitute quota "circumvention" within the meaning of Article 5.1?

REPLY: China submits that, in light of the conclusions that follow from the discussion in its answers to questions 43(a) and (b) above, the answer here is clearly "No."

As noted in China�s answer to question No. 43(a), none of the four specified activities that constitute "circumvention" under Article 5.1 involves any activity related to manufacturing or processing. Each of the four specified activities relates either to the evasive movement of goods from the original country of manufacture to other locations prior to import ("transshipment," "re-routing"), or to the falsification of documents that are relevant to the determination of origin ("false declarations concerning country or place of origin," "falsification of official documents"). In either case, the condition and characteristics of the goods after leaving the original place of manufacture have not physically changed through any subsequent manufacturing or processing activity. Therefore, to the extent that any Member takes the position that physical alteration of the condition and characteristics of the goods, as a result of subsequent manufacturing or processing activity, constitutes "circumvention," that Member has exceeded its authority under Article 5.1 to address "such circumvention."

In the case before the Panel, the United States has rested the justification for its substantive changes to origin rules on its concerns over "circumvention." As noted in the Third-Party Submission of China, the United States argues that changes to its rules of origin were necessary "to reduce circumvention of quota limits through illegal transshipment."³⁶⁷ As China has shown, however, this argument ultimately amounts to a concession that the origin rules were in fact used to pursue trade objectives. The textile quota limits enforced by the United States depend entirely on an accurate determination, based on true and correct information, of the actual country of origin of the product. As shown, however, the substantive revisions to the origin rules enacted in section 334 changed the country of origin outcome for particular textile and apparel products, as compared with United States origin determinations prior to section 334, under the same set of facts. These substantive revisions changed the nature and degree of the subsequent manufacturing and processing activity that the United States would consider sufficient to confer origin on particular products. Yet, as noted above, none of the four specified activities that constitute "circumvention" under Article 5.1 involves any activity related to manufacturing or processing.

REPLY: As noted in China�s answer to question No. 43(b) above, China believes that the type of "transshipments" envisioned as "circumvention" in Article 5.1 must contain an element of misrepresentation, deception, or other falsification that would enable the parties involved to obtain some advantage in the importing Member�s treatment of the products for duty assessment, quota application or other aspects. For example, a producer may wish, for whatever reason, to ship his products from the original country of manufacture to a third country, where the products will be stored and then re-shipped to the ultimate country of end-use. So long as the parties to the transactions accurately report the true (original) country of manufacture, there would be no difference in duty assessment, application of quotas, statistical reporting or other aspects of the importing Member�s treatment of those products. This type of "transshipment," therefore, cannot be considered the type of activity that Members believed would frustrate the implementation of the Agreement.³⁶⁸

REPLY: In China�s view, the concern of the United States regarding "circumvention" could have been addressed, in a manner consistent with its obligations under the RO Agreement, by implementing measures intended to ensure more accurate information regarding the location of manufacturing and production processes, so that the substantive rules of origin already being applied by the United States would lead to more uniform and correct results and reduce the instances in which imports were not correctly allocated to the appropriate quotas.

Such measures could have included a wide variety of pre-emptive and punitive measures, such as: (1) more resources (funds and manpower) devoted to coordination with the customs agencies of third countries that are thought to be the source of major "circumvention" efforts; (2) increased penalties (criminal and civil) for falsification of documentation relevant to determining the true country of origin of imported goods; (3) more resources (funds and manpower) devoted to United States Customs� inspection and verification of imported goods and accompanying documentation; and (4) gathering of more complete information regarding the nature and extent of foreign industries of particular concern to the United States, so that this intelligence could assist in the inspection and verification of the origin of imported goods.

Each of these measures would have enhanced the United States� enforcement of its textile quota limits, for example. Such quotas depend entirely on an accurate determination, based on true and correct information, of the actual country of origin of the product. At the same time, as noted in China�s response to question No. 43(a) above, the notion of "circumvention," as defined in Article 5.1 of the Agreement on Textiles, involves either the evasive movement of goods, false documentation, or both. In either case, false representations and/or false documentation (i.e., illegal action) must be present to frustrate the purposes of the Agreement. Thus, actions to combat circumvention that are consistent with the United States� multilateral obligations would focus on mechanisms to prevent the evasive movement of goods and false documentation. In contrast, actions that change the substantive rules on the nature and degree of manufacturing or processing that a Member deems sufficient to confer origin, as the United States has done in this case, have nothing to do with preventing circumvention; they are, rather, a veiled use of origin rules as an instrument to pursue trade objectives, in violation of Article 2(b) of the RO Agreement.  

ANNEX B-2

answers of the european communities to questions from the panel

Question 39: Do the third 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?

In the European Communities� view the answer to this question is yes. While it is clear that Members are not prevented from changing their rules of origin during the transitional period (otherwise Article 2(i) would not make sense), it is equally obvious that they cannot do so if that change, for example, is made to pursue trade objectives within the meaning of Article 2(b). Such a change in the rules of origin would be open to challenge under that provision.

Question 40: With reference to Article 2(b) of the RO Agreement, do the third 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?

Whether the panel is to assess rules of origin as of the time they were adopted or as of the time of establishment of the panel, depends on what is challenged. If the rules themselves are challenged, the relevant point in time is the adoption of the rules. If the application of the rules is challenged, the relevant point in time is the establishment of the panel.

Question 41: With reference to Article 2(c) of the RO Agreement, could the third parties answer the following questions:

Question 41 (a): Does Article 2(c) prohibit rules of origin which create the specified effects even in cases where those effects are entirely unintentional?

In the European Communities� view the answer to this question is yes. Intent is not relevant in Article 2(c) for three reasons. First, there is no mention whatsoever of intentional elements in the text itself. Second, such elements, at the same time, are amply present in Article 2(b), so that a contextual analysis points to the conclusion that intent was not meant to be in Article 2(c), but in Article 2(b). And third, reading intent into Article 2(c) would make a distinction between Article 2(b) and Article 2(c) impossible, which is contrary to the principle of effective treaty interpretation.

Question 41 (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 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?

In the European Communities� view it is not necessary to show a net effect on international trade. In principle, it is enough to show the effect on just one Member. This may be the complaining Member itself or another Member. The latter point, in the European Communities� view is supported, on the one hand, by the text of Article 2(c) itself ("international trade" instead of "trade of a given Member") and, on the other hand, by the findings of the Appellate Body in the case European Communities - Bananas regarding the issue of locus standi requirements.³⁶⁹

Question 41 (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").

In order to reply to these questions, it is, in the European Communities� view necessary to make a number of clarifications. First, it is important to keep in mind that the concept of "rules of origin" refers to requirements both on a substantive and on a formal level. On a substantive level rules of origin establish origin-conferring criteria, on a formal level they set conditions necessary to proceed with an origin determination in a given case. On both levels international trade has faced and is facing restrictive effects, which is the very reason why the Agreement on Rules of Origin has been negotiated. If that agreement provides for different stages, it is because time and further negotiation is required to address some of the problems related to origin rules, and in particular to achieve a harmonisation of the origin-conferring criteria relied upon by the Members.

Against this background, the European Communities would agree with the proposition that rules of origin inherently create "restrictive" effects on international trade, inasmuch as they may require traders to fulfil certain requirements such as the preparation of certificates etc. It would suggest, however, that such "inherent" effects are not the ones meant by Article 2(c) first sentence. For that reason, also, it does not believe, that there exists a de minimis requirement in Article 2 (c). As the European Communities has already stated in its submission,³⁷⁰ de minimis requirements are usually spelled out in the specific areements, if and where they are intended.

The European Communities would also note that the concepts of unduly strict requirements in the second sentence of Article 2(c) and unnecessary obstacles in the Preamble, to which the Panel points, suggest that the Agreement is concerned with non-inherent effects and those that are disproportionate to the objective pursued and is not intended to prevent origin rules from being applied at all.

Question 41 (d): How should the Panel assess whether particular rules of origin create "distorting" effects on international trade? What do you compare the existing rules of origin with?

The European Communities agrees that it is necessary to compare rules with an appropriate benchmark. Given that Article 2(c) covers a number of different cases, that benchmark may vary and, therefore, may have to be established on a case by case basis. In the European Communities� view, where changes of origin rules are addressed, effects can be shown in a comparison with the status quo ante of a given country.

Question 41 (e): How should the phrase "create [�] disruptive effects on international trade" be interpreted? Could the third parties give examples of cases where rules of origin might create such effects?

An example for disruptive effects on international trade would be if an export activity would have to be stopped because of the change in origin rules.

Question 41 (f): What is the relationship between the first and second sentences of Article 2(c)? Do they provide for distinct and independent obligations, such that the second sentence adds an obligation which is not already covered by the first sentence? Or does the second sentence simply spell out one aspect, or consequence, of the obligation set out in the first sentence?

In the European Communities� view, Article 2(c) first sentence and Article 2(c) second sentence have to be read as two distinct and independent obligations. First, a textual analysis does not point to there being a relationship between the two sentences. If, the second sentence were meant to be an "aspect" or a "consequence" of the first, there would have been an element of linkage in the text such as for example "in particular" or "therefore." Second, the second sentence is clearly not about effect, but rather about the structure of the origin rules as such. Therefore, from a point of view of logic, the two sentences do not belong together.

Question 42: Assume that in the framework of multilateral tariff negotiations Member X requests Member Y to grant a tariff concession with respect to product Z (of which Member X is the principal supplier) and Member X obtains that concession on an MFN basis. Assume further that Member Y refuses to grant a tariff concession with respect to product Q (of which Member R is the principal supplier). In those circumstances, could it be said that Member X has obtained from Member Y a de facto advantage contrary to Article I of the GATT 1994? Why (not)? Is this different from the United States providing, at the request of the European Communities, for exceptions from the fabric formation rule with respect to specified products and regardless of the "origin" of those products?

In the European Communities� view the example given by the Panel is not a case of MFN violation. The MFN principle requires Members to treat all other Members equally in the application of tariffs, custom duties and other measures related to the importation or exportation of a good. The MFN principle does not, however, require Members to treat equally products that are not like. Indeed, Members are free to apply individual policies to individual products even if these policies affect other Members in unequal ways. WTO law does not prescribe a substantive standard on what tariff (and other measures) should apply to what products.³⁷¹

The same logic applies to rules of origin. As long as there is no harmonisation, Members may apply individual origin-conferring criteria for individual products even if other Members are affected differently by the individual choices. Discrimination (as prohibited by Article 2(d)) only exists where Members are treated differently with regard to the same product.

Question 43: With reference to Article 5.1 of the Agreement on Textiles and Clothing, could the third parties please answer the following questions:

The European Communities would like to point out that the issue of circumvention, in the present case, is of relevance because the United States has used it as a justification for changing its rules of origin in 1996. It has done so without referring to the ATC. In light of this, the European Communties questions the relevance of the questions below. In its view the exact interpretation of Article 5.1. of the ATC is not particularly relevant here. Neither does the RO Agreement itself use that notion, nor is it obligatory that whatever meaning is to be be given to "circumvention" in the context of Article 5.1. of the ATC necessarily has to be employed in the context of the application of the RO Agreement. The ATC and the RO Agreement do not pursue the same objective and may provide for different means of addressing a given situation.

Question 43 (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.)?

The dictionary defines the act of "circumventing" as "deceiving, outwitting, overreaching; finding a way round, evading (a difficulty)"³⁷² thus leaving open the question whether a fraudulent behaviour is necessarily involved or not. Whether Article 5.1. of the ATC presupposes such behaviour is not expressly stated in the text as that provision does not offer a definition of circumvention, but merely refers to certain ways of achieving it (see Raffaelli and Jenkins, "The Drafting History of the Agreement on Textiles and Clothing", ITCB Geneva, at p. 101). In any event, in the European Communities� view the question as to what specific meaning "circumvention" might have in the context of Article 5.1. ATC can be left open. It is by no means obligatory that the meaning of that word in Article 5.1. ATC is automatically relevant for the assessment of what may be a legitimate objective in the context of Article 2(b) of the RO Agreement.

Question 43 (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.)?

In light of what has been said above, for the European Communities the question of the legal or illegal character of "circumvention" has to be addressed in the specific context of the Agreement on the Rules of Origin. Article 2(b), in the view of the European Communities is about preventing that origin rules are used to manipulate trade patterns that would have legitimately arisen under the existing set of rules. Therefore, for the purposes of the application of Article 2(b) it is clear that such trade patterns that do not violate any (so far) existing provisions, must be protected from being manipulated (disrupted/distored/restricted) through a change in origin rules.

Question 43(c): Does outward processing involving no fraud, false declaration, etc. constitute quota "circumvention" within the meaning of Article 5.1?

Outward processing involves an origin conferring activity. From a point of view of origin rules, therefore, it cannot be considered a circumvention.

Question 43 (d): What is "circumvention by transshipment"? Would this necessarily involve some illegal action such as fraud, false declaration, etc., or could the mere fact that shipments are transiting through third countries with or without alterations made to the goods concerned be considered "circumvention"?

To "transship" is defined in the dictionary as meaning to "transfer (cargo etc.) from one ship or form of transport to another."³⁷³ On the basis of that definition, transshipment in itself does not constitute circumvention, neither in a "legal" nor in an "illegal" sense. The mere fact that a product is being transferred from one means of transport to another does not change its origin; the same is true if the transfer takes place in another country through which the product transits. If the original declaration of origin is sent along, the authorities in the country of the final destination would be able to determine origin correctly and apply quota restrictions if there are any.

Question 45: 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)?

No. Such a clear demonstration of a "quota-effect", however, would play its role in establishing protectionist intent in Article 2(b) in that it would indicate that the "design and architecture" of the measure at hand shows this intent.

359WT/DS243/5/Rev. 1.

360Id.

361WT/DS243/6.

362The New Shorter Oxford English Dictionary, L. Brown (ed.)(Clarendon Press 1993), Vol. 1, p. 707.

363The New Shorter Oxford English Dictionary, L. Brown (ed.)(Clarendon Press 1993), Vol. 1, p. 703.

364See United States - Rules of Origin for Textiles and Apparel Products, WT/DS243, First Submission of India (30 October 2002), at 9-16.

365If Members had wished the definition of "circumvention" to encompass more than the four specified activities, it would have been a simple matter to insert the words "for example," "inter alia" or other such terms to indicate that the list of activities was not exhaustive. Furthermore, Members could have agreed to remove the limiter "such" when referring to "circumvention" later in the Article.

366The same can be said for circumvention by "re-routing."

367United States -- Rules of Origin for Textile and Apparel Products, first written submission of the United States (November 27, 2002), at 7.

368It is conceivable, although highly unlikely, that a Member could define the country of origin of a good for quota purposes as being the last country in which the good was physically present prior to importation into the Member country, regardless of the location of any original or subsequent manufacturing or processing of the good. In that case, a producer or importer could obtain an advantage by simply "transshipping" the good from the country subject to the quota to another country prior to importation into the Member country. It is questionable whether the Member, having chosen to define country of origin in this manner, would consider such a transshipment as "circumvention." In any event, China believes that the RO Agreement -- and indeed the origin rules of virtually every Member -- depends upon the notion of where the good is produced or processed, not where it happens to be shipped after completion of the manufacturing or processing. See Article 9(1)(b) of the RO Agreement.

369Appellate Body Report, EC - Bananas III, supra, para. 132 ff.

370See, submission of the European Communities, para. 30 (supra, para. 4.284).

371The concept of de facto discrimination as developed by the Appellate Body in the case Canada Automotive follows the above logic that MFN is about discrimination between countries and not between products. Indeed, in that case the de facto discrimination was found to reside in the fact that one and the same product - cars - was being treated differently with regard to different countries as a tariff advantage was granted de facto only to cars from certain countries (and brands) and not to cars from other countries. Appellate Body Report, Canada - Autos, supra, in particular para. 81.

372The New Shorter Oxford English Dictionary, L. Brown (ed.) (Clarendon Press, 1993), Vol. I, p. 406.

373The New Shorter Oxford English Dictionary, L. Brown (ed.) (Clarendon Press, 1993), Vol. II, p. 3374.