ANNEX B-3

ANSWERS OF THE PHILIPPINES TO QUESTIONS FROM THE PANEL

Question 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?

Article 2(b)-(e) can be relied upon to challenge a change in the rules of origin per se insofar as, among others, it results in the consequences proscribed by Article 2(b)-(e) of the RO Agreement. In addition, where the changes themselves are meant to or inevitably result in the implementation of policy which discriminates between WTO Members, then such changes themselves may be said to be in derogation of the principles established under Article 2(b)-(e).

Question 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?

The term "used" should be construed in the context of the time in which the rules of origin themselves were adopted. In this particular case, the change in the rules of origin especially section 405 of the Trade and Development Act had the patent objective at the time they were adopted of providing preferential treatment in favor of the European Communities for the purpose of dissuading the latter from pursuing the dispute proceedings it had filed against the United States While it may be the case that the existing rules under section 405 continue to serve the objective of providing preferential treatment even as of the time of the establishment of the panel, this "use" was especially true and particularly of more import at the time section 405 was adopted.

Question 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?

Yes, Article 2(c) prohibits such rules of origin even where their effects are entirely unintentional. The issue of intent is very difficult to ascertain, especially where it would incriminate the Member implementing the rules of origin. In such a situation, documentary evidence proving the intent sought to be established, if any existed, would obviously be difficult to access. Subsidiarily, to the extent that intent is a "state of mind" of the government or at least certain officials of the Member in question, one would have to divine or ascertain such "state of mind" existing at the time the rules of origin were adopted.

Furthermore, if intent were deemed to be a necessary element which needs to be proved under Article 2(c), any Member whose rules of origin are being challenged may conveniently assert the defense that the effects specified under Article 2(c) are "entirely unintentional" and thereafter avoid culpability under the WTO. Certainly, this could not have been the intention of the negotiators when they drafted the final text of 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 favorably affected? In the latter case, could that one Member be a Member other than the complaining Member?

No, a complaining Member need not show a net restrictive effect, it being sufficient that the trade of that Member or any other Member has been adversely affected. A contrary interpretation would mean that a complaining Member would have to conduct a thorough, comprehensive investigation of how the rules of origin of the Member complained against have affected the trade of each and every Member and then evaluate how these trade effects sum up on each side of the equation. It is our sense that such a mode of evaluation of the restrictive effects on international trade of a particular set of rules of origin is too encompassing and unduly comprehensive as to have been intended by the negotiators of the RO Agreement.

Furthermore, a contrary interpretation would mean that a Member may impose a measure which benefits a major trading partner to the detriment of trade with other less major trading partners, and justify such preferential or discriminatory practice on the basis that the net effect of such a measure does not or will not result in a reduction in the level of international trade.

(c) Could it be said that rules of origin inherently create "restrictive" effects on international trade, inasmuch as they may require traders to fulfill 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 requirement") and the fourth preambular paragraph of the RO Agreement ("unnecessary obstacle to trade").

The concept of "restrictive effects" on international trade generally speaking must be understood to relate to how a certain measure impedes or diminishes a Member�s ability to effectively trade or export its products to another Member. Such "restrictive effects" must be distinguished from reasonable, necessary, and oftentimes procedural, requirements which may be imposed upon products imported by a Member. For instance, in the ordinary course of trade, the preparation of certificates of origin are presumably reasonable and necessary requirements, the fulfillment of which would not result in a diminution or impediment to the ability of a Member to effectively export its products to the imposing Member. Where the criteria and substantive modality for ascertaining the origin to be marked upon the certificate however has the effect of impeding or diminishing a Member�s ability to effectively export its product(s) of interest to the imposing Member, as is the case in the present dispute, then such criteria and substantive modalities have "restrictive effects" on international trade.

In this sense, it may be admitted that Article 2(c) implies some sort of a de minimis exception. More properly, however Article 2(c) implies a "reasonableness" exception, such that a reasonable and necessary requirement may be deemed as not necessarily having "restrictive effect." In this regard, the imposition by an importing Member of "unduly strict requirements" forming "unnecessary obstacles to trade" fall outside the ambit of "reasonable" exceptions insofar as they have the effect of impeding or diminishing a Member�s ability to effectively export its products.

(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?

(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?

The Philippines prefers to provide a consolidated answer to these two questions.

As indicated by India in its submission, which the Philippines fully subscribes with, rules of origin create "distorting" effects on international trade if they modify the pattern of international trade by changing either the type of product traded in international trade or the direction of international trade flows. In concrete terms, the change in the United States rules of origin created distorting effects because they shifted origin from a third country, such as the Philippines, where the fabric was dyed and printed and subjected to two further finishing operations to the country, e.g., India, where the greige fabric was formed. For purposes of calculating quota usage, India as a restrained Member is constrained to account for the export of fabrics to the United States even if these were otherwise substantially transformed in the Philippines. To the extent that these otherwise substantially transformed fabrics and apparel are counted against India�s export quotas to the United States, which are empirically proved to be almost always fully utilized, if not exceeded, then the Philippines� ability to export its products made up of greige fabrics �originating� from India is substantially impaired. Moreover, since the amended rules favored products of export interest to the European Communities over products of export interest to other, mostly developing, countries, the rules consequently distorted the flow of trade away from developing countries in favor of the European Communities.

Likewise, as articulated by the Philippines in support of the Indian argument, the sheer complexity and arbitrary nature of the criteria used in determining origin under the United States� amended rules of origin create trade-disruptive effects. The challenged measures allow more favorable access to certain products vis-�-vis other products. For instance, the rule on substantial transformation is applied differently depending on fiber composition, i.e., wool, silk, cotton and even the blend of cotton. There is no cogent reason for this other than to obviously favor the products of export interest to the European Communities over products of export interest to developing countries.

(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?

The first and second sentences of Article 2(c) provide for distinct and independent obligations, such that the second sentence adds an obligation which is not already covered by the first sentence. The first sentence more properly relates to the effects on international trade that ought to be avoided by a Member�s rules of origin. As earlier indicated in certain responses, the restrictive, distorting and disruptive effects may be assessed even from a particular country�s perspective and experience. In the sense that a particular requirement imposed by an importing Member may impede or diminish an exporting Member�s ability to effectively export a product of export interest to it, such requirement may be said to have a "restrictive effect." This however does not preclude a more specific examination under the test established under the second sentence of how a particular requirement imposed by an importing Member�s may in fact pose an unduly strict requirement or obligation on the part of the exporting Member such that while it may or may not have a "restrictive effect" it, for instance, increases the cost or the burden, be it in actual, administrative or other terms, of exporting the product.

7.1 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?

7.2 In the first place, it may not be appropriate to compare the situation in which the European Communities was able to obtain exceptions from the fabric formation rule with respect to specific products with the situation of multilateral tariff negotiations. In the former situation, only the European Communities given its inherently stronger negotiating leverage, was in a position to obtain the concessions it got. Other Members were not similarly situated, i.e., not every other Member was in a position to file dispute settlement proceedings and use the advantage of their large and diverse trading interest and ability to use, for instance, retaliatory measures to compel the United States to come to a settlement. In contrast, in the on-going multilateral tariff negotiations, each Member has at least an equal opportunity to request from another Member a concession with respect to a particular product of export interest to it.

Question 43. With reference to Article 5.1 of the Agreement on Textiles and Clothing, could the third 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.)?

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

(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"?

The Philippines declines the opportunity to respond to these questions.