UNITED STATES – RULES OF ORIGIN FOR TEXTILES AND APPAREL PRODUCTS
Document: Report of the Panel
Date: 20 June 2003
Document codes: WT/DS243/R
Complainant: India
Respondent: U.S.
Third parties: Bangladesh, China, EU, Pakistan, Philippines
Dispute stage: Panel
Agreements cited: Art. 2  Rules of Origin

UNITED STATES – RULES OF ORIGIN
FOR TEXTILES AND APPAREL PRODUCTS

Report of the Panel

The report of the Panel on United States – Rules of Origin for Textiles and A pparel Products is being
circulated to all Members, pursuant to the DSU. The report is being circulated as an unrestricted
document from 20 June 2003 pursuant to the Procedures for the Circulation and Derestriction of WTO
Documents (WT/L/452). Members are reminded that in accordance with the DSU only parties to the
dispute may appeal a panel report. An appeal sha ll be limited to issues of law covered in the Panel
report and legal interpretations develope d by the Panel. There shall be no ex parte communications
with the Panel or Appellate Body concerning matte rs under consideration by the Panel or Appellate
Body.

Note by the Secretariat: This Panel Report shall be adopted by the Dispute Settlement Body (DSB) within 60
days after the date of its circulation unless a party to the dispute decides to app eal or the DSB decides by
consensus not to adopt the report. If the Panel Report is appealed to the Appellate Body, it shall not be
considered for adoption by the DSB until after the completion of the appeal. Information on the current status
of the Panel Report is available from the WTO Secretariat.

I. INTRODUCTION
1.1 On 11 January 2002, India requested consultations with the United States pursuant to Article 4 of
the Understanding on Rules and Procedures Govern ing the Settlement of Disputes (hereafter the
"DSU"), Article XXII of the General Agreement on Tariffs and Trade 1994 (hereafter the "GATT
1994"), Article 7 of the Agreement on Rules of Origin (hereafter the " RO Agreement") … regarding
section 334 of the United States Uruguay Round Agre ements Act of 1994 (hereafter "section 334")
and section 405 of the United States Trade and De velopment Act of 2000 (hereafter "section 405")
and the customs regulations implementing these provisions.1
1.2 Consultations were held in Geneva on 7 and 28 February and 26 March 2002, but did not lead to a
mutually satisfactory resolution of the matter.
1.3 On 7 May 2002, India requested 2 the Dispute Settlement Body (h ereafter the "DSB") to establish
a panel pursuant to Article 6 of the DSU, Ar ticle XXIII of the GATT 1994 and Article 8 of the RO
Agreement. India's panel request referenced the rules of origin for textiles and apparel products set
out in section 334 and the Statement of Administrative Action accompanying the Uruguay Round
Agreements Act (hereafter the "URAA"), the sub sequent modifications made by section 405 of the
Trade and Development Act, the customs regulations implementing these Acts as well as the
administration of these Acts and regulations, as the measures at issue. India claimed that the United
States' rules of origin for textiles and apparel products were inconsistent with paragraphs (b), (c), (d)
and (e)
3 of Article 2 of the RO Agreement.4
1.4 At its meeting on 24 June 2002, the DSB established a Panel pursuant to the request of India, in
accordance with Article 6 of the DSU. The Panel w as established with standard terms of reference.
The terms of reference are the following:
"To 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 and to make such findings as will assist the DSB in making the
recommendations or in giving the rulings provided for in those agreements."
5
1.5 On 10 October 2002, the Panel was constituted as follows:
 Chairperson: Mr Lars Anell

 Members: Ms Mary Elizabeth Chelliah
 M r D o n a l d M c R a e
6

1.6 Bangladesh, China, the European Communities, Pakistan and the Philippines reserved their third
party rights to participate in the Panel's proceed ings. China, the European Communities and the
Philippines presented written and oral arguments to the Panel.

1 WT/DS243/1.
2 India had originally submitted its request on 7 May 2002 but omitted reference to Article 2. On
3 June India submitted a corrected panel request, and it is on the basis of this request that the Panel was
established.
3 India has decided to refrain from further pursuing its claim that the administration of the United States
rules of origin is inconsistent with Article 2(e) of the RO Agreement because India considers that the DSU does
not provide an effective remedy against WTO-inconsistent actions that have been taken in the past. Therefore,
any finding of violation of this provision would not result in an effective remedy for India.
4 WT/DS243/5/Rev.1.
5 WT/DS243/6.
6 Ibid.

1.7 The Panel met with the parties on 12 and 13 December 2002 as well as on 23 January 2003. It
met with the third parties on 13 December 2002. Th e Panel issued its interim report to the parties on
11 April 2003. The Panel issued its final report to the parties on 25 April 2003.
II. FACTUAL ASPECTS
2.1 This dispute concerns the rules of origin whic h the United States applies to textiles and apparel
products under section 334 of the URAAct of 1994 and the subsequent modifications made thereto by
section 405 of the Trade and Development Act of 2000 as well as the implementing customs
regulations set out in 19 CFR § 102.21.
A. S
ECTION 334 OF THE URUGUAY ROUND AGREEMENTS ACT
2.2 Section 334 provides, in relevant part, that:
"(b) Principles.—

(1) In general.-- Except as otherwise provide d for by statute, a textile or apparel
product, for purposes of the customs laws and the administration of quantitative
restrictions, originates in a country, territory, or insular possession, and is the growth,
product, or manufacture of that country, territory, or insular possession, if--

 (A) the product is wholly obtained or produced in that country, territory, or
possession;

(B) the product is a yarn, thread, twin e, cordage, rope, cable, or braiding
and--
 (i) the constituent staple fibers are spun in that country, territory, or
possession, or

 (ii) the continuous filame nt is extruded in that country, territory, or
possession,

 (C) the product is a fabric, including a fabric classified under chapter 59 of
the HTS, and the constituent fibers, fila ments, or yarns are woven, knitted,
needled, tufted, felted, entangled, or transformed by any other fabric-making
process in that country, territory, or possession; or

(D) the product is any other textile or apparel product that is wholly
assembled in that country, territory, or possession from its component pieces.

 (2) Special rules.-- Notwithstanding paragraph (1)(D)--

(A) the origin of a good that is classified under one of the following HTS
headings or subheadings shall be dete rmined under subparagraph (A), (B), or
(C) of paragraph (1), as appropriate: 5609, 5807, 5811, 6209.20.50.40, 6213,
6214, 6301, 6302, 6303, 6304, 6305, 6306, 6307.10, 6307.90, 6308, or
9404.90; and

(B) a textile or apparel product which is knit to shape shall be considered to
originate in, and be the growth, product, or manufacture of, the country,
territory, or possession in which it is knit.

(3) Multicountry rule.-- If the origin of a good cannot be determ ined under paragraph
(1) or (2), then that good shall be consid ered to originate in, and be the growth,
product, or manufacture of--

(A) the country, territory, or possession in which the most important
assembly or manufacturing process occurs, or

(B) if the origin of the good cannot be determined under subparagraph (A),
the last country, territory, or possession in which important assembly or
manufacturing occurs."

2.3 The descriptions of goods classifiable under HTS h eadings and subheadings referred to in section
334 quoted above are as follows:
HTS heading
 Description

5609 Articles of yarn, strip or the like of heading No. 54.04 or 54.05, twine,
cordage, rope or cables, not elsewhere specified or included.
5807 Labels, badges and similar articles of te xtile materials, in the piece, in strips
or cut to shape or size, not embroidered.
5811 Quilted textile products in the piece, composed of one or more layers of
textile materials assembled with padding by stitching or otherwise, other than
embroidery of heading No. 58.10.
6209.20.50.40 Infants' woven cotton diapers.
6213 Handkerchiefs.
6214 Shawls, scarves, mufflers, mantillas, veils and the like.
6301 Blankets and travelling rugs.
6302 Bed linen, table linen, toilet linen and kitchen linen.
6303 Curtains (including drapes) and inte rior blinds; curtain or bed valances.
6304 Other furnishing articles, excluding those of heading No. 94.04.
6305 Sacks and bags, of a kind used for the packing of goods.
6306 Tarpaulins, awnings and sunblinds; tents; sails for boats, sailboards or
landcraft; camping goods
6307.10 Floor-cloths, dish-cloths, dusters and similar cleaning cloths.
6307.90 Other made-up articles.
6308 Sets consisting of wove n fabric and yarn, whether or not with accessories, for
making up into rugs, tapestries, embroide red table cloths or serviettes, or
similar textile articles, put up in packings for retail sale.
9404.90 Other articles of bedding.

B. S
ECTION 405 OF THE TRADE AND DEVELOPMENT ACT OF 2000
2.4 Section 405 amended section 334 of the Urugua y Round Agreements Act. Of particular
relevance to this dispute are two exceptions whic h section 405 created from the "fabric formation"
rule established by section 334. Specifically, section 405 provides that:
- for silk, cotton, man-made or vegetable fi bre fabric, origin is conferred by dyeing and
printing and two or more specified finishing operations; and that

- for certain textile products excepted from the assembly rule, origin is also conferred by
dyeing and printing and two or more specified finishing operations, subject to certain
exceptions.

2.5 Section 405(a) reads as follows:
 "In General. Section 334(b)(2) of the Uruguay Round Agreements Act
 (19 U.S.C. 3592(b)(2)) is amended-

(1) by redesignating subparagraphs (A) and (B) as clauses (i) and (ii),
 respectively;

(2) in the matter preceding clause (i) (as redesignated), by striking
"Notwithstanding paragraph (1)(D)" and inserting "(A) Notwithstanding
paragraph (1)(D) and except as provided in subparagraphs (B) and (C)";and

 (3) by adding at the end the following:
 "(B) Notwithstanding paragraph (1)(C), fabric classified under the HTS as
 of silk, cotton, man-made fiber, or vegetable fiber shall be considered to
 originate in, and be the growth, product, or manufacture of, the country,
 territory, or possession in which the fa bric is both dyed and printed when
accompanied by 2 or more of the following finishing operations: bleaching,
shrinking, fulling, napping, decating, permanent stiffening, weighting,
permanent embossing, or moireing.

"(C) Notwithstanding paragraph (1)(D), goods classified under HTS
 heading 6117.10, 6213.00, 6214.00, 6302.22, 6302.29, 6302.52, 6302.53,
6302.59, 6302.92, 6302.93, 6302.99, 6303.92, 6303.99, 6304.19, 6304.93,
6304.99, 9404.90.85, or 9404.90.95, except for goods classified under such
headings as of cotton or of wool or c onsisting of fiber blends containing 16
percent or more by weight of cotton, shall be considered to originate in, and
be the growth, product, or manufactu re of, the country, territory, or
possession in which the fabric is both dy ed and printed when accompanied by
2 or more of the following finishing operations: bleaching, shrinking, fulling,
napping, decating, permanent stiffening, weighting, permanent embossing, or
moireing."

2.6 The consolidated text of section 334 as ame nded by section 405 can be found in 19 U.S.C.
§ 3592.
2.7 The descriptions of goods classifiable under H TS headings, subheadings and sub-subheadings
referred to in section 405 quoted above are as follows:
HTS heading
 Description

61.17 Other made up clothing accessories, knitted or crocheted; knitted or
crocheted parts of garments or of clothing accessories.
6117.10 Shawls, scarves, mufflers, mantillas, veils and the like.
62.13 Handkerchiefs.
62.14 Shawls, scarves, mufflers, mantillas, veils and the like.
63.02 Bed linen, table linen, toilet linen and kitchen linen.
6302.22 Bed linen, not knitted or croche ted, printed, of man-made fibres.
6302.29 Bed linen, not knitted or crocheted, printed, of other textile materials,
excluding cotton.

6302.52 Table linen, not knitted or crocheted, of flax.
6302.53 Table linen, not knitted or crocheted, of man-made fibres.
6302.59 Table linen, not knitted or crocheted, of other textile materials, excluding
cotton.
6302.92 Toilet linen and kitchen linen, other than terry towelling, of flax.
6302.93 Toilet linen and kitchen linen, other than terry towelling, of man-made fibres.
6302.99 Toilet linen and kitchen linen, othe r than terry towelling, of other textile
materials.
63.03 Curtains (including drapes) and inte rior blinds; curtain or bed valances.
6303.92 -- Not knitted or crocheted, of synthetic fibres.
6303.99 -- Not knitted or crocheted, of other textile materials.
63.04 Other furnishing articles, excluding those of heading No. 94.04.
6304.19 -- Bedspread, not knitted or crocheted.
6304.93 -- Other, not knitted or crocheted, of synthetic fibres.
6304.99 -- Other, not knitted or croche ted, of other textile materials.
9404.90 Other articles of bedding.
9404.90.85 Quilts, eiderdowns, comf orters and similar articles.
9404.90.95 Other articles of bedding.

C. 19
 CFR § 102.21
2.8 Paragraph (a) of section 334 directed the Secretary of Treasury to prescribe rules to implement the
principles contained in section 334 of the URAA for determining the origin of textiles and apparel
products. The regulations set forth in 19 CFR § 102.21 reflect the exercise of that authority. The
section 102.21 regulations contain amendments, adopte d on an interim basis, to align the regulatory
text with the statutory amendments to section 334 as set forth in secti on 405. 19 CFR § 102.21 is
annexed to this report (Annex C).
III. ARGUMENTS OF THE PARTIES
3.1 The arguments presented by the parties in their written submissions and oral statements are
reflected below.
7 The parties' answers to questions and comments on each other's responses are
reproduced in Annex A.
A. FIRST WRITTEN SUBMISSION OF INDIA
1. Introduction
3.2 As the United States International Trade Commi ssion ("ITC") noted, "rules of origin have a
particularly significant impact in the textiles ar ea because the manufacture of such products involves
many production processes often perform ed in more than one country." 8 The temptation to use rules
of origin as a means of protectionism is therefore pa rticularly great in this area. The United States
could not resist this temptation. Despite its a dvocacy of trade-neutral rules of origin, the United
States included in its legislation implementing the results of the Uruguay Round negotiations, new
rules for the determination of the origin of textil es and apparel products that changed the criteria to
determine the origin of products covered by a transitional regime of country-specific quotas
established under the Agreement on Textiles and Clothi ng ("ATC") in such a way that trade which
had previously been quota-free was now subjected to quantitative limits.

7 The summaries of the parties' arguments are ba sed on the executive summa ries submitted by the
parties to the Panel.
8United 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. xi.

3.3 Many WTO Members, both developing and develo ped countries, registered their concern about
these new United States rules of origin. The Europ ean Communities also complained about the WTO-
inconsistency of the new United States rules of or igin and their effects on its textile and apparel
industry; in 1997, it initiated WTO dispute se ttlement proceedings against the United States.
 The
European Communities withdrew its complaint after it entered into a bilateral agreement with the
United States according to which the United Stat es Administration was to propose amendments to
Congress to address the issues of concern to the European Communities. However, when the
European Communities realized that the draft legisla tion proposed did not fulfil adequately the terms
of the bilateral agreement, the European Communities initiated new WTO dispute settlement
proceedings against the United States. A second settlement agreement was concluded and the United
States Congress upon a recommendation from the United States Administration, then further amended
the United States rules of origin addressing the concerns of the European Communities.
3.4 The United States rules of origin set out in section 334 of the Uruguay Round Agreements Act
("section 334" or the "1996 rules of origin"), and modified in section 405 of the Trade and
Development Act of 2000 ("section 405" or the "2000 rules of origin"), and the customs regulations
implementing these statutory provisions, and their appli cation, are inconsistent with the United States
obligations under Article 2 (b), (c), (d) and (e) of the Agreement on Rules of Origin (" RO
Agreement").
2. Factual background
(a) Section 334 of the Uruguay Round Agreements Act
3.5 In December 1994, the United States Congress enacted legislation relating to textiles in Subtitle D
of Title III of the URAA. This was the first time that product-specific non-preferential rules of origin
were created in the United States by legislation rather than by executive action or by the courts.
Subtitle D of Title III of the URAA contains five sections related to textile s and apparel, namely
sections 331 to 335. Section 334 re quired the Department of Treasury to develop regulations that
incorporated certain principles on rules of origin for textiles and apparel products.
3.6 Section 334 establishes three basic sets of origin rules for textiles and apparel products:
– a set of "general rules", as provided for in section 334(b)(1);
– "special rules" applicable to certain clas ses of textiles and apparel, as provided for in
section 334(b)(2); and
 – a "multicountry rule" as provided for in sec tion 334 (b)(3), designed to determine the
origin of goods whose origin is not fixed by the general or special rules.

3.7 Section 334(b)(1)(A) establishes a "single country" ru le of origin, which provides, quite logically,
that if a product is "wholly obtained or produced" in a single country - that is, manufactured in a
country entirely from materials or components origin ating in that country - it will be deemed to
originate in that country. This rule follows the pr inciple that applied under the previously applicable
customs regulations in 19 CFR section 12.130.
3.8 Section 334(b)(1)(B) establishes what is known as the "yarn" or "yarn forward" rule of origin,
under which yarns, threads, cordage, twine and si milar products are deemed to originate in the
country where they are spun from their constituent fibres, or (in the case of synthetic filaments
produced by extrusion), in the country where they are extruded. Here again, these rules are consistent
with those obtained under the previously applicable customs regulations.
3.9 However, section 334(b)(1)(C) establishes a new rule , which fixes the origin of a fabric in the
country where it is woven, knitted or otherwise formed in the "greige" state. No recognition of origin

is given for any operations which follow the forming of the fabric, such as dyeing, printing or other
finishing steps. This is a major departure from th e previous rule, under which dyeing and printing, as
well as at least two additional finishing operations, were deemed sufficient to transform "greige"
fabric formed in one country into a new product of the country where the finishing operations were
performed. Greige fabric is "a term used to descr ibe textile products prior to bleaching, dyeing or
finishing."
3.10 Finally, section 334(b)(1)(D) contains the "single country assembly" rule. It provides that,
where a textile product (except for those product head ings specified in the section 334(b)(2) "Special
Rule") is wholly assembled in a single country, that is its country of origin. The mere cutting of
fabric to form garment parts is no longer sufficient to confer origin on an assembled textile good.
3.11 The initial section 334(b)(2) provides "Special Rules" of origin for goods which are not
covered by the "single country assembly" rule of section 334(b)(1)(D). Under section 334 (b)(2)(A),
except for the Harmonized Tariff Schedule ("HTS") heading 5609 which deals with yarn, those
products under the other listed HTS headings would be conferred origin based on where their greige
fabric was formed, not where they were assembled.
 The second exception under section 334 (b)(2)(B)
was for products that were knit to shape. Sec tion 334(b)(2)(B) provides that where textile goods are
"knit to shape" in a particular country, that country will be the country of origin.
3.12 In many cases, the section 334(b)(1) "General Rules" and the section 334(b)(2) "Special
Rules" will not yield a definitive country of origin for an imported textile or apparel article. To
address these situations, section 334(b)(3) contains a "Multicountry Rule" of origin.
(b) The Amendments to section 334 in section 405 of the Trade and Development Act of 2000
3.13 The United States Congress amended section 334 through section 405 of the Trade and
Development Act of 2000. The purpose of this amen dment was to implement the bilateral agreement
settling the WTO case brought by the European Co mmunities against the United States on section
334.
3.14 Section 405 establishes two exceptions to the sp ecial rules contained in section 334(b)(2).
First, although the origin of fabric was to be dete rmined where the greige fabric was formed, fabric
classified under the HTS as of silk, cotton, man-made fibre, or vegetable fibre shall be considered to
originate in, and be the growth, product, or manufacture of, the country, territory, or possession in
which the fabric is dyed and printed when accompan ied by two or more of the following finishing
operations: bleaching, shrinking, fulling, napping, decating, permanent stiffening, weighting,
permanent embossing, or moreing.
3.15 Second, goods that would normally be s ubject to the wholly assembled rule in
section 334(b)(2)(D) but that were classified unde r specifically listed HTS headings shall be
considered to originate in, and be the growth, pr oduct, or manufacture of, the country, territory, or
possession in which the fabric is both dyed and printed when accompanied by two or more of the
following finishing operations: bleaching, shrinking, fulling, nappi ng, decating, permanent stiffening,
weighting, permanent embossing, or moreing. This exception does not apply to those products
classified under these headings when they are made of cotton or of w ool or consisting of fibre blends
containing 16% or more by weight of cotton.
3. Legal argument
(a) The measures at issue
3.16 The specific measures challenged by India ("measu res at issue") are the United States rules of
origin set out in section 334 of the URAA and modi fied in section 405 of the Trade and Development

Act of 2000 and the customs regulations im plementing these statutory provisions, and their
application.
(b) The measures at issue are rules of origin within the meaning of Article 1 of the RO Agreement
3.17 Article 1 of the RO Agreement defines the term "rules of origin" as "laws, regulations and
administrative determinations of general applicati on applied by any Member to determine the country
of origin of goods provided such rules of origin are not related to contractual or autonomous trade
regimes leading to the granting of tariff preferen ces going beyond the application of paragraph 1 of
Article I of GATT 1994." The measures at issue are the United States rules applied to determine
country of origin and do not relate to a preferen tial trade arrangement and consequently, fall within
the definition of rules of origin as set out in Article 1.1.
(c) The measures at issue are subject to the disciplines set out in Article 2 of the RO Agreement
3.18 The RO Agreement divides the disciplines to guide the application of origin determinations
into two phases: (1) disciplines during a trans itional period until the work programme for the
harmonization of origin rules is completed and; (2 ) disciplines that will apply after the harmonization
period is completed. Article 2 of the RO Agreement provides that, until the work programme for the
harmonization of rules of origin (as set out in Pa rt IV) is completed, Members shall abide by the
disciplines set out in Article 2. Upon the implem entation of the results of the harmonized work
programme, the disciplines in Article 3 will be applicab le. As of the date of the establishment of the
panel, the work programme for the harmonization of rules of origin has not been completed.
Therefore, the United States is bound by the disciplines set out in Article 2.
(d) The measures at issue are inconsistent with Article 2(b) of the RO Agreement
3.19 The operative clause of Article 2(b) is the obligati on that rules of origin shall not be used "as
instruments to pursue trade objectives." Given the cr itical importance of ensuring that rules of origin
are not used as instruments to pursue trade objectiv es, the drafters of this provision chose to
strengthen the operative clause of Article 2(b) by the text that precedes it ("notwithstanding the
measure or instrument of commercial policy to which they are linked") and that follows it ("directly or
indirectly").
3.20 The preceding clause "notwithstanding the measure or commercial policy instrument to which
they are linked" recognizes that rules of origin w ill be "linked" to a measure or instrument of
commercial policy, and consequently to a measure or instrument that is, by definition, not "trade-
neutral". The clause therefore implies that, wh ile commercial policy measures and instruments may
be applied for commercial policy purposes, rules of origin should be used exclusively as a mechanism
to implement those measures and instruments.
3.21 Article 1.2 of the RO Agreement sets out a non-exhaustive list of commercial policy
instruments. This includes the application of "m ost-favoured-nation treatment under Articles I, II, III
and XI and XIII of GATT 1994; anti-dumping and c ountervailing duties under Article VI of GATT
1994; safeguard measures under Article XIX of GATT 1994; origin marking requirements under
Article IX of GATT 1994; and any discriminatory qu antitative restrictions or tariff quotas." It may
therefore be concluded that WTO Members may use rules of origin to implement commercial policy
instruments of the kind listed in Article 1.2 but that they may not use rules of origin to pursue policy
objectives of the kind commonly pursued with these po licy instruments, in particular, the objective of
protecting the domestic industry against import comp etition or of favouring imports from one country
over imports from another.
3.22 As noted above, the succeeding clause in Article 2( b) states: "rules of origin are not [to be]
used as instruments to pursue trad e objectives directly or indirectly." The critical importance of

separating rules of origin determinations from tr ade objectives manifests itself in the Article 2(b)
enumeration that the prohibition applies whether or not the Member uses its rules of origin to pursue a
trade objective directly or indirectly. The placement of the adverbs "directly" or "indirectly" supports
the interpretation that they modify the verb "pursu e" in the clause "to pursue trade objectives." This
interpretation is supported by both the French and Spanish versions.
3.23 The New Shorter Oxford English Dictionary defines "instrument" as "a thing used in or for
performing an action; a means" and "objective" as the "thing aimed at or sought; a target, a goal, an
aim." Therefore, the ordinary meaning of the term "trade objective" in the context of Article 2(b) is
an aim, goal, or object related to trade. An instrument is therefore the means by which to pursue trade
objectives. One way of assessing whether a rule of or igin 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. As pointed out above, trade objectives include the objective of protecting the
domestic industry against import competition or of favouring imports from one country over imports
from another. Any rule of origin that is used as an instrument to protect a domestic industry or to
favour imports from one country over imports from anothe r country is, by definition, an instrument to
pursue trade objectives.
3.24 While Members may use measures or commerc ial policy instruments to pursue trade
objectives, they are prohibited from using their rules of origin to achieve such trade objectives. In
other words, rules of origin as such should not be used as a policy instrument. This interpretation is
supported by the context. The use of the term "notwithstanding" in the preceding clause implies a
contrast between this clause and the prohibition that rules of origin must not be used to pursue trade
objectives. Thus, measures or commercial policy instruments may pursue aims, goals or objects
related to trade, but rules of origin may not do so. And they may not do so either directly or
indirectly.
3.25 The object and purpose of the RO Agreement also supports this interpretive approach. The
seventh recital of the Preamble stat es that Members desire through the RO Agreement, "to ensure that
rules of origin are prepared and applied in an impartial, transparent, predictable, consistent and neutral
manner."
3.26 To determine whether rules of origin are used as an instrument to pursue trade objectives it is
useful to examine the design, arch itecture, and structure of the rules of origin. The Appellate Body
has noted that "[a]lthough it is true that the aim of a measure may not be easily ascertained,
nevertheless its protective application can most often be discerned from the design, the architecture,
and the revealing structure of a measure."
9
3.27 An examination of the design, architecture, and structure of section 334 shows that it is used
as an instrument to pursue trade objectives. Th ere are essentially three different methods for
determining origin. All 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.
3.28 Section 334 confers origin on the basis of criteria that are unrelated to the value added
operations or the change in the nature of the product. Instead, the criteria are those that are commonly
used in the application of commercial policy instruments.
3.29 Section 334(b)(1)(C) contains the principle that origin would be determined based on where
the greige fabric was woven. Furthermore, s ection 334(b)(2) provides the special rule that,
"notwithstanding" the wholly assembled rule, the orig in of certain flat goods under certain headings
would be determined where the greige fabric was woven. On fabrics, the new rules of origin moved

9Appellate Body Report, Japan – Taxes on Alcoholic Beverages ("Japan – Alcoholic Beverages II "),
WT/DS8/AB/R, WT/DS10/AB/R, WT/DS11/AB/R, adopted 1 November 1996, DSR 1996:I, 97, p. 29.

the United States away from those used by its major trading partners such as the European
Communities and Canada. To India’s knowledge, no other coun try determines the origin of fabric as
the place where the greige fabric was formed, if that fabric was further processed and made into a flat
good. The fact that no other country determines or igin based on where the greige fabric is woven
reflects the importance of cutting and sewing to produce a finished product. Greige fabric can be put
to a variety of uses. Even dyed and printed greige fabric can be put to a variety of uses. However,
once the fabric is cut and sewn into a pillowcase, no one can use that fabric for anything other than a
pillow case.
3.30 To use the "fabric forward rule" that section 334 imposed on a wide variety of non-apparel
textile articles such as bedding articles (quilts, comf orters, mattresses, blankets) home furnishings
(wall hangings, table linens) and fashion accessories such as scarves, shows that they are being used
as instruments to pursue trade objectives. For home textiles, beddings, furnishings, and miscellaneous
made up articles, the section 334 rules work a signifi cant change in the determination of the country
of origin. Under the "fabric forward" rule, these products were deemed to originate in the country
where their constituent fabric was formed (woven or knitted) in the greige state. No account was
taken of any subsequent value-added operations such as the dyeing, printing or finishing of the fabric,
the cutting of the fabric into components, the assemb ly of those components into finished articles or
any other operations.
3.31 The majority of India’s exports are in greige fa bric. India exports its greige fabrics to other
countries where they are further processed and then exported to the United States. Under the old rules
these finished products were not deemed to originate in India. However, according to section 334, the
same finished products would be counted as Indi a’s exports to the United States and subject to
quantitative restrictions established for textiles.
3.32 The legislative history confirms that section 334 was used as an instrument to protect the
domestic textiles and apparel industry. As noted earlier, this was the first time that the United States
Congress became directly involved in the passage of legi slation dictating how rules of origin were to
be determined in a particular sector. Both th e Reports by the House Committee on Ways and Means

and the Senate Committees that eventually accompanied the Uruguay Round Agreements Act reveal
that section 334 was intended by Congress to be used as an instrument to pursue trade objectives.
3.33 According to the Statement of Administrative Action (SAA) that accompanied the URAA, the
purpose of section 334 was to:
– help combat transhipment and other ci rcumvention of textile and apparel quotas;
– bring the United States rules of origin in line with the rules employed by other major
textile and apparel importing countries;
– advance the goal of harmonizing international rules of origin set out in the WTO RO
Agreement;
 – more accurately reflect where the most significant production activity occurs.

3.34 With respect to the first listed objective, it is difficult to see how the provisions of section 334
"help to combat transhipment and "other circ umvention of textile and apparel quotas"". The
definition of transhipment is "the action or pro cess of transhipping", and the verb tranship is to
"transfer (cargo, etc.) from one ship or form of transport to another." The definition of circumvention
as a "deceitful or fraudulent conduct perpetrated against a … person. " There is a specific provision in
Article 5 of the ATC which enables countries to address the problem of "circumvention by
transhipment, re-routing, false declaration concerning country or place of origin, and falsification of
official documents". Article 5.2 specifically provi des that "should any Member believe that [the
ATC] is being circumvented by transhipment, re -routing, false declaration concerning country or

place of origin, and falsification of official documen ts, and that no, or inadequate, measures are being
applied to address and/or take action against such circumvention, that Member should consult with the
Member or Members concerned with a view to seeking a mutually satisfactory solution." The section
334 changes in determining the rules of origin do not assist the United States in combating
transhipment.10
3.35 Second, the section 334 rules on fabric did not bring the United States rules of origin in line
with the rules employed by other major textile and apparel importing countries or United States
trading partners. To the contrary, section 334 w as the subject of criticism in the WTO Committee on
Rules of Origin. For example, at the 1 Februa ry 1996 meeting, the representatives of Canada, the
European Communities and Switzerland expressed con cern with respect to the recent unilateral
changes of origin rules for certain textiles and apparel by the United States.
3.36 India submits that if United States had changed its rules of origin in order to harmonize them
with those of its major trading partners such as the European Communities and Canada, those very
trading partners would not have expressed concern over those chang es. Indeed, the fact that the
European Communities challenged the United States rules of origin in the WTO indicated that it
considered the United States rules to be fundame ntally different from those of the European
Communities.
3.37 Third, section 334 did not advance the goal of ha rmonizing the international rules of origin
set out in the RO Agreement. Article 3 of the RO Agreement recognises the aim of WTO Members to
achieve the establishment of harmonized rules of origin, and in this regard, sets forth in
subparagraph (b) that "Members shall ensure, upon the implementation of the results of the
harmonization work programme, that: … (b) under their rules of origin, the country to be determined
as the origin of a particular good is either the country where the good has been wholly obtained or,
when more than one country is concerned in th e production of the good, the country where the last
substantial transformation has been carried out." S ection 334 represents a step away from the basis of
substantial transformation.
3.38 Fourth, it is unclear how the principle of determining origin as set out in section
334 (b)(2)(A), i.e., that the origin for certain made- up articles is determined where the greige fabric is
woven, would help the United States "more accurate ly reflect where the production activity takes
place." The production activity would more accurately be determined where the value is added or the
last substantial transformation takes place, rather than where the greige fabric is woven.
3.39 Members of the United States Congress criticized the section 334 rules as being protectionist.
Senator Charles E. Grassley and Senator Bill Brad ley presented the harshest criticism of the trade
protectionist effects of section 334, which they re ferred to as a "very significant change in rules of
origin."
11
3.40 The 2000 rules of origin are being used as an instrument to pursue trade objectives. An
examination of the design, architecture, and structure of section 405 shows that it is used as an
instrument to pursue trade objectives. As noted above, section 405 was designed and structured to
favour imports from the European Communities over imports from developing countries such as

10Indeed, the question arises that if the United St ates believed the application of the principle of
substantial transformation did not discourage "transhipment or other circumvention of textile and apparel
quotas" and sought therefore to move away from this principle in section 334, why did it revert to the substantial
transformation principle to determine origin for some of the products listed in the specified HTS heading in
section 405, but not all products, when it settled the dispute with the EC?
11 Questions on New Rules of Origin for Rita Hayes, Chief Textile Negotiator Submitted by Senator
Charles E. Grassley and Senator Bill Bradley on 6 March 1996, reprinted in Inside US Trade , "Text: Hayes
Responses to Bradley, Grassley Questions," 29 March 1996.

India. As noted above, one way of assessing 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. Trade objectives include the objective of favouring imports from one country over
imports from another. Any rule of origin that is used as an instrument to protect a domestic industry
or to favour imports from one country over impor ts from another country is, by definition, an
instrument to pursue trade objectives.
3.41 The legislative history of section 405 confirms th at it was used as an instrument to favour
imports from the European Communities. When th e European Communities complained about the
WTO-consistency of section 334 it c ited the adverse effects on certain textile and apparel products of
concern to the European Commun ities. The United States is the largest export market for the
European Communities textile and apparel industry, in particular, for its silk products. The European
Communities registered its concerns with the new United States rules of origin on the grounds of
diminution of market access. The European Communities claimed that European Communities
exporters no longer benefited from free access to the Un ited States market, but rather were subject to
the quantitative restrictions the United States mainta ined against the third country where the greige
fabric was woven.
3.42 On 22 May 1997, the European Communities re quested WTO consultations with the United
States on the section 334 rules of origin. The European Communities stated in its request for
consultations that the United States rules of or igin "adversely affected exports of European
Community fabrics, scarves and other flat textile products to the United Stat es of America. As a
result of this change, European Community products are no longer recognized in the USA as being of
European Communities origin and lose the free access to the US market that they enjoyed before."
12
3.43 Prior to the holding of formal WTO dispute settlement consultations, the United States and
the European Communities entered into a bilateral agreement. The United States Administration
agreed to propose an amendment to Congress for its rules of origin for those products of concern to
the European Communities, namely, silk scarves, silk accessories, dyed and printed cotton fabrics.
3.44 In July 1998, at the request of the United States Administration, draft legislation was
introduced in the United States Senate to impl ement the EC-US procès-verbal. However, the
European Communities claimed the draft legislation did not meet the terms of the procès-verbal, and
therefore initiated new dispute settlement proceedings against the United States.
3.45 Once again, in order to avoid a WTO dispute settlement case with the European Communities
in this sector, the United States agreed to settle the case. In August 1999, an amendment to the
procès-verbal was concluded whereby the United St ates Administration agreed to submit legislation
to Congress to amend the rules of origin set out in section 334. To ensure that there were no gaps
between what the procès-verbal called for and what the draft legislation would actually include, the
European Communities and the Unite d States agreed upon specific la nguage that the United States
Administration would propose to Congress. The United States and the European Communities also
agreed on the amendment of export visa and quota requirements.
3.46 In May 2000, the United States Congress passed section 405 of the Trade and Development
Act. Section 405 was virtually identical to the text agreed in the second procès-verbal between the
European Communities and the United States.
3.47 The United States thus modified its rules of origin in 2000 for the sole purpose of providing
favourable market access to the European Commun ities in order to settle the WTO case with the
European Communities. Section 405 amended section 334 to create certain exceptions to the general

12United States – Measures Affec ting Textiles and Apparel Products , WT/DS85/1, G/RO/D/1,
G/TBT/D/13, 3 June 1997.

rules on determining origin for fabrics and made-u p articles. These exceptions resulted in absurd
cases. If cotton fabric is woven in India and exporte d to Portugal where it is dyed, printed and subject
to two or more finishing operations, that fabric is now considered a product of Portugal. If, however,
the same cotton fabric is now used in Portugal to pr oduce a finished sheet, the origin reverts back to
India. Therefore, even though operations were performed in Portugal on a Portuguese product, the
origin of that product would be determined as In dian. The absurdity of this case is that the
determination of origin differs depending on the type of product. For cotton fabric, the country in
which it is dyed and printed and subjected to two fu rther finishing operations is determined to be the
country of origin. Paradoxically, for cotton fabric which is dyed and printed and subjected to two
further finishing operations and which is subsequent ly made into a bed sheet (which has more value-
added operations) in Portugal, that bed sheet will be determined as a product of India.
3.48 The section 405 amendment created arbitrary revers ions to the 1996 rules of origin. First,
section 334 had established origin based on the country where the greige fabric was formed by
weaving or knitting, regardless of any further fini shing operations, such as dyeing and printing.
However, in order to address the European Co mmunities concerns, the 2000 rules provide an
exception to this rule for fabrics classified unde r the HTS as silk, cotton, man-made fibres or
vegetable fibres. Such fabrics are now considered to originate in the country in which the fabric is
both dyed and printed and subjected to two or more finishing operations: bleaching, shrinking,
fulling, napping, decating, permanent stiffening, weighting, permanent embossing or moireing.
However, the same rule does not apply to fabrics made of wool. The origin of fabrics made of wool,
whether or not they are subject to two or more finishing operations, will be determined where the
basic wool fabric is formed.
3.49 Second, the 1996 rules established that origin would be determined based on where the
product was wholly assembled. There were excepti ons to the "wholly assembled rule" for specified
products falling under 16 HTS four-digit headings or s ub-headings so that they would be conferred
origin based on where the greige fabric was formed. The European Communities expressed its
concerns about some of these products when it re quested WTO consultations. For the products of
concern to the European Communities, the United States provided in the 2000 amendment that the
rule for determining their origin would revert to the pre-1996 rules for seven out of the 16 HTS four-
digit headings. India submits that the listed seven HTS four-digit headings are for those products that
are of particular export interest to the European Communities.
 For products under these seven four-
digit headings, the origin will be determined where the product is dyed and printed and subject to two
further finishing operations.
3.50 Third, although the 2000 amendment provided th at the determination of certain products
under these seven HTS headings would be determ ined based on where the product was dyed and
printed when accompanied by two further finishin g operations, additional exceptions were made.
However, these exceptions do not apply to products under these seven HTS headings where they are
made of (a) cotton, (b) wool or (c) fibre blends with more than 16% cotton. For these products under
these HTS headings when they are made of cotton, wool, and fibre blends with over 16% of cotton,
the origin will be determined where the greige fabric is formed.
3.51 It is clear that the only reason for the United States to change its rules of origin in 2000 was to
favour imports from the European Communities over imports from other countries. As mentioned
above, the text agreed to in th e procès-verbal ended up almost wo rd-for-word in the United States
section 405 legislation. The sole objective of these rules of origin was to settle the trade dispute
between the United States and the European Comm unities in a manner that singles out products of
export interest to the European Communities for more favourable treatment. There was no other
reason for the United States to pass section 405. Indi a submits that the clarifications made through
section 405 were the result of the United States recognition that section 334 was in violation of its
WTO obligations.

(e) The measures at issue are inconsistent with Article 2(c) of the RO Agreement
3.52 The language that rules of origin shall not " themselves" create restrictive, distorting or
disruptive effects should be read together with th e language of the preceding clause in Article 2(b)
that "notwithstanding the measure or instrument of commercial policy to which they are linked,
[Members shall ensure that] their rules of orig in are not used as instruments to pursue trade
objectives." Therefore, reading the provisions in Ar ticle 2(b) and Article 2(c) together, a measure or
instrument of commercial policy may have restrictiv e, distorting or disruptive effects on international
trade, but that rules of origin in and of themselves should not have such adverse effects.
3.53 Article 2(c) uses the term " create" rather than "have". The New Shorter English Oxford
Dictionary defines "create" as to "cause, occasion, produce, give rise to", and it defines "have" as to
"possess as an attribute, function, position, etc." In the Import Licensing Agreement, Article 3.2,
which addresses itself to trade-restrictive or trad e-distorting effects, states that "non-automatic
licensing shall not have trade-restrictive or distor ting effects on imports additional to those caused by
the imposition of the restriction." In contrast, the corresponding provision in the RO Agreement uses
the term "create", which implies that WTO Members must refrain from adopting rules of origin that
create a framework capable of producing such adverse effects.
3.54 Article 2(c) contains the prohibition that Members must ensure that their rules of origin do not
create restrictive, distorting or disruptive effects on international trade. According to the New Shorter
Oxford English Dictionary , the definition of "restrictive" is "implying, conveying, or expressing
restriction or limitation…having the nature or e ffect of a restriction; imposing a restriction."
 The
definition of distorting is "tending to distort; constitu ting distortion. The meaning of "disruptive" is
"causing or tending to cause disruption or disorder."
3.55 The effects of the challenged measure have to be " on international trade " and not only on
imports in the United States. We note the difference between the wording used in Article 2(c) of the
RO Agreement and that used in Article 3.2 of the Import Licensing Agreement. Article 2(c) does not
limit the trade distorting effects to imports but rather refers to restrictive, distorting or disruptive
effects on international trade generally. On the other hand, Article 3.2 of the Import Licensing
Agreement requires that "non-automatic licensing sha ll not have trade-restrictive or trade-distorting
effects on imports additional to those caused by the imposition of the restriction."
3.56 The measures at issue create conditions of co mpetition that are restrictive, distorting or
disruptive. Rules of origin create "restrictive" eff ects on international trade if they reduce the level of
international trade. Rules of origin create "distortin g" 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.
3.57 India cites examples illustrating the restrictive, distorting and disruptive effects on
international trade created by the measures at issu e. The United States rules of origin create trade
restrictive effects because they entail new quantitative restrictions on Indian products exported to third
countries, which had previously never been subject to any restrictions. They create distorting effects
because they shifted origin from a third country wher e the fabric was dyed and printed and subjected
to two further finishing operations to the country where the greige fabric was formed and because
they favoured products of export interest to th e European Communities over products of export
interest to developing countries. They create trade disruptive effects because of their sheer complexity
and the arbitrary nature of the criteria used. Th e measures at issue allow more favourable access to
certain products over trade in other products. An ex ample is the different treatment being accorded to
products based on their fibre composition, such as, silk, cotton and wool. The measures at issue
favour the products of export interest to the European Communities over products of export interest to
developing countries. The measures at issue conse quently create distorting effects on international
trade.

(f) The measures at issue are inconsistent with Article 2(d) of the RO Agreement
3.58 The rules of origin adopted in 2000 only prov ide that products under specific HTS headings
would be conferred origin based on where they ar e dyed, printed, and subjected to two further
finishing operations. The products that were chos en to be treated under the principles used in the
previous rules of origin were those products of e xport concern to the European Communities, namely
bed linen, silk scarves, and table linen. When the United States provi ded special treatment for such
products, so that they would be conferred origin where such products were dyed and printed and
subjected to two finishing operations, it was providing a de facto advantage to the European
Communities products. The advantage to the European Communities is that these products are not
conferred the origin of where the fabric is formed - usually a developing country under restraints - but
are instead allowed unrestricted access to the United States market.
3.59 The products for which the exceptions are pr ovided indicate that the United States is
providing a de facto advantage to those products of export concern to the European Communities,
even though the products in question are origin-neutral.
(g) The measures at issue are inconsistent with Article 2(e) of the RO Agreement
3.60 This provision obliges Members not only to administer their rules of origin in a consistent,
uniform, impartial and reasonable manner, but also to adopt rules that lend themselves to being
administered in this manner. The complexity and arbitrary criteria which are used in section 334 and
section 405 make it nearly impossible to administer these legislative provisions in a consistent,
uniform, impartial and reasonable manner. Their complexity is such that traders have to regularly seek
rulings from the United States Customs as to the dete rmination of origin for a particular product.
Also, the requirement that exporters have to provide visas for specified products when the fabric that
left their country was in greige form shows the difficulties of the administration of these rules of
origin.
4. Conclusion
3.61 India respectfully requests the Panel to find that the United States rules of origin set out in
section 334 of the Uruguay Round Agreements Act and modified in section 405 of the Trade and
Development Act of 2000 and the customs regulati ons implementing these statutory provisions, and
the application of these sections and regulations, are inconsistent with the United States obligations
under Article 2 of the RO Agreement. India requests that the Panel recommend that the United States
bring its measures into conformity with its obligations under the RO Agreement.
B. F
IRST WRITTEN SUBMISSION OF THE UNITED STATES
1. Introduction
3.62 The RO Agreement prescribes a set of obligations that are informed by its guiding principles,
as set out in the preamble. These principles list the fundamental objectives of the RO Agreement .
Among these principles are: (a) that clear and pr edictable rules of origin and their application
facilitate the flow of international trade; (b) th at laws, regulations and practices regarding rules of
origin be transparent; and (c) that rules of origin s hould be prepared and administered in an impartial,
transparent, predictable, consistent and neutral manner. The United States has rules of origin for
textile and apparel products that were formulated in a transparent process; are clear, concise, and
complete; and are applied in an impartial, predictabl e, consistent, neutral and transparent manner. As
such, the United States rules of origin regime is clearly consistent with the RO Agreement. What the
RO Agreement does not prescribe, however, is what specific rules of origin Members must use. But
that is precisely what India seeks in this dispute. Alternatively, India seeks to impose a system in
which there are no rules.

3.63 Despite the fact that India has no publishe d rules or guidance regarding its origin
determinations, eight years after the United States enacted statutory rules of origin for textile and
apparel products as part of the legislation impl ementing its Uruguay Round commitments, India is
challenging the specific rules utilized by the Unite d States because it disagrees with the content of
those rules. India asserted in its first written submission ("India First Submission") that it would show
that the United States rules of origin embodied in section 334 of the URAA were enacted to pursue
protectionist trade objectives; that they restrict, di stort, and disrupt trade; and are discriminatory and
administered in an unfair manner, all in violation of Article 2 of the RO Agreement . India also
asserted that it would show that section 405 of the Trade and Development Act of 2000 ("Trade Act"),
which modified section 334 pursuant to a settleme nt of WTO dispute settlement proceedings, is
similarly inconsistent with Article 2.
3.64 India has not shown that the United States rules of origin regime is inconsistent with Article
2. Instead, India devotes significant discussion to the different origin determinations it believes would
result from use of its interpretation of the "substantia l transformation" concept. India is correct about
one thing, however, these rules represented a cha nge from previous United States practice – a change
to concise, predictable, published rules from the pr actice of interpreting substantial transformation on
a case-by-case basis. India’s problem is that it does not like the certain and specific origin
determinations that result from the product-specifi c rules of origin which the United States
promulgated in order to bring greater certainty to th e textile and apparel trade. India, in effect, is
asking the Panel to read into the RO Agreement certain specific criteria and, indeed, interpretations of
what constitutes an operation that confers origin. However, the RO Agreement does not permit such a
reading. The RO Agreement provides for changes to origin regim es and allows varying origin criteria
to be used until harmonization is completed.
3.65 As the United States discusses below, the rules of origin regime established in section 334
and section 405 are not inconsistent with Article 2(b)-(e), as read in good faith in accordance with the
ordinary meaning to be given to their terms in th eir context and in the light of the object and purpose
of the RO Agreement . These rules were enacted to combat circumvention of established quotas,
prevent transshipment, facilitate harmonization and best capture where a new product is formed.
Furthermore, both section 334 and its modificati on section 405 were offered on an MFN basis, in
accordance with WTO rules. As such, th ese rules are not inconsistent with the RO Agreement .
Rather, they facilitate the flow of international trade.
13
3.66 Where then do India’s arguments lead? They l ead to one of two impermissible results: (1)
that the United States should have no rules of or igin for textile and apparel products and instead
simply make case-by-case determinations of origin, or (2) that the Panel should determine what the
specific rules of origin should be. Neither of these results is allowed under the RO Agreement. Either
would be contrary to the goals of the RO Agreement – to provide transparency, clarity and
predictability in a rules of origin regime.
2. Factual background
(a) The Agreement on Rules of Origin
3.67 In the RO Agreement, WTO Members sought to bring about further liberalization of world
trade by providing for transparent laws, regulations, and practices regarding rules of origin that are
non-discriminatory, clear and predictable. 11 Article 2 of the RO Agreement prescribes a set of
disciplines on Members to promote transparency and prevent trade distortion through rules of origin
until the work programme for the harmonization of orig in rules is completed. Specifically, Article 2
directs Members to ensure that, in relevant part:

 13 See RO Agreement preamble.

– notwithstanding underlying commercial policy, rules of origin are not to be used as
instruments to pursue trade objectives directly or indirectly (Article 2(b));
– rules of origin do not themselves create restrictive, distorting or disruptive effects on
international trade (Article 2(c));
– rules of origin do not discriminate betw een other Members (Article 2(d)); and
– rules of origin are administered in a cons istent, uniform, impartia l and reasonable manner
(Article 2(e)).
3.68 India’s claims, that the United States rules of origin are protectionist, create restrictive, distorting
and disruptive effects on trade, are discriminatory, and are not uniformly administered, are based on
the flawed understanding that the RO Agreement would preclude product-specific rules of origin and
that the RO Agreement precludes different rules of origin from applying to different products.
However, Article 2(b)-(e) does not direct Member s to adopt particular origin regimes before
harmonization, nor does it require that the same ru les be used for similar products. Contrary to
India’s desire, nothing in Article 2 or any other provision of the RO Agreement mandates that
Members use a particular rule for a particular ma nufacturing process, or for particular products.
Furthermore, nothing in these provisions can be read to imply that Members may not change their
rules of origin. In fact, Article 2(i) of the RO Agreement envisions that Members will introduce
changes to their rules during the transition pe riod and imposes disciplines upon such changes.
14
Morever, and perhaps most importantly, nothing in the RO Agreement precludes a Member from
settling disputes in a WTO-consistent manner through an agreement to amend its rules of origin, as
encouraged by the Understanding on Rules and Procedures Governing the Settlement of Disputes (the
"DSU").
(b) Section 334 of the Uruguay Round Agreements Act
3.69 Section 334 implemented United States obligations with respect to rules of origin, and
established a body of rules that are based on the princi ple that the origin of fabric and certain textile
products is derived where the fabric is woven, knitted or otherwise formed; and that the origin for any
other textile or apparel product is where th at product is wholly produced or assembled. 15 If
production or assembly, whichever is applicable, occu rs in more than one country, then origin is
conferred where the most important assembly or manufacturing process takes place. This reflects the
United States’ conclusion that assembly is generally the most important step in the manufacturing of
assembled apparel. In enacting section 334, the Un ited States Congress expressed a policy of seeking
to harmonize United States rules with those of other major importing Members, and to reduce
circumvention of quota limits through illegal tr ansshipment by providing greater certainty and
uniformity in the application of origin rules.
16
3.70 India goes to great lengths to portray section 334 as a complicated, unmanageable,
discriminatory set of rules. They are not. First, by their mere existence, and in contrast to the chaos
of having no rules, these sector-wide rules are cl ear, predictable and neutral, as prescribed by the RO
Agreement. Second, these rules are based on a simple pr inciple that the process that results in the
creation of a new textile product, and therefore meri ts a change of country of origin, is assembly. 17

14 In fact, Article 4 of the Agreement on Textiles and Clothing also envisions that such changes would
take place, and sets forth a mechanism for Member s to reach a mutually accep table solution regarding
appropriate adjustments, a mechanism India chose not to use here.
 15 See Exhibit US-1.
16 H.R. Rep. 103-826(i), Uruguay Round Agreements Act, P.L. 103-465, October 3, 1994. Exhibit
US-2.
17 India contradicts itself when it asserts that the United States Cu stoms Service ("Customs Service")
does not define what it means by "important assembly in manufacturing process." India First Submission, para.
30. In the same paragraph, however, India acknowledges that the Customs Service recognizes three types of
operations as major: fabric forming, cutting and assembly. Furthermore, between cutting and forming, forming
is more important. This is consistent with the policies underlying section 334.

They are, therefore, "readily understandable, pub lished in easily understood language, uncomplicated
and predictable in application."
18
3.71 India vigorously asserts that section 334 was su ch a dramatic change from previous United
States practice that it significantly distorts trade. Se tting aside the fact that an effect on trade should
not be equated with distortion of trade, the pr ior application of substa ntial transformation was
criticized for being "too subjective, too inconsistent in the results it produce[d], too vulnerable to
political pressure in its administration."19
(c) Section 405 of the Trade and Development Act of 2000
3.72 Section 405 amended section 334 in order to settle a WTO dispute brought by the European
Communities alleging that section 334's provisions had negatively affected trade in specific exporting
sectors of the European Communities, most notably Italian silk products. 20 The United States held
extensive consultations with the European Communiti es. In order to settle the dispute, the United
States agreed to amend section 334, creating two exceptions to section 334's "fabric formation rule":
– for silk, cotton, man-made and vegetable fiber fabric, origin would once again be
conferred by dyeing and printing and two or more finishing operations; and
– for certain textile products excepted from th e assembly rule, origin would be conferred
where dyeing and printing and two or more finishing operations took place, with
exceptions.
21

3.73 These amendments apply to all WTO Members, not just the European Communities. India’s
complaint that they are discriminatory has no meri t. Section 334, as amended by section 405 is
codified at 19 U.S.C. § 3592.22
3. Procedural background
3.74 On 3 June 2002, India requested that a panel be established in this dispute pursuant to
Article 6 of the DSU, Article XXIII of GATT 1994, and Article 8 of the RO Agreement .23 India
requested the Panel to consider the consistency of sections 334 and 405 with Article 2 (b)-(e) of the
RO Agreement. The Panel was established on June 24, 2002, and composed on 10 October 2002.24
4. Legal argument
3.75 The United States rules of origin regime is cons istent with the ordinary meaning of Article 2
of the RO Agreement , in its context and in light of the object and purpose of the RO Agreement .
India’s burden is to show that the United States regime does not comport with the provisions of
Article 2. India does not and cannot show that section 334 and section 405 are inconsistent with the

18 See N. David Palmeter, "The US Rules of Origin Proposal to GATT: Monotheism or Polytheism,"
Journal of World Trade (1990) 24:2, pp. 25-36, at 28-9. Exhibit INDIA-1.
19 Palmeter, at 27. Exhibit INDIA-1.
20 H.R. Conf. Rep. 106-606, section 405, Clarification of section 334 of the Uruguay Round
Agreements Act, p. 232 (2000). Exhibit US-3.
21 See Exhibit US-3.
22 Exhibit US-4.
23 India had originally submitted its request on 7 May 2002 but omitted reference to Article 2. On
3 June India submitted a corrected panel request, and it is on the basis of this request that the Panel was
established.
24 The United States notes that India, in its firs t submission, makes a reference to the "customs
regulations" implementing section 334 and section 405 as inconsistent with the RO Agreement. See India First
Submission, para. 7 (supra, para. 3.4). As India did not make this cl aim in either its Consultation Request or its
Panel Request, such a claim cannot form part of this dispute.

RO Agreement. It is well-established that the complaining party in a WTO dispute bears the burden
of coming forward with argument and evidence suffici ent to establish a prima facie case of breach of
a Member's WTO obligations.25 If the balance of evidence and argum ent is inconclusive with respect
to a particular claim, India, as the complaining part y, must be found to have failed to establish that
claim.26 Furthermore, a finding that the United States re gime is inconsistent with Article 2 leads to an
impermissible result under the RO Agreement: that the United States should have no rules of origin
and instead simply make case-by-case determinations of origin, or that the WTO dispute settlement
system can assign origin determinations for specific products.
3.76 Customary rules of interpretation of public intern ational law, as reflected in Article 31(1) of
the Vienna Convention on the Law of Treaties ("Vienna Convention"), provide that a treaty "shall be
interpreted in accordance with the ordi nary meaning to be given to the terms of the treaty in their
context and in the light of its object and purpose." 27 The Appellate Body, in US - Wool Shirts and
Blouses, has recognized that Article 31 of the Vie nna Convention reflects a customary rule of
interpretation.28 In applying this rule, however, the Appellate Body in India – Patents cautioned that
the panel’s role is limited to the words and concepts used in the treaty.29
(a) Section 334 is consistent with Article 2(b)
3.77 The text of Article 2, read in its context and in light of the RO Agreement ’s object and
purpose, does not preclude Members from determining the origin of goods based on assembly, type of
material, or type of product. India distinguish es between the product-specific tariff shift rules and
rules based on case-by-case applications of "substantial transformation" criteria. However, India’s
criticism of this distinction is based on its own interpretation of what , in its view, the product specific
result should be, ignoring the greater certainty and clarity brought about by section 334 as against the
case-by-case subjective origin determinations which ha d preceded it. To require the United States to
utilize a particular rule for a specific product, as I ndia advocates, would be to add an obligation not
contained in the RO Agreement during the transition phase.
3.78 Article 2 provides, in relevant part, that "U ntil the work programme for the harmonization of
rules of origin set out in Part IV is completed, Members shall ensure that: . . . (b) notwithstanding the
measure or instrument of commercial policy to which they are linked, their rules of origin are not used
as instruments to pursue trade objectives directly or indirectly[.]"
3.79 The United States agrees with India that the opera tive clause in Article 2(b) is the obligation
that rules of origin are not to be used "as instruments to pursue trade objectives."
30 The United States

25 See, e.g., Appellate Body Report, United States – Measure Affecting Imports of Woven Wool Shirts and
Blouses from India ("US – Wool Shirts and Blouses "), WT/DS33/AB/R and Corr.1, adopted 23 May 1997,
DSR 1997:I, 323, page 14; Appellate Body Report, EC Measures Concerning Meat and Meat Products
(Hormones) (" EC – Hormones "), WT/DS26/AB/R, WT/DS48/AB/R, adopted 13 February 1998,
DSR 1998:I, 135, para. 104; Panel Report, Korea – Definitive Safeguard Measure on Imports of Certain Dairy
Products ("Korea – Dairy "), WT/DS98/R and Corr.1, adopted 12 January 2000, as modified by the Appellate
Body Report, WT/DS98/AB/R, DSR 2000:I, 49, para. 7.24.
26 See, e.g., Panel Report, India – Quantitative Restrictions on Imports of Agricultural, Textile and
Industrial Products ("India – Quantitative Restrictions "), WT/DS90/R, adopted 22 September 1999, as upheld by
the Appellate Body Report, WT/DS90/AB/R, DSR 1999:V, 1799, para. 5.120. See also Appellate Body Report,
European Communities – Trade Description of Sardines (" EC – Sardines "), WT/DS231/AB/R, adopted
23 October 2002, para. 270, quoting Appellate Body Report, US – Wool Shirts and Blouses, supra, at 335.
27 Vienna Convention Article 31(1) (emphasis added).
28 Appellate Body Report, US - Wool Shirts and Blouses, supra, at 16.
29 Appellate Body Report, India – Patent Protection for Pharmaceutical and Agricultural Chemical
Products ("India – Patents (US) "), WT/DS50/AB/R, adopted 16 January 1998, DSR 1998:I, 9, paras. 45-46
(emphasis added).

also agrees that "instrument" can be defined as "tool ," "device," or "means" and that "objective" is a
goal.
31 Likewise, the United States ag rees that the preamble to the RO Agreement provides the
relevant "object and purpose" of the RO Agreement. However, the United States submits that India’s
interpretation of a "trade objective" is incorrect, as it is overly broad. If "trade objective" is
understood to be any objective related to trade, rules of origin could not be used to pursue
transparency or predictability, two trade-related goals . Such an interpretation would be at odds with
both the object and purpose of the RO Agreement and the context of this provision. Nevertheless, the
United States accepts India’s contention that protection of a domestic industry is an "impermissible"
trade objective for purposes of Article 2(b).
3.80 India seems to make three argumen ts with respect to its claim that section 334 is inconsistent
with Article 2(b): (1) the objective of the United States in formulating its rules of origin was to
protect its domestic industry; (2) the Panel should look to the measures or instruments of commercial
policy listed in Article 1.2 and assess whether the Un ited States rule of origin "achieves the same
results;" and (3) "the design, architecture and structure" of section 334 "demonstrate that it was
adopted to protect the domestic textile industry."
32
3.81 The section 334 rules of origin do not have as their objective the protection of domestic
industry. The Statement of Administrative Action ("SAA") is clear on what its objectives were: to
prevent quota circumvention and address illegal tran sshipment, to advance harmonization, and to
more accurately reflect where the mo st significant production activity occurs. 33 Congress concluded
that greater clarity needed to be brought into determin ations of origin in this area, which was of great
interest to the United States trading community - whether from the standpoint of seeking to import
textiles and apparel or from the standpoint of de terring circumvention of commercial instruments. 34
The type of finishing operations presented to the Customs Service for determination of origin and
application of quotas had grown, and under the in creasing number of case-by-case applications by the
Customs Service of the substantial transformation cr iteria, the list of processes that were deemed to
confer origin also expanded, sometimes including pr ocesses that in retrospect were understood not to
be significant.35
3.82 India points to no evidence to support its asserti on that section 334 has been used to achieve
protection of the domestic industry. Furtherm ore, the commentaries referenced by India 36
acknowledge that the United States was trying to prevent circumvention: "Some new industrialized
countries of Southeast Asia could otherwise try to circumvent the quantitative restrictions applied to
their exports of textile products. They c ould do so by exporting semi-finished products ( in casu dyed
or printed cloths) to third countries, in the hope that the origin of those countries (for which no

31 See Id. para. 46 ( supra, para. 3.23), notes 29 and 30, citing The New Shorter Oxford English
Dictionary and The New Oxford Thesaurus of English.
 32 Id. paras. 46-49 (see, supra, paras. 3.23-3.26).
33 As India correctly notes, the SAA is an aut horitative expression of the Administration’s and
Congress’s views regarding implementation of the URAA. H.R. Doc. No. 316, 103d Cong. 2d sess., Vol. 1
(1994), at 656.
34 See SAA pages 124-126. Exhibit US-5.
35 For example, one of these processes was cutting. Some traders successfully argued that the location
of cutting of a product that could receive further finishing conferred origin. Congress acted to harmonize United
States rules in this respect with those of our major trading partners.

36 We note, however, that one of the commentaries addresses a 1984 rules change, which presumably
cannot be used to infer the intent of the United Stat es Congress ten years later when section 334 was passed.
See India First Submission, note 33.

quantitative restrictions for exports of textile products are applied) would be attributed to the finished
cloths."37
3.83 Rather, India’s quarrel is with certain specific determinations of origin for particular products.
That is, India disagrees with the judgment of the United States that certain processes constitute
sufficient "transformation" to merit changing the origin of a product (except in certain circumstances).
Not only is there nothing in the text of the RO Agreement that says that Members must confer certain
origin determinations, there is nothing in Article 2( b) that indicates that if a Member does not include
certain finishing operations in a determination of or igin the Member is using its rules of origin to
pursue trade objectives. It is the policy decision of the United States that origin conferring production
is based on assembly, not a finishing operation. The United States rules ta ke into account which
finishing operations merit changing origin, and th at may vary based on the type of product.
Moreover, Article 2(a) sets forth a range of criteria that can be used by a Member in formulating its
rules of origin, and the United States rules of orig in for textile and appare l products are consistent
with these criteria. Specifically, Article 2(a)(i) directs Members that apply a tariff classification
criterion to specify headings or subheadings in th e rule. Both section 334 and section 405 meet this
directive. Article 2(a)(ii) directs that where a manufacturing or processing criterion is prescribed, the
operation that confers origin must be precisely specifi ed. This is exactly what the United States rules
do. India’s arguments, that the United States should not confer origin based on where the product is
formed or assembled, essentially renders Article 2( a) a nullity by its sweeping view of the subsequent
provisions.
(b) Section 405 is consistent with Article 2(b)
3.84 With respect to India’s claims that secti on 405's amendment of section 334 constitutes an
impermissible use of rules of origin, India’s arguments fail on their face.38 First, the modifications in
section 405 apply to all Members on an MFN basis. India was a third party to the European
Communities disputes; as such India was well aware of the very specific nature of the European
Communities’ complaints.
39 In particular, India knew the importance of its interest with respect to the
products it exports in whether dyeing and printing and additional finishin g operations conferred
origin. If India did not believe that the scope of the European Communities' consultation request
captured its concerns, it could have sought separate consultations.40
3.85 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 ma n-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. Therefore, modification of section 334 to reflect
this would serve as an appropriate mutually satisfactory solution to the issues in dispute.
3.86 It would be absurd to penalize a Member for reaching a mutually satisfactory settlement of a
dispute with another Member, pursuant to the provisions of the DSU, where the benefits of the
settlement accrue to all Members. Yet that is precisely what India asks of this Panel. 41 The logic that
India would have the Panel accept -- namely, that the United States’ decision to resolve a trade
dispute with the European Communities necessarily implies that the United States believed that the

37 See Franklin Dehousse, Katelyne Ghemar and Philippe Vincent, "The EU-US Dispute Concerning
the New American Rules of Origin for Textile Products," Journal of World Trade 36:1 67-84, 2002 at 73, India
First Submission, note 46. Exhibit INDIA-12.
38 See India First Submission, paras. 69-85. The United States does not intend to engage in a merits
discussion of a settled dispute that is not part of the terms of reference of this dispute.
39 See India First Submission, note 48.
40 See United States - Measures Affecting Textiles and Apparel Products (I), WT/DS85/9,
G/TBT/D/13/Add.1, Notification of Mutually-Agreed Solution, 25 February 1998. Exhibit INDIA-13.

European Communities' claims in that dispute were valid -- is untenable. Does India perhaps wish to
discourage Members from achieving mutually satisf actory solutions? That would be the likely
consequence of accepting the logical leap that Indi a urges on the Panel; and it would be inconsistent
with provisions such as DSU Article 3.7, which provid es that such solutions are "clearly preferred" to
"bringing a case". Notwithstanding India’s unsupporte d assertions to the contrary, the United States
decision to settle the European Communities dis pute by amending section 334 was in no way a
recognition of any violation of any WTO obligations.
(c) Section 334 and section 405 are consistent with Article 2(c)
3.87 Article 2(c) of the RO Agreement provides, in relevant part, that "(c) rules of origin shall not
themselves create restrictive, distorting, or disrupt ive effects on international trade." The ordinary
meaning of this phrase is clear from its terms. As discussed above, India bears the burden of showing
that these measures, in and of themselves, restrict, di stort and disrupt trade. India has failed to meet
its burden. Contrary to its assertion, an effect on or "modification" to trade is not sufficient to rise to
the level of "restriction," "d istortion," or "disruption."
42 Even if modification were sufficient, India
has not presented any concrete data to support these allegations. Furthermore, assuming that it were
true, India presents no textual support in the RO Agreement for its argument that rules favoring one
product over another, or one fabric over another, restrict, distort or disrupt trade. 43 Nor does the letter
from the Cotton Textiles Export Promotion Council help India establish a prima facie case in this
dispute.44 India does not address the possibility that Sri Lankan producers may have decided to weave
their own fabric or to source it from elsewhere.
3.88 India also argues that the rules disrupt trade by "t heir sheer complexity." First, India has not
demonstrated that "complexity" is a prohibited crite rion. It would seem that India’s view incorrectly
equates "simplicity" either with the absence of non-pr eferential rules of origin (such as is the situation
in India) or perhaps with an origin regime th at operates through case-by-case origin determinations
that will, by its very nature and operation, invo lve subjectivity and greater administrative discretion
than what currently exists in the United States orig in regime. Second, India presents no evidence that
the rules have discouraged exporters from shipping their products to the Unit ed States because they
simply could not understand them. Nor could th ey: the United States regime is perfectly
comprehensible to businesses engaged in importing and exporting. Finally, the United States does not
share India’s apparent view that having no rules, at least no published rules, is less complex. Rather,
the United States believes that in order for rules of origin to be "clear and predictable" so as to
facilitate trade; transparent; and "applied in an impa rtial, transparent, predictable, consistent and
neutral manner,
45 they should be published, and be written as completely and concisely as possible.
Section 334 and section 405 meet these standards.
3.89 India’s argument is tantamount to saying that the RO Agreement established a "standstill" for
origin regimes. There is no fo undation for such an assertion. The RO Agreement clearly allows for
changes in rules of origin, particularly since regimes such as the United States, which provide
transparency through publication and certainty throug h product-specific rules, greatly contribute to a
trade-facilitative environment. Moreover, since the RO Agreement , in Article 2(i), clearly allows
changes in rules, some effect on international trade must have been envisioned, including the
possibility that products would have different countries of origin.

43 Id.
44 See India First Submission, para.93. Exhibit INDIA-15.
45 See RO Agreement preamble.

(d) Consistent with Article 2(d), the rules are not discriminatory
3.90 Article 2(d) provides, in relevant part, that Members should ensure that " … (d) the rules of
origin that [Members] apply to imports and exports … shall not discriminate between other Members,
irrespective of the affiliation of the manufacturers of the good concerned… ." As a preliminary
matter, it appears that India is making this claim onl y with respect to section 405, and therefore that
the applicable provision of Article 2(d) that it claims is being violated is that rules "shall not
discriminate between other Members irrespectiv e of the affiliation of the goods concerned. 46 I n
respect of this claim regarding Article 2(d), however, India makes no attempt to show how the
settlement with the European Communities, which is applicable to India and all other Members on an
MFN basis, is discriminatory. Accordingly, Indi a has failed to meet its burden to establish that
sections 334 and 405 are inconsistent with Article 2(d).
(e) The administration of the rules is consistent with Article 2(e)
3.91 Article 2(e) provides, in relevant part, that "(e) [Members’] rules of origin are administered in
a consistent, uniform, impartial a nd reasonable manner. . . ." Once again, India makes no effort to
show how the administration of section 334 and section 405 is in consistent with Article 2(e)’ s
instruction that Members ensure that "rules of origin are administered in a consistent, uniform,
impartial and reasonable manner" (emphasis added) . Rather than addressing the actual language of
the provision, India attempts to add factors to this provision: "members should adopt rules that lend
themselves to being administered in a consistent, unifo rm, impartial and reasonable manner;" and that
the rules should not be " complex and arbitrary." 47 In other words, India attempts to recast this
obligation in order to challenge attributes of the rule itself, rather than of its administration. However,
India may not by fiat amend the terms of Article 2(e) so as to challenge the law itself, rather than its
administration. Just as claims under Article X:3 of the GATT 1994 must fail if they are based on
challenges to aspects of the laws themsel ves, rather than their administration
48 so too must claims
under Article 2(e) fail if they are based on perceive d infirmities of the rules themselves, rather than
their administration.
5. Conclusion
3.92 For the foregoing reasons, the United States request s that the Panel find that India has failed
to establish that section 334 of the URAA and sec tion 405 of the Trade and Development Act of 2000
are inconsistent with Article 2(b)-(e) of the Agreement on Rules of Origin.
C. ORAL STATEMENT OF INDIA AT THE FIRST MEETING OF THE PANEL
3.93 It is my honour to represent India before you t oday. My name is K.M. Chandrasekhar, and I
am the Ambassador of India. The members of the Indian delegation are our officials, Mr M. K. Rao,
First Secretary (Legal), Mr Sudhakar Dalela, First Secretary (WTO), Mrs Alka Bhatia, First Secretary,
Geneva, all with the Permanent Mission of Indi a to the WTO, Mr S. Rajagopal from the Cotton
Textile Export Promotion Council of India, and our advisers, Mr Frieder Roessler, Executive Director,
Advisory Centre on WTO Law, and Ms. Cherise Valles, Counsel, Advisory Centre on WTO Law.
3.94 Exports of textile and apparel products are of critical importance to India and other
developing countries. We have initiated these di spute settlement proceedings because the United
States is using rules of origin to undermine Indi a's market access rights for these products. India also

46 See India First Submission, paras. 98-9 (supra, paras. 3.58-3.59).
48 Appellate Body Report, European Communities – Regime for the Importation, Sale and Distribution of
Bananas ("EC – Bananas III "), WT/DS27/AB/R, adopted 25 September 1997, DSR 1997:II, 591, para. 200. A
similar provision is found in Article 1.3 of the Agreement on Import Licensing Procedures.

has a systemic interest to ensure that rules of or igin are prepared and app lied in accordance with the
obligations assumed by all WTO Members. We are aware that the outcome of this dispute will be
watched closely by all of those who support the trade-neutral application of rules of origin.
3.95 The RO Agreement exists because rules of origin need to be used correctly. The RO
Agreement exists in order to prevent the abuse of rules of origin. Rules of origin can be used as a
perfectly legitimate instrument to define the nati onal origin of products in order to determine the
treatment to be accorded to that product. Rules of origin can also be used to determine the products
eligible for preferential treatment. Every WTO Member that applies non-preferential but country-
specific trade policy instruments needs rules that de termine in which country a product is deemed to
originate. Article 2 of the RO Agreement reserves each Member’s right to determine the criteria that
confer origin pending the adoption of harmonized disciplines after the transition period. The use of
rules of origin is therefore at present in no way curta iled. However, rules of origin can also be abused
for the purpose of impairing the benefits of market access rights and the right to non-discriminatory
treatment and arbitrary origin requirements can create unnecessary obstacles to trade. Article 2
therefore obliges Members not to use rules of or igin to pursue trade objectives and not to impose
origin requirements that create restrictive, distor ting and disruptive effects on international trade or
that discriminate between WTO Members. The abuse of rules of origin is therefore clearly
prohibited.
3.96 Contrary to the assertion of the United States, India is not asking you to adopt interpretations
of Article 2 that would curtail the right of Members to determine the criteria which confer origin, or to
change such criteria over time or to apply different criteria to different products. A Member may do
so. However, a Member may not have rules of origin that are adopted and applied in a manner
inconsistent with its obligations under Article 2 of the RO Agreement. It is clear that the United States
has exercised its right to determine criteria for ru les of origin for purposes for which such rules may
not be used and, in a manner, which cannot be reconciled with its obligations under the RO
Agreement. India brought this case because the United States is clearly abusing its right to determine
the criteria that confer origin for the purpose of protecting its domestic industry and of favouring
products of export interest of one other Member of the WTO over others. In fact, the abuse is so
serious that it is difficult to imagine what measures would be subject to the disciplines of Article 2 of
the RO Agreement if measures of the type imposed by th e United States were considered to be
consistent with that provision. A finding that the United States measures at issue are consistent with
Article 2 of the RO Agreement would render that provision a nullity.
3.97 It is now clear that the harmonisation of rules of origin is likely to take much longer than the
drafters of the RO Agreement had anticipated. As a result, the di sciplines to be observed pending the
harmonisation have become more important than ever . All Members, not only India, have an interest
in ensuring that these disciplines are interpreted in a manner that is consistent with the objectives of
the RO Agreement. All Members, not only India, have an in terest in ensuring that the market access
commitments they have already negotiated and tho se that they will negotiate in the Doha Work
Programme are not rendered meaningless through the manipulation of rules of origin. The United
States was the main promoter of the RO Agreement . India would therefore like to encourage the
United States to look beyond the application of its rules of origin during the remaining years of the
Agreement on Textiles and Clothing and assist the Panel in developing cons tructive interpretations
fully consistent with the objectives of the RO Agreement.
3.98 India’s main legal claims are that the United States is using its rules of origin to pursue trade
objectives and that its rules of origin themselves rest rict, distort or disrupt international trade. The
"fabric forward" rule of section 334 meant that more textile and apparel produ cts were conferred the
origin of countries that were under quota restrain ts. Section 405 provided exceptions to the "fabric
forward" rule for certain products of export intere st to the European Communities, but then also
provided a further exception that if those products were made from certain fibres, such as cotton, they

would be subject to the "fabric forward" rule. These latter products were once again conferred the
origin of the countries that were under quota restraints.
3.99 India demonstrated in our first submission th at sections 334 and 405 were adopted to pursue
trade objectives, that they create restrictive, distorting and disruptive effects on international trade and
that they entail a de facto discrimination between exports of the European Communities and those of
other Members of the WTO and that they conseque ntly violate Article 2(b), (c) and (d) of the RO
Agreement. However, the United States fails to rebut in any meaningful way the claims and argument
that India made.
3.100 Contrary to what is stated in the United Stat es' submission, India does not seek to have the
Panel "prescribe…what specific rules of origin Memb ers must use." Nor does India seek to "impose
a system in which there are no rules." India has not, and would not, make such claims. Rather, India
is making a claim as to what the United States rules of origin should not be.
3.101 The term "trade objectives" is not defined in the RO Agreement . As noted in India’s
submission, the ordinary meaning of "trade objectives" in the context of Article 2(b) is an aim, goal,
or object related to trade. We similarly argued that one way of assessing whether a rule of origin is
being used as an instrument to pursue a trade obj ective is to assess whether it achieves the same
results as a measure or instrument of commercia l policy would. Trade objectives include the
objective of protecting the domestic industry against import competition, or of favouring imports from
one WTO member over imports from another. Any rule of origin that does so is, by definition, used
as an instrument to pursue trade objectives.
3.102 The United States' submission (see para. 3.79 above) provides the important
acknowledgement that "the United States accepts Indi a ’s contention that protection of a domestic
industry is an ‘impermissible’ trade objective fo r the purposes of Article 2(b)." The European
Communities submission adds that "the European Communities can join the consensus among the
parties that in any event, the objective of protec ting domestic industry would come under Article 2(b)
of the RO Agreement (see European Communities' submission, para. 11). Furthermore, the European
Communities is also ready to accept India’s cont ention that favouring one Member over another
would, in principle, be a trade objective covered by that provision."
3.103 For the purposes of this dispute, it is not necessary for the Panel to develop a general
definition of the term "trade objectives." India’s vi ew is that it would be sufficient for the Panel to
find that the United States measures at issue have as their objective the protection of the domestic
industry against import competition or the favouring of imports from one WTO Member over imports
from another.
3.104 The United States explains that section 334 was passed "to prevent quota circumvention and
address illegal transhipment to advance harmonization and to more accurately reflect where the most
significant production activity occurs." The definition of "circumvention" was provided by the United
States in its first submission. It cites with approval a commentary th at the United States was

addressing circumvention through section 334 because "some new industrialized countries of
Southeast Asia could otherwise try to circumvent th e quantitative restrictions applied to their exports
of textile products. They could do so by exportin g semi-finished products (in casu dyed or printed
cloths) to third countries, in the hope that the origin of those countries (for which no quantitative
restrictions for exports of textile pr oducts are applied) would be attri buted to the finished cloths."
However, this is not circumvention. Circumvention is a term which implies a violation of the
applicable origin rules through false declarations and other illegitimate means. The reaction of the
market to the incentives and disincentives created by country-specific quotas cannot be described as
circumvention. These newly industrialized countries of Southeast Asia were not "circumventing"
origin rules but were adapting their production to their market access conditions. Since the origin
determinations of the products in these new trade patt erns were conducted in conformity with the then

applicable section 12.130 regulations, as a ma tter of definition, they could not constitute
"circumvention."
3.105 In its submission, the European Communiti es rightly points out that if the expression
"circumvention of quotas" was used to describe the changing of trade patterns in response to quotas,
the intent to pursue a trade objective could be estab lished through the legislative history itself. The
United States' intention to combat "circumventi on" corresponds, in the words of the European
Communities, to an intention to "re-apply quantitative restrictions where these have lost their bite
through changes in trade patterns and regulations ." As noted by the European Communities and
China, this is precisely the type of trade objective that Members are not to achieve through the use of
rules of origin.
3.106 India has demonstrated in its submission th at the trade objective of section 334 was the
protection of the United States domestic industry. Th e effect of section 334, especially its fabric
forward provision, was that a range of textiles and clothing products imported into the United States
were subjected to the strict quot as of the developing countries whereas previously they had been
under no quota or a more generous quota. India noted that the United States has not provided any
explanations in its submission that would justify the conclusion that section 334 was meant to be trade
neutral. We therefore believe that we have made a prima facie case of violation that the United States
has failed to rebut.
3.107 The United States submits that the main pur pose of section 405 was the same as that of
section 334, namely to prevent circumvention or transhipment. However, the changes effected
through section 405 did not address circumvention or tr anshipment concerns. As noted by China, the
United States' arguments that these concerns were a legitimate basis for the changes to its textile
origin rules are inapposite with respect to section 405. We note that also with respect to section 405
the United States has failed to give any explanations that would support its claim that section 405 does
not reveal the intent to favour exports of th e European Communities over those from other Members
of the WTO. It merely asserted that the main objective of section 405 was to prevent circumvention
and transhipment. However, as noted by the Europe an Communities in its submission, the Appellate
Body made clear in Chile – Alcoholic Beverages that the mere stating of objectives does not constitute
effective rebuttal by a respondent.
3.108 The United States passed section 405 to amend cer tain provisions in section 334. India has
argued that the sole objective of section 405 was to favour the exports of the European Communities,
while maintaining the restraints for non-European Communities countries. The United States has not
responded adequately to this argument. The only point the United States makes is that Members
should not be discouraged from achieving mutually agreed solutions. India agrees that Members
should not be discouraged from arriving at mutually agreed solutions. However, India is challenging
the discriminatory terms of the legislation implementing the settlement.
3.109 Article 2(b) of the RO Agreement is violated if rules of origin are used as instruments "to
pursue trade objectives. " The legal status of a rule of origin under this provision thus depends on the
purpose it serves. If its only objective is to determ ine the origin of products, it is consistent with
Article 2(b). If it is used, directly or indirectly, to pursue a trade objective, it is not. The principal
remaining interpretative issue is how the objective of rules of origin at issue should be determined.
One approach would be to look at the declared inte nt of the legislators and to ask: what objective did
Congress declare to pursue when adopting the rules? Another approach would be to examine the
objective that is expressed in the legislation and ask: what is the objective revealed by the terms of the
legislation?
3.110 The Appellate Body has clearly indicated its pr eference for latter approach. Article III:2 of
the GATT prohibits the application of internal taxes on products "so as to afford protection to
domestic production". In Japan – Alcoholic Beverages, the Appellate Body ruled that the question of

whether internal taxes were being applied so as to afford protection had to be determined by
examining the objectives revealed by the legislation’ s design, architecture and structure rather than
the reasons given by the legislators.
3.111 The approach adopted by the Appellate Body in respect of Article III:2 can be transposed to
the case before the Panel. WTO law leaves Members in principle free to determine the criteria on the
basis of which they tax products and determine their origin. However, neither internal taxes nor rules
of origin must serve trade policy purposes. The consis tency of both internal taxes and rules of origin
with WTO law thus depends on the objective pursued . The obligations governing internal taxes have,
of course, a different rationale than the obligations governing rules of origin. However, since both sets
of obligations distinguish between legal and ille gal measures on the basis of the objective pursued,
there is no reason why the Appellate Body’s appr oach to Article III:2 of the GATT should not be
applied to Article 2(b) of the RO Agreement.
3.112 In its submission, the European Communities states that a differen ce in the test to be applied
might be justified because in its view "Article 2(b) of the RO Agreement is exclusively about intent
whereas Article III of the GATT is rather about show ing effects through intent". However, both the
wording of Article III of the GATT ("so as to afford protection") interpreted by the Appellate Body
and the wording at issue in this case ("to pursue tr ade objectives") refer to intent ("so as to" and "to")
and effect ("protection" and "trade objectives"). Ther e is consequently no textual justification for the
distinction made by the European Communities. It would in our view be too far-reaching to conclude
that "Article 2(b) of the RO Agreement is exclusively about intent", as asserted by the European
Communities. There is no reason to declare a rule of origin illegal merely because it was intended to
be used as an instrument to pursue trade objec tives; it must also be capable of achieving those
objectives. The Panel would for these reasons be on more solid ground if it were to apply the
conceptual framework developed by the Appellate Body for Article III:2 of the GATT also to
Article 2 (b) of the RO Agreement.
3.113 In India’s first written submission, we adopted a two-pronged approach to this interpretative
issue. We demonstrated that the objective features of the rules of origin at issue in this dispute all
point in one direction: they were adopted to prot ect the United States textiles and apparel industry and
to single out products of export interest to the Eu ropean Communities for more favourable treatment.
We fully recognise that the intentions expressed duri ng the legislative history, by themselves, cannot
constitute a violation of Article 2(b). However, we believe it can reasonably be assumed that the
domestic industry and the Administration knew what th e impact of their proposals would be and that
the rules of origin finally adopted produce the desire d result. We are therefore of the view that our
presentation of the legislative history of the rules of origin at issue justifies, given the absence of
alternative explanations by the United States, the c onclusion that the measures are in effect used as
instruments to pursue trade objectives.
3.114 Let me now turn to the meaning of the phrase "rules of origin shall not themselves create
restrictive, distorting or disruptive effects on international trade" in Article 2(c) of the RO Agreement.
Unlike Article 2(b), this provision does not refer to the "use" of rules of origin (that is, their link to a
particular commercial policy instrument) but to the rules of origin "themselves". This indicates that
Article 2(c) obliges Members to ensure that that th e rules of origin as such (whatever the commercial
policy instrument to which they are linked) do not create restrictive and other adverse effects on
international trade.
3.115 The basic interpretative issue is whether the words "create restrict ive . . . effects" refer to the
effects that the rules of origin are capable of creati ng or whether they refer to the effects they actually
create in the market place. If the former were true, it would be sufficient for I ndia to demonstrate that
the incentives and disincentives faced by traders as a resu lt of the rules of origin at issue are such so
as to create restrictive effects. If the latter were true, India would have to demonstrate that the
regulatory framework imposed by the United States has actually produced those effects.

3.116 The parties to this proceeding take different positi ons on this issue. In the view of India, a
Member violates Article 2(c) if it adopts rules of orig in creating restrictive effects. What is relevant,
according to India, under Article 2(c) is the nature of the rules of origin that the Member adopted, not
the reaction of the market to those rules. As a r esult, the other Members could therefore challenge the
rules of origin under Article 2(c) as soon as they enter into force. The United States takes the position
that a violation of Article 2(c) has to be prove n through trade data showing adverse effects. The
implication of the United States’ position is that Members wishing to challenge rules of origin under
Article 2(c) would have to wait until the rules of or igin have actually produced an adverse impact and
trade data are available to demonstrate this. A furthe r implication is that the consistency of a rule of
origin would depend on the market ’s reaction to it and consequently on factors that normally escape
the control of Members.
3.117 The question of whether the rules of internati onal trade regulate conduct or effects has been
an issue on many previous occasions. In EC – Oilseeds , the CONTRACTING PARTIES to the
GATT 1947 had to decide whether a quota restriction can be deemed to have been "made effective"
within the meaning Article XI:1 even if the quot a is not exhausted and therefore did not actually
restrict imports. They decided that the mere imposition of a quota violated Article XI. The
CONTRACTING PARTIES also had to decide whether a tax was "applied" to imported products
within the meaning of Article III:2 of the GATT even if there had not yet been any imported product
on which the tax had actually been imposed. The CONTRACTING PARTIES decided that the actual
impact of a tax was irrelevant under Article III: 2. The Appellate Body noted the CONTRACTING
PARTIES’ jurisprudence approvingly in Japan – Alcoholic Beverages and ruled that "Article III
protects expectations not of any particular tr ade volume but rather of the equal competitive
relationship between imported and domestic products and that it is irrelevant that ‘the trade effects’ of
the tax differential between impor ted and domestic products, as reflect ed in the volumes of imports,
are insignificant or even non-existent."
3.118 Articles III and XI of the GATT have thus never be en interpreted to require the attainment or
avoidance of particular effects on international tr ade. They have been interpreted to require the
establishment of a regulatory framework that enab les investors and traders to foresee under what
condition they will have to compete with the prod ucts of the importing country. The purpose of
Articles III and XI of the GATT is to prevent the impairment of market access concessions through
non-tariff measures imposed internally or at the bor der. As noted in the Preamble, the purpose of
Article 2 of the RO Agreement is to prevent the impairment "of the rights of Members under GATT
1994" through rules of origin. Given that the basi c rationale of these provisions is the same, the
approach to their interpretation should be the same. Just like the terms "made effective" in Article XI
of the GATT and "applied" in Article III:2 of the GATT, the terms "create effects" in Article 2(c)
must be given a meaning consistent with the basic function of the world trade order, which is to create
predictability for traders and investors.
3.119 The only logical conclusion that one can draw from these considerations is that Article 2(c) of
the RO Agreement, just as all the other provisions in WTO law designed to prevent the circumvention
of market access commitments through non-tariff me asures, must be interpreted as a provision
prescribing conditions of competition, not the avoidance of certain trade results. What is thus relevant
is whether the rules of origin create conditions of competition with restrictive, distorting and
disruptive effects, and not whether the actual app lication of these rules to a specific commercial
policy instrument has produced such effects.
3.120
 If, as the United States advocates, a claim of violation of Article 2(c) could only be made if
and when trade data are available and it had to be demonstrated that the change in trade flows was
caused by the rules of origin and not other factors, this important provision in the RO Agreement
would become for all practical purposes unenforceable because the effect of the rules of origin and the
effect of the policy instrument to which they linked could, in practice, not be segregated. India
believes that the approach to the interpretation of Article 2(c) advocated by the United States is

therefore not only inconsistent with the GATT and WTO jurisprudence and the basic function of the
world trade order but also with the fundamental pr inciple of interpretation that each provision of a
treaty must be given effect.
3.121 In response to India’s claim that the United States rules of origin have restrictive, distorting or
disruptive effects on international trade, the United States argues that a modification of trade is not
sufficient to rise to the level of "restriction, distortion or disruption". This is no doubt true. Rules of
origin, by their very nature, change patterns of trad e and this consequence, by itself, can therefore not
be deemed to be "restrictive, distorting or disruptive" within the meaning of Article 2(c). The meaning
of these terms has to be examined in the context in which they appear. Their immediate context is the
second sentence of Article 2(c) according to which ru les of origin shall not impose requirements that
are unduly strict or unrelated to manufacturing or processing. This suggests that Article 2(c) is meant
to ensure that Members do not include in their rules of origin requirements that need not be imposed
to determine in which country a sufficient amount of economic activity has taken place to justify the
conferral of origin. In other words, Article 2(c) is meant to ensure that the conferral of origin does not
depend on the fulfilment by producers and traders of c onditions creating restrictive, distorting or
disruptive effects that are not necessary to determine the origin of products and that consequently go
beyond those inevitably created by any rule of origin. This conclusion is supported by the fourth
clause of the preamble of the RO Agreement according to which this Agreement is "to ensure that
rules of origin themselves do not create unnecessary obstacles to trade".
3.122 The United States, supported by the European Communities, argues that section 405 is not
discriminatory within the meaning of Article 2(d) b ecause the rules of origin in that section apply to
all Members equally. This argument implies th at Article 2(d) covers only cases of formal
discrimination, that is rules of origin that explicitly distinguish between different WTO Members. In
the view of India, this is an untenable position.
3.123 The most-favoured-nation provisions of Article I of the GATT have been applied in past
practice to measures involving de facto discrimination. For instance, tariff treatment less favourable
for Arabica and Robusta coffee than for other groups of coffee was deemed to be inconsistent with
Article I. In EC – Bananas, the Appellate Body noted this ju risprudence approvingly and concluded
that also the most-favoured-nation provisions of Article II of the General Agreement on Trade in
Services (GATS) applied to both de facto and de jure discrimination. The Appellate Body considered
that, "if Article II of the GATS was not applicable to de facto discrimination, … it would not be
difficult to devise discriminatory measures aimed at circumventing the basic purpose of that Article."
There is no reason why the approach to the pr inciple of non-discrimination laid down in the RO
Agreement should be different. The danger of circum venting the purpose of Article 2(d) through
product distinctions is just as great as the da nger of circumventing the most-favoured-nation
provisions of the GATT and the GATS through produc t or service-specific distinctions. Indeed, the
case before you is a clear demonstration that arbitr ary distinctions between closely related products
can be used to achieve the objective of favouring one WTO Member over others.
D. O
RAL STATEMENT OF THE UNITED STATES AT THE FIRST MEETING OF THE PANEL
1. Introduction
3.124 Mr Chairman and members of the Panel. We ar e pleased to have this opportunity to appear
before you to present the arguments of the United St ates in defence of the rules of origin found in
section 334 of the Uruguay Round Agreements Act and section 405 of the Trade and Development
Act of 2000. As we discussed in our first submissi on, the United States rules of origin are consistent
with the RO Agreement and advance its objectives. India b ears the burden of making a showing,
based on more than mere allegations, that the United States rules of origin are inconsistent with the
provisions of the RO Agreement. India has not done so, not in its first submission, and not at the first
meeting of the Panel with the parties.

3.125 Let’s begin by taking a step back. The RO Agreement was drafted because Uruguay Round
negotiators wanted to ensure that rules of origin : (a) were clear and pred ictable and would through
their application facilitate the flow of internationa l trade; (b) were implemented through transparent
laws, regulations and practices; and (c) were prepared and administered in an impartial, transparent,
predictable, consistent and neutral manner. The RO Agreement prescribes a set of obligations that are
guided by these principles. At the same time, wh ile setting out the program for harmonization, the
RO Agreement drafters did not impose a single set of rules of origin at the close of the Uruguay
Round. Instead, the RO Agreement left policy flexibility in the hands of individual Members (both in
Members’ design of rules of origin, and in Members’ right to alter those rules of origin from time to
time), and specifically set out various mechanisms that could be used ( see Article 2(a)). In addition,
the RO Agreement provides for changes to origin regimes in Article 2(i) and allows varying origin
criteria to be used until harmonization is completed.
3.126 When it looks at the United Stat es measures, the Panel will see th at the United States rules of
origin for textiles and apparel products were dr afted in such a way that they advance the RO
Agreement’s objectives. And, when the Panel looks at India’s arguments, it will see that, at bottom,
India is hoping to impose a single set of rules of origin on the United States (and, implicitly, on all
other Members) - notwithstanding the fact that the RO Agreement was intended to leave flexibility in
the hands of Members. Of course, we recognize that the RO Agreement imposed disciplines on
Members. But not the ones that India would like you to believe exist. India appears to argue that the
RO Agreement prescribes a specific determination of origin for, say, bedsheets, or that a particular
outcome resulting from the application of rules of origin is somehow less than neutral because it is not
a determination of origin that India agrees with.
3.127 The United States cannot help but note that India’s approach to its own measures helps to
demonstrate the benefits of the approach of the United States measures at issue. India has notified
the WTO that it does not have non-preferential rules of origin for textiles, apparel or other products,
even though India maintains non-preferential commer cial policy regimes that would appear to be
implemented through origin determinations.
3.128 With that background, let us take a look at th e legal arguments that India has put before the
Panel. India asserts that the United States rules of origin were enacted to pursue protectionist trade
objectives; that they restrict, distort, and disr upt trade; and that they are discriminatory and
administered in an unfair manner, all in violation of Article 2 of the RO Agreement. India also claims
that section 405 is discriminatory and similarly inconsistent with Article 2. India’s problem is that it
does not like the certain and specific origin determ inations that result from the product-specific rules
of origin which the United States promulgated in or der to bring greater certainty to the textile and
apparel trade. India, in effect, is asking the Panel to read into the RO Agreement certain specific
criteria and, indeed, interpretations of what constitutes an operation that confers origin.
3.129 The rules of origin regime established in section 334 and section 405 are not inconsistent with
Article 2(b)-(e), as read in good fa ith in accordance with the ordinary meaning to be given to their
terms in their context and in the light of the object and purpose of the RO Agreement
. These rules
were enacted to combat circumvention of estab lished quotas, prevent transshipment, facilitate
harmonization and best capture where a new product is formed. Furthermore, both section 334 and its
modification section 405 are maintained on an MFN basi s, in accordance with WTO rules. As such,
these rules are not inconsistent with the RO Agreement . Rather, they facilitate the flow of
international trade.49

49 See RO Agreement preamble.

(a) The Agreement on Rules of Origin
3.130 Article 2 of the RO Agreement prescribes a set of disciplines on Members to promote
transparency and prevent trade distortion through rules of origin until the work programme for the
harmonization of origin rules is completed.
(b) Section 334 of the Uruguay Round Agreement Act
3.131 Section 334 established a body of rules that are based on the principle that the origin of fabric
and certain textile products is derived where the fabric is woven, knitted or otherwise formed; and that
the origin for any other textile or apparel produc t is where that product is wholly produced or
assembled. If production or assembly occurs in more than one country, origin is conferred where the
most important assembly, or manufacturing process, takes place. The United States system is based
on the conclusion that origin is conferred wher e the most important assembly or manufacturing
process takes place. This reflects the United States ’ judgment that assembly is generally the most
important step in the manufacturing of assembled a pparel and that fabric formation is the most
important step in manufacturing fabric or flat goods.
(c) Section 405 of the Trade and Development Act of 2000
3.132 Section 405 amended section 334 in order to settle a WTO dispute brought by the European
Communities alleging that section 334's provisions had negatively affected trade in specific exporting
sectors of the European Communities, most notably Italian silk products. 50 In order to settle the
European Communities dispute, the United Stat es agreed to amend section 334, creating two
exceptions to section 334's "fabric formation rule": 1) for silk, cotton, man-made and vegetable fiber
fabric, origin would once again be conferred by dyeing and printing and two or more finishing
operations; and 2) for certain textile products ex cepted from the assembly rule, origin would be
conferred where dyeing and pr inting and two or more finishing operations took place, with
exceptions. These amendments apply to all WTO Members, not just the European Communities.
2. Legal analysis
3.133 The text of Article 2, read in its context and in light of the RO Agreement ’s object and
purpose, does not preclude Members from determining the origin of goods based on assembly, type of
material, or type of product. To require the Unite d States to utilize a particular rule for a specific
product, as India advocates, would be to add an obligation not contained in the RO Agreement during
the current transition phase.
(a) Section 334 is consistent with Article 2(b)
3.134 The United States submits that India’s interpretation of a "trade objective" is incorrect, as it is
overly broad. If "trade objective" is understood to be any objective related to trade, rules of origin
could not be used to pursue transparency or pr edictability, two trade-related goals. Such an
interpretation would be at odds with both the object and purpose of the RO Agreement and the context
of this provision.
3.135 As we discussed in our first submission, the section 334 rules of origin do not have as their
objective the protection of domestic industry. Instead, the purpose of these rules of origin is found in
the Statement of Administrative Action (the "SAA"). The SAA is clear on what its objectives were:
to prevent quota circumvention and address illegal transshipment, to advance harmonization, and to
more accurately reflect where the most significant production activity occurs. In the United States'

50 H.R. Conf. Rep. 106-606, section 405, Clarification of section 334 of the Uruguay Round
Agreements Act, p. 232 (2000). Exhibit US-3.

experience, the type of finishing operations presented to the Customs Service for determination of
origin and application of quotas had grown, and under the increasing number of case-by-case
applications by the Customs Service of the substantial transformation criteria, the list of processes that
were deemed to confer origin also expanded, so metimes including processes that in retrospect were
understood not to be significant. Section 334 was desi gned to remedy these errors. India points to no
evidence to support its assertion that section 334 has been used to achieve protection of the domestic
industry.
3.136 Not only is there nothing in the text of the RO Agreement that says that Members must confer
certain origin determinations, there is nothing in Ar ticle 2(b) that indicates that if a Member does not
include certain finishing operations in a determinati on of origin the Member is thereby using its rules
of origin to pursue trade objectives. It is the policy decision of the United States that origin conferring
production is based on manufacturing or formation of either fabric or apparel, not a finishing
operation. The United States rules take into account which operations merit changing origin, and that
may vary based on the type of product. Moreover, as we have noted, Article 2(a) sets forth a range of
criteria that can be used by a Member in formulating its rules of origin, and the United States rules of
origin for textile and apparel products are consistent with these criteria.
(b) Section 405 is consistent with Article 2(b)
3.137 India’s arguments that section 405's amendment of section 334 constitutes an impermissible
use of rules of origin fail.
51 First, the modifications in section 405 apply to all Members on an MFN
basis. And while we do not wish to belabor the poi nt today, we have also explained in our first
submission that it would be absurd to penalize a Member for reaching a mutually satisfactory
settlement of a dispute with another Member, pur suant to the provisions of the DSU, where the
benefits of the settlement accrue to all Members. Yet that is precisely what India asks of this Panel. 52
Does India perhaps wish to discourage Members from achieving mutually satisfactory solutions?
That would be the likely consequence of accepting the logical leap that India urges on the Panel.
(c) Section 334 and section 405 are consistent with Article 2(c)
3.138 India has also failed to meet its burden of s howing that section 334 and section 405, in and of
themselves, restrict, distort and disrupt trade. To begin with, India presents no textual support in the
RO Agreement for its argument that rules favoring one product over another, or one fabric over
another, for that reason alone, restrict, distort or disrupt trade. 53 The single exhibit presented by India
to support its allegations is a letter from the Cotton Textiles Export Promotion Council, which does
not help India establish a prima facie case in this dispute.54 India does not address the possibility that
Sri Lankan producers may have decided to weave th eir own fabric or to source it from elsewhere.
There is simply no causal connection between section 334 and either the rise or fall of Indian fabric
exports to Sri Lanka.
3.139 In fact, data on India's exports of cotton w oven fabric, available from the United Nations,
indicates that quite to the contrary, India's exports to the world (as well as to the United States)
increased between 1995 and 1996 (from $959.6 million to $1 billion), and while exports declined
slightly in 1997 (to $974.5 million), the 1997 valu e of exports was higher than that in 1995.
Similarly, again according to United Nations data, In dia’s exports of bed linen to the world increased
between 1995 and 1996 (from $3.2 million to $4.7 million), and increased again in 1997 (to $5.3
million). These statistics do not bear out a claim of trade disruption.

51 See India First Submission, paras.69-85 (supra, paras. 3.41-3.51).
53 Id.
54 See India First Submission, para.93, exhibit INDIA-15.

3.140 India also argues that the rules disrupt trade by "their sheer complexity." Importantly, India
has not demonstrated that ‘complexity’ is a prohibited criterion, nor has India demonstrated that the
United States rules are inordinately complex. In addition, India presents no evidence that the rules
have discouraged exporters from shipping their produc ts to the United States because they simply
could not understand them. Indeed, India supplies ne arly $3 billion in textiles and apparel products to
the United States, which strongly suggests that Indian exporters have not had too much difficulty
understanding the rules.
(d) Consistent with Article 2(d), the rules are not discriminatory
3.141 As a preliminary matter, it appears that India is making a claim regarding Article 2(d) only
with respect to section 405, and that the applicable provision of Article 2(d) India claims is being
violated is that rules "shall not discriminate between other Members irrespective of the affiliation of
the manufacturers [ sic] of the goods concerned." 55 In respect of this claim regarding Article 2(d),
however, India makes no attempt to show how the settlement with the European Communities, which
is applicable to India and all other Members on an MFN basis, is discriminatory. Accordingly, India
has failed to meet its burden to establish that sections 334 and 405 are inconsistent with Article 2(d).
(e) The administration of the rules is consistent with Article 2(e)
3.142 Similarly, India makes no effort to show how the administration of section 334 and section
405 is inconsistent with Article 2(e)’s instructi on that Members ensure that "rules of origin are
administered in a consistent, uniform, impartial and r easonable manner" (emphasis added). Rather,
India attempts to recast this obligation in order to ch allenge attributes of the rule itself, rather than of
its administration. However, just as claims unde r Article X:3 of the GATT 1994 must fail if they are
based on challenges to aspects of the laws th emselves, rather than their administration, 56 so too must
claims under Article 2(e) fail if they are based on pe rceived infirmities of the rules themselves, rather
than their administration.
3. Conclusion
3.143 Where then do India’s arguments lead? They l ead to one of two impermissible results: 1)
that the United States should have no rules of or igin for textile and apparel products and instead
simply make case-by-case determinations of origin, or 2) that the Panel should determine what the
specific rules of origin should be. Ne ither of these results is allowed under the RO Agreement, nor do
they advance the goals of the RO Agreement - to provide transparency, clarity and predictability in a
rules of origin regime.
E. SECOND WRITTEN SUBMISSION OF INDIA
1. Introduction
3.144 The purpose of this submission is to further elaborate India’s claims and arguments in this
proceeding, taking into consideration the questions fr om the Panel as well as the points raised by the
United States and the third parties in their submissi ons and in their replies to the questions from the
Panel.

55 See India First Submission, paras. 98-9 (supra, paras. 3.58-3.59).
56 Appellate Body Report, European Communities - Regime for the Importation, Sale and Distribution
of Bananas, supra, para. 200. A similar provision is found in Article 1.3 of the Agreement on Import Licensing
Procedures. para. 203.

2. Legal argument
(a) The measures at issue
3.145 The measures at issue in this dispute are (i) section 334 of the Uruguay Round Agreements
Act, (i) its clarification contained in section 405 of the Trade and Development Act
57, and the
implementing customs regulations set out in 19 C.F.R. § 102.21.58
(i) The fabric forward rule
3.146 Section 334 (b)(1)(C) (consolidated as section 3592(b)(1)(C)) sets out the criteria to
determine the origin of a fabric. It establishes the "fabric forward rule" whereby the country of origin
of a fabric is where its constituent fibres, filaments or yarns are woven, knitted, needled, tufted, felted,
or transformed by any other fabric-making process. It disregards further manufacturing operations,
such as dyeing, printing as well as two or more fini shing operations (DP2), as relevant transformation
processes that could determine the country of origin of a fabric.
3.147 The fabric forward rule is implemented thro ugh specific customs regulations contained in
19 C.F.R. § 102.21. Paragraph (C)(1) provides that origin will be conferred where the textile or
apparel product has been wholly obtained or produc ed. Paragraph (C)(2) establishes that when origin
cannot be established by the application of (C)(1) then the country of origin of the good is where each
foreign material incorporated in the textile or apparel product underwent an applicable change in tariff
classification and/or "met any other requirement, sp ecified for the good in paragraph (e) of this
section."
3.148 19 C.F.R §102.21(e) provides for specific rules by tariff classification. According to some of
these rules, a transformation or change that is the result of a fabric-making process entails an
automatic tariff shift for the good at issue.
(ii) The DP2 rule for fabric of silk, cotton, man-made fibre or vegetable fibre
3.149 Section 405 (a)(3)(B) (consolidated as section 3592 (b)(2)(B)) amends the fabric forward rule
and establishes that a fabric classified under the HTS as of silk, cotton, man-made fibre, or vegetable
shall be considered to originate in, and be th e growth, product, or manufacture of, the country,
territory, or possession in which the fabric is dyed and printed when accompanied by two or more of
the following finishing operations: bleaching, sh rinking, fulling, napping, decating, permanent
stiffening, weighting, permanent embossing, or moireing (hereafter the "DP2").
3.150 It is important to note that the amendment does not contemplate a comparable change in the
criterion to determine origin for all types of fabrics.
3.151 Customs regulations implementing this statutory provision are contained in § 102.21 (e). By
virtue of it, tariff shifts originally envisaged to implement the fabric forward rule were modified only
for certain HTS headings.
(iii) The DP2 rule for products of 7 HTS headings

57 Both United States provisions are codified in 19 U.S.C. section 3592.
58 India wishes to clarify its claims under the Customs regulations. In its response to question 10 from
the Panel, the United States notes that "India has not made any claim with respect to the regulations in either its
first submission or its oral statement." India notes th at its claims and argument s with respect to the WTO-
inconsistency of the customs regulations were made in its request for the establishment of the Panel and in
paragraphs 7 and 53, inter alia , of its first submission. India also notes that the challenge of the customs
regulations is in no way dependent upon its bringing a challenge under Article 2(e) of the RO Agreement.

3.152 Section 405 (a)(3)(C) (consolidated as section 3592(b)(2)(C)) sets out a departure from the
application of the "wholly-assembled rule" as contai ned in section 334 (b)(1)(D), and the special rule
to the wholly-assembled rule, provided for by section 334(b)(2)(A) (consolidated as section
3592 (b)(2)(A)(i)). Pursuant to section 405 (a)(3)(C), only for 7 HTS 4-digit headings out of 16 that
were originally subjected to the special rule of section 334(b)(2)(A), and except for goods classified
under such headings made of cotton or of wool or consisting of fibre blends containing 16 percent or
more by weight of cotton, origin is conferred where the fabric is both dyed and printed, and subjected
to two or more further finishing operations. This provision is implemented through § 102.21(e)(2).
(iv) The fabric forward rule for products of 7 HTS headings made of cotton, wool or fibre blend
with more than 16% cotton
3.153 Section 405 (a)(3)(C) (consolidated as section 3592(b)(2)(C)) exempts products of the 7 HTS
headings which are made of cotton, wool or consis ting of fibre blends containing 16 percent or more
by weight cotton from the application of the DP2 rule . For these specific products, origin is conferred
in accordance with the fabric forward rule as defined in section 334 (b)(1)(C).
3.154 This provision is implemented through § 102.21(e)(1) which includes specific rules to
determine origin where the fabric comprising the good was formed by a fabric-making process.
(b) The measures at issue are inconsistent with Article 2(b) of the RO Agreement
(i) Definition of the terms "trade objectives"
3.155 The terms "trade objectives", contained in Article 2(b), are not defined in the RO Agreement.
The ordinary meaning of "trade objectives" in the context of Article 2(b) is an aim, goal, or object
related to trade. One way of assessing whether a ru le 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 would.
59 Trade objectives include the objective of protecting the domestic
industry against import competition, or of favouring imports from a WTO Member over imports from
another. Any rule of origin that does so is, by definition, used as an instrument to pursue trade
objectives.
3.156 Paragraph 27 of the United States' first submission (see para. 3.79 above) provides the
important acknowledgement that "the United States accepts India’s contention that protection of a
domestic industry is an ‘impermissible’ trade ob jective for the purposes of Article 2(b)."
Paragraph 11 of the European Communities submission adds that "the European Communities can
join the consensus among the parties that in any event, the objective of protecting domestic industry
would come under Article 2(b) of the RO Agreement . Furthermore, the European Communities is
also ready to accept India’s contention that favourin g one Member over another would, in principle,
be a trade objective covered by that provision."
3.157 For the purposes of this dispute, it is not necessary for the Panel to develop a general
definition of "trade objectives." India’s view is th at it would be sufficient for the Panel to find that
the objectives of protecting the domestic industry and favouring imports from one WTO Member over
imports from another are trade objectives within the meaning of Article 2(b).
(ii) The prevention of quota circumvention as defined by the United States is the pursuit of a
trade objective
3.158 The United States explained that section 334 was passed "to prevent quota circumvention and
address illegal transhipment to advance harmonization and to more accurately reflect where the most

significant production activity occurs."
60 The definition of "circumvention" was provided by the
United States in its first submission. However, this is not circumvention. Circumvention is a term
that implies a violation of the applicable origin rules through false declarations and other illegitimate
means. The reaction of the market to the incen tives and disincentives created by country-specific
quotas cannot be described as circumvention. These ne wly industrialized countries of Southeast Asia
were not "circumventing" origin rules but were adapting their production to their market access
conditions.
3.159 The European Communities rightly points out that if the expression "circumvention of
quotas" was used to describe the changing of trade pa tterns in response to quotas, the intent to pursue
a trade objective could be established through the legislative history itself. The United States'
intention to combat "circumvention" corresponds, in the words of the European Communities, to an
intention to "re-apply quantitative restrictions where these have lost their bite through changes in trade
patterns and regulations." This is precisely the type of trade objective that Members are not to
achieve through the use of rules of origin.
61
(iii) The Senate Report shows that section 333, not section 334, was passed to implement the anti-
circumvention provisions of the ATC
3.160 India notes that in the Senate Report (Exhibit IND-10), under the heading "Textile
transshipments" (section 333), there is a reference to Article 5.1 of the ATC. Specifically, the Report
states that the s ection 333 of the URAA adds a new section to Title IV to address specifically the
problem of textile transhipments.
3.161 Article 5.1 of the ATC provides that circumvention "frustrates the implementation of this
Agreement to integrate the textiles and clothing sector into GATT 1994. Accordingly, Members
should establish the necessary legal provisions and/or administrative procedures to address and take
action against such circumvention…".
3.162 From a review of the term "circumvention" as de fined in the Article 5.1 of the ATC, it would
seem that section 333, rather than section 334, was enacted to implement Article 5.1 since it tracks the
language of Article 5.1 more dire ctly, and addresses more specifically the type of circumvention
noted in Article 5 of the ATC. This would imply that section 334 was passed for reasons other than to
prevent circumvention within the meaning of Article 5.1 of the ATC. India’s argument is that section
334 was passed to pursue trade objectives.
(iv) Section 334 is being used as an instrument to protect the United States domestic industry
3.163 Section 334 is inconsistent with Article 2 (b) because it is being used to pursue the trade
objective of protecting the United States domestic industry. The United States did not adequately
respond to this claim in its first submission. Instead, it argued that section 334 was enacted in
conformity with other provisions of the RO Agreement, namely Article 2(a) which sets forth a range
of criteria that can be used by a Member in form ulating its rules of origin and Article 2(i) which
allows a Member to change its rules of origin. India’s view is that a Member’s compliance with
Articles 2(a) or 2(i) does not provide a justification for inconsistencies with Articles 2(b), 2(c) or 2(d)
of the RO Agreement.

60 First submission of the United States, 27 November 2002, para. 29. India notes there is a bilateral
textile and apparel agreement between the United States and India which has been notified under Article 2.17 of
the Agreement on Textile and Clothing, G/TMB/N/274, 22 July 1997.
61 Third party submission by the European Communities, 5 December 2002, para. 24 ( infra, para.
4.280).

3.164 In the context of country-specific quotas, such as those permitted under the ATC, the concept
of origin is critical. The United States changed its rules of origin in section 334 by introducing, inter
alia, the "fabric forward" rule, i.e., to determine or igin for certain made-up article where the greige
fabric was formed. The clearly protectionist objective of section 334 can be demonstrated by its
effect on the determination of origin for such products . The effect of section 334, especially its fabric
forward provision, was that a range of textiles and clothing products imported into the United States
were subjected to the strict quot as of the developing countries whereas previously they had been
under no quota or a more generous quota. India notes that the United States has not provided any
explanations in its submission that would justify the conclusion that the objective of section 334 was
not to protect the domestic industry. India therefore believes that it has made a prima facie case of
violation that the United States has failed to rebut.
3.165 India notes that its view on this matter is shared by certain third parties, notably, China. It
notes that the circumstances and purposes that underlie the United States changes to its textiles origin
rules in section 334 amount to an impermissible pursu it 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 a country’s limited quota and thus protecting the United States
domestic textiles and apparel industry.
62
(v) Section 405 is being used as an instrument to favour the European Communities
3.166 The United States submits that the main pur pose of section 405 was the same as that of
section 334, namely to prevent circumvention or transhipment. However, the changes effected
through section 405 did not address circumvention or transhipment concerns.
3.167 In its submission, the European Communities has accepted that "favouring one Member over
another would, in principle, be a trade objective covered by Article 2 (b)." 63 China has stated that
section 405 was a unilateral action taken by the Unite d States, to the detriment of China and other
Members, in order to appease one particular Memb er -- the EU – and to avoid the difficulty of
defending the provisions of section 334 before the WTO. 64 India agrees with China’s views: the
purpose of section 405 was to settle the case with the European Communities in a manner that favours
the products of export interest to the European Communities.
3.168 As the United States itself admitted at the firs t hearing and in its responses to the Panel’s
questions, "the purpose of the exceptions to the rul es contained in section 405 were (sic) to settle the
WTO dispute with the European Communities" 65 , in a manner that favours the European
Communities. The United States has indicated that it bases its rules of origin on criteria set out in
Article 2(a). However, the exceptions as set out in section 405 are not based on any of these criteria.
Therefore, section 405 is being used to pursue the objective of favouring the European Communities.
(c) The measures at issue are inconsistent with the second sentence of Article 2(c) of the RO
Agreement
(i) The measures at issue require the fulfilment of a condition not related to manufacturing or
processing

62 Responses of China to questions by the Panel, 3 January 2003. Answer 39.
63 Third party submission by the European Communities, 5 December 2002, para. 11 ( infra, para.
4.276).
64 Responses of China to questions by the Panel, 3 January 2003, Answer 42.
65 Responses of United States to questions by the Panel, 6 January 2002, Answer 45 to Question 37.

3.169 The second clause of the second sentence of Artic le 2(c) makes clear that a Member cannot
require the fulfilment of a conditio n not related to manufacturing or processing, as a prerequisite to
determine origin. Both Articles 2(a) and 2(c) reflect the significance that manufacturing or processing
of a product has upon the determination of origin for that product.
3.170 The United States rules of origin require th e fulfilment of conditions not related to
manufacturing or processing in three situations. First, when there is a distinction made between fabric
of silk, cotton, man-made fibre, or vegetable fibre and fabric made of other fibres, such as wool in
determining when the fabric forward rule will be applied.
66 Second, when there is a distinction made
between products classified under 7 HTS 4-digit he adings listed in section 405 (a) (3) (C) and the
products classified under the remaining 16 HTS headi ngs in section 334 (b) (2) in determining when
origin will be conferred by dyeing, prin ting and two or more finishing operations. 67 T h i r d , w h e n
within those 7 HTS 4-digit headings, there is a di stinction made between products made of cotton,
wool, or a fibre blend with more than 16% cotton and products made of ot her fibres in determining
when the fabric forward rule will be applied.
3.171 Based on these distinctions, different determinati ons of origin are made for each situation,
which are not at all related to manufacturing or pro cessing, and therefore are clearly inconsistent with
the obligation in the second clause of the second sentence of Article 2(c).
3.172 A United States attorney, expert in the textiles and apparel sector, has noted the absurdity of
these distinctions 68 and concluded that the United States rules of origin containing the distinctions
between fabrics, products and fibre blends were "f ar more motivated by a desire to protect United
States wool and cotton producers than by any desire to create genuinely logical changes to rules of
origin."69 India agrees with this interpretation, and considers that the United States rules of origin
require the fulfilment of conditions not related to manufacturing or processing as a prerequisite to the
determination of country of origin, which is inconsistent with the second clause of the second
sentence of Article 2(c).
(ii) The measures at issue pose unduly strict requirements
3.173 If the Panel were to conclude that the distinc tions between fabrics, products and fibre blends
are related to manufacturing or processing, India is of the view, that the Panel should find that these
distinctions impose "unduly strict" requirements wi thin the meaning of the first clause of the second
sentence of Article 2(c).
3.174 The first clause of the second sentence of Artic le 2(c) prohibits the imposition of "unduly
strict" requirements. The text of this provision supports the view that Article 2(c) is meant to ensure
that the conferral of origin does not depend on the fulfilment by producers and traders of conditions
creating restrictive, distorting or disruptive effects t hat are not necessary to determine the origin of
products and that consequently go beyond those inevitably created by any rule of origin. T h i s
conclusion is also supported by the fo urth clause of the preamble of the RO Agreement according to
which this Agreement is "to ensure that rules of origin themselves do not create unnecessary obstacles
to trade".
3.175 It is clear from the wording of Article 2(a) and Article 2(c) that the conferral of origin upon a
product must be based on the determination of the country with which that product has a significant

66 Section 405 (a) (3) (B), consolidated as §19 U.S.C.3592 (b) (2) (B).
67 Section 405 (a) (3) (C), which provided exceptions to section 334 (b) (2) and consolidated as
§19 U.S.C.3592 (b) (2) (C).
68 John Peterson, "Rules of Origin : The textile mess gets messier", Journal of Commerce , July 2000
(Exhibit INDIA-13).
69 Ibid.

economic link. It follows that the first clause of th e sentence of Article 2(c) is violated if a Member
confers origin on the basis of requirements that are burdensome and need not be imposed to determine
that economic link between the product and the c ountry seeking to be conferred origin for that
product.70 In its replies to India's questions, the Unite d States has declared that it does not use criteria
for the determination of origin othe r than those listed in Article 2(a). 71 However, none of these
criteria would require the imposition of requirements as strict as those applied by the United States.
3.176 India considers that the United States measures at issue impose strict requirements that do not
assist the United States in determining the country with which the product has the most significant
economic link.
(d) The measures at issue are inconsistent with the first sentence of Article 2(c) of the RO
Agreement
(i) The basic interpretative issue
3.177 Article 2(c) of the RO Agreement could be interpreted to require Members to prevent rules of
origin from having a restrictive or distorting impact on international trade flows . According to this
"result-oriented" interpretation, the restrictive and distorting effects referred to in this provision would
be the effects that occur after producers and traders have adjusted their business plans to the new
rules.
3.178 Article 2(c) of the RO Agreement could also be interpreted as requiring Members to refrain
from adopting and maintaining rules of origin which create conditions of competition with restrictive,
distorting or disruptive effects on international trade . According to this "conduct-oriented"
interpretation, the incentives and di sincentives created by the rules of origin themselves, not their
actual impact in the market, would be decisive. For the reasons set out below, India is of the view that
the "conduct-oriented" interpretation is the correct one.
(ii) Article 2 (c) does not require the showing of an actual restrictive, distorting and disruptive
impact on international trade reflected in trade statistics
3.179 According to the "result-oriented" interpretation, it is not the nature of the rule of origin but
its actual impact in the marketplace that counts. The only obligation of the Members under the first
sentence of Article 2(c) would be to modify the ru les of origin if they generate a restrictive or
distorting impact on international trade as reflected in trade statistics. According to the result-oriented
interpretation, the purpose of this provision would be to protect expectations on the volume, direction
and product-composition of trade. A complaint could th erefore not be brought against rules of origin
themselves immediately upon their adoption, but onl y against the trade impact generated by them
after some time. Moreover, the complainant would ha ve to bear the burden of demonstrating that the
change in the volume, direction and product-composition of trade was attributable to the rule of
origin, and not to other factors. The interpreta tion presupposes that Members know and control what
the actual impact of changes in their rules of origin in the market will be. A violation of Article 2(c)
would thus not depend exclusively on what the Member does, but would be triggered by what
producers and traders do.
3.180 If, as the United States advocates, a claim of violation of Article 2(c) could only be made if
and when trade data are available and it had to be demonstrated that the change in trade flows was
caused by the rules of origin and not other factors, this important provision in the RO Agreement
would become, for all practical purposes, unenforceab le. The effects of the rules of origin
themselves on the one hand and the effects of othe r commercial policy instruments to which they are

70 Responses of India to questions by the Panel, 6 January 2003, Answer 11 (c).
71 Responses of the United States to questions by India, 6 January 2003, Answer to Question 1.

linked (as well as those to which they were not linked) and market factors could, in practice, not be
segregated. India believes that the approach to th e interpretation of Article 2(c) advocated by the
United States is, therefore, not only inconsistent with the GATT and WTO jurisprudence and the basic
function of the world trade order, but, also with th e fundamental principle of interpretation that each
provision of a treaty must be given effect.
72
3.181 For these reasons, India does not believe that a violation of Article 2(c) requires a showing of
actual restrictive or distorting effects demonstrated through trade statistics.
(iii) Article 2 (c) requires Members to refrain from adopting and maintaining rules of origin
which create conditions of competition with rest rictive, distorting and disruptive effects on
international trade
3.182 The "conduct-oriented" approach to the interpre tation of Article 2(c) would take into account
that a new rule of origin changes immediatel y the incentives and disin centives for producers and
traders and, as a result, also their investment a nd other business plans. According to this approach,
the immediate impact of the rule of origin on the decisions of producers and traders involved in
international trade would be taken into account in assessing whether a rule of origin creates restrictive
or distorting effects on international trade. It thus takes into account that the very adoption of a rule
of origin can have serious restrictive or distorting effects on international trade.
3.183 According to this interpretation, the purpose of the provision would be to ensure that
Members do not adopt and maintain rules of origin creating conditions of competition that operate to
restrict or distort trade. A complaint could, therefore, be brought against new rules of origin
immediately upon their adoption, and not only when the producers and traders have actually reacted
to the new conditions of competition. Members would be held responsible for the rules of origin they
adopted, not for the reactions of the market to their rules of origin . Their obligation under Article
2(c) would thus not go beyond what they can cont rol or foresee. Given that market conditions
constantly change and that rules of origin are only one of many factors that determine trade flows, a
Member cannot foresee how precisely producers and tr aders will react to a new rule of origin.
Members control and foresee only the conditions of competition that they impose. If the Panel were
to rule that the actual trade effects of a rule of or igin were to determine its legal status under Article
2(c), it would therefore have to presume Article 2(c) does not regulate the rules of origin adopted by
Members, but the reaction of producers and traders to those rules. However, so far, all rules of
conduct governing non-tariff measures have consistently been interpreted to regulate what Members
should do, not what producers or traders have done.
3.184 Therefore, it cannot reasonably be assumed that the drafters meant to exclude from the
coverage of Article 2(c), the immediate restrictive or distorting effects that rules of origin can create
by forcing enterprises to change th eir business plans. The purpose of the RO Agreement is, according
to its Preamble, to "further the objectives of the GATT 1994" and to "ensure that rules of origin do not
nullify or impair the rights of Members under the GATT 1944". The drafters of the RO Agreement
therefore expected the rules of the RO Agreement to be interpreted in a ma nner consistent with the
basic objectives of the GATT, in general, and the market access rights accorded under it, in particular.
3.185 The European Communities adopted this conduct-or iented approach to Article 2(c) in its
dispute with United States on measures a ffecting textiles and apparel products.
73 The European
Communities twice brought claims under Article 2(c) immediately upon the adoption of new rules of

72 See e.g. Appellate Body Report, United States – Standards for Reformulated and Conventional
Gasoline ("US – Gasoline "), WT/DS2/AB/R, adopted 20 May 1996, DSR 1996:I, 3, p. 23.
73 United States – Measures Affecting Textiles and Apparel Products, WT/DS85/1, G/RO/D/1,
G/TBT/D/13, 3 June 1997 and United States – Measures Affecting Textiles and Apparel Products (II)
WT/DS151/1, G/TMB/N/341, G/RO/D/3, G/TBT/D/19, G/L/279, 25 November 1998.

origin by the United States, without awaiting the impact of the new rules to show up in trade statistics.
Why? Because the Italian producers of silk scarves and other manufacturers in the European
Communities felt the restrictive effects of the new rules of origin immediately and urged the European
Communities to intervene before the new rules had caused actual trade damage.
3.186 GATT and WTO jurisprudence support the conduct- oriented interpretation of Article 2 (c).
All GATT and WTO panels and th e Appellate Body have interpreted the rules governing tariff
concessions and non-tariff measures as rules re quiring the establishment of conditions of
competition.74
3.187 The purpose of Articles III and XI of the GATT is to prevent the impairment of market access
concessions through non-tariff measures imposed intern ally or at the border. The purpose of Article 2
of the RO Agreement is to prevent the impairment "of the rights of Members under GATT 1994"
through rules of origin. Given that the basic rationale of these provisions is the same, the approach to
their interpretation should be the same. Just like the terms "made effective" in Article XI of the GATT
and "applied" in Article III:2 of th e GATT, the terms "create effects" in Article 2(c) must be given a
meaning consistent with the basic function of the wo rld trade order, which is to create predictability
for producers and traders.
3.188 The only logical conclusion that one can draw from these considerations is that Article 2(c) of
the RO Agreement, just as all the other provisions in WTO law designed to prevent the circumvention
of market access commitments through non-tariff me asures, must be interpreted as a provision
prescribing conditions of competition, not the avoidance of a certain trade impact. What is thus
relevant is whether the rules of origin create conditio ns of competition with restrictive, distorting and
disruptive effects, and not whether the applicati on of these rules to a specific commercial policy
instrument has actually produced such effects.
(iv) The measures at issue establish conditions of competition with restrictive, distorting or
disruptive effects on international trade
3.189 The measures at issue provide for distinctions be tween types of fabrics or fibre blends. These
distinctions restrict, distort and disrupt trade fl ows between countries supplying different fabrics and
fibres. India notes that the United States has failed to give any reasons as to why the differentiation
between products made of different fabrics or fibre blends is required to determine in which country a
sufficient amount of manufacturing, processing or other economic activity took place to justify the
conferral of origin. Both China and the Philippi nes have given concrete examples of the trade
distorting, disruptive and restrictive effects that th e United States rules of origin themselves have on
international trade.
75
(e) The measures at issue are inconsistent with Article 2(d) of the RO Agreement
(i) Provisions that prohibit discri mination (treatment no less favourable) have been interpreted
as prohibiting both de jure and de facto discrimination
3.190 Both GATT and WTO jurisprudence confirm that provisions that prohibit discrimination
(treatment less favourable) have been interpreted as prohibiting de jure and de facto discrimination.76

74 See for instance, BISD, 37/S/130-131.
75 Responses of the Philippines to the questions by the Panel, Answer to Question 41 (e).
76 See for instance, Appellate Body Report, ( EC – Bananas III ), supra, paras. 233 to 234; Appellate
Body Report, Canada – Certain Measures Affecting the Automotive Industry ("Canada – Autos "),
WT/DS139/AB/R, WT/DS142/AB/R, adopted 19 June 2000, DSR 2000:VI, 2995, para 63.

3.191 The concept of de facto discrimination was described by the Panel in Canada-Pharmaceutical
Patents in the following terms:
de facto discrimination is a general term descr ibing the legal conclusion that an ostensibly
neutral measure transgresses a non-discrimination norm because its actual effect is to impose
differentially disadvantageous consequences on cer tain parties, and because those differential
effects are found to be wrong or unjustifiable.
77
3.192 [Void]
(ii) De facto discrimination is covered by Article 2 (d) of the RO Agreement
3.193 With respect to the concept of discrimination in Article 2(d), the United States, supported by
the European Communities, argues that section 405 is not discriminatory within the meaning of
Article 2(d) because the rules of origin in that section apply to all Members equally. This argument
implies that Article 2(d) covers only cases of formal discrimination; that is rules of origin that
explicitly distinguish between different WTO Members. In the view of India, this is an untenable
position. There is no reason why the approach to th e principle of non-discrimination laid down by the
Appellate Body in the context of the non-discr imination provisions of the GATT and the GATS
should not also apply to the prohibition of discrimination in the RO Agreement . The danger of
circumventing the purpose of Article 2(d) through produc t distinctions is just as great as the danger of
circumventing the most-favoured-nation provisions of the GATT and the GATS through product or
service-specific distinctions. Indeed, the case before the Panel is a clear demonstration that arbitrary
distinctions between closely related products can be used to achieve the objective of favouring one
WTO Member over others.
78
(iii) Section 405 discriminates on a de facto basis in favour of the European Communities
3.194 Applying the test in Canada – Pharmaceutical Patents , the Panel will need to examine
section 405 in order to assess whether it imposes diff erentially disadvantageous consequences and if
these different effects are unjustifiable. India submits that both these elements are present in
section 405.
(a) The effect of section 405 is to impose differentially disadvantageous consequences
3.195 Section 405 provides exemptions to the genera l rules for determining origin for certain
fabrics, certain products and certain fibre blends. These exemptions are, de jure, applied on an origin-
neutral basis. However, the type of exceptions indicates that the United States is providing a de facto
advantage to those products of export concern to the European Communities. In response to the
request of the European Communities, the United States re-worked the section 334 origin rules
specifically for the products that were of concern to the European Communities, but not for any other
products. The United States committed to change b ack to its prior rules with regard to silk
accessories, silk fabrics, dyed and printed cotton fa brics, dyed and printed man-made fibre fabrics,
and dyed and printed vegetable fibre fabrics. 79 This solution, of course, addressed those products of
most concern to the European Communities: silk scarves, silk accessories, dyed and printed cotton
fabrics.

77 Panel Report, Canada – Patent Protection of Pharmaceutical Products ("Canada – Pharmaceutical
Patents "), WT/DS114/R, adopted 7 April 2000, DSR 2000:V, 2295, para 7.101.
78 India notes that the United States has replied in its answer 9 to the questions from India, that "Article
2(c) does not prescribe that Members must use the same rules to determine the origin of different products"
India considers that a Member cannot apply different rules of origin to the same products just because they
comprised of types of fabrics or different type of fibre blends.
79 United States – Measures Affecting Textiles and Apparel Products, (I), WT/DS85/9, Notification of
Mutually-Agreed Solution, 25 February 1998.

3.196 Section 405 does not make a formal distinction between Members. However, it de facto
favours products from the European Communities sin ce the fabrics, products or fibre blends that
benefit from the exemptions are mainly the type of textile and appare l products which undergo
"value-added" or substantial transformation operations in the European Communities. Those products
singled out for exemptions from the fabric-forward ru le and the wholly-assembled rule can, therefore,
enter the United States without being subject to an y quota restraints. However, when these products
are made of certain fibres such as cotton, those products will be conferred origin where the greige
fabric is woven. It is mainly developing countries under quota restraints that export cotton fabric. The
effect of section 405 is clearly to impose differentially disadvantageous consequences.
(b) The differential effects created by section 405 are unjustifiable
3.197 As noted in India’s first submission, the United States Congress passed section 405 in May
2000, containing text that was virtually identical to the text agreed upon by the United States and the
European Communities in their second procès-verbal settling the WTO dispute resolution proceeding.
Indeed, the United States has acknowledged that as a result of its agreement with the European
Communities, it passed section 405 which provides ex ceptions to the rules in section 334 for certain
specific products and for certain fabrics and fibre blends. 80 It is, therefore, indisputable that the
United States modified its rules of origin in 2000 for the sole purpose of providing favourable market
access for particular textile products that were of special concern to the European Communities.
3.198 The United States has stated that it "does not use criteria for the determination of origin other
than those listed in Article 2 (a)." 81 However, 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). The amendments in
section 405 thus created arbitrary and inconsistent reve rsions to the pre-section 334 rules of origin for
a group of selected textile products, without any partic ular regard for the degree of further processing,
assembly or other operations and how the extent of those further operations would change the nature
of the products. Rather, the exceptions created by section 405 – a reversion to the pre-section 334
rules – were defined solely by the types of end products imported into the United States from the
European Communities and for which the European Communities expressed concern.
3.199 It follows from the above that the United States rules of origin are unjustifiable because they
were only enacted to favour one Member over a nother, and because the exemptions in section 405
(which makes distinctions between certain pr oducts) bears no relation to the manufacturing or
processing of those products.
3. Findings and recommendations requested
3.200 For the reasons indicated above, India respectfu lly requests the Panel to find that the United
States rules of origin set out in section 334 of the Uruguay Round Agreements Act and modified in
section 405 of the Trade and Development Act of 2000 and the customs regulations implementing
these statutory provisions, and the application of these sections and regulations, are inconsistent with:
• Article 2(b) of the RO Agreement because they are being used as instruments to pursue
trade objectives;
• The second sentence of Article 2(c) of the RO Agreement because (a) they require the
fulfilment of a certain condition not related to manufacturing or processing and (b) they
pose unduly strict requirements;

80 Responses of the United States to questions from India, 6 January 2003, Answer 7 to Question 8.
81 Ibid, Answer 1 to Question 1.

• The first sentence of Article 2(c) of the RO Agreement because they create restrictive,
distorting and disruptive effects on international trade; and
• Article 2(d) of the RO Agreement because they discriminate between other Members.82

3.201 In cases where there is an infringement of the obligations assumed under a covered
agreement, the action is considered, according to Article 3:8 of the DSU, to constitute a prima facie
case of nullification or impairment of benefits under that agreement. Accordingly, India requests the
Panel to find that the measure at issue has nullifie d or impaired the benef its accruing to India under
the RO Agreement.
3.202 India requests that the Panel recommend that the United States bring its measures into
conformity with its obligations under the RO Agreement.
F. SECOND WRITTEN SUBMISSION OF THE UNITED STATES
1. Introduction
3.203 The issues for resolution in this dispute are cl ear and call for a straightforward reading of the
provisions of Article 2 of the Agreement on Rules of Origin (" RO Agreement "). Through its first
submission, oral statement, and answers to questi ons from the Panel, India urges the Panel to ignore
the words of Article 2 and instead adopt its novel inte rpretations that at their core are simply India’s
disagreement with the determinations of origin for ce rtain products. Starting with India’s first claim -
that section 334 was enacted to pursue trade objectives in violation of Article 2(b), India has latched
on to the idea that one of the goals of secti on 334, preventing circumvention of quotas, is
impermissible because circumvention must involve fraud. However, there is no consensus among
Members as to whether any type of circumvention is legitimate, and therefore no basis for India’s
claim under Article 2(b). It is ironic that India seeks to sanction the United States for identifying, as
one of four goals, addressing circumve ntion, when Article 5.1 of the Agreement on Textiles and
Clothing ("ATC") calls on Members to take action ag ainst circumvention. Moreover, it would be
unfortunate for a Member to be penalized for doing just what the RO Agreement mandates - enacting
clear, concise, and transparent rules.
3.204 India bases its claim under Article 2(c) on analyses imported from dissimilar GATT
provisions. Unable or unwilling to meet the standard plainly set out in the text of the provision, India
instead attempts to convince the Panel to substitute a GATT analysis for discrimination. However,
once again, India fails to meet its burden under th at GATT standard. The words of Article 2(b)
cannot be read to require an analysis of assu med "changed competitive conditions" upon the adoption
of a rule of origin. Rather, this argument reveals India’s true intent - it would simply like section 334
to go away and either force the United States to reach the specific origin determinations it seeks for
particular products, or revert to a system with no product-specific rules of origin (by utilizing a
case-by-case administrative system that India appears to favor). This is somewhat curious since trade
data reveals that Indian exporters, and indeed inte rnational trade in the products at issue, have not
been restricted, distorted or disrupted, but, on the contrary, have grown significantly. It is also curious
since India appears to be contesting specific instan ces (section 405) where origin rules reverted to
pre-section 334 principles.
3.205 Finally, India’s claims with respect to section 405 center on the idea that because it was a the
result of a settlement, and as such its terms reflect changes that the European Communities requested,

82 India has decided to refrain from further pursuing its claim that the administration of the United
States rules of origin is inconsistent with Article 2(e) of the RO Agreement because India considers that the DSU
does not provide an effective remedy against WTO-inconsistent actions that have been taken in the past.
Therefore, any finding of violation of this provision would not result in an effective remedy for India.

section 405 impermissibly "favours" the European Communities and discriminates against India.
Here again, however, not only does India make little effort to support its allegations, the analysis it
offers for the basis of its allegations is also faulty.
2. India has failed to establish that section 334 of the URAA is inconsistent with United
States obligations under the RO Agreement
3.206 India’s allegations regarding section 334 are essentially that the United States rules of origin
were enacted to protect the domestic textile industr y and that they have restricted, distorted and
disrupted trade. India’s arguments in support of its allegations, however, are confused and sometimes
contradictory. The only clear thread running th rough them is India’s desire to operate in an
environment in which section 334 does not exist.
3.207 India is the complainant in this dispute, and as such India bears the burden of coming forward
with argument and evidence sufficient to establish a prima facie case of a breach of a Member’s WTO
obligations.83 If the balance of evidence and argument is inconclusive with respect to a particular
claim, India, as the complaining party, must be found to have failed to establish that claim. 84 India
has not established a prima facie case that section 334 breaches United States obligations under the
RO Agreement.
(a) The goals of section 334 are not impermissible trade objectives in the context of Article 2(b)
3.208 The Statement of Administrative Action ("SAA") lists four objectives for section 334: i) to
reflect the important role assembly plays in th e manufacture of apparel products; ii) to combat
transshipment; iii) to harmonize United States rules with those of major trading partners and major
textile and apparel importing countries such as th e European Communities and Canada; and iv) to
advance the RO Agreement goal of harmonization.85 India has focused its allegations on a charge that
section 334 is an impermissible "trade objective" in breach of Article 2(b) by arguing that, because it
disagrees with the United States as to what constitu tes circumvention, the United States effort to
prevent circumvention through having clear, concise and transparent rules is a hoax.
3.209 What India is asking the Panel to do is to disregard what the SAA says about section 334 and
make a subjective judgment that one of section 334’s goals, preventing circumvention, is somehow
illegitimate and that this one "illegitimate goal" makes all of section 334 inconsistent with the RO
Agreement. However, as India noted in its first submissi on, and as was affirmed in the United States
first submission, WTO dispute settlement panels have acknowledged that the SAA expresses an
authoritative expression of the purpose of United States legislation.86 The SAA stated that section 334
would combat circumvention 87 by: lessening confusion resulti ng from differences between United
States practices and the practices of other major trad ing partners; facilitating the use of more effective
labeling requirements; and focusing on practices mo re easily subject to inspection by the United
States Customs Service. 88 The United States has explained in its submissions and in answers to

83 See, e.g., Appellate Body Report, US – Wool Shirts and Blouses , supra, page 14; Appellate Body
Report, EC – Hormones, supra, para. 104; Panel Report, Korea – Dairy, supra, para. 7.24.
84 See, e.g., Panel Report, India – Quantitative Restrictions, supra, para. 5.120.
85 Statement of Administrative Action in "Message of the President of the United States Transmitting
the Uruguay Round Agreement, Text of Agreements, Implementing Bill, Statement of Administrative Action
and Required Supporting Documents," H.R. Doc. No. 316, 103d Cong. 2d Sess., Vol. 1(1994) at 656, et. seq.,
Exhibit US-6 at 119.
United States - section 129(c)(1) of the Uruguay Round Agreements Act , WT/DS221/R, 30 August 2002, paras.
6.36-6.38.
87 As the United States noted in answer to panel question 14 (para. 22), the reference in the SAA to
transshipment has the same meaning as "circumvention" as that term is used in the ATC.
88 SAA, Exhibit US-6 at 119.

questions from the Panel what prac tices could be harmonized (cutting would no longer confer origin)
and how these changes would prevent circumventi on (clear guidance for importers and customs
officers), and so will not repeat those explanations here.
89
3.210 India’s complaint is not so much with whet her or how the United States was going to deter
circumvention but with whether trying to address ci rcumvention was acceptable. In its answers to
Panel questions 2 and 17 (answe rs 17(b) and 17(d)) India sets a standard for judging whether
preventing circumvention is legitimate - such circ umvention must only be clearly fraudulent. India
also makes the bald claim that the United States was not seeking to prevent fraudulent circumvention,
but rather "legal circumvention" and that this was therefore illegitimate. India’s arguments, however,
fail for several reasons. First, as India itsel f acknowledges, and as noted by the European
Communities, there is no consensus as to what constitutes "circumvention." The ATC provides
examples of circumvention practices that frustrate the effective integration of textiles into the GATT,
but does not define circumvention and there is no consensus among Members on the concept of
legitimate vs. illegitimate circumvention ( See India answer 17(a), European Communities answer to
question 43(a), and United States answer to question 18( a) (paras. 27-32) (and exhibit US-7).). India
is therefore asking the Panel to make a subjectiv e determination, that the United States goal of
preventing circumvention is a trade objective, with out proving that there is an understanding among
Members as to what "circumvention" means.
3.211 Moreover, if preventing quota circumvention were determined to be a "trade objective" for
purposes of Article 2(b), then Members would be severely hampered in th eir ability to ensure
compliance with textile and apparel quotas and to comply with Article 5 of the ATC. What India so
easily objects to as "protectionism" is a methodology for implementing measures sanctioned under the
ATC. Rules of origin designed to simplify and pr ovide certainty in origin determinations ensure
transparency and predictability, and allow importe rs, exporters, and Members to work together to
prevent circumvention, as directed by ATC Articles 5. 1 and 5.5. Such a design is clearly consistent
with the purpose of Article 2 of the RO Agreement.
90
3.212 Finally, even assuming arguendo that the Panel would elect to disregard the statements in the
SAA as "untrue," India would still have the burden of proving that the true purpose of section 334 was
a trade objective - protection of the domestic industry. India has presented no evidence to support this
allegation, not in its first submission, oral statement or answers to panel questions. The United States
already has a regime in place for the purpose of protecting its domestic industry during the ATC
transition period, i.e., a quota regime, and it does no t need to use additional measures or subterfuge
for such purposes. The quota regime that is in place under the transitional ATC agreement provides
effective protection for the domestic industry. Indeed this is why this dispute exists - - even though
India’s quotas are increased annually by a schedul ed factor, India requested but did not receive
additional increases in their quota, beyond those agreed to by India and the United States, and
commenced these proceedings within days of United St ates textile officials rejecting their request. It
would indeed be a leap of legal logic, WTO or otherwise, to then find by "implication," as India

89 See United States' answers to panel questions 14 (para. 22) and 19.
 90 It should also be noted that India’s contention regarding the true purpose of section 333 of the
URAA being to prevent circumvention, rather than section 334, suggests that India has mis-read or is
mis-representing section 333. (See India answer to question by the panel 17(a).) Section 333 establishes new
and more rigorous customs measures to counteract circumvention, once circumvention is uncovered (such as the
publication of names of violators, additional "reasonable care" measures for importers to take when doing
business with published violators, etc.). Thus, the purpose of section 333 is to establish "after the fact"
remedies, which is different from section 334, the purpose of which is to prevent circumvention from happening
in the first instance. Both are valid measures to counteract and deter circumvention.

urges, that the true purpose of section 334 was to protect the United States domestic industry. See
India answer to panel question 17(a).91
3.213 Moreover, India has not met its burden under its proposed standard of showing that the
design, structure and architecture of section 334 "rev eals," prima facie, that the United States’ "true
objective" in enacting section 334 was protection of its domestic industry. India cites to the
conclusions of the Appellate Body in the Japan - Taxes on Alcoholic Beverages and Chile - Taxes on
Alcoholic Beverages disputes,92 in which this interpretative standard was developed, but makes little
effort to discuss the factors identified by the Appe llate Body in those disputes to determine whether
the design, structure and architecture of section 334 reveals a discriminatory intent. While the United
States does not consider that this analysis is neces sary or relevant, or that it is the United States
burden to make and rebut India’s case, the United States would like to point out one instance where
India has failed to meet its burden of proof under this standard - the "applied so as to afford protection
" standard identified in these disputes.
3.214 One factor reviewed in this determination is the connection between the stated objectives and
the results of the measure. 93 In section 334, the United States has achieved what it set out to do - the
rules reflect where the most important manufacturing process takes place, there is closer
harmonization with our major trading partners, and th e clear, concise rules have resulted in a greater
ability to identify circumvention. In addition, section 334 has facilitated an enormous increase in
trade in textile and apparel products to the United States market. Accordingly, a conclusion that
section 334 was enacted to protect the United States te xtile industry, and is therefore a trade objective
in the context of Article 2(b), would not be based on any legal or factual foundation.
94 The United
States urges the Panel not to adopt India’s "trade objective by implication" standard.95
(b) India has not shown that section 334 restricts, distorts or disrupts international trade
(i) India's analytical framework is inconsistent with Article 2(c)
3.215 India, in its first submission and in answers to panel questions, seems to suggest that the Panel
may assess whether section 334 "creates restrictive, di storting, or disruptive effects on international
trade" by looking at the effect on one single Member’s trade. 96 This reading simply cannot be found
in the words of Article 2(c). If the Members wanted to proscribe rules of origin that affected only one
Member (or a couple for that matter) it would ha ve been easy: the provision could have read:
"Members shall ensure that their rules of origin sh all not themselves create restrictive, distorting or
disruptive effects on another Member’s trade." Ho wever, even this provision would require some
presentation of trade effects data and Indi a is not, apparently, prepared to discuss actual effects on its
trade. Rather, India seems to argue that the Panel should instead adopt a GATT product
discrimination analysis, which would assess, India claims, "whether the rules of origin create
conditions of competition with restrictiv e, distorting and disruptive effects."
97 India calls this a

91 In addition, the United States would like to be clear that nothing it has ever said amounts to, or
should be construed as, an "admission," as India claims, that the true goal of section 334 was protection of the
United States domestic industry. See India answer to question from the panel, question 2.
92 Appellate Body Report, Japan – Alcoholic Beverages II, supra, pages 26-29, Appellate Body Report,
Chile – Taxes on Alcoholic Beverages ("Chile – Alcoholic Beverages "), WT/DS87/AB/R, WT/DS110/AB/R,
adopted 12 January 2000, DSR 2000:I, 281, paras. 62, 69-71.
93 See Appellate Body Report, Chile-Alcohol, supra, paras. 56-57, 69-71.
94 In addition, contrary to India’s assertions, the United States has not advocated that a claim under
Article 2(b) can only be made "if and when trade data are available . . ." In dia oral statement paras.43-44. That
point is relevant only to Article 2(c).
95 See India answer 17(a) to questions from the Panel.
96 India answer to question 11(b) from the panel and India first submission, para. 93.
97 India oral statement paras. 39-45 ( supra, paras. 3.116-3.121) and answers to panel questions 11 and
28 (India answers 14 and 26).

"conduct-oriented" approach (preamble to India answ er 26) and urges that it should be pre-supposed
that mere adoption of a rule of origin will have an "immediate impact" that distorts or restricts trade.
This argument is, at best, circular and contradicted by India’s own behavior. As a preliminary matter,
it seems strange that India would advocate a legal pos ition not in accordance with its behavior in this
dispute. India, advocate today of a finding that says, essentially, "upon adoption assume impact [read
effect]," waited eight years to bring this dispute, and its case is founded upon the basis that its trade
has suffered as a result of the change in the United States rules of origin. This necessarily involves a
backward look at the effect of the change. Indeed, the only evidence that India has so far presented to
this Panel regarding its Article 2(c) claim is the charge by one of its exporting associations that its
members have lost business since section 334,
98 (a claim that stands in stark contrast to actual United
States import statistics).
3.216 India’s interpretation is inconsistent with the text of Article 2(c) and unnecessary. The
drafters of the RO Agreement must certainly have been aware of GATT Articles I and III and if they
had wanted to adopt a product discr imination standard for Article 2( c), perhaps they could have done
so -- although that, again, would contradict the RO Agreement’s sanctioning of product-specific rules.
The United States submits that they chose not to do that because product differentiation is allowed
under the RO Agreement (India seems to confuse differentiation with discrimination). There is no
need for the Panel to resort to ad opting this analysis when, in add ition to the terms of the provision,
there is other WTO guidance, more similar to Article 2(c) on which to rely. Further, as India itself
notes, this analysis presumes an element of intent, which is not found in Article 2(c).
3.217 India makes a laborious argument that the panel should look at the effects of a change in rules
of origin on conditions of competition in its an swer to Panel question 26. This argument is
misguided. As a preliminary matter, the United States notes again that the text of Article 2(c) does
not discipline changes in rules of origin per se ; instead, it applies to rules of origin "themselves."
Thus, the type of comparative argument suggested by India is precluded by the text of Article 2(c)
itself. Moreover, the fact that Article 2(i) sets fo rth specific disciplines on chan ges in rules of origin
and does so expressly further indicates that 2(c) was not meant to discipline changes per se. T h e
panel must examine whether the United States rules, as enacted, "create restrictive, distorting, or
disruptive effects on international trade," not wh ether the change in United States rules altered
conditions of competition.
3.218 In its questions to India (question 26(e)), the panel correctly noted that under India’s
interpretation of 2(c), "Members cannot introduce chang es to their rules of origin, given that different
rules of origin are almost bound to produce different trade effects." India’s response, that changes are
permitted provided they comply with Article 2, does not answer the panel’s implied objection.
Furthermore, at no time does India present analysis, pursuant to the WTO jurisprudence that it cites,
of how section 334 "changed the competitive conditions."
3.219 India suggests in its answer to question 11(b) that the Panel should follow the reasoning of the
panel in United States – Section 337 of the Tariff Act of 1930
99 and consider conditions of
competition. Doing so, however, would misint erpret that report. India’s approach to Section 337
would mean by definition that there could be no changes in rules of origin because somebody always
benefits and somebody always loses. In Section 337, the panel rejected the proposition that Article III
allows "balancing more favourable treatment of some imported products against less favourable
treatment of other imported products . . ." becau se such an interpretation would "lead to great
uncertainties about the conditions of compe tition between imported and domestic products." 100

98 In addition, as noted above, India only commenced these proceedings when it did not get an increase
in its United States quota, and after India apparently decided not to pursue its claim under ATC procedures.
99 Panel Report on United States – Section 337 of the Tariff Act of 1930 ("US-Section 337"), L/6439,
BISD 36S/345, adopted 7 November 1989.
100 Ibid, para. 5.14.

Finally, and most significantly, in neither Section 337 nor in the Oilseeds101 case (cited by India in its
answer to the panel question 26) did the panel conc lude that a measure was inconsistent with the
GATT solely because it had an impact on conditions of competition. In Section 337, the panel did not
find the United States measure inconsistent with Article III because the measure had an impact on
conditions of competition; instead, it first found that the measure subjected imported products to legal
provisions that are different from those applicable to products of domestic or igin, and it relied on the
conditions of competition test to determine whethe r this differential treatment accorded to imported
products less favorable treatment. 102 I n t h e Oilseeds case, the panel was considering whether the
benefits to the United States under the European Communities' tariff concession for oilseeds were
being nullified or impaired by subsidies granted by the European Communities. 103 The panel did not
look to conditions of competition to determine whet her Article II had been violated; instead, it looked
to conditions of competition to determine if benefits under Article II were being nullified or impaired,
despite no violation of Article II. India’s reading would in essence make this a non-violation claim.
(ii) The interpretation of "restrictive, distorting, disruptive effects"
3.220 Article 2(c) itself gives guidance on how rules of origin might themselves create restrictive,
distorting, or disruptive effects on international trade, for example by imposing "unduly strict
requirements" as a "prerequisite for the determinati on of the country of origin" or by requiring "the
fulfilment of a certain condition not related to ma nufacturing or processing as a prerequisite for the
determination of the country of origin." India had the correct interpretation earlier, when it noted that
the meaning of Article 2(c) could be ascertained from the "immediate context [of] the second sentence
of Article 2(c) according to which rules shall not impose requirements that are unduly strict or
unrelated to manufacturing or processing."104
3.221 The determination of whether section 334 creates re strictions or distortions or disruption on
international trade can be made simply, by looki ng at trade flows. As India acknowledges, the
drafters of the RO Agreement gave us a specific example of how rules of origin can create the
prohibited effects - through unduly strict requireme nts or the imposition of conditions not related to
origin determinations. In the second sentence, the dr afters also were clear that some effects would
occur from simply having requirements and would not be considered to rise to the level of
"distortions" of international trade. This also makes common sense, as the RO Agreement does not
operate to address constant disputes about specific origin determinations for particular products which
may have an uneven effect on one Member versus another.105
3.222 A reading of Article 2(c) that does not require some showing of actual effects on international
trade would render the provision meaningless and w ould mean that a complainant would never have
to prove, in a case where it was specifically allegi ng that a provision had been violated, that there
actually was a violation. As was noted in the Un ited States response to the Panel’s questions, in a
given case, a change to rules of origin could elimin ate restrictive, 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 admini stered system, with benefits to trade, and rules
that more accurately reflect commercial realities (i.e., reflect the important role of assembly).

101 Panel Report on EEC – Payments and Subsidies to Processors and Producers of Oilseeds and
Related Animal Feed Proteins ("EEC-Oilseeds" ), L/6627, BISD 37S/86, adopted 25 January 1990.
102 See Ibid, paras. 5.19-5.20.
103 See Ibid, paras. 142-144.
105 See United States' answer to question 11 from the panel, paras. 10-16. In response to question
11(b), India speaks of Article 2(c) as serving "to protect expectations regarding the level of imports: and
"expectations regarding the trade between the third countri es." Setting aside India’s dismissal of the need to
show the Panel hard data to satisfy its allegations, nothing in the RO Agreement suggests that it was designed to
protect expectations of levels of imports.

3.223 The United States submits that, despite India’s claims to the contrary, the Panel will not make
history by looking for actual effects on international tr ade in its assessment of "restrictive effects," as
India suggests, because an important principle of tr eaty interpretation is sufficient in this case. The
Vienna Convention on the Law of Treaties directs that examiners of a treaty provision determine the
ordinary meaning of the provision from its words a nd in its context, as well as the object and purpose
of the agreement.
106
3.224 This interpretation is further supported by sim ilar provisions in other WTO agreements. As
the Panel correctly noted in question 26(b) to I ndia, Article 6.3 of the SCM Agreement, which
addresses effects of subsidies on imports and exports is at least equally relevant to an analysis of
Article 2(c) (effects on international trade) as GATT cases that address discrimination among like
products. This is especially so if India is correct that the term "trade effects" does not appear
anywhere in the GATT, because it does appear in RO Agreement Article 2(c), as well as in Articles
2(a) and 3.2 of the Agreement on Import Licensing Procedures, as the Panel noted.
3.225 Far from being restrictive, our clear and tran sparent rules of origin have facilitated a
significant expansion of international trade, from Indi a and the rest of the world. As shown in the
attached Exhibit US-8, trade in the HTS classificati ons that India has identified as being affected by
section 334 and 405 (footnotes 23, 25 and 56 of India’ s first submission) cannot be said to show a
pattern of effects of a "restrictive, distorting or disr uptive" action; in fact, the contrary is the case.
Therefore, India has not shown how section 334 breaches the United States WTO obligations in
Article 2(b) and 2(c). Finally, the United States notes that India has not made any specific allegations
regarding an Article 2(d) discrimination claim with respect to section 334.
(c) India has not shown that section 405 is discriminat ory or that it restricts, distorts and disrupts
international trade
3.226 India appears to have three claims with respect to section 405 - that section 405, enacted to
settle a WTO dispute with the European Commun ities, "favours" the Eu ropean Communities in
violation of Article 2(b) and 2(d), and that secti on 405 has restricted, distorted or disrupted trade in
violation of Article 2(c). India made a vague argument in its first submission that because the
settlement was reached to end a US-EC dispute, that was a "trade objective." However, as we
explained in the first submission and oral statement of the United States, it would be absurd to find
that a settlement, which furthers the goals of th e WTO, is an impermissible trade objective under
Article 2(b).
107
3.227 Similarly, with respect to India’s charge that section 405 restricts, distorts, and disrupts
international trade, the United States first notes that India has made little effort to develop this claim,
either legally or factually. In addition, changes in rules of origin for quota goods will usually have
quota implications that will be different for di fferent Members, depending on their quota levels and
the nature of their exports. In ac cordance with the terms of bilatera l textile agreements incorporated
into the ATC, there are several examples where United States tex tile 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.
3.228 Finally, trade statistics do not bear out India’s claims of a disruption of its trade. Section 405
was effective in May, 2000 and in 2001, a year in which overall Unite d States imports of textile and
apparel products contracted, United States imports of products affected by section 405 demonstrated
no particular pattern that would indicate trade restriction, disruption or distortion. In fact, in several
categories of section 405 products, United States imports from the world and from India instead
showed healthy increases, for example, HTS 6213 (imports from world up 44 percent; imports from

106 See Vienna Convention, Article 31.
107 See also Third Party Submission of the European Communities, paras. 26-27 (infra, para. 4.282).

India up 57 percent); 6302.59 (imports from world up 21 percent; imports from India up 5 percent);
6302.93 (imports from world up 16 percent; imports fr om India up 70 percent); and 6303.99 (imports
from the world up 35 percent; imports from India up 142 percent).
3.229 India’s primary claim with respect to section 40 5 is its charge that because the exceptions to
section 334 took into account specific products of interest to the European Communities, this
"favoured" the European Communities and is discrimin atory. Of course, any settlement has to be
satisfactory to the complaining party. But if the settlement is applicable to all Members on an MFN
basis, it will in all likelihood benefit all e xporting Members. Neither can India rely on Canada -
Certain Measures Affecting the Automotive Industry to substantiate a claim of de facto advantage in
favor of the European Communities. In that disp ute the Appellate Body was addressing an advantage
given to some products that was based on the country of aff iliation of the producers. However, in that
case, the de facto discrimination resulted because Canada was giving advantage to some of the same
(like) products based on nationality. In this dispute, India’s charges in respect of the United States
rules of origin relate to different products. 108 Furthermore, while it is true that in that report the
Appellate Body made a reference to " de facto advantage," GATT Article I:1 is not at issue in this
case. If India had wished to make such a claim, it could have brought a dispute under that provision.
India did not do so.
3. Conclusion
3.230 For the foregoing reasons, the United States request s that the Panel find that India has failed
to establish that section 334 of the URAA and sec tion 405 of the Trade and Development Act of 2000
are inconsistent with Articles 2(b)-(e) of the RO Agreement.
G. ORAL STATEMENT OF INDIA AT THE SECOND MEETING OF THE PANEL
3.231 In the light of the arguments and evidence presented by India in our first and second
submissions, in our oral statement at the first meeting of the panel, and in our answers to the questions
from the Panel, India considers it has met its burde n of proof in this case. India has clearly
established that the United States rules of origin at issue are prima facie inconsistent with the
obligations of the United States under Articles 2(b) , 2(c), and 2(d) of the Agreement on Rules of
Origin (RO Agreement).
3.232 India accepts that as the complaining party we bear the burden of establishing the prima facie
case of violation. In each and every claim that India is making, we have established a prima facie
violation of the specific RO Agreement provisions being challenged. Therefore, it was up to the
United States to rebut India’s case. However, the United States has failed to do so. It failed to rebut
India’s arguments in its first submission. It did not rebut India’s arguments in its oral statement at the
first hearing. It also did not avail itself of the opportunity to effectively rebut India’s case in its
responses to the questions from the Panel or to the questions from India. The United States has also
not rebutted India’s claims in its second submission.
3.233 The main arguments that India has put forwar d in this case are addressed below and within
the context of each of these claims, the points that have been made in the second submission of the
United States will be addressed specifically.
3.234 With respect to the Article 2(b) claim, India has demonstrated throughout the proceedings that
the United States measures at issue are being used as instruments to pursue trade objectives. In its
second submission on page 8, the United States notes, th at even if the Panel were to disregard the
objectives listed in the Statement of Administrativ e Action (SAA) as "untrue," India would still have

108 Appellate Body Report, Canada – Certain Measures Affecting the Automotive Industry ("Canada –
Autos "), WT/DS139/AB/R, WT/DS142/AB/R, adopted 19 June 2000, DSR 2000:VI, 2995, paras. 81 and 85.

to prove that true purpose of section 334 was a trad e objective. India believes that it has already done
so.
3.235 The United States claims it already has a regime in place for the "purpose of protecting its
domestic industry" and that this "quota regi me under the transitional ATC agreement provides
effective protection for the domestic industry." Th e fabric forward rule, by definition, increases the
quantities of textile imports that w ould be conferred the origin of the countries that are under quota.
This measure strengthens the impact of its quota regime under the ATC which – as the United States
admits - was put in place to protect the domestic indus try. The fabric forward rule is thus clearly
being used to pursue a trade objective.
3.236 In its submission, the European Communiti es rightly points out that if the expression
"circumvention of quotas" was used to describe the changing of trade patterns in response to quotas,
the intent to pursue a trade objective could be estab lished through the legislative history itself. The
United States intention to combat "circumventi on" corresponds, in the words of the European
Communities, to an intention to "re-apply quantitative restrictions where these have lost their bite
through changes in trade patterns and regulations." As noted by the European Communities, this is
precisely the type of trade objective that Members are not to achieve through the use of rules of
origin.
 109
3.237 The United States argues, moreover, that it would be unfortunate for a Member to be
"penalized for doing just what the RO Agreement mandates – enacting clear, concise, and transparent
rules." India is not convinced that the rules of origin of the United States are clear and concise. We
would like to note that in any event clear, concise, and transparent rules of origin must also be
consistent with Articles 2(b), 2(c) and 2(d) of the RO Agreement. The argument of the United States
therefore does not respond to India’s claims.
3.238 With respect to section 405, India has demonstrated that it is being used as an instrument to
pursue the trade objective of favouring one WTO Member, namely the European Communities, over
others. India has shown that the only reason why section 405 was enacted was to settle the rules of
origin dispute with the European Communities, and that the only products that benefited from this
settlement were those of export interest to the European Communities. India notes that the United
States has not offered any justification that section 405 is consistent with its obligations under Article
2(b). Therefore, the United States has not discharged its burden of rebuttal on this argument.
3.239 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 fi rst sentence. The United States has agreed with this
approach in its answers to the panel’s questions.
110 It thus acknowledged that, according to the
second sentence, the imposition of unduly strict requirement and cond itions unrelated to
manufacturing or processing as such is inconsistent with Article 2(c), irrespective of the actual trade
impact. It cannot reasonably be presumed that the drafters of the RO Agreement chose to employ a
conduct-oriented approach for the second sentence of Article 2(c) while seeking to adopt a result-
oriented approach for the first sentence of Article 2(c). The interpretation of the first sentence of
Article 2(c) that has been put forward by the United States can therefore not be reconciled with its
own interpretation of the second sentence of that provision.

109 Third party submission by the European Communities, 5 December 2002, para. 24 ( infra, para.
4.280).
110 Responses of the United States to the questions from the Panel, 6 January 2003, paragraph 16.

3.240 India would like to add that support for the conduct-oriented approach to Article 2(c) is also
found in the negotiating history of the RO Agreement. The text of the first sentence of Article 2(c)
reflects negotiating proposals originally made by Japan and Hong Kong. Japan proposed that "the
rules of origin should not be prepared or used as a means of restricting or distorting international
trade."111 Hong Kong suggested that "rules of origin should not be prepared, adopted or applied in
such a manner as to create trade distorting, restric tive or disruptive effects on international trade." 112
In the view of the original proponents of the norm in corporated into the first sentence of Article 2(c),
it was thus not only the application of rules of origin that could create distorting, restrictive and
disruptive effects on international trade, but also their preparation. That idea is now reflected in the
final version of the RO Agreement in the seventh recital of the Preamble of the RO Agreement, which
states that Members desire "to en sure that rules of origin are prepared and applied in an impartial,
transparent, predictable, consistent, and neutral manner." The reference to the "rules of origin
themselves" in Article 2(c) must therefore be unders tood to be a reference to the rules both as applied
and as prepared. The United States’ claim that the first sentence of Article 2(c) refers exclusively to
the adverse effects created by the application of the rules therefore is untenable.
3.241 The United States, in its second submission, notes that India has waited eight years to bring
this case, and therefore, implies that looking "back wards" at the effects of the change, India should
have trade data available to prove that our trade h as suffered. However, the United States fails to
address the interpretative issue before the Panel. The interpretation of Article 2(c) should not depend
on the interval between the adoption of a rule of origin and its challenge by another WTO Member.
3.242 Indeed, the United States has implicitly accepte d the conduct-oriented approach because it
agreed to provide "compensation" for the adverse tr ade effects caused by its new rules of origin on
various countries such as the Philippines, Pakistan and Indonesia, 113 and reached a settlement
agreement with the European Co mmunities before any of these WTO Members were in a position to
demonstrate adverse trade effects through trade statistics.
3.243 The United States has said, "[i]ndications of whet her rules restrict, distort or disrupt trade
would be if they are overly burdensome to comply with …. or cause confusion in the market place." 114
India agrees with the United States that these are re levant criteria. Furthermore, India notes that the
United States rules of origin requirements relating to type of fabrics and fibre blends are overly
burdensome to comply with. The differences betw een the type of fabrics and fibre blends impose
stricter requirements. The rules of origin defin itively cause confusion because the conferral of origin
will differ depending on the fibre composition of th e fabrics used to produce the end-products.
Therefore, using the very test set out by the United States in its second submission, the United States
rules of origin restrict, distort, or disrupt trade.
3.244 The United States has devoted a large part of its second submission (and has referred today in
paragraph 21 of its oral statement) to referring to st atistics that textile trade from India to the United
States increased in specific years, and therefore, ar gues that India has not suffered adverse effects.
However, India would argue that this result is precisely what section 334 was designed to achieve,
namely to bring more finished products under the qu ota of the country where the greige fabric was
woven. As we have pointed out in paragraph 90 of our first submission, the effects of the challenged
measure have to be on international trade and not only on imports in the United States. For example,
India has asserted that its exports of greige fabr ic to Sri Lanka for further processing into products
such as cotton bed linen before onward export to th e United States have been adversely affected by
the "chilling effect" of the United States rules of origin.

111 MTN.GNG/NG2/W/52, 17 January 1990.
112 MTN.GNG/NG2/W/41, 15 September 1989.
113 Third party submission by the Ph ilippines, 5 December 2002, para. 5. See also, for example, the
MOU between Pakistan and the United States, G/TMB/N/328, 27 July 1998.
114 Second submission of the United States, 6 January 2003, para. XXIII.

3.245 With respect to Article 2(d), the United Stat es has argued in its second submission that India
has abandoned its claims with respect to section 334 . India notes that we never made a claim under
this provision with respect to section 334.
3.246 India has made a claim that section 405 and its implementing customs regulations are
inconsistent with Article 2(d). In response, the United States argues that section 405 was enacted on
an MFN basis. India agrees that section 405 does not make a formal distinction between Members.
However, it de facto favours products from the European Comm unities since the fabrics, products or
fibre blends that benefit from the exemptions are mainly the type of textile and apparel products
which undergo "value-added" or subs tantial transformation operations in the European Communities.
Therefore, these products can enter the United States without being subject to any quota restraints.
However, when these products are made of certain fibres such as cotton, those products will be
conferred origin where the greige fabric is wove n. It is mainly developing countries under quota
restraints that export cotton fabric. The effect of section 405 is clearly to impose differentially
disadvantageous consequences for developing countries such as Indi a which export cotton fabric and
products thereof. In addition, India would note th at the United States refers to its Harmonized Tariff
Schedule (general note 22) which defines "wholly of " as meaning "that the goods are …completely of
the named material." However, for section 405, th e United States arbitrarily made more than 16%
cotton as the criterion to determine the applicable rule of origin (i.e., that origin would be conferred
where the greige fabric is woven.) Indeed, as the United States has noted in paragraph 8 of its
response to the Panel’s questions, "by establishing a rule of certain goods containing 16% or more of
weight of cotton, we ensured that we would cove r the products defined in our settlement agreement."
By reducing the threshold of the definition of a cotton product from one that is composed completely
of cotton to one that is merely 16% and above of cotton, the United States effectively brought more
items under the definition of cotton, which according to section 405, would be conferred origin where
the greige fabric was woven.
115
3.247 In addition, India notes that the manufacturing and assembly of a product such as bed linen is
the same whether it is made of silk or cotton. If, however, it was made of silk, it would be conferred
origin where it was subjected to DP2. If, however, it was made of cotton, it would be conferred
origin where the fabric was formed. In its reply to question 4 from India, the United States answered
that India’s concerns with respect to the differential treatment provided by the "exceptions in section
405 are based on a disagreement with the United Stat es as to where the most significant or important
manufacturing or assembly takes place." India cons iders that there should be no disagreement as to
where the most significant or important manufacturing or assembly takes place between those
products singled out for exemption and those that are not. It is the same for both types of products, as
the products are the same. We consider in this respect that there are no technical reasons to
discriminate in terms of rules of origin between identical products (which by definition are
competitive or substitutable in the market) and th at undergo the same manufacturing and processing.
However, the different rules of origin that the United States applies to such products are unjustifiable.
H. O
RAL STATEMENT OF THE UNITED STATES AT THE SECOND MEETING OF THE PANEL
1. Introduction
3.248 Good afternoon, Mr Chairman and members of th e Panel. We are pleased to have this
opportunity to once again appear before you to pr esent the arguments of the United States in defense
of the rules of origin found in section 334 of the Uruguay Round Agreements Act and section 405 of
the Trade and Development Act of 2000. We will concentrate our remarks on responding to India’s
second submission, but note that our second submi ssion and our responses to the questions by the

115 This "16% and more" definition is also not consistent with the definitions as set out in Chapters 50
to 55 of the Harmonized System which provides for a definition of "85% or more", as pointed out by the
United States in paragraph 8 of its replies to the Panel’s questions.

Panel also address India’s current iteration of its claims. We welcome any questions you may have,
and we look forward to responding to them. The Unite d States rules of origin are not only consistent
with the Agreement on Rules of Origin (the " RO Agreement "), they advance its objectives. India
bears the burden of demonstrating why the Panel s hould adopt its interpretive theories and determine,
by implication, that the United States rules of or igin are inconsistent with the provisions of the RO
Agreement. India has not done so and instead attempts to shift its burden of proof to the United
States.
3.249 As we have previously discussed, the RO Agreement was drafted because Uruguay Round
negotiators wanted to ensure that rules of origin : a) were clear and predictable and would through
their application facilitate the flow of internationa l trade; b) were implemented through transparent
laws, regulations and practices; and c) were prepared and administered in an impartial, transparent,
predictable, consistent and neutral manner. The RO Agreement prescribes a set of obligations that are
guided by these principles. At the same time, wh ile setting out the program for harmonization, the
RO Agreement drafters did not impose a single set of rules of origin at the close of the Uruguay
Round. Instead, the RO Agreement left policy flexibility in the hands of individual Members until
harmonization is completed, and specifically set out various mechanisms that could be used.
Moreover, the RO Agreement gave Members the right to alter th ose rules of origin from time to time
in Article 2(i). The Panel should bear these Memb er decisions in mind as it evaluates both the United
States rules of origin and India’s legal arguments in this dispute.
3.250 India’s answers to questions from the Panel and its second submission confirm that what
India is hoping for is to impose a single set of rules of origin on the United States (and, implicitly, on
all other Members) -- notwithstanding the fact that the RO Agreement was intended to leave
flexibility in the hands of Members. This is shown by India’s attempts to convince the Panel to adopt
a per se rule that mere adoption of rules of origin creates effects prohibited by the RO Agreement.
India is seeking to unilaterally change the RO Agreement by introducing GATT provisions not
relevant in this dispute.
3.251 Has the United States "used" its rules of origin in an impermissible manner? Have those rules
created restrictions, distortions and disruptions of in ternational trade? Have those rules discriminated
against India? These concepts would appear to be relatively straightforward and the answer, in each
instance, an equally straightforward "no." Yet Indi a tries to introduce complicated theories to distract
the Panel from its real purpose in bringing this case - to impose on the United States its preferred rules
of origin. India would have the Panel believe that it is concerned about the "serious abuse" of the RO
Agreement on the part of the United States, yet if that were so, India would have brought this case
eight years ago, when the rules were adopted. No, India’s apparent motivation in bringing this case
was the rejection by the United States of an unrelat ed request for greater access to the United States
market. However, there is no "serious abuse" of the RO Agreement here, whether from a literal or
practical standpoint. As the United States has noted before, the codification of the rules in section 334
largely clarified what was already existing practi ce under pre-334 customs regulations. Thus, it is
unclear how the withdrawal of section 334 or s ection 405 (the "first objective" of the dispute
settlement mechanism) would meet India’s wishes.
2.
 Section 334
3.252 India ignores its burden to show that secti on 334 was enacted to pursue trade objectives and
instead raises several ineffectual and somewhat puzz ling arguments. First, India attempts to shift the
burden of proof to the United States by arguing th at the United States has not addressed its claim of
protectionism. Of course, the United States has i ndeed argued throughout these proceedings that the
purpose of section 334 was not to protect the United States textile industry, and, more importantly,
that India has not shown that one of section 334's four stated objectives, preventing circumvention,
was a smokescreen for protectionism.

3.253 Now, in its second submission, India "refines" its claim to be one of inferring protectionism
from "quota effect." Not surprisingly, India’s contention is a gross oversimplification of a complex
worldwide production and trade network. Section 334 did not always shift origin to developing
countries under tight quotas. In fact, at the time the rules of origin were implemented, and thereafter,
six out of the top ten world exporters of cotton fa brics, accounting for 50 percent of world trade in
cotton fabric, were countries that were not subject to quantitative restraints on fabric or bed linen in
the United States. Thus, depending on particular and company-specific sourcing patterns, the
application of section 334 rules was as likely to r esult in goods falling outside of quotas as it was to
goods migrating into quotas. Neither is India helped by China’s position that changes in rules of
origin per se are inconsistent with Article 2(b) because the changes create effects that render them
protective of the domestic industry, because clearly such an effect has not been demonstrated by
China. Furthermore, even before section 334, mo st cotton bed linen imported into the United States
originated in the country where the greige fabric was formed because bed linen is normally either
dyed or printed, but rarely dyed and printed. Moreover, no amount of arguments focused on creating
a debate about what circumvention may or may no t mean to different Members, or attempts at
redrafting the ATC, can change the fact that the Un ited States has been quite clear regarding the "use"
of section 334 - it was to further goals set forth in the SAA, which are entirely consistent with and
supportive of the objectives of the RO Agreement itself.
3.254 India therefore asks the Panel to make a determ ination that the objec tives stated in the SAA
are not true and instead imply that the real reason was protectionism. Such a conclusion would be
unsupported by WTO jurisprudence and any reading of Article 2(b) of the RO Agreement . India
claims, the "design, structure and architecture" of section 334 reveals the protectionist intent. But
India apparently does not feel that it should bear th e burden of showing how the design, structure and
architecture of section 334 reveals such an intent, but rather claims that it is the United States’ burden
to rebut an assertion that it has not established. More over, it is simply not credible to interpret this
provision as meaning that whenever new rules come into force they should be presumed to have a
restrictive, distorting or disruptive trade effect wh en there is no agreement on what the specific rules
should be, such that a variation could be assumed to have these effects. India wants a standard that
presumes an adverse effect on trade anytime a rule of orig in is changed, in direct contravention of the
words of the RO Agreement. Such a standard is not acceptable.
3.255 India has not made a case as to why a GATT Article I, III, or XI analysis should be relevant
here, rather than looking to the ordinary meaning of the text (that is, within the "four corners" of the
RO Agreement). Accordingly, the United States will only briefly review the arguments we made in
our second submission. First, as the United States explained in its second submission, India’s
"conduct oriented approach" pre-supposes that mere adoption of a rule of origin will have an
"immediate impact" that distorts or restricts trade. This argument is, at best, circular. As is the case
with each of its claims, India’s argument appe ars to envision either that Members adopt
product-specific rules which result in outcomes it ag rees with, or that Members may never change
their rules or institute a product-specific origin regi me. India’s argument reads out of Article 2(c) its
primary element "restrictive, distorting or disruptive effects on international trade." India’s case is
founded upon an unsupported claim that its trade has suffered as a result of the change in the United
States rules of origin. The only evidence that Indi a has so far presented to this Panel regarding its
Article 2(c) claim is a facsimile message from on e of its exporting associations claiming that its
members have been "adversely impacted by section 334."
116 Not only does this claim stand in stark
contrast to actual United States import statistics, but the second example in the fax seems to indicate
that Indian fabric exporters actually benefitted from section 334, as they were able to develop new
business opportunities in China.

116 In addition, as noted above, India only commenced these proceedings when it did not get an
increase in its United States quota, and after India apparently decided not to pursue its claim under ATC
procedures.

3.256 India’s interpretation is inconsistent with the text of Article 2(c) and is unnecessary. If the
drafters of the RO Agreement had wanted a per se rule, they would have adopted one, but they did
not. In addition, with respect to India’s attempt to import into the RO Agreement the product
discrimination standard of GATT Articles I and III, the drafters must certainly have been aware of
GATT Articles I and III and if they had wanted to adopt a product discrimination standard for Article
2(c), they could have done so -- but they did not . The United States submits that Members chose not
to adopt such a standard because product differentiation is allowed under the RO Agreement (India
seems to confuse differentiation with discrimination).
3.257 India argues that the Panel should look at the effects of a change in rules of origin on
conditions of competition in its answer to Panel qu estion 26. This argument is misguided. As a
preliminary matter, the United States notes again that the text of Article 2(c) does not discipline
changes in rules of origin per se; instead, it applies to rules of orig in "themselves." Thus, the type of
comparative argument suggested by India is precluded by the text of Article 2(c) itself. Moreover, the
fact that Article 2(i) sets forth specific disciplines on changes in rules of origin and does so expressly
further indicates that 2(c) was not meant to discipline changes per se. The panel must examine
whether the United States rules, as enacted, "create restrictive, distorting, or disruptive effects on
international trade," not whether the change in Un ited States rules altered c onditions of competition.
In its questions to India (question 28(e)), the Panel correctly noted that under India’s interpretation of
2(c), "Members cannot introduce changes to their rules of origin, given that different rules of origin
are almost bound to produce different trade effects. " Furthermore, at no time does India present
analysis, pursuant to the WTO jurisp rudence that it claims supports its interpretation of Article 2(c),
of how section 334 "changed the competitive conditions."
3.258 Even if the Panel, in our view mistakenly, were to decide to adopt India’s argument equating
"effects on international trade" with "effects on conditions of competition created by a Member’s
conduct," the United States must emphasize that th e question is whether the United States rules,
themselves, had such effects, not whether the changes in the United States rules had such effect. As
the United States rules reflect common internati onal practice, are based on criteria related to
production, and reflect where the most recent substantial transformation took place, the rules
themselves cannot be found to create restrictive, distorting, or disruptive effects on international trade.
Finally, the United States wonders, under India’s analysis, what do the words "create effects" mean in
Article 2(c)? If the drafters used that term instead of the terms found in GATT Articles III and XI, is
not the logical conclusion that the drafters did not intend to draw from those articles? And how is the
Panel to assess how a rule creates an "immediate impact"?
3.259 In addition to our arguments in our second submi ssion, the United States calls the attention of
the Panel to Exhibit US-9, which we are submitting t oday, and which shows year after year of steady
increases in United States imports from India and from the world (mostly double-digit increases) in
the categories that seem to be of co re interest to India in this dispute, i.e., those under the "fabric
formation" rule ( identified in footnote 23 of India’s first submission). These include bed linens, table
linens and bath (toilet) linens classified in HTS head ing 6302. For these categories, the trade data do
not bear out any claim of disruption, distortion or restriction. Indeed, the data show increases in
imports in the period 1995 - 1997 that are especially steep.
3.260 Again, it appears to be India’s opinion, which it is not free under the RO Agreement to impose
on the United States, that no distinction should be made in determining the origin of silk versus wool
fabrics, and that the distinction that is made by the United States is unrelated to the "economic link"
between the country claiming origin and the country where the product underwent the most
significant processing. Neither does India even make an attempt to support its allegations that the
rules impose "unduly strict requirements," other than for the Panel to assume that the rules set out in
section 334 are burdensome. India has similarly not me t its burden under Article 2(d) with respect to
either section 334 or section 405. Indeed, the United States notes that this claim appears to relate only
to section 405.

3. Section 405
3.261 Turning then to India’s claims under section 405, we will first address India’s claim at
paragraph 34 of its second submission that the Unite d States has cited circumvention as the reason for
section 405. This claim is at best disingenuous. The United States has always been clear that the
purpose of section 405 was to implement an agreem ent between the United States and the European
Communities. And how else, since we were changing rules, would we implement a settlement
agreement on its terms other than with the specific terms of the agreement reached with the European
Communities? As we have also made clear, we do not accept that settling a dispute with another
Member, on the terms agreed to, is an illegitimate "trade objective" for purposes of Article 2(b).
3.262 India also appears to argue one theory for both its Article 2(c) and 2(d) claims in respect of
section 405 - "differential treatment." India be gins with a discussion of WTO "like product"
discrimination jurisprudence. With respect to I ndia’s arguments that its Article 2(c) claim is
supported by the Appellate Body’s findings in EC – Bananas II and Canada – Autos , as the United
States explained in our second submission at para graph 19, we are not proposing that the Panel
balance more favorable treatment for some products with less favorable trea tment for others. In
addition, as the United States has previously not ed, Article 2(d) addresses discrimination among
Members – that is, applying different rules to different Members with respect to the same product –
not discrimination between domestic versus imported products, or among imported products.
Moreover, the issue for India here is not a showing of de jure as opposed to de facto discrimination.
India makes no effort to meet either test. Neither does the panel report in Canada- Pharmaceuticals
Patents save India’s case. As the United States h as previously noted, this dispute is not a
product-discrimination case and Article 2(d) is not a bout product discrimination. Even if the United
States were to accept that the panel report in that di spute were relevant here, India has not shown that
the "actual effect" of section 405 is to impose "di fferentially disadvantageous consequences" on India,
or China or the Philippines and that those differential effects are wrong or unjustifiable, as is the basis
for the panel’s reasoning in Canada - Pharmaceuticals Patents.
4. Conclusion
3.263 India spins a confusing web of theories in its effo rt to find some legal basis for its claims that
section 334 and section 405 were adopted for impermissible reasons; restrict, distort and disrupt trade;
and that section 405 is discriminatory. However, supposition or the ascribing by implication of
nefarious purposes cannot give India the proof it l acks that the United States rules of origin are
inconsistent with Article 2(b) of the RO Agreement. Neither can complicated linkages to WTO like
product discrimination jurisprudence save India from its failure to show, based on even its theories, a
factual foundation for its claim that the rules adversel y affect trade. Finally, India makes an attempt
to transfer a variation of its "competitive conditions" analysis to its claims that the rules discriminate
in favor of the European Communities in violation of Article 2(d). Sweeping interpretive statements,
without applying the facts of this case, barely rise to the level of assertion, much less a rebuttable
prima facie showing. None of this analysis demons trates inconsistency with Article 2(d). India’s case
was and always has been totally without merit.

IV. ARGUMENTS OF THE THIRD PARTIES
4.1 The arguments presented by China, the Europ ean Communities, and the Philippines in their
written submissions and oral statements are re flected in the integrated summaries below. 117 The third
parties' answers to questions and comments on each other's responses are reproduced in Annex […].

117 The summaries of the third parties' arguments are based on the executive summaries submitted by
the third parties to the Panel.

A. THIRD-PARTY SUBMISSION OF CHINA
4.2 China believes that United States rules of origin set forth in section 334 of the United States
Uruguay Round Agreements Act and certain modifica tions thereto contained in section 405 of the
United States Trade and Development Act of 2000 are inconsistent with the obligations of the United
States under Article 2 of the Agreement on Rules of Origin ( RO Agreement). These United States
enactments undermine one of the primary achieve ments of the Uruguay Round – the commitment by
Members to trade-neutral rules of origin that are not used as instruments to pursue trade objectives
and that do not create restrictive, distorting and disruptive effects on international trade.
4.3 First, the United States, by changing its rules to conf er origin on the basis of criteria that are
unrelated to value added and to changes in the na ture of the product, but instead were explicitly
intended to assuage the concerns of the United States textile industry, violated its obligations under
Article 2(b) of the RO Agreement . This Article prohibits Members from pursuing, directly or
indirectly, their trade objectives by using rules of origin as an instrument in that pursuit. A textual
analysis of Article 2(b), as well as its objective and purpose, shows that while Members may use
measures or commercial policy instruments to pursue trade objectives, they are prohibited from using
their rules of origin to achieve such trade objectives.
4.4 The structure, legislative history and text of section 334 establish that the United States is
pursuing its trade objectives – namely, the protection of its domestic textile industry – by changing
pre-existing origin rules that were based on an ex amination of whether the product was "substantially
transformed," to a new regime that confers origin on the basis of per se criteria that take no account of
the value added or significance of the change in characteristics of the product as a result of subsequent
processing, assembly or manufacturing that occurs in a third country. The new rules of origin
provided for in section 334 move the United States position away from those of its major trading
partners, such as the European Communities and Canada . In contrast to the United States origin
rules as they existed prior to the enactment of section 334, the new United States determination of
origin of a given textile product no longer considers the nature and extent of the processing operations
in a third country – it rests instead on a per se rule regarding the nature of the underlying fabric. The
United States change in the definitio n of a product’s origin by applying per se rules that fail to
account for the nature and degree of subsequent processing in a third count ry serves no other purpose
than that of protecting the United States domestic textiles and apparel industry. Indeed, the United
States position that changes to its rules of origin were necessary "to reduce circumvention of quota
limits through illegal transshipment" amounts to an ad mission that the modifications to its rules of
origin were used as an instrument to pursue trade objectives. Rath er than enacting means to ensure
true and correct information on the source of materi als and processes under its previous origin rules,
the United States simply changed th e substantive origin rules so th at such information was no longer
relevant.
4.5 Second, by further modifying its origin rules to cr eate exceptions for certain articles of special
interest to the European Commun ities, and for the sole purpose of providing favorable market access
in order to settle an existing WTO dispute settleme nt proceeding with the European Communities, the
United States violated its obligations under Article 2(b) of the RO Agreement . The structure,
legislative history and text of section 405 shows that it was carefully drafted to favor imports from the
European Communities over those from other countri es, thus operating as an instrument to pursue
United States trade objectives.
4.6 As a result of the European Communities’s challe nge to the new rules of section 334, and the
consultations that followed, it is apparent that th e United States was prepared to re-work its section
334 origin rules specifically for the products that were of concern to the European Communities, but
not for any other products. The United States committed to change back to its prior rules solely with
regard to those products of most concern to the European Communities: silk scarves, silk accessories,
dyed and printed cotton fabrics. Accordingly, the United States modified section 334 by enacting

section 405 in 2000, creating arbitrary and inconsis tent reversions to the pre-section 334 rules of
origin for a group of selected textile products, withou t any particular regard for the degree of further
processing, assembly or other operations and how the extent of those further operations would change
the nature of the products. The exceptions created by section 405 were defined solely by the types of
end products imported into the United States from the European Communities and for which the
European Communities expressed concern. The arbitr ary result demonstrates that the rules of origin
changes enacted in section 405 were used as an instru ment to pursue the trade policy objectives of the
United States, i.e. resolving its dispute with the European Communities.
4.7 Third, by enacting complex new rules of origin in section 334, and selective modifications thereto
in section 405, that in and of themselves create restrictive, distorting and disruptive effects on
international trade, the United States violated its obligations under Article 2(c),(d) and (e) of the RO
Agreement. Article 2(c) of the RO Agreement prohibits Members from imposing rules of origin that
"themselves create restrictive, distorting or disrupt ive effects on international trade." In addition,
Article 2(d) provides that rules of origin "shall not discriminate between other Members irrespective
of the affiliation of the goods concerned." Finally, Article 2(e) provides that rules of origin should be
administered "in a consistent, uniform, impartial and reasonable manner."
4.8 The rules of origin enacted by the United States in section 334, as modified by section 405, are
inconsistent with the obligations of the United States under Article 2(c),(d) and (e). Trade is distorted,
disrupted and restricted as a resu lt of arbitrary and differential treatment under rules of origin that
reflect specific exemptions based on the type of fibr e, rather than any criteria regarding the nature and
extent of further processing and assembly in a third country. Furthermore, the section 405
modifications to section 334 discriminate among text iles imported from different Members, providing
a de facto advantage to textile products of specific in terest to the European Communities, to the
disadvantage of textile products of interest to ot her Members. Finally, the complex and arbitrary
nature of the section 334 rules of origin on textile and apparel products, particularly as modified by
section 405, renders it virtually impossible that thes e rules can be applied in a consistent, uniform,
impartial and reasonable manner.
B. T
HIRD-PARTY SUBMISSION OF THE EUROPEAN COMMUNITIES
1. Disciplines under Article 2 of the RO Agreement and their effect on Members’ freedom
to choose their rules of origin
4.9 Contrary to what the Unites States claims, if the Panel were to reach the conclusion that the
United States rules are inconsistent with Article 2, its recommendation would neither be that the
United States should not have any rules at all nor that it should adopt a specific set of rules. Its
recommendation would simply be that the United States bring its rules of origin into conformity with
its obligations under the RO Agreement.
4.10 The argument, however raises a general question, namely to what extent the disciplines under
Article 2 of the RO Agreement restrict the freedom of Members to make determinations of origin and
rules of origin. That question can best be approached through stating what Article 2 does not do. First,
Article 2, in principle, does not oblige Members to have legislation on rules of origin. However, a
Member that does not have any written rules and proceeds on a case-by-case basis, is much more
vulnerable to claims under Article 2(e).
4.11 Second, Article 2 of the RO Agreement does not, as the United States rightly states, prevent
Member from changing their rules of origin.
118 Third, again as rightly stated by the United States, 119
Article 2 of the RO Agreement does not prescribe any specific rul es of origin. One might raise the

119 In particular in para. 8 First Submission United States (see, supra, para. 3.64).

question, in this context, whether the concept of substantial transformation is not an overall principle
governing the RO Agreement and thus also inherent in Article 2. If this were the case, there would be,
at least within certain limits, a substantive review of rules of origin of WTO Members during the
transitional period. However, while the concep t of substantial transformation was made the
cornerstone of harmonisation (see Article 9 of the RO Agreement), it was intentionally left out of the
disciplines to be applied during the transitional period.
4.12 While Members, thus, are not obliged to have a specific set of rules of origin under Article 2
of the RO Agreement , they are not entirely free to adopt/appl y any kind of rules they like. The
disciplines contained in Article 2 set limits to thei r sovereign right to freely choose their own rules.
The rationale underlying the findings of the Appella te Body regarding Article III of the General
Agreement on Tariffs and Trade 1994 (hereinafter "GATT 1994") is fully relevant here.
120
2. Article 2(b) of the RO Agreement
(a) "Trade objective"
4.13 The concept of "trade objectives" in this provision is unclear. The European Communities
agrees with the United States that it cannot just mean any objective related to trade, including all those
that are in the interest and to the benefit of all.
4.14 It is worth briefly commenting on the issue of multiple objectives in this context. Where it is
established that a measure pursues several distinct obj ectives, the fact that one part of that measure
pursues a legitimate objective (i.e. not covered by Ar ticle 2(b)) does not cure the inconsistency of
other parts of the measure with Article 2(b) if the objectives pursued through those fall under that
provision.
(b) "Used as instrument to pursue trade objectives directly or indirectly"
4.15 Article 2(b) clearly is about intent, not effect. I ndeed, the subjective element of intent is triply
present in the wording of Article 2(b). First, there is the expression "used", which can be found in the
dictionary to mean "make use of (a thi ng), esp. for a particular end or purposes." 121 The use of that
word is then reinforced through th e words "as instrument" which the parties have rightly identified to
signify "as a means, tool or device". Second, the provision uses the expression "to pursue" which the
dictionary identifies to mean, "try to obtain or accomplish, aim at." 122 And finally, what is sought to
be achieved is an "objective" which India rightly translates to signify a "goal". That conclusion is
confirmed by a contextual interpre tation of Article 2(b). If that pr ovision were about effect, Article
2(c) would be devoid of substan ce. This would be contrary to the principle of effective treaty
interpretation.123
4.16 India takes a two-pronged approach based on the one hand, on the design, architecture and
structure of the contested rules and, on the other ha nd, on the legislative history of these rules, relying
on the Appellate Body’s findings in the above-mentioned cases on taxation of alcoholic beverages.124
The European Communities believes that the test app lied in these cases to the interpretation of Article

120 Appellate Body Report, Japan – Alcoholic Beverages II, supra, page 16; that finding was confirmed
and further elaborated in Appellate Body Report, Chile – Alcoholic Beverages, supra, paras. 59 and 60; see also
Appellate Body Report, United States – Tax Treatment for "Foreign Sales Corporations" ("US – FSC "),
WT/DS108/AB/R, adopted 20 March 2000, DSR 2000:III, 1619, para. 100.
121 The New Shorter Oxford English Dictionary , L. Brown (ed.) (Clarendon Press, 1993), Vol. II, p.
3531.
122 The New Shorter Oxford Dictionary, supra footnote 9, p. 2422.
123 On the principle of effective treaty interpretation see in par ticular Appellate Body Report, United
States – Gasoline, supra, page 23.
124 See, supra, footnote 121.

III of the GATT 1994, is also pertinent for the purposes of interpreting Article 2(b) of the RO
Agreement.
(i) Section 334 – Protection of domestic industry
4.17 India’s main contention is that section 334 conf ers origin on the basis of criteria that are
unrelated to the value-added operations or the change in the nature of the product.
125 The European
Communities questions the pertinence of this argumen t given that, in its view, Members are under no
obligation during the transitional period to base th eir origin rules on the concept of substantial
transformation, of which the "value added" idea is one facet. Arguing that a rule does not correspond
to that idea amounts to imposing specific substantiv e criteria on origin rules during the transitional
period, which, in the European Communities’ vi ew, cannot be read into Article 2(b) of the RO
Agreement.
4.18 What is pertinent, on the other hand, is to sh ow what the application of the "fabric forward"
rule is designed to achieve in this specific case. Protectionist intent or an intent to increase the severity
of a quota regime would be indicated if it could be demonstrated that through the switch in origin,
achieved by the "fabric forward" rule, products im ported into the United States now come under a
strict quota, where previously they had been under no quota at all or under a more generous quota. 126
Such a "quota-effect" would show that origin rul es are used to "re-apply" quantitative restrictions
where these have lost their "bite" through changes in trade patterns or trade regulation. Indeed trade
patterns may – and may legitimately so - change in order to "avoid" quotas by outsourcing origin-
conferring processes to countries that have better ma rket access conditions in a given country. To use
origin rules to counter such changes is precisely what Article 2(b) prohibits.
4.19 As regards the legislative history, the United St ates legislator refers to the need to reduce
circumvention of quotas. That reference would see m ambiguous. If it were used here to describe the
above discussed phenomenon of changing trade pattern s in order to avoid quotas, the intent to pursue
a trade objective under Article 2(b) could already be established through the legislative history itself.
For, as seen above, such re-organisation of trade is legitimate and Article 2(b) is precisely about
preventing that origin rules be used to counter its effects. If, on the other hand, the expression were
used in the sense of illegitimate circumvention, i.e. fraud on origin requirements, that objective, per
se, would not come under Article 2(b). It would th en be a matter of establishing whether, through
changing origin rules in the way it was done here, the objective of preventing such fraud could indeed
be achieved.
(ii) Section 405 – Favouring the European Communities over other countries
4.20 India seems to want to prove that the sole objective of section 405 was to settle the US/EC
trade dispute.127 Neither the United States nor the European Communities would deny that section 405
reflects the terms of the settlement reached between them. To equal settling a dispute with favouring
one country over another, however, is absurd, quite ap art from the fact it is contrary to the declared
preference of the DSU for amicable settlements of disputes (Article 3.7). The fact that a settlement
quite naturally focuses on the specific interests of the parties involved does not mean that those parties
are favoured over other WTO Members. The "favouring" needs to be in the terms of the settlement
themselves.

126 This is a matter of showing which countries were traditionally the "countries of origin" for a given
product in United States imports before the introduction of the "fabric forward" rule and what conditions applied
to them regarding quota; and then compare to the quota conditions of those "fabric" producing countries that are
now considered to be the origin of these same products.

3. Article 2(c)
(a) Points related to the meaning of certain elements
4.21 For the European Communities, Ar ticle 2 (c) is about showing actual, not potential effects.
Several arguments support this view. First, if Artic le 2(c) were about potential effects, the drafting
could have been different to reflect this idea mo re clearly. The provision could for example have
spoken of rules being "susceptible of creating effect s…". Second, if Article 2(c) were about potential
effects, then there would be a considerable overl ap with Article 2(b). And finally, nothing in the
negotiating history indicates that Article 2(c) was intended to cover potential effects. India points to
the difference between the wording used in Article 2 (c) ("effects on international trade") and that
used in Article 3.2 of the Import Licensing Agr eement ("effects on imports"). To the European
Communities it would seem logical that Article 2(c) do es not refer to effects on imports. Were Article
2 (c) restricted to effects on imports only, only the direct exporter would be protected.
(b) Existence of a de minimis threshold regarding restrictive, distorting or disruptive effects
4.22 The United States, when contending that the effect demonstrated by India does not "rise to the
level of ‘restriction’, ‘distortion’ or ‘disruption’" (para. 40), seems to hint to the existence of a de
minimis threshold in Article 2(c). De minimis requirements where they are intended are usually
spelled out by an Agreement
128 with the exception of the de minimis requirement read into Article
III:2 second sentence of the GATT 1994 by the Appellate Body. However, proving differential
treatment cannot be compared to proving an effect on trade. Therefore, the Appellate Body’s findings
on Article III, in this respect, cannot be applied to Article 2 (c) of the RO Agreement.
(c) How to demonstrate effect
4.23 It is obvious that where effects are not only di fferent in nature (restrictive, distortive or
disruptive), but are also felt on different levels of trade (up- or downstream in the chain of
production/manufacture), there must be different ways of demonstrating them. There exists no single
and unique standard of proof. The question of what kind of proof is required and sufficient has to be
answered on a case-by-case basis. India has not present ed any trade statistics. There would seem to be
a number of possibilities for India to show "effects", be it on the level of exports of greige fabric, or
on the level of direct exports of third countries to the United States.
4.24 Regarding the letter of the Cotton Textiles Export Promotion Council (First Submission India,
Exhibit 15), the fact that the export activity ceased within the two years after section 334 has become
effective is a coincidence in trends that has an i ndicative value. The more there are such coincidences,
the stronger the indication that there is a causal li nk with the adoption of section 334. India, however,
has only shown one such coincidence and there do es not seem to be any indication that this is
representative of the situation in Sri Lanka. Thus, this may not be enough to establish a prima facie
case of violation of Article 2(c).
4.25 Finally, it is not enough to claim that the sheer complexity of rules has disruptive effects.
While it is true that unnecessary co mplexity could lead to such e ffects, it still remains that those
effects would have to be proven under Article 2(c) of the RO Agreement.

128 For example Article 5.8 of the Agreement on Implementation of Article VI of the General
Agreement on Tariffs and Trade 1994; Articles 27.10, 27.11 and 27.12 of the Agreement on Subsidies and
Countervailing Measures; Article 6.4 of the Agreemen t on Agriculture; Article 9.1. of the Agreement on
Safeguards.

4. Article 2(d)
4.26 India argues that section 405 is providing a de facto advantage to European Communities
products without, however, offering any evidence for this claim. Section 405 does not distinguish
between products on the basis of their origin. The "adv antage" it offers is that it gives up on the fabric
forward rule for a number of products. That "advant age" is accruing to all countries involved in the
production of the products covered: those that produce the finished product as well as those that
provide the greige fabric. Contrary to what India seems to say, there is a great number of countries
that currently operate under section 405, including India itself.
129 In addition, any "new" country can
engage in trade in these kinds of products and thus also benefit from the "advantage" provided in
section 405.
4.27 Thus, the European Communities fails to see how the findings of the Appellate Body in
Canada - Automotive Industry could apply to the present case. 130 Neither is there a "closed list"
situation as in that case; 131 nor could it be said that the advantage accruing from section 405 in
practice ends up being granted only or mostly to a small number of countries.132
4.28 In fact, India’s problem does not lie in what has been enacted through section 405, it lies in
what still remains of the fabric forward rule under section 334. Indeed, if section 405 were found to be
inconsistent with Article 2 of the RO Agreement and were to be abolished, the "fabric forward" rule
would fully apply again.
C. THIRD-PARTY SUBMISSION OF THE PHILIPPINES
4.29 In the succinct Third Party submission of the Philippines, the following claims are made:
4.30 Section 334 of the United States' Urugua y Round Agreements Act (URAA) and,
subsequently, section 405 of the Trade and Deve lopment Act of 2000 (TADA), and the customs
regulations implementing these legislations (the "disputed measures") create inter alia restrictive,
distorting or disruptive effects on international trade, including on the Philippines' ability to
effectively participate in the trade of these products.
4.31 The disputed measures constitute a violation of Article 2(b) of the WTO Agreement on Rules
of Origin (the "Agreement") because they provide for extraordinarily complex rules of origin for
textiles and apparel products under which the criteria th at confer origin vary between similar products
and processing operations. The Philippines agrees with India that the structure of the disputed
measures, their implementation and administratio n, including especially 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 instrume nts to pursue trade objectives, in this particular
case, directly. Even if, for the sake of argument, the purposes outlined in the United States' Statement
of Administrative Action could be taken as conclusive for this case, the same would still not qualify to
absolve the United States of the need to amend the disputed measures and bring them into conformity
with the Agreement.
4.32 It must emphasized that the United States, in recognition of the unjustifiable adverse effects
of the disputed measures on Philippine trade in tex tiles and apparel products, entered into a series of
Memorandums of Understandings (M OUs) beginning in 1997 in order to compensate the Philippines

129 The United States imports statistics for the HS co des covered by section 405 are available on the
internet at the following address: http://dataweb.usitc.gov/scripts/user_set.asp
130 Appellate Body Report, Canada – Autos .
131 Ibidem, para. 73.
132 Ibidem, para. 81.

for the difficulties and adverse effects caused by th e disputed measures. These MOUs, on their face,
were clearly not intended to serve as a transition mechanism.
4.33 The disputed measures also constitute a violati on of Article 2(c) of the Agreement because
they create restrictive, distorting, and disruptive effects on international trade, posing unduly strict
requirements, requiring the fulfilment of certain c onditions not related to manufacturing or processing
as a pre-requisite for the determination of the country of origin. While the United States argues on the
basis of its understanding of what "restrictive, distor ting, or disruptive effects on international trade"
mean, these concepts need to be understood not in terms of the United States' understanding, but
rather with regard to the known and proven effects of the disputed measures on international trade,
that is, on the trade of other countries.
4.34 Furthermore, Article 2(c) likewise requires that the rules of origin do not pose unduly strict
requirements or require the fulfilment of certain c onditions not related to manufacturing or processing
as a prerequisite for the determination of the country of origin. Also, Article 2(d) states that the rules
of origin they apply to imports (and exports) be not more stringent than the rules of origin they apply
to determine whether or not a good is domestic and shall not discriminate between other Members.
On its face, the disputed measures fail on these c ounts because they, strangely, bifurcate the current
"special rule" of origin for certa in non-apparel textiles articles, with the result that some goods will
have their origin determined according to where their constituent fabrics were formed (knitted or
woven), while others will continue to have their origin determined according to the country where the
constituent fabric was converted (by dyeing, printi ng, and two or more additional operations). In
contrast, paragraph (4) of the URAA reveal less stringent rules in determining whether a good is
domestic.
4.35 Finally, the disputed measures are a violation of Article 2(e) of the Agreement as they are not
being administered in a consistent, uniform, impa rtial, and reasonable manne r and thus discriminate
between Members. Contrary to the United Stat es' assertions, one cannot segregate the language of
law from that of its administration. If the language of the law is violative then its administration
cannot be any different; otherwise, such administra tion would have the absurd consequence of being
violative of the very law supposed to be administ ered. In any event, under Article XVI:4 of the
Marrakesh Agreement Establishing the WTO, the United States has the obligation to ensure the
conformity of its laws, regulations and administrativ e procedures with its obligations. If the disputed
measures do not and cannot on their face lend themsel ves to proper administration in a consistent,
uniform, impartial and reasonable ma nner, any attempt at discussing th e fine differences between the
rule itself and its administration is futile and could not have been the intention of Article 2(e).
4.36 Accordingly, the Philippines requests the Panel to find that the disputed measures as set out in
section 334 of the URAA and modified in section 40 5 of the TADA, and the customs regulations
implementing these statutory provisions, and the application of these measures, are inconsistent with
the obligations of the United States under Article 2, pa ragraphs (b), (c), (d) and (e) of the Agreement
on Rules of Origin. In this light, the Philippines respectfully requests that the Panel recommend that
the United States bring the disputed measures and their implementing measures into conformity with
the Agreement on Rules of Origin.
V. INTERIM REVIEW
5.1 In letters dated 23 April 2003, India and the United States informed the Panel that they had no
comments on the interim report issued to the parties on 11 April 2003. India and the United States
also informed the Panel that they did not wish to request a meeting with the Panel on the interim
report. Accordingly, consistent with Article 15.2 of the DSU, the Panel's interim report became the
Panel's final report. The Panel corrected several typographical errors.

VI. FINDINGS
A. M
EASURES AT ISSUE
6.1 The measures at issue in this dispute are:
(a) Section 334 of the US Uruguay Round Agreements Act 133 (hereafter "section 334"),
which entered into force on 1 July 1996,
(b) the clarification of section 334 contained in section 405 of the United States Trade
and Development Act 134 (hereafter "section 405"), which entered into force on 18
May 2000, and
(c) the customs regulations contained in 19 C.F.R. § 102.21 135, which implement the
aforementioned statutory provisions.
6.2 Section 334, as amended, is codified at 19 U.S. C. § 3592. In this Report, we will use the term
"section 334" to refer to those parts of section 334, as amended, which were not affected by the
amendments made by section 405. Similarly, we will use the term "section 405" to refer to those
parts of section 334, as amended, which incorporate the amendments made by section 405.
6.3 Section 334 and section 405 lay down rules of origin, inter alia, for fabrics and certain made-up
non-apparel articles assembled in a single country fr om single country fabric. The latter category of
goods, also referred to in this Report as "flat goods", in clude goods of export interest to India, notably
bedding articles (bed linen, quilts, comforters, bl ankets, etc.) and home furnishing articles (wall
hangings, table linens, etc.).
6.4 Section 334 provides, in relevant part, that fa brics and made-up non-apparel articles falling under
16 specified HTS 4-digit headings 136 – essentially flat goods – are considered to originate in the
country where the fabric is woven, knitted or othe rwise formed, regardless of any further finishing
operations which may have been performed in respect of the fabrics or articles concerned. 137 T h e
parties have in some instances referred to this rule of origin as the "fabric forward" rule. We prefer to
use the term "fabric formation" rule.
6.5 Section 405 provides, in relevant part, for two exceptions from the fabric formation rule
established by section 334. The first exception created by section 405 is that fabric classified under
the relevant HTS headings as of silk, cotton, man-ma de or vegetable fibre are considered to originate
in the country in which the fabric is both dyed an d printed when accompanied by two or more of the
following finishing operations: bleaching, shrinking, fulling, napping, decating, permanent stiffening,
weighting, permanent embossing, or moireing. We will refer to this rule as the "DP2" rule, and to the
relevant operations as "DP2 operations". The DP 2 rule does not apply to wool fabric, which,
therefore, remains subject to the fabric formation rule established by section 334.

133 Pub. Law 103-465, 108 Stat 4809, enacted on 8 Decem ber 1994, and codified at 19 U.S.C. § 3592.
For the text of section 334, see, supra, para. 2.2.
134 Pub. Law 106-200, entitled "Clarification of Sec tion 334 of the Uruguay Round Agreements Act",
enacted on 18 May 2000, and codified at 19 U.S.C. § 3592. For the text of section 405, see, supra, para. 2.5.
135 Reproduced, in relevant part, in Annex C.
136 For a list of the goods concerned, see supra, para. 2.3. India notes that one of the 16 HTS headings
refers to goods which are deemed to originate where the yarn was produced. India's first written submission,
para. 36.
137 United States' reply to Panel question No. 7.

6.6 The second exception created by section 405 is that made-up non-apparel articles classified under
seven of the 16 HTS 4-digit headings specified in section 334 138 are subject to the DP2 rule, except
where such articles are classified under the relevant headings as of cotton or of wool or consisting of
fibre blends containing 16 percent or more by weight of cotton. The articles classified under the
relevant headings as of cotton or of wool or cons isting of fibre blends containing 16% or more by
weight of cotton remain subject to the fabric formation rule established by section 334.
139
6.7 The two tables reproduced below reflect in simp lified form our understanding of the relevant
provisions of section 334 and section 405.

Table 1 – Origin of Fabrics

ORIGIN OF FABRICS

ORIGIN-CONFERRING PROCESS

FABRIC-FORMATION
(KNITTING, WEAVING, ETC.)

DYEING & PRINTING OF FABRIC
& TWO OR MORE SPECIFIED
FINISHING OPERATIONS ("DP2")

Wool fabrics

YES
 (section 334(b)(1)(C))

NO

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

YES
 (section 334(b)(1)(C), unless
subsequently subjected to DP2)

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

138 For a list of the goods concerned, see supra, para. 2.7.
139 It is our understanding from the parties' subm issions that, under the United States' regulations
applicable before section 334 entered into force, DP2 op erations were normally considered significant enough,
for fabrics and certain flat goods, to confer origin. United States' replies to Panel questions Nos. 33 and 47(a);
India's first written submission, paras. 14-15.

Table 2 – Origin of Made-Up Articles Assembled in a Single Country from Single Country Fabric(s)

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

ORIGIN-CONFERRING PROCESS

FABRIC-FORMATION
(KNITTING,
WEAVING, ETC.)

DYEING & PRINTING
OF FABRIC & 2 OR
MORE SPECIFIED
FINISHING
OPERATIONS ("DP2")

"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 334(b)(2)(A))
NO NO
 - Cotton

YES
(section 334(b)(2)(A))
NO NO
 - Cotton blends (more than 16%
cotton by weight)
YES
(section 334(b)(2)(A))
NO NO
 - Other (silk, man-made fibres,
vegetable fibres)
YES
 (section 334(b)(2)(A),
unless subsequently
subjected to DP2)
YES
(section 405(a)(3)(C))

NO
Articles which are "knit to shape"
(e.g., stockings)
YES
(section 334(b)(2)(B),
although "knitting-to-
shape" is not considered
fabric making, but
component or article
formation)
NO NO
Other articles (including apparels) NO NO YES
 (section 334(b)(1)(D))

6.8 It should be noted that the rules of origin cont ained in section 334, as amended, are used by the
United States "for purposes of the customs laws and the administration of quantitative restrictions". 140
They are, accordingly, used not only for the admi nistration of quantitative restrictions, but also for
such purposes as the gathering of trade statistics, origin marking and administering MFN customs
duties.141 However, the present dispute primarily arises from the application of section 334, as
amended, for the purpose of administering the textil e quota regime maintained by the United States
pursuant to the provisions of the Agreement on Textiles and Clothing .142 Thus, this dispute concerns
the use of rules of origin in support of a trade po licy instrument – quotas – which, by definition, is
trade-restrictive. The United States even acknowle dges that the textile quota regime has been put in
place "for the purpose of protecting its domestic i ndustry during the […] transition period [provided
for in the Agreement on Textiles and Clothing]".143
6.9 Regarding the customs regulations contained in 19 C.F.R. § 102.21, it is sufficient to note that
they were promulgated pursuant to section 334(a) and amended, on an interim basis, to take account

140 Section 334(b)(1).
141 United States' reply to Panel question No. 34.
142 India's first oral statement, paras. 8 and 11.
143 United States' second written submission, para. 10.

of the amendments made to section 334 by section 405. The regulations contained in 19 C.F.R. §
102.21, including the interim amendments, are legally binding.144
B. OVERVIEW OF THE PARTIES' CLAIMS AND ARGUMENTS
6.10 India claims that the United States rules of origin set out in section 334 and modified in
section 405 and the customs regulations implementing these statutory provisions, and the application
of these statutory provisions and implementing regulations:145
(a) are being used by the United States as inst ruments to pursue trade objectives, thereby
violating Article 2(b) of the RO Agreement . Section 334 is being used as an
instrument to protect the United States' te xtile and apparel indus try. Section 405 is
being used as an instrument to favour im ports of the products of concern to the
European Communities;
(b) create restrictive, distorting and disruptiv e effects on international trade and are,
therefore, inconsistent with the United St ates' obligations under Article 2(c), first
sentence, of the RO Agreement;
(c) require the fulfilment of a certain c ondition not related to manufacturing or
processing and pose unduly strict requirements and are, therefore, inconsistent with
Article 2(c), second sentence, of the RO Agreement; and
(d) with respect to section 405, discriminate between Members, and in particular,
discriminate in favour of the European Comm unities and are, therefore, inconsistent
with the United States' obligations under Article 2(d) of the RO Agreement.146
6.11 Based on these claims, India requests that the Pa nel find that the measures at issue, and their
application, are inconsistent with the United States ' obligations under Article 2(b), (c) and (d) of the
RO Agreement , and that the Panel recommend that the United States bring its measures into
conformity with its obligations under the RO Agreement.147
6.12 The United States argues that the rules of origin at issue are not inconsistent with
Article 2(b), (c) or (d). According to the Un ited States, these rules were enacted to combat
circumvention of established quotas, prevent transsh ipment, facilitate harmonization and best capture
where a new product is formed. The United States further argues that these rules of origin were
offered on an MFN basis, in accordance with WTO ru les. In the view of the United States, the
measures at issue are therefore not inconsistent with the RO Agreement. Rather, they facilitate the
flow of international trade, consistent with the terms of the preamble to the RO Agreement.
6.13 Based on these arguments, the United States requ ests that the Panel find that India has failed
to establish that the measures at issue are inconsistent with Article 2(b), (c) and (d) of the RO
Agreement.

144 United States' reply to Panel question No. 54(a ); India's reply to Panel question No. 54(a); supra,
para. 2.8.
145 India's first written submission, para. 8; India's second written submission, para. 75.
146 India's second oral statement, para. 18.
147 India initially also claimed that the criteria used in section 334 and section 405 are so complex and
arbitrary that it is nearly impossible to administer these statutory provisions in a consistent, uniform, impartial
and reasonable manner and that these provisions are, therefore, inconsistent w ith Article 2(e) of the RO
Agreement. India's first written submission, para. 101. India later abandoned this claim. India's second written
submission, footnote 37.

6.14 The Panel notes that, in response to its questions, In dia has clarified that its claims concern
the imposition and maintenance by the United States of the rules of origin set out in section 334 and
section 405, and implemented through customs regulations, not the fact that the United States changed
its rules of origin in 1996 and 2000.
148 As a result, we understand India's complaint to be in respect of
the results of the United States' le gislative changes made in 1996 and 2000, not the fact that changes
were made.149
C. PRELIMINARY REMARKS
6.15 This is the first time a panel has been called upon to interpret and apply the provisions of the
RO Agreement . It is therefore appropriate, briefly to address, as a preliminary matter, the general
issues of the allocation of the burden of proof, the ap plicable rules of interpretation and the nature of
the disciplines prescribed by the provision at issue in this dispute, Article 2 of the RO Agreement.
1. Burden of proof
6.16 The rules concerning burden of proof are well established in WTO jurisprudence. In United
States – Measure Affecting Imports of Woven Wool Shirts and Blouses , the Appellate Body stated
that:
"[…] the burden of proof rests upon the party, whether complaining or defending, who asserts
the affirmative of a particular claim or defence. If that party adduces evidence sufficient to raise
a presumption that what is claimed is true, the burden then shifts to the other party, who will fail
unless it adduces sufficient evidence to rebut the presumption."
150

6.17 Once the Panel determines that the party asserting the affirmative of a particular claim or
defence has succeeded in raising a presumption that its claim is true, it is incumbent on the Panel to
assess the merits of all the arguments made and th e admissibility, relevance and weight of all the
factual evidence submitted with a view to establishi ng whether the party contesting a particular claim
has successfully rebutted the pr esumption raised. If the arguments and evidence adduced by the
parties remain in equipoise, the Panel must, as a matter of law, find against the party who bears the
burden of proof.
6.18 In this case, it is for India as the complaini ng party to establish the violations of the RO
Agreement it alleges. Specifically, it is for India to submit arguments and evidence sufficient to raise
a presumption that the measures at issue are inconsis tent with the United States' obligations under the
RO Agreement. Once it has done so, it is for the United States to rebut that presumption.
2. Applicable rules of interpretation
6.19 Article 3.2 of the DSU provides that panels are to clarify the provisions of "covered
agreements" in accordance with cust omary rules of interpretation of public international law. The
RO Agreement is one of the "covered agreements" subject to the DSU. 151 It is clear from Appellate
Body jurisprudence that Articles 31 and 32 of th e Vienna Convention on the Law of Treaties (the
"Vienna Convention") 152 are part of the customary rules of in terpretation of public international

148 India's reply to Panel questions Nos. 15 and 18.
149 Ibid.
150 Appellate Body Report, United States – Measure Affecting Imports of Woven Wool Shirts and
Blouses from India (" United States – Wool Shirts and Blouses "), WT/DS33/AB/R and Corr.1, adopted
23 May 1997, DSR 1997:I, 323; at 335.
151 Appendix 1 of the DSU.
152 Vienna Convention on the Law of Treaties, done at Vienna, 23 May 1969, 1155 U.N.T.S. 331;
(1969) 8 International Legal Materials 679.

law.153 Pursuant to Article 31(1) of the Vienna Conve ntion, the duty of a treaty interpreter is to
interpret a treaty in accordance with the ordinary meaning to be given to the terms of the treaty in
their context and in the light of its object and purpos e. If, after applying the rules of interpretation set
out in Article 31(1), the meaning of the treaty remains ambiguous or obscure or leads to a result that is
manifestly absurd or unreasonable, Article 32 allo ws the treaty interpreter to have recourse to
supplementary means of interpretation, including the preparatory work of the treaty and the
circumstances of its conclusion.
6.20 These rules of interpretation are equally applicable to the provisions of the RO Agreement.
3. Disciplines prescribed by Article 2 of the RO Agreement
6.21 All of India's claims are based on the provisions of Article 2 of the RO Agreement. Article 2
lays down disciplines governing Members' application of non-preferential rules of origin "[u]ntil the
work programme for the harmonization of rules of origin set out in Part IV [of the RO Agreement] is
completed".154 After this "transition period" 155, i.e., "upon implementation of the results of the
harmonization work programme" 156, Members will apply harmonized rules of origin and the
application of those rules will be subject to the provisions of Article 3 of the RO Agreement.
6.22 As of the date of establishment of this Pane l, the work programme for the harmonization of
rules of origin set out in Part IV of the RO Agreement had not been completed. As a result, India is
entitled to invoke the provisions of Article 2 of the RO Agreement.
6.23 With regard to the provisions of Article 2 at issue in this case – subparagraphs (b) through (d)
– we note that they set out what rules of origin should not do: rules of origin should not pursue trade
objectives directly or indirectly
157; they should not themselves create restrictive, distorting or
disruptive effects on international trade 158; they should not pose unduly strict requirements or require
the fulfilment of a condition unrelated to manufacturing or processing 159; and they should not
discriminate between other Members160. These provisions do not prescribe what a Member must do.
6.24 By setting out what Members cannot do, these provisions leave for Members themselves
discretion to decide what, within those bounds, they can do. In this regard, it is common ground
between the parties that Article 2 does not prev ent Members from determining the criteria which
confer origin 161, changing those criteria over time 162, or applying different criteria to different
goods163.

153 See, e.g., Appellate Body Reports, United States — Standards for Reformulated and Conventional
Gasoline ("United States — Gasoline "), adopted 20 May 1996, DSR 1996:I, p. 16; Japan — Taxes on Alcoholic
Beverages ("Japan — Alcoholic Beverages II ") WT/DS8/AB/R, WT/DS10/AB/R, WT/DS11/AB/R, adopted 1
November 1996, DSR 1996:I, p. 104; India — Patent Protection for Pharmaceutical and Agricultural Chemical
Products ("India — Patents (United States) "), WT/DS50/AB/R, adopted 16 January 1998, DSR 1998:I, para.
46; European Communities — Customs Classification of Certain Computer Equipment (" EC — Computer
Equipment"), WT/DS62/AB/R, WT/DS67/AB/R, WT/DS68/AB/R , adopted 22 June 1998, DSR 1998:V, para.
154 Chapeau of Article 2 of the RO Agreement.
155 Title of Article 2 of the RO Agreement.
156 Article 3 of the RO Agreement.
157 Article 2(b) of the RO Agreement.
158 Article 2(c), first sentence, of the RO Agreement.
159 Article 2(c), second sentence, of the RO Agreement.
160 Article 2(d) of the RO Agreement.
161 India's first oral statement, para. 5; India's reply to Panel question No. 4; United States' first oral
statement, para. 3.
162 India's first oral statement, para. 6; United States' first oral statement, para. 3
163 India's first oral statement, para. 6; United States' first written submission, para. 8.

6.25 Accordingly, in assessing whether the relevant Un ited States rules of origin are inconsistent
with the provisions of Article 2, we will bear in mind that, while during the post-harmonization period
Members will be constrained by the result of the harmonization work programme, during the
transition period, Members retain considerable di scretion in designing and applying their rules of
origin.
D. I
NDIA'S CLAIMS IN RESPECT OF SECTION 334 AND SECTION 405
6.26 In this Section, the Panel will assess India's claims in respect of the statutory provisions at
issue in this dispute, i.e., section 334 and section 405. In the next Section, the Panel will assess
India's claims in respect of the customs regulations implementing these statutory provisions.
1. India's claims under Article 2(b) of the RO Agreement
6.27 India claims that both section 334 and section 405 are inconsistent with Article 2(b) of the RO
Agreement. The Panel will examine these claims in turn . Before doing so, however, it is necessary to
address the parties' interpretation of Article 2(b).
(a) Article 2(b) of the RO Agreement
6.28 Article 2(b) provides as follows:
"Until the work programme for the harmonization of rules of origin set out in Part IV is
completed, Members shall ensure that:
[…]
(b) notwithstanding the measure or instrument of commercial policy to which they are
linked, their rules of origin are not used as in struments to pursue trade objectives directly or
indirectly[.]"
6.29 India considers that the operative clause of Article 2(b) is the obligation that rules of origin
must not be used "as instruments to pursue trade objectives". India points out that the New Shorter
Oxford English Dictionary defines "instrument" as "a thing used in or for performing an action; a
means" and "objective" as the "thing aimed at or s ought; a target, a goal, an aim". India considers,
therefore, that the ordinary meaning of the term "tra de objective" in the context of Article 2(b) is an
aim, goal, or object related to trade. According to India, for the purposes of this dispute, it is not
necessary to develop a general definition of the term "trade objectives". In India's view, it is sufficient
for the Panel to find that trade objectives include the objective of protecting the domestic industry
against import competition or of favouring imports from one country over imports from another.
India maintains that any rule of origin that is used as an instrument to protect a domestic industry or to
favour imports from one country over imports from another country is an instrument to pursue "trade
objectives" as that term is used in Article 2(b).
6.30 India considers that its interpretation of Article 2(b) is supported by the context. The use of
the term "notwithstanding" in the preceding clause – "notwithstanding the measure or instrument of
commercial policy to which they are linked" – im plies a contrast between this clause and the
prohibition that rules of origin must not be used to pursue trade objectives. Thus, in India's view,
measures or commercial policy instruments may pursue aims, goals or objects related to trade, or
trade objectives, but rules of origin may not do so ei ther directly or indirectly. In other words, WTO
Members may use rules of origin to implement co mmercial policy instruments of the kind listed in
Article 1.2 of the RO Agreement, but they may not use rules of origin to pursue policy objectives of
the kind commonly pursued with these policy instruments.

6.31 India contends that the object and purpose of the RO Agreement also supports its interpretive
approach. Specifically, India notes that the seventh recital of the preamble states that Members
desire, through the RO Agreement, "[…] to ensure that rules of orig in are prepared and applied in an
impartial, transparent, predictable, consistent and neutral manner". India also notes that, according to
its preamble, the RO Agreement is "to further the objectives of the GATT 1994". According to the
preamble of the GATT 1994, the GATT 1994 is to expand the production a nd exchange of goods
through the reduction of tariffs and other barriers to trade. In India's view, one of the fundamental
purposes of the RO Agreement thus is to ensure that the barriers to trade 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.
6.32 Finally, with respect to how to assess whether a rule of origin is being used as an instrument
to pursue a trade objective, India submits that one way is to assess whether the rule of origin in
question achieves the same results as a measure or instrument of commercial policy. India also
considers it useful to examine the d esign, architecture, and structure of the relevant rule of origin.
India recalls that the Appellate Body has noted that "[a]lthough it is true that the aim of a measure
may not be easily ascertained, nevertheless its protective application can most often be discerned from
the design, the architecture, and the revealing structure of a measure".164
6.33 The United States agrees with India that the operative clause in Article 2(b) is the obligation
that rules of origin are not to be used "as instru ments to pursue trade objectives". The United States
also agrees that "instrument" can be defined as "tool ", "device", or "means" and that "objective" is a
goal. Likewise, the United States agrees that the preamble to the RO Agreement provides the relevant
"object and purpose" of the RO Agreement . However, the United States submits that India's
interpretation of a "trade objective" is overly broad. The United States argues that if "trade objective"
is understood to be any objective related to trade, rules of origin could not be used to pursue
transparency or predictability, two trade-related goals. According to the United States, such an
interpretation would be at odds with both the object and purpose of the RO Agreement and the context
of Article 2(b).
6.34 As for India's contention that the protection of a domestic industry and the favouring of
imports from one Member over imports from another would constitute "trade objectives" within the
meaning of Article 2(b), the United States accepts India's contention that protection of a domestic
industry is an "impermissible" trade objective for the purposes of Article 2(b). Concerning the other
objective identified by India as a "trade objective" – the favouring of imports from one Member over
imports from another – the United States cautions that rules of origin might have the practical effect
of favouring one Member over another and that su ch rules could not, on that basis alone, be
considered to pursue a "trade objective". 165 Apart from this, the United States does not raise concerns
with respect to the second trade objective referred to by India. In fact, the United States suggests that
"discrimination" in favour of one Member could be considered to be a "trade objective".166
6.35 Regarding the issue of how it can be assessed wh ether a rule of origin is being used as an
instrument to pursue a trade objective, unlike Indi a, the United States does not consider that it is
necessary or relevant to analyse whether the design, structure and architecture of a contested rule of
origin measure reveals an "impermissible" trade objective.
6.36 The Panel agrees with the parties that the operative part of Article 2(b) is the phrase "rules of
origin are not [to be] used as instruments to pursue trad e objectives directly or indirectly". It is clear

 164Appellate Body Report, Japan – Taxes on Alcoholic Beverages ("Japan – Alcoholic Beverages II "),
WT/DS8/AB/R, WT/DS10/AB/R, WT/DS11/AB/R, adopted 1 November 1996, DSR 1996:I, 97, at 120
(emphasis added by India).
165 United States' reply to Panel question No. 6; United States' second written submission, para. 31.
166 United States' second written submission, para. 29.

from this phrase that in order to establish a violati on of Article 2(b), a Member needs to demonstrate
that another Member is using rules of origin for a specified purpose, viz., to pursue trade objectives.
As noted by India, this interpretation of Article 2(b) , which is not in dispute, confronts the Panel with
the following two issues. First, how is the Panel to determine whet her a Member's rules of origin are
used for the purpose specified in Article 2(b)? And second, what are "trade objectives"?
6.37 Beginning with the first issue, we agree with India that the Appellate Body has already taken
a position on how panels should co nduct an inquiry into the objectives of a measure. The Appellate
Body did so in the context of an analysis under Ar ticle III:2, second sentence, of the GATT 1994. In
examining whether a tax measure was applied "so as to afford protection to domestic production", the
Appellate Body stated that:
"[…] it is not necessary for a panel to sort through the many reasons legislators and
regulators often have for what they do and weigh the relative significance of those reasons to
establish legislative or regulatory intent." The subjective intentions inhabiting the minds of
individual legislators or regulators do not bear upon the inquiry, if only because they are not
accessible to treaty interpreters. It does not follow, however, that the statutory purposes or
objectives – that is, the purpose or objectives of a Member's legislature and government as a
whole – to the extent that they are given objective expression in the statute itself, are not
pertinent. To the contrary, as we also stated in Japan – Alcoholic Beverages:

Although it is true that the aim of a measure may not be easily ascertained,
nevertheless its protective application can most often be discerned from the design,
the architecture, and the revealing structure of a measure. (emphasis added)"
167
6.38 The reasons cited by the Appellate Body in suppor t of its view do not appear to be specific to
the provisions of Article III:2, second sentence, of the GATT 1994. Hence, these reasons apply with
equal force in the context of Article 2(b) of the RO Agreement. Accordingly, in applying Article 2(b),
we will follow the above-quoted statement by the Appellate Body.
6.39 In respect of the second issue, the meaning of the term "trade objectives" as it appears in
Article 2(b), we recall the statement by India that, for the purposes of the present dispute, it is not
necessary for the Panel to develop a general definiti on of the term "trade objectives". India considers
that it would be sufficient for the Panel to find that the objectives of protecting the domestic industry
against import competition and favouring imports from one Member over imports from another are
"trade objectives" within the meaning of Article 2(b).
168 The United States has not objected to the
Panel proceeding in this way.
6.40 In seeking to determine whether the objectives of "protecting the domestic industry against
import competition" and "favouring imports from one Member over imports from another" are "trade
objectives" within the meaning of Article 2(b), the Panel begins by noting that, as a textual matter,
these objectives are clearly related to trade. In th at sense, they could certainly be covered by the
ordinary meaning of the term "trade objectives", whic h, as India has identified, is "goals" or "aims"
related to trade.169
6.41 The relevant context supports this reading of the term "trade objectives". Article 2(c), first
sentence, of the RO Agreement provides that "rules of origin shall not themselves create restrictive,
distorting, or disruptive effects on international trad e". This provision reveals a concern about rules
of origin inhibiting trade. Reading Article 2(b) in this context supports the interpretation that Article

167 Appellate Body Report, Chile – Taxes on Alcoholic Beverages ("Chile – Alcoholic Beverages "),
WT/DS87/AB/R, WT/DS110/AB/R, adopted 12 January 2000, DSR 2000:I, 281, para. 62 (footnotes omitted).
168 India's second written submission, para. 24; India's first oral statement, para. 18.
169 Supra, para. 6.29.

2(b) prohibits the use of rules of origin for th e purpose of protecting the domestic industry against
import competition and of favouring imports of one Member over imports from another.
6.42 More importantly, we note that the operative clause of Article 2(b) – to the effect that rules of
origin should not be used as instruments to pursue trade objectives – is preceded by the phrase
"notwithstanding the measure or commercial policy instrument to which they are linked". This phrase
implies that, whereas rules of origin may not pur sue "trade objectives", commercial policy measures
or instruments may do so. It follows that the "t rade objectives" mentioned in the operative clause of
Article 2(b) would include the kind of policy obj ectives which trade policy measures or instruments
typically pursue. Plainly, the objectives of "protecting the domestic industry against import
competition" and "favouring imports from one Member over imports from another" fit within this
category.
6.43 Finally, we believe that interpreting the term "trade objectives" as suggested by India is
consistent with the objective of Article 2(b). In our view, Article 2(b) is intended to ensure that rules
of origin are used to implement and support trade po licy instruments, rather than to substitute for, or
to supplement, the intended effect of trade policy instruments. Allowing Members to use rules of
origin to pursue the objectives of "protecting the domestic industry against import competition" or
"favouring imports from one Member over imports fro m another" would be to substitute for, or
supplement, the intended effect of a trade policy instrument and, hence, be contrary to the objective of
Article 2(b).
6.44 Taken together, the foregoing considerations l ead us to the conclusion that the objectives
identified by India – i.e., the objectives of "protecting the domestic industry against import
competition" and of "favouring imports from one Member over imports from another" – may, in
principle, be considered to constitute "trade objectiv es" in pursuit of which rules of origin may not be
used.
6.45 Bearing in mind the above conclusions, we now turn to examine whether section 334 is
inconsistent with Article 2(b), as claimed by India.
(b) Consistency of section 334 with Article 2(b) of the RO Agreement
6.46 India argues that an examination of the design, architecture, and structure of section 334
shows that it is used as an instrument to pursue the objective of protecting the domestic textiles and
apparel industry. India submits that section 334 c onfers origin on the basis of criteria that are
unrelated to the value added operations or the change in the nature of the product. Instead, the criteria
are those that are commonly used in the application of commercial policy instruments.
6.47 India considers that the new rules of origin moved the United States away from those used by
its major trading partners such as the European Communities and Canada. To India's knowledge, no
other country determines origin on the basis of the place where the greige fabric was formed, if that
fabric was further processed and made into a flat good, thereby reflecting the importance of cutting
and sewing to produce a finished product. India not es that greige fabric, and even dyed and printed
greige fabric, can be put to a vari ety of uses. India points out that, in contrast, once the fabric is cut
and sewn into a pillowcase, no one can use that fabric for anything other than a pillow case.
6.48 India argues that the fact that the "fabric forw ard" rule set out in section 334 is used for a
wide variety of non-apparel flat textile articl es, such as bedding articles (quilts, comforters,
mattresses, blankets), home furnishings (wall hangi ngs, table linens) and fashion accessories such as
scarves, shows that the section 334 rules are being used as instruments to pursue trade objectives.
India notes in this respect that, for home textiles, bedding articles, furnishings, and miscellaneous
made up articles, the section 334 rules work a signifi cant change in the determination of the country
of origin. India notes that under the "fabric forwar d" rule, these products are deemed to originate in

the country where their constituent fabric is formed (woven or knitted) in th e greige state and no
account is taken of any subsequent value-added operations such as the dyeing, printing or finishing of
the fabric, the cutting of the fabric into components, the assembly of those components into finished
articles or any other operations. India offers the example of down-filled comforters, which are
classified under HTS subheading 9404. 90 and subject to the fabric forward rule. According to India,
this means that if the down-filled comforter was cut, sewn and assembled in country A and had a
value of US $200, it would be nevertheless determined as a product of country B if the greige fabric
used in its manufacture, which cost only a few dollars, was woven in country B.
6.49 India submits that the clearly protectionist objective of section 334 can be demonstrated by its
effect on the determination of origin for the products subject to section 334. India points out that the
effect of section 334, especially its fabric forward provision, was that a range of textiles and clothing
products imported into the United States were su bjected to the strict quotas of the developing
countries whereas previously they had been under no quota or a more generous quota. In India's
view, the fabric forward rule increases the quantities of textile imports that are conferred the origin of
the countries that are under quota.
170 India argues that this strengthens the impact of the United States'
quota regime under the Agreement on Textiles and Clothing which – as the United States admits – was
put in place to protect the domestic industry. Accord ing to India, the fabric forward rule is thus
clearly being used to pursue a trade objective.
6.50 India further notes that, according to the Statement of Administrative Action (the "SAA") that
accompanied the Uruguay Round Agreements Act171, the purpose of section 334 was to:
- help combat transhipment and other circumvention of textile and apparel quotas;
- bring the United States' rules of origin in line with the rules employed by other major
textile and apparel importing countries;
- advance the goal of harmonizing international rules of origin set out in the WTO RO
Agreement;
 - more accurately reflect where the most significant production activity occurs. 172

6.51 With respect to the first objective listed in the SAA, India notes that there is a specific
provision in Article 5 of the Agreement on Textiles and Clothing which enables countries to address
the problem of "circumvention by transhipment, re-routing, false declaration concerning country or
place of origin, and falsification of official documents". India points out that Article 5.2 specifically
provides that "should any Member believe that [the Agreement on Textiles and Clothing ] is being
circumvented by transhipment, re-routing, false declaration concerning country or place of origin, and
falsification of official documents, and that no, or inadequate, measures are being applied to address
and/or take action against such circumvention, that Member should consult with the Member or
Members concerned with a view to seeking a mutually satisfactory solution". In the view of India, the
section 334 changes in determining the rules of orig in do not assist the United States in combating
transhipment and other circumvention of textile and apparel quotas.
173

170 In its second oral statement, India went further an d said that the fabric forward rule "by definition"
increases the quantities of textile imports that are confer red the origin of the countries that are under quota.
India's second oral statement, para. 8.
171 The SAA may be found in "Message of the President of the United States Transmitting the Uruguay
Round Agreement, Text of Agreements, Implementing Bill, Statement of Administrative Action and Required
Supporting Documents", H.R. Doc. No. 316, 103d Cong. 2d Sess., Vol. 1 (1994) at 656 et. seq.; exhibit US-6.
172 SAA, supra, pp. 118-119.
173 According to India, the question ar ises here that if the United States believed the application of the
principle of substantial transformation did not discourage transhipment or other circumvention of textile and
apparel quotas and sought therefore to move away from this principle in section 334, why did it revert to the

6.52 India further notes that Article 5.1 of the Agreement on Textiles and Clothing provides that
circumvention "frustrates the implementation of this Agreement to integrate the textiles and clothing
sector into GATT 1994. Accordingly, Members should establish the necessary legal provisions
and/or administrative procedures to address and take action against such circumvention […]". India
submits that section 333 of the URAA
174, rather than section 334, was enacted to implement
Article 5.1 since it tracks the language of Article 5.1 more directly, and addresses more specifically
the type of circumvention noted in Article 5 of the Agreement on Textiles and Clothing.175 According
to India, this implies that section 334 was passed for reasons other than to prevent circumvention
within the meaning of Article 5.1 of the Agreement on Textiles and Clothing.
6.53 India points out that, notwithstanding this, the United States insists that section 334 was
passed, inter alia, "to prevent quota circumvention and address illegal transhipment […]". 176 India
points out that the definition of "circumvention" was provided by the United States when it cited with
approval a commentary that the United States was addressing circumvention through section 334
because "some new industrialized countries of Southeast Asia could otherwise try to circumvent the
quantitative restrictions applied to their exports of textile products. They could do so by exporting
semi-finished products (in casu dyed or printed cloths) to third countries, in the hope that the origin of
those countries (for which no quantitative restrictions for exports of textile products are applied)
would be attributed to the finished cloths". India s ubmits that this is not circ umvention. India recalls
its view that circumvention is a te rm which implies a violation of th e applicable origin rules through
false declarations and other illegitimate means. Indi a considers that the reaction of the market to the
incentives and disincentives created by country-speci fic quotas cannot be described as circumvention.
The newly industrialized countries of Southeast Asia were not, in the view of India, "circumventing"
origin rules, but were adapting their production to their market access conditions. India considers that
since the origin determinations of the products in these new trade patterns were conducted in
conformity with the pre-section 334 rules of origin, as a matter of definition, they could not constitute
"circumvention".
6.54 India further notes that the European Communitie s rightly points out that if the expression
"circumvention of quotas" was used by the United St ates to describe the changi ng of trade patterns in
response to quotas, the intent to pursue a trade obj ective could be established through the legislative
history itself. India considers that the Unite d States' intention to combat "circumvention"
corresponds, in the words of the European Commun ities, to an intention to "re-apply quantitative
restrictions where these have lost their bite th rough changes in trade patterns and regulations".
177 In
India's view, this is precisely the type of trade objective that Members are not to achieve through the
use of rules of origin. 178 India submits that the prevention of quota circumvention as defined by the
United States is the pursuit of a trade objective.
6.55 Regarding the second objective of section 334 as described in the SAA, India asserts that the
section 334 rules on fabric did not bring the United St ates' rules of origin in line with the rules
employed by other major textile and apparel impor ting countries or United States trading partners.
India considers that, to the contrary, section 334 was the subject of criticism in the WTO Committee
on Rules of Origin. India notes, for example, that at the 1 February 1996 meeting, the representatives
of Canada, the European Communities and Switz erland expressed concern with respect to the

substantial transformation principle to determine origin for some of the products listed in the specified HTS
heading in section 405, but not all products, when it settled the dispute with the European Communities?
174 Exhibit INDIA-5.
175 Referring to the negotiating history, India notes that in the Senate Report, under the heading
"Textile transshipments" (section 333), ther e is a reference to Article 5.1 of the Agreement on Textiles and
Clothing. Specifically, India notes that the Report states that section 333 of the URAA adds a new section to
Title IV to address specifically the problem of textile transshipments.
176 India refers to United States' first written submission, para. 29.
177 India refers to European Communities' written third-party submission, para. 24.
178 India refers to ibid.

unilateral changes of origin rules for certain textiles and apparel by the United States.
179 India submits
that if United States had in effect changed its rules of origin in order to harmonize them with those of
its major trading partners such as the European Co mmunities and Canada, those very trading partners
would not have expressed concern over those changes. India argues that the f act that the European
Communities challenged the United States rules of orig in in the WTO indicated that it considered the
United States' rules to be fundamentally different from those of the European Communities.
6.56 With regard to the third objective listed in the SAA, India contends that section 334 did not
advance the goal of harmonizing the international rules of origin set out in the RO Agreement. India
points out that Article 3 of the RO Agreement recognises the aim of Me mbers to achieve the
establishment of harmonized rules of origin, and, in this regard, sets forth in subparagraph (b) that
"Members shall ensure, upon the implementation of the results of the harmonization work
programme, that: […] (b) under their rules of origin, the country to be determined as the origin of a
particular good is either the country where the good has been wholly obtained or, when more than one
country is concerned in the production of the good, the country where the last substantial
transformation has been carried out". In India' s view, section 334 represents a step away from the
basis of substantial transformation.
6.57 With regard to the fourth objective listed in the SAA, India considers that it is unclear how
the principle of determining origin as set out in section 334(b)(2)(A), i.e., that the origin for certain
made-up articles is determined where the greige fa bric is woven, would help the United States "more
accurately reflect where the production activity takes place". In India's view, the production activity
would more accurately be determined where the valu e is added or the last substantial transformation
takes place, rather than where the greige fabric is woven.
6.58 The United States notes that India makes three arguments with respect to its claim that
section 334 is inconsistent with Article 2(b): (1) the objective of the United States in formulating its
rules of origin was to protect its domestic industry; (2) the Panel should look to the measures or
instruments of commercial policy listed in Article 1.2 of the RO Agreement and assess whether the
United States' rule of origin "achieves the same results"; and (3) "the design, architecture and
structure" of section 334 "demonstrate that it was adopted to protect the domestic textile industry".
180
6.59 With respect to the objectives of the United States in formulating section 334, the United
States argues that section 334 rules of origin do not have as their objective the protection of domestic
industry. The United States notes that the SAA is clear on what the objectives of section 334 were:
(i) to prevent quota circumvention and address illega l transshipment, to advance harmonization, and
(ii) to more accurately reflect where the most significant production activity occurs.
181 According to
the United States, the United States Congress concluded th at greater clarity needed to be brought into
determinations of origin in this area, which the United States says was of great interest to the United
States'' trading community – whether from the stan dpoint of seeking to import textiles and apparel or
from the standpoint of deterring circumvention of commercial instruments. The United States points
out that the type of finishing op erations presented to the Customs Service for determination of origin
and application of quotas had grown, and under the increasing number of case-by-case applications by
the Customs Service of the substantial transformatio n criteria, the list of processes that were deemed
to confer origin also expanded, sometimes includi ng processes that in retrospect were understood not
to be significant.182

179 India refers to document G/RO/M/5, para. 1.6.
180 The United States refers to paras. 46-49 of India's first written submission.
181 The United States considers that these objectives are entirely consistent w ith and supportive of the
objectives of the RO Agreement itself.
182 As one example of these processes the United Stat es cites cutting. According to the United States,
some traders successfully argued that the location of cutting of a product th at could receive further finishing

6.60 The United States asserts that India has not show n that preventing circumvention, one of the
four stated objectives of section 334, was a smok escreen for protectionism. The United States notes
in this regard that the commentaries referenc ed by India acknowledge that the United States was
trying to prevent circumvention: "Some new industrialized countries of Southeast Asia could
otherwise try to circumvent the quantitative restric tions applied to their expor ts of textile products.
They could do so by exporting semi-finished products ( in casu dyed or printed cloths) to third
countries, in the hope that the origin of those countries (for which no quantitative restrictions for
exports of textile products are applied) w ould be attributed to the finished cloths."
183 The United
States further argues that what India is asking the Pa nel to do is to disregard what the SAA says about
section 334 and make a subjective judgment that preventing circumvention is somehow illegitimate
and that this one "illegitimate goal" mak es all of section 334 inconsistent with the RO Agreement .
The United States recalls in this regard that WT O dispute settlement panels have acknowledged that
the SAA contains an authoritative expression of the purpose of United States legislation. 184 T h e
United States notes that the SAA stated that section 334 would combat circumvention 185 by: lessening
confusion resulting from differences between United States' practices and the practices of other major
trading partners (cutting would no longer confer origin); facilitating the use of more effective
labelling requirements; and focusing on practices more easily subject to inspection by the United
States Customs Service.
6.61 The United States further argues that India's co mplaint is not so much whether or how the
United States was going to deter circumvention but whether trying to address circumvention was
acceptable. The United States notes that, in its answer s to Panel questions Nos. 2 and 17, India sets a
standard for judging whether preventing circumven tion is legitimate – such circumvention must only
be clearly fraudulent. The United States further notes that India also makes the claim that the United
States was not seeking to prevent fraudulent circumven tion, but rather "legal circumvention" and that
this was therefore illegitimate. In the view of the United States, India's arguments fail for several
reasons.
6.62 The United States points out, first, that, as India itself acknowledges and as also noted by the
European Communities, there is no consensus as to what constitutes "circumvention". The United
States believes that the Agreement on Textiles and Clothing provides examples of circumvention
practices that frustrate the effective integration of textiles into the GATT 1994, but does not define
circumvention and there is no consensus am ong Members on the concept of legitimate versus
illegitimate circumvention. The United States consider s, therefore, that India has not proven that
there is an understanding among Members as to what "circumvention" means.
6.63 The United States argues, secondly, that 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
Agreement on Textiles and Clothing . The United States contends that what India so easily objects to
as "protectionism" is a methodology for implementing measures sanctioned under the Agreement on
Textiles and Clothing . In the view of the United States, ru les of origin designed to simplify and
provide certainty in origin determinations help prevent circumvention.

conferred origin. The United States not es that Congress acted to harmonize United States rules in this respect
with those of the United States' major trading partners
183 The United States refers to exhibit INDIA-12.
184 The United States refers, inter alia , to Panel Report , United States – Section 129(c)(1) of the
Uruguay Round Agreements Act (" United States – Section 129(c)(1) URAA "), WT/DS221/R, adopted
30 August 2002, paras. 6.36-6.38.
185 The United States notes that the reference in th e SAA to "transshipment" has the same meaning as
"circumvention" as that term is used in the Agreement on Textiles and Clothing.

6.64 The United States notes, thirdly, that India's contention regarding section 333 of the Uruguay
Round Agreements Act suggests that India has misrea d or is misrepresenting section 333. According
to the United States, section 333 establishes new an d more rigorous customs measures to counteract
circumvention, once circumvention is uncovered (s uch as the publication of names of violators,
additional "reasonable care" measures for importers to take when doing business with published
violators, etc.). The United States argues that the pu rpose of section 333 is thus to establish "after the
fact" remedies, which is different from section 334, the purpose of which is to prevent circumvention
from happening in the first instance. The United States submits that both are valid measures to
counteract and deter circumvention.
6.65 The United States argues, finally, that even assuming arguendo that the Panel would elect to
disregard the statements in the SAA as "untrue", India would still have the burden of proving that the
true purpose of section 334 was a trade objective, namely, the protection of the domestic industry.
The United States submits that India has presented no evidence to support this allegation. The United
States recalls that it already has a regime in place for the purpose of protecting its domestic industry
during the Agreement on Textiles and Clothing transition period, i.e., a quota regime, and it does not
need to use additional measures or subterfuge for such purposes. According to the United States, it
would, therefore, be a leap of legal logic to then find by "implication", as India urges, that the true
purpose of section 334 was to protect the United States' domestic industry.
186
6.66 With respect to the results which section 334 achieves, the United States notes that India
points to no evidence to support its assertion that sec tion 334 has been used to achieve protection of
the domestic industry. The United States argues that, in section 334, it has achieved what it set out to
do, i.e., the rules reflect where the most important ma nufacturing process takes place, there is closer
harmonization with major trading pa rtners, and the clear, concise rules have resulted in a greater
ability to identify circumvention. The United States claims, in addition, that section 334 has
"facilitated an enormous increase" in trade in te xtile and apparel products to the United States'
market.187 Accordingly, in the view of the United St ates, a conclusion that section 334 was enacted to
protect the United States' textile industry and is therefore pursuing a trade objective in the context of
Article 2(b) would not be based on any legal or factual foundation.
6.67 The United States also rejects India's claim that a protectionist objective can be inferred from
"quota effect". In the view of the United States, India's contention is a gross oversimplification of a
complex worldwide production and trade network. The United States contends that section 334 did
not always shift origin to developing countries und er tight quotas. In fact, according to the United
States, at the time the rules of origin were implemented, and thereafter, six out of the top ten world
exporters of cotton fabrics, accounting for 50 percen t of world trade in cotton fabric, were countries
that were not subject to quantitative restraints on fa bric or bed linen in the United States. The United
States maintains that, as a result, depending on part icular and company-specific sourcing patterns, the
application of section 334 rules was as likely to r esult in goods falling outside of quotas as it was to
goods migrating into quotas. The United States furthe r points out that, even before section 334, most
cotton bed linen imported into the United States origin ated in the country where the greige fabric was
formed because bed linen is normally either dyed or printed, but rarely dyed and printed.
6.68 With respect to the issue of the design, structure and architecture of section 334, the United
States submits that India has not met its burden of showing that the design, structure and architecture
of section 334 "reveals" that the United States' "t rue objective" in enacting section 334 was protection
of its domestic industry.
6.69 The United States notes that section 334 establis hed a body of rules that are based on the
principle that the origin of fabric and certain tex tile products is derived wher e the fabric is woven,

186 The United States refers to India's reply to Panel question No. 17(a).
187 United States' second written submission, para. 12.

knitted or otherwise formed; and that the origin for any other textile or apparel product is where that
product is wholly produced or assembled. The United States notes that if production or assembly
occurs in more than one country, origin is conferred where the most important assembly, or
manufacturing process, takes place. The United States contends that its system is based on the
conclusion that origin is conferred where the most important assembly or manufacturing process takes
place. According to the United States, this refl ects the United States' judgment that assembly is
generally the most important step in the manufacturing of assembled apparel and that fabric formation
is the most important step in manufacturing fabric or flat goods.
6.70 The United States notes that India disagrees w ith the judgment of the United States that
certain processes constitute sufficient "transforma tion" to merit changing the origin of a product
(except in certain circumstances). The United States argues that there is nothing in the text of the RO
Agreement that says that Members must confer certain origin determinations
188, and that there is
nothing in Article 2(b) that indicates that if a Me mber does not include certain finishing operations in
a determination of origin the Member is using its rules of origin to pursue trade objectives. The
United States submits that it is the policy decision of the United States that origin-conferring
production is based on assembly, not a finishing operation. The United States notes that its rules take
into account which finishing operations merit changi ng origin, and that that may vary based on the
type of product. In the view of the Unite d States, Article 2 does not preclude Members from
determining the origin of goods based on assembly, type of material, or type of product.
6.71 Moreover, the United States argues that Article 2( a) sets forth a range of criteria that can be
used by a Member in formulating its rules of origin , and that United States' rules of origin for textile
and apparel products are consistent with these criteria. According to the United States, India's
arguments that the United States should not confer origin based on where the product is formed or
assembled essentially renders Article 2(a) a nullity in view of India's sweeping view of the subsequent
provisions of Article 2. The United States believes, furthermore, that rules of origin designed to
simplify and provide certainty in origin determinat ions ensure transparency and predictability and
allow importers, exporters and Members to work to gether to prevent circumvention, as directed by
Articles 5.1 and 5.5 of the Agreement on Textiles and Clothing . Such a design, the United States
argues, is clearly consistent with the purpose of Article 2 of the RO Agreement.
6.72 The Panel begins by recalling India's claim that the United States is using the fabric
formation rule set forth in section 334 as an inst rument to pursue the objective of protecting its
domestic textile industry. This is clear, in India' s view, from the features, or design, of the fabric
formation rule as well as from its effect.
6.73 We first address the features, or design, of the fabric formation rule. India seeks to cast doubt
on the validity of this rule. Specifically, India asserts that no other country uses a fabric formation
rule for flat textile goods. Since we have not b een provided with information on the rules of origin
employed by Members other than the United States , we are not in a position to determine whether
Indian's assertion is correct. However, we note en passant that, within the framework of the
harmonization work programme, a significant numbe r of those Members expressing a view on the
issue have indicated support for a fabric formation rule for flat textile goods.
189 In any event, even if
the United States was using an unusual rule of or igin, that would be irrelevant. There is no
requirement in Article 2 of the RO Agreement to use a particular type of rule. Instead, as pointed out
earlier190, Article 2 simply provides broad parameters for the use of rules of origin.

188 The United States argues that, to require it to utilize a particular rule for a specific product, as it
claims India advocates, would be to add an obligation not contained in the RO Agreement during the transition
phase.
189 Document G/RO/52, p. 69.
190 Supra, para. 6.25.

6.74 India also appears to question the rationality of a fabric formation rule. India argues, first of
all, that a fabric formation rule does not reflect the importance of cutting and sewing to the making of
a final article. India notes in this regard that, wh ereas greige fabric has a variety of uses, once the
fabric is cut and sewn into a pillow case, the fabr ic can only be used as a pillow case. The United
States, on the other hand, states that its rules of origin are based on where the most important
assembly or manufacturing process takes place and that, in its judgment, fabric formation is the most
important step in manufacturing flat goods. We are not aware of any basis in Article 2 of the RO
Agreement on which to resolve the parties' disagreem ent regarding what is the most important
manufacturing process. The silence of Article 2 on th is issue suggests that Members are, subject to
the disciplines contained in Article 2(b) and (c), free to make this determination as they deem fit.
191
At any rate, we do not find the United States' view that the flat goods in question ( e.g., bedsheets) are
basically fabric to be on its face unreasonable. 192 Indeed, as we have noted, the fabric formation rule
commands substantial support within the framework of the harmonization work programme. In these
circumstances, we are not persuaded that the fabric formation rule is inherently unsound.
6.75 The other feature of the fabric formation rule which India finds revealing is that the fabric
formation rule takes no account of any subsequent value-added operations, such as a DP2 operation,
cutting, etc. India notes that, under a fabric form ation rule, an article which has undergone value-
added operations worth almost US$200 may be determined to originate in a country where the fabric
was formed at a cost of only a few US dollars. However, India points to no legal provision which
would require that, during the transition period, orig in determinations must reflect the importance of
the various value-added operations performed in the manufacture of a good. We see no requirement
in Article 2 that Members need to confer origin on the country where a significant, or even the most
significant, economic contribution to a final good has been made. 193 Nor do we consider that the fact
that an origin-conferring operation may not be the one which adds the most value to the final good
necessarily indicates an objective on the part of the United States to use its rules of origin to protect its
domestic textile industry.
6.76 In sum, India has not persuaded us that the mere fact that the United States is using a fabric
formation rule requires us to conc lude that it is doing so in order to protect its domestic textile
industry.
6.77 We now turn to examine whether the effect of the fabric formation rule demonstrates that the
United States is using section 334 to protect its textile industry. India contends that the application of
the fabric formation rule as of mid-1996 meant that a range of flat goods "were subjected to the strict
quotas of the developing countries whereas previously they had been under no quota or a more
generous quota".194 Similarly, India asserts that the fabric formation rule, "by definition", increases
the quantities of textile imports that would be co nferred the origin of the countries that are under
quota.195 India argues that this "strengthens the impact" 196 of the United States' quota regime and
renders it "more restrictive"197.
6.78 It is clear that applying a fabric formation rule will result in flat articles subject to that rule
being conferred the origin of the fabric-forming country. Also, if the relevant fabric-forming country

191 Of course, the disciplines in Articles 2(b) and (c) may bar a Member from using particular rules of
origin in a given case. Indeed, this is precisely what we need to examine in this case.
192 United States' reply to Panel question No. 14.
193 Indeed, it is our understanding that, under the widely recognized substantial transformation
criterion, a substantial transformation may, in some in stances, be said to occur in situations where the
transforming process adds little value, or even where it decreases the value of the transformed good.
194 India's first oral statement, para. 22.
195 India's second oral statement, para. 8.
196 Ibid.
197 India's reply to Panel question No. 72.

is under quota in the United States for the article c oncerned, the article will be subjected to that
country's quota. However, the Panel was not provided with any evidence and/or data regarding:
− which countries are under quota in the United St ates with respect to the articles in
question;
− the quota levels of those countries;
− the quota utilization by those countries;
− which countries are important suppliers of relevant fabric (e.g., cotton); and
− the price and quality of the fabric made by those countries and their production
capacity.

6.79 In these circumstances, i.e., without specific information on the design of the United States'
quota system, the market in the relevant final and intermediate goods and the relationship between the
two, it is very difficult to assess the correctness, weight and implications of India's factual
assertions.
198
6.80 It may well be that articles subject to the fa bric formation rule became subjected to quotas as
of mid-1996, when previously they were not unde r quota because origin was conferred on a country
which was not under quota or on a country which was under a more generous quota. However, in the
absence of relevant factual information, it is equally possible that, as a result of the application of the
fabric formation rule, certain articles:
− could be exported to the United States quot a-free because their fabric was formed in a
country that was not under quota, when previously such articles were under quota;
and/or
− could be exported to the United States under a more generous quota because the quota
levels of the fabric-forming country might be higher than those of the previous origin-
conferring country.

6.81 Likewise, it is not apparent that, as a general matter, the fabric formation rule set out in
section 334 "by definition" increases the quantities of textile imports that w ould be conferred the
origin of the countries that are under quota. It would certainly not do so if:
− countries producing made-up articles (inc luding fabric-forming countries which
export such articles under quota) could sour ce fabric from countries not subject to
quota in the United States
199; and/or if
− countries not under quota in the United States start a fabric-forming industry and
export the fabric to countries producing made-up articles.

6.82 Moreover, if more articles would be conferre d the origin of quota-countries, this would
arguably matter only if the quota utilization of the fa bric-forming countries is such that they have no,
or insufficient, quota available for countries using fabric made by the quota-countries. 200 I n t h e

198 The Panel does not believe that it would have been difficult for the parties to have provided this
information. For instance, some of it is available from notifications to the WTO Textiles Monitoring Body
("TMB"). Without that information and arguments of the parties on its legal significance, the Panel is unable to
draw any conclusion.
199 India itself acknowledges this possibility. India's reply to Panel question No. 61. We also note the
United States' assertion that, at the time the rules of orig in were implemented, and thereafter, six out of the top
ten world exporters of cotton fabrics, accounting for 50 percent of world trade in cotton fabric, were countries
that were not subject to quota on fabric or bed linen in the United States. United Stat es' second oral statement,
para. 6. The United States has not, however, provided any evidence in support of its statement.
200 India appears to acknowledges this. India's reply to Panel question No. 64.

absence of relevant factual information, we are re luctant simply to conclude that all of these
alternative "effects" of the fabric formation rule are hypothetical or irrelevant.
6.83 In conclusion, we consider that the evidence and argument adduced by India do not support
the conclusion that the fabric formation rule necessa rily, or in fact, brings more imports of made-up
articles under quota in the United States.
6.84 In any event, if India had established to our sa tisfaction that, under the fabric formation rule,
more imports would be under quota in the United St ates, this would only prove that there would be
more restrained imports than under the pre-section 334 rules of origin. This circumstance would not
prove, however, that the fabric formation rule is being used as an instrument to protect the United
States' textile industry rather than as an instru ment to implement United States' textile quotas and
other commercial policy instruments. Article 2(b) is intended to preclude Members from using rules
of origin to substitute for, or supplement, th e intended effect of a trade policy instrument.
Accordingly, where a rule of origin is linked, inter alia, to a quota, the rule of origin should not add to
the protection already afforded by the quota.
201 India's argument is that if a rule of origin makes a
quota regime more restrictive, the quota regime automatically becomes too restrictive in the sense that
it would add to the protective effect of the quota regi me, thus indicating the use of rules of origin in
pursuit of the trade objective of protecting the dom estic textile industry. But, India's argument
focuses on the direction of a change in rules of origin , not the end point of the change. That is to say,
India ignores the distinction between the use of rules of origin to implement and support a quota
regime and the use of rules of origin to supplemen t the protective effect of the quota regime. Using
rules of origin which render a quota regime more re strictive may be consistent with using rules of
origin to implement and support such a regime.
6.85 Moreover, we note that the mere fact of maki ng the quota system more restrictive could not,
ipso facto , condemn the fabric formation rule. A restri ctive fabric formation rule may have been
adopted in pursuit of legitimate objectives.
6.86 One of the objectives claimed by the United States in using the fabric formation rule is "to
more accurately reflect where the most significant production activity occurs".
202 Since we have
already found that the fabric formation rule is not an unsound rule for the United States to apply to the
made-up articles in question, we see no justificatio n for determining that the stated United States
objective of reflecting where the most important manufacturing process takes place is a pretext for
protecting the United States' textile industry.
203
6.87 Another objective claimed by the United States to underlie the fabric formation rule is to
prevent quota circumvention. The United States has stated that the fabric formation rule helps prevent
quota circumvention in two respects. First, the United States argues that a clear, simple and precise

201 We think a rule of origin which has the effect of discouraging the full utilization of a quota could be
one example of a rule of origin which affords extra protection to the Member maintaining the quota in question.
202 United States' first written submission, para. 29; United States' replies to Panel questions Nos. 14
and 19.
203 Merely that the United States changed its substantiv e rules of origin in 1996 for some of the made-
up articles in question does not, in our view, suggest that the fabric formation rule is not intended to "more
accurately reflect where the most signifi cant production activity occurs". It seems pertinent to note, in this
regard, that the pre-section 334 rules, found at 12 C.F.R. 130, originated with the Administration, specifically
the United States Customs Service, whereas section 334 was prescribed by Congress. India's first written
submission, paras. 14 and 16. Nor do we think that the "clarification of section 334", enshrined in section 405,
undermines the United States' assertion that the fabric fo rmation rule is not intended to "more accurately reflect
where the most significant production activity occurs". We note that, with respect to this clarification, the
United States has stated that it was persuaded by the European Communities that, for the goods at issue, the
most important manufacturing process would be better reflected by a DP2 rule. United States' reply to Panel
question No. 76.

rule such as the fabric formation rule ensures tran sparency and predictability for traders and enhances
the ability of customs officials to determine the origin of goods and, in that sense, identify
circumvention.204 Second, the United States maintains that the cl early stated fabric formation rule
removed ambiguity and uncertainty which the Un ited States says existed under the pre-section 334
rules of origin, inasmuch as for most fabrics a nd flat goods (specifically towels and linens)
manufacturing processes were analysed on a case-by -case basis to determine whether they were
significant enough to confer origin. 205 India has identified no provision in the RO Agreement, or the
Agreement on Textiles and Clothing , which would preclude Members from taking appropriate
preventative action against quota circumvention.206
6.88 In India's view, circumvention, properly un derstood, necessarily implies illegal behaviour.
India contends, however, that the United States' notion of preventing quota circumvention is unduly
broad, in that it encompasses not only action taken to prevent the illegal evasion of quotas by traders,
but also action taken to prevent the legitimate avoidance of quotas. 207 India submits that, in contrast,
evasive and adaptive action taken by producers in response to country-specific quotas ( e.g., through
reallocation of production) is not circumvention. India argues that rules of origin used to counteract
such action must be considered to pursue a tr ade objective. The United States counters India's
contention by noting that there is no consensus am ong Members regarding the constituent elements of
the concept of "circumvention". The United States also points out that India's view would undermine
Members' ability to ensure compliance with textile quotas.
6.89 Even if we were to accept India's contention that the concept of "circumvention" does not
include legal quota avoidance strategies, this would not detract from the fact that the United States has
offered a plausible explanation of how the fabric formation rule promotes the objective of preventing
illegal quota circumvention. In these circumstances, we see no reason to dismiss the United States'
contention that one of the objectives of the fabr ic formation rule is the prevention of quota
circumvention.
6.90 This does not dispose, however, of the issue, raised by India, whether the fabric formation
rule is, in addition or even primarily, being used by the United States to prevent "legal"
circumvention. India argues that, if the fabric formation rule is being used for that purpose, this
would demonstrate that it is being used to afford protection to the United States' textile industry by
making the quota regime "more restrictive".
208 We do not consider that there is an inherent link
between the possible objective of preventing circumve ntion – defined here as the prevention of quota
avoidance through legal means – and the objective of protecting the United States' textile industry,
such that the two objectives could invariably be viewed as one and the same. The rationale for
seeking to prevent quota avoidance may be to mainta in the integrity and effectiveness of trade policy
instruments, in this case te xtile quotas sanctioned by the Agreement on Textiles and Clothing .209
Maintaining integrity and effectiveness is a valid concern for Members implementing country-specific
quotas. For that reason, we cannot accept that using rules of origin in pursuit, inter alia , of the

204 United States' replies to Panel questions Nos. 2, 14 and 19.
205 United States' replies to Panel questions Nos. 2, 19, 33 and 47(a).
206 India asserts that the fabric formation rule cannot be said to serve the purpose of preventing
circumvention, given that another section of the URAA, section 333, was enacted for that purpose. The United
States rebuts that assertion by pointing out that sec tion 333 is designed to counteract circumvention by
establishing certain measures to be taken once circumvention is found to have occurred, while section 334 is
designed to prevent circumvention from occurring in the first place.
207 United States' first written submission, para. 32.
208 India's reply to Panel question No. 2.
209 See also United States' reply to India's question No. 10.

objective of maintaining the integrity and effec tiveness of country-specific textile quotas would, a
priori and without exception, constitute an illegitimate objective.
210
6.91 The issue, then, is more appropriately framed as follows: Has India established that the fabric
formation rule cannot be said to pursue the objectiv e of maintaining the integrity and effectiveness of
country-specific United States' textile quotas? In ot her words, has India established that this is an
instance where the United States is using rules of or igin to supplement the protective effect of its
quota regime?
6.92 India argues that if the United States considered that its previous rules of origin did not
protect the integrity and effectiveness of various trade policy instruments, it would have introduced
changes for all products, and not just for textile and apparel products.211 We are not persuaded by this
argument. As we have noted above , trade in textile and apparel pr oducts is governed by a special
WTO agreement, the Agreement on Textiles and Clothing , which, unlike most other WTO
agreements, sanctions the use of country-specific qu otas. Against this background, in this case, the
use of sector-specific rules of origin would tend to confirm, rather than disprove, that the rules of
origin in question are designed to implement and support sector-specific trade instruments. India
further argues that the fine product distinctions dr awn by the United States are "completely unrelated"
to the objective of protecting the integrity and eff ectiveness of the United States' textile quotas. India
does not, however, examine, and elaborate on, why the United States' product distinctions cannot be
said to support the aforementioned objective.
212 In the light of the foregoing, we consider that India
has failed to establish that the fabric formati on rule cannot be said to pursue the objective of
maintaining the integrity and effectiveness of country-specific United States' textile quotas.
6.93 We note in this regard that India has adduced other evidence which it considers demonstrates
that the "real" objective of the fabric formation rule is to afford protection to the United States' textile
industry by making the relevant quotas "more restri ctive". These elements include the legislative
history of section 334, notably the House and Senate reports 213; post-enactment statements by two
United States senators 214; a statement by a United States textile importer association 215; and
publications by academics and a practising lawyer 216. It should be noted that these elements are not
part of section 334 itself, nor can they be said to "objectively manifest" 217 the objective of the fabric
formation rule. Under the test established by the Appellate Body in Chile - Alcoholic Beverages 218,
we are not to base our inquiry into the objective of the fabric formation rule on such elements. 219 In
any event, we have carefully reviewed each of thes e elements. We do not consider that, individually
or taken together, they are sufficient to support the conclusion that the United States is using the
fabric formation rule to afford protection to its textile industry, over and above the protection it
already enjoys as a result of the United States' quota regime. With respect to the legislative history,
India has provided no support for its assertion that the House and Senate reports reveal that section
334 was intended by the United States Congress as an instrument to pursue trade objectives. 220 With
respect to the post-enactment statements by two Un ited States senators, India states that the senators

210 Indeed, India itself has stated that "[i]n the context of countr y-specific quotas, such as those
permitted under the Agreement on Textiles and Clothing (ATC ), the concept of origin is critical". India's first
oral statement, para. 22.
211 India's reply to Panel question No. 72.
212 Ibid.
213 India's first written submission, para. 57.
214 Ibid., paras. 66-68.
215 Ibid., para. 64.
216 Ibid., para. 65.
217 Appellate Body Report, Chile - Alcoholic Beverages, supra, para. 71.
218 Supra, para. 6.37.
219 We also note that, as a matter of United States law, the legislative history, for instance, is less
authoritative than the SAA. United States' reply to Panel question No. 31.
220 India's first written submission, para. 57.

in question referred to section 334 as a "very significant change in rules of origin". 221 However, such
a characterization would not demonstrate that section 334 is "protectionist"222. Finally, with respect to
the opinions expressed by a United States' textile importer association, academics and a practising
lawyer, we do not think they are particularly probative. 223 Indeed, the Panel was struck by the paucity
of public and critical comment on the legislative changes.
6.94 In sum, India has not persuaded us that th e fabric formation rule does not pursue any
legitimate objectives, or that any such objectives are a sham. Therefore, even assuming that the fabric
formation rule rendered re levant United States textile quotas more restrictive, India has failed to
establish that any restrictive effects of the fabric fo rmation rule are not incidental to the pursuit of
legitimate objectives.
6.95 Up to this point, we have focused on the fabr ic formation rule as it applies to certain non-
apparel made-up articles. Based on certain replies given to questions from the Panel, India could be
understood to challenge the fabric fo rmation rule also as it applies to fabrics subjected to further
finishing operations. 224 However, neither in its written submi ssions nor in its oral statements has
India offered specific legal arguments with respect to fabrics. 225 At any rate, mutatis mutandis, our
reasoning with respect to made-up articles applies to fabrics as well. For these reasons, we find that
India has not demonstrated that the fabric formation rule as it applies to fabrics is inconsistent with
Article 2(b).
6.96 In the light of the above, we find that India has failed to establish that section 334 is being
used as an instrument to pursue the objective of protecting the United States' textile industry. 226
Accordingly, we conclude that India has failed to establish that section 33 4 is inconsistent with
Article 2(b).
(c) Consistency of section 405 with Article 2(b) of the RO Agreement
6.97 The Panel now proceeds to examine India's second claim under Article 2(b), viz., that
section 405 is inconsistent with Article 2(b).

221 India's first written submission, para. 66; exhibit INDIA-3.
222 India's first written submission, para. 66.
223 We note that the comments by the United States textile importer association were made at the time
of the Congressional deliberations on what later became section 405 and sought to convince United States
legislators to revisit the fabric formation rule in section 334. Exhibit INDI A-11, p. 14. The academic
publication referred to by India is authored by members of an association which has prepared a report on
obstacles to textile trade for the European Commission. Exhibit INDIA-12, opening footnote. The other
publication referred to by In dia is by a private lawyer who, accordin g to the United States, often represents
importers. United States' second oral statement, para. 22.
224 India's replies to Panel questions Nos. 19 and 61.
225 We note, for instance, India's fi rst oral statement, para. 22, and India's second written submission,
para. 32, which only refer to made-up articles, not fabrics.
226 In response to question 55(b) from the Panel, India briefly addressed some of the other purposes for
which section 334 is used, that is to say, purposes ot her than the administration of quantitative restrictions.
However, India's response does not establish that, when used for one of these purposes, section 334 is used to
pursue a trade objective. With respect to origin marking, the mere fact that the fabric formation rule in section
334 may mean that some goods have to be marked as originating in a different country and that this may, in
some cases, affect the marketability of these goods, woul d not, in and of itself, warrant the conclusion that the
fabric formation rule is designed to protect the United States' textile industry. Also, the example mentioned by
India, silk scarves, is not subject to the fabric formation rule, but to the DP2 rule provided for in section 405.
With respect to the purpose of gathering trade statistics, we are not persuaded by India's argument that the fabric
formation rule is intended to protect the United States' textile industry because it skews import statistics. India's
argument is based on its disagreement with the United States as to where finished fabrics and flat goods should
be deemed to originate, an argument which we have already dealt with.

6.98 India considers that section 405 was designed a nd structured to favour imports from the
European Communities over imports from developing countries such as India. India recalls that
section 405 amended section 334 to create certain ex ceptions to the general rules on determining
origin for fabrics and made-up articles. India notes that section 405 provides that certain products
would be conferred origin, based on where they are subjected to a DP2 operation. India submits that
the products that were chosen for specific exempti ons and therefore, special treatment, were those
products of export concern to the European Co mmunities: bed linen, scarves and table linen.
According to India, these products comprised th e bulk of the European Communities textile and
apparel exports to the United States. Thus, wh en the United States provided exceptions from the
general rule for these products so that their orig in would be conferred on where the product was
subjected to a DP2 operation, in India's view, the United States was providing a de facto advantage to
products from the European Communities. India notes that these products, which traditionally had
been subjected to DP2 operations in the European Communities, could now continue to be exported to
the United States without being conferred the origin of the country where the greige fabric was
woven, and without being subject to the quantitative restrictions imposed on those countries which
made the greige fabric.
6.99 India considers that section 405 created arbitrar y reversions to the pre-section 334 rules of
origin. First, section 334 established origin based on the c ountry where the greige fabric was formed
by weaving or knitting, regardless of any further fi nishing operations, such as dyeing and printing.
India notes that, in order to address the European Communities' concerns, section 405 provided an
exception to this rule for fabrics classified unde r the HTS as silk, cotton, man-made fibres or
vegetable fibres. Such fabrics are now considered to originate in the country in which the fabric is
subjected to a DP2 operation. India points out, howev er, that the same rule does not apply to fabrics
made of wool. India notes that the origin of fabrics made of wool, whether or not they are subject to
two or more finishing operations, will be determined where the basic wool fabric is formed.
6.100 Second, India notes that, for the products of c oncern to the European Communities, the
United States provided in section 405 that the rule for determining their origin would revert to the pre-
section 334 rules for seven out of the 16 HTS 4-digit headings. India submits that these seven HTS 4-
digit headings are for those products that are of particular export interest to the European
Communities.
227 India recalls that for products under these seven 4-digit headings, the origin will be
determined where the product is subjected to a DP2 operation.
6.101 Third, although section 405 provides that the determ ination of origin for certain products
under the aforementioned seven HTS headings is b ased on where the product was subjected to a DP2
operation, certain exceptions have been made. India notes that the DP2 rule does not apply to
products under these seven HTS headings where they are made of (a) cotton, (b) wool or (c) fibre
blends with more than 16% cotton. For the produc ts under these HTS headings made of cotton, wool,
and fibre blends with over 16% of cotton, the country of origin will be the country where the greige
fabric is formed.
6.102 India notes that, under the amended section 334, origin can now vary based solely on the fibre
content of a product. To India's knowledge, no othe r country uses such a distinction to determine
origin. India submits that this criterion is arb itrary and leads to absurd results. A different
determination of origin results de pending on the fibre content of the product that is subject to further
processing. If cotton fabric is woven in India and exported to Portugal where it is subjected to a DP2

227 India notes that the seven products were the following: HTS 6213 – handkerchiefs, HTS 6214 –
shawls, scarves, mufflers, HTS 6302 – bed, table, toilet, kitchen linen (changed with respect to HTS 6302.22,
29, 52, 53, 59, 92, 93, 99), HTS 6303 – curtains and bed valances (changed with respect to 6303.92 and 99),
HTS 6304 – other furnishing article (changed with re spect to 6304.19, 93 and 99), HTS 9404.90 – quilts,
cushions, comforters (changed with respect to 9404.90.85, 95). In addition, HTS 6117.10 – shawls, scarves,
mufflers, knit, was affected by section 405. India notes that this HTS number was not referred to in section 334.

operation, that fabric is now consid ered a product of Portugal. However, if the same cotton fabric is
now used in Portugal to produce a finished sheet (which, according to India, has more value-added
operations), the origin reverts back to India. Th e absurdity of this case, In dia claims, is that the
determination of origin differs depending on the type of product.
6.103 India submits that the origin of section 405 conf irms that it was used as an instrument to
favour imports from the European Communities. India notes that, on 22 May 1997, the European
Communities requested WTO consultations with the Un ited States on section 334. India recalls that
the European Communities stated in its request for consultations that the United States' rules of origin
"adversely affect exports of European Community fa brics, scarves and other flat textile products to
the United States of America. As a result of this change, European Community products are no
longer recognized in the United States as being of European Communities origin and lose the free
access to the United States market that they enjoyed before". 228 India notes that, prior to the holding
of formal WTO dispute settlement consultations , the United States and the European Communities
entered into a bilateral agreement ( procès-verbal). According to India, the United States
Administration agreed to propose an amendment to Congress for its rules of origin for those products
of concern to the European Communities, namely, s ilk scarves, silk accessories, and dyed and printed
cotton fabrics.229 India notes that, in July 1998, at the request of the United States Administration,
draft legislation was introduced in the United States Senate to implement the EC-US procès-verbal.230
However, according to India, the European Commun ities claimed the draft legislation did not meet
the terms of the procès-verbal, and therefore initiated new dispute settlement proceedings against the
United States.231
6.104 India considers that, in order to avoid WTO dispute settlement, the United States once again
agreed to settle. In August 1999, an amendment to the procès-verbal was concluded whereby the
United States Administration agreed to submit legisl ation to Congress to amend the rules of origin set
out in section 334. According to India, in order to ensure that there were no gaps between what the
procès-verbal called for and what the draft legislation would actually include, the European
Communities and the United States agreed upon specific language that the United States
Administration would propose to Congress. 232 India notes that, in May 2000, the United States
Congress passed section 405 of the Trade and Development Act. India points out that section 405
was virtually identical to the text agreed in the second procès-verbal between the European
Communities and the United States.
6.105 India claims that "the only reason for the United States to change its rules of origin in 2000
was to favour imports from the European Communiti es over imports from other countries". In India's
view, "[t]he sole objective of section 405 was to settle the trade dispute between the United States and
the European Communities in a manner that singles out products of export interest to the European
Communities for more favourable treatment". Indi a submits that section 405 is therefore being used
as an instrument to pursue trade objectives, i.e., to favour one Member – the European Communities –
over other Members.
6.106 The United States notes that section 405 amended section 334 in order to settle a WTO
dispute brought by the European Communities alle ging that section 334 had negatively affected trade
in specific exporting sectors of the European Commun ities, most notably Italian silk products. The
United States points out that it held extensive c onsultations with the European Communities. The
United States argues that, although it did not consider that the European Communities' claims had any

228 India refers to document WT/DS85/1.
229 India refers to document WT/DS85/9.
230105th Congress, 2d Session. S. 2394. Introduced by Senator Roth and Senator Daniel P. Moynihan;
exhibit INDIA-14.
231 India refers to document WT/DS151/1.
232 India refers to document WT/DS151/10.

merit, in order to settle the dispute, it agreed to amend section 334, creating two exceptions to the
fabric formation rule. The United States notes that the first of these exceptions is that, for silk, cotton,
man-made and vegetable fibre fabric, origin would once again be conferred by a DP2 operation. The
second exception, according to the United States, is that, for certain textile products excepted from the
assembly rule, origin would be conferred where a DP2 operation took place.
6.107 With respect to India's claims that section 4 05 constitutes an impermissible use of rules of
origin, the United States notes, first of all, that th e modifications in section 405 apply to all Members
on an MFN basis. The United States recalls, in th is regard, that India was a third party to the
European Communities disputes; as such, India was well aware of the very specific nature of the
European Communities' complaints. The United States notes that, in particular, India knew the
importance of its interest with respect to the pr oducts it exports in whether a DP2 operation conferred
origin. In the view of the United States, if Indi a did not believe that the scope of the European
Communities' consultation request captured its concerns, it could have sought separate
consultations.
233
6.108 The United States also submits, in this context, that, in practice, rules of origin may "favour"
one Member over another just by their existence, an d thus cannot, on that basis alone, be considered
to pursue a "trade objective" within the meaning of Article 2(b).
6.109 The United States further argues 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 ble nds, and fabrics made of man-made and vegetable
fibres (specifically silk scarves and flat products such as linens), DP2 operations were significant
enough to confer origin. The United States notes that modification of section 334 to reflect this
served as an appropriate mutually satisfactory solution to the issues in dispute.
6.110 The United States submits, finally, that it woul d be absurd to penalize a Member for reaching
a mutually satisfactory settlement of a dispute with another Member, pursuant to the provisions of the
DSU, where the benefits of the settlement accrue to all Members. In the view of the United States,
that is precisely what India asks of this Panel. According to the United States, the likely consequence
of accepting India's argument is that Members would be discouraged from achieving mutually
satisfactory solutions. This would be inconsistent with provisions such as Article 3.7 of the DSU,
which provides that such solutions are "clearly pr eferred" to "bringing a case". The United States
considers, therefore, that settling a dispute with another Member, on the terms agreed to, is not a trade
objective within the meaning of Article 2(b).
6.111 The Panel begins its examination by recalling Indi a's claim that section 405 is inconsistent
with Article 2(b) because it is being used by th e United States as an instrument to pursue a trade
objective. More particularly, India claims that s ection 405 is being used to pursue the trade objective
of favouring imports from the European Communities over imports from other countries, and
particularly imports from developing countries such as India.
234 We understand this claim to be about
imports of different fabrics ( e.g., wool fabric versus silk fabric) or flat goods ( e.g., cotton bed linen
versus silk scarves or cotton bed linen versus polyester bed linen), not imports of the same fabrics
(e.g., European Communities' wool fabric versus Australian wool fabric) or flat goods ( e.g., European
Communities' cotton bed linen versus Indian cotton bed linen). 235 In any event, since section 405
applies equally to qualifying goods from all Members 236, we do not see how it could be said that

233 The United States refers to document WT/DS85/9.
234 India's first written submission, paras. 69 and 84.
235 India's reply to Panel question No. 58(a).
236 United States' first written submission, para. 17.

section 405 is being used as an instrument to pursue the objective of favouring European
Communities imports over imports of the same goods from other Members.237
6.112 For its claim to succeed, India must demonstrate, at a minimum, that section 405 is being used
as an instrument to pursue the objective of favouring imports from the European Communities over
imports from other Members. We consider that India has shown that section 405 was adopted to
create exceptions from the fabric formation rule with respect to goods which are of export interest to
the European Communities. Indeed, the United States itself has stated that the purpose of section 405
was to implement a settlement agreement between the European Communities and itself.238 However,
a showing that the United States created exceptions for goods of export interest to the European
Communities does not establish that these exceptions pursue the objective of favouring imports from
the European Communities over imports from other Members.
6.113 There is no indication that the European Co mmunities was concerned about anything other
than the conditions of access of its own goods to the United States' market. 239 Nor is there any
evidence that the European Comm unities requested the United Stat es to create exceptions from the
fabric formation rule so that it could enjo y an advantage, competitive or otherwise, vis-à-vis other
Members. The fact that the European Communitie s apparently showed concern about only those
goods which are of export interest to itself 240, does not require us to conclude that the European
Communities sought to obtain an advantage for th ose goods over different goods exported to the
United States by other Members.
6.114 Nor has India provided evidence to show that the United States is using section 405 to pursue
the objective of favouring the European Communities over other Members. It is clear that, in
enacting section 405, the United States meant to achieve the objective of settling a bilateral WTO
dispute with the European Communities. 241 But settling a bilateral trade dispute does not imply an
intention on the part of the disputing parties to disfavour Members which are not parties to a
settlement agreement. At any rate , in the case at hand, the provisions of section 405 benefit subject
goods from all Members.
6.115 It should further be noted that the United Stat es has told this Panel that it settled the WTO
dispute with the European Communities not beca use it saw any legal merit in the European
Communities' complaint
242, but because, inter alia, it was " persuaded that it would be appropriate to
amend Section 334 and return to DP2 for the [relevant] products". 243 This statement also
demonstrates that the failure of the United States to apply a DP2 rule (or another rule different from
the fabric formation rule) to goods other than those of concern to the European Communities does not,
in and of itself, justify the conclusion that sec tion 405 is being used to pursue the objective of
favouring imports from the European Communities ove r imports from other Members. The decision
of the United States not to amend section 334 with re spect to such other goods may simply reflect the
fact that the United States is not persuaded of the appropriateness of doing so.

237 It should be noted, as well, that India has presented no evidence which would demonstrate that
section 405, in practice, can only benefit relevant goods imported from the European Communities.
238 United States' second oral statement, para. 23.
239 India's first written submission, para. 71.
240 Ibid., para. 74.
241 The United States emphasises that not all of the European Communities' requests are reflected in
section 405. United States' reply to Panel question No. 76. See also European Communities' oral third-party
statement, para. 21. This tends to confirm that the United States did not intend to "favour" the European
Communities, but rather to do what was necessary and acceptable to settle the bilateral WTO dispute.
242 United States' first written submission, para. 37; United States' first oral statement, para. 16.
243 United States' reply to Panel question No. 79 (e mphasis added); United States' reply to Panel
question No. 76.

6.116 Moreover, India's assertion that the selective reversions to a DP2 rule lead to "absurd"
consequences, even if conceded arguendo, does not assist India in establishing that the United States
is using section 405 to pursue the objective of favouring the European Communities over other
Members. Regardless of whether the consequences may be viewed by some as "absurd", it is entirely
conceivable that the United States amended the rele vant parts of section 334 for no other reason than
to settle a bilateral WTO dispute with the European Communities.
6.117 We note, finally, that even if section 405 had the practical effect of favouring goods imported
from the European Communities over competitive goods imported from other Members, that effect
might be incidental rather than intentional. In ot her words, we do not think that the mere effect of
favouring European Communities imports over imports from other Members would in itself justify
the inference that creating such an effect is an objective pursued by the United States.
6.118 Having regard to the foregoing considerations, we find that India has failed to establish that
the rules of origin set out in section 405 are being used by the United States as instruments to pursue a
trade objective. We therefore conclude that India has failed to establish that section 405 is
inconsistent with Article 2(b).
2. India's claim under Article 2(c), first sentence, of the RO Agreement
6.119 India claims that section 334 and section 405 ar e also inconsistent with the first and second
sentences of Article 2(c) of the RO Agreement. Consistent with the structure of Article 2(c), the Panel
will commence its examination with India's claim unde r the first sentence of Article 2(c). The Panel's
first task in this respect is to consider the parties' interpretation of the first sentence of Article 2(c).
(a) Article 2(c), first sentence, of the RO Agreement
6.120 Article 2(c) provides as follows:
"Until the work programme for the harmonization of rules of origin set out in Part IV is
completed, Members shall ensure that:
[…]
(c) 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 rela ted to manufacturing or processing, as a prerequisite for the
determination of the country of origin. Howeve r, 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)[.]"
6.121 India considers that the language of Article 2(c), fi rst sentence, that rules of origin shall not
"themselves" create restrictive, distorting or disr uptive effects should be read together with the
language of Article 2(b) that "notwithstanding th e measure or instrument of commercial policy to
which they are linked, [Members shall ensure that] th eir rules of origin are not used as instruments to
pursue trade objectives". India submits that, when th e provisions in Article 2(b) and Article 2(c) are
read together, it becomes clear that a measure or instrument of commercial policy may have
restrictive, distorting or disruptive effects on internat ional trade, but that the rules of origin as such
(whatever the commercial policy instrument to whic h they are linked) should not have such adverse
effects.
6.122 India also points out that the effects of th e challenged rule of origin have to be "on
international trade" and not only on imports. In this regard, India notes the difference between the
wording used in Article 2(c) and that used in Article 3.2 of the Agreement on Import Licensing

Procedures, which requires that "non-automatic licensing shall not have trade-restrictive or trade-
distorting effects on imports additional to those cau sed by the imposition of the restriction". In
addition, India considers that, under Article 2(c), firs t sentence, it is sufficient for a complaining party
to show that the challenged rule of origin creates restrictive or distorting effects for one Member,
which could be a Member other than the complaining Member.
6.123 With respect to the phrase "restrictive, distor ting, or disruptive effects", India offers the
following interpretation: Rules of origin create "r estrictive" effects on international trade if they
reduce the level of international trade. 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 internationa l trade flows. Finally, rules of origin create
"disruptive" effects on international trade if, for instance, they are very complex and arbitrary in
nature.
6.124 In India's view, the central interpretative i ssue presented by Article 2(c), first sentence,
however, is whether the words "create restrictive [… ] effects" refer to the effects that the rules of
origin are capable of creating or whether they refe r to the effects they actually create in the market
place. According to the former, " conduct-oriented" interpretation, it would be sufficient for India to
demonstrate that the incentives and disincentives faced by traders as a result of the rules of origin at
issue are such that they create restrictiv e effects. According to the latter, " result-oriented"
interpretation, it would be necessary to demonstrat e that the regulatory fra mework imposed by the
United States has actually produced those effects on international trade.
6.125 India is of the view that the conduct-oriented interpretation is the correct one. What is
relevant, according to India, under Ar ticle 2(c) is the nature of the rules of origin that the Member
adopted, not the reaction of the market to those rules. India notes in this regard that Article 2(c), first
sentence, uses the term "create" rather than "have". India points out that the New Shorter English
Oxford Dictionary defines "create" as to "cause, occasion, produce, give rise to", and it defines "have"
as to "possess as an attribute, function, position, etc. ". India also recalls that Article 3.2 of the
Agreement on Import Licensing Procedures states that "non-automatic licensing shall not have trade-
restrictive or distorting effects on imports add itional to those caused by the imposition of the
restriction". In contrast, Article 2(c), first sentenc e, uses the term "create", which, in India's view,
implies that Members must refrain from adopting rul es of origin that create a framework capable of
producing such adverse effects.
6.126 India notes that, under a conduct-oriented interp retation, Members coul d challenge another
Member's rules of origin under Article 2(c), first se ntence, as soon as they enter into force. India
considers this important because, in its view, the adoption of new rules of origin can immediately stop
production for a particular market or purchases from particular markets. India argues that, in contrast,
under a result-oriented interpretation, a violation of Article 2(c), first sentence, has to be proven
through a showing of an actual restrictive, distorting or disruptive impact on international trade
reflected in trade statistics. According to India, the implication of such an interpretation is that
Members wishing to challenge rules of origin under Article 2(c), first sentence, would have to wait
until the rules of origin have actually produced an adverse impact and trade data are available to
demonstrate this. A further implication, India maintain s, is that the consistency of a rule of origin
would depend on the market's reaction to it and consequently on factors that normally escape the
control of Members. Moreover, India argues that, under a result-oriented interpretation, it would have
to be demonstrated that the change in trade flows was caused by the rules of origin and not by other
factors. India considers that, in those circumstanc es, Article 2(c), first sentence, would become for all
practical purposes unenforceable because the effect of th e rules of origin and the effect of the policy
instrument to which they are linked could, in practice, not be segregated.
6.127 India submits that the question of whether the rules of international trade regulate conduct or
effects has been an issue on many previous occasions. According to India, in Japanese Measures on

Imports of Leather
244, the CONTRACTING PART IES to the GATT 1947 had to decide whether a
quota restriction could be deemed to have been "mad e effective" within the meaning Article XI:1 of
the GATT 1947 even if the quota was not exhausted a nd therefore did not actually restrict imports.
India recalls that they decided that the mere imposition of a quota violated Article XI:1. 245 India
points out that the CONTRACTING PARTIES also ha d to decide whether a tax was "applied" to
imported products within the meaning of Article III:2 of the GATT 1947 even if there had not yet
been any imported product on which the tax had actu ally been imposed. According to India, the
CONTRACTING PARTIES decided that the actua l impact of a tax was irrelevant under
Article III:2.246 India finally points out that the Appellate Body noted the CONTRACTING
PARTIES' jurisprudence approvingly in Japan – Taxes on Alcoholic Beverages and ruled that "Article
III protects expectations not of any particular trade volume but rather of the equal competitive
relationship between imported and domestic products and that it is irre levant that 'the trade effects' of
the tax differential between impor ted and domestic products, as reflect ed in the volumes of imports,
are insignificant or even non-existent".247
6.128 India notes that Articles III and XI of the GA TT 1947 have thus never been interpreted to
require the attainment or avoidance of particular e ffects on international trade. Instead, India argues,
they have been interpreted to require the estab lishment of a regulatory framework that enables
investors and traders to foresee under what condition they will have to compete with the products of
the importing country. According to India, the pur pose of Articles III and XI of the GATT is to
prevent the impairment of market access conces sions through non-tariff measures imposed internally
or at the border. India considers that the purpose of Article 2 of the RO Agreement is to prevent the
impairment "of the rights of Members under GATT 1994" through rules of origin, as noted in the
preamble to the RO Agreement. India submits that, since the basic rationale of these provisions is the
same, the approach to their interpretation should be the same. Just like the te rms "made effective" in
Article XI of the GATT and "applied" in Article III :2 of the GATT, the terms "create effects" in
Article 2(b) must, in India's view, be given a mean ing consistent with the basic function of the world
trade order, which, India notes, is to create predicta bility for traders and investors. India argues that
the only logical conclusion that one can draw from th ese considerations is that Article 2(c), just as all
the other provisions in WTO law designed to prevent the circumvention of market access
commitments through non-tariff measures, must be interpreted as a provision prescribing conditions
of competition, not the avoidance of certain trade resu lts. What is thus relevant, according to India, is
whether the rules of origin create conditions of co mpetition with restrictive, distorting or disruptive
effects, and not whether the actual application of these rules to a specific commercial policy
instrument has produced such effects.
6.129 The United States points out, as a preliminary matter, that the Panel must examine whether
the challenged United States rules of origin, as enacted , "create restrictive, distorting, or disruptive
effects on international trade", not whether the ch ange in United States rules altered conditions of
competition. The United States notes that the text of Article 2(c) does not discipline changes in rules
of origin per se; instead, it applies to rules of origin "them selves". That Article 2(c) was not meant to
discipline changes per se is also borne out, in the view of the United States, by the fact that Article
2(i) of the RO Agreement contemplates changes in rules of origin.248

244 Panel Report, Panel on Japanese Measures on Imports of Leather ("Japan – Leather II (US) "),
adopted 15 May 1984, BISD 31S/94.
245 Ibid., p. 113.
246 Panel Report, United States – Taxes on Petroleum and Certain Imported Substances (" US –
Superfund"), adopted 17 June 1987, BISD 34S/136, 160.
247 Appellate Body Report, Japan – Taxes on Alcoholic Beverages ("Japan – Alcoholic Beverages II "),
WT/DS8/AB/R, WT/DS10/AB/R, WT/DS11/AB/R, adopted 1 November 1996, DSR 1996:I, 97, at 110.
248 Article 2(i) reads:
"Until the work programme for the harmonization of rules of origin set out in Part IV is
completed, Members shall ensure that:

6.130 Concerning the interpretation of Article 2(c), first sentence, the United States rejects India's
view. First of all, the United States rejects Indi a's view that the Panel may assess whether rules of
origin create restrictive, distorting, or disruptive effects "on international trade" by looking at the
effect on one single Member's trade. In the view of the United States, this reading simply cannot be
found in the words of Article 2(c), first sentence. The United States argues that if Members had
wanted to proscribe rules of origin that affected one or more Members it would have been easy: the
provision could have read "Members shall ensure that their rules of origin shall not themselves create
restrictive, distorting or disruptive effects on another Member's trade".
6.131 The United States also rejects India's "conduct-or iented" interpretation of the terms "create
[… ] effects on international trade". In the view of the United States, India's conduct-oriented
interpretation is inconsistent with the text of Article 2(c), first sentence. The United States submits
that India's interpretation is mistaken in that it e quates "effects on international trade" with "effects on
conditions of competition created by a Member's conduct". The United States wonders what the
terms "create [… ] effects on international trade" mean under th is interpretation. If the drafters used
those terms instead of the terms found in GATT Articles III and XI, the United States queries, is not
the logical conclusion that the drafters did not intend to draw from those articles?
6.132 The United States also disagrees with India's c onduct-oriented approach because, in its view,
it pre-supposes that mere adoption of a rule of origin will have an immediate impact that distorts or
restricts trade. The United States argues that if the drafters of the RO Agreement had wanted a per se
rule, they would have adopted one, but they di d not. The United States considers that this
interpretation reads out of Article 2(c) its primary element, i.e., that rules of origin not create
"restrictive, distorting or disruptive effects on inte rnational trade". The United States also wonders
how panels should assess whether a rule of origin creates an immediate impact.
6.133 Finally, the United States rejects India's conduct-oriented interpretation because, in its view, it
is, in any event, unnecessary. The United States considers that there is no need for the Panel to resort
to adopting a GATT Article I, III, or XI analysis wh en, in addition to the terms of Article 2(c), first
sentence, there is other WTO guidance, more similar to Article 2(c), first sentence, on which to rely.
The United States argues that Article 6.3 of the SCM Agreement, which addresses effects of subsidies
on imports and exports, is at least e qually relevant to an analysis of Article 2(c), first sentence, as
GATT cases that address discrimination among like products.
6.134 The United States submits that, contrary to India's view, Article 2(c), first sentence, does
require a showing of actual effects on international trade. The United States argues that a
determination of whether rules of origin create restrictive or distorting or disruptive effects on
international trade can be made simply, by looking at trade flows. The United States also points out,
however, that such an evaluation has to be qualitative as well as quantitative.
6.135 According to the United States, the second senten ce of Article 2(c) indicates that rules of
origin may impose strict requirements, and the preamble to the RO Agreement recognizes that rules of
origin may pose obstacles. The United Stat es further points out Article 2(a) of the RO Agreement

provides that Members may maintain rules of origin th at will have some effect on international trade.
The United States holds the view, for example, that using ad valorem percentages as a criterion in
non-preferential rules of origin is inherently dist ortive, because it can operate to "punish" inexpensive
labour costs, is greatly affected by currency shifts , and requires excessive administrative burdens. In
the view of the United States, all of this makes cl ear that an effect on international trade is not

[…]
(i) when introducing changes to their rules of origin or new rules of origin, they shall not
apply such changes retroactively as defined in, and without prejudice to, their laws or
regulations[.]"

sufficient to rise to the level of a "restriction", "disto rtion", or "disruption" of international trade. The
United States considers that this also makes common sense, as the RO Agreement does not operate to
address constant disputes about specific origin determ inations for particular products which may, for
instance, have an uneven effect on one Member versus another. According to the United States,
indications of whether rules of origin 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; or
cause confusion in the marketplace.
6.136 The Panel recalls that the text of Article 2(c), first sentence, states in relevant part: "[Rules of
origin] shall not themselves create restrictive, distor ting, or disruptive effects on international trade".
The first element to be addressed is the term "themsel ves". We consider that, in the first sentence of
Article 2(c), the pronoun "themselves" is used ma inly to emphasise the preceding term "rules of
origin". By emphasising the term "rules of origin ", the pronoun "themselves" brings out very clearly
that the first sentence of Article 2(c) is concerne d with a Member's rules of origin, as distinct from
something other than rules of origin, and that it is rules of origin, as opposed to something other than
rules of origin, that must not "create restrictive, distorting, or disruptive effects on international trade".
6.137 This interpretation draws support from, and is further informed by, the provision immediately
preceding Article 2(c). Article 2(b) provides that "notwithstanding the measure or instrument of
commercial policy to which they are linked, [Members shall ensure that] their rules of origin are not
used as instruments to pursue trade objectives". Thus , Article 2(b) contrasts rules of origin with the
commercial policy instruments they are used to implem ent. As previously noted, Article 2(b) can be
understood to mean that commercial policy instrument s may pursue trade objectives, but that rules of
origin may not. We consider that Article 2(b) le nds force to our view that the focus in the first
sentence of Article 2(c) is on rules of origin, not some other instrument or mechanism, and clarifies
that the relevant other instruments or mechanisms include what Article 2(b) refers to as "the
measure[s] or instrument[s] of commercial policy to which [rules of origin] are linked".
6.138 Consideration of relevant context thus leads us to the conclusion that the term "themselves" is
meant to highlight that, although there may be co mmercial policy measures which create restrictive,
distorting, or disruptive effects on international tr ade, the rules of origin used to implement and
support these commercial policy measures must not create restrictive, distorting, or disruptive effects
on international trade additional to those which may be caused by the underlying commercial policy
measures.
249 Similarly, in cases where an underlying commercial policy measure does not cause any
restrictive, distorting, or disruptive effects on inte rnational trade, the word "themselves" would serve
to underscore that rules of origin must not create any new restrictive, distorting, or disruptive effects
on international trade.
6.139 This interpretation is consistent also with the objective of Article 2(c), first sentence, which is
to guarantee a certain trade-neutrality of rules of origin.
6.140 The next element of the text of the first sentence of Article 2(c) to be considered is the term
"create". The ordinary meaning of the term "cre ate" is to "cause, occasion, produce, give rise to". 250
Thus, it is implicit in the term "create" that a Me mber's rules of origin only contravene the first
sentence of Article 2(c) if there is a causal li nk between those rules and the prohibited effects

249 It is worth noting in this context that Article 3.2 of the Agreement on Import Licensing Procedures
on non-automatic licensing contains provisions along thes e lines. Specifically, it stat es that "[n]on-automatic
licensing shall not have trade-restrictive or -distortive effects on imports additional to those caused by the
imposition of the restriction" (emphasis added).
250 The New Shorter Oxford English Dictionary, L. Brown, ed., Clarendon Press, 1993, Vol. I, p. 198.

specified in the first sentence. 251 In our view, the term "create" does not imply, however, that the
creation of the prohibited effects necessarily needs to be deliberate.252
6.141 Turning to the prohibited effects – i.e., "restrictive, distorting, or disruptive effects" – the
Panel notes that these effects constitute alternative bases for a claim under the first sentence of Article
2(c), as is confirmed by the use of the disjunctive "o r". Accordingly, independent meaning and effect
should be given to the concepts of "restriction", "dis tortion" and "disruption". In this regard, we note
that the ordinary meaning of the term "restrict" is to "limit, bound, confine"; that of the term "distort"
is to "alter to an unnatural shape by twisting"; and th at of the term to "disrupt" is to "interrupt the
normal continuity of".253 Thus, the first sentence of Article 2(c) prohibits rules of origin which create
the effect of limiting the level of international trad e ("restrictive" effects); of interfering with the
natural pattern of international trade ("distorting" e ffects); or of interrupting the normal continuity of
international trade ("disruptive" effects).
6.142 The first sentence of Article 2(c) states that the prohibited effects must be on "international
trade". India points out in this regard that the first sentence does not refer to effects on "imports". We
agree with India that the phrase "effects on interna tional trade" encompasses, but is not limited to
effects on imports of the good to which the Member concerned applies the relevant rule of origin
(e.g., cotton bed linen). This gives rise to two issues. First, can the phrase "effects on international
trade" also cover adverse effects on trade in goods in intermediate stages of production ( e.g., cotton
fabric), rather than just trade in the final, or fini shed, goods to which the relevant rule of origin is
applied ( e.g., cotton bed linen)? 254 Second, can the phrase "effects on international trade" cover
adverse effects on trade in different (but closely similar) types of finished goods? For instance, would
there be a distorting effect on international trade if a rule of origin modified international trade flows
by changing the type of goods traded in international trade ( e.g., by increasing trade in silk scarves
and decreasing trade in cotton scarves)?255 We will address these two issues in turn.
6.143 Beginning with the issue of effects on trade in goods in earlier stages of processing – i.e.,
"upstream" goods – it is not necessary, in this case, to resolve this issue. In our analysis of the
measures at issue, we will assume, arguendo, that effects on relevant upstream goods can be viewed
as "effects on international trade" within the meaning of the first sentence of Article 2(c).
6.144 With regard to the issue of effects on differe nt types of finished goods, we think it is
important, in considering this issue, to have regard, in particular, to the provisions of Article 2(d) of
the RO Agreement. As we will explain below 256, Article 2(d) does not require Members to apply the
same rule of origin to "closely related" (but different) goods. Consequently, we cannot adopt an
interpretation of Article 2(c), first sentence, whic h would effectively bar Members from doing what is
permissible under Article 2(d).

251 It is relevant to point out here that the Appellate Body has given a similar interpretation to the
previously mentioned Article 3.2 of the Agreement on Import Licensing Procedures . Appellate 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, paras. 126-127.
252 The parties share this view. India's reply to Panel question No. 11(a); United States' reply to Panel
question No. 11(a).
253 The New Shorter Oxford English Dictionary, L. Brown, ed., Clarendon Press, 1993, Vol. II, p.
2569; Vol. I, pp. 707 and 702, respectively.
254 India argues that the phrase "effects on internatio nal trade" does cover adverse effects on trade in
goods in intermediate stages of production ( e.g., cotton fabric). E.g., India's second oral statement, para. 17;
India's reply to Panel question No. 56.
255 India considers this to be an example of distor ting effects inconsistent with Article 2(c), first
sentence. India's first written submission, para. 91.
256 Infra, para. 6.249.

6.145 Indeed, if we were to accept that the first sente nce of Article 2(c) prohibits adverse effects on
trade in a good which is different from the good subj ect to the relevant rule of origin, we would
effectively require Members to apply a uniform rule of origin to a wide range of different goods. It
could then be argued, for instance, that a rule of origin which is not uniformly applied to all
competitive goods creates "distorting" effects on interna tional trade. Potentially, therefore, the scope
of Article 2(c), first sentence, would be very broad.
6.146 In view of these far-reaching potential con sequences, and having regard also to the
circumstance that, prior to th e entry into force of the RO Agreement, rules of origin were not subject
to significant GATT disciplines, we cannot assume th at Members intended to bring adverse effects on
different types of goods within the ambit of the prohi bition set out in the first sentence of Article 2(c).
Indeed, as the Appellate Body has said in a different context, "[t]o sustain such an assumption and to
warrant such a far-reaching interpretation, treaty language far more specific […] would be necessary".
257
We consider that the same could be said of Article 2(c), first sentence.258
6.147 Therefore, we consider that it would not be appropriate to interpret the phrase "effects on
international trade" as covering adverse effects on trade in different (but closely similar) types of
finished goods. We construe the phrase "effects on in ternational trade" to cover trade in the goods to
which the relevant rule of origin is applied ( e.g., cotton bed linen). Whether, in addition, this phrase
covers trade in goods in inte rmediate stages of production ( e.g., cotton fabric) is an issue which we
have said we do not need to decide in this case.
6.148 Relying on the phrase "on international trade" , India argues that it is sufficient for a
complaining party to show that the challenged rule of origin creates restrictive or distorting effects on
one Member's trade. 259 Although it is possible to view trade between any two Members as
"international trade", we are not convinced that demonstrating an adverse effect on one Member's
trade would always and necessarily be sufficient. Ind eed, while the use of a particular rule of origin
may adversely affect the trade of one Member, it may favourably affect the trade of one or more other
Members. For example, the mere fact that one Member would lose trade cannot, in our view, be
regarded as conclusive, in and of itself, on the issue of whether the rule in question creates a
"restrictive" effect on international trade.
6.149 Regarding the disagreement between the parties whether the phrase "create [… ] effects"
refers to the effects that the rules of origin are capable of creating or whether it refers to the effects
they actually create in the market-place, we note that, fo r the purposes of our analysis, we need not
resolve the parties' disagreement. In our examin ation of India's claims under the first sentence of
Article 2(c), we will assume, arguendo, that India is correct in asserting that the first sentence does
not require a showing of actual prohibited effects on international trade and that it is sufficient to
demonstrate that the rules of origin in question "create conditions of competition with restrictive,
distorting or disruptive effects on international trade" 260, i.e., that "the incentives and disincentives

257 Appellate Body Report, EC Measures Concerning Meat and Meat Products (Hormones) (" EC –
Hormones "), WT/DS26/AB/R, WT/DS48/AB/R, adopted 13 February 1998, DSR 1998:I, 135, para. 165.
258 In response to a question from the Panel, India argue s that the plural in Article 2(c) means that that
provision applies both to an individual rule of origin as well as to a Member's system of rules of origin. India's
reply to Panel question No. 48. Since India, in developing its claim, does not rely on this interpretation of the
text of Article 2(c), it is sufficient to note that we underst and the plural in Article 2(c) , first sentence, to refer to
a Member's "rules of origin" taken individually, i.e., to individual rules of origin as they apply to individual
goods. Indeed, provisions like the second sentence of Arti cle 2(c), the first clause of Article 2(d), Article 2(f)
and Article 3(a) of the RO Agreement cannot reasonably be read to lay down disciplines for anything other than
individual rules of origin.
259 India's reply to Panel question No. 11(b).
260 India's second written submission, paras. 48 and 60.

faced by traders as a result of the rules of origin at issue are such as to create [the prohibited ]
effects".261
6.150 With the foregoing considerations in mind, we now proceed to assess the consistency of the
measures at issue with the first sentence of Article 2(c).
(b) Consistency of the measures at issue with Article 2(c), first sentence, of the RO Agreement
6.151 India claims that section 334 and section 405 – hereafter the "measures at issue" – are
inconsistent with the first sentence of Article 2(c) because they create (i) "restrictive", (ii) "distorting",
and (iii) "disruptive" effects on international trade. In support of this claim, India has advanced two
sets of arguments. The first set of arguments is developed mainly in India's first written submission
and primarily focuses on the effects resulting from th e application of the measures at issue in the
implementation of the United States' textile quot as and from the changes made to United States rules
of origin in 1996 and 2000. 262 The second set of arguments is de veloped in subsequent submissions
and focuses on the features of the relevant United States rules of origin as such.263 As the relationship
between these two sets of arguments is not clear, the Panel will address them separately.264 The Panel
will begin its examination with the first set of India's arguments.
(i) India's arguments as developed in India's first written submission
"Restrictive" effects on international trade
6.152 India asserts that the measures at issue reduced the level of exports from countries such as
India which exported greige fabric to third countr ies to be further processed into made-up articles
before onward export to the United States because the fabric-exporting countries' quotas were debited
for such further processed articles. According to India, the measures at issue thus entailed new
quantitative restrictions on Indian goods exported to third countri es, which goods had previously
never been subject to any restrictions.
6.153 India cites an example to illustrate the restric tive effects on international trade created by the
measures at issue. Based on a fax message dated 20 July 2002 from the Cotton Textiles Export
Promotion Council in Bombay to the Permanent Mission of India to the WTO 265, India states that,
prior to the adoption of section 334, greige fabrics we re sent from India to Sri Lanka where they were
dyed and printed, and subjected to two finishing ope rations and then stitched into bed linen products.
India argues that these products were then exporte d to the United States as Sri Lankan goods. India
contends that, responding to the change in the 1996 rul es of origin, India started issuing visas for such
consignments from 26 December 1996 to 24 December 1998. India notes that, ultimately however, in
view of the non-availability of quota in the relevant category, the operations in Sri Lanka were wound
up. India points out that this meant that the export of greige fabric from India to Sri Lanka, the related
finishing operations in Sri Lanka, as well as the resu lting exports from Sri Lanka to the United States
were terminated.
6.154 The United States considers that the fax message from the Cotton Textiles Export Promotion
Council does not demonstrate a causal connection between section 334 and either the rise or fall of
Indian fabric exports to Sri Lanka. The United States also notes that India's charge that it has lost
business in Sri Lanka as a result of section 334 stands in stark contrast to actual United States import

261 India's first oral statement, para. 38.
262 India's first written submission, paras. 91-96.
263 India's first oral statement, pa ra. 25; India's second written submi ssion, para. 61; India's reply to
Panel question No. 66.
264 We note that India has not said that the second set of arguments was somehow intended to supersede
the first set.
265 Exhibit INDIA-15.

statistics, which, according to the United Stat es, do not demonstrate – for trade in the HTS
classifications that India has identified as being affected by sections 334 and 405 – a particular pattern
that would indicate trade restriction.
266 The United States also points out that the fax message
contains information which indicates that Indian fa bric exporters actually benefited from section 334,
as they were able to develop new business opportuni ties in China. The United States further asserts
that United Nations data indicates that India's expor ts of cotton woven fabric to the world increased
between 1995 and 1996 and declined slightly in 1997, but the value of exports was higher in 1997
than in 1995.
6.155 The Panel notes, as an initial matter, that India' s claim with respect to the (alleged)
"restrictive" effects of the fabric formation ru le in section 334 concerns effects on upstream goods –
greige fabric – exported by fabric-forming countries such as India which are under quota in the United
States.267 The Panel has indicated above that it is prepared to assume, arguendo, that such effects can
be viewed as "effects on international trade" within the meaning of the first sentence of Article 2(c).
6.156 It should also be noted that India's assertion is that the fabric formation rule creates a de facto
restriction on international trade, not a de jure restriction.268 As has been observed by another panel,
in circumstances where there is no de jure, or formal, restriction, "it is inevitable, as an evidentiary
matter, that greater weight attaches to the actual trade impact of a measure", i.e., to factual evidence
supporting the existence of such a restriction, even if the WTO provision prohibiting such a restriction
protects competitive opportunities rather than trade flows.269
6.157 India has offered little factual evidence in suppor t of its assertion that the fabric formation
rule creates restrictive effects on trade in upstream goods, specifically, greige fabrics. India relies on
a fax message from the Cotton Textiles Export Promotion Council in Bombay to the Permanent
Mission of India to the WTO. In that message, the Cotton Textiles Export Promotion Council
provides information, at the request of India's Pe rmanent Mission, regarding what it considers to be
the effects of section 334 on Indian textile trade.270
6.158 We are not persuaded from the fax message from the Cotton Textiles Export Promotion
Council alone that the fabric formation rule in secti on 334 creates restrictive effects on India's exports
of greige fabric. The fax message in question c ontains a number of assertions, which, however, are
not supported by documentary evidence or trade da ta. The mere assertion, by an Indian exporters'
association, that, as a result of the fabric formation rule provided for in sectio n 334, "exports of grey
fabrics from India to Sri Lanka [… ] suffered a major setback" 271 is insufficient to establish that the
level of exports of Indian greige fabric to Sri La nka has decreased or that there exists a causal link
between the fabric formation rule in section 334 and the alleged decre ase in India's exports of greige
fabric.
6.159 In any event, even if India had demonstrated that the fabric formation rule creates a restrictive
effect on its exports of greige fabric, we have stated above that a showing of a restrictive effect on the
trade of a single Member is not sufficient, in all cases, to establish restrictive effects "on international
trade". In this case, we have no basis for finding that a showing of restrictive effects on India's
exports of greige fabric would, by itself, be suffi cient to establish an incons istency with Article 2(c),

266 The United States refers to exhibits US-8 and US-9.
267 E.g., India's second oral statement, para. 17. We do not understand India to argue that the DP2 rule
provided for in section 405 creates restrictive effects.
268 India uses the term "chilling effect". India's second oral statement, para. 17.
269 Panel Report , Argentina – Measures Affecting the Export of Bovine Hides and Import of Finished
Leather ("Argentina – Hides and Leather"), WT/DS155/R and Corr.1, adopted 16 February 2001, para. 11.20.
270 Exhibit INDIA-15, p. 1.
271 Ibid., p. 2.

first sentence. As we have previously pointed out 272, we were not provided with any evidence and/or
data regarding:
− which countries are under quota in the Unite d States with respect to relevant
downstream goods (e.g, cotton bed linen);
− which countries are important suppliers of the relevant upstream goods ( e.g., cotton
fabric); and
− the price and quality of the upstream goods made by those countries and their
production capacity.

6.160 Lacking information on the design of the United States' quota system, the market in the
relevant downstream and upstream goods and the relationship between the two, we cannot simply
assume that India is the only commercially viable sourcing option for Members importing the relevant
greige fabric. There may be competitive suppliers other than India which are not under quota with
respect to the relevant downstream goods.
273 A possible decrease in Indi an exports of greige fabric
might then be accompanied by a corresponding in crease in competitive exports by other Members,
such that there would not be a restrictive effect on international trade in the relevant greige fabric.
6.161 On the basis of the foregoing considerations, we conclude that India has not established that
the measures at issue create restrictive effects on international trade within the meaning of Article
2(c), first sentence.
"Distorting" effects on international trade
6.162 India submits that the measures at issue allow more favourable access to certain products
over other products. An example is the different treatment being accorded to products based on their
fibre composition, such as silk, cotton and wool. In India's view, the measures at issue also favour the
products of export interest to the European Co mmunities over products of export interest to
developing countries. According to India, the meas ures at issue consequently create distorting effects
on international trade within the meaning of Article 2(c). India also argues th at the measures at issue
create distorting effects because they shift origin fro m a third country where the fabric was dyed and
printed and subjected to two further finishing opera tions to the country where the greige fabric was
formed. Finally, India argues that, because of the new United States' rules of origin, importers have
had to switch to new suppliers as traditional supplie rs lost their access to the United States market,
distorting historical trade patterns.
6.163 By way of example, India notes that the United States negotiated quota allocations for home
textile products ( e.g., sheets, pillowcases, comforter shells, qu ilts, comforters) with various countries
or customs territories, such as Hong Kong or Ma cau, which lacked an indigenous fabric-making
industry. India submits that when section 334 en tered into force, these quota allocations became
useless. India points out that Pac Fung, for example, a Hong Kong-based manufacturer of comforter
shells, bed sheets and other home textile produc ts, manufactured these products in Hong Kong and
Macau using fabric that had been woven in China. India contends that the adoption of section 334
effectively meant that Pac Fung's Hong Kong and Macau plants we re no longer able to export
products to the United States as the fabric was made in China. According to India, trade was distorted
because the Hong Kong-based manufacturer's goods were now considered products of China rather

272 Supra, para. 6.78.
273 The United States asserts that, at the time secti on 334 was implemented, and thereafter, six out of
the top ten world exporters of cotton fabrics, accounting for 50 percent of world trade in cotton fabric, were
countries which were not subject to quotas on fabric or bed linen in the United States. United States' second
oral statement, para. 6. We also recall our earlier finding regarding India's claim under Article 2(b) that India
has failed to establish that the fabric formation rule neces sarily, or in fact, brings more imports of downstream
goods under quota in the United States. Supra, para. 6.83.

than of Hong Kong or Macau and they were subject to Chinese quota restrictions. India submits that,
since the Chinese quotas for these goods had essentially been filled, the result was that the Hong
Kong manufacturer's products were s hut out of the United States market. India concludes that, in
order to continue to export comforter shells to the United States, the Hong Kong manufacturer had to
obtain the fabric from a source other than China, thus distorting patterns of trade.
274
6.164 The United States argues that changes in rules of or igin for quota goods will usually have
quota implications that will be different for di fferent Members, depending on their quota levels and
the nature of their exports. The United States subm its that Members are, however, 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. The United States also argues that
product differentiation is allowed under the RO Agreement and that India seems to confuse
differentiation with discrimination.
6.165 The United States further submits that trade data do not bear out any claim of trade distortion
for trade in the HTS classifications that India has identified as being affected by sections 334 and
405.275
6.166 In considering India's claim of distortion, the Panel turns, first, to India's argument that the
measures at issue create distorting effects on inte rnational trade because they shifted origin from a
country where the fabric of a made-up article was subjected to a DP2 operation to the country where
the greige fabric was formed.276 In our view, the mere fact that a change in a Member's rules of origin
results, for a given finished good exported to that Member ( e.g., bed linen), in a different country of
origin is not sufficient, in and of itself, to demo nstrate a distorting effect on international trade.
Indeed, if the first sentence of Article 2(c) preven ted a Member from changing a rule of origin merely
because that would involve a change of country of origin, then, contrary to Article 2(i) of the RO
Agreement, rules of origin could never be changed.
6.167 What matters, for the purposes of Article 2(c), first sentence, is whether the new rule of origin
creates distorting effects, not whether the change from the previous rule of origin to the new one
creates such effects. Indeed, as noted by the Unite d States, the previous rule may itself have created
distorting effects, such that any country of orig in determination resulting from that rule could be
inappropriate.277
6.168 The second Indian argument which we consider is that the measures at issue result in certain
finished goods enjoying better acce ss to the United States market than other finished goods and that
this creates distorting effects on international trad e. Specifically, India argues that the measures at
issue create distorting effects on trade in different types of finished goods ( e.g., silk scarves versus
cotton scarves).278 We have stated above that we do not consider that the prohibition set out in Article
2(c), first sentence, covers distorting effects on trad e in different types of goods. At any rate, for
India's argument to succeed, India would need to demonstrate that the goods in question are in
competition with each other and that the measures at issue distort trade in those goods. But India has
not demonstrated that those goods which it alleges enjoy more favourable access to the United States
market ( e.g., silk scarves) are in competition with t hose goods which it considers are given less
favourable access (e.g., cotton scarves).

274 India refers to Pac Fung Leather Co. v. The United States , 111 F.3d. 114 (Fed. Cir 1997) (exhibit
INDIA-16).
275 The United States refers to exhibits US-8 and US-9.
276 India's first written submission, para. 96.
277 United States' reply to Panel question No. 11(f).
278 India's first written submission, para. 91.

6.169 Nor has India established that the measures at issue create distorting effects on trade. India's
argument is that the measures at issue distort tr ade because, pursuant to these measures, some goods
are subject to the DP2 rule, while others are subjec t to the fabric formation rule and because this
determines whether particular exports fall within quotas in the United States. We do not consider that
the fact that the United States uses a fabric formati on rule for some finished goods and a DP2 rule for
others is of itself sufficient to demonstrate distorting effects on trade in these goods. For example, if a
country which performs a DP2 operation on a partic ular good is under quota in the United States for
that good, a DP2 rule would not necessarily result in more favourable access to the United States
market than a fabric formation rule.
6.170 For these reasons, we are unable to accept India's argument that the measures at issue create
distorting effects because they result in certain finished goods enjoying better access to the United
States market than other finished goods.
6.171 A related argument put forward by India is that the measures at issue create distorting effects
because they create artificial incentives to modify the type of inputs used ( e.g., silk fabric versus
cotton fabric). 279 India has not elaborated on this argument or provided supporting factual
information. In our view, this argument is no more than a variation of India's previous argument,
except that it is concerned with inputs, or "ups tream" goods, rather than with the finished goods. 280
Notwithstanding this difference, our considerati ons relating to the previous argument apply, mutatis
mutandis, to this argument as well.
6.172 The third Indian argument is that the measures at issue create distorting effects on
international trade because they favour goods of export interest to the European Communities over
goods of export interest to developing countries. To recall, such goods as silk scarves (a good of
export interest to the European Communities) are subject to the DP2 rule, whereas such goods as
cotton bed linen (a good of export interest to developing countries such as India) are subject to the
fabric formation rule. Since India's argument con cerns the trade implications of the application of
different rules of origin to different goods, this argument, too, depends on the goods in question being
in competition with each other and the measures at i ssue distorting trade. It is also premised on a
reading of Article 2(c), first sente nce, with which we do not agree, viz., that the prohibition set out in
Article 2(c), first sentence, cove rs distorting effects on trade in different types of goods. Even
disregarding this, India has not specifically estab lished the existence of a competitive relationship
between individual goods of export interest to the European Communities, on the one hand, and
developing countries, on the other.
281 Nor has India established that applying a DP2 rule to goods of
export interest to the European Commun ities would necessarily favour those goods vis-à-vis goods of
export interest to developing countries which are subject to the fabric formation rule.
6.173 Finally, we turn to India's argument that, because of the new United States rules of origin,
importers had to switch to new suppliers, as traditiona l suppliers lost their a ccess to the United States
market, which, according to India, distorted historical trade patterns. 282 This argument concerns
effects on "upstream" trade, specifically the sourcing of inputs of a particular type (e.g., cotton fabric).
We note that sourcing decisions by importers are not ex clusively driven by rules of origin, such that a
change in historical sourcing patterns is not necessarily attributable to a change in rules of origin. But
even assuming that the measures at issue, rather than some other factor, led some importers to source
particular inputs from new countries 283, we do not think that these measures could, for that reason

279 India's reply to Panel question No. 66.
280 As previously pointed out, we are assuming, arguendo, that effects on upstream goods can be
viewed as "effects on international trade" within the meaning of the first sentence of Article 2(c).
281 India's reply to Panel question No. 58(b).
282 India's reply to United States' question No. 2.
283 We note in this regard that the documentary evidence provided by India in support of the example of
Pac Fung, the Hong Kong-based manufacturer of comforter shells, bed sheets and other home textile products,

alone, be considered to create distorting effects on international trade. India has not demonstrated, for
particular inputs, that the measures at issue r esult in importers sourcing these inputs from countries
whose inputs are not comparable in relevant respects (price, quality, etc.) to the inputs they used to
obtain from other countries under the previous rules of origin. In the absence of any demonstration of
this kind, we are unable to accept India's argument th at the measures at issue create distorting effects
on trade because some importers had to source their inputs from new supplier countries.
6.174 In the light of the above, we conclude that India has not established that the measures at issue
create distorting effects on international trade within the meaning of Article 2(c), first sentence.
"Disruptive" effects on international trade

6.175 India argues that the measures at issue create disr uptive effects on international trade because
of their sheer complexity and the arbitrary nature of the criteria used. India also argues that the
measures at issue undermine informed compliance by fo reign producers, thereby disrupting trade, as
the same product undergoing the same production opera tions in Sri Lanka may be a product of Sri
Lanka or India depending on the product's fibre content.
6.176 As an example of the disruptive effects of th e measures at issue, India again cites the Sri
Lankan case referred to above. According to India, th e changes in the United St ates' rules of origin
disrupted the trade from India to Sri Lanka. India argues that, from the perspective of the importer in
Sri Lanka, the process of obtaining an allocation from India's quota imposed a burden to verify that
the greige fabric was Indian. India considers that, from the perspective of the exporter in India, it also
imposed difficulties. India notes that its exporters of fabric usually export to a wholesaler in bulk.
India points out that, in the other country, such as Sri Lanka, the processors and manufacturers of
made-up items usually purchase greige fabrics fro m these wholesalers, and then convert them to
made-up items which could then be exported to othe r markets, such as the Unit ed States. Due to the
complexities of this commercial chain, it was difficu lt, according to India, for its exporters to give
information on how much of their fabrics exported to other countries were subsequently exported to
the United States as made-up products.
6.177 The United States notes that India has not demonstrated that "complexity" is a prohibited
criterion. The United States points out, in addition, that India has presented no evidence that the rules
of origin in question have discouraged exporters from shipping their products to the United States
because they simply could not understand them. The United States considers that its regime is
perfectly comprehensible to businesses engaged in im porting and exporting, as is demonstrated by the
fact that India supplies nearly $3 billion in textil es and apparel products to the United States. The
United States also recalls that importers have always had the right to ask for an interpretation of the
rules with specific regard to their product.
6.178 The United States submits, furthermore, that trade data do not bear out any claim of trade
disruption for trade in the HTS cl assifications that India has identi fied as being affected by sections
334 and 405.
284
6.179 The Panel notes that India's claim of disruption is based on three separate grounds. First,
India considers that the "sheer complexity" of the measures at issue creates disruptive effects on trade.
However, rules of origin are, by their nature, comp lex. India has neither shown that the measures at
issue are more complex than necessary, nor has it explained precisely how the alleged complexity of
the measures at issue creates a disruptive effect on international trade. In a different context, India
asserts that the complexity of the measures as issue is such that "traders have to regularly seek rulings

does not seem to support India's assertion that, because of the measures at issue, Pac Fung had to obtain its
inputs from a country other than China in order to continue to export to the United States. Exhibit INDIA-16.
284 The United States refers to exhibits US-8 and US-9.

from the United States Customs as to the determination of or igin for a particular product". 285 Given
the inherent complexity of rules of origin, it is common that traders regularly seek interpretative
rulings. The mere fact that they do so does not est ablish, in and of itself, that the measures at issue
disrupt trade. 286 In any event, as also pointed out by the United States, this Panel has seen no
evidence that traders or producers stopped expor ting to the United States due to the "sheer
complexity" of the measures at issue. In the light of these considerations, we are unable to accept that
the measures at issue create a disruptive effect on international trade because of their "sheer
complexity".
6.180 Second, India asserts that the measures at issue cr eate disruptive effects on international trade
because of the "arbitrary nature" of the "criteria" us ed. However, the measures at issue use origin-
conferring criteria which are specifically identified in Article 2(a)(iii) of the RO Agreement. To that
extent, they plainly cannot be regarded as "arbitrary" criteria. India sees as "arbitrary" the fact that,
pursuant to the measures at issue, the country of origin of goods can vary based on the type of good
(e.g., finished cotton fabric versus cotton bed linen) or the fibre composition of the finished good
(e.g., made-up articles with 15% cotton by weight versus made-up articles with 17% cotton by
weight).287 It is true that the distinction made by the United States between certain cotton blends of
flat goods is not found in the HS heading for flat goods. However, that distinction is not without
rationale, since it is based on a distinction found in the HS chapter relating to classification of cotton
yarn and fabrics. Nor can distinctions based on th e type of good be regarded as arbitrary, unless the
goods are essentially the same. In an y event, even if the criteria used in the relevant United States'
rules of origin were to be characterized as arbitrar y, we have not been provided with evidence that
exports of foreign producers have been disrupted as a result of the alleged arbitrariness of the
"criteria" used in the relevant United States' rul es of origin. The only argument offered by India is
that the measures at issue "underm ine informed compliance" by fo reign producers because the same
good undergoing the same production operations in, say, Sri Lanka may be a good of Sri Lanka or
another Member depending on the good's fibre conten t. We do not find this argument persuasive.
The measures at issue do not strike us as particularly complex or difficult for foreign producers to
understand. Moreover, India's argument presumes that foreign producers are somehow uninformed as
to the rules of origin their exports must comply with.
288
6.181 Third, India asserts that the measures at issue cr eate disruptive effects on international trade
because they result in the imposition of certain admi nistrative burdens. India notes that a foreign
producer making bed linen from Indian cotton fabric fo r export to the United States would, in order to
obtain an allocation from India's bed linen quota, need to verify that the greige fabric is Indian. We
understand this to mean that the producer in questi on would need to establish to the satisfaction of
India's authorities that the bed linen was made from I ndian fabric. It is apparent that, in order for
India to be able to verify the origin of goods exported under quotas, India needs to establish a
relatively complex administrative system, the opera tion of which may entail some administrative
burden for India's producers as well as foreign producers. However, it is not clear to us that the
measures at issue are in any way linked to the verification requirement referred to by India. 289 At any
rate, India has provided no information regarding th e steps producers must take in order to comply

285 India's first written submission, para. 100.
286 Indeed, we note that Article 2(h) of the RO Agreement not only permits, but actually requires
Members to issue, on request of an exporter or importer, assessments of the origin they would accord to
individual goods. Thus, the issuance of origin assessments is apparently considered to be an integral part of the
application of all rules of origin. Moreover, Article 2( h) also states that requests for assessments must be
accepted even before trade in the good concerned begins and is normally valid for a period of three years. Thus,
the assessment procedure need not disrup t trade. In the presen t case, India does not clai m that the measures at
issue are inconsistent with Article 2(h).
287 India's first written submission, paras. 78, 82-83.
288 We note in this regard that India itself consider s that new rules of origin immediately change the
investment and other business plans of producers and traders. India's reply to Panel question No. 26.
289 The Panel has not been provided with documentary evidence of that verification requirement.

with the verification requirement in question. No r has India explained precisely how that requirement
results in the measures at issue creating a disruptive effect on trade. In these circumstances, we are
unable to conclude that the measures at issue create disruptive effects on international trade.
6.182 Another administrative burden which India claims results from the application of the
measures at issue and creates a disrup tive effect on its trade is that it is "difficult" for Indian exporters
to give information on how much of their fabr ics exported to third c ountries are subsequently
exported to the United States as made-up articles. Given the legitimate right of the United States to
determine the origin of goods imported under quotas, th e difficulty identified by India is unavoidable.
However, it is not clear to us that the measures at issue are in any way linked to the information
requirement referred to by India.
290 At any rate, India has not explained precisely how the "difficulty"
identified by India creates a disruptive effect on trade. Nor has India discussed the possibility of
addressing this difficulty, for instance, through a rrangements for administrative co-operation between
India's authorities and the authorities of countries importing fabrics from India. In these
circumstances, we are unable to accept India's clai m that the measures at issue disrupt trade because
they result in certain administrative difficulties for Indian exporters.
6.183 In the light of the foregoing, we conclude that India has not established that the measures at
issue create disruptive effects on international trade within the meaning of Article 2(c), first sentence.
6.184 Before proceeding to examine what the Panel has referred to as the second set of India's
arguments, it should be noted that the Panel takes no position on whether rules of origin which create
restrictive, distorting or disruptive effects on inte rnational trade would necessarily constitute rules of
origin which "themselves" create "restrictive, distorti ng, or disruptive effects on international trade",
within the meaning of Article 2(c), first sentence.
291
(ii) India's arguments as developed subsequent to India's first written submission
6.185 India argues that the first sentence of Article 2(c) is not intended to prevent the adoption of
all rules of origin changing trade patterns, but only the adoption of rules of origin with features
comparable to those referred to in the second senten ce of Article 2(c). Along the same lines, India
argues that Article 2(c) is meant to ensure th at the conferral of origin does not depend on the
fulfilment by producers and traders of conditions crea ting restrictive, distorting or disruptive effects
that are not necessary to determine the origin of products and that conse quently go beyond those
inevitably created by any rule of origin.
6.186 With respect to the measures at issue, India asser ts that the fabric formation rule and the DP2
rule create restrictive, distorting or disruptive e ffects whether they are applied to the current United
States' textile quota regime or any other trade policy instrument. More specifically, India asserts that
the United States' rules of origin themselves create restrictive, distorting or disruptive effects on
international trade because they impose require ments completely unrelated to the degree of

290 India has not identified the legal basis for such a requirement. India's first written submission, para.
95.
291 We also note that India has not established that the fabric formation and DP2 rules, when used for
purposes other than quota administration, create the effects on international trade prohibited by Article 2(c), first
sentence. For instance, with respect to the use of United States' rules of origin in support of marking, India
merely states that it is "arguable" that the change in rules of origin disrupted trade. In any event, this assertion is
based on the effect of a change in rules of origin, rather than on the effect of the new rules of origin themselves.
India's reply to Panel question No. 55(b). With respect to the use of the fabric formation rule for the purpose of
gathering trade statistics, India has also not substantiated its assertion that this rule creates a distorting effect on
trade by skewing import statistics. Nor, in our view, has it explained how the fabric formation rule "might make
it appear as if imports from a given country, say, India, were increasing, when in fact, they might not be", such
that anti-dumping duties might be imposed against such imports when there is no basis for doing so. India's
reply to Panel question No. 55(b).

manufacturing, processing or other economic activity that took place in the country deemed to be the
originating country. India considers that the United States' rules of origin, by providing for
distinctions based on the type of fabrics or fibre bl ends, rather than any criteria regarding the nature
and extent of further processing in a third country , distort and disrupt trade flows between countries
supplying different fibres. India also considers that trade is disrupted and restricted as it relates to
those countries which supply fabric (such as cotton) for textiles that do not enjoy the exemptions
specified in section 405. India submits that th e differentiation between goods made of different
fabrics or fibre blends is not necessary to de termine in which country a sufficient amount of
manufacturing, processing or other economic activity took place to justify the conferral of origin.
6.187 The United States argues that the United States' rules of or igin at issue in this dispute reflect
common international practice, are based on criteria re lated to production, and reflect where the most
recent substantial transformation took place. The Un ited States considers that these rules of origin
themselves cannot, therefore, be found to create restrictive, distorting or disruptive effects on
international trade.
6.188 The Panel notes that India's arguments are based on a reading of Article 2(c), first sentence,
according to which rules of origin must not create restrictive, distorting or disruptive effects which are
not necessary to determine the origin of goods. In considering India's arguments, the Panel will
assume, arguendo, that this reading of Article 2(c), first sentence, is correct.
6.189 India's arguments rest on the assertion that the distinctions made in the measures at issue
between goods made of different fabrics or fibr e blends are not necessary to determine in which
country a sufficient amount of processing or other economic activity took place to justify the conferral
of origin. This is essentially a variation on India' s earlier assertion, advanced in support of its claim
under Article 2(b), that the fabric formation rule in section 334 neither reflects the importance of
subsequent processing operations to the making of the goods to which it applies nor takes account of
subsequent value-added opera tions. However, as we have stated in our analysis of India's claims
under Article 2(b), we are not persuaded that, fo r the goods concerned, the United States cannot
determine that fabric formation is the most si gnificant processing operation and that a subsequent
processing operation is insufficient to justify the conf erral of origin, or that the United States must
confer origin on the country where the most significant economic contribution to the final good has
been made.
292 In the light of this, and having regard to the fact that India has presented no new
arguments here, we find that India has failed to estab lish that the distinctions made in the measures at
issue are not necessary to determine the origin of the relevant goods.
6.190 Since India has failed to establish the basic premise of its arguments, we need not continue
our analysis. In particular, we need not decide wh ether India's reading of Article 2(c), first sentence,
is correct. Accordingly, we conclude that, even under India's own reading, India's arguments do not
establish that the measures at issue are inconsistent with Article 2(c), first sentence.
6.191 We have concluded that neither what we have re ferred to as the first set of Indian arguments
nor what we have referred to as the second set of Indian arguments establishes that the measures at
issue are inconsistent with Article 2(c), first sente nce. Even considering all of India's arguments
together, however, they do not support the conclusion that the measures at issue are inconsistent with
Article 2(c), first sentence.
3. India's claims under Article 2(c), second sentence, of the RO Agreement
6.192 The Panel now turns to examine India's claims that section 334 and section 405 are
inconsistent with the second sentence of Article 2(c) of the RO Agreement. The Panel will begin this
examination by considering the provisions of the second sentence of Article 2(c).

292 Supra, paras. 6.74-6.75. See also infra, para. 6.207.

(a) Article 2(c), second sentence, of the RO Agreement
6.193 Article 2(c) provides as follows:
"Until the work programme for the harmonization of rules of origin set out in Part IV is
completed, Members shall ensure that:
[…]
(c) 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 rela ted to manufacturing or processing, as a prerequisite for the
determination of the country of origin. Howeve r, 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)[.]"
6.194 India notes that the second sentence of Article 2( c) has two clauses. With respect to the
second clause of the second sentence – "[rules of origin shall not] require the fulfilment of a certain
condition not related to manufacturing or processing " – India argues that, like Article 2(a) of the RO
Agreement, it reflects the significance that manufacturing or processing of a product has upon the
determination of origin for that product.
6.195 With respect to the first clause of the second sentence – "[rules of origin] shall not pose
unduly strict requirements" – India argues that that clause supports the view that Article 2(c) is meant
to ensure that the conferral of origin does not de pend on the fulfilment by producers and traders of
conditions creating restrictive, distorting or disrupt ive effects that are not necessary to determine the
origin of products and that conse quently go beyond those inevitably created by any rule of origin. In
India's view, this conclusion is also supported by the fourth clause of the preamble of the RO
Agreement according to which this Agreement is "to en sure that rules of origin themselves do not
create unnecessary obstacles to trade".
6.196 According to India, it is clear from the wordi ng of Article 2(a) and Article 2(c) that the
conferral of origin upon a product must be based on the determination of the country with which that
product has a significant economic link. In India's vi ew, it follows that the first clause of the second
sentence of Article 2(c) is violated if a Member co nfers origin on the basis of requirements that are
burdensome and are not necessary to determine the economic link between the product and the
country on which origin is conferred.
6.197 The United States considers that the second clause of the second sentence of Article 2(c)
qualifies the first clause. In other words, in the view of the United States, 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 manufacturi ng or process" except "as a prerequisite for the
determination of country of origin".
6.198 With respect to the second clause of the second sentence, the United States argues that 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 re quires the use of personnel of a certain religious
order to achieve a certain determination of origin , or requires 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.

6.199 With respect to the first clause of the second sentence, th e United States argues that the
application of a non-preferential rule of origin that involves a 60% ad valorem criterion would likely
be viewed as "strict", but not "unduly strict". By contrast, a non-preferential 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".
6.200 The United States further argues that 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 of Article 2(c). In other words, the United States considers that the second sentence
of Article 2(c) demonstrates one ma nner in which rules of origin can "create restrictive, distorting, or
disruptive effects on international trade". Therefor e, in the view of the United States, it would be
necessary to show that the existence of the elemen ts of the second sentence of Article 2(c) created
actual effects on international trade.
6.201 Thus, in determining whether a requirement is " unduly strict", for example, it is necessary, in
the view of the United States, to examine the actua l effects on international trade. If such a
requirement had a significant impact on international trade, it would, according to the United States,
support a Member's claim that the requirement is "unduly strict". 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,
there are some such requirements that on their f ace would, in the view of the United States, 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, in the view
of the United States, 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). The United States submits that, similarly, 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 interna tional trade". By contrast, a rule of origin that
requires the fulfilment of a condition not related to manufacturing or pro cessing (e.g., nationality of
company ownership) could, according to the United States, 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.
6.202 The Panel commences its analysis with the first clause of Article 2(c), second sentence,
according to which rules of origin must not "pose unduly strict requirements".
6.203 The United States argues that in order for requirements to be "unduly strict" within the
meaning of Article 2(c), second sentence, it would be necessary to demonstrate that the challenged
rules of origin create actual effects on international trade "in violation of the first sentence of Article
2(c)".
293 However, in view of the position the Panel takes on India's claim in respect of the second
sentence of Article 2(c), the Panel sees no need to examine whether Article 2(c), second sentence,
includes the requirement referred to by the United States.
6.204 First, we need to examine what kind of "re quirements" are covered by the obligation that
Members must ensure that their rules of origin no t "pose unduly strict requirements". In this regard,
we note the view of the United States that the clau se "as a prerequisite for the determination of the
country of origin" qualifies also the phrase "[rules of origin] shall not pose unduly strict
requirements". While the English version of Article 2(c) may be susceptible of such an interpretation,
the equally authentic French version is not.
294 Nevertheless, the clause "as a prerequisite for the

293 United States' reply to Panel question No. 73.
294 The French version of Article 2(c), second sentence, reads as follows:

determination of the country of orig in" is part of the immediate context of the term "requirements".
Considered as relevant context, the clause at issue lends force to the argument that the "requirements"
which must not be unduly strict include the kind of requirements which must be fulfilled as a
prerequisite for the determination of the country of origin. Article 2(a) of the RO Agreement provides
further contextual support for such an interpretation. The first sentence of that provision states that
the "requirements to be fulfilled" must be clearly de fined. It is clear to us that these requirements
include the substantive requirements which must be met for a good to be determined to originate in a
particular country. For these reasons, we read th e term "requirements" in the second sentence of
Article 2(c) as encompassing the substantive origin requirements
295 that must be met for a good to
obtain origin status.296
6.205 Another issue presented by the phrase "unduly stri ct requirements" is the interpretation to be
given to the adjective "strict". The most pertinen t dictionary definitions of the term "strict" are
"exacting"297 and "rigorous" 298. Thus, a "strict" requirement is an exacting or rigorous requirement.
In the specific context of Article 2 of the RO Agreement, and also bearing in mind our interpretation
of the term "requirements", "strict" requirements are, therefore, those requirements which make the
conferral of origin conditional on conformity with an exacting or rigorous (technical) standard.299
6.206 The second sentence of Article 2(c) only precludes Members from imposing requirements
which are "unduly" strict. The dictionary meaning of the adverb "unduly" is "more than is warranted
or natural; excessively, disproportionately". 300 Accordingly, an origin requirement can be considered
to be "unduly" strict if it is excessively strict.
6.207 India invites the Panel to adopt a particular standard in determining whether origin
requirements are unduly strict. Specifically, India ar gues that origin requirements are unduly strict if
they are burdensome and need not be imposed to determine the country with which the good in
question has a significant economic link. Even if we were to agree that Ar ticle 2(a) (specifically, the
three origin-criteria specifically listed in indent s (i) through (iii)) and the second clause of the second

"[Les règles d'origine] n'imposeront pas de prescriptions indûment rigoureuses ni n'exigeront,
condition non liée à la fabrication ou à l'ouvraison."
The Spanish text of Article 2(c), second senten ce, seems to track the French version rather
than the English version. It reads:
"[Las normas de origen] [n]o impondrán condiciones indebidamente estrictas ni exigirán el
295 For the purposes of this dispute, we need not decide whether the "requirements" mentioned in the
second sentence of Article 2(c) would also encompass the formal, or administrative, requirements which may be
imposed in order to assess compliance with rules of origin (e.g., documentation requirements).
296 The negotiating history of the RO Agreement tends to confirm that the term "requirements" refers to
the substantive origin requirements that must be met for a good to obtain origin st atus. The first clause of
Article 2(c), second sentence, appears to originate in two provisions proposed by Japan. The first of these
proposed provisions states that "the requirements to be fulfilled in the determination of origin shall be clearly
defined. [… ] Rules of origin which state only what does not confer origin [… ] or state only abstract conditions
or unduly strict conditions shall be prohibited". MTN.GNG/NG2/W/52, p. 5 (emphasis added). The other
provision proposed by Japan states that " [t]echnically excessive requirements as a prerequisite for the
determination of country of origin shall be prohibited". Ibid.
297 Black's Law Dictionary, B. A. Garner (ed.), West Group, 1999, p. 1434.
298 Merriam-Webster OnLine Thesaurus, http://www.m-w.com (March 2003). We note that the French
version of the second sentence of Article 2(c) also uses the adjective "rigoureux".
299 In other words, we think that the "strictness" of requirements is to be assessed from the perspective
of countries wanting to obtain origin status, rather than from the perspective of countries wanting to lose origin
status.
300 The New Shorter Oxford English Dictionary , L. Brown (ed.), Clarendon Press, 1993, Vol. 2,
p. 3480.

sentence of Article 2(c) (specifically, the obligat ion not to require the fulfilment of a condition
unrelated to manufacturing or processing) could broadl y support the notion that origin determinations
should be conditional on the existence of some economic link between the good in question and the
country the origin of which it is accorded, we do not discern in Article 2(a) or Article 2(c) a
requirement that there necessarily be a significant economic link. At any rate, it is not clear on what
basis and how Members would distinguish between economic links that are "significant" and those
that are not.
6.208 Regarding the second clause of Article 2(c), s econd sentence, we note that the parties have
not identified specific interpretativ e issues. We consider that the ordinary meaning of the second
clause is clear. It requires Members to ensure th at the conditions their rules of origin impose as a
prerequisite for the conferral of origin not include a condition which is unrelated to manufacturing or
processing.301 We note the example offered by the United States that a rule of origin would not
conform to this requirement if it stated that a good can only be ascribed the origin of a country if the
good has been certified by several authorities thro ugh a time-consuming process in the exporting
country.
6.209 With the foregoing considerations in mind, we now proceed to assess the consistency of the
measures at issue with the second sentence of Article 2(c).
(b) Consistency of the measures at issue with Article 2(c), second sentence, of the RO Agreement
6.210 India claims that section 334 and section 405 – hereafter the "measures at issue" – are
inconsistent with the second clause of Article 2( c), second sentence ("fulfilment of a condition not
related to manufacturing or processing"). In the alternative, India claims that the measures at issue are
inconsistent with the first clause of Article 2(c), second sentence ("unduly strict requirements"). 302
Accordingly, the Panel will first examine India's claim under the second clause of Article 2(c), second
sentence.
(i) "Fulfilment of a condition not related to manufacturing or processing"
6.211 India asserts that the United States' rules of or igin require the fulfilment of conditions not
related to manufacturing or processing in three situations. First, when there is a distinction made
between fabric of silk, cotton, man-made fibre, or vegetable fibre and fabric made of other fibres,
such as wool in determining when th e fabric forward rule will be applied. 303 Second, when there is a
distinction made between products classified under seven HTS 4-digit headings listed in section
405(a)(3)(C) and the products classified under the remaining 16 HTS headings in section 334(b)(2) in
determining when origin will be conferred by a DP2 operation. 304 Third, when within those seven
HTS 4-digit headings, there is a distinction made between products made of cotton, wool, or a fibre
blend with more than 16% cotton and products made of other fibres in determining when the fabric
forward rule will be applied.
6.212 With respect to the first situation, India consid ers that there is no difference in the processing
of the weaving of wool yarns into fabric from the weaving of cotton, silk or man-made fibre yarns
into fabric. With respect to the second situation, India considers that there is no distinction in the
processing of the products under the seven headings as compared to the remaining 16 headings.
According to India, the processing of a shawl under HTS 6214 is not different from the processing of

301 We are aware that the third sentence of Article 2( c) states that "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)". But the third sentence opens with the word "however", which
implies a contrast between the second and third sentences.
302 India's second written submission, para. 43.
303 India refers to section 405(a)(3)(B).
304 India refers to section 405(a)(3)(C), which provided exceptions to section 334(b)(2).

a blanket under HTS 6301. With respect to the thir d situation, India considers that there is no
difference between the processing of a bed valanc e made of 83% polyester / 17% cotton blend as
compared to a bed valance made of 86% polyester / 14% cotton blend. India argues that under the
United States' rules of origin different determinat ions of origin will be made in each of these
situations. India submits that these distinctions co nstitute conditions which are not at all related to
manufacturing or processing, and therefore are clearly inconsistent with the obligation in the second
clause of the second sentence of Article 2(c).
6.213 India points out that a United State' attorney, an expert in the textiles and apparel sector, has
noted the absurdity of these distinctions
 and concluded that the Unite d States' rules of origin
containing the distinctions between fabrics, products and fibre blends were "far more motivated by a
desire to protect United States wool and cotton pr oducers than by any desire to create genuinely
logical changes to rules of origin". India agrees w ith this interpretation, and considers that the United
States' rules of origin require the fulfilment of conditions not related to manufacturing or processing
as a prerequisite to the determination of country of origin, which is inconsistent with the second
clause of the second sentence of Article 2(c).
6.214 The United States notes that it does not see the value of the bifurcation of India's claim in
respect of the first two sentences of Article 2(c), other than to highlight the opinions of a United States
attorney who often represents importers. In the view of the United States, India has not made a prima
facie case that the United States' rules of origin are unrelated to the manufacturing or processing or
assembly of textile and apparel products. The Unite d States notes that it appears to be India's opinion
that the United States cannot, under the RO Agreement, make a distinction between the rules of origin
for silk fabrics and the rules of origin for wool fabrics.
6.215 The Panel recalls India's argument that, for the purpo se of determining the applicable rule of
origin, the measures at issue make distinctions between:
− fabrics of silk, cotton, man-made fibre, or vegetable fibre, on the one hand, and fabric
made of other fibres, such as wool, on the other hand;
− goods classified under seven HTS 4-digit headings listed in section 405(a)(3)(C) and
goods classified under the remaining 16 HTS headings in section 334(b)(2); and,
within those seven HTS 4-digit headings,
− between goods made of cotton, wool, or a fibre blend with more than 16% cotton and
goods made of other fibres.

6.216 In India's view, these three "distinctions" c onstitute "conditions" within the meaning of
Article 2(c), second sentence, which are not related to manufacturing or processing.
305 We are not
persuaded by this view.
6.217 The three distinctions identified by India are not hing more than what India itself calls them,
viz., product distinctions. The distinctions are maintain ed by the United States in order to define the
product coverage of particular rule s of origin, such as the fabric formation rule and the DP2 rule.
Indeed, it seems to us that, unless a country applie s a uniform rule of origin to all goods, product
distinctions are unavoidable.
6.218 In any event, as a matter of logic, we fail to see how a "distinction" could be viewed as a
"condition". Presumably, what India means is that, pursuant to the measures at issue, goods must
meet a certain definition in order to be entitled to pa rticular rules of origin. At most, we could accept
that, in a very broad sense, the product defin itions impose certain "conditions". These would be
conditions which must be fulfilled for a good to be subject to a particular rule of origin. However, the
second clause of Article 2(c), second sentence, speaks of "the fulfilment of a certain condition […] as

305 India's second written submission, para. 40.

a prerequisite for the determination of the country of origin". It does not speak of "the fulfilment of a
certain condition […] as a prerequisite for the applicati on of particular rules of origin". We consider,
therefore, that the conditions at issue in the sec ond clause of Article 2(c), second sentence, are those
that relate to the determination of the country of origin, and not the determination of the (applicable)
rule of origin. 306 Consistent with this, we think that th e conditions at issue in the second clause of
Article 2(c), second sentence, are those that must be fulfilled for a qualifying good to be accorded the
origin of a particular country. The third sentence of Article 2(c) reinforces our view. It plainly
addresses conditions used in connec tion with the application of a cr iterion for origin determination –
the ad valorem percentage criterion. It does not address the issue of how the goods which are covered
by such a criterion are defined.
6.219 In the light of the foregoing considerations, we are not convinced that the three "distinctions"
identified by India can be regarded as "condition[s] not related to manufacturing or processing" within
the meaning of the second clause of Article 2(c), second sentence.
6.220 India has not argued that there are other cond itions in section 334 or section 405 which are
unrelated to manufacturing or processing. We not e, furthermore, that, in response to questions
regarding the criteria for the determination of origin applied in section 334 and section 405, the
United States has stated that the relevant pr ovisions of section 334 and section 405 are based on
Article 2(a)(iii) of the RO Agreement.
307 Article 2(a)(iii) relates to the criterion of "manufacturing or
processing operation[s]". We have no difficulty accepting that fabric formation and DP2 operations
are "manufacturing or processing operation[s]".
6.221 In the light of the above, we conclude that India has not established that the measures at issue
are inconsistent with Article 2(c), second sentence, on the grounds that they "require the fulfilment of
a certain condition not related manufacturing or pro cessing, as a prerequisite for the determination of
the country of origin".
(ii) "Unduly strict requirements"
6.222 In view of the Panel's conclusion with resp ect to India's claim under the second clause of
Article 2(c), second sentence, it is necessary to examin e India's claim under the first clause of Article
2(c), second sentence.
6.223 India asserts that the United States' measures at issue impose strict requirements that do not
assist the United States in determining the country with which the product has the most significant
economic link. For example, according to India, the requirement that bed linen made from 86%
polyester and 14% cotton will be conferred origin where it is subjected to a DP2 operation, whereas
bed linen made from 84% polyester and 16% cotton will be conferred origin where the greige fabric is
woven is "unduly strict". India submits that this requirement bears no relation to determining the
country with which the bed linen has an economic link. In India's view, it constrains the
manufacturer's use of certain fibres as input for finished products.
6.224 India also argues that none of the criteria for the determination of origin listed in Article 2(a)
of the RO Agreement would require the imposition of requirements as strict as those applied by the
United States.

306 It is worth noting that India itself has stated th at Article 2(c), second sentence, is concerned with
"conditions that must be fulfilled to obtain the status of originating country". India's question No. 8 to the
United States.
307 United States' reply to India's question No. 2; United States' reply to Panel question No. 78.

6.225 The United States rejects India's view that there has to be an "economic link" between the
country on which origin is conferred and th e country where the product underwent the most
significant processing.
6.226 The United States further argues that India does not even make an attempt to support its
allegations that the relevant rules of origin impo se "unduly strict requirements", other than for the
Panel to assume that the rules set out in section 334 are burdensome. In the view of the United States,
India's description of the relevant United States' ru les of origin disproves this claim. The United
States submits that its rules are laid out in a clear, concise manner that could not be burdensome to the
ordinary, reasonable importer/exporter.
6.227 The Panel recalls its view that, for the purposes of this dispute, the relevant "requirements" in
the sense of the first clause of Article 2(c), sec ond sentence, are the substantive requirements for
qualifying as the country of origin.
308 In this case, they are that the goods concerned must have
undergone a specified manufacturing or processing ope ration – fabric formation or a DP2 operation –
in the country for which origin is claimed.
6.228 India provides only one example, relating to bed linen, in support of its argument that the
United States measures at issue impose unduly strict requirements. 309 However, we have difficulty
understanding how this example demonstrates that th e measures at issue are "unduly strict". India's
example could be understood in one of two ways. First, India could be understood as arguing that it
is "unduly strict" to "require" that bed linen be made from 86% polyester and only 14% cotton to be
conferred the origin of the country where that be d linen has undergone a DP2 operation. However,
such an argument would not demonstrate that it is "unduly strict", with respect to the good to which
the relevant rule of origin applies, to require a DP2 operation as a condition for the conferral of origin
on a country. If anything, it would demonstrate that the relevant rule of origin has a narrowly defined
product scope, in the sense that it excludes from its scope bed linen made from 84% polyester and
16% cotton. This does not, however, imply a re quirement to produce bed linen made from 86%
polyester and only 14% cotton. There may be an incentive to do so, but plainly there is no
requirement to do so. 310 India also argues that the "requirement" that bed linen must be made from
86% polyester and only 14% cotton for the DP2 rule to apply "bears no relation to determining the
country with which the bed linen has an economic link". 311 This assertion presupposes that the
"requirement" in question is intended for that purpos e. As already noted, we are not convinced it is.
In our view, the purpose of the "requirement" in ques tion is to define what goods are eligible for the
DP2 rule, not to establish the existence of an economic link.
6.229 Second, India could be understood as arguing that for bed linen which has been subjected to a
DP2 operation and which is made of 84% polyester and 16% cotton, it would be "unduly strict" to
require that, for a country to qualify as the country of origin, it needs to have woven the fabric. Even
were we to assume that, for the goods concerned, the fabric formation rule could be viewed as
imposing a "strict" requirement, India would still need to demonstrate that the fabric formation rule is
"unduly" strict.
6.230 In this respect, India appears to argue that, for the goods concerned – i.e., for bed linen which
has been subjected to a DP2 operation and which is made of 84% polyester and 16% cotton – the
fabric formation requirement is "unduly" strict, inter alia, because it bears no relation to determining
the country with which those goods have the most significant link, or at least a significant economic

308 Supra, para. 6.207.
309 India's second written submission, para. 46.
310 We are not convinced, therefore, that the measures at issu e impose any "constraints" of a legal
nature on the use of cotton fibres in the making of bed linen, as India appears to suggest. India's second written
submission, para. 46.
311 India's second written submission, para. 46.

link.312 We have previously indicated that we see no basis in Article 2 of the RO Agreement for a
requirement that there be a significant economic link between a good and the country the origin of
which it is accorded. 313 Even if India's view were correct, however, India has not demonstrated that
there is no significant economic link between bed lin en which has been subjected to a DP2 operation
and which is made of 84% polyester and 16% cotton and the country in which the fabric of such bed
linen was formed.
6.231 In the light of the above, we are not persuade d that India's example demonstrates the "undue
strictness" of the requirements set out in the releva nt United States' rules of origin. Since India does
not rely on any other example, we conclude that India has not established that the measures at issue
are inconsistent with Article 2(c), second sentence, on the grounds that they pose "unduly strict
requirements".
4. India's claim under Article 2(d) of the RO Agreement
6.232 The last of India's claims c oncerning the statutory provisions at issue is India's claim under
Article 2(d) of the RO Agreement. That claim is limite d to section 405. As with India's other claims,
the Panel begins its analysis of the consistency of section 405 with Article 2(d) by considering the
provisions of Article 2(d).
(a) Article 2(d) of the RO Agreement
6.233 Article 2(d) provides as follows:
"Until the work programme for the harmonization of rules of origin set out in Part IV is
completed, Members shall ensure that:
[…]
(d) the rules of origin that they apply to im ports and exports are not more stringent than
the rules of origin they apply to determine whether or not a good is domestic and shall not
discriminate between other Members, irrespective of the affiliation of the manufacturers of the
good concerned2[.]"
Canada-Patent Protection of Pharmaceutical Products in the following terms:
"de facto discrimination is a general term descr ibing the legal conclusion that an ostensibly
neutral measure transgresses a non-discrimination norm because its actual effect is to impose

312 Ibid., paras. 45-46.
313 Supra, paras. 6.207.

differentially disadvantageous consequences on cer tain parties, and because those differential
effects are found to be wrong or unjustifiable."
314
6.236 India argues that the Panel in this case s hould, therefore, examine whether section 405
imposes differentially disadvantageous consequences a nd if these different effects are justifiable. In
support of this view, India notes that the Appellate Body, in the context of the non-discrimination
provisions of the GATT 315 and the GATS 316, interpreted those provisions as prohibiting both de jure
and de facto discrimination. In the view of India, there is no reason why this approach to the principle
of non-discrimination should not also apply to the prohibition of discrimination in the RO Agreement.
India believes that the danger of circumventi ng the purpose of Article 2(d) through product
distinctions is just as great as the danger of circ umventing the most-favoured-nation provisions of the
GATT and the GATS through product- or service-specific distinctions. India is of the view that the
case before the Panel is a clear demonstration that arbitrary distinctions between closely related
products can be used to achieve the objective of favouring one WTO Member over others.
6.237 India further argues that Article 2(d), unlike Articles I and III of the GATT 1994, does not
refer to measures distinguishing between products of other Members but to discrimination between
other Members. According to India, the wording of Article 2(d) reflects the fact that the very purpose
of the measures regulated by this provision is to determine whether a product is a product originating
in another Member. India believes that Article 2(d) can, therefore, be violated by denying a product
the status of originating in a Member.
6.238 India notes that, unlike Article III of the GATT 1994, Article 2(d) does not refer to
discrimination between "like" produc ts originating in different countr ies or to discrimination between
imported and domestic products that are "directly co mpetitive or substitutable". In India's view, this
suggests that Article 2(d) can be violated even if the products distinguished in the rules of origin are
neither like nor directly competitive or substitutable. India recalls that the Appellate Body decided
that the question of whether two products are "like" or "directly competitive or substitutable" within
the meaning of Articles III:2 and III:4 of the GATT 1994, must be answered by examining them from
the perspective of the consumer in the market of the importing country. However, in India's view,
two products that are "like" or "directly compe titive or substitutable" from the perspective of the
consumer should be accorded a different origin if they were produced in different countries. The
criteria for determining whether two products are " like" or "directly competitive or substitutable"
within the meaning of Article III of the GATT 1994 can therefore not be transposed to Article 2(d).
6.239 India submits that it would be equally inappropriate to transpose to Article 2(d) the concept of
"like" products used in Article I of the GATT 1994. India notes that tariffs are a negotiable (and
hence legitimate) instrument of protection, while ru les of origin are not. India argues that, under the
GATT 1994, Members are therefore permitted to make very fine product distinctions in their tariff
classifications designed to protect specific domestic industries. However, under the RO Agreement,
Members are not to use rules of origin to pursue tr ade objectives. According to India, it would, for
this reason, not be logical to determine the sc ope of the prohibition of discrimination under the RO
Agreement by using concepts that determine the scope of discrimination under Article I of the GATT
1994.

314 Panel Report, Canada – Patent Protection of Pharmaceutical Products ("Canada – Pharmaceutical
Patents "), WT/DS114/R, adopted 7 April 2000, DSR 2000:V, 2295, para 7.101.
315 Appellate Body Report, Canada – Certain Measures Affecting the Automotive Industry ("Canada –
Autos"), WT/DS139/AB/R, WT/DS142/AB/R, adopted 19 June 2000, DSR 2000:VI, 2995, para 63.
316 Appellate Body Report, European Communities – Regime for the Importation, Sale and Distribution
of Bananas ("EC – Bananas III "), WT/DS27/AB/R, adopted 25 September 1997, DSR 1997:II, 591, paras. 233
to 234.

6.240 India considers that rules of origin violate Article 2(d) if they result in unjustifiably
differential treatment of "closely related (Indian and European Communities) products". In India's
view, textile products which are comp rised of different types of fabrics or different types of fibre
blends are "closely related" products. India argu es that a Member cannot apply different rules of
origin to textile products just because they are comp rised of different types of fabrics or different
types of fibre blends. India recalls that, in th e case of the United States measures at issue, when a
scarf is made of silk, it is conferred the origin of th e country where it is subjected to a DP2 operation.
On the other hand, when a scarf is made of cotton, it is conferred the origin of the country where the
greige fabric is formed. India submits that, fro m the perspective of production techniques, these
scarves are virtually identical, and that it is completely arbitrary to distinguish them for the purpose of
determining their origin.
6.241 The United States notes that the second clause of Article 2(d) is directed at precluding the
type of discrimination, in the form of non-preferential rules of origin, that would include a criterion
based on the national affiliation of a company or nationality of is employees.
6.242 The United States considers that India's interpreta tion of Article 2(d) is based on the flawed
understanding that the RO Agreement would preclude product-specific rules of origin and that the RO
Agreement precludes different rules of origin from appl ying to different products. However, in the
view of the United States, Article 2 of the RO Agreement does not require that the same rules be used
for similar products. The United States submits that, contrary to India's desire, nothing in Article 2 or
any other provision of the RO Agreement mandates that Members use a particular rule for a particular
manufacturing process, or for particular products. The RO Agreement clearly allows for
differentiation of rules between products, as can be seen in the harmonization work programme,
where Members are addressing thousands of subheadings in the tariff schedule.
6.243 The United States then turns to the question of what disciplines the RO Agreement imposes on
a Member in distinguishing products . The United States submits that the RO Agreement does not
require the same rule of origin for all "like" or "directly competitive" products. In the view of the
United States, 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 th at it should be so inferred. Moreover, according to
the United States, the RO Agreement does not require the same rules for all products that are similar in
some other sense. Again, the United States considers that such a requirement is not spelled out in the
RO Agreement and cannot be inferred fr om any provision of the RO Agreement. The United States
argues that it would, therefore, 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 ma nner, and even if such product-specific rules are
perceived to be based on distinctions deemed in some sense "narrow".
6.244 The Panel begins its analysis by recalling India's claim that section 405 violates the second
clause of Article 2(d) because it results in unjust ifiably differential treatment of "closely related
(Indian and European Communities) products". 317 This claim is based on three cumulative
assumptions. First, it assumes that the second clause of Article 2(d) imposes an obligation on
Members to apply the same rule of origin, or at leas t equally advantageous rul es, to "closely related"
products ( e.g., silk scarves and cotton scarves) imported from different Members. 318 Second, it
assumes that the second clause of Article 2(d) should be interpreted to prohibit not only de jure
discrimination between Members, but also de facto discrimination. Third, it assumes that an
assessment of whether rules of origin discriminate, de facto , between Members calls for an
examination of whether those rules impose differe ntially disadvantageous consequences on certain
Members and of whether these different consequences are justifiable.

317 India's reply to Panel question No. 60; India's second written submission, para. 68.
318 We note that India does not offer a definition of the concept of "closely related products".

6.245 In respect of the first of India's three assump tions, we recall that the second clause of Article
2(d) states that rules of origin "shall not discriminate between other Members, irrespective of the
affiliation of the manufacturers of the good concerned". It does not state that rules of origin "shall not
discriminate between closely related goods of othe r Members […]". Thus, the plain terms of the
second clause do not support India's reading.
6.246 Moreover, the expression "the good concerned" in the singular indicates that the second
clause of Article 2(d) is not concerned with discrimination across different (but closely related) goods.
Were it otherwise, the second clause would arguably have referred to "the go ods concerned" in the
plural. In our view, the use of the singular s uggests that, for the purposes of assessing whether there
is discrimination "between Members", a comparison should be made between the rule of origin
applicable to a particular good when imported from one or more Members and the rule(s) of origin
applicable to the same good – "the good concer ned" – when imported from one or more other
Members.
6.247 If the second clause of Article 2(c) were intende d to preclude discrimination across different
(but closely related) goods, we consider it likely th at the drafters would have provided some textual
guidance as to the product scope of the prohibition set forth in the second clause. Indeed, we note that
other WTO non-discrimination provisions, such as Articles I, III and IX of the GATT 1994, do
specify the product scope of the prohibitions they contain.
319
6.248 Finally, our reading of the second clause of Article 2(d) is consistent with the objective of that
clause. In our view, the principal objective of the sec ond clause of Article 2(d) is to ensure that, for a
given good, the strictness of the requirements that must be satisfied for that good to be accorded the
origin of a particular Member is the same, rega rdless of the provenance of the good in question ( i.e.,
Member from which the good is imported, affiliation of the manufacturers of the good, etc.).320
6.249 In view of the above considerations, we ar e unable to accept India's assumption that the
second clause of Article 2(d) imposes an obligation on Members to apply the same rule of origin, or at
least equally advantageous rules, to "closely related" products imported from different Members.321
6.250 Since we have rejected the first of three cumulative assumptions underlying India's claim
under Article 2(d), and since it is not necessary to our disposition of that claim, we do not decide
whether the second and third of India's assumptions are correct. Accordingly, in examining India's
claim that section 405 is inconsistent with the se cond clause of Article 2(d), we will accept these
assumptions on an arguendo basis.
(b) Consistency of section 405 with Article 2(d) of the RO Agreement
6.251 India recalls that section 405 provides exemptions to the general rules for determining origin
for certain fabrics, certain goods and certain fibr e blends. India acknowledges that these exemptions
are, de jure, applied on an origin-neutral basis. Ho wever, in India's view, these exemptions de facto
favour goods from the European Comm unities since the fabrics, products or fibre blends that benefit
from the exemptions are mainly the type of tex tile and apparel products which undergo "value-added"
or substantial transformation operations in the Eur opean Communities. Therefore, India argues, these

319 For instance, Article I of the GATT 1994 prohibits discrimination as between "like" products only.
320 The Panel notes that this is consistent with its view that Article 2 is intended to leave Members a
considerable measure of discretion in designing and applying their rules of origin. Supra, para. 6.25.
321 India could be understood as arguing as well that the second clause of Article 2(d) can be violated
even if the products distinguished in the rules of or igin are neither "like" nor "directly competitive or
substitutable" products within the meaning of Article III of the GATT 1994. India's reply to Panel question No.
3. Our reasoning with respect to India's concept of "clo sely related products" would be equally applicable if
India meant to argue that the second cl ause of Article 2(d) also prohibited discrimination as between products
that are neither "like" nor "directly competitive or substitutable".

products can enter the United States without being subject to any quota restraints. India notes that, in
contrast, when these products are made of certa in fibres such as cotton, those products will be
conferred origin where the greige fa bric is woven. India asserts that it is mainly developing countries
under quota restraints that export cotton fabric. Acco rding to India, this demonstrates that the effect
of section 405 is to impose differentially disadvantageous consequences for developing countries such
as India which export cotton fabric and products thereof.
6.252 India argues, furthermore, that the differential effects created by section 405 are unjustifiable.
India considers it indisputable that the United St ates enacted section 405 for the sole purpose of
providing favourable market access for particular tex tile products that were of special concern to the
European Communities. In India's view, the effects of section 405 are, therefore, unjustifiable.
6.253 According to India, the effects created by section 405 are also unjustifiable because, in its
view, the exemptions in section 405 (which makes distinctions between ce rtain products) bear no
relation to the manufacturing or processing of those products. Specifically, India argues that the
amendments in section 405 created arbitrary and in consistent reversions to the pre-section 334 rules
of origin for a group of selected textile products, without any particular regard for the degree of
further processing, assembly or other operations and how the extent of those further operations would
change the nature of the products. India submits that the exceptions created by section 405 were
defined solely by the types of end products im ported into the United States from the European
Communities and for which the European Communiti es expressed concern. India asserts in this
regard that the manufacturing and assembly of bed linen is the same whether it is made of silk or
cotton. India is of the view that these products are th e same. India considers in this respect that there
are no technical reasons to discriminate in terms of rules of origin between products that are identical
(and thus by definition are competitive or substitu table in the market) and that undergo the same
manufacturing and processing.
6.254 In addition, India notes that the United Stat es refers to its Harmonized Tariff Schedule
(general note 22) which defines "wholly of" as meaning "that the goods are […] completely of the
named material". India maintains that for secti on 405, however, the United States arbitrarily made
more than 16% cotton as the criterion to determine the applicable rule of origin ( i.e., that origin would
be conferred where the greige fabric is woven). I ndia points out in this regard that the United States
has noted that in response to a question from the Panel that "by est ablishing a rule of certain goods
containing 16% or more of weight of cotton, we en sured that we would cover the products defined in
our settlement agreement". India submits that by reducing the threshold of the definition of a cotton
product from one that is composed completely of cotton to one that is merely 16% and above of
cotton, the United States effectively brought more items under the definition of cotton, which
according to section 405, would be conferred origin where the greige fabric was woven.
322
6.255 The United States notes that India's primary claim with respect to section 405 is its charge
that because the exceptions to section 334 took into account specific products of interest to the
European Communities, this "favoured" the Euro pean Communities and is discriminatory. The
United States notes that, of course, any settlement has to be satisfactory to the complaining party. But
the United States submits that if the settlement is applicable to all Members on an MFN basis, it will
in all likelihood benefit all exporting Members. In the view of the United States, India cannot rely on
Canada-Autos to substantiate a claim of de facto advantage in favour of the European Communities.
The United States notes that, in that dispute, the Appellate Body was addressing an advantage given
to some products that was based on the country of a ffiliation of the producers. The United States
emphasizes that, in that case, the de facto discrimination resulted because Canada was giving
advantage to some of the same (like) products based on nationality. The United States considers that,

322 India considers that the "16% and more" definition is also not consistent with the definitions as set
out in Chapters 50 to 55 of the Harmonized System which provides for a definition of "85% or more" as
pointed out by the United States in its replies to the Panel's questions.

in this dispute, India's charges in respect of the United States' rules of origin relate to different
products. The United States further ar gues that, while it is true that in that report the Appellate Body
made a reference to " de facto advantage", Article I:1 of the GATT 1994 is not at issue in this case.
The United States notes that if India had wished to ma ke such a claim, it could have brought a dispute
under that provision.
6.256 The United States further points out that India also appears to argue a "differential treatment"
theory in support of its Article 2(d) claim in r espect of section 405. The United States notes in this
respect that Article 2(d) addresses discrimination among Members – that is, applying different rules to
different Members with respect to the same product – not discrimination between domestic versus
imported products, or among imported products.
6.257 The United States argues, finally, that the Panel report in Canada-Pharmaceuticals Patents
does not save India's case either. The United St ates considers that this dispute is not a
product-discrimination case and Article 2(d) is not about product discrimination. The United States
believes that, even accepting that the Panel report in th at dispute were relevant to the present dispute,
India has not shown that the "actual effect" of section 405 is to impose "differentially disadvantageous
consequences" on India, or China or the Philippines and that those differential effects are wrong or
unjustifiable, as is the basis for the Panel's reasoning in Canada-Pharmaceuticals Patents.
6.258 The Panel understands India's claim to be based on three assertions: first, that section 405
results, de facto, in differential treatment of goods, by prov iding an advantage to goods of concern to
the European Communities which it does not provide to goods of concern to developing countries like
India; second, that the goods affected by the differe ntial treatment are goods which are "closely
related"; and, third, that the differential treatment of the goods in question is unjustifiable.
323
6.259 We accept, arguendo, India's first assertion and, accord ingly, begin by examining India's
second assertion – that the (assumed) differential treatment resulting from section 405 affects "closely
related" goods. We recall in this respect that we have rejected India's view that the second clause of
Article 2(d) imposes an obligation on Members to a pply the same rule of orig in, or at least equally
advantageous rules, to "closely related" products imported from different Members.
324 However, this
does not, in itself, dispose of India's claim under Article 2(d). The reason is that the category of
"closely related goods" logically comprises, as a sub set, goods which are the same. It is necessary,
therefore, to examine whether India has identifie d goods which are the same, but are differentially
affected by section 405.
6.260 We note, first, that it is unclear whether India is su ggesting that finished cotton fabric ( i.e.,
fabric which has been subjected to a DP2 operati on), and cotton bed sheets are "closely related"
goods.
325 These are goods in different stages of manufacturing, classified under different HS
headings. It is not clear to us, therefore, how co tton fabric and cotton bed sheets could be viewed as
the same products. In our view, merely that cotto n fabric may be converted to cotton bed sheets does
not make these goods the same. In any event, India has not made a prima facie case in this regard.326

323 India's second written submission, paras. 70-74; India's reply to Panel question No. 60.
324 Supra, para. 6.249. We note that, at the same time , we have accepted, for the sake of argument,
India's assumptions: (i) that the second clause of Ar ticle 2(d) should be inte rpreted to prohibit not only de jure
discrimination between Members, but also de facto discrimination and (ii) that an assessment of whether rules of
origin discriminate, de facto , between Members calls for an examin ation of whether those rules impose
differentially disadvantageous consequences on certain Members and of whether these different consequences
are justifiable. Supra, para. 6.250.
325 India's first oral statement, paras. 28-29.
326 In fact, India itself seems to ack nowledge that these are different "types" of product. India's first
oral statement, para. 28.

6.261 Second, India could be understood as implying that wool fabric and other fabric, such as silk
or cotton fabric, are "closely related" goods. 327 India's submissions with respect to its claim under
Article 2(d) do not specifically address wool fabric. We note that in the context of a different claim,
India argues that there is no difference in the pr ocess of weaving wool yarns into fabric and the
process of weaving cotton or silk yarn into fabric. 328 Even ignoring the fact that this argument
concerns a different claim, India has not provided any information on the processing of wool yarn and
other yarn. Moreover, even if India were correct and there was no difference in the processing, it is
not clear to us why this would detract from the fact that wool fabric, cotton fabric and silk fabric,
which are classified under different HS headings, ar e quite different in thei r physical characteristics,
quality and reputation. Thus, based on India's submissions, we are not convinced that wool fabric and
other fabric, such as silk or cotton fabric, ar e the same for the purposes of the second clause of
Article 2(d).
6.262 Third, India argues, explicitly, that silk scarves and cotton scarves are "closely related" goods.
India submits that, from the perspective of producti on techniques, silk scarves and cotton scarves are
virtually identical.329 Here again, India provides no specific information regarding the manufacturing
process of scarves made of different fabric. Nor does India address why the (alleged) fact that the
manufacturing process is the same makes other differences, including differences in classification
under the Harmonized System, physical characteristics, quality and reputation, inconsequential. In
the light of this, we consider that India's submissi ons are insufficient to convince us that silk scarves
and cotton scarves are the same for the purposes of the second clause of Article 2(d).
6.263 We note, furthermore, that, in India's view, be d linen made of silk and bed linen made of
cotton are the "same" products. This argument, too, is based on the contention that both types of bed
linen undergo the same manufacturing processes.
330 To that extent, mutatis mutandis , our
observations in the preceding paragraph with respect to scarves apply equally here. 331 India could be
understood to contend, in addition, that silk and cotton bed linen are "identical products" and, as such,
competitive and substitutable in the market. 332 However, even were we to assume that silk bed linen
and cotton bed linen could be determined to be the same on the basis of their competitive relationship,
this would not assist India, since India has not submitted sufficient information for us to assess the
nature and extent of a competitive relationship, if an y. Consequently, we consider that India has not
established that silk and cotton bed linen are th e same for the purposes of the second clause of
Article 2(d).
6.264 Finally, India could be understood as arguing that relevant goods made of a fibre blend with
16% or more cotton and goods made of a fibre bl end with less than 16% cotton are the "same"
goods.333 India's submissions with respect to its claim under Article 2(d) do not specifically address
goods made of fibre blends. We note, however, that in the context of a different claim, India argues
that there is no difference between the processing of a bed valance made of 83% polyester / 17%
cotton blend as compared to a bed valance made of 86% polyester / 14% cotton blend. 334 In this
particular instance, it is not necessary for us to d ecide whether India's submissions are sufficient to
establish that goods made of fabric with 16% or mo re cotton and goods made of fabric with less than
16% cotton are the same. This is because India has, in any event, not persua ded us that it would be

327 India says that, with respect to its claim under Article 2(d), it is challenging section 405(a)(3)(B),
which deals with fabrics. India's reply to Panel question No. 19.
328 India's second written submission, para. 40.
329 India's reply to Panel question No. 60.
330 India's second oral statement, para. 20.
331 We note that India has not provided any information regarding the manufacturing processes for silk
and cotton bed linen.
332 India's second oral statement, para. 20.
333 India's second written submission, footnote 33.
334 Ibid., para. 40.

unjustifiable to apply different rules of origin to goods with 16% or more cotton and goods with less
than 16% cotton.
6.265 Based on the foregoing, it is clear that, with the exception of one category of goods – goods
containing fabrics made of a cotton blend – wher e we have made no finding, India has failed to
establish that the (assumed) differential treatment resulting from section 405 affects goods which are
the same. As a result, India has failed to estab lish its claim under Article 2(d), with the possible
exception of goods made of a cotton blend.
6.266 Consistent with our conclusion in the preceding paragraph, with respect to goods made of a
cotton blend, we need to proceed to examine I ndia's third assertion that the (assumed) differential
effect is unjustifiable. For the purposes of this examination, we will assume that goods made of fabric
containing 16% or more cotton and goods made of fabric containing less than 16% are the same and
that the different rules of origin applied to such goods as a result of section 405 provides a de facto
advantage to goods of concern to the European Communities.
6.267 India argues that this (assumed) differential effect is unjustifiable because section 405 was
enacted for the "sole purpose"
335 of favouring goods of export interest to the European Communities
over goods of export interest to developing countri es. However, we have already found, when
examining India's claim under Article 2(b), that India has not established that the United States is
using section 405 to favour goods of concern to the European Communities over goods of concern to
other Members.
6.268 India appears to argue that the (assumed) diffe rential effect is unjustifiable, in addition,
because there is "no technical reason" to discriminat e in terms of rules of origin between goods made
of fabric containing 16% or more cotton and goo ds made of fabric containing less than 16%. 336 India
considers that it is "arbitrary" to maintain such a product distinction for rules of origin purposes and to
make more than 16% cotton the criterion to determine the applicable rule of origin. 337 The United
States has explained that the 16% cotton threshold w as established in order to implement the terms of
the bilateral settlement agreemen t between the United States and the European Communities. The
United States further points out that its definition of cotton blends is consistent with the structure of
the Harmonized System. The United States points out that the Harmonized System, in Chapters 50
through 55, defines yarns and fabrics as "wholly of" a given fibre if they contain 85% or more of that
fibre.
338
6.269 We understand the United States to argue, in essen ce, that it needed to define which cotton
blends, if any, should be entitled to the exception set forth in section 405(a)(3)(C), i.e., the DP2 rule.
Apparently, the United States determined that only those goods which are, effectively, "wholly of" a
fibre other than cotton should qualify for the DP2 rule (pr ovided such fibre is covered by the HTS
headings specified in section 405(a)(3)(C)). Thus , a bed valance made of 83% polyester / 17% cotton
blend is not regarded as, in effect, a polyester bed va lance. As such, it is not entitled to the DP2 rule.
The (low) 16% cotton threshold would appear to be consistent with the complete exclusion from the
DP2 rule of specified cotton goods which are not blends.
6.270 The 16% cotton threshold appears to be consis tent with the structure of the Harmonized
System, which recognizes the utility of specifying a certain percentage threshold for textile blends.339
Thus, setting a relatively low percentage threshold is consistent with the fact that cotton goods which

335 India's second written submission, para. 72.
336 India's second oral statement, para. 20.
337 India's reply to Panel question No. 60; India's second oral statement, para. 19.
338 United States' reply to Panel question No. 9.
339 See Chapter 50-55 of the Harmonized System.

are not blends are completely excluded from the DP 2 rule. We are, therefore, not persuaded by
India's assertion that the 16% cotton threshold is arbitrary and, hence, unjustifiable.340
6.271 Accordingly, we find that, with respect to goods made of a cotton blend, India has not
established that the (assumed) differential effects created by section 405 are unjustifiable. As a
consequence, we reject India's claim under Article 2( d), insofar as it concerns relevant goods made of
a cotton blend.
6.272 In the light of all of the above considera tions, we conclude that India has failed to
demonstrate that section 405 is inconsistent with the second clause of Article 2(d).
E. INDIA'S CLAIMS IN RESPECT OF THE IMPLEMENTATING CUTOMS REGULATIONS
6.273 As will be recalled, India's claims are not limite d to the statutory provisions at issue in this
dispute, but also concern the customs regulations contained in 19 C.F.R. § 102.21.
6.274 India notes that these customs regulations impl ement section 334 and section 405. India
asserts that these regulations include provisions wh ich are inconsistent with the United States'
obligations under Article 2(b), (c) and (d) of the RO Agreement.
6.275 The United States argues that India has failed to establish a prima facie case that 19 C.F.R. §
102.21 breaches United States obligations.
6.276 The Panel recalls its previous conclusion that India has failed to establish that section 334 or
section 405 are inconsistent with Article 2 of the RO Agreement . India agrees that the customs
regulations set forth in 19 C.F.R. § 102.21 implemen t the principles contained in section 334 and 405.
In these circumstances, the Panel could only uphold I ndia's claims in respect of 19 C.F.R. § 102.21:
(i) if, unlike in the case of India's claims in respect of section 334 and section 405, India had provided
evidence and argument sufficient to establish an inconsistency with Article 2 of the RO Agreement;
or (ii) if India had identified certain aspects sp ecific to 19 C.F.R. § 102. 21 which would render these
regulations inconsistent with Article 2 of the RO Agreement independently of section 334 or section
405. However, India has done neither. Indeed, I ndia has made few references to 19 C.F.R. § 102.21,
and those references essentially summarize or reproduce the provisions of 19 C.F.R. § 102.21.341
6.277 Accordingly, the Panel concludes that Indi a has failed to establish that the customs
regulations contained in 19 C.F.R. § 102.21 are incons istent with Articles 2(b), 2(c) or 2(d) of the RO
Agreement.
F. INDIA'S CLAIMS IN RESPECT OF THE APPLICATION OF THE MEASURES AT ISSUE
6.278 India also requests the Panel to find that the "application" of section 334, section 405 and the
customs regulations contained in 19 C.F.R. § 102.21 is inconsistent with Articles 2(b), 2(c) or 2(d) of
the RO Agreement .342 India has not presented arguments or evidence with respect to specific
instances of application, by relevant United States au thorities, of the measures at issue. Nor has India
argued that these measures are applied, in practice, in a manner which is not specifically provided for

340 We also note that India has not shown that the 16% cotton threshold operates in such a way, for
instance, that producers of certain Members cannot adjust their production so as not to exceed this threshold, or
can only do so at an excessive cost.
341 E.g., India's reply to Panel question No. 21; Indi a's second written submission, paras. 9-10, 14, 17
and 20.
342 India's first written submission, para. 102.

in those measures.
343 In view of the lack of specific Indian submissions on the application of the
measures at issue, we see no need to examine these claims further.
6.279 Accordingly, the Panel concludes that India h as failed to establish that the application of
section 334, section 405 or the customs regulations c ontained in 19 C.F.R. § 102.21 is inconsistent
with Articles 2(b), 2(c) or 2(d) of the RO Agreement.

VII. CONCLUSION
7.1 For the reasons set forth in this Report, the Panel concludes as follows:
(a) India has failed to establish that section 334 of the Uruguay Round Agreements Act is
inconsistent with Articles 2(b) or 2(c) of the RO Agreement; and
(b) India has failed to establis h that section 405 of the Trade and Development Act is
inconsistent with Articles 2(b), 2(c) or 2(d) of the RO Agreement;
(c) India has failed to establish that the customs regulations contained in 19 C.F.R. §
102.21 are inconsistent with Articles 2(b), 2(c) or 2(d) of the RO Agreement;
7.2 In the light of its conclusion, the Panel ma kes no recommendations under Article 19.1 of the
DSU.

343 India's replies to Panel questions Nos. 19 and 62 do not contain any specific arguments in support of
a challenge to section 334, section 405 and the implementing customs regulations, as applied.

ANNEX A

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

ANNEX A-1
ANSWERS OF INDIA TO QUESTIONS FROM THE PANEL FOLLOWING THE FIRST
MEETING

Question 1
Do you agree with the European Communities that the concept of substantial transformation "was
intentionally left out of the disciplines to be applied during the transitional period" and that,
therefore, "Members are under no obligation during the transitional period to base their origin
rules on the concept of substantial transforma tion"? (European Communities' written submission,
paras. 9 and 22)
Answer 1

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

Question 2

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

Yes. In the United States' first submission (para. 32) and in the oral responses of the United States
delegation provided at the First Hearing, the Un ited States used the term "prevention of quota
circumvention" to refer to a situation where certa in countries attempted to avoid the quotas placed on
their textile and apparel products by exporting semi- finished products to third countries (not under
quota or under a more generous quota) to be subject ed to finishing operations, in order that those
products could be conferred the origin of the thir d country, when they were exported to the United
States.
However, this situation cannot be described as " quota circumvention." Circumvention is a term
which connotes a violation of existing rules. In the context of rules of origin, quota circumvention
describes situations where traders are making make false declarations about the origin of their
products or using other illegal mean s in order to evade the application of quotas. The United States
has not shown any instances of illegal circumvention of section 12.130 rules. India notes that, pre-
section 334, United States Customs was applying an d enforcing its section 12.130 regulations. The
United States' determinations of origin for such products (e.g., those exported to third countries for
DP2 before being exported to the United States) were therefore reached in conformity with the then
applicable section 12.130 customs regulations.
What the United States describes as "quota circumve ntion" is a perfectly legitimate reaction of the
market to the existence of country-specific quotas, which resulted in increased quantities of textile and
apparel products entering the United States. In the case before the Panel, the United States changed
its rules of origin to prevent perfectly legitimate ma rket reactions in order to maintain the protective
impact of its own quota regime on te xtile and apparel products. The new rules of origin are therefore

being used by the United States, by its own admission, to pursue the trade objective of protecting the
domestic industry. They are consequently inconsistent with Article 2 (b) of the RO Agreement.
(DP2 refers to dyeing and printing plus two finishing operations.)
Question 3

Does Article 2(d) of the RO Agreement cove r discrimination between the products of "other
Members"? If so, what kind of products, i.e., identical products, like products, directly competitive
or substitutable products, etc.?
Answer 3

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

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

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

Question 4

With reference to Article 2(a) of the RO Agree ment, could Members use criteria for determining
origin other than those specified in indents (i)-(iii)?
Answer 4
The general obligation in Article 2(a) is that Memb ers must ensure that when issuing "administrative
guidelines of general application, the requirements to be fulfilled are clearly defined." The words "in
particular" preceding the three examples in indents (i ) to (iii) support the inte rpretation that when one
of those three types of administrative guidelines is u sed, then the specific requirements listed in that

indent must be used. It is conceivable that a Member could use other criteria other than those set out
in the three indents to determine origin provided those criteria comply with the general obligation in
the first sentence of Article 2(a).

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

Question 5

Could India elaborate on the type of quotas to wh ich Indian exports become subject pursuant to
section 334? (India's first written submission, paras. 54 and 91). Are those quotas for (i) India's
fabric exports, (ii) quotas for finished products (e.g ., bed linen) made of Indian fabric or (iii) other
quotas?
Answer 5

Section 334 establishes origin for fabrics and certa in made-up articles based on the country where the
greige fabrics are formed by weaving or knitting, re gardless of any further finishing operations, such
as dyeing and printing. In view of this change in origin criteria under section 334, India’s exports of
greige fabrics become subject to quotas, as furthe r finishing operations like dyeing and printing are
not recognized for conferring origin. For example, India’s exports of greige fabrics to Portugal, when
subjected to dyeing, printing and two finishing operations in Portugal and exported to the United
States, would attract debits to India’s quotas on gr eige fabrics under the provisions of the "fabric
forward" rule established by section 334.
Exports of finished products (e.g. bed linen) made of Indian fabric are al so subjected to quotas as
section 334 (b)(2) provides the special rule that " notwithstanding the wholly assembled rule", the
origin of certain flat goods under certain headings such as bedding articles (quilts, comforters, bed
linen, mattresses, blankets), home furnishing (wa ll hangings, table linens), would be determined
where the greige fabric was woven.
These items when made from Indian fabrics and ex ported from a third country after finishing to the
United States become subject to quota limits set out for these products by the United States for India.
The range of restrictions imposed on Indian exports of fabrics or finished products by the United
States were notified in the Memorandum of U nderstanding signed between the Governments of
United States of America and India on December 31, 1994. These were subsequently notified to the
WTO within 60 days as mandated by the ATC.

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

(Questions 6 to 10 for the United States only)

Questions 11 (a) to (d)

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

(a) Does Article 2(c) prohibit rules of origin which create the specified effects even in
cases where those effects are entirely unintentional?
Answer 11 (a)
Yes. There is no intent requirement in Article 2(c). It establishes criteria that the
rules of origin themselves must meet. It contains no wording that could be construed
to require the Panel to distinguish between effects that were intended and those were
not.

(b) Does the phrase "restrictive
[… ] effects on international trade" mean that a
complaining Member must show a net restrictive effect on international trade? Or
would it be sufficient to show that the trade of one Member has been adversely
affected, even if the trade of another Memb er has been favourably affected? In the
latter case, could that one Member be a Member other than the complaining
Member?
Answer 11 (b)

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

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

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

(c) Could it be said that rules of origin inherently create "restrictive" effects on
international trade, inasmuch as they may require traders to fulfil certain
requirements (e.g., the preparation of certific ates 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 e ffect? In answering this question, please
address the relevance of the second sentence of Article 2(c) ("unduly strict
requirements") and the fourth preambul ar paragraph of the RO Agreement
("unnecessary obstacles to trade")
Answer 11 ( c )

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

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

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

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

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

(d) How should the Panel assess whether particul ar rules of origin create "distorting"
effects on international trade? What do you compare the existing rules of origin
with?
Answer 11 (d)

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

Question 12
In their submissions, the parties have referred to "visa requirements". Could the parties provide
information regarding the legal basis in Unite d States law for these requirements and how they
operate? Also, please address whether these requirem ents are imposed in order to administer
textile and apparel quotas or textile and apparel rules of origin.
Answer 12

The legal basis in the United St ates law for the visa requirements was clarified by the United States
delegation at the First Hearing of the parties. The visa and certification system is part of an
administrative arrangement to monitor the textile and apparel quotas.
Each shipment of textile and textile products subject to specific and group restraints are required to be
visaed by the Government of India with a circular shaped stamp (the visa) before entry or withdrawal
from warehouse for consumption into the United States.

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

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

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

Question 13 for the United States only

Question 14

With reference to Article 2(c) of the RO Ag reement, could the parties answer the following
additional questions:
(e) What is the relationship between the first and second sentences of Article 2(c)? Do
they provide for distinct and independent obligations, such that the second sentence
adds an obligation which is not already covered by the first sentence? Or does the
second sentence simply spell out one aspect , or consequence, of the obligation set
out in the first sentence?
Answer 14 (e)

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

(f) Is it appropriate to evaluate the trade effect s of rules of origin introduced by a
Member after the entry into force of the RO Agreement by comparing those rules
with rules of origin applied by the same Member before the entry into force of the
RO Agreement, i.e., with rules of or igin which were not subject to the RO
Agreement?
Answer 14 (f)

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

Question 15
Do the parties consider that Article 2(b)-(e) of the RO Agreement could be relied on to challenge a
change in rules of origin per se, as opposed to the specific rules of origin in force at the time a
challenge is brought? In other words, could a panel uphold claims under Article 2(b)-(e) that a
change in rules of origin of itself is contrary to these provisions?
Answer 15
There is nothing in Article 2(b)-(e) that prevents Members from changing their rules of origin
provided they meet the requirements set out in th ese provisions. India does not claim that the United
States violated these provisions merely because it cha nged its rules of origin. India claims that the
United States violated these provisions because it imposed and maintained rules of origin inconsistent
with these provisions.

Question 16
With reference to Article 2(b) of the RO Agreem ent, do the parties consider that the term "used"
should be interpreted to mean that a panel sh ould assess whether rules of origin are used as
instruments to pursue trade objectives as of the time they were adopted or as of the time of
establishment of the panel?
Answer 16

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

Question 16 bis
The European Communities suggests that Article 2(c) of the RO Agreement requires a showing of
actual restrictive or distorting effects and that such actual effects would need to be demonstrated
through trade statistics (European Communities' wr itten submission, paras. 28 and 32). At the
same time, the European Communities argues that pr otectionist intent would be indicated if what
the EC calls a "quota-effect" could be demonstrated, i.e., if it could be demonstrated, for instance,
that certain products which used to be quota-free be fore certain rules of origin entered into force
are subject to a quota after the entry into fo rce of those rules (European Communities' written
submission, paras. 23-24). Would a clear demonstra tion of such a (potential) "quota-effect", when
there is no demonstration of actual adverse impact on the trade of a Member, be sufficient to
establish restrictive or distorting effects under Article 2(c)?
Answer 16bis

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

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

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

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

344 United States – Measures Affecting Textiles and Apparel Products, WT/DS85/1, G/RO/D/1,
G/TBT/D/13, 3 June 1997 and United States – Meas ures Affecting Textiles and Apparel Products (II)
WT/DS151/1, G/TMB/N/341, G/RO/D/3, G/TBT/D/19, G/L/279, 25 November 1998.

manufacturers in the European Communities felt the r estrictive effects of the new rules of origin
immediately and urged the European Communities to intervene before th e new rules had caused
actual trade damage.

Question 17

With reference to Article 5.1 of the Agreement on Textiles and Clothing, which is referenced in the
Senate Report (exhibit IND-10, p. 125), could the parties please answer the following questions:
(a) What is the meaning of the term "circumven tion" as that term is used in Article
5.1? Please provide documentary suppor t if available (e.g., WTO documents,
negotiating documents, views of experts, etc.)?
Answer 17 (a)
A useful reference guide to responding to questions at 17 (a), (b), & (d) is the "Drafting History of the
Agreement on Textiles & Clothing" by Marcelo Raff aelli and Tripti Jenkins pu blished by the ITCB,
Geneva.

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

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

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

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

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

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

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

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

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

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

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

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

Article 5.1 of the ATC provides that: "Members agree that circumvention by transshipment, re-
routing, false declaration concerning country or place of origin, and falsification of official
documents, frustrates the implemen tation of this Agreement to inte grate the textiles and clothing
sector into GATT 1994. Accordingly, Members should establish the necessary legal provisions
and/or administrative procedures to address and take action against such circumvention…."

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

(b) Does "circumvention" as that term is used in Article 5.1 cover both quota
"evasion" (i.e., illegal action such as fraud, etc.) as well as quota "avoidance" (i.e.,
legal action intended to minimise the impact of a quota, etc.)?
Answer 17 (b)

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

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

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

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

(c) Does outward processing -- e.g., the shipment of Indian greige fabric to Sri Lanka, where
the fabric is converted to bed linen and th en exported to the United States -- constitute
quota "circumvention" within the meaning of Article 5.1, in cases where no fraud, false
declaration, etc. is involved?
Answer 17 ( c )

In the light of the reasoning in its answer to ques tion 17 (a), India considers the answer to question 17
(c) to be no. Clearly, outward processing does not constitute quota circumvention.
Circumvention within the meaning of Article 5.1 of the ATC is conduct involving "transshipment, re-
routing, false declaration, concerning country or place of origin and falsification of official
documents". The example relating to export of Indian greige fabrics to Sri Lanka where the fabric is
converted to bed linen and then exported to the Unite d States is a legitimate trade activity carried out
on the basis of "comparative advantage". The operations were based on investments made in the
processing sector in Sri Lanka. This activity ca nnot be termed as quota circumvention within the
meaning of Article 5.1 as no fraud or false declar ation etc. was involved. The intention of the
circumvention provisions in Article 5.1 is not to pr event legitimate changes in trade patterns based on
investment decisions but rather to prevent deliberate efforts to get RO Agreementund the provisions of
the ATC by false declarations or false documents with a view "to frustrating the implementation of
the ATC."

(d) What is "circumvention by transshipment"? Would this necessarily involve some illegal
action such as fraud, false declaration, etc., or could the mere fact that shipments are

transiting through third countries with or with out alterations made to the goods concerned
be considered "circumvention"?
Answer 17 (d)

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

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

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

Question 17 bis

At p. 118, under the heading "Rules of Origin", the SAA appears to provide the objectives which
the "country-of-assembly rule" "will serve". Could th e 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 me ntioned in the SAA do not apply to the fabric
formation rule, what are its objectives?
Answer 17 bis
The four objectives listed in the SAA can only reasona bly apply to the country of assembly rule. In
India’s view, these objectives cannot be met through th e fabric formation rule, and therefore they
cannot be said to apply to that rule. As the four objectives do not apply to the fabric formation rule,
the fabric formation rule must be said to have been passed to achieve different objectives. As India
has explained in its first submission and in its or al statement, the rule was passed to bring more
products under quota whereas previously they had been quota free or subject to more generous quota.
This rule of origin was therefore used to protect the United States' domestic industry.

Question 18

Is India challenging sections 334 and 405, per se, or the 1996 and 2000 changes in rules of origin?
Answer 18

India is challenging section 334 and section 405 per se . The sections are part of United States
legislative changes made in 1996 and 2000.
Question 19

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

With respect to the claim under Article 2 (b), India is challenging the following specific provisions of
the legislation and customs regulations:
Section 334 (b) (1) (C) - the fabric formation rule. The country of origin of a fabric is where the
fabric is woven, knitted, needled, tufted, felted, entangled or created by any other fabric-making
process.
Section 405 (a) (3) (B) - amendment to fabric formation rule
19 U.S.C. §3592 (b) (1) (C) - consolidated fabric formation rule
19 C.F.R. §102.21
Section 334 (b) (1) (D) – the wholly assembled
rule. The country of origin of a product is the country
where the components of the product are wholly assembled.
Section 405 (a) (3) (C) - amendments to the wholly assembled rule to exempt products of concern to
the European Communities and providing exceptions for goods made of cotton, wool or fibre blends
consisting of 16% or more of cotton.
19 U.S.C. §3592 (b) (1) (D) – consolidated wholly assembled rule
19 C.F.R. §102.21
Section 334 (b) (2) – "special rules " – Articles under certain HTS headings will be classified where
yarn or fabric formed, not where article is assembled.
Section 405 (a) (3) (B) - Certain fabrics such as silk, cotton, wool, MMF or vegetable fibre deemed to
originate where subject to DP2
19 U.S.C. §3592 (b) (2) (B) - Certain fabrics such as silk, cotton, wool, MMF or vegetable fibre
deemed to originate where subject to DP2
Section 405 (a) (3) (C) - Products classified under certain HTS headings deemed to originate where
subjected to DP2 not where greige fabric formed, exce pt for cotton, wool, fibre blends with more than
16% cotton.
19 U.S.C. §3592 (b) (2) (C) - Products classified under certain HTS headings deemed to originate
where subjected to DP2 not where greige fabric fo rmed, except for cotton, wool, fibre blends with
more than 16% cotton.
19 C.F.R. 102.21
With respect to the claim under Article 2(c), India is challenging the following specific provisions of
the United States legislation and customs regulations:

Section 334 (b) (1) (C) - the fabric formation rule. The country of origin of a fabric is where the
fabric is woven, knitted, needled, tufted, felted, entangled or created by any other fabric-making
process.
Section 405 (a) (3) (B) - amendment to fabric formation rule

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

19 C.F.R. §102.21

Section 334 (b) (1) (D) – the wholly assembled
rule. The country of origin of a product is the country
where the components of the product are wholly assembled.
Section 405 (a) (3) (C) - amendments to the wholly assembled rule to exempt products of concern to
the European Communities and providing exceptions for goods made of cotton, wool or fibre blends
consisting of 16% or more of cotton.
19 U.S.C. §3592 (b) (1) (D) – consolidated wholly assembled rule
19 C.F.R. §102.21
Section 334 (b) (2) – "special rules " – Articles under certain HTS headings will be deemed to
originate where yarn or fabric formed, not where article is assembled.
Section 405 (a) (3) (B) - Certain fabrics such as silk, cotton, wool, MMF or vegetable fibre deemed to
originate where subject to DP2
19 U.S.C. §3592 (b) (2) (B) - Certain fabrics such as silk, cotton, wool, MMF or vegetable fibre
deemed to originate where subject to DP2
Section 405 (a) (3) (C) - Products classified under certain HTS headings deemed to originate where
subjected to DP2 not where greige fabric formed, exce pt for cotton, wool, fibre blends with more than
16% cotton.
19 U.S.C. §3592 (b) (2) (C) - Products classified under certain HTS headings deemed to originate
where subjected to DP2 not where greige fabric fo rmed, except for cotton, wool, fibre blends with
more than 16% cotton.
19 C.F.R. 102.21
With respect to the claim under Article 2 (d), India is challenging the following specific provisions of
the United States legislation and customs regulations:
Section 405 (a) (3) (B) - Certain fabrics such as silk, cotton, wool, MMF or vegetable fibre deemed to
originate where subject to DP2
19 U.S.C. §3592 (b) (2) (B) - Certain fabrics such as silk, cotton, wool, MMF or vegetable fibre
deemed to originate where subject to DP2
Section 405 (a) (3) (C) - Products classified under certain HTS headings deemed to originate where
subjected to DP2 not where greige fabric formed, exce pt for cotton, wool, fibre blends with more than
16% cotton.

19 U.S.C. §3592 (b) (2) (C) - Products classified under certain HTS headings deemed to originate
where subjected to DP2 not where greige fabric fo rmed, except for cotton, wool, fibre blends with
more than 16% cotton.
19 C.F.R. 102.21
India will further elaborate upon the specific aspect s of the challenged provisions in the second
written submission.
In addition, please indicate whether your claims concern all qualifying products or only some
(Example: Claim X concerns only made-up non-appa rel textile articles made from vegetable fibre).
Also, please indicate what aspects of the "applic ation" of section 334 and/or section 405 as well as
the customs regulations India is challenging..
India’s claims cover all qualifying products which ha ve been impacted by the United States' rules of
origin in section 334 and section 405 (as consol idated in 19 U.S.C. §3592) and the customs
regulations.
 With respect to the application of section 334 and/or section 405, India notes the following:

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

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

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

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

5. Application of "fabric forward" rule to blended made-up articles where the cotton
component is 16% or more by weight.
6.
Question 20

Specifically with respect to India's claim under Ar ticle 2(c) of the RO Agreement, could India
clarify whether that claim relates to the first sentence thereof, the second sentence, or both?
Answer 20
India’s claims cover both sentences. As noted in its request for the establishment of the Panel, India
considers that the rules of origin at issue (a) requi re the fulfilment of certain conditions not related to
manufacturing or processing, (b) pose unduly strict requirements and (c) create restrictive, distorting
and disruptive effects on international trade. India will elaborate these claims in its second
submission.
Question 21

Could India submit a complete version of the customs regulations (exhibit IND-17)? It seems that
19 C.F.R. section 102.21(e) is missing from the document submitted (see India's written

submission, para. 53)? Could India elaborate on the relevance of 19 C.F.R. section 102.21(e) to
this dispute?
Answer 21
The complete version of the customs regulations is attached.
The relevance of 19 C.F.R. section 102.21 (e) – which addresses the tariff shift rules - to this dispute
is best explained in the following excerpt from th e Informed Compliance Publication on Textiles and
Apparel Rules of Origin by United States Customs. The underlined section, in particular, addresses
one of India’s main complaints in this dispute.

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

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

a) A change from greige fabric of heading 520 8 through 5212 to finished fabric of heading
5208 through 5212 by both dyeing and printing when accompanied by two or more of the
following finishing operations:
bleaching, shrinking, fulling, napping, decating, permanent stiffening, weighting, permanent
embossing, or moireing; or

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

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

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

The result is that the determination of the country of origin is defined in objective tariff
classification shifts rather than subjective terms such as "substantial assembly" or "new
commercial product". By using HTS classifications , there is no doubt when a change in the country
of origin occurs. If a shipper knows the classification of a textile product he is exporting, he merely
has to locate the classification in the tariff shift rul es to see if the required change of classifications

occurred when the product was produced or manufact ured. If the tariff shift has occurred and
any other listed requirement is met, then the country of origin is changed by the processing.

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

Question 22
Does India agree with the United States' statement th at section 334 was intended, in part, to bring
about greater certainty and clarity as compared to the previous practice of interpreting substantial
transformation on a case-by-case basis" (United States' first written submission, paras. 25 and 29)?
Answer 22
India does not agree with the United States' statement that section 334 was intended, in part, to bring
about greater certainty and clarity as compared to the previous practice of interpreting substantial
transformation on a case-by-case basis. In this regard, India would note that the case-by-case
determination process, as evidenced by the Cardinal Glove case, was abandoned by the enactment of
the section 12.130 regulations. The section 12.130 regul ations were a set of "concise, predictable,
published rules." The United States did have regulations in effect through section 12.130, plus a large
body of customs rulings, which applied to virt ually every production scenario. It is India’s
understanding that the section 12. 130 regulations were promulga ted in accordance with the
requirements of the United States Administrativ e Procedure Act (APA) and that interpretative
customs regulations issued pursuant to the APA are presumed to be correct, unless clearly arbitrary,
capricious, an abuse of discretion or otherwise not in accordance with the law.
Question 23

Could India elaborate on how para. 53 of its first written submission supports its conclusion that
section 334 is used as an instrument to pursue trade objectives?
Answer 23
Paragraph 53 of India’s first submission, read toge ther with paragraph 54, explains how the fabric
forward rule operated to protect the domestic industry of the United States. The paragraph is part of
India’s demonstration that the design, structure and architecture of section 334 reveal the objective of
protecting the domestic industry.
Question 24
Please address the United States' argument that "India does not address the possibility that Sri
Lankan producers may have decided to weave their own fabric or to source it from elsewhere".
(United States' first written submission, para. 41)

Answer 24
One has to acknowledge that changing the rule of orig in to a fabric forward rule will confer origin on
those countries that have loom capacity. However, looms are not inexpensive items that can be moved
RO Agreementund easily. It is not as if the Sri Lankans can "simply snap their fingers" and decide to
weave their own fabric. Setting up weaving mills is a capital intensive project. One may conclude
that countries with loom capabilities would be "w inners" in such an arrangement. But the United
States never amended its quota allotmen ts to account for the fact that the change in origin to the
location of the looms (i.e., to where the fabric was formed) would impact on origin for quota
purposes.
Countries such as Sri Lanka, with a low loom capacity and a growing sewing/dyeing business were
adversely affected by the United States' change in rules of origin b ecause they were limited as to the
amount of Indian fabric they could use because of the quota allotments. The restrictions on which
country Sri Lanka could source or input material s from decreased the amount of goods Sri Lanka
could send to the United States, thereby resulting in protection to the United States industry.
In addition, India notes that the United States' argument as to the Sri Lankan response is effectively an
acknowledgement by the United States that section 334 did restrict and distort trade. It acknowledges
that the likely response to section 334 would either be (a) to force a shift of investment in loom
facilities from other countries into Sri Lanka or (b) to shift the supply of fabric from India to other
countries whose quota remained open and who woul d still be willing to issue visas for goods not
produced in their country.
Question 25

With reference to Article 2(b) of the RO Agre ement, could India please answer the following
questions:
(a) Does India consider that the prevention of quota circumvention as that term is used
by the United States would need to be viewed as a "trade objective"?
Answer 25 (a)
Yes. See answer to Question 2.
(b) At para. 35 of its oral statement, India appears to reject the European
Communities' approach to the interpretation of Article 2(b) which India
understands as being based purely on intent and suggests that the Panel should
follow the approach adopted by the Appellate Body in interpreting Article III:2 of
the GATT 1994. But India then goes on, at para. 36 of its oral statement, to say
that "
[w]e fully recognise that the intentions expressed during the legislative
history, by themselves, cannot constitute a violation of Article 2(b)." (emphasis
added) Is India suggesting then that a qualified Article III:2 approach should be
adopted, which looks both at intent of legislators and the design and structure of
rules of origin?
Answer 25 (b)
India believes that the objectives that a Member pursues with rules of origin should be determined by
examining their design, structure and architecture. If, as in the case before the Panel, the statements by
those that participated in the drafting of the legislation confirm the objectives revealed by the
legislation’s design, structure and architecture, those statements can be taken as additional evidence.
This is justified because, in th e absence of any indications to the contrary, it can reasonably be

assumed that the intentions of those who promoted the legislation are reflected in the legislation’s
design, structure and architecture.
In the statements cited by the Panel, India rej ects the idea expressed by the European Communities
that Article 2(b) is exclusively about intent. In the view of India, this provision is violated by the
adoption of rules of origin that reveal through th eir design, structure and architecture that a trade
objective is being pursued. Article 2(b) is thus not about intent as such, but about the intent revealed
in the legislation. India believes that its approach is fully consistent with the approach adopted the
Appellate Body (see for instance, Chile – Taxes on Alcoholic Beverages, WT/DS87/AB,
WT/DS110/AB, paras. 69-71).
Question 26

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

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

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

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

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

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

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

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

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

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

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

be interpreted in a manner consistent with the b asic objectives of the GATT, in general, and the
market access rights accorded under it, in particular.

Question 26

With reference to Article 2(c) of the RO Agreement , could India please answer the following
questions:
(a) Regarding the term "create" as it appears in Article 2(c), is there a difference in
meaning between the phrase "origin rule X has a trade-restrictive effect" and the
phrase "origin rule X creates a trade-restrictive effect"?
Answer 26 (a)

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

(b) Following on from the previous sub-qu estion, if there were a difference, what
would be the rationale for using the term "create" in Article 2(c) of the RO
Agreement and the term "have" in Artic les 2(a) and 3.2 of the Agreement on
Import Licensing Procedures? What would justify regulating Members' use of
rules of origin differently from Members' use of import licensing?
Answer 26 (b)

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

(c) Would India agree that Article 6.3 of the SCM Agreement contemplates a showing
of "actual" adverse effects? If so, is there any reason why the Panel, when
interpreting the phrase "create […] effects" , should not seek inspiration from the
provisions of Article 6.3 as well as the case law on Articles III and XI of the GATT
1994? (India's oral statement, paras. 40-42)
Answer 26 ( c )

India agrees that Article 6.3 of the SCM Agreement contemplates the showing of
actual adverse effects. However, this provision does not require Members to attain or
avoid any particular market impact. It merely describes various market situations
caused by a subsidy that trigger the right of adversely affected Members to request

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

 These allotments are non-transferable.

POWERLOOM EXPORTERS ENTITLEMENT (PPE) SYSTEM

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

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

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

ANNEX A-2
ANSWERS OF THE UNITED STATES TO QUESTIONS FROM THE PANEL
FOLLOWING THE FIRST MEETING

For both parties

1. Do you agree with the European Comm unities that the concept of substantial
transformation "was intentionally left out of th e 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 subs tantial transformation"? (European Communities'
written submission, paras. 9 and 22)

1. Yes. There is no basis for a Member to cha llenge 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 harm onization 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 Un ited States would need to be viewed as a "trade
objective"?

2. No. Limits on textile and a pparel imports are, under the WTO Agreement on Textiles and
Clothing (ATC), entirely consistent with WTO obligati ons, and Members are entitled to take steps to
ensure that they are not circumve nted. In fact, Article 5.1 of the ATC requires Members to establish
legal provisions and administrative procedures to addr ess 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 AT C. Origin determinations that allow traders and
customs officials to draw bright lines ensure tr ansparency and predictability, and allow importers,
exporters, and Members to work together to preven t 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 co ver 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 di scriminate between other members, irrespective of the
affiliation of the manufacturers of the good c oncerned." 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 mo re 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 natio nal 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 Me mbers 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;

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 th e meaning of Article 2(b). For example, some
Members may believe that a coffee product should orig inate 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. Sim ilarly, 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 quot a 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 term s 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 ra tes 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 produc t is one of the products
identified in section 405, four or more operations s ubsequent 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 th e 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 produc ts, with different rules that reflect -- as is
the case with all product-specific rules -- a determ ination based on assessing the relative importance
of various operations or inputs to the final produc t. Consultations with the European Communities
led to the conclusion as reflected in section 405, pr oviding 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 particul ar fiber. These provisions generally define such

products as "wholly of" any given fiber. The Ha rmonized Tariff Schedule of the United States
(HTSUS), general note 22 defines "wholly of" as m eaning "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 co ntaining 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 cotto n that is consistent with the structure of the
Harmonized System.

10. What is the basis for the United St ates' 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 th e customs regulations implementing section 334 and
405 should not form part of this dispute, the Un ited 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 recons idering 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 Stat es' answer to question 6, any change to a rule
of origin may, in the view of the exporting Member s concerned, affect different Members differently,
or "more favorably." It is for just this reason th at Members have had difficulty in reaching agreement
on harmonized rules of origin. With respect to produc ts 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 a ffected? In the latter case, could that one
Member be a Member other than the complaining Member?

12. Yes, the plain language of the provision indicat es 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 Membe r-specific, they would have made that clear.
They did not because to adopt a standard where a part y 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, et c.)? 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 ques tion, 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 inheren tly 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 evalua tion 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 inhe rently 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 pl ace a limit on the percentage that could be used
for such a rule. Therefore with terms like "undu ly" and "unnecessary" and the lack of limitations in
Article 2(a), Article 2(c) would imply a standard far greater than "de minimis."

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

15. Whether particular rules create "distorting" e ffects 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 internat ional trade that reaches the level of a distortion.
This is necessary because many elements, includi ng 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.

(e) What is the relationship between the first and second sentences of Article 2(c)? Do
they provide for distinct and independent ob ligations, 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 conseq uence, of the obligation set out in the first
sentence?

16. The second sentence clarifies and provides an ex ample 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 rest rictive effects on international trade" through rules
of origin. Thus, the first clause of the second sen tence 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 intern ational trade" through rules of origin. Thus, the second clause of
the second sentence is another example of a violati on of the first sentence. The second sentence also
makes clear that "strict requirements" are allowe d; it is only "unduly strict" requirements that are
prohibited.

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

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 "c hanged" their rules are in compliance with this
provision.) This was clearly not the intent of Artic le 2(c). Second, with respect to the United States
change, such an analysis would be an "apples to or anges" 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 requi rements 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 Multif iber 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 arrangeme nt 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 secur ed 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 e xporter 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 cas es, visa arrangements are established at the request of an exporting
country, even in the absence of a quota restriction, in order to control expor ts 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 th e 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 a pparel 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 appa rel 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 substantia l transformation in manufacturing fabric is the
transformation from yarn to fabric. India would ap parently 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 circumventi on by not recognizing cutting (as in cutting the
edges of a bedsheet) as conferring origin; it prev ents 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 AT C; 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 qu estion 11(f), it is not the change that must be
examined under Article 2(b)-(e), but rather the rul es 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 de termination of whether the rules at issue are
used as instruments to pursue trade objectives depe nds on the timing of the examination of those
rules. However, as we explained in answer to qu estion 15, the issues in Article 2(b)-(e) are generally
best addressed at the time of challenge, or establishm ent 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 st atistics (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 Answ ers to Preliminary questions by the Panel,
question 6, changes in rules of origin for quota good s 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 Un ited 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 rul es. 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 a nd more easily administered system, with benefits
to trade, and rules that more accurately reflect comm ercial 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 "circumv ention" 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 th at can result in circumvention of the ATC in Article 5.1 and
Article 5.5: transshipment, re-routing, false declara tion concerning country of origin and falsification
of official documents.

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

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.

(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"?

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 Internationa l 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 Multifib er 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 e xplain that the concept of circumvention, as
used in that provision, was based on the prev ious experience of these predecessor agreements,
345 and
entails a very broad description of the concept of ci rcumvention – violations of customs law (such as
illegal transshipment) are only one way that ci rcumvention 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.
346 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 le d 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 no n-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-ma de counterpart. Brenda Jacobs, in Renewal and
Expansion of the Multifiber Arrangement,
347 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 te xtiles," 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 subs titution 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 obj ectives mentioned in the SAA do not apply to the
fabric formation rule, what are its objectives?

345 Attached as Exhibit US-7, page 101.
346 Id., page 103.
347 Law and Policy in International Business, v. 19, 1987, pages 7 - 50.

33. The objectives do apply to the fabric formation rule but were specifically aimed at textile and
apparel products, where the primary issue of c oncern was where significant assembly of those
products took place. Combating circumvention thr ough illegal transshipment is furthered by having a
clearly stated fabric formation rule. This remove d 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 governme nt 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 la w or otherwise, whether the Panel conducts its
examination in terms of sections 334 and 405, ta ken together, or in terms of 19 U.S.C. § 3592
(exhibit IND-7)?

35. While the United States is not aware that it ma kes 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 ru les 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 an d 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 goo d example of how origin was determined in the
past. On a case by case basis, production processes a nd finishing processes were evaluated to decide
if they were significant enough to constitute a substantial transformation.

34. Section 334(b) incorporates the following prov isions: "Except as otherwise provided for by
statute, a textile and apparel product, for purpo ses 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 th e 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 Ru les 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:

(a) What are the commercial policy instrument s to which the fabric formation rule is
linked and the circumvention of which that rule is intended to deter?

39. The fabric formation rule is linked to all of the commercial policy instruments identified in
the United States' answer to question 34, and refl ects 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.

(b) With reference to the ph rase "reduce circumvention of quota limits through
outward processing" in the House Reports (IND-9, p.146), could the United States explain
the concept of "circumvention through outward processing"?

40. "Circumvention of quota limits through outwa rd processing" refers to the concern with
shippers/exporters trying to perform as little as possibl e 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.

(c) Is the reduction of circumvention thro ugh outward processing a reason why the
United States continues to maintain section 334?

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

(d) With reference to the ph rase "reduce circumvention of quota limits through
outward processing" in the House Reports (IND-9, p.146), could the United States explain
which quotas were being circumvented? Specifica lly, to use United States imports of silk
scarves made in the European Communities from Chinese silk fabric as an example, was it
(i) China's quota for silk fabric, (ii) China's quota for silk scarves or (iii) another Chinese
quota which was being circumvented?

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 great er certainty and predictability, rather than being
directed at specific cases of circumvention.

(e) Were the quotas affecting articles currently subject to the fabric formation rule
more prone to circumvention than the quotas, if any, affecting articles currently subject to
the assembly rule?

43. No. Quota utilization is generally the primar y factor in assessing whether a quota is "prone to
circumvention." This can change from year to y ear, 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.

(f) Are quotas more prone to circumvention in a situation where dyeing, printing and
two or more finishing operations confer orig in on made-up non-apparel textile products
than in a situation where fabric formation confers origin?

44. The United States cannot say that this statem ent 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 circ umvention (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 det ermination 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 crit eria 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 an d 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 orig in 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 base d 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 St ates 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 Un ited 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 canno t 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 in terpretation 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 differen t 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 rul es of origin for the two products referenced are
consistent with the requirements of Article 2, a nd 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 processin g". In relation to this provision India has the
following questions:

• Would the United States agree that Article 2(c) of the RO Agreement implies that,
in the case of a rule of origin designed to determine the origin of a product manufactured
or processed in more than one country, Arti cle 2(c) implies that the conditions to be
fulfilled must in some way be related to the de gree of manufacturing or processing that the
product underwent in the different countries? If not, why not?

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

• The United States rules of origin distin guish between a made-u p article consisting
of fabric containing 85% man-made fibre an d 15% cotton and a made-up article consisting
of 80% man-made fibre and 20% cotton. Please explain how this distinction can be
reconciled with the requirement set out in Article 2(c) of the RO Agreement that all
conditions that must be fulfilled to obtain the status of originating country must relate to
manufacturing or processing.

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 conferri ng origin on the basis of narrow product
distinctions designed to favour the exports fr om 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 throug h 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 br oad 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 th e 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 descri ptions 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:
(a) What discretion, if any, did United St ates Customs officer enjoy in applying the
DP2 rule apparently established by CFR 12.130?
Answer
: India considers that 19 C.F.R. 12.130 provided for legal certainty and
predictability, and afforded little discretion to the United States Customs officers.
The regulation begins with the general criteri a that will be used to determine origin
for textiles and textile products. The regul ation continues with specific examples of
operations that usually will, or will not, confer origin. (India has included the
relevant excerpts of 19 C.F.R. 12.130 in INDIA- Exhibit 8 at pages 46 to 47.)
 In this regard, India recalls its answer to question 22 from the Panel following the
first meeting. India noted that the case- by-case determination process, as evidenced
by the Cardinal Glove case, was abandoned by the enactment of the section 12.130
regulations. The section 12.130 regulations were a set of "concise, predictable,
published rules." The United States did ha ve regulations in effect through section
12.130, plus a large body of customs rulings, which applied to virtually every
production scenario. It is India’s understa nding that the section 12.130 regulations
were promulgated in accordance with the requirements of the United States
Administrative Procedure Act (APA) and that interpretative customs regulations
issued pursuant to the APA are presumed to be correct, unless clearly arbitrary,
capricious, an abuse of discretion or otherwise not in accordance with the law.
(b) If there was discretion under CFR 12.130, co uld 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?
Answer
: Customs officials do not have much discretion in administering the DP2
Rule as set out in section 405. This is because regulations made pursuant to a specific
statutory directive are considered to have the force and effect of law. See, e.g.,
Chevron USA Inc. v. Natural Resources Defense Council , 467 US 837 (1984)

[INDIA- Exhibit 19]. Such regulations are normally given considerable deference by
the courts.

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 th e 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?
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 th e 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 inte rpretation 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 TB T Agreement in their context and in the light of
the objectives set out in the Preamble of that Agr eement (WT/DS231/R, paras. 7.118-7.122). In the
present case, a similar approach would support th e 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 excha nge 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 di fference 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 tr ade objectives may either be developed by a Member
on its own volition or to address a request made by a tr ading 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 ca nnot 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 ma nufacturers of the good concerned." India considers
that the first clause of Article 2(d) ("the rules of or igin 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 th e 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 fo llowing 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 th e elimination of those rules which are being used
to pursue trade objectives or that create adverse eff ects on international trade. Such agreed rules
would, therefore, by definition, be those that ar e 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 ru le 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 rul es 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 labe lling 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 Admi nistrative Procedure Act, pursuant to a
specific statutory directive contained in the statut e 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 st atutes 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 re gulations would be of no legal validity.
However, India has specifically challenged th e 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.
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?
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 comm ercial 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 dist inctions 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 orig in determine the conditions of competition for producers
and traders under the quota regime currently in pl ace, 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 Un ited States were to apply in 2004 a safeguard
measure in the form of an import quota allo cated among supplying countries in accordance with
Article XIII:2(d) of the GATT, the production distin ctions 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 in struments 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 inter est 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 ar e 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 or igin of an imported good lest that information
influence his or her purchasing decision. As the fa bric 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 Euro pean Communities' complaints dir ected 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 whic h were hand-painted and sold by design houses
such as Hermes. Before section 334 was adopted, th ese 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", ra ther than "Product of France", a change which
affected the products’ marketability and value. Ar guable, the required change in marking disrupted
trade in these goods, even though no quotas were involved.

Furthermore, since goods which are not properly ma rked 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, admissib ility, 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 Un ited 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 st atistical 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, th e import statistics would report as being of Chinese
origin the fabrics which had unde rgone 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, an d 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,
has restrictive or distortive effects on that part of trade that is
not strictly subject to those procedures.
348

348 Appellate 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.

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 in terpreted 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 (rathe r 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 clea r that the terms "trade distortions" have to be
interpreted broadly to cover also the impact of a li censing procedure on that part of international trade
that is not strictly subject to the licensing proce dures. 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:
"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?
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 fibr es. 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 fi nishing operations may be carried out on all
cotton products. For example, the following pro ducts (other than bed linen) are subject to
DP2 operations:

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

For India

58. With reference to section 405, please answer the following questions:
(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 e xport interest to other countries if those
countries had a strong production base in cotton pr oducts, wool products, or blended products
where cotton was more than 16%. The refere nce to developing countries was made because
these countries have a large capacity in cotto n 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 competiti on 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 cott on-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 expor ted to the United States if India were in a
position to supply the relevant quotas on an unlim ited 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. Th is adversely affected India’s conditions of
competition.
59. Could India identify where in its submissions India has stated, and supported, a claim that
the "wholly assembled" rule set out in section 334(b)(I )(D) is inconsistent with Article 2(b) and (c)
of the RO Agreement? (see India's reply to question No. 19 (pp. 15 and 16))
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 excep tions to this rule as set out in section 334 (b)(2)
and section 405 (a) (3) (c) which India is challe nging. See paragraph 16 of India’s Second
Submission.
60. With reference to India's claim under RO Agree ment 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 Europe an 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 re lated (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 or al 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:

(1) Fabrics formed in Country A (including non-quota countries) and
exported to the United States; and

(2) Fabrics formed in Country A, which are subjected to further
processing operations in another c ountry and then shipped to the
United States; and;

(3) Non-apparel made-up articles that are produced in other
countries (including non-quota countries) using fabric formed in
Country A.

Prior to the adoption of the section 334 rules, onl y products in (1) would have been recognised as
being products of Country A. Following section 33 4, countries with fabric-making capacity would,
by definition, tend to have their quota allocations c onsumed 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 fo r 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 co untries 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 tho se 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 di fference? (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 consol idated 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 cl aims. 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 shou ld 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 manufact ured 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 par t 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 Indi an fabric maker sold cotton cloth to an Indian
manufacturer of bed sheets and to a Philippine ma nufacturer of bed sheets, both of whom exported
their products to the United States. Under secti on 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 th e 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 be d 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 St ates 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-appa rel 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 anot her, 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 b ased 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 th is 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 intern ational 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 preven t the adoption of all rules of origin changing trade
pattern but only the adoption of rules of origin wi th 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 orig in do not create "unnecessary obstacles to
trade" and are prepared in a "consistent and neutra l" 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 Ea twell 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 give n 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 ru le 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 libera lized"? (China's reply to question No. 41(b)).
Does such a redistribution of trade constitute a tr ade "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 commentat ors, 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 econom ic 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 differe nt 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 ques tion 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 exporte rs 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 provide d the following report: "Standardization of Rules
of Origin, Report to the Committee on Ways and Means, US House of Representatives on

349 J. 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.

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 P ub. 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 re port, 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 interpre ted to required the complainant to demonstrate the
economic impact of rules of origin through trade stat istics. 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:
Although there is general agreement that rules of origin do have an
economic effect on trade, the effect of a rule of origin cannot be
isolated from all the other factors that contribute to business
decision-making. Therefore, it is not possible to quantify the
economic impact of a rule of origin.
350

Measuring the effects requires data on all of the factors affecting
trade flows, and it is not possible to isolate the effect of applying a
rule of origin from all of the factors affecting trade flows, and it is
not possible to isolate the effect of applying a rule of origin from all
of the other factors that contribute to business decision making.
351

72. Would the United States be in breach of Article 2 of the RO Agreement if, in selecting a
rule of origin among a range of alternative rul es, it selected the one which it deems most suitable
for protecting the integrity and effectiveness of the textiles quota system, a programme which is
legitimately designed to protect the domestic textile industry?
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

350 United 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.
351 Ibid. page 77.

case before the Panel, the United States did not a dopt rules of origin to protect the integrity and
effectiveness of its textiles quota system but to re nder it more restrictive and skew its operation in
favour of the European Communities. If the consider ed 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 cl othing 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 th e declared objective and the instrument allegedly
used to implement that objective.

For the United States:

73. With reference to the second sentence of Artic le 2 (c), if one establishes the existence of
"unduly strict requirements" for example, is it th en 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 viola tion 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 fi rst 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 cond itions unrelated to
manufacturing or processing as such is inconsistent with Article 2(c), irrespective of the actual trade
impact.

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

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 th e Panel’s tables, indicated in bolded double
underline, and has also attached an explanation of its changes.

47. The parties have offered slightly different descri ptions 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 eff ective, 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 de terminations 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, co uld it be said that, by the same token,
United States Customs officers currently enjoy the sa me 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 u nder 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 th e 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 "r ules," 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 th e 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 St ates notes that Article 2(b), in its first clause,
recognizes that rules of origin may be linked to me asures 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 pr otection 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 Memb er 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 depe nd on the particular facts of the case. Further,
as the United States has indicated in this disput e, 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 stringe nt 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 requiri ng 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 rec ognizes 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 th e 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 impl emented 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 e ffects 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 Artic le 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 stringe nt 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:

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

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 a pparel products. The regulations set forth in
19 C.F.R.§102.21 reflect the exercise of that aut hority and were promulgated in accordance with the
US Administrative Procedures Act and, as such, have th e 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 regulati ons. 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 secti on 102.21 is inconsistent with United States'
obligations unless India has established a prima faci e case with respect to each of the measures at
issue in this dispute, and it may not be assumed th at 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 inconsis tent 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, th e fabric formation rule in section 334 and the DP2
rule in section 405 were enacted to best capture where a new product is fo rmed 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 woul d 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 intern ational trade. Indeed, the data submitted by the
United States in Exhibits US-8 and US-9 would stro ngly 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 1 995 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 forma tion 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 ra ther than detracts from the principles of the RO
Agreement.

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

The requirement to prevent trade distortio n found in Articles 1.2 and 3.2 of the
Licensing Agreement refers to any trade dist ortion that may be caused by the
introduction or operation of licensing pro cedures, 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 licensi ng 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 contex t in which it was made, are relevant in that
they underscore that there has to be a causal conn ection 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 incr eased since the rules were enacted (exhibits US-8
and US-9), in addition to the fact that India’s quo tas have increased over this time. Despite India’s
assertions to the contrary, it is clear that prior WT O 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 tr ade." While the Appellate Body sought through the
above statement to counter any mis-impression th at 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" tr ade. Accordingly, the Appellate
Body concluded that the panel was merely pointin g out "this obvious fact," and upheld the panel’s
finding. Therefore, it is difficult to draw a ny relevant conclusion from the Appellate Body’s
statement other than that there h as 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:

"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

353 Appellate Body Report, EC- Poultry, supra, para. 121.
354 Ibid, paras. 125-126.
355 Ibid. para. 127.
356 Ibid. para. 127.

 - 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 th e most widely traded bed linen is made of
either cotton or man-made fibres?

21. According to United States import data comp iled 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?

22. The United States notes that in addition to being bleached or white-d yed, 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. Be cause these products are normally cut to length
and hemmed, the application of the "fabric form ation" 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 th en 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 se ntence 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 "act ual effects on international trade" are created
merely by the implementation of a measure through app lication of a particular rule of origin. Article
2(c) does not bar "requirements," "strict requireme nts," 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 "undul y 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 St ates' 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 w ould 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 par ticular measure, any rule of origin – and most
certainly any change in a rule of origin – c ould probably be viewed as having an effect on
international trade. However, in the context of su ch 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 c onclusion that such a rule of origin itself ,
creates "restrictive, distorting, or disruptive e ffects 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 sha ll not themselves create restrictive, distorting, or
disruptive effects on international trade. They sh all 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 pur poses 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 disr uptive effects on international trade, and the second
clause of the second sentence qualifies the first clause. In other wo rds, Article 2(c) does not bar
"unduly strict requirements"; it bars "unduly st rict 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 manufacturi ng 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., na tionality of company owne rship, or requiring the
use of personnel of a certain religious order to ach ieve a certain determina tion 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 c ondition 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 e xporting 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 Memb ers 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 explai ned below, operate base d on distinctions among
products. The United States is not familiar with an RO Agreement criterion that would establish
whether certain product distinctions (that are cap tured 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 th e 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 Ar ticle 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 criteri on (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," "d irectly competitive" or similar
in some other manner, and even if such produ ct-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 consider ed 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 prev ent circumvention by illegal transshipment, to
harmonize United States practice with that of our majo r 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 t oo 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 de tect 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 produc ts 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, wh ereas 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 fo rmation rule to wool fabric, when all other
fabrics appear to be subject to DP2?

33. In section 405, the United States amended sec tion 334 to reflect the terms of our settlement
agreement with the European Commun ities. 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 S econd 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 exem ptions in section 405 are in accordance with all
relevant provisions of the RO Agreement. The relevant provision in Artic le 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 whic h 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 precisel y specified. The determinations of fabric or
product origin in section 405 could not be more pr ecisely 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 th e other hand, the United States says that, "as a
result of extensive consultations with the Europe an 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 veg etable fibers (specifically silk scarves and flat
products such as linens), dyeing and printing alon g with two or more finishing operations were
significant enough to confer origin". Could the United States please explain the relationship of
these two statements?

35. These statements form the basis for section 40 5 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 form ed the basis of the text of section 405, resulted
from the consultations with the European Communiti es, during which, for example, the United States
was persuaded that it would be appropriate to am end section 334 and return to DP2 for the cited
products.

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))

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

YES

(Section 334 (b)(2), unless
subsequently subjected to DP2
under Section 405)

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)

NO

NO

- Cotton

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

NO

NO

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

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

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))

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 cl arified the fact that the process of “knitting to
shape” is not a fabric making process. The pr ocess of "knitting-to-shape" involves making a
component or an article directly without the formation of a fabric.

ANNEX A-6
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 clarif y exactly what activities are being performed in
Sri Lanka to "convert" the fabric into bed linens?

Answer: Sri Lanka has emerged as a ma jor 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/pillo w 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 follo wing 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 ne eds to be clarified that the United States
imposes "quotas" on imports of "pillow cases" (C at. 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 im pact of a "conduct oriented" approach could
be seen in terms of "the incentives and disin centives for producers and traders and as a result
also on their investment and other business plan s". 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 Un ited 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 subjec ted to quotas whereas they had never
previously been subject to quotas.

(ii) Importers have to switch to new supplier s 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 co mpliance 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 con sequence of the changes in the origin
rules themselves", the very adoption of a ru le 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 implyi ng that it is an "unduly strict requirement" to
conform to Harmonized Tariff Schedule (HTS) classi fications 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 la ding (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:

Year Qty.
(in Tonnes)
Value
(in Million US $)
1994 773 4.07
1995 726 4.27
1996 504 2.52
1997 667 3.81
1998 850 3.97
1999 982 3.55
2000 998 3.38
2001 1159 3.58
2002 1022 3.34

With respect to the question as to whether these fabrics were subjected to DP2 in Portugal, it
is a well known principle in the manufacture of te xtiles that greige fabrics imported into any
country including Portugal are meant to be further processed including subject to DP2 as mere
re-routing of the fabric to a third country is infrequently done.

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 th ese 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.

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 th e 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 statut ory 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 ref ers to "rules of origin" in the plural. Do the
parties agree that, notwithstanding the use of the plur al, 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 pro ducts could escape examination by a panel. This
would be especially true if a Member’s overall sy stem 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-s pecific 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 equivale nt 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 stringe nt rules for determining whether a good is domestic,
than the harmonized rules of origin applied to imports and exports.
C
OMMENT: 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 a pparel products. The regulations set forth in
19 C.F.R.§102.21 reflect the exercise of that aut hority and were promulgated in accordance with the
US Administrative Procedures Act and, as such, have th e 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 regulati ons. 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.
C
OMMENT: 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 no ted 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 faci e case with respect to each of the measures at
issue in this dispute, and it may not be assumed th at 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 inconsis tent with the obligations found in each of those
provisions.
C
OMMENT: 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) th e 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 fabr ic formation rule in Section 334 and the DP2
rule in Section 405 were enacted to best captur e 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 a nd Section 405 will continue in force after the ATC
regime expires in 2005). The United States woul d 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 intern ational trade. Indeed, the data submitted by the
United States in Exhibits US-8 and US-9 would stro ngly 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 1 995 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.)
C
OMMENT: 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 pro ducts 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 th e 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 ra ther than detracts from the principles of the RO
Agreement.
C
OMMENT: In India’s view, transparency and pred ictability 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 compile d 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 be ing bleached or white-d yed, 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. Be cause these products are normally cut to length
and hemmed, the application of the "fabric forma tion" 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 Artic le 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 se ntence 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 "act ual effects on international trade" are created
merely by the implementation of a measure through app lication of a particular rule of origin. Article
2(c) does not bar "requirements," "strict requireme nts," 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 "undul y 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 St ates' 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 w ould 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 partic ular measure, any rule of origin – and most
certainly any change in a rule of origin – c ould 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 c onclusion that such a rule of origin itself ,
creates "restrictive, distorting, or disruptive e ffects on international trade" – assuming the latter
situation has also been established.

COMMENT: Please see India’s comments on Panel qu estion 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 vi olation 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 sen tence, 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 Sec ond 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 ma ke 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 exemp tions in Section 405 are in accordance with all
relevant provisions of the RO Agreement. The relevant provision in Artic le 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 ar guments 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 whic h 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 precisel y 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 Sectio n 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 th at the purpose of section 405 was to settle a WTO
dispute with the European Communities. On the ot her hand, the United States says that, "as a result
of extensive consultations with the European Co mmunities, 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 (s pecifically silk scarves and flat products such as
linens), dyeing and printing along with two or mo re 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 Communiti es, during which, for example, the United States
was persuaded that it would be appropriate to am end Section 334 and return to DP2 for the cited
products.

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

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 clar ified 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.

S e c t i o n 3 3 4

(b)(1)(A) single country

(b)(1)(B) yarn forward

(b)(1)(C) fabric forward Section 405(a)(3)(B)
 f a b r i c o f s i l k , c o t t o n ,
(b)(1)(D) "wholly assembled" MMF, or vegetable fibre
 where product is wholly conferred origin where DP2
 assembled, that is its country (not wool)
 of origin

 (b)(2) Special rules

 (A) For 16 HTS, they Section 405(a)(3)(C) 405(a)(3)(C)
 will be classified not where they For products classified under BUT:
are assembled, but under single 7 HTS (out of 16 HTS If products under
country yarn forward or fabric 4 dig it) origin is conferred 7 HTS made of:
forward rules. where fabric is subject to DP2, - cotton
 (not where greige fabric is - wool
(B) Knit to shape products formed). - fibre blend 16%
determined where knit or more cotton,
 t h e n o r i g i n i s
 d e t e r m i n e d
(b)(3) "multicountry" where the greige
 f a b r i c i s w o v e n
 (A) most important assembly
 (B) last country

See also supporting customs regulations in 19 C.F.R. 102.21

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 respon se is somewhat misleading. The harmonized
system provides for a separate classification of pr inted 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 C ountry 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 represen tations 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 th e document, despite its notice to the United States
mission in Geneva that it already had a copy of th is document. At the second meeting with the Panel
on January 23rd, the United States presented exhibit US-7 bis, the 1987 document, and noted that both
the 1985 and 1987 documents should be considered exhibit US-7 bis. 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 respond s 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 th at Indian greige fabric was subject to DP2 in
Portugal).

5. Furthermore, the type of fabric on India’s i nvoice, is, according to industry experts, one of the
very last fabrics anyone would try to dye and pr int, and a far cry from the Hermes-type silk scarves
that were the subject of the EU settlement agreem ent. 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 becau se 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 statis tics available on the Department of Commerce’s
Office of Textiles and Apparel website, there we re 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 ar e 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 impor ts as a proxy, since the United States is the
world’s largest import market, we found that 5.3 pe rcent of our imports of fabric were printed and
41.2 percent of our imports of bed linen were pr inted (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 Indi a. 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 lin en that had actually been DP2’d are substantially
lower.

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

ANNEX B

Annex B Answers of third parties to questions
 B-1 Answers of China to questions from the
Panel following the first meeting
 B-2 Answers of the European Communities
to questions from the Panel following the first
meeting
 B-3 Answers of the Philippines to questions
from the Panel following the first meeting

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’ obligati ons 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 Memb ers 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, oblig ations 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 or igin 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 provision s, 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 hist ory, design and structure of section 334 show
that it was used by the United Stat es as an instrument to pursue trad e 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 de monstrated that the circumstances and purposes
that underlay the United States changes to its text iles 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, thereb y 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 fo r textiles and apparel products demonstrate that
they are used as instrument s to pursue trade objectives."
359 The request of India specifically refers to

359 WT/DS243/5/Rev. 1.

"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 rele vant provisions of the covered agreements cited by
India in document WT/DS243/5/Rev.1, the matter refe rred 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 or igin 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 sp ecified 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 [...] effect s 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 "inter national trade"; it is sufficient, therefore, to
show that trade between two indivi dual Members has been adversely a ffected 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." Chin a believes that, while the terms "restrictive,"
"distorting" and "disruptive" are listed in the disj unctive -- suggesting that any one of these effects is
sufficient to constitute a violation -- these thre e 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 pa rticular Members is "restricted" or "disrupted"
while trade between one of those Members and a third Member is correspondingly enhanced and
liberalized.

360 Id.
361 WT/DS243/6.
362 The New Shorter Oxford English Dictionary, L. Brown (ed.)(Clarendon Press 1993), Vol. 1, p. 707.

(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 certific ates 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 preambul ar paragraph of the RO Agreement
("unnecessary obstacles to trade").

 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 reas onable 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 conditi ons not related to manufacturing or processing. A
Member that imposes "unduly strict" requirements, how ever, has violated its obligations by failing to
ensure that the rules of origin themselves do not create "unnecessary obstacles to trade."

(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?

 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 internati onal trade, therefore, must reasonably encompass a
scenario in which trade between two particular Memb ers 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 th at 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).

 (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?

 REPLY: China believes that the Panel should interpret the phrase "create . . .
disruptive effects on international trade" in the contex t 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 in ternational 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 viola tion -- 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 so me 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 subse quent assembly and manufacturing operations outside
the initial country in which the fabric was first wo ven, knitted or otherwise formed in the "greige"
state. For example, certain types of fabrics ha ve their origin determined on the basis of where the
greige fabric was first woven or knitted, without regard to any s ubsequent 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-appare l 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 su bsequent 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

(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?

 REPLY: As noted in China’s answer to ques tion No. 41(c) above, China believes that
the second sentence of Article 2(c) provides for a di stinct 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" restric tive 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 cer tain level of administrative burden (e.g., filing

363 The New Shorter Oxford English Dictionary, L. Brown (ed.)(Clarendon Press 1993), Vol. 1, p. 703.
364 See , WT/DS243, First
Submission of India (30 October 2002), at 9-16.

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 ma nufacturing 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 concessi on 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 fabr ic formation rule with respect to
specified products and regardless of the "origin" of those products?

 REPLY: China believes that concessions grante d (or withheld) in the context of
multilateral tariff negotiations are quite distinct fro m unilateral action by one Member to change its
rules of origin in a way that disadvantages particul ar 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 su ch multilateral negotiations, which involve the give
and take of all Members, are made final and enfor ceable 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-à-vis other Members with respect to certain products,
if that Member has concluded that other provision s in the multilateral agreement provide advantages
to the Member that equal or outweigh the disadvantages.

 It is quite a different matter when, as in th is case, the United States has unilaterally changed
its rules of origin -- not once, but twice -- such that the modified ru les of origin themselves restrict,
distort and disrupt trade to the disadvantage of partic ular Members. The actions by the United States
in 1994 and 2000 were not the result of any mu ltilateral tariff concessi on 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 Ag reement on Textiles and Clothing, 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 documen tary support if available (e.g., WTO
documents, negotiating documents, view of experts, etc.)?

 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 declara tion concerning country or place of origin,
and falsification of official documents." Artic le 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 th e 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 de termination 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 leav ing 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 phys ical 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."

(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.)?

 REPLY: As noted in China’s answer to qu estion 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 frustra te 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 par ties to the transactions ac curately 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 Ag reement. 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 parti es 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 "transship ment" or "re-routing" are limited, if
they indeed exist at all. So long as a quota is de fined with reference to a given product’s original
country of manufacture, it would seem that no amount of "transshipment" or "re-routing" of the

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

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 defin ition 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 phys ically 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 c onclusions 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 activ ities 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 de termination 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 leav ing 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 phys ical 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 h as 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 orig in 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 de gree of the subsequent manufacturing and processing activity that the
United States would consider sufficient to confer or igin 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.

(d) What is "circumvention by transshipment"? Would this necessarily
involve some illegal actions 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"?

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

 REPLY: As noted in China’s answer to ques tion No. 43(b) above, China believes that
the type of "transshipments" envisioned as "circumven tion" 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 pr oducer 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

For China:
44. What could the United States have done "to improve the collection of true and
correct information regarding the actual source and location of the materials and
particular production processes" rather than "simply change the substantive origin
rules"? (China’s written submission, para. 17)

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

 Such measures could have included a wide va riety 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 sour ce 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 re garding the nature and exte nt of foreign industries
of particular concern to the United States, so that this intelligence could assi st 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 entirel y 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 represen tations 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

368 It 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.

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 Ar ticle 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 rul es of origin in force at
the time a challenge is brought? In other words, could a panel uphold clai ms under Article 2(b)-(e)
that a change in rules of origin of itself is contrary to these provisions?
 In the European Communities’ vi ew 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 object ives 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 th at 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 wh at is challenged. If the rules themselves are
challenged, the relevant point in time is the adoptio n 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 ment ion 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 eff ect on international trade? Or would it be
sufficient to show that the trade of one Member ha s adversely affected, even if the trade of another
Member has been favourably affected? In the la tter 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 findi ngs of the Appellate Body in the case European
Communities - Bananas regarding the issue of locus standi requirements.369

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

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 wo uld constitute a de minimis restrictive effect? In
answering this question, please address the relev ance 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 Commun ities’ view necessary to
make a number of clarifications. First, it is importa nt 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 r eason why the Agreement on Ru les of Origin has been
negotiated. If that agreement provides for different st ages, 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 Co mmunities would agree with the proposition that
rules of origin inherently create "restrictive" e ffects 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 no t 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 alr eady 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 ob stacles 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 n ecessary 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 Eur opean 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 […] disrup tive 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 internati onal 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 oblig ations, such that the second sentence adds an

obligation which is not already covered by the firs t 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 indepe ndent 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 re spect to product Z (of which Member X is the
principal supplier) and Member X obtains that con cession 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, co uld it be said that Member X has obtained from
Member Y a de facto advantage contrary to Artic le 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 exam ple given by the Panel is not a case of MFN
violation. The MFN principle requires Members to tr eat all other Members equally in the application
of tariffs, custom duties and other measures relate d 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 indi vidual products even if these policies affect other
Members in unequal ways. WTO law does not prescrib e 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 indivi dual products even if other Members are affected
differently by the individual choices. Discriminati on (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:

371 The 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.

The European Communities would like to point ou t that the issue of circumvention, in the
present case, is of relevance because the United Stat es 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 what ever meaning is to be be given to "circumvention" in the context
of Article 5.1. of the ATC necessarily has to be em ployed 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 "circu mvention" 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 provisi on 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 specif ic 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 releva nt 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 th e 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 manipul ate trade patterns that would have legitimately arisen under the
existing set of rules. Therefore, for the purposes of th e 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 frau d, 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.

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

Question 43 (d): What is "circumvention by transshipment"? Would this necessarily involve some
illegal action such as fraud, false declaration, et c., or could the mere fact that shipments are
transiting through third countries with or withou t 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 anothe r does not change its origin; the same is true if
the transfer takes place in another country thr ough 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 Ar ticle 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 (Europe an Communities' written submission, paras. 28
and 32). At the same time, the European Commun ities 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.

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

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, co uld 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 ch allenge a change in the rules of origin per se insofar
as, among others, it results in the consequen ces proscribed by Article 2(b)-(e) of the RO Agreement.
In addition, where the changes them selves are meant to or inevitably result in the implementation of
policy which discriminates between WTO Members, th en 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 c ontext 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 pr oceedings it had filed against the United States
While it may be the case that the existing rules unde r 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 whic h 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 difficu lt to ascertain, especially where it would incriminate
the Member implementing the rules of origin. In su ch a situation, documenta ry 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 intern ational 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, co uld 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 be en adversely affected. A contrary interpretation
would mean that a complaining Member woul d have to conduct a t horough, comprehensive
investigation of how the rules of origin of the Memb er 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 evalua tion of the restrictive effects on international trade
of a particular set of rules of origin is too en compassing 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 detrim ent of trade with other less major trading partners,
and justify such preferential or discriminatory prac tice 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 seco nd sentence of Article 2(c) ("unduly strict
requirement") and the fourth preambular paragr aph 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 re quirements, the fulfillment of which would not
result in a diminution or impediment to the ability of a Member to effectivel y export its products to
the imposing Member. Where the criteria and substa ntive modality for ascertain ing 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 "re asonableness" 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 st rict requirements" forming "unnecessary obstacles
to trade" fall outside the ambit of "reasonable" excep tions 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 ru les 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 cons olidated answer to these two questions.

 As indicated by India in its submission, whic h the Philippines fully subscribes with, rules of
origin create "distorting" effects on international trad e if they modify the pattern of international trade

by changing either the type of product traded in in ternational 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, su ch 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 calculatin g 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 agains t 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 ‘o riginating’ 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 u sed 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-à-vis othe r products. For instance, the rule on substantial
transformation is applied differently depending on fi ber 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 se cond sentences of Article 2(c)? Do they provide
for distinct and independent obligations, such th at the second sentence adds an obligation which is
not already covered by the first sentence? Or do es 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 ob ligation 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 ev en 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 sec ond 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 Europ ean 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 fa bric 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 a nd 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 "circumven tion" as that term is used in Article
5.1? Please provide documentary suppor t 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 declara tion, etc., or could the mere fact that
shipments are transiting through third count ries with or without alterations made
to the goods concerned be considered "circumvention"?
 The Philippines declines the opportunity to respond to these questions.

ANNEX C
19 CFR

§ 102.21 Textile and apparel products.

(a) Applicability. Except for purposes of determining whether goods originate in Israel or are the
growth, product, or manufacture of Israel, and except as otherwise provided for by statute, the
provisions of this section shall control the determina tion of the country of origin of imported textile
and apparel products for purposes of the Custom s laws and the administration of quantitative
restrictions. The provisions of this section sh all apply to goods entered, or withdrawn from
warehouse, for consumption on or after 1 July 1996.
(b) Definitions. The following terms shall have the meanings indicated when used in this section: (1)
Country of origin. The term country of origin means the country, territory, or insular possession in
which a good originates or of which a good is the growth, product, or manufacture. (2) Fabric-making
process. A fabricmaking process is any manufacturing operation that begins with polymers, fibers,
filaments (including strips), yarns, twine, cordage, rope, or fabric strips and results in a textile fabric.
(3) Knit to shape. The term knit to shape applies to any good of which 50 percent or more of the
exterior surface area is formed by major parts that ha ve been knitted or crocheted directly to the shape
used in the good, with no consideration being give n to patch pockets, appli ques, or the like. Minor
cutting, trimming, or sewing of those major parts w ill not affect the determination of whether a good
is ‘‘knit to shape.’’ (4) Major parts. The term major parts means integral components of a good but
does not include collars, cuffs, waistbands, plackets, pockets, linings, paddings, trim, accessories, or
similar parts. (5) Textile or apparel product. A textile or apparel product is any good classifiable in
Chapters 50 through 63, Harmonized Tariff Sche dule of the United States (HTSUS), and any good
classifiable under one of the following HTSUS headings or subheadings:

3005.90; 3921.12.15; 3921.13.15;3921.90.2550; 4202.12.40–80; 4202.22.40–80; 4202.32.40–95;
4202.92.15–30; 4202.92.60-90; 6405.20.60; 6406.10.77; 6406.10.90; 6406.99.15; 6501; 6502;
6503; 6504; 6505.90; 6601.10–99; 7019.19.15; 7019.19.28; 7019.40–59; 8708.21; 8804;
9113.90.40; 9404.90.10; 9404.90.80–95; 9502.91; 9612.10.9010

(6) Wholly assembled. The term ‘‘wholly assembled’’ when used with reference to a good means that
all components, of which there must be at least two, pre-existed in essentially the same condition as
found in the finished good and were combined to form the finished good in a single country, territory,
or insular possession. Minor attachments and minor embellishments (for example, appliques, beads,
spangles, embroidery, buttons) not appreciably affecting the identity of the good, and minor
subassemblies (for example, collars, cuffs, plackets, pockets), will not affect the status of a good as
‘‘wholly assembled’’ in a single country, territory, or insular possession.
(c) General rules. Subject to paragraph (d) of this section, the country of origin of a textile or apparel
product shall be determined by sequential applicati on of paragraphs (c)(1) through (5) of this section
and, in each case where appropriate to the speci fic context, by application of the additional
requirements or conditions of §§ 102.12 through 102.19 of this part.
(1) The country of origin of a textile or appare l product is the single country, territory, or insular
possession in which the good was wholly obtained or produced.
(2) Where the country of origin of a textile or apparel product cannot be de termined under paragraph
(c)(1) of this section, the country of origin of the good is the single country, territory, or insular
possession in which each foreign material incorporated in that good underwent an applicable change
in tariff classification, and/or met any other requi rement, specified for the good in paragraph (e) of
this section.
(3) Where the country of origin of a textile or apparel product cannot be de termined under paragraph
(c) (1) or (2) of this section:

 (i) If the good was knit to shape, the country of origin of the good is the single country,
territory, or insular possession in which the good was knit; or

 (ii) except for goods of heading 5609, 5807, 5811, 6213, 6214, 6301 through 6306, and
6308, and subheadings 6209.20.5040, 6307.10, 6307.90, and 9404.90, if the good was
not knit to shape and the good was wholly assembled in a single country, territory, or
insular possession, the country of origin of the good is the country, territory, or
insular possession in which the good was wholly assembled.

(4) Where the country of origin of a textile or apparel product cannot be de termined under paragraph
(c)(1), (2) or (3) of this section, the country of origin of the good is the single country, territory, or
insular possession in which the most important assembly or manufacturing process occurred.
(5) Where the country of origin of a textile or apparel product cannot be de termined under paragraph
(c)(1), (2), (3) or (4) of this section, the country of origin of the good is the last country, territory, or
insular possession in which an important assembly or manufacturing process occurred.
(d) Treatment of sets. Where a good classifiable in the HT SUS as a set includes one or more
components that are textile or apparel products and a single country of origin for all of the
components of the set cannot be determined under para graph (c) of this section, the country of origin
of each component of the set that is a textile or apparel product shall be de termined separately under
paragraph (c) of this section. (e) Specific rules by tariff classification. (1) The following rules will
apply for purposes of determining the country of origin of a textile or apparel product under
paragraph (c)(2) of this section:

HTSUS Tariff shift and/or other requirements
3005.90 If the good contains ph armaceutical substances, a change to subheading 3005.90 from
any other heading; or If the good does not contain pharmaceutical substances, a change
to subheading 3005.90 from any other heading, except from heading 5007, 5111 through
5113, 5208 through 5212, 5309 through 5311, 5407 through 5408, 5512 through 5516,
5601 through 5603, 5801 through 5804, 5806, 5809, 5903, 5906 through 5907, and 6001
through 6002.
3921.12.15 A change to subheading 3921.12.15 from any other heading.
3921.13.15 A change to subheading 3921.13.15 from any other heading.
3921.90.2550 A change to subheading 3921.90.2550 from any other heading.
4202.12.40–
4202.12.80
A change to subheading 4202.12.40 through 4202.12.80 from any other heading,
provided that the change is the result of the good being wholly assembled in a single
country, territory, or insular possession.
4202.22.40–
4202.22.80
A change to subheading 4202.22.40 through 4202.22.80 from any other heading,
provided that the change is the result of the good being wholly assembled in a single
country, territory, or insular possession.
4202.32.40–
4202.32.95
A change to subheading 4202.32.40 through 4202.32.95 from any other heading,
provided that the change is the result of the good being wholly assembled in a single
country, territory, or insular possession.
4202.92.15–
4202.92.30
A change to subheading 4202.92.15 through 4202.92.30 from any other heading,
provided that the change is the result of the good being wholly assembled in a single
country, territory, or insular possession.
4202.92.60–
4202.92.90
A change to subheading 4202.92.60 through 4202.92.90 from any other heading,
provided that the change is the result of the good being wholly assembled in a single
country, territory, or insular possession.
5001–5002 A change to heading 5001 through 5002 from any other chapter.
5003 A change to heading 5003 from any other heading, provided that the change is the result
of garnetting. If the change to heading 5003 is not the result of garnetting, the country of
origin of the good is the country of origin of the good prior to its becoming waste.
5004–5006 (1) If the good is of staple fibers, a change to heading 5004 through 5006 from any
heading outside that group, provided that the change is the result of a spinning process.
(2) If the good is of filaments, a change to heading 5004 through 5006 from any heading
outside that group, provided that the change is the result of an extrusion process.

HTSUS Tariff shift and/or other requirements
5007 (1) A change from greige fabric of heading 5007 to finished fabric of heading 5007 by
both dyeing and printing when accompanied by two or more of the following finishing
operations: bleaching, shrinking, fulling, napping, decating, permanent stiffening,
weighting, permanent embossing, or moireing; or,
(2) If the country of origin cannot be determined under (1) above, a change to heading
5007 from any other heading, provided that the change is the result of a fabric-making
process.
5101–5103 A change to heading 5101 through 5103 from any other chapter.
5104 A change to heading 5104 from any other heading.
5105 A change to heading 5105 from any other chapter.
5106–5110 A change to heading 5106 through 5110 from any heading outside that group, provided
that the change is the result of a spinning process.
5111–5113 A change to heading 5111 through 5113 from any heading outside that group, provided
that the change is the result of a fabric-making process.
5201 A change to heading 5201 from any other chapter.
5202 A change to heading 5202 from any other heading, provided that the change is the result
of garnetting. If the change to heading 5202 is not the result of garnetting, the country of
origin of the good is the country of origin of the good prior to its becoming waste.
5203 A change to heading 5203 from any other chapter.
5204–5207 A change to heading 5204 through 5207 from any heading outside that group, provided
that the change is the result of a spinning process.
5208–5212 (1) A change from greige fabric of heading 5208 through 5212 to finished fabric of
heading 5208 through 5212 by both dyeing and printing when accompanied by two or
more of the following finishing operations: bleaching, shrinking, fulling, napping,
decating, permanent stiffening, weighting, permanent embossing, or moireing; or
(2) If the country of origin cannot be determined under (1) above, a change to heading
5208 through 5212 from any heading outside that group, provided that the change is the
result of a fabric-making process.
5301–5305 (1) Except for waste, a change to heading 5301 through 5305 from any other chapter.
(2) For waste, a change to heading 5301 through 5305 from any heading outside that
group, provided that the change is the result of garnetting. If the change is not the result
of garnetting, the country of origin of the good is the country of origin of the good prior
to its becoming waste.
5306–5307 A change to heading 5306 through 5307 from any heading outside that group, provided
that the change is the result of a spinning process.
5308 (1) Except for paper yarns, a change to heading 5308 from any other heading, provided
that the change is the result of a spinning process. (2) For paper yarns, a change to
heading 5308 from any other heading, except from heading 4707, 4801 through 4806,
4811, and 4818.
5309–5311 (1) A change from greige fabric of heading 5309 through 5311 to finished fabric of
heading 5309 through 5311 by both dyeing and printing when accompanied by two or
more of the following finishing operations: bleaching, shrinking, fulling, napping,
decating, permanent stiffening, weighting, permanent embossing, or moireing;
or (2)If the country of origin cannot be determined under (1) above, a change to heading
5309 through 5311 from any heading outside that group, provided that the change is the
result of a fabric-making process.
5401–5406 A change to heading 5401 through 5406 from any other heading, provided that the
change is the result of an extrusion process.
5407–5408 (1) A change from greige fabric of heading 5407 through 5408 to finished fabric of
heading 5407 through 5408 by both dyeing and printing when accompanied by two or
more of the following finishing operations: bleaching, shrinking, fulling, napping,
decating, permanent stiffening, weighting, permanent embossing, or moireing; or
(2) If the country of origin cannot be determined under (1) above, a change to heading
5407 through 5408 from any heading outside that group, provided that the change is the
result of a fabric-making process.
5501–5502 A change to heading 5501 through 5502 from any other chapter, provided that the
change is the result of an extrusion process.

HTSUS Tariff shift and/or other requirements
5503–5504 A change to heading 5503 through 5504 from any other chapter, except from Chapter
54.
5505 A change to heading 5505 from any other heading, provided that the change is the result
of garnetting. If the change is not the result of garnetting, the country of origin of the
good is the country of origin of the good prior to its becoming waste.
5506–5507 A change to heading 5506 through 5507 from any other chapter, except from Chapter
54.
5508–5511 A change to heading 5508 through 5511 from any heading outside that group, provided
that the change is the result of a spinning process.
5512–5516 (1) A change from greige fabric of heading 5512 through 5516 to finished fabric of
heading 5512 through 5516 by both dyeing and printing when accompanied by two or
more of the following finishing operations: bleaching, shrinking, fulling, napping,
decating, permanent stiffening, weighting, permanent embossing, or moireing; or (2) If
the country of origin cannot be determined under (1) above, a change to heading 5512
through 5516 from any heading outside that group, provided that the change is the result
of a fabric-making process.
5601 (1) A change to wadding of heading 5601 from any other heading, except from heading
5105, 5203, and 5501 through 5507.
(2) A change to flock, textile dust, mill neps, or articles of wadding, of heading 5601
from any other heading or from wadding of heading 5601.
5602–5603 (1) Except for fabric of wool or of fine animal hair, a change from greige fabric of
heading 5602 through 5603 to finished fabric of heading 5602 through 5603 by both
dyeing and printing when accompanied by two or more of the following finishing
operations: bleaching, shrinking, fulling, napping, decating, permanent stiffening,
weighting, permanent embossing, or moireing; or (2) If the country of origin cannot be
determined under (1) above, a change to heading 5602 through 5603 from any heading
outside that group, provided that the change is the result of a fabric-making process.
5604 (1) If the textile component is of continuous filaments, including strips, a change of
those filaments, including strips, to heading 5604 from any other heading, except from
heading 5001 through 5007, 5401 through 5408, and 5501 through 5502, and provided
that the change is the result of an extrusion process.
(2) If the textile component is of staple fibers, a change of those fibers to heading 5604
from any other heading, except from heading 5004 through 5006, 5106 through 5110,
5204 through 5207, 5306 through 5308, and 5508 through 5511, and provided that the
change is the result of a spinning process.
5605–5606 If the good is of continuous filaments, including strips, a change of those filaments,
including strips, to heading 5605 through 5606 from any other heading, except from
heading 5001 through 5007, 5401 through 5408, and 5501 through 5502, and provided
that the change is the result of an extrusion process;
or If the good is of staple fibers, a change of those fibers to heading 5605 through 5606
from any other heading, except from heading 5106 through 5110, 5204 through 5207,
5306 through 5308, and 5508 through 5511, and provided that the change is the result of
a spinning process.
5607 If the good is of continuous filaments, including strips, a change of those filaments,
including strips, to heading 5607 from any other heading, except from heading 5001
through 5007, 5401 through 5406, and 5501 through 5511, and provided that the change
is the result of an extrusion process;
or If the good is of staple fibers, a change of those fibers to heading 5607 from any other
heading, except from heading 5106 through 5110, 5204 through 5207, 5306 through
5308, and 5508 through 5511, and provided that the change is the result of a spinning
process.
5608 (1)(a) Except for netting of wool or of fine animal hair, a change from greige netting of
heading 5608 to finished netting of heading 5608 by both dyeing and printing when
accompanied by two or more of the following finishing operations: bleaching, shrinking,
fulling, napping, decating, permanent stiffening, weighting, permanent embossing, or
moireing; or
(1)(b) If the country of origin cannot be determined under (1)(a) above, a change to

HTSUS Tariff shift and/or other requirements
netting of heading 5608 from any other heading, except from heading 5804, and
provided that the change is the result of a fabric-making process.
(2) A change to fishing nets or other made up nets of heading 5608:
(a) If the good does not contain non-textile attachments, from any other heading, except
from heading 5804 and 6002, and provided that the change is the result of a fabric-
making process; or
(b) If the good contains non-textile attachments, from any heading, including a change
from another good of heading 5608, provided that the change is the result of the good
being wholly assembled in a single country, territory, or insular possession.
5609 (1) If of continuous filaments, including strips, the country of origin of a good
classifiable under heading 5609 is the country, territory, or insular possession in which
those filaments, including strips, were extruded.
(2) If of staple fibers, the country of origin of a good classifiable under heading 5609 is
the country, territory, or insular possession in which those fibers were spun into yarns.
5701–5705 A change to heading 5701 through 5705 from any other chapter.
5801–5803 (1) Except for fabric of wool or of fine animal hair, a change from greige fabric of
heading 5801 through 5803 to finished fabric of heading 5801 through 5803 by both
dyeing and printing when accompanied by two or more of the following finishing
operations: bleaching, shrinking, fulling, napping, decating, permanent stiffening,
weighting, permanent embossing, or moireing; or
(2) If the country of origin cannot be determined under (1) above, a change to heading
5801 through 5803 from any other heading, including a heading within that group,
except from heading 5007, 5111 through 5113, 5208 through 5212, 5309 through 5311,
5407 through 5408, 5512 through 5516, and 6002, and provided that the change is the
result of a fabric-making process.
5804.10 (1) Except for fabric of wool or of fine animal hair, a change from greige fabric of
subheading 5804.10 to finished fabric of subheading 5804.10 by both dyeing and
printing when accompanied by two or more of the following finishing operations:
bleaching, shrinking, fulling, napping, decating, permanent stiffening, weighting,
permanent embossing, or moireing; or
(2) If the country of origin cannot be determined under (1) above, a change to
subheading 5804.10 from any other heading, except from heading 5608, and provided
that the change is the result of a fabric-making process.
5804.21–
5804.30
 (1) Except for lace of wool or of fine animal hair, a change from greige lace of
subheading 5804.21 through 5804.30 to finished lace of subheading 5804.21 through
5804.30 by both dyeing and printing when accompanied by two or more of the
following finishing operations: bleaching, shrinking, fulling, napping, decating,
permanent stiffening, weighting, permanent embossing, or moireing; or (2) If the
country of origin cannot be determined under (1) above, a change to subheading
5804.21 through 5804.30 from any other heading, provided that the change is the result
of a fabric-making process.
5805 A change to heading 5805 from any other heading, except from heading 5007, 5111
through 5113, 5208 through 5212, 5309 through 5311, 5407 through 5408, and 5512
through 5516, and provided that the change is the result of a fabric-making process.
5806 (1) Except for fabric of wool or of fine animal hair, a change from greige fabric of
heading 5806 to finished fabric of heading 5806 by both dyeing and printing when
accompanied by two or more of the following finishing operations: bleaching, shrinking,
fulling, napping, decating, permanent stiffening, weighting, permanent embossing, or
moireing; or (2) If the country of origin cannot be determined under (1) above, a change
to heading 5806 from any other heading, except from heading 5007, 5111 through 5113,
5208 through 5212, 5309 through 5311, 5407 through 5408, 5512 through 5516, and
5801 through 5803, and provided that the change is the result of a fabric-making
process.
5807 The country of origin of a good classifiable under heading 5807 is the country, territory,
or insular possession in which the fabric comprising the good was formed by a fabric-
making process.
5808.10 (1) If the good is of continuous filaments, including strips, a change of those filaments,

HTSUS Tariff shift and/or other requirements
including strips, to subheading 5808.10 from any other heading, except from heading
5001 through 5007, 5401 through 5406, 5501 through 5502, and 5604 through 5607,
and provided that the change is the result of an extrusion process.
2) If the good is of staple fibers, a change of those fibers to heading 5808.10 from any
other heading, except from heading 5106 through 5113, 5204 through 5212, 5306
through 5311, 5401 through 5408, 5508 through 5516, and 5604 through 5607, and
provided that the change is the result of a spinning process.
5808.90 (1) For ornamental fabric trimmings: (a) A change from a greige good of subheading
5808.90 to a finished good of subheading 5808.90 by both dyeing and printing when
accompanied by two or more of the following finishing operations: bleaching, shrinking,
fulling, napping, decating, permanent stiffening, weighting, permanent embossing, or
moireing; or,
(b) If the country of origin cannot be determined under (a) above, a change to
subheading 5808.90 from any other chapter, except from heading 5007, 5111 through
5113, 5208 through 5212, 5309 through 5311, 5407 through 5408, and 5512 through
5516, and provided that the change is the result of a fabric-making process.
(2) For non-fabric ornamental trimmings: (a) If the trimming is of continuous filaments,
including strips, a change to subheading 5808.90 from any other heading, except from
heading 5001 through 5007, 5401 through 5408, 5501 through 5502, and 5604 through
5607, and provided that the change is the result of an extrusion process; or
(b) If the trimming is of staple fibers, a change to subheading 5808.90 from any other
heading, except from heading 5106 through 5113, 5204 through 5212, 5306 through
5311, 5401 through 5408, 5508 through 5516, and 5604 through 5607, and provided that
the change is the result of a spinning process.
(3) For tassels, pompons and similar articles: (a) If the good has been wholly assembled
in a single country, territory, or insular possession, a change to subheading 5808.90
from any other heading;
b) If the good has not been wholly assembled in a single country, territory, or insular
possession and the good is of staple fibers, a change to subheading 5808.90 from any
other heading, except from heading 5004 through 5006, 5106 through 5110, 5204
through 5207, 5306 through 5308, and 5508 through 5511, and 5604 through 5607, and
provided that the change is the result of a spinning process; or
c) If the good has not been wholly assembled in a single country, territory, or insular
possession and the good is of filaments, including strips, a change to subheading
5808.90 from any other heading, except from heading 5001 through 5007, 5401 through
5406, and 5501 through 5502, and provided that the change is the result of an extrusion
process.
5809 A change to heading 5809 from any other heading, except from heading 5007, 5111
through 5113, 5208 through 5212, 5309 through 5311, 5407 through 5408, 5512 through
5516, 5801 through 5802, 5804, and 5806, and provided that the change is the result of a
fabric-making process.
5810.10 The country of origin of goods of subheading 5810.10 is the single country, territory, or
insular possession in which the embroidery was performed.
5810.91–
5810.99
(1) For embroidered fabric, the country of origin is the country, territory, or insular
possession in which the fabric was produced by a fabric-making process.
(2) For embroidered badges, emblems, insignia, and the like, comprised of multiple
components, the country of origin is the place of assembly, provided that the change is
the result of the good being wholly assembled in a single country, territory, or insular
possession.
(3) For embroidered badges, emblems, insignia, and the like, not comprised of multiple
components, a change to subheading 5810.91 through 5810.99 from any other chapter,
except from heading 5007, 5111 through 5113, 5208 through 5212, 5309 through 5311,
5407 through 5408, 5512 through 5516, 5602 through 5603, 5608, 5903, 5907, 6001
through 6002, and provided that the change is the result of a fabric-making process.
5811 The country of origin of a good classifiable under heading 5811 is the country, territory,
or insular possession in which the fabric comprising the good was formed by a fabric-
making process.
5901–5903 (1) Except for fabric of wool or of fine animal hair, a change from greige fabric of

HTSUS Tariff shift and/or other requirements
heading 5901 through 5903 to finished fabric of heading 5901 through 5903 by both
dyeing and printing when accompanied by two or more of the following finishing
operations: bleaching, shrinking, fulling, napping, decating, permanent stiffening,
weighting, permanent embossing, or moireing; or,
(2) If the country of origin cannot be determined under (1) above, a change to heading
5901 through 5903 from any other heading, including a heading within that group,
except from heading 5007, 5111 through 5113, 5208 through 5212, 5309 through 5311,
5407 through 5408, 5512 through 5516, 5803, 5806, 5808, and 6002, and provided that
the change is the result of a fabric-making process.
5904 (1) For goods that have been wholly assembled by means of a lamination process, a
change to heading 5904 from any other heading, provided that the change is the result of
the good being wholly assembled in a single country, territory, or insular possession. (2)
For all other goods, the country of origin of the good will be determined by application
of § 102.21(c)(4) or, if the country of origin cannot be determined under that section, by
application of § 102.21(c)(5).
5905 (1) Except for wall coverings consisting of te xtile fabric of wool or of fine animal hair
treated on the back or affixed by any means to a backing of any material, a change from
wall coverings of greige fabric of heading 5905 to wall coverings of finished fabric of
heading 5905 by both dyeing and printing when accompanied by two or more of the
following finishing operations: bleaching, shrinking, fulling, napping, decating,
permanent stiffening, weighting, permanent embossing, or moireing; or,
(2) If the country of origin cannot be determined under (1) above, a change to heading
5905 from any other heading, except from heading 5007, 5111 through 5113, 5208
through 5212, 5309 through 5311, 5407 through 5408, 5512 through 5516, 5603, 5803,
5806, 5808, and 6002, and provided that the change is the result of a fabric-making
process.
5906–5907 (1) Except for fabric of wool or of fine animal hair, a change from greige fabric of
heading 5906 through 5907 to finished fabric of heading 5906 through 5907 by both
dyeing and printing when accompanied by two or more of the following finishing
operations: bleaching, shrinking, fulling, napping, decating, permanent stiffening,
weighting, permanent embossing, or moireing; or,
(2) If the country of origin cannot be determined under (1) above, a change to heading
5906 through 5907 from any other chapter, except from heading 5007, 5111 through
5113, 5208 through 5212, 5309 through 5311, 5407 through 5408, 5512 through 5516,
5803, 5806, 5808, and 6002, and provided that the change is the result of a fabric-
making process.
5908 (1) Except for yarns, twine, cord, and braid, a change to heading 5908 from any other
heading, except from heading 5007, 5111 through 5113, 5208 through 5212, 5309
through 5311, 5407 through 5408, 5512 through 5516, 5801 through 5802, 5806, 5808,
and 6001 through 6002.
(2) For yarns, twine, cord, and braid:
(a) If the good is of continuous filaments, including strips, a change to heading 5908
from any other heading, except from heading 5001 through 5007, 5401 through 5406,
and 5501 through 5502, and provided that the change is the result of an extrusion
process; or
(b) If the good is of staple fibers, a change to heading 5908 from any other heading,
except from heading 5106 through 5110, 5204 through 5207, 5306 through 5308, and
5508 through 5511, and 5605 through 5607, and provided that the change is the result of
a spinning process.
5909 A change to heading 5909 from any other chapter, except from heading 5007, 5111
through 5113, 5208 through 5212, 5309 through 5311, 5407 through 5408, 5512 through
5516, 5603, 5801 through 5804, 5806, 5808, and 6001 through 6002, and provided that
the good does not contain armor or accessories of non-textile material and provided that
the change is the result of a fabricmaking process; or
A change to textile hosepiping with armor or accessories of non-textile material, of
heading 5909, from any heading, including a change from another good of heading
5909, provided that the change is the result of the good being wholly assembled in a
single country, territory, or insular possession.

HTSUS Tariff shift and/or other requirements
5910 (1) For belts and belting of braid, rope, or cord:
(a) If the good is of continuous filaments, including strips, a change of those filaments,
including strips, to heading 5910 from any other heading, except from heading 5001
through 5006, 5401 through 5406, and 5501 through 5502, and provided that the change
is the result of an extrusion process; or
(b) If the good is of staple fibers, a change of those fibers to heading 5910 from any
other heading, except from heading 5106 through 5110, 5204 through 5207, 5306
through 5308, and 5508 through 5511, and provided that the change is the result of a
spinning process.
(2) For fabric belting and belts, not braids and not combined with non-textile
components, whether or not reinforced with metal or other material, a change to heading
5910 from any other heading, except from heading 5007, 5111 through 5113, 5208
through 5212, 5309 through 5311, 5407 through 5408, 5512 through 5516, 5602 through
5603, 5801 through 5804, 5806, 5808 through 5809, and 6001 through 6002, and
provided the change is the result of a fabric-making process.
(3) For fabric belts, including belts of braided materials, combined with non-textile
components, whether or not reinforced with metal or other material, a change to heading
5910 from any heading, including a change from another good of heading 5910,
provided that the change is the result of the good being wholly assembled in a single
country, territory, or insular possession.
5911.10–
5911.20
(1) Except for fabric of wool or of fine animal hair, a change from greige fabric of
subheading 5911.10 through 5911.20 to finished fabric of subheading 5911.10 through
5911.20 by both dyeing and printing when accompanied by two or more of the
following finishing operations: bleaching, shrinking, fulling, napping, decating,
permanent stiffening, weighting, permanent embossing, or moireing; or,
(2) If the country of origin cannot be determined under (1) above, a change to
subheading 5911.10 through 5911.20 from any other heading, except from heading
5007, 5111 through 5113, 5208 through 5212, 5309 through 5311, 5407 through 5408,
5512 through 5516, 5602 through 5603, 5801 through 5804, 5806, and 6001 through
6002, and provided that the change is the result of a fabric-making process.
5911.31–
5911.32
(1)(a) Except for fabric of wool or of fine animal hair, a change from greige fabric of
subheading 5911.31 through 5911.32 to finished fabric of subheading 5911.31 through
5911.32 by both dyeing and printing when accompanied by two or more of the
following finishing operations: bleaching, shrinking, fulling, napping, decating,
permanent stiffening, weighting, permanent embossing, or moireing; or,
(1)(b) If the country of origin cannot be determined under (1)(a) above, for goods not
combined with non-textile components, a change to subheading 5911.31 through
5911.32 from any other heading, except from heading 5007, 5111 through 5113, 5208
through 5212, 5309 through 5311, 5407 through 5408, 5512 through 5516, 5602 through
5603, 5801 through 5804, 5806, and 6001 through 6002, and provided that the change is
the result of a fabric-making process.
(2) For goods combined with non-textile components, a change to subheading 5911.31
through 5911.32 from any other heading, provided that the change is the result of the
good being wholly assembled in a single country, territory, or insular possession.
5911.40 (1) Except for fabric of wool or of fine animal hair, a change from greige fabric of
subheading 5911.40 to finished fabric of subheading 5911.40 by both dyeing and
printing when accompanied by two or more of the following finishing operations:
bleaching, shrinking, fulling, napping, decating, permanent stiffening, weighting,
permanent embossing, or moireing; or,
(2) If the country of origin cannot be determined under (1) above, a change to
subheading 5911.40 from any other heading, except from heading 5007, 5111 through
5113, 5208 through 5212, 5309 through 5311, 5407 through 5408, 5512 through 5516,
5602 through 5603, 5801 through 5804, 5806, and 6001 through 6002, and provided that
the change is the result of a fabric-making process.
5911.90 (1) For goods of yarn, rope, cord, or braid:
a)If the good is of continuous filaments, including strips, a change of those filaments,
including strips, to subheading 5911.90 from any other heading, except from heading
5001 through 5006, 5401 through 5406, and 5501 through 5502, and provided that the

HTSUS Tariff shift and/or other requirements
change is the result of an extrusion process; or
b) If the good is of staple fibers, a change of those fibers to subheading 5911.90 from
any other heading, except from heading 5106 through 5110, 5204 through 5207, 5306
through 5308, and 5508 through 5511, and provided that the change is the result of a
spinning process.
(2)(a) If the good is a fabric, except for fabric of wool or of fine animal hair, a change
from greige fabric of subheading 5911.90 to finished fabric of subheading 5911.90 by
both dyeing and printing when accompanied by two or more of the following finishing
operations: bleaching, shrinking, fulling, napping, decating, permanent stiffening,
weighting, permanent embossing, or moireing; or,
(2)(b) If the country of origin cannot be determined under (2)(a) above, if the good is a
fabric, a change to subheading 5911.90 from any other heading, except from heading
5007, 5111 through 5113, 5208 through 5212, 5309 through 5311, 5407 through 5408,
5512 through 5516, 5602 through 5603, 5801 through 5804, 5806, 5809, and 6001
through 6002, and provided that the change is the result of a fabric-making process.
(3) If the good is a made up article other than a good of yarn, rope, cord, or braid, a
change to subheading 5911.90 from any heading, including a change from another good
of heading 5911, provided that the change is the result of the good being wholly
assembled in a single country, territory, or insular possession.
6001–6002 (1) Except for fabric of wool or of fine animal hair, a change from greige fabric of
heading 6001 through 6002 to finished fabric of heading 6001 through 6002 by both
dyeing and printing when accompanied by two or more of the following finishing
operations: bleaching, shrinking, fulling, napping, decating, permanent stiffening,
weighting, permanent embossing, or moireing; or,
(2) If the country of origin cannot be determined under (1) above, a change to heading
6001 through 6002 from any heading outside that group, provided that the change is the
result of a fabric-making process.
6101–6117 (1) If the good is not knit to shape and consists of two or more component parts, except
for goods of subheading 6117.10 provided for in paragraph (e)(2) of this section, a
change to an assembled good of heading 6101 through 6117 from unassembled
components, provided that the change is the result of the good being wholly assembled
in a single country, territory, or insular possession.
(2) If the good is not knit to shape and does not consist of two or more component parts,
except for goods of subheading 6117.10 provided for in paragraph (e)(2) of this section,
a change to heading 6101 through 6117 from any heading outside that group, except
from heading 5007, 5111 through 5113, 5208 through 5212, 5309 through 5311, 5407
through 5408, 5512 through 5516, 5806, 5809 through 5811, 5903, 5906 through 5907,
and 6001 through 6002, and subheading 6307.90, and provided that the change is the
result of a fabric-making process.
(3) If the good is knit to shape, except for goods of subheading 6117.10 provided for in
paragraph (e)(2) of this section, a change to 6101 through 6117 from any heading
outside that group, provided that the knit to shape components are knit in a single
country, territory, or insular possession.
6201–6208 (1) If the good consists of two or more component parts, a change to an assembled good
of heading 6201 through 6208 from unassembled components, provided that the change
is the result of the good being wholly assembled in a single country, territory, or insular
possession. (2) If the good does not consist of two or more component parts, a change to
heading 6201 through 6208 from any heading outside that group, except from heading
5007, 5111 through 5113, 5208 through 5212, 5309 through 5311, 5407 through 5408,
5512 through 5516, 5602 through 5603, 5801 through 5806, 5809 through 5811, 5903,
5906 through 5907, and 6217, and subheading 6307.90, and provided that the change is
the result of a fabric-making process.
6209.10.0000–
6209.20.5035
(1) If the good consists of two or more component parts, a change to an assembled good
of subheading 6209.10.0000 through 6209.20.5035 from unassembled components,
provided that the change is the result of the good being wholly assembled in a single
country, territory, or insular possession.
2) If the good does not consist of two or more component parts, a change to subheading
6209.10.0000 through 6209.20.5035 from any other heading, except from heading 5007,

HTSUS Tariff shift and/or other requirements
5111 through 5113, 5208 through 5212, 5309 through 5311, 5407 through 5408, 5512
through 5516, 5602 through 5603, 5801 through 5806, 5809 through 5811, 5903, 5906
through 5907, and 6217, and subheading 6307.90, and provided that the change is the
result of a fabric-making process.
6209.20.5040 The country of origin of a good classifiable in subheading 6209.20.5040 is the country,
territory, or insular possession in which the fabric comprising the good was formed by a
fabric-making process.
6209.20.5045–
6209.90.9000
 (1) If the good consists of two or more component parts, a change to an assembled good
of subheading 6209.20.5045 through 6209.90.9000 from unassembled components,
provided that the change is the result of the good being wholly assembled in a single
country, territory, or insular possession.
(2) If the good does not consist of two or more component parts, a change to subheading
6209.20.5045 through 6209.90.9000 from any other heading, except from heading 5007,
5111 through 5113, 5208 through 5212, 5309 through 5311, 5407 through 5408, 5512
through 5516, 5602 through 5603, 5801 through 5806, 5809 through 5811, 5903, 5906
through 5907, and 6217, and subheading 6307.90, and provided that the change is the
result of a fabric-making process.
6210–6212 (1) If the good consists of two or more component parts, a change to an assembled good
of heading 6210 through 6212 from unassembled components, provided that the change
is the result of the good being wholly assembled in a single country, territory, or insular
possession.
(2) If the good does not consist of two or more component parts, a change to heading
6210 through 6212 from any heading outside that group, except from heading 5007,
5111 through 5113, 5208 through 5212, 5309 through 5311, 5407 through 5408, 5512
through 5516, 5602 through 5603, 5801 through 5806, 5809 through 5811, 5903, 5906
through 5907, 6001 through 6002, and 6217, and subheading 6307.90, and provided that
the change is the result of a fabric-making process.
6213–6214 Except for goods of heading 6213 through 6214 provided for in paragraph (e)(2) of this
section, the country of origin of a good classifiable under heading 6213 through 6214 is
the country, territory, or insular possession in which the fabric comprising the good was
formed by a fabric-making process.
6215–6217 (1) If the good consists of two or more component parts, a change to an assembled good
of heading 6215 through 6217 from unassembled components, provided that the change
is the result of the good being wholly assembled in a single country, territory, or insular
possession.
2) If the good does not consist of two or more component parts, a change to heading
6215 through 6217 from any heading outside that group, except from heading 5007,
5111 through 5113, 5208 through 5212, 5309 through 5311, 5407 through 5408, 5512
through 5516, 5602 through 5603, 5801 through 5806, 5809 through 5811, 5903, 5906
through 5907, and 6217, and subheading 6307.90, and provided that the change is the
result of a fabric-making process.
6301–6306 Except for goods of heading 6302 through 6304 provided for in paragraph (e)(2) of this
section, the country of origin of a 17 good classifiable under heading 6301 through 6306
is the country, territory, or insular possession in which the fabric comprising the good
was formed by a fabric-making process.
6307.10 The country of origin of a good classifiable under subheading 6307.10 is the country,
territory, or insular possession in which the fabric comprising the good was formed by a
fabric-making process.
6307.20 A change to subheading 6307.20 from any other heading, provided that the change is the
result of the good being wholly assembled in a single country, territory, or insular
possession.
6307.90 The country of origin of a good classifiable under subheading 6307.90 is the country,
territory, or insular possession in which the fabric comprising the good was formed by a
fabric-making process.
6308 The country of origin of a good classifiable under heading 6308 is the country, territory,
or insular possession in which the woven fabric component of the good was formed by a
fabric-making process.

HTSUS Tariff shift and/or other requirements
6309–6310 The country of origin of a good classifiable under heading 6309 through 6310 is the
country, territory, or insular possession in which the good was last collected and
packaged for shipment.
6405.20.60 A change to subheading 6405.20.60 from any other heading, provided that the change is
the result of the good being wholly assembled in a single country, territory, or insular
possession.
6406.10.77 (1) If the good consists of two or more components, a change to subheading 6406.10.77
from any other heading, provided that the change is the result of the good being wholly
assembled in a single country, territory, or insular possession.
(2) If the good does not consist of two or more components, a change to subheading
6406.10.77 from any other heading, except from heading 5007, 5111 through 5113,
5208 through 5212, 5309 through 5311, 5407 through 5408, 5512 through 5516, 5602
through 5603, 5608, 5801 through 5804, 5806, 5808 through 5810, 5903, 5906 through
5907, and 6001 through 6002, and provided that the change is the result of a fabric-
making process.
6406.10.90 (1) If the good consists of two or more components, a change to subheading 6406.10.90
from any other heading, provided that the change is the result of the good being wholly
assembled in a single country, territory, or insular possession.
(2) If the good does not consist of two or more components, a change to subheading
6406.10.90 from any other heading, except from heading 5007, 5111 through 5113,
5208 through 5212, 5309 through 5311, 5407 through 5408, 5512 through 5516, 5602
through 5603, 5608, 5801 through 5804, 5806, 5808 through 5810, 5903, 5906 through
5907, and 6001 through 6002, and provided that the change is the result of a fabric-
making process.
6406.99.15 (1) If the good consists of two or more components, a change to subheading 6406.99.15
from any other heading, provided that the change is the result of the good being wholly
assembled in a single country, territory, or insular possession.
(2) If the good does not consist of two or more components, a change to subheading
6406.99.15 from any other heading, except from heading 5007, 5111 through 5113,
5208 through 5212, 5309 through 5311, 5407 through 5408, 5512 through 5516, 5602
through 5603, 5608, 5801 through 5804, 5806, 5808 through 5810, 5903, 5906 through
5907, and 6001 through 6002, and provided that the change is the result of a fabric-
making process.
6501 (1) If the good consists of two or more components, a change to heading 6501 from any
other heading, provided that the change is the result of the good being wholly assembled
in a single country, territory, or insular possession.
2)If the good does not consist of two or more components, a change to heading 6501
from any other heading, except from heading 5602, and provided that the change is the
result of a fabricmaking process
6502 (1) If the good consists of two or more components, a change to heading 6502 from any
other heading, provided that the change is the result of the good being wholly assembled
in a single country, territory, or insular possession.
(2) If the good does not consist of two or more components, a change to heading 6502
from any other heading, except from heading 5007, 5111 through 5113, 5208 through
5212, 5407 through 5408, 5512 through 5516, 5602 through 5603, 5608, 5801 through
5804, 5806, 5808 through 5810, 5903, 5906 through 5907, and 6001 through 6002, and
provided that the change is the result of a fabric-making process.
6503 (1) If the good consists of two or more components, a change to heading 6503 from any
other heading, provided that the change is the result of the good being wholly assembled
in a single country, territory, or insular possession.
(2) If the good does not consist of two or more components, a change to heading 6503
from any other heading, except from heading 5602, and provided that the change is the
result of a fabricmaking process.
6504 (1) If the good consists of two or more components, a change to heading 6504 from any
other heading, provided that the change is the result of the good being wholly assembled
in a single country, territory, or insular possession.
(2) If the good does not consist of two or more components, a change to heading 6504

HTSUS Tariff shift and/or other requirements
from any other heading, except from heading 5007, 5111 through 5113, 5208 through
5212, 5407 through 5408, 5512 through 5516, 5602 through 5603, 5608, 5801 through
5804, 5806, 5808 through 5810, 5903, 5906 through 5907, and 6001 through 6002, and
provided that the change is the result of a fabric-making process.
6505.90 (1) If the good consists of two or more components, a change to subheading 6505.90
from any other heading, provided that the change is the result of the good being wholly
assembled in a single country, territory, or insular possession.
(2) If the good does not consist of two or more components, a change to subheading
6505.90 from any other heading, except from heading 5007, 5111 through 5113, 5208
through 5212, 5407 through 5408, 5512 through 5516, 5602 through 5603, 5608, 5801
through 5804, 5806, 5808 through 5811, 5903, 5906 through 5907, and 6001 through
6002, and provided that the change is the result of a fabric-making process.
6601.10–
6601.91
A change to subheading 6601.10 through 6601.91 from any other heading, provided that
the change is the result of the good being wholly assembled in a single country,
territory, or insular possession.
7019.19.15 (1) If the good is of filaments, a change to subheading 7019.19.15 from any other
heading, provided that the change is the result of an extrusion process.
(2) If the good is of staple fibers, a change to subheading 7019.19.15 from any other
subheading, except from subheading 7019.19.30 through 7019.19.90, 7019.31.00
through 7019.39.50, and 7019.90, and provided that the change is the result of a
spinning process.
7019.19.28 (1) If the good is of filaments, a change to subheading 7019.19.28 from any other
heading, provided that the change is the result of an extrusion process.
(2) If the good is of staple fibers, a change to subheading 7019.19.28 from any other
subheading, except from subheading 7019.19.30 through 7019.19.90, 7019.31.00
through 7019.39.50, and 7019.90, and provided that the change is the result of a
spinning process.
7019.40–
7019.59
 A change to subheading 7019.40 through 7019.59 from any other subheading, provided
that the change is the result of a fabric-making process.
8708.21 (1) For seat belts not combined with non-textile components, a change to subheading
8708.21 from any other heading, except from heading 5007, 5111 through 5113, 5208
through 5212, 5309 through 5311, 5407 through 5408, and 5512 through 5516, and
provided that the change is the result of a fabric-making process.
(2) For seat belts combined with non-textile components, a change to an assembled good
of subheading 8708.21 from unassembled components, provided that the change is the
result of the good being wholly assembled in a single country, territory, or insular
possession.
8804 (1) If the good consists of two or more component parts, a change to an assembled good
of heading 8804 from unassembled components, provided that the change is the result of
the good being wholly assembled in a single country, territory, or insular possession.
2) If the good does not consist of two or more component parts, a change to heading
8804 from any other heading, except from heading 5007, 5111 through 5113, 5208
through 5212, 5309 through 5311, 5407 through 5408, 5512 through 5516, 5603, 5801
through 5804, 5806, 5809 through 5811, 5903, 5906 through 5907, and 6001 through
6002, and subheading 6307.90, and provided that the change is the result of a fabric-
making process.
9113.90.40 (1) If the good consists of two or more component parts, a change to an assembled good
of subheading 9113.90.40 from unassembled components, provided that the change is
the result of the good being wholly assembled in a single country, territory, or insular
possession.
(2) If the good does not consist of two or more component parts, a change to subheading
9113.90.40 from any other heading, except from heading 5007, 5111 through 5113,
5208 through 5212, 5309 through 5311, 5407 through 5408, 5512 through 5516, 5603,
5801 through 5802, 5806, 5809, 5903, 5906 through 5907, and 6001 through 6002, and
subheading 6307.90, and provided that the change is the result of a fabric-making
process.
9404.90 Except for goods of subheading 9404.90 provided for in paragraph (e)(2) of this section,

HTSUS Tariff shift and/or other requirements
the country of origin of a good classifiable under subheading 9404.90 is the country,
territory, or insular possession in which the fabric comprising the good was formed by a
fabric-making process.
9502.91 A change to an assembled good of subheading 9502.91 from unassembled components,
provided that the change is the result of the good being wholly assembled in a single
country, territory, or insular possession.
9612.10.9010 A change to subheading 9612.10.9010 from any other heading, except from heading
5007, 5111 through 5113, 5208 through 5212, 5309 through 5311, 5407 through 5408,
5512 through 5516, 5603, 5806, 5903, 5906 through 5907, and 6002, and provided that
the change is the result of a fabric-making process.

(2) For goods of HTSUS headings 6213 and 6214 and HTSUS subheadings 6117.10, 6302.22,
6302.29, 6302.52, 6302.53, 6302.59, 6302.92, 6302.93, 6302.99, 6303.92, 6303.99, 6304.19, 6304.93,
6304.99, 9404.90.85 and 9404.90.95, except for goods classified under those headings or subheadings
as of cotton or of wool or consisting of fibre ble nds containing 16 percent or more by weight of
cotton: (i) The country of origin of the good is the country, territory, or insular possession in which
the fabric comprising the good was both dyed and prin ted when accompanied by two or more of the
following finishing operations: bleaching, shrinking, fulling, nappi ng, decating, permanent stiffening,
weighting, permanent embossing, or moireing; (ii) If the country of origin cannot be determined under
(i) above, except for goods of HTSUS subheading 6117. 10 that are knit to shape or consist of two or
more component parts, the country of origin is the country, territory, or insular possession in which
the fabric comprising the good was formed by a fa bric-making process; or (iii) For goods of HTSUS
subheading 6117.10 that are knit to shape or consis t of two or more component parts: (A) If the good
is knit to shape, the country of origin of the good is the country, territory, or insular possession in
which a change to HTSUS subheading 6117.10 from yarn occurs, provided that the knit to shape
components are knit in a single country, territory, or insular possession; or (B) If the good is not knit
to shape and consists of two or more component parts, the country of origin of the good is the country,
territory, or insular possession in which a cha nge to an assembled good of HTSUS subheading
6117.10 from unassembled components occurs, provide d that the change is the result of the good
being wholly assembled in a single country, territory, or insular possession. [T.D. 95–69, 60 FR
46197, Sept. 5, 1995, as amended by T.D. 96–56, 61 FR 37818, July 22, 1996; T.D. 99–64, 64 FR
43266, Aug. 10, 1999; T.D. 01–36, 66 FR 21661, May 1, 2001; 66 FR 23981, May 10, 2001]