Source: http://www.sice.oas.org/DISPUTE/wto/ds243/ds243r1e.asp
Timestamp: 2018-09-24 23:15:47
Document Index: 672182349

Matched Legal Cases: ['§ 102', '§ 102', '§ 102', '§ 3592', '§ 102', '§ 102', '§ 102', '§ 3592', 'in casu', 'in casu']

SICE-WTO-United States - WT/DS243/R
WT/DS243/R
(03-3200)
UNITED STATES - RULES OF ORIGIN
FOR TEXTILES AND APPAREL PRODUCTS
The report of the Panel on United States - Rules of Origin for Textiles and Apparel 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 shall be limited to issues of law covered in the Panel report and legal interpretations developed by the Panel. There shall be no ex parte communications with the Panel or Appellate Body concerning matters under consideration by the Panel or Appellate Body.
A. Section 334 of the Uruguay Round Agreements Act
B. Section 405 of the Trade and Development Act of 2000
C. 19 CFR § 102.21
A. FIRST WRITTEN SUBMISSION OF INDIA
(a) Section 334 of the Uruguay Round Agreements Act
(b) The Amendments to section 334 in section 405 of the Trade and Development Act of 2000
3. Legal argument
(a) The measures at issue
(b) The measures at issue are rules of origin within the meaning of Article 1 of the RO Agreement
(c) The measures at issue are subject to the disciplines set out in Article 2 of the RO Agreement.
(d) The measures at issue are inconsistent with Article 2(b) of the RO Agreement
(e) The measures at issue are inconsistent with Article 2(c) of the RO Agreement
(f) The measures at issue are inconsistent with Article 2(d) of the RO Agreement
(g) The measures at issue are inconsistent with Article 2(e) of the RO Agreement
(a) The Agreement on Rules of Origin
(b) Section 334 of the Uruguay Round Agreements Act
(c) Section 405 of the Trade and Development Act of 2000
(a) Section 334 is consistent with Article 2(b)
(b) Section 405 is consistent with Article 2(b)
(c) Section 334 and section 405 are consistent with Article 2(c)
(d) Consistent with Article 2(d), the rules are not discriminatory
(e) The administration of the rules is consistent with Article 2(e)
C. Oral statement of India at the first meeting of the Panel
D. Oral statement of the United States at the first meeting of the Panel
(b) Section 334 of the Uruguay Round Agreement Act
E. Second written submission of India
(i) The fabric forward rule
(ii) The DP2 rule for fabric of silk, cotton, man-made fibre or vegetable fibre
(iii) The DP2 rule for products of 7 HTS headings
(iv) The fabric forward rule for products of 7 HTS headings made of cotton, wool or fibre blend with more than 16% cotton
(b) The measures at issue are inconsistent with Article 2(b) of the RO Agreement
(i) Definition of the terms "trade objectives"
(ii) The prevention of quota circumvention as defined by the United States is the pursuit of a trade objective
(iii) The Senate Report shows that section 333, not section 334, was passed to implement the anti-circumvention provisions of the ATC
(iv) Section 334 is being used as an instrument to protect the United States domestic industry
(v) Section 405 is being used as an instrument to favour 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
(ii) The measures at issue pose unduly strict requirements
(d) The measures at issue are inconsistent with the first sentence of Article 2(c) of the RO Agreement
(i) The basic interpretative issue
(ii) Article 2 (c) does not require the showing of an actual restrictive, distorting and disruptive impact on international trade reflected in trade statistics
(iii) Article 2 (c) requires Members to refrain from adopting and maintaining rules of origin which create conditions of competition with restrictive, distorting and disruptive effects on international trade
(iv) The measures at issue establish conditions of competition with restrictive, distorting or disruptive effects on international trade
(e) The measures at issue are inconsistent with Article 2(d) of the RO Agreement
(i) Provisions that prohibit discrimination (treatment no less favourable) have been interpreted as prohibiting both de jure and de facto discrimination
(ii) De facto discrimination is covered by Article 2 (d) of the RO Agreement42
(iii) Section 405 discriminates on a de facto basis in favour of the European Communities.
(a) The effect of section 405 is to impose differentially disadvantageous consequences
(b) The differential effects created by section 405 are unjustifiable
3. Findings and recommendations requested
F. Second written submission of the United States
2. India has failed to establish that section 334 of the URAA is inconsistent with 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)
(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)
(ii) The interpretation of "restrictive, distorting, disruptive effects"
(c) India has not shown that section 405 is discriminatory or that it restricts, distorts and disrupts international trade
G. Oral statement of India at the second meeting of the Panel
H. ORAL STATEMENT OF THE UNITED STATES AT THE SECOND MEETING OF THE PANEL
2. Section 334
3. Section 405
IV. ARGUMENTS OF THE THIRD PARTIES
A. Third-party submission of China
B. Third-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
2. Article 2(b) of the RO Agreement
(a) "Trade objective"
(b) "Used as instrument to pursue trade objectives directly or indirectly"
(i) Section 334 – Protection of domestic industry
(ii) Section 405 – Favouring the European Communities over other countries
3. Article 2(c)
(a) Points related to the meaning of certain elements
(b) Existence of a de minimis threshold regarding restrictive, distorting or disruptive effects
(c) How to demonstrate effect
4. Article 2(d)
C. Third-party submission of the Philippines
V. INTERIM REVIEW
A. Measures at issue
B. Overview of the parties' claims and arguments
C. Preliminary remarks
2. Applicable rules of interpretation
3. Disciplines prescribed by Article 2 of the RO Agreement
D. India's claims in respect of section 334 and section 405
1. India's claims under Article 2(b) of the RO Agreement
(a) Article 2(b) of the RO Agreement
(b) Consistency of section 334 with Article 2(b) of the RO Agreement
(c) Consistency of section 405 with Article 2(b) of the RO Agreement
2. India's claim under Article 2(c), first sentence, of the RO Agreement
(a) Article 2(c), first sentence, of the RO Agreement
(b) Consistency of the measures at issue with Article 2(c), first sentence, of the RO Agreement
(i) India's arguments as developed in India's first written submission
(ii) India's arguments as developed subsequent to India's first written submission
3. India's claims under Article 2(c), second sentence, of the RO Agreement
(a) Article 2(c), second sentence, of the RO Agreement
(b) Consistency of the measures at issue with Article 2(c), second sentence, of the RO Agreement
(i) "Fulfilment of a condition not related to manufacturing or processing"
(ii) "Unduly strict requirements"
4. India's claim under Article 2(d) of the RO Agreement
(a) Article 2(d) of the RO Agreement
(b) Consistency of section 405 with Article 2(d) of the RO Agreement
E. India's claims in respect of the implementating cutoms regulations
F. India's claims in respect of the application of the measures at issue
ANNEX A - ANSWERS OF PARTIES TO QUESTIONS
ANNEX A-1 - answers of india to questions from the panel following the first meeting
ANNEX A-2 - Answers of the united states to questions from the panel FOLLOWING THE FIRST MEETING
ANNEX A-3 - answers of the united states to questions from india FOLLOWING THE FIRST MEETING
ANNEX A-4 - ANSWERS OF INDIA TO QUESTIONS FROM THE PANEL FOLLOWING the SECOND MEETING
ANNEX A-5 - ANSWERS OF THE UNITED STATES TO QUESTIONS FROM the PANEL FOLLOWING THE SECOND MEETING
ANNEX A-6 - answers of india to questions from the united stateS FOLLOWING THE SECOND MEETING
ANNEX A-7 - Comments of india on answers of the United states to questions from the panel following the second meeting
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
ANNEX B - ANSWERS OF THIRD PARTIES TO QUESTIONS
ANNEX B-1- answers of china to questions from the panel
ANNEX B-2 - answers of the european communities to questions from the panel
ANNEX B-3 - answers of the philippines to questions from the panel
ANNEX C - 19 CFR § 102.21
1.1 On 11 January 2002, India requested consultations with the United States pursuant to Article 4 of the Understanding on Rules and Procedures Governing 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 Agreements Act of 1994 (hereafter "section 334") and section 405 of the United States Trade and Development 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 requested2 the Dispute Settlement Body (hereafter the "DSB") to establish a panel pursuant to Article 6 of the DSU, Article 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 subsequent 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 was 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
Mr Donald McRae6
1.6 Bangladesh, China, the European Communities, Pakistan and the Philippines reserved their third party rights to participate in the Panel's proceedings. China, the European Communities and the Philippines presented written and oral arguments to the Panel.
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. The 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.
2.1 This dispute concerns the rules of origin which 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.
Section 334 of the Uruguay Round Agreements Act
2.2 Section 334 provides, in relevant part, that:
"(b) Principles.—
(1) In general.-- Except as otherwise provided 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, twine, cordage, rope, cable, or braiding and--
(i) the constituent staple fibers are spun in that country, territory, or possession, or
(ii) the continuous filament 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, filaments, 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 determined 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 determined under paragraph (1) or (2), then that good shall be considered 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 headings and subheadings referred to in section 334 quoted above are as follows:
HTS heading Description
6209.20.50.40
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.
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.
Infants' woven cotton diapers.
Other furnishing articles, excluding those of heading No. 94.04
Floor-cloths, dish-cloths, dusters and similar cleaning cloths.
Other made-up articles.
Other articles of bedding.
Section 405 of the Trade and Development Act of 2000
2.4 Section 405 amended section 334 of the Uruguay Round Agreements Act. Of particular relevance to this dispute are two exceptions which section 405 created from the "fabric formation" rule established by section 334. Specifically, section 405 provides that:
- for silk, cotton, man-made or vegetable fibre 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-
(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
"(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 fabric 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 consisting of fiber blends containing 16 percent or more by weight of cotton, shall be considered to originate in, and be the growth, product, or manufacture of, the country, territory, or possession in which the fabric 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."
2.6 The consolidated text of section 334 as amended by section 405 can be found in 19 U.S.C. § 3592.
2.7 The descriptions of goods classifiable under HTS headings, subheadings and sub-subheadings referred to in section 405 quoted above are as follows:
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 crocheted, 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, other than terry towelling, of other textile materials.
63.03 Curtains (including drapes) and interior 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 crocheted, of other textile materials.
9404.90 Other articles of bedding.
9404.90.85 Quilts, eiderdowns, comforters and similar articles.
9404.90.95 Other articles of bedding.
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, adopted on an interim basis, to align the regulatory text with the statutory amendments to section 334 as set forth in section 405. 19 CFR § 102.21 is annexed to this report (Annex C).
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
First written submission of India
3.2 As the United States International Trade Commission ("ITC") noted, "rules of origin have a particularly significant impact in the textiles area because the manufacture of such products involves many production processes often performed in more than one country."8 The temptation to use rules of origin as a means of protectionism is therefore particularly great in this area. The United States could not resist this temptation. Despite its advocacy 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 textiles 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 Clothing ("ATC") in such a way that trade which had previously been quota-free was now subjected to quantitative limits.
3.3 Many WTO Members, both developing and developed countries, registered their concern about these new United States rules of origin. The European Communities also complained about the WTO-inconsistency of the new United States rules of origin and their effects on its textile and apparel industry; in 1997, it initiated WTO dispute settlement 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 States 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 legislation 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 application, are inconsistent with the United States obligations under Article 2 (b), (c), (d) and (e) of the Agreement on Rules of Origin ("RO Agreement").
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 textiles and apparel, namely sections 331 to 335. Section 334 required 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 classes of textiles and apparel, as provided for in section 334(b)(2); and
— a "multicountry rule" as provided for in section 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" rule 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 originating in that country - it will be deemed to originate in that country. This rule follows the principle 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 similar 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 the 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 describe 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 headings 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. Section 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.
3.13 The United States Congress amended section 334 through section 405 of the Trade and Development Act of 2000. The purpose of this amendment was to implement the bilateral agreement settling the WTO case brought by the European Communities against the United States on section 334.
3.14 Section 405 establishes two exceptions to the special rules contained in section 334(b)(2). First, although the origin of fabric was to be determined 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 accompanied 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 subject to the wholly assembled rule in section 334(b)(2)(D) but that were classified under specifically listed HTS headings shall be considered to originate in, and be the growth, product, 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, napping, 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 wool or consisting of fibre blends containing 16% or more by weight of cotton.
3.16 The specific measures challenged by India ("measures at issue") are the United States rules of origin set out in section 334 of the URAA and modified in section 405 of the Trade and Development Act of 2000 and the customs regulations implementing these statutory provisions, and their application.
3.17 Article 1 of the RO Agreement defines the term "rules of origin" as "laws, regulations and administrative determinations of general application 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 preferences 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 preferential 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 transitional 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 Part IV) is completed, Members shall abide by the disciplines set out in Article 2. Upon the implementation of the results of the harmonized work programme, the disciplines in Article 3 will be applicable. 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.
3.19 The operative clause of Article 2(b) is the obligation that rules of origin shall not be used "as instruments to pursue trade objectives." Given the critical importance of ensuring that rules of origin are not used as instruments to pursue trade objectives, 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 will 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, while 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 "most-favoured-nation treatment under Articles I, II, III and XI and XIII of GATT 1994; anti-dumping and countervailing 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 quantitative 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 policy instruments, in particular, the objective of protecting the domestic industry against import competition 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 trade objectives directly or indirectly." The critical importance of separating rules of origin determinations from trade 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 "pursue" 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 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. 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 another country is, by definition, an instrument to pursue trade objectives.
3.24 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. 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 states 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, architecture, 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. There 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, section 334(b)(2) provides the special rule that, "notwithstanding" the wholly assembled rule, the origin of certain flat goods under certain headings would be determined where the greige fabric was woven. On fabrics, 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 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 origin 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, comforters, 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 significant 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 assembly of those components into finished articles or any other operations.
3.31 The majority of India’s exports are in greige fabric. 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 India’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 legislation dictating how rules of origin were to be determined in a particular sector. Both the 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 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.
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 circumvention of textile and apparel quotas"". The definition of transhipment is "the action or process 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 provides 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 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." 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 was the subject of criticism in the WTO Committee on Rules of Origin. For example, at the 1 February 1996 meeting, the representatives of Canada, the European Communities and Switzerland expressed concern 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 changes. 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 fundamentally different from those of the European Communities.
3.37 Third, section 334 did not advance the goal of harmonizing 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 the production of the good, the country where the last substantial transformation has been carried out." Section 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 accurately 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 Bradley presented the harshest criticism of the trade protectionist effects of section 334, which they referred 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 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 imports from another country is, by definition, an instrument to pursue trade objectives.
3.41 The legislative history of section 405 confirms that it was used as an instrument to favour imports from the European Communities. When the European Communities complained about the WTO-consistency of section 334 it cited the adverse effects on certain textile and apparel products of concern to the European Communities. 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 United States market, but rather were subject to the quantitative restrictions the United States maintained against the third country where the greige fabric was woven.
3.42 On 22 May 1997, the European Communities requested 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 origin "adversely affected exports of European Community fabrics, 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 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 implement 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 States 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 United States agreed upon specific language 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 Communities in order to settle the WTO case with the European Communities. Section 405 amended section 334 to create certain exceptions to the general rules on determining origin for fabrics and made-up articles. These exceptions resulted in absurd cases. If cotton fabric is woven in India and exported 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 produce 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 Indian. 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 further 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 subsequently 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 reversions 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 finishing operations, such as dyeing and printing. However, in order to address the European Communities concerns, the 2000 rules provide an exception to this rule for fabrics classified under 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 exceptions to the "wholly assembled rule" for specified products falling under 16 HTS four-digit headings or sub-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 requested 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 that the determination of certain products under these seven HTS headings would be determined based on where the product was dyed and printed when accompanied by two further finishing 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 the procès-verbal ended up almost word-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 Communities 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. India 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.
3.52 The language that rules of origin shall not "themselves" create restrictive, distorting or disruptive effects should be read together with the 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 origin are not used as instruments to pursue trade objectives." Therefore, reading the provisions in Article 2(b) and Article 2(c) together, a measure or instrument of commercial policy may have restrictive, 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 trade-distorting effects, states that "non-automatic licensing shall not have trade-restrictive or distorting 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 effect of a restriction; imposing a restriction." The definition of distorting is "tending to distort; constituting 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 shall 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 competition that are restrictive, distorting or disruptive. Rules of origin create "restrictive" 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 international trade flows.
3.57 India cites examples illustrating the restrictive, distorting and disruptive effects on international trade created by the measures at issue. 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 where 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 the 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. The measures at issue allow more favourable access to certain products over trade in other products. An example 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 consequently create distorting effects on international trade.
3.58 The rules of origin adopted in 2000 only provide that products under specific HTS headings would be conferred origin based on where they are dyed, printed, and subjected to two further finishing operations. The products that were chosen to be treated under the principles used in the previous rules of origin were those products of export concern to the European Communities, namely bed linen, silk scarves, and table linen. When the United States provided 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 provided 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.
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 determination 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.
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 regulations 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.
First written submission of the United States
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 predictable rules of origin and their application facilitate the flow of international trade; (b) that laws, regulations and practices regarding rules of origin be transparent; and (c) that rules of origin should 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, predictable, 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 published 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 implementing its Uruguay Round commitments, India is challenging the specific rules utilized by the United 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, distort, 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 settlement 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 "substantial transformation" concept. India is correct about one thing, however, these rules represented a change from previous United States practice - a change to concise, predictable, published rules from the practice 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-specific rules of origin which the United States promulgated in order 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. However, the RO Agreement does not permit such a reading. The RO Agreement provides for changes to origin regimes 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 their 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 modification section 405 were offered on an MFN basis, in accordance with WTO rules. As such, these 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 lead to one of two impermissible results: (1) that the United States should have no rules of origin 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.
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 origin rules is completed. Specifically, Article 2 directs Members to ensure that, in relevant part:
— 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 between other Members (Article 2(d)); and
— rules of origin are administered in a consistent, uniform, impartial 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 Members to adopt particular origin regimes before harmonization, nor does it require that the same rules 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 manufacturing 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 period 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").
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 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 product is where that product is wholly produced or assembled.15 If production or assembly, whichever is applicable, occurs 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 United 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 transshipment 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 clear, predictable and neutral, as prescribed by the RO Agreement. Second, these rules are based on a simple principle that the process that results in the creation of a new textile product, and therefore merits a change of country of origin, is assembly.17 They are, therefore, "readily understandable, published in easily understood language, uncomplicated and predictable in application."18
3.71 India vigorously asserts that section 334 was such a dramatic change from previous United States practice that it significantly distorts trade. Setting aside the fact that an effect on trade should not be equated with distortion of trade, the prior application of substantial transformation was criticized for being "too subjective, too inconsistent in the results it produce[d], too vulnerable to political pressure in its administration."19
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 Communities. 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 the 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 merit. Section 334, as amended by section 405 is codified at 19 U.S.C. § 3592.22
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
3.75 The United States rules of origin regime is consistent 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 RO Agreement. It is well-established that the complaining party in a WTO dispute bears the burden of coming forward with argument and evidence sufficient to establish a prima facie case of breach of a Member's WTO obligations.25 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.26 Furthermore, a finding that the United States regime 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 international 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 ordinary 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 Vienna 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
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 distinguishes 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 had preceded it. To require the United 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 transition phase.
3.78 Article 2 provides, in relevant part, that "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 instruments to pursue trade objectives directly or indirectly[.]"
3.79 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 instruments to pursue trade objectives."30 The United States also agrees that "instrument" can be defined as "tool," "device," or "means" and that "objective" is a goal.31 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 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 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 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."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 transshipment, to advance harmonization, and to more accurately reflect where the most significant production activity occurs.33 Congress concluded that greater clarity needed to be brought into determinations 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 deterring 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 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, sometimes including processes that in retrospect were understood not to be significant.35
3.82 India points to no evidence to support its assertion that section 334 has been used to achieve protection of the domestic industry. Furthermore, the commentaries referenced by India36 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 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."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 origin 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 take into account which finishing operations merit changing origin, and that 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 origin for textile and apparel 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 the 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 specified. 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.
3.84 With respect to India’s claims that section 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 finishing 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 man-made and vegetable fibers (specifically silk scarves and flat products such as linens), dyeing and printing along with two or more finishing operations were significant enough to confer origin. 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 European Communities' claims in that dispute were valid -- is untenable. 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; and it would be inconsistent with provisions such as DSU Article 3.7, which provides that such solutions are "clearly preferred" to "bringing a case". Notwithstanding India’s unsupported assertions to the contrary, the United States decision to settle the European Communities dispute by amending section 334 was in no way a recognition of any violation of any WTO obligations.
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 disruptive 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, distort 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," "distortion," 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 "their sheer complexity." First, India has not demonstrated that "complexity" is a prohibited criterion. It would seem that India’s view incorrectly equates "simplicity" either with the absence of non-preferential rules of origin (such as is the situation in India) or perhaps with an origin regime that operates through case-by-case origin determinations that will, by its very nature and operation, involve subjectivity and greater administrative discretion than what currently exists in the United States origin regime. Second, India presents no evidence that the rules have discouraged exporters from shipping their products to the United States because they simply could not understand them. Nor could they: 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 impartial, 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 foundation 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 through 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.
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 only 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 irrespective of the affiliation of the goods concerned.46 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).
3.91 Article 2(e) provides, in relevant part, that "(e) [Members’] rules of origin are administered in a consistent, uniform, impartial and reasonable manner. . . ." Once again, India makes no effort to show how the administration of section 334 and section 405 is inconsistent 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, uniform, 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.48 Just as claims under Article X:3 of the GATT 1994 must fail if they are based on challenges to aspects of the laws themselves, rather than their administration so too must claims under Article 2(e) fail if they are based on perceived infirmities of the rules themselves, rather than their administration.
3.92 For the foregoing reasons, the United States requests that the Panel find that India has failed to establish that section 334 of the URAA and section 405 of the Trade and Development Act of 2000 are inconsistent with Article 2(b)-(e) of the Agreement on Rules of Origin.
Oral statement of India at the first meeting of the Panel
3.93 It is my honour to represent India before you today. 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 India 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 dispute settlement proceedings because the United States is using rules of origin to undermine India's market access rights for these products. India also has a systemic interest to ensure that rules of origin are prepared and applied 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 national 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 determine 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 curtailed. 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 origin to pursue trade objectives and not to impose origin requirements that create restrictive, distorting 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 rules 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 the 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 disciplines 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 interest in ensuring that the market access commitments they have already negotiated and those 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 constructive 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 restrict, distort or disrupt international trade. The "fabric forward" rule of section 334 meant that more textile and apparel products were conferred the origin of countries that were under quota restraints. Section 405 provided exceptions to the "fabric forward" rule for certain products of export interest 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 that 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 consequently 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 States' submission, India does not seek to have the Panel "prescribe…what specific rules of origin Members 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 objective is to assess whether it achieves the same results as a measure or instrument of commercial 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 India ’s contention that protection of a domestic industry is an ‘impermissible’ trade objective for 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 protecting 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 contention 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 view 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 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." 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 patterns were conducted in conformity with the then applicable section 12.130 regulations, as a matter of definition, they could not constitute "circumvention."
3.105 In its submission, the European Communities 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 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." 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 that the trade objective of section 334 was the protection of the United States domestic industry. 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 quotas 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 purpose 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. 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 the 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 European 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 certain 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 determine 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 intent 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 preference 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 consistency 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 illegal measures on the basis of the objective pursued, there is no reason why the Appellate Body’s approach 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 difference 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 showing 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 trade objectives") refer to intent ("so as to" and "to") and effect ("protection" and "trade objectives"). There 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 objectives; 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 protect the United States textiles and apparel industry and to single out products of export interest to the European Communities for more favourable treatment. We fully recognise that the intentions expressed during 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 the impact of their proposals would be and that the rules of origin finally adopted produce the desired 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 conclusion 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 the 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 restrictive . . . effects" refer to the effects that the rules of origin are capable of creating or whether they refer to the effects they actually create in the market place. If the former were true, 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 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 positions on this issue. In the view of India, a Member violates Article 2(c) if it adopts rules of origin 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 result, 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 proven 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 origin have actually produced an adverse impact and trade data are available to demonstrate this. A further 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 international 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 quota 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 trade 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 imported and domestic products, as reflected in the volumes of imports, are insignificant or even non-existent."
3.118 Articles III and XI of the GATT have thus never been interpreted to require the attainment or avoidance of particular effects on international trade. They have been interpreted to require the establishment 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. 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 border. 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 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 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 measures, 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 application 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 principle 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 trade 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 rules 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 conditions 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) 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.
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 jurisprudence 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 principle of non-discrimination laid down in the RO Agreement should be different. The danger of circumventing the purpose of Article 2(d) through product 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 you 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.
To continue with D. Oral statement of the United States at the first meeting of the Panel
1WT/DS243/1.
2India 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.
3India 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.
4WT/DS243/5/Rev.1.
5WT/DS243/6.
7The summaries of the parties' arguments are based on the executive summaries 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.
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.
10Indeed, the question arises 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 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?
11Questions 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.
12United States - Measures Affecting Textiles and Apparel Products, WT/DS85/1, G/RO/D/1, G/TBT/D/13, 3 June 1997.
13See RO Agreement preamble.
14In fact, Article 4 of the Agreement on Textiles and Clothing also envisions that such changes would take place, and sets forth a mechanism for Members to reach a mutually acceptable solution regarding appropriate adjustments, a mechanism India chose not to use here.
15See Exhibit US-1.
16H.R. Rep. 103-826(i), Uruguay Round Agreements Act, P.L. 103-465, October 3, 1994. Exhibit US-2.
17India contradicts itself when it asserts that the United States Customs 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.
18See 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.
19Palmeter, at 27. Exhibit INDIA-1.
20H.R. Conf. Rep. 106-606, section 405, Clarification of section 334 of the Uruguay Round Agreements Act, p. 232 (2000). Exhibit US-3.
21See Exhibit US-3.
22Exhibit US-4.
23India 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.
24The United States notes that India, in its first 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 claim in either its Consultation Request or its Panel Request, such a claim cannot form part of this dispute.
25See, 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.
26See, 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.
27Vienna Convention Article 31(1) (emphasis added).
28Appellate Body Report, US - Wool Shirts and Blouses, supra, at 16.
29Appellate 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).
30India First Submission, para. 42 (see, supra, para. 3.19).
31See 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.
32Id. paras. 46-49 (see, supra, paras. 3.23-3.26).
33As India correctly notes, the SAA is an authoritative 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.
34See SAA pages 124-126. Exhibit US-5.
35For 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.
36We note, however, that one of the commentaries addresses a 1984 rules change, which presumably cannot be used to infer the intent of the United States Congress ten years later when section 334 was passed. See India First Submission, note 33.
37See 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.
38See 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.
39See India First Submission, note 48.
40See 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.
41See India First Submission, para. 84 (supra, para. 3.51).
42See India First Submission, para. 91.
44See India First Submission, para.93. Exhibit INDIA-15.
45See RO Agreement preamble.
46See India First Submission, paras. 98-9 (supra, paras. 3.58-3.59).
47See India First Submission, para. 101 (supra, para. 3.60).
48Appellate 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.