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April 1998

WTO Textile Ruling Stuns India

Asia Times
April 18, 2003

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Asia Times | By D. Ravi Kanth | 18 April 2003

GENEVA - A World Trade Organization (WTO) dispute settlement panel last Friday created a watershed when it summarily ruled that the United States' controversial rules of origin for textile and apparel products - instituted in 1996 to restrict burgeoning textile imports from Asia - do not violate the core principles of the trade body's rules-of-origin agreement.

In a dispute raised by India against the United States' rules of origin for textile and apparel products, a three-member dispute settlement panel said in an interim "confidential" ruling that New Delhi had failed to show how the purported measures by Washington undermined Indian textile exports.

The US rules of origin led to a storm of protests in various Asian capitals in July 1996.

"This is an astonishing ruling given the fact that Washington's real goal in changing the rules of origin on July 1, 1996, were primarily aimed at achieving trade objectives," said Munir Ahmed, executive director of the Geneva-based International Textile and Clothing Bureau, a pressure group for developing countries to seek fair trade in textiles.

The ruling - handed over to the two parties last Friday - is a watershed given the appalling US track record of losing all its textile disputes until now, said another textile trade analyst in Hong Kong.

Previously, the US had lost all three major textile disputes raised by WTO members. In the first textile dispute raised at the WTO, Costa Rica secured a major victory against the US over Washington's restriction on Costa Rican underwear exports. Subsequently, India won a major case against US restrictions on Indian wool shirts and blouses. And in a third dispute, Pakistan succeeded in proving that the United States' restriction on Pakistani cotton-yarn exports was illegal.

The WTO's dispute settlement body, which is regarded as the "jewel in the crown" in deciding more than 225 trade disputes, until now has caused sleepless nights for successive administrations in Washington.

Recently, the US lost comprehensively in two major trade disputes - the Byrd amendment to encourage US industry to raise anti-dumping and countervailing cases against foreign companies, and President George W Bush's infamous safeguard measures to restrict imports of steel products in 2002.

Against this backdrop, trade analysts expected the US to lose the rules-of-origin dispute hands down because the measures were allegedly aimed at helping its domestic textile producers. Currently, the US Congress is assessing whether the WTO rulings are biased against US laws.

The WTO's complex rules-of-origin agreement allow most customs administrations to decide the origin of goods according to where the product underwent the last substantial transformation. The most widely applied criterion attributes origin to a country if the product was sufficiently changed there to move its customs classification from one heading to another.

In textile trade, the rules of origin play a major role because of the existing quotas perpetrated by the industrialized countries on textile imports from developing countries.

At the core of this dispute is whether the US-amended Section 334 of the Uruguay Round Agreements Act that brought substantial changes in the rules of origin governing textile and apparel products in 1996, Section 405 of the US Trade and Development Act of 2000, and the customs regulations to implement these provisions violate the application of WTO's rules-of-origin agreement.

India said that Section 334 - introduced by the administration of president Bill Clinton in July 1996 - effected a major change in the application of rules of origin to textile and apparel products as it departed from the "substantial transformation" rule that was at the core of the rules-of-origin agreement. Washington was actually pursuing its trade objectives through the Section 334 amendment, India charged.

New Delhi said that faced with a major trade dispute with India and the European Union, Washington struck a bilateral deal with Brussels through a "process verbal" to take on board the EU's concerns.

In short, the US not only pursued trade objectives through amendments to rules of origin, which are banned under the WTO's rules-of-origin agreement, but further discriminated against the Indian exports over exports from the EU member countries, India charged.

More important, India charged that Washington's sole purpose in pursuing these changes in its rules of origin for textile and apparel products is to further its trade-policy goals, banned under the WTO agreement.

Also, India's dispute was bolstered by realities at the WTO, where some members, particularly the US, repeatedly stalled attempts to establish the new harmonized rules of origin, which were to be completed by July 1998, a trade analyst said.

India fails to convince But the panel was unconvinced by India's reasoning. It said New Delhi could not show hard evidence as to how its exports were restricted over the past seven years due to the US measure.

Therefore, the panel dismissed the Indian claims on all three major grounds that New Delhi raised in its complaint. The panel said India was unable to provide evidence that Section 334 of the Uruguay Round Agreements Act is inconsistent with Articles 2(b) or 2(c) of the rules-of-origin agreement. These two provisions - Articles 2(b) and 2(c) - require that WTO members not pursue rules of origin for "trade objectives" and that they do not create "restrictive, distorting, or disruptive effects on international trade".

Similarly, the panel dismissed India's complaint against Section 405 of the US Trade and Development Act on the ground that its was consistent with Articles 2(b), 2(c) or 2(d) of the trade body's rules-of-origin agreement.

The latest verdict is only an "interim" one in nature but rarely do they undergo changes when are made final. The final ruling will be issued only to the parties in about 30 days and subsequently, it will be made public after another 30 days.

India will have no other alternative but to challenge the panel's verdict before the Appellate Body, the WTO's highest appeals body, to overturn the ruling. "One is confident that the Appellate Body would overturn this ruling," said Munir Ahmed.

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