Synopsis of United States – Rules of Origin

      Synopsis of United States – Rules of Origin for Textiles and Apparel Products(WTO Dispute Settlement Body, 2003)Trade Legal IssuesJanuary 7, 2018Honglin Dan John Finley                        

The United States Rules of Origin for Textiles and Apparel Products was a legal dispute with several important dimensions and characteristics. According to the WTO agreement, the report concluded in 2003, and involved India as the accuser and the US as the defendant. A dispute occurs when a member nation believes that another nation is violating a certain agreement embodied in the WTO. The member complaining submits a “request for consultations”  that identifies which agreements are potentially being violated. Often, a dispute can be applied to several agreements. The dispute is resolved in the WTO. So, WTO is often used as a forum to resolve the dispute. According to Bown & Reynolds (2014), WTO disputes have become quite commonplace, and have involved everything from trade to currency disagreements. The following are the facts of the case, which involve the US and India about textiles dispute. First, it is important to understand Rules of Origin. According to the WTO agreement, Rules of Origin are criteria that determine which nation a product comes from. Certain restrictions and duties are placed on imports, which makes rules of origin important during import or export operations. Governments employ varying practices when it comes to rules of origin. Some of these include changes in tariff classification or processing and manufacturing of operations. Because economy globalization, it is important that Rules of Origin remain consistent. The issue involves rules of origin applied to apparel products and textiles within the US. There is a textile quota regime administered by the Agreement on Textiles and Clothing. This is part of the United States Trade and Development Act of 2000. The issue here surrounded non-apparel articles(WTO, 2018). These are called “flat goods” (WTO, 2018), and included items like home furniture and bedding, which India had been interested in exporting (WTO, 2018). India claimed that before Section 334, the rule of origin that applied to apparel and textiles was called the “Substantial transformation” (WTO, 2018) rule. India believed Section 334 made changes by identifying processes that conferred origin to certain apparel and textile products. India believed the changes were there for the US’ protection of clothing and textiles from import competitors. India stated that the changes proposed in Section 334 were already discussed and challenged by European Communities because it was demonstrated that they were incompatible with obligations the US had under Rules of Origin agreements and the agreement, WT/DS151. India maintained the dispute had already been settled via a verbal process, where the US agreed to amend Section 334. India claimed that the legislation that amended Section 334 (section 405) was aimed at considering the European Communities’ export interests (WTO, 2018). The World Trade Organization released a document that described, in detail, both the India case and rules surrounding textiles. According to this document (2003), Section 334 states that a “textile or apparel products, 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…” (WTO, Report of the Panel, 2003) This occurs if the product is fully obtained and/or produced within that nation, and if it is—in some way, shape or form—designated as a textile or apparel item (WTO, Report of the Panel, 2003). In other words, a textile / apparel item belongs to a country if the country produces it. It is tempting for countries to use rules of origin for textiles because of the tremendous effort and investment in manufacturing these products. India complained about inconsistency in the US’ rules of origin. The following is a discussion of the relevant law and how it applied to the case. According to the WTO, Report of the Panel (2003), Rules of origin cannot be used to achieve objectives in trade, either indirectly or directly. This means that rules of origin must remain objective. A special clause was inserted to further ensure that the rules of origin were not used for the purposes of obtaining or securing trade objectives. Rules of origin must be used for implementation of instruments and measures, and not for commercial purposes. One objective the amendment to 334 seeks to meet is protecting a domestic industry from import competitors or favoring certain imports from a country over those from a different country (WTO, Report of the Panel, 2003). Article 2b is the piece of legislation that prohibits rules of origin from securing trade objectives. Furthermore, 3.23 of the document talks about how to gauge whether a rule of origin is being used to secure a trade objective. According to the document (2003), a rule of origin is used “as an instrument to pursue a trade objective” (WTO, Report of the Panel, 2003) when it favors imports from one nation over another or protects a domestic industry. Instruments of commercial policy are welcomed for use in pursuing and securing trade objectives, but rules of origin cannot play that role. Countries should not use the rules of origin as “policy instruments” (WTO, Report of the Panel, 2003). Commercial policy can secure trade objectives, but rules of origin may not, either indirectly or directly. There are various ways in which Rules of Origin are determined, and specific criteria they adhere to. As mentioned earlier, a country must entirely produce the item to be its sole originator. Origin status is conferred when that country has the right to produce the item as well as modify it. Much of this depends on the greige fabric (raw material) and where it is originally woven. All the raw material must be manufactured in the same place. Flat goods originate where their greige fabrics are woven. Additionally, dyeing and printing must be done in the place of origin. Section 334 had a ‘fabric forward’ rule, which demonstrated that it was being used to secure trade objectives. Here is where the heart of the issue at hand lies. Greige fabrics makes up most of India’s exports.It is shipped to various countries, where the fabrics are processed further and subsequently exported to the US. Under the old rules, before section 334, the products did not technically ‘originate’ from India. However, under Section 334, those products would count as exports of India to the US, and would be therefore held under several restrictions designed for the textile business. The issue was that Section 334 was used to protect domestic apparel and textiles. It was the first time the United States was involved in passing legislation that governed rules of origin. It was later revealed that the US was using rules of origin to secure trade objectives (WTO, Report of the Panel, 2003). The purpose of section 334 is combating transhipment and circumvention, bringing the US rules of origin closer to other apparel and textile countries’ rules, harmonizing other rules of origin in WTO and identifying where most textile / apparel activity occurred. The complaint was that Section 334 and its new rules did not help the US battle shipment circumventing. To resolve the dispute, a panel was established, and India tries to make the appeal that the US had violated the rules of origin agreements. According to the WTO (2018), India made an additional request, and the DSB(Dispute Settlement Body) began a panel on the 24th of June in 2002. Several other countries also established third party rights. The following are the panel’s primary conclusions about the case. India had failed to claim that Section 334 of the Uruguay Round Agreements Act was not consistent with Articles 2b or c of the rules of origin agreement. The Uruguay Round Agreements Act is not a separate Act, but means the same thing as Section 334. Under the Uruguay Round Agreements Act, Section 334 operated. The Panel also did not establish section 405 as inconsistent with the Articles 2b, c or d of the rules of Origin agreement. With respect to customs regulation, the Panel decided that India was unable to determine a violation. On July of 2003, the DSB passed the report of the Panel. Additional findings can be found in the this case. According to the WTO (2018), with respect to trade objectives (RO Agreement 2b). The panel did not accept the statement from India, and claimed that although the protection of imported competitors by domestic industry and importing or importing products from some members, it could be regarded as the “trade target”. Because the rules of origin should not be used. India was ultimately unable to establish that rules of origin in the US were being used to secure trade objectives in a way that violated Article 2b. In terms of Article 2c, where India maintained that the rules of origin were “restrictive, distorting or disruptive” (WTO, 2018), the Panel rejected this claim. It cited there must be a causal connection between the rules of origin challenged via the appeal and effects that are prohibited. This means that there must be a clear link between Section 334 and the effects mentioned. However, the Panel found no concrete link between the ‘restrictive’ and ‘distorting’ effects and Section 334. Additionally, the Panel claims that it may not always be enough for one party to complain about a challenged rule of origin; although this rule of origin may impact that party adversely, it may confer benefits to others. The Panel ultimately said that India did not provide sufficient evidence to hold that the measures employed by the US were distorting, restrictive or disruptive on an international level of trade. With respect to 2C, the Panel rejected the claim. They held that India failed to establish that “the measures at issue required the fulfillment of conditions” (WTO, 2018) that were banned by Article 2c.    India attempted to show that certain laws and legislation surrounding textiles and apparel were corrupt or otherwise unfair, but the panel decided this was not true. Was India trying to secure its own interests and skewing the debate and perspectives? In the end, section 334 and its constituent legislation was not deemed distorting or restrictive, and India’s appeals were quashed.   ReferencesBown, C. P., & Reynolds, K. M. (2014, August 12). Who uses the WTO to settle disputes? Retrieved January 02, 2018, from https://www.weforum.org/agenda/2014/08/wto-trade-disputes-products-policies/World Trade Organization. (2003). Report of the Panel. UNITED STATES – RULES OF ORIGIN FOR TEXTILES AND APPAREL PRODUCTS. Retrieved January 3, 2018, from https://www.wto.org/english/tratop_e/dispu_e/243r_e.pdf.WTO. (2018). World Trade Organization. Retrieved January 03, 2018, from https://www.wto.org/english/tratop_e/dispu_e/cases_e/ds243_e.htm 

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