11:47 AM Jun 19, 1997

TEXTILES AND CLOTHING: MINISCULAR INTEGRATION BY US, EC

Geneva 18 June (Chakravarthi Raghavan) -- There will be no significant elimination of the discriminatory quantitative restrictions (QRs) on textile clothing imports from developing countries, which are in place in the major industrialized nations until at least 2003.

The quota restrictions, first put in place in 1960 on cotton textiles and products, has been tightened and extended to more and more products, under a regime maintained as a derogation from the international trade rules of the GATT system (which will be 'celebrating' its 50th anniversary next year).

The Uruguay Round has sought to end it by a gradual and phased-in liberalization process (to provide a further 10-year industrial adjustment), through the Agreement on Textiles and Clothing (ATC) of the WTO. And if it is to be believed, the restrictions are to finally disappear on 1 January 2005.

But judged by the programmes (notified to the WTO) for the second stage of integration of ATC products, to be effected by the major industrial importing countries on 1 January 1998, there will be no significant elimination of restraints till perhaps 1 January 2003 (the date for the third stage), nor any assurance of industrial adjustment process foreseen by the ATC.

The second stage of integration under the ATC is to begin on 1 January 1998, and importing countries were required to notify their programmes of integration for the second stage by 31 December 1996.

Excepting for one restrained item, by Canada, there was no integration of restrained products at all in the first stage. All the major industrial nations that had MFA-restrictions, continued with them, merely "integrating" those products that had never been under restraint any way.

The analysis of the first stage of integration showed that the intended "progressivity" of integration, to prepare the industry in the North to adjust to market forces and face competition would not be achieved.

The major industrial importing nations at Singapore (and in preparations for it in Geneva) pressed ahead with their drive for liberalising the markets of developing countries for exports of goods and services (information technology products, basic telecom, financial services, investments, government procurement) from the North, but blocked any decisions for liberalising the restrained trade in ATC.

Nevertheless, in their Declaration, the ministers said at Singapore: "We attach importance to the implementation of the Agreement (ATC) so as to ensure an effective transition to GATT 1994 by way of integration which is progressive in character..."

If developing countries, at Singapore, had believed they had got something, and that the US and EC would take some "liberalisation" moves in the programmes to be notified by them on 31 December 1996, they were in for one more disappointment.

An analysis of the integration programmes, undertaken by the International Textiles and Clothing Bureau (ITCB) show that the integration process so far in the US, EU, Canada and Norway (four major importers maintaining MFA restrictions) has not resulted in any meaningful liberalisation. The products included for integration in the first two stages have been free of restrictions under the MFA or the ATC and the few restrained products to be integrated do not represent any substantial proportion of the value of overall imports.

In expressing disappointment with this outcome, the Council of Representatives of the ITCB in a communique issued after its meeting last week, said in a communique that the second stage integration programmes had again failed to contribute to any significant elimination of restrictions and continued to ignore the commercially meaningful products. They were not designed to facilitate industrial adjustment nor increased competition.

"The 50th anniversary of the rule-based multilateral trading system offered an opportunity to contrast the general liberalisation of trade with protectionism in textiles and clothing," the ITCB declared in its communique.

The ITCB Council asked the WTO's Goods Council, during its forthcoming major review (beginning in July), to devote specific attention to the implementation of integration programmes, with a view to restoring credibility to the integration process.

The Goods Council is to undertake this review, and take appropriate decisions (by consensus) by end of 1997.

The ITCB Council met at San Salvador (in El Salvador) from 10-13 June and issued a communique, outlining its views on the integration process, on the EU's misuse of anti-dumping investigations and actions for protectionist purposes, and the US use of rules of origin to pursue restrictive trade objectives.

Under the ATC scheme for a progressive integration of the products over a 10-year period, WTO members maintaining MFA restrictions (USA, EC, Canada and Norway), and others with no MFA restrictions but seeking to retain the right to impose transitionary safeguards, were required to integrate on 1 January 1995 (date of entry of WTO) 16% (by volume) of products listed in Annex I of the ATC, and 17% on 1 January 1995. Another 18% is to be integrated on 1 January 2003, and the remaining 49% on 1 January 2005. Normal GATT rules, including those on non-discriminatory safeguards and prohibition of QRs, will apply to the integrated products.

Before the completion of each stage of the integration, the WTO's Goods Council is required to undertake a major review of the integration process, and take appropriate decisions to ensure that the balance of rights and obligations under the ATC are not impaired.

An analysis of the integration programme notified by the major importing countries to the WTO by 31 December 1996, shows that while fulfilling the technical requirements of integration, as a percentage of their 1990 imports, combining both stages together, the United States had integrated only 1.3% by volume of products that were under restraint, the EU only 3.15%. The two had not integrated in the first stage any product that was under restraint.

The Canadian programme integrated in the first stage 0.27% by volume of restrained products, and another 0.7% in the second stage -- liberalizing imports of work gloves and handbags.

The integrated products in all four markets are concentrated in yarns and fabrics, while the proportion of clothing products integrated has been very small.

Integration in the first two stages of total 1990 imports, in terms of value, has been markedly less than in volume and integration of commercially meaningful products have been avoided.

The products that would be integrated in the two stages of integration (end 2002) by the US, as a percentage of total imports in 1990, would by 33.24% in volume, but only 17.35% in value and for the EU, the respective figures will be 34.38 and 21.62. For Canada, it will be 33.62 and 29.74, while for Norway it will be 40.52 and 23.95.

The EU's integration in the first stage included no product restrained under the MFA, but such miscellaneous items (not under restraint) as yarns, fabrics, and sacks and bags of jute, certain umbrellas, parachute parts and accessories, garments for dolls, fabrics coated with plastic, typewriter ribbons, shoe uppers, yarns and fabrics of glass fibre, and certain luggage articles.

In the second stage, the EU integration will include some 23 categories of restrained products -- including such miscellaneous products like handkerchiefs, carded or combed wool, elastic fabrics and trimmings, knitted or crotched accessories, ski suits, tents, camping goods etc. The marginal liberalisation of these products would benefit Macau, Argentina, Brazil, Hong Kong and Korea.

Norway included no product of restraint in its first stage integration, and in the second stage only parts of two HS lines together accounting in volume terms for 0.4% of its 1990 imports.

The US programme, in its first stage, included no product covered by the US bilateral agreements under the MFA. Its second stage integration is spread over 464 HS lines, at the 10-digit classification (normal HS classification is at six digit levels), covering some 24 categories restrained under bilaterals. Of these 24 categories, only category 239 (babies' garments excluding cotton diapers), categories 353, 354, 653 and 654 (down-filled coats) and category 632 (certain hosiery items) were under restraint. Imports of these accounted for a mere 1.3% of total volume of US imports in 1990. The liberalisation will benefit Hong Kong, Korea, Pakistan, the Philippines, Singapore and Thailand.

The EC's choice of products for 2nd stage of integration appears to have been influenced also by its demand for "reciprocity". The EU has said that its package of second stage integration could have been more substantial if its demands for reciprocal market access had been heeded.

The ITCB countries had rejected this 'reciprocity' demand, which is contrary to the ATC and its multilateral approach. When restraints under MFA were imposed, none of the countries hit received any compensation, and the demand for reciprocity is a demand for "double payment".

The ITCB's council also expressed its serious concern over the protectionist resort to anti-dumping actions by the EU, especially of products already under restraint.

Early in 1996, the EC initiated anti-dumping investigations on imports of unbleached (grey) cotton fabrics originating in China, Egypt, India, Indonesia, Pakistan and Turkey. Later that year, similar investigations were started against imports of bed linen from Egypt, India and Pakistan. The investigations on grey cloth resulted in levy of provisional anti-dumping duties, but there are reports that the EC is unlikely to confirm the provisional duties. Investigations on bed linen are still continuing.

This AD actions against grey cloth attracted widespread criticism both within and outside the EC.

The EC proceedings against grey cloth and bed linen have been continuing since 1993. They were withdrawn in July 1996, and refiled again within a few days.

The methodology used by the EC in these investigations have been widely contested, both by the exporting countries, and others.

The ITCB denounced these repeated anti-dumping investigations, most of which, it said, were based on unsubstantiated claims, resulting in loss for business.

The ITCB also addressed the issue of US rules of origin for imports of textiles and clothing products and said these were disruptive of access under the ATC, and had upset the balance of rights and obligations of members. It had been effected to pursue restrictive trade objectives.

The US adopted these rules of origin as part of its legislation implementing the Uruguay Round, and made significant changes in its long-standing practice on the meaning of 'substantial transformation' for conferring origin on particular textiles and clothing products.

Till now 'substantial transformation' is considered to have taken place if manufacturing or processing in a foreign country resulted in a physical change of the product, and produced a new and different article.

As a result of the new rules, and a hierarchial order set under it, for determining the origin:

* in the case of yarns and fabrics, processes such as bleaching, dyeing, printing, finishing etc are not considered to involve transformation, substantial enough to confer origin with respect to the country where the transformation takes place;

* in the case of some 16 product categories, including made-up articles, transformation subsequent to manufacturing is not considered to involve substantial transformation;

* for garments, origin will be based on where a garment product is wholly assembled.

Earlier, origin was conferred by where cutting of the fabric takes place (based on a long-standing approach that the process results in a physical change to the fabric).

* for garment products made from knit-to-shape panels, origin will be on the basis of where the panels are knitted.

The US changes in rules of origin were effected after the conclusion of the Uruguay Round and the balance between rights and obligations established under it.

The ATC, in Art 4:2 provides that changes in rules not upset the balance of rights and obligations between members, not adversely affect the access available to a member nor impede the full utilization of such access or disrupt trade under the ATC.

Art. 2 (b) and 2 (c) of the WTO Agreement on Rules of Origin (which has a work programme for harmonization of rules) provides that until this work programme is completed, Members shall ensure that their rules of origin are not used as instruments to pursue trade objectives directly or indirectly, and the rules not create restrictive, distorting or disruptive effects on international trade.

This issue has not been reviewed (as required by the ATC) by the Textiles Monitoring Body, nor has anyone raised a dispute.

However, the EC has become concerned, since as a result of these changes in rules, some of its fashion designer clothes manufacturers, who import silk or grey cloth and make them into fashionable, high-priced articles for export, have been hit.

The EC is threatening to invoke the dispute settlement mechanism. The US is reportedly discussing with the EC ways of dealing with this problem - suggesting, for example, that Italian scarves or ties made of Chinese silk should have the origin as "made in Italy from Chinese silk"

In a possible reference to these, the ITCB expressed concern that aspects of reported arrangements aimed at compensatory adjustments may affect the integrity of the multilateral disciplines under the ATC.

The WTO accord provides that the harmonized rules are to be applied "equally for all purposes" -- namely, for MFN treatment, for imposing anti-dumping and countervailing duties, quantitative restrictions, safeguard measures and origin marking requirements.

The work programme on rules of origin has been initiated in 1995, and is to be completed by July 1998. It is being carried out by a technical committee under the auspices of the World Customs Organization. The WTO Ministerial Conference is to set a time-frame for entry into force of the harmonized rules.

Within the technical group, where views differ widely, it is reported that a number of divergent proposals have been tabled on the precise meaning to be attached to "substantial transformation"

The ITCB has decided to follow these talks carefully.