WORLD TRADE
ORGANIZATIONG/C/W/396
16 July 2002
(02-3931)
Council for Trade in Goods
MAJOR REVIEW OF THE IMPLEMENTATION OF THE AGREEMENT ON TEXTILES
AND CLOTHING IN THE SECOND STAGE OF THE INTEGRATION PROCESS
Draft Report
1. In carrying out its mandate to oversee the implementation of the Agreement on Textiles and
Clothing (ATC), the Council fo r Trade in Goods is required, by Article 8.11, to conduct a major
review before the end of each stage of the integration process.  The second stage, which began on
1 January 1998, ended on 31 December 2001, hence, the need to conduct the second major review
before the end of 2001.
2. Article 8.11 of the ATC also requires that, at least five months before the end of each stage,
the Textiles Monitoring Body (TMB) shall provid e a comprehensive report on the implementation of
the Agreement during the stage under review.  For the present review, the TMB submitted its report in
document G/L/459, dated 31 July 2001.  In addition, background statistical information with respect
to trade in textiles and clothing was prepared by the Secretariat at the request of the TMB and was
circulated in document G/L/474.
3. The Council began its review at a meeting convened for this purpose on 27 September 2001,
focussing on the goals and objectives of the review, the organization of the work and the
establishment of a timetable.  The Council noted the substantial information contained in the TMB's
comprehensive report and considered that it w ould make a useful contribution to the review.
4. It was agreed that the review process would be structured around three broad subject areas,
containing several individual topics.  These were:
(a) The Integration Process and Other Related Issues (Article 2)
- Integration Programmes of the Members
- Increases in the Rates of Quota Growth
- Art. 2.1  -  Notifying quantitative restrictions
- Art. 2.4  -  No new restrictions  except under ATC or GATT 1994
- Art. 2.10 - Advanced integration
- Art. 2.15 - Removal of restrictions- Art. 2.11 and 2.17 - Administrative arrangements
(b) Use of Transitional Safeguard Mechanism (Article 6)
(c)  Other Articles of the ATC
- Article 5 - Circumvention of restrictions by transshipment, false declaration, etc.
- Article 7 - Abiding by GATT 1994 rules and disciplines so as to achieve improved
market access, ensure the application of policies for fair and equitable trading
condition (AD, CVD, IP), avoid discrimination against textiles in general tradepoliciesG/C/W/396
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- Special and Differential Treatment in the ATC
- Provisions related to new entrants and small suppliers (Articles 1.2 and 2.18)
- Provision related to cotton producing exporting Members (Article 1.4)
- Provision related to small supplier s' growth on growth (Article 2.18)
- Provisions related to LDCs (Articles 1.2 footnote and 2.18)
- Article 1.5 - Autonomous Industrial Adjustment
- Article 1.6 - Rights and obligations of Members under WTO and Multilateral Trade
Agreements
- Article 3 - Treatment of quantitative restrictions other than those under the
MFA (Art. 2)
- Article 4 - Changes in rules, procedures, etc. (e.g. rules of origin)
- Article 8 - Functions of the TMB
5. It was also decided that these subjects would be taken up at Council meetings to be held on 17
and 26 October 2001.  The reports on the three meetings held by the Council to conduct the revieware contained in documents G/C/M/51, 52 and 56.
6. As the topics were discussed, the representative  of Uruguay, on behalf of the members of the
International Textiles and Clothing Bureau (ITCB) that are also Members and observers of the WTO
(henceforth ITCB Members), provided papers with assessments and analyses of the matters underdiscussion.  These were circulated in documents G/C/W/304 and 325.  In addition, they made a
number of proposals for adoption by the Council which, they considered, were necessary to restore
the balance of rights due to them under the Agreement.  These proposals were circulated in document
G/C/W/339.
7. At the meeting of 17 October 2001 (G/C/M/52), the ITCB Members and some other
developing Members pointed out that in the Uruguay Round, they had hoped to gain significantly in
the area of textiles and clothing.  It was an area where they had competitive advantage and the
concessions which they had to make in other areas would be justified only if significant benefits were
forthcoming in the areas of textiles and agricultu re.  Accordingly, they stressed the importance they
attached to this second review, not only in view of the significance of textiles and clothing trade for
the developing and least-developed country Members, but also since it came at a critical time, justthree years before the end of the transitional process and when the full integration programmes of
Members had been notified.  In the view of the ITCB Members and some other developing Members,
the objective of the major review was to evaluate Members' experience, to consider the progress
achieved in relation to the objectives and to conduct a stock-taking .  This would enable the Council to
assess if the process of integration was or was not on track to achieve its prime objective of re-integrating the textiles and clothing sector into normal GATT rules by 2005, to forestall any problems
during the implementation process and, where necessary, to take corrective action to ensure that the
balance of rights and obligations is not impaired, in accordance with the Council's mandate under
Article 8.12.
8. The same Members emphasized that the objective of the ATC was actually to liberalise trade
in textiles and clothing through progressive integration and that the central purpose of the ATC was
the elimination of quotas through the operation of the integration process.  They were deeply
concerned that little progress had been achieved towards this objective, as reflected in the
documentation before the Council.  In fact, the integration programmes of the restraining Membershad concentrated on low value-added yarns, fabrics and textile made-up products with very few
clothing items being included;  moreover, the bulk of quotas remained in place.  In this respect, even
after the third stage integration, the number of quotas that would remain in place were as high as 701
out of 757 in the case of the United States, 164 out of 219 in the case of the European Communities
and 241 out of 295 in the case of Canada.  Thus, progress had been meagre and had not led to theG/C/W/396
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expected benefits for exporting, developing Member s.  Consequently, the review of the integration
process should focus on whether there had been progress towards the meaningful phasing-out of the
quota system.  The progressivity of the process, that is, the gradual phasing-out of the quota
restrictions during the transitional period, not just at the end of that period, was a necessary and
inherent condition of full implementation.  They also emphasized that, whereas Article 1.5 of theATC required Members to allow for continuous autonomous adjustment and increased competition in
their markets to facilitate the integration process, the restraining Members had, in fact, impeded this.
9. In their view, another key aspect of the integration process was the increases in the rates of
annual quota growth.  In this area, it was considered  that the application of the growth rate increases
could not be considered a substitute for effective integration of products.  Furthermore, the actual
growth rate increases had not provided significant improvements in market access as, on average, theactual pre-ATC growth rates were low.  On the basis of average pre-ATC growth rates, the average
addition in access during the first two stages of the ATC implementation had amounted to only 0.73%
per year in the EC, 1.03% in the US, and 1.22% in Canada.  As a result, the quotas continued to be
restrictive.
10. Also in this regard, ITCB Members and some other developing Members  considered that the
ATC provisions in favour  of small suppliers , least-developed country Members and cotton-producing
exporting Members had not been fully implemented  by some restraining Members in conformity with
those provisions.
11. In their view, the purported increases in imports in the restraining Members' markets could
not be attributed to the implementation of the ATC.  They further pointed out that increases in imports
were neither relevant to assessing the fulfilment of obligations under the Agreement, nor could they
justify any violations of those obligations.  The ten-year period and progressivity of the process were
not mutually exclusive;  they had to go hand in hand.  Furthermore, the Agreement did not providethat the quota restrictions were to be eliminated only at the end of the ten years.
12. In sum, this group of Members argued that an objective assessment of the situation would
lead to the conclusion that the balance of rights and obligations embodied in the ATC had been
impaired to the disadvantage of developing, exporting Members.  They based this conclusion on
instances of violation of certain obligations.  In other cases, implementation of ATC provisions by the
restraining Members had not been in conformity with the object and purpose of the Agreement.  Insome further cases, ATC provisions had not been given full meaning and effect.  Accordingly, the
major review should develop an overall assessmen t leading to clear recommendations, which would
enable the restraining Members to fully and faithfully implement the ATC.  These Members,
therefore, proposed that the Council adopt decisions pursuant to its self-standing  mandate under
Article 8.12 to restore the balance of rights and obligations under the Agreement.
13. The developed, restraining Members considered that the differences between their positions
and those of the developing countries could be traced to the differing views on what was expected
during the life of the ATC.  In their opinion, the ultimate purpose of the Agreement was the full
integration of the textiles and clothing sector into GATT 1994 rules and disciplines by1 January 2005, with the consequential elimination of all GATT inconsistent restrictions by that date.
They fully supported the implementation of the Agreement and the effective realization of its
objective of full integration.  They recalled, in this regard, that there were three negotiated variables in
the ATC;  namely, the length of the transitional period, the product coverage and the accelerated
growth rates.  The ten-year time-period and the faster growth rates had been accepted by the
developed Members as part of a negotiated package that included product coverage with products not
subject to restrictions.
14. In their view, the ATC specified a ten-year transition period to allow the industries to adjust
to the full integration of the textiles and clothing sector.  The transition path was that defined by theG/C/W/396
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ATC.  It comprised three stages of integration during which minimum thresholds of volumes of
imports must be integrated.  Also, the products integrated during each stage must include products
from the four groups identified in Article 2.  Otherwise, the ATC left the choice entirely to the
importing Member as to which textile and clothing products, restrained or not, were to be integrated at
any given stage during the transition period.  Another key element was the growth-on-growthprovisions for those products remaining under restraint during the transition period.  These provisions
clearly specified the increases in growth rates for the purpose of facilitating the opening of domestic
markets.  In examining the integration process of the Members maintaining restrictions, and in
assessing the implementation of the ATC, it was necessary to consider the combined impact on
market access of the integration of products and of the growth-on-growth provisions.
15. In their view, the growth rate increases were an inherent aspect of the process leading to full
integration which, due to their cumulative effect, had served to increase market access possibilities.
Starting with a pre-ATC growth rate of 6%, the AT C's growth-on-growth provisions would lead to a
19% increase in the quota levels by 2002.  In fact, imports into the developed, restraining Members
had increased at a substantial rate during the period in which quotas had been applied.  In the US there
had been, on the one hand, a rapidly rising share of the US market held by imported clothing and, onthe other hand, a rapid contraction of the US clothing sector since 1994.  In the EC, between 1995 and
2000, imports had increased 54% and these imports had come mostly from developing countries.  In
Canada, total clothing  imports since 1994 had increased by 71%, imports from developing countries
had grown by 79% during the 1995-2000 period.  It must also be borne in mind that, during the
transitional period, a number of quotas had been eliminated, including on some key products such aswomen's, girls' and children's blouses and shirts,  some through the application of Article 2.15.
Norway had abolished all of its remaining quota restrictions by 1 January 2001 using Article 2.15,
which was four years in advance of the agreed deadline, while Canada had also applied this provision.
As regards the application of advancement of growth rates for small suppliers and least-developed
Members, the restraining Members concerned  considered that the method which they had  applied was
consistent with the ATC.
16. With respect to autonomous industrial adjustment, the developed, restraining Members
considered that this process was proceeding well in order to ensure the smooth, final re-integration
steps.  This was witnessed by decreases in employment, increases in imports and in the market share
held by developing Members and changes in production and in products.  It was also noted that the
obligations in Article 1.5 applied to both developed and developing Members, though in differentways.
17. Bearing all this in mind, they considered that the ATC implementation process was on track ,
was proceeding as rapidly as expected, and that the full integration of the textiles and clothing sector
into GATT 1994 rules and disciplines, with the consequent removal of quotas, would be achieved bythe end of the ten-year transitional period.  Furthermore, in cases where Members felt that their
interests were not being respected during the implementation of the ATC, they should use the
mechanism built into the Agreement to address such problems.
18. In addition to examining the operation of the integration process, the Council also discussed,
at its meeting of 17 October 2001, other topics which had been identified at the previous meeting.
These included the introduction of new restrictions (Article 2.4), advanced integration (Article 2.10),
removal of restrictions (Article 2.15), administrative arrangements (Articles 2.11 and 2.17), plus the
use of the transitional safeguard mechanism (Article 6).
19. On the circumvention of restrictions in terms of ATC Article 5, a developed, restraining
Member considered that this was a serious, continuing problem and was a major issue.  Investigations
had consistently shown a high rate of circumvention activity in several Members which had been used
as transshipment points.  Failure to deal effectively with this problem was contrary to the letter and
spirit of the ATC and had had a negative impact on its industry.  The ITCB Members stated that theyG/C/W/396
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did not condone circumvention of restrictions and had extended cooperation consistent with the ATC
requirements.  Citing figures from investigations by the Customs authorities of the Member
concerned, they pointed out that claims about widespread circumvention were not supported by facts
and were greatly exaggerated.  On the contrary, the measures that the importing Member had put in
place to address the perceived problem were disproportionate.  By prescribing additional documentaryrequirements, these measures impeded the utilization of access available to restrained Members under
the ATC.
20. The developed, restraining Members referred to Article 7.1(a) of the ATC on improved
market access for textile and clothing products and considered that this provision had not produced a
noticeable result.  While it required that improved access to markets should be achieved through such
measures as tariff reductions and bindings, reductions or elimination of non-tariff barriers andfacilitation of Customs, administrative and licencing formalities, the markets in many developing
Members required greater access for the exports of textile and clothing products.  The ITCB Members
and some other developing Members considered that all Members, developed and developing, had
been implementing their specific Uruguay Round commi tments in accordance with their schedules of
concessions.  They referred to the report by the TMB which stated that there had been no notificationsof non-compliance with any specific market-acce ss commitments undertaken as a result of the
Uruguay Round.  Therefore, there did not appear to be a problem and, in fact, a number of developing
Members had adopted autonomous market liberalization measures.  They emphasized that any
additional reductions in tariffs or bindings was a matter for future negotiations.
21. At the meeting held on 26 October 2001 (G /C/M/56), the review continued with the
examination of other ATC articles and provisions, including special and differential treatment,
autonomous industrial adjustment (Article 1.5), rights and obligations of Members under WTO and
Multilateral Trade Agreements (Article 1.6), changes in rules and procedures (Article 4), and
functions of the TMB (Article 8).  At this meeting, Members also presented their overall observationsand assessments with respect to the implementation process.
22. Based on the discussions, which are set out in detail in the reports on the meetings, the
Council noted a number of considerations and arrived at certain conclusions, as follows:
• the reaffirmation by all  Members of their commitment to achieve the full and faithful
implementation of the ATC  by 1 January 2005;
• the importance of the full integration of this sector into WTO rules and disciplines by
1 January 2005 in view of the significance of trade in textile and clothing products  as animportant source of employment and export earnings for the economies of many Members, in
particular, for  developing and least-developed country Members;
• the declining trend  with respect to the application of the transitional safeguard mechanism during
the second stage;  while recognizing that Members may resort to the safeguard provisions of the
ATC during its final years, called upon all Members to apply it as sparingly as possible,
consistently  with the provisions of Article 6 and the effective implementation of the integration
process under the Agreement;
• the views expressed by Members with regard to the implementation of ATC provisions in favour
of small suppliers, new entrants, cotton-producing exporting Members and least-developed
country Members and reaffirmed the importance of full implementation of those provisions;
• the views expressed by Members with respect to problems relating to circumvention of the ATC;
reiterated the importance of full cooperation in addressing these problems consistent with theG/C/W/396
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provisions of Article 5 and emphasized the need for any remedies to be proportionate to the
problem;
• the views expressed recalled the provisions of Article 7 and called on all Members, as part of the
integration process and with reference to the specific commitments undertaken as a result of the
Uruguay Round, to take  actions to abide by GATT 1994 rules and disciplines so as to achieve,
inter alia , improved market access;
• the appreciation for  the comprehensive report prepared by the TMB on the implementation of the
ATC in the second stage and stressed the need for continued supervision by the TMB of theimplementation of the ATC during the third stage;
• the importance of maintaining full transparency in  all aspects of the implementation process and
of facilitating the examination by the TMB of all measures taken under this Agreement, andcalled upon all Members to comply with all ATC notification requirements in a complete and
timely manner;
• the importance of the Council overseeing and regularly evaluating the progress, in accordance
with Article IV.5 of the WTO Agreement and Article 8 of the ATC, of the functioning of theATC, whose implementation is being supervised by the TMB;
• that Members should allow for continuous autonomous industrial adjustment and increased
competition in their markets in order to facilitate the integration of the textiles and clothing sectorinto GATT 1994 and encouraged Members to provide information to the TMB, from time to time,
on relevant developments in this area.
23. On a number of other topics examined by the Council, the understandings and positions held
by groups of Members differed substantially and, thus, it was not possible to arrive at agreed
conclusions.  The detailed views are set out in documents G/C/M/52 and 56, and are summarized
hereunder.
24. In respect of Article 1.6, ITCB Members and some other developing Members referred to
instances during the second stage of the ATC implementation process in which a restraining Member
had eliminated quota restrictions on certain non-WTO Member countries with respect to textile and
clothing products, while continuing to apply such restrictions on WTO Members.  This was
inconsistent with that Member's obligation under GATT 1994, especially Articles I and XIII, and
therefore, impaired the rights of WTO Members whose exports to that Member had been restrained byquotas.   They pointed out that Article 1.6 of the ATC provided that "Unless otherwise provided in this
Agreement, its provisions shall not affect the righ ts and obligations of Members under the provisions
of the WTO Agreement and the Multilateral Trade Agreements";  therefore, the rules of GATT 1994
applied unless the ATC contained a different rule, which in this instance was not the case.  The
developed,  restraining Members noted that the ATC was clearly an exception to the MFN principle;  it
allowed for the discriminatory elimination of restrictions on WTO Members.  Therefore, one could
not make an argument that such a procedure w ould not be possible in cases involving non-Members.
Also, there was no requirement under the ATC to provide similar treatment to WTO Members and to
non-WTO Members.
25. In relation to Article 2.4, ITCB Members referred to two specific cases in which the
obligations under that Article had not been lived up to.  In one case, in the context of implementing acustoms union, a Member had imposed new restricti ons on imports of textile and clothing products
from a number of countries.  These restrictions had not been notified to the TMB.  A dispute
settlement panel and the Appellate Body had found that these restrictions were not permitted under
Article XXIV of the GATT, and that they were inconsistent with the concerned Member's obligationG/C/W/396
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under Article 2.4 of the ATC.  Further, such Member had implemented the panel recommendations in
this matter and had reached a mutually satisfactory solution with another Member while maintaining
the restrictions on other countries.   In response, it was pointed out that the implementation of the
customs union covered all trade policy aspects and required a common trade policy.  These
restrictions were only part of this general agreement  which also contained positive aspects including a
drastic reduction in tariffs.
26. The other instance relating to Article 2.4 involved a restriction imposed by a developed,
restraining Member on another Member's exports of cotton and man-made fibre underwear.  The
Members concerned did not notify the TMB of this restriction or of the ATC provision under which
the introduction of such restriction could be justified.  Subsequently, the TMB had found that there
was no provision in the ATC that justified this restriction, nevertheless, the restriction continued to bein place.  According to ITCB Members, the introduction of such restriction amounted to impeding the
realization of the objectives of the ATC and it hampered the TMB in carrying out its mandate of
examining the conformity of all measures with the provisions of the ATC.  They recalled that the
TMB had already noted that the restriction in question was not justified under Article 4 of the ATC
either.   In response to this point, the concerned Members  argued that the restraint arrangement on
cotton and man-made fibre underwear was a mutually satisfactory agreement.  The restraining
Member considered that its measure was consistent with Article 4 of the ATC,  which allows for
changes to be made to restrictions applied under the ATC and that the changes should not upset the
balance of rights and obligations under the Agreement.
27. ITCB Members referred to Articles 2.11 and 2.17 and raised their concerns about the failure
of a restraining Member to notify the elimination of visa arrangements in respect of products to be
integrated in Stage 3, a violation of Article 2.11.  In response, the Member concerned said that prior
notification of the elimination of the visa requirement was not required under the provisions of the
ATC;  such administrative arrangements were a matter for agreement between the Membersconcerned.  The Council noted that subsequently the Member concerned had announced its decision
not to require visas on integrated products.
28. Reference was also made by ITCB Members and some other developing Members to
situations involving the impairment of access due to changes in rules of origin and to certain related
administrative formalities.  The restraining Member  had fundamentally modified its rules of origin
pertaining to textile and clothing products with effect from July 1996, for trade policy reasons, andthese changes had disrupted the utilization of existing market access under the ATC and had violated
its obligation under Article 7.1(c).  It was argued that the changes in rules of origin were not justified
either under the ATC or the Agreement on Rules of Origin.  The changes in rules of origin had upset
and impaired the balance of rights accruing  to them under the ATC.  When some adjustments were
subsequently made, the rules for some products of particular export interest to developing Membershad not been reinstated to the pre-ATC rules.  Refe rence was also made to a change in the definition
of cotton products, implemented from May 2000, which had resulted in an expanded coverage of
restrained cotton products and it was questioned if consultations on this had been held with concerned
Members.  For its part, the concerned Member was clear in its reading of Article 4 that the kind of
changes that it had made in 1996 were permitted by the Agreement as long as they did not upset thebalance of rights and obligations that had existed before the change.  It had consulted with all
Members that had expressed concern on this issue, including cotton-producing, exporting Members
and understandings had been reached with some Members.
29. Reference was also made by ITCB Members and some other developing Members to the use
of anti-dumping investigations and measures on restrained products, which had had serious adverse
effects on the exports of some developing countries.  There had been an impairment of the balance of
rights and obligations as the market access made available through integration and growth rates,
though inadequate, were being taken away through an ti-dumping actions in this area.  According to
these Members, by disrupting the utilization of access, these actions had impeded the realization ofG/C/W/396
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the objectives of the ATC.  They pointed out that several aspects of the methodology used by the
Member concerned in dumping determinations had since been faulted by a WTO dispute settlement
panel and the Appellate Body.  In response, the concerned restraining Member reiterated that it
applied anti-dumping legislation in a fully transparent manner in compliance with WTO obligations.
30. Towards the end of the second stage of the integration process, at the Fourth Ministerial
Conference, a Decision on Implementation-Re lated Issues and Concerns (WT/MIN(01)/17)  was
adopted, containing a section which pertained to some of the subjects being discussed in the major
review.1
__________
                                                     
1 "4. Agreement on Textiles and Clothing
Reaffirms the commitment to full and faithful implementation of the Agreement on Textiles
and Clothing, and agrees:
4.1 that the provisions of the Agreement relating to the early integration of products and
the elimination of quota restrictions should be effectively utilised;
               4.2 that Members will exercise pa rticular consideration before initiating investigations in
the context of antidumping remedies on textile and clothing exports from developingcountries previously subject to quantitative restrictions under the Agreement for a
period of two years following full integration of this Agreement into the WTO;
               4.3 that without prejudice to their rights and obligations, Members shall notify any
changes in their rules of origin concerning products falling under the coverage of theAgreement to the Committee on Rules of Origin which may decide to examine them.
 Requests the Council for Trade in Goods to examine the following proposals:
               4.4 that when calculating the quota levels for small suppliers for the remaining years of
the Agreement, Members will apply the most favourable methodology available inrespect of those Members under the growth-on-growth provisions from the beginning
of the implementation period;  extend the same treatment to least-developed
countries;  and, where possible, eliminat e quota restrictions on imports of such
Members;
                4.5 that Members will calculate the quota levels for the remaining years of the Agreement
with respect to other restrained Members as if implementation of the growth-on-
growth provision for stage 3 had been advanced to 1 January 2000;
 and make recommendations to the General Council  by 31 July 2002 for appropriate action."