FINAL REPORT OF THE PANEL UNDER CHAPTER 18 OF THE CANADA-UNITED STATES FREE TRADE AGREEMENT

IN THE MATTER OF:

Puerto Rico Regulations on the Import, Distribution and Sale of U.H.T. Milk from Qebec

Panel:

Ivan Bernier

Bruce Gardner

Joseph Greenwald

Armand de Mestral (Chair)

Frank Petrie

7. RECOMMENDATIONS

1. Introduction

1.1 On September 17, 1992, Canada's Minister for International Trade wrote to the United States Trade Representative requesting the establishment of a Panel pursuant to Article 1807.2 of the Canada-U.S. Free Trade Agreement (the "FTA") to decide certain questions relating to the importation, distribution and sale of UHT milk from Québec in Puerto Rico. The Governments of Canada and the United States reached agreement on the terms of reference of this panel on December 2, 1992.

1.2 Accordingly, a Panel was convened and, pursuant to Article 1807(3) of the FTA, the United States and Canadian Governments agreed on the individuals who would serve as panelists, namely, Professor Ivan Bernier, Professor Bruce Gardner, Joseph Greenwald, Esq., Professor Armand de Mestral (Chair)¹, and Frank Petrie, Esq.

1.3 On December 17, 1992, the parties agreed to a timetable. Canada made its initial submission on January 5, 1993. The United States requested an extension until February 1, 1993 for filing its counter-submission.

1.4 As a result of this delay, a new schedule for the Panel's review was set as follows:

In accordance with this agreed timetable, a hearing was held in Washington, D.C., on Monday, March 1, 1993. Counter-submissions, including responses to questions put at the hearing, were received on March 10, 1993. The Panel deliberated and, having requested an extension of the deadline, submitted its Initial Report on April 26, 1993. The Parties filed their Comments on May 10, 1993.

1.5 Having requested an extension, the Panel submitted its Final Report in English and an unofficial version in French on June 3, 1993.

2. Terms Of Reference

The following terms of reference were agreed by the parties:

The Panel is asked:

(a) The Product

3.1 Aseptically processed ultra-high temperature milk (''UHT milk'') is produced by treating fluid milk to a high temperature for a specified period of time, such as at least 138 degrees Celsius for a minimum of two seconds. The milk is then cooled to room temperature and is aseptically packaged in hermetically sealed containers. The shelf life of properly processed and handled UHT milk is between six and twelve months at room temperature.

(b) Right of Entry into US

3.2 In the United States, UHT milk from Canada is subject to an import duty of 0.5 cents per litre. In accordance with the Canada-U.S. Free Trade Agreement Article 401.2, the United States is under an obligation to eliminate the tariff on UHT milk over a ten-year period.

(c) History of Sales of UHT Milk by Lactel

i) Sales in Puerto Rico

3.3 During the period beginning September 1977 and ending on December 31, 1991, UHT milk from Québec was exported to, and sold to the general public in, Puerto Rico by the Lactel company. Prior to the entry of UHT milk from Québec into Puerto Rico, there was no UHT milk sold in the Puerto Rico market.

3.4 From 1977 through 1981, UHT milk from Québec produced by Lactel, and sold under the brand name "Grand Pré", occupied 100% of the Puerto Rico UHT milk market. During the years 1982 to 1985, the Québec UHT milk market share fluctuated between 25.3% and 88.4%. In 1986, INDULAC (the trade name for the "Puerto Rico Milk Industry Inc.") entered the market and the Québec UHT milk market share slowly declined from 66.5% to 24.59% in 1991 when its market access was closed.² UHT milk from Québec was also sold to the United States Army at Fort Buchanan, Catana, Puerto Rico on a monthly basis since September 1977. These sales to the United States Army continued until March 3, 1993. However, UHT milk has always been a very small part of the total milk consumed in Puerto Rico.

ii) Other Exports of UHT Milk from Québec

3.5 According to information supplied by Canada, UHT milk from Québec has been sold throughout the Caribbean since 1976. Prior to being excluded from Puerto Rico on January 1, 1992, Québec UHT milk was also shipped to St. Croix and St. Thomas in the U.S. Virgin Islands. There is also a history of sales to the public and U.S. Army in Panama and to Venezuela, Mexico, Africa and the Middle East. UHT milk from Québec is sold in both Newfoundland and the Northwest Territories in Canada.

(d) Regulations governing the Importation, Production, Processing and Inspection of Milk

i) U. S. Regulations Before 1991

3.6 Before 1991, UHT milk from Québec was exported to Puerto Rico on the basis of the Puerto Rico Secretary of Health's determination that it was produced and processed under conditions and standards that were ''essentially equivalent'' to those under Health Regulation 133, then in force.³ Officials from the Puerto Rico Department of Health based this determination on a review of the processing data for each shipment, as well as on a sampling of each production batch of the milk during a ten-day impoundment period upon arrival in Puerto Rico. In the 14 years of exports to Puerto Rico, no shipment of UHT milk from Québec was ever rejected as unsafe.

3.7 Until April 1989, Puerto Rico maintained a unique milk regulatory system. For two decades, Puerto Rico was repeatedly urged by the U.S. Food and Drug Administration ("FDA") to upgrade its milk regulatory system. The FDA criticized Puerto Rico's milk standards for inadequately protecting the public health. In an effort to meet this criticism the Puerto Rico Department of Health asked the FDA in 1983 to make a preliminary evaluation of Puerto Rico's milk. Over the next several years, both the Puerto Rico Department of Health and the Department of Agriculture took steps to improve the safety and quality of Puerto Rico milk.

3.8 The Puerto Rico authorities changed their milk regulations in 1983 and Lactel was advised that its milk fell under the definition of thermally processed, low-acid canned foods subject to the Low-Acid Canned Food Regulations⁴ of the FDA and that the product could no longer be sold. In order to return to the Puerto Rico market, Lactel modified its processing equipment in Québec, obtained the required approvals and was permitted to export to Puerto Rico until December 31, 1991.

ii) U.S. Regulations Post-1991

3.9 In 1987, the Puerto Rico Departments of Health and Agriculture entered into an interagency agreement to improve the quality of milk production, to join the National Conference on Interstate Milk Shipments (''NCIMS'') and to adopt the Pasteurized Milk Ordinance (''PMO''). The U.S. milk program is based on prevention. It was designed to enforce strict milk industry adherence to safe sanitation standards and practices. The objective is to prevent milk from becoming contaminated or adulterated. The focus of milk regulation has been mainly on fresh milk.

3.10 The NCIMS, a voluntary organization of State and local milk control agencies and the governing body for U.S. interstate milk shipments, was created in 1950. All 50 states, and the District of Columbia are members. In May 1989, Puerto Rico was accepted as a full voting member of the NCIMS. The mission of the Conference is stated to be to ''Promote the Best Possible Milk Supply for all the People''⁵. In a 1977 Memorandum of Understanding, the FDA and NCIMS agreed on measures to implement the Interstate Milk Shippers Program which governs the sale of milk in U.S. interstate commerce. The agreement is embodied in the Procedures Governing the Cooperative Federal-State Program for Certification of Interstate Milk Shippers (''Procedures'').

3.11 The Procedures provide for a mandatory certification process, to ensure compliance with health and safety requirements. The certification standards are set out in Methods of Making Sanitation Ratings of Milk Supplies. Dairy processing plants that comply with the certification requirements are deemed to comply with the requirements of any member of the NCIMS, and thus may ship their milk and milk products to NCIMS member states.

3.12 The Interstate Milk Shippers Program relies upon the Grade ''A'' Pasteurized Milk Ordinance (''PMO''),the "model" regulation developed by the Public Health Service of the FDA establishing technical standards for fluid milk, milk products and UHT milk, and related technical documents referred to in the Procedures Manual for sanitary standards, requirements and procedures it follows to ensure the safety and wholesomeness of Grade ''A'' milk and milk products.⁶

3.13 The PMO is drafted in the form of an ordinance. It has been incorporated into the laws of the 50 U.S. states, the District of Columbia, and since 1991, Puerto Rico. As a result, it is recognized as the U.S. national standard for milk sanitation. Accordingly, two new regulations were subsequently adopted by Puerto Rico to incorporate the technical standards of the PMO into Puerto Rico law.

3.14 On December 21, 1990, the Puerto Rico Department of Health issued Sanitation Regulation 138. The Regulation became effective January 21, 1991. In October 1991, Regulation 5 was issued by the Administrator of the Office of Milk Industry Regulation of the Puerto Rico Department of Agriculture. This Regulation became effective December 1, 1991. The PMO and the rating process referred to in the Procedures were thus incorporated into the Puerto Rico regulations.

3.15 Articles XIV:E and IV of Regulation 138 of the Department of Health (similar to the provisions of Sections 5 and 12 of Regulation 5 and Section 5 of Regulation 2 of the Department of Agriculture) provide the central provisions with respect to the import, distribution and sale of milk and milk products originating from outside the territory of Puerto Rico.

3.16 Article XIV:E of Regulation 138 and Section 12 of Regulation 5 state that:

The supply of milk and milk products for sale from areas outside territorial boundaries of Puerto Rico shall be accepted, without having to inspect the supply thereof, as long as it complies with the following requirements:

Shippers meeting these conditions are eligible for licenses authorising them to import, distribute and sell milk in Puerto Rico.

3.17 The United States informed the Panel that Puerto Rico's adoption of the PMO and the rating and inspection systems required by the NCIMS, together with its joining the NCIMS were the latest of a series of initiatives by the Puerto Rico Departments of Health and Agriculture to improve the safety and quality of milk production in the Commonwealth. Puerto Rico also desired to adhere to the NCIMS and PMO regulatory system and standards so that its milk could be sold to other U.S. states, major airlines, U.S. flag vessels, the large military bases located in Puerto Rico and other local purchasers of Grade A only milk.⁷

3.18 Section 11 of the PMO governs the entry of milk from outside the jurisdiction. Section 11 states that:

To Continue with Regulation of Production of UHT Milk in Québec

¹ Professor Stephen Toope, Ms Lisa Yarmoshuk and Me Guy Lachapelle served as assistants to Armand de Mestral.

² Groupe Lactel sales figures, 1977-1991. Sources: Internal marketing and Milk Industry Regulation Office of the Puerto-Rican Department of Agriculture (Canadian Exhibit A).

³ Article XVII of the Department of Health's Sanitary Regulation 133.

⁴ 21 C.F.R. 113.

⁵ Constitution of the National Conference on Interstate Milk Shipments, May 5, 1989, Article II, Section 1.

⁶ Memorandum of Understanding Between the U.S. Food and Drug Administration and the National Conference of Interstate Milk Shipments.

⁷ United States First Submission, p. 10, para. 52.

⁸ Grade ''A'' Pasteurized Milk Ordinance, 1989 Revision, U.S. Department of Human Services, pp 106-107.