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

3 Factual Background

.1 The applicable species

.1 The U.S. minimum lobster size requirement, which is the subject of this dispute, relates only to the species of crustacean "American lobster".³

.2 The American lobster

.1 The American lobster is widely distributed over the continental shelf of the Western North Atlantic Ocean. Along in-shore waters, the American lobster ranges from Labrador to Virginia and, along the outer continental shelf and slope, it ranges from Georges Bank to North Carolina. The American lobster is only found in Canadian and U.S. waters.

.2 In the United States, there are two major areas of harvest: the in-shore waters of coastal States from Maine to New Jersey out to a depth of 40 to 100 meters and the continental margin from Corsair Canyon to Cape Hatteras (Rhode Island to North Carolina) in depths of 100 to 600 meters. In Canada, there are three major areas of harvest: the Gulf of St. Lawrence along the coasts of New Brunswick and Nova Scotia and around Prince Edward Island (which accounts for 55 percent of Canada's landings), the Gulf of St. Lawrence along the coasts of Quebec, and the Atlantic coasts of Nova Scotia, New Brunswick, and Newfoundland.

.3 Available U.S. statistics indicate that approximately 75 to 85 percent of total U.S. lobster harvest comes from waters under the jurisdiction of the various States, principally Maine with close to 60 percent of all U.S. lobster landings; the remaining 15 percent to 25 percent are harvested in the fisheries conservation zone under federal jurisdiction. State laws regulate in-shore catches of lobster up to 3 miles from the coast line ("in-shore harvest") while federal jurisdiction applies to catches in the exclusive economic zone, 3 to 200 miles off-shore ("off-shore lobster harvest").

.4 According to the biologists, the American lobster grows by shedding its external shell, a process called "molting". American lobsters molt about twenty to twenty-five times between hatching and sexual maturity and generally reach U.S. legal, commercial size after five to seven growing seasons, depending on water temperature. Lobster growth occurs only at the molting stage.

.5 Water temperature has a differential effect on the time lobsters will take to attain sexual maturity and reproductive capacity. It may take a lobster up to 10 years to attain sexual maturity in cold waters and only five years in warmer waters, where the lobster molts more frequently. Thus, reproductive maturity will occur at a smaller size in warmer waters.

.6 Water temperature maxima and averages vary from area to area along the U.S. and Canadian coasts. In the Gulf of St. Lawrence region, temperatures are higher than in Nova Scotia waters and much higher than in Gulf of Maine waters. Biological samples show that, at 50 percent maturity, the average lobster size is 76 mm (3 inches) in the warm Gulf of St. Lawrence waters, 92 mm (3 5/8 inches) in the cool oceanic Nova Scotia waters, and 105 mm (4 inches) in the cold Gulf of Maine waters.

.7 The stock structure of American lobsters therefore varies from one harvest region to the other depending on water temperature. There is a view that lobster migrations tend to be local and generally occur laterally between in-shore and off-shore waters due to seasonal variations in water temperature. Mature lobsters having reached reproductive maturity travel an average of 18 kilometers per year while those that have not travel only 7 to 8 kilometers yearly. However, it has been observed that larger lobsters sometimes migrate longer distances than is commonly believed, including across the maritime boundaries between the United States and Canada.

.3 The industry

.1 The U.S. lobster industry is concentrated in the harvesting and marketing of live lobster. As far as the Canadian catch is concerned, 52 percent goes to the lobster processing industry, which produces frozen, and canned lobster meat, frozen whole lobsters, and frozen lobster tails.

.2 Before 1950, the U.S. lobster fishery remained essentially a shoal-water, coastal trap fishery. Since then, the lobster fishery has expanded to off-shore waters and a new fishery has developed with deep water trap fishery along the continental shelf off Southern New England. Off-shore lobster fishery in the United States takes place mostly from Rhode Island down to North Carolina.

.3 There are two principal types of lobstermen in the United States. In the in-shore fishery, less cash investment is needed and there are lobstermen who fish full time for lobsters, others for whom lobstering is a regular but seasonal part of a diverse fishing enterprise, and finally those who are part-time fishermen with other employment. In the off-shore fishery, the participation is limited to serious, full-time operators who carry on other fishery activities at the same time. In the off-shore fishery, lobstering requires major investment and the use of expensive vessels.

.4 Both the U.S. and the Canadian lobster industry have been growing rapidly in recent years, mostly in the harvesting sector.⁴ Canada's growth in harvesting has been accompanied by some decrease in fishing "input." From 1950 to 1980, total landing inventories in the United States increased by about 40 percent.

.5 In 1988, total landings of American lobster in major ports in the United States were 14,462 metric tonnes ("tonnes"), valued at US$95.4 million. (In information submitted subsequent to the hearings, Canada stated that more complete U.S. data showed substantially higher landings for all of the United States.) Maine has been the leading lobster-producing State with about half the volume of total landings.

.6 By comparison, overall Canadian lobster landings were approximately 40,392 tonnes in 1988. Of this quantity, 48 percent or 19,619 tonnes were sold in the live lobster market, 14,528 of which were exported to the United States.

.7 U.S. lobsters are consumed domestically. According to 1988 figures, the United States exports only about 2,500 tonnes of lobster per year (live weight),⁵ valued at US$23.5 million. However, U.S. imports account for 45 to 50 percent of total domestic consumption of lobsters in the United States.

.8 Most Canadian lobster is exported to the United States, where 74 percent (by volume) of Canadian live lobster is sold.⁶ In 1988, out of 80 million pounds of lobster harvested in Canada, 56 million were exported to the United States live, canned, or frozen. The live lobster exports totalled almost 32 million pounds (14,528 tonnes) with a total export value of C$192 million. However, according to preliminary U.S. data, Canadian exports of live lobsters to the United States declined by about 2,000 tonnes in 1989.

.9 It is estimated by Canada and the United States that the proportion of total lobster landings in Canada which are below the U.S. federal minimum lobster size requirements will be between 8.0 percent and 8.4 percent in 1990, 12.1 percent and 12.4 percent in 1991, and 16.1 percent and 16.9 percent in 1992. However, Canada asserts that, since all lobsters within the range of 3 3/16 inches to 3 1/4 inches (81.0 mm to 82.5 mm) are sold live, the proportion of live lobsters legally harvested from Canadian waters which do not meet the U.S. federal minimum size requirement and which would have entered the live market in the United States will reach 18 percent in 1990, 26 percent in 1991, and 34 percent in 1992.

.4 Processing and marketing

.1 Approximately 87 percent of the U.S. domestic catch is marketed live or freshly cooked at the point of final sale. The remaining portion is marketed as fresh or frozen meat. Since lobster landings are seasonal and do not necessarily coincide with market demand, the lobster industry has developed holding capacity mechanisms to supply the market efficiently in live lobsters. Marketing is done through five types of pounds, which are used for extended storage of live lobsters and serve to level the marketing periods of slack supply or demand. These are tidal pounds, crates or cars, inside pounds, tank houses, and dry-land pounds.

.2 The distribution chain for live American lobster consists of several steps. First, the lobsterman sells his catch to a dealer or a buyer. Secondly, the dealer then sells his stocks to a wholesaler, unless the dealer is a wholesaler himself. Finally, wholesalers and brokers market their stocks either to retail outlets or to restaurants.

.3 As far as Canadian exports to the United States are concerned, the live lobsters shipped by air, which are stored in tank houses or dry-land pounds, are graded by size and are "culled" before shipping. Canadian lobsters shipped by land to the United States are held in tidal pounds, crates, or cars and inside pounds. According to Canada, the typical Canadian lobster shipment to the United States is sorted in Canada by size to meet prescribed U.S. buyer demands; according to the United States, Canada typically sends lobster shipments in unsorted 100-pound crates.

.5 Legislative background

.1 There has been intensive lobster harvesting in recent years and a large increase in the fishing effort. It was estimated in 1983 that only a tiny fraction (from 1 to 6 percent) of U.S. lobsters in the most-exploited areas avoided capture before reaching reproductive capacity. Scientists in both Canada and the United States have voiced alarm that this small percentage might be insufficient to avoid a catastrophic stock collapse although Canadian scientists believe Canadian stocks are now healthy.

.2 The current prevailing characteristic of the U.S. lobster fishery in all in-shore waters is therefore heavy dependence on newly "recruited" lobsters; 80 to 90 percent of the catch in the more heavily exploited areas in the Gulf of Maine and in Southern New England is composed of the new recruiting year class.

.3 In view of this, the United States decided to adopt a range of conservation and management measures regarding its lobster industry.

.4 In the 1980s the U.S. federal government, in coordination with the major lobster-producing States and the recommendation of the New England Fishery Management Council ("NEFMC"), began looking for measures to increase the minimum harvest size for lobsters in order to safeguard the U.S. lobster population.

.5 At the federal level, the United States first introduced a federal lobster size requirement with the adoption in 1985 of the American Lobster Fishery Regulations ("Federal Regulations") under the Magnuson Act. The federal minimum size requirement, set at 3 3/16 inches (81.0 mm), was established on the basis of the 1983 American Lobster Fishery Management Plan prepared by NEFMC.

.6 Among the other measures proposed by NEFMC in 1983 to protect the lobster population, and included in the Federal Regulations since, were:

• A schedule of further increases in the minimum lobster harvesting size;

• A total ban on marketing egg-bearing lobsters;

• A total ban on marketing "scrubbed" lobsters, which are lobsters with visible evidence of eggs having been forcibly removed;

• A total ban on marketing "V-notched" lobsters, that is, lobsters bearing a V-shaped notch on the right flipper next to the middle flipper or any lobster which is mutilated in a manner which could obliterate such a mark (lobster fishermen in Maine voluntarily V-notch egg-bearing lobsters and return them to the sea and are prohibited from harvesting V-notched lobsters or from obliterating their V-notches);

• Changes in trap construction.⁷

.7 In 1987, the U.S. Commerce Department amended the Federal Regulations to incorporate NEFMC's 1987 recommendations to increase the 3 3/16 inches federal minimum lobster size requirement by 1/8 inch (3.2 mm) in four stages. This four-step, five-year increase is as follows:

.8 The amended Federal Regulations prohibited the possession and marketing of sub-sized lobsters harvested in off-shore waters, which are subject to federal jurisdiction. The Federal Regulations also required any fisherman holding a state lobster permit endorsed for lobstering in federal waters to observe the more restrictive federal requirements for minimum lobster size.

.9 The 1987 amendment to the Federal Regulations presumed lobsters to have been harvested in U.S. federal waters or in violation of more liberal state laws; however, this presumption could be rebutted by the dealer with evidence that the lobsters were harvested either in state waters by a vessel not holding a federal permit or outside U.S. jurisdiction, that is, in Canada. A valid shipping certificate or bill of lading would indicate whether the harvested lobsters were taken in state or Canadian waters.

.10 According to a representative of both the State of Maine and the NEFMC, the NEFMC had wanted the 1987 Federal Regulations amendments to impose a flat ban on possession of all sub-sized lobsters whatever their origin. However, because the Commerce Department advised it could not impose a minimum size requirement outside its federal jurisdiction, NEFMC's formal request stopped short of asking for a total prohibition.⁸

.11 Concurrently with the adoption and amendments of the Federal Regulations, the major lobster-producing states have also enacted measures applicable to lobsters caught in coastal waters, including minimum lobster size requirements and other bans on the marketing of certain categories of lobsters.

.12 Maine, the largest lobster-producing state, led the effort to raise the minimum lobster size and adopted in 1986 a four-step, five-year increase in minimum lobster size identical to the 1987 Federal Regulations amendments. Other major lobster-producing states⁹ followed Maine and increased their minimum lobster size requirements, previously set at 3 3/16 inches, sometimes with a one-year lag behind Maine and the federal lobster plan. Therefore, following the 1987 amendments to the Federal Regulations, almost all jurisdictions in the United States had introduced a possession and marketing ban on sub-sized lobsters. By early 1988, only about 3 percent of lobsters harvested in state and federal waters escaped the application of the federal minimum lobster size requirement, mainly in New Hampshire and New Jersey.

.13 In 1987, NEFMC asked for the elimination of the rebuttable presumption available to state-harvested and Canadian lobsters and requested prohibition in the U.S. market of any sub-sized lobster, whatever its origin. In 1987, NEFMC did not obtain these objectives. In 1989, it asked for the prohibition and considers that it obtained it (with the qualified exemption of some state-harvested lobsters).

.14 The 1989 amendment therefore extended the prohibition on the marketing of sub-sized lobsters to lobsters harvested in foreign countries and to lobsters harvested in states having minimum lobster size requirements lower than the Federal Regulations and either marketed in interstate commerce or harvested by fishermen with federal permits and did away with the rebuttability of the presumption that the lobster was illegally harvested. The 1989 amendment only applies to whole live lobsters and excludes frozen and canned lobsters, because the United States says, these are clearly labelled and readily identifiable according to origin.

.15 The question for this Panel is whether the 1989 amendment constitutes a prohibition or restriction on the importation of Canadian lobster in conflict with U.S. obligations under GATT Article XI.

.16 The legislative history of the 1989 amendment to the Magnuson Act indicates that there were three underlying objectives to extending the prohibition to imported sub-sized lobsters.

.17 First, the 1989 amendment was expected to facilitate the enforcement and management of the federal program. According to U.S. enforcement officials, it was hard to catch violators under the Federal Regulations that went into effect in 1987. Unscrupulous lobster dealers might obtain fraudulent documentation to show Canadian origin of the lobsters or use, time after time, the same bills of lading or certificates attesting to the Canadian origin of sub-sized lobsters. Between 1987 and 1989 there were relatively few convictions involving falsified documents or fraudulent re-use of originally legitimate documents.¹⁰

.18 Secondly, the 1989 amendment was expected to strengthen the conservation of U.S. lobster stocks by removing the lure of the already illegal market for sub-sized U.S. lobsters.

.19 Thirdly, the 1989 amendment was expected to redress a perception of unfairness in the application of the federal size minima only to U.S. lobsters; there was among many American lobstermen a sense of being forced to comply with minimum lobster size requirements which were not required of Canadian lobstermen, a situation perceived as a competitive imbalance.

.20 Though the 1989 amendment could, as its terms make clear, be enforced at any point within the United States, it is the intention of the American authorities that it will be enforced mainly at the dealer level while only limited spotchecks will occur directly at the border. Though U.S. Customs Service has no explicit mandate to enforce the 1989 amendment, the U.S. Department of Commerce could request the Customs Service's cooperation and Customs would have the discretion to offer that cooperation.

4 Main Arguments Of The Parties

.1 General

.1 Canada

.1 Canada requested the Panel to find that the 1989 amendment to section 307(1)(J) of the United States Magnuson Act ("1989 amendment") violates, FTA Article 407, which incorporates GATT Article X1:1. In Canada's view, this law constitutes a restriction on importation in violation of Article XI.

.2 Canada argued that none of the exceptions allowed by the GATT are applicable. Specifically, Canada argued that the 1989 amendment is not a conservation measure falling under the exception of GATT Article XX(g), but rather is a trade restriction which the United States is attempting to disguise as a conservation measure.¹¹

.3 In addition, Canada disputed the United States' contention that Article III of the GATT applies to the measure. Canada argued that Article III constitutes a means to protect imported goods from discrimination on the domestic market, but not a means to block their importation¹². Using Article III in the fashion proposed by the United States would, in Canada's view, render Articles XI and XX practically meaningless.

.4 As a result of United States' violation, Canada claimed the loss of a lobster market worth approximately $127 million over the next three years.

.2 United States

.1 The United States argued that Canada bears the burden of proving that the 1989 amendment is a trade restriction in violation of FTA Article 407 and GATT Article XI. It was the U.S. position that Canada had not met this burden because the measure falls, instead, under GATT Article III. Because the United States and Canadian lobsters are subjected to identical minimum carapace length requirements, the United States contended that the law represents an "internal measure", subject to Article III, rather than a restriction applied solely to importation, subject to Article XI.¹³

.2 According to the United States, if the Panel finds that the United States measure properly falls under Article III, the Panel's work is finished because Canada has elected to base its challenge solely on Article XI. However, in case the Panel were to find the 1989 amendment in violation of Article XI, as Canada alleges, the United States argued that the amendment falls within the exception of Article XX(g).¹⁴

.3 Finally, in its discussion of trade effect, the United States pointed out that because no statistics are kept on percentages of lobsters of various sizes shipped to the United States from Canada, any calculation would be speculative at best. The United States also contended that the Canadian estimates of the trade effect are excessive and that the question of trade effect cannot be answered without consideration of options available in third-country markets and possible long-term benefits to Canada of increasing the minimum carapace length. Considering such options, the United States estimated that the 1989 amendment is unlikely to have more than a very minor adverse trade effect in the short term and is likely to be of net commercial benefit to Canada in the medium and long term.¹⁵

To Continue with Article XI

³ The only other clawed crustacean called "lobster" on international markets is the Homarus gamarus, which is the European lobster.

⁴ Canada declares that the processed lobster industry is rather static and is virtually a no-growth market.

⁵ These figures include all lobsters and not only American lobsters.

⁶ Only 10.7 percent of Canadian lobster landings were consumed unprocessed in Canada in 1988. 

⁷ The Canadian regulatory system, which is a purely federal matter, also includes a range of management measures such as minimum lobster size requirements varying from 2 1/2 inches to 3 3/16 inches (63.5 to 81.0 mm) to reflect regional differences in growth rates related to temperature cycles, licenses for fishermen and boats, fishing seasons, restrictions on trap numbers and size, and a total ban on possession of egg-bearing and "scrubbed" lobsters.

⁸ In a letter dated November 1987 filed by Canada at the oral hearing, the U.S. Department of Commerce assured Canada that the 1987 amendment to the Federal Regulations would not impede the importation of lobster legally harvested from Canadian waters.

⁹ Rhode Island, Maine, and Massachusetts account for 90 percent of U.S. lobster harvesting.

¹⁰ One U.S. witness stated at the Panel's hearing that, for the field office in which he was employed, there were a maximum of three convictions since February 1987 (Transcript, vol. I, pp. 178-179).

¹¹ Opening statement of Canada by Serge April, p. 4; Supplemental Submission by Canada, 13 March 1990, para. 13.

¹² Opening statement of Canada by Serge April, p. 6.

¹³ United States Submission of 21 February 1990, p. 9 ("U.S. Submission").

¹⁴ United States Written Summary of Oral Arguments on Article XX(g) and Trade Effects, pp. 1-2.

¹⁵ U.S. Submission, p. 14.