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

.2 Article XI

.1 Canada

.1 Canada argued that the U.S. measures were measures on importation contrary to GATT Article XI:1 and that the burden of proof then fell on the United States to demonstrate that it met the requirements of any applicable exceptions. In Canada's view, the United States has not met its burden of justifying the 1989 amendment under Article XX (g).

.2 Canada argued that the 1989 amendment is a trade restriction within the meaning of FTA Article 407, which incorporates GATT Article XI:1. Article XI:1 places an absolute ban on all measures that prohibit or restrict the importation of products. The 1989 amendment, according to Canada, effectively restricts the import of Canadian lobster at the border in violation of Article XI:1.¹⁶

.3 Canada argued that the 1989 amendment is a de jure breach of Article XI. Canada pointed out that the amendment specifically prohibits the transportation and sale of small lobsters in "foreign commerce." Canada alone exports this species of lobster to the United States, and thus only Canada's exports are affected. Canada claimed that the clear purpose of the 1989 amendment is to prohibit the importation of live small Canadian lobsters. To support this argument, Canada cited Senator Cohen's statement as he introduced the amendment: "Current Federal law only prohibits the harvest of undersized lobsters in the U.S. waters. It does not prohibit their importation."¹⁷

.4 In addition, Canada argued that the 1989 amendment constitutes a de facto violation of the GATT. Canada stated that prior to implementation of the amendment, the United States imposed no federal size limits on the importation of Canadian lobster as long as it could be shown by bills of lading that the lobster were caught legally in Canada. The 1989 amendment completely prohibits live small lobsters from entering the United States. Furthermore, because interstate trade of small lobsters is understood by Canada to be insignificant in the light of the NEFMC's estimation,¹⁸ and intra-state trade in small lobsters is exempt from the 1989 amendment, Canada argued that the 1989 amendment is, in fact, directed at Canadian imports in violation of Article XI. Moreover, Canada argued, it is unfair to restrict Canadian live lobster because, for environmental reasons, those lobster mature at an earlier age and enjoy a comparative advantage over U.S. lobster.¹⁹

.5 Canada contended that the Article XI ban on import restrictions has been interpreted broadly by FTA and GATT Panels. It saw four examples. In the Tomato Concentrate case, an EEC measure setting a minimum price for imported products was held an import restriction in violation of Article XI.²⁰ The Japan - Trade in Semi-Conductors case held a complex administrative structure inconsistent with Article XI:1, on the basis that the complex measures exhibited the "rationale as well as the essential elements of a formal system of export control."²¹ The Liquor Boards Panel found internal practices concerning listing/delisting requirements and availability of points of sale of goods to be "import restrictions" in violation of Article XI:1.²² Finally, the FTA Panel in the Salmon and Herring case stated that interpretations of Article XI should be broad enough so that the Article accomplishes its basic purpose.²³

.6 In Canada's view, the broad scope of Article XI makes it fundamental in the operation of the Free Trade Agreement between Canada and the United States. Canada claimed that the intention of the drafters of GATT was to reduce tariff restrictions and "ensure that governments did not erect other non-tariff impediments in their place to protect domestic industries."²⁴ Since 1947, Canada has been entitled to a U.S. tariff binding of zero in the case of lobster.²⁵ Because the 1989 amendment restricts foreign commerce, and Canadian lobster exports to the United States have been adversely affected, Canada argued that the amendment is prohibited by Article XI.

.2 United States

.1 The United States said that under GATT precedent Canada, as the moving party in the dispute, had the burden of proving that the 1989 amendment was inconsistent with Article XI. In the view of the United States, because the 1989 amendment does not fall under Article XI, no exception under Article XX need be invoked. The United States argued that Article III rather than Article XI governs laws like the 1989 amendment, which is an "internal measure" requiring identical minimum carapace lengths for both imported and domestic lobsters.

.2 The United States offered three reasons in support of its argument. First, according to the United States, Article XI does not cover measures applying to both imports and like domestic products. Article XI applies, instead, to "non-tariff `border measures' applying exclusively to imports."²⁶ The fact that the measure may be applied at the border is irrelevant, as shown by the interpretative note to Article III. Indeed, the United States argued that the inclusion of the term of art "in interstate and foreign commerce" reflects the intent of drafters to invoke the Commerce Clause powers of Congress rather than an attempt to direct the measure toward trade protection.²⁷

.3 Second, the United States argued that application of Article XI to this case would create an undesirable precedent. According to the United States, Article XI has never been applied by any GATT Panel to a measure covering both imports and domestic products. The United States asserted that the cases cited by Canada can be distinguished from the present case; the measures in the Tomato Concentrate and Liquor Boards cases²⁸ applied exclusively to imports, and the Japan Semi-Conductors²⁹ case dealt with Japanese government measures applying to exports. None of the cases suggests that Article XI covers measures applying equally to imports and domestic products. Moreover, the United States argued that by challenging the 1989 amendment under Article XI, Canada was implicitly asking the Panel to bar governments from imposing equal restrictions on domestic and foreign products whenever doing so would have the effect of restricting imports.

.4 Finally, the United States contended that the 1989 amendment is subject to Article III and therefore cannot fall under the provisions of Article XI because the two Articles are mutually exclusive.

.3 Article III

.1 United States

.1 As noted above, the United States argued that Article III rather than Article XI is the GATT provision under which the United States measures fall. Based on the thesis that Articles XI and III cannot apply to the same measure, and on Canada's limitation of the terms of reference to Article XI, the United States contended that a determination favoring application of Article III would end the Panel's consideration of the case.

.2 The United States pointed to GATT

interpretative note Ad Article III to support its argument that the measures introduced by the 1989 amendment are internal even though they may be applied at the time or point of importation. Ad Article III makes clear that a measure affecting the internal sale, offering for sale, purchase, transportation, distribution, or use of products may be applied to an imported product at the time of importation without affecting its status as an internal measure under Article III. The United States contended that the literal language of the interpretative note makes it obvious that Article III, rather than Article XI, covers measures like the 1989 amendment, which applies to both imported and domestic products. Whether the measure is applied at the border or after the product has crossed the border is irrelevant. All countries have internal laws that can be enforced at the border.³⁰

.3 Canada's challenge to the 1989 amendment, according to the United States, implicitly asks this Panel to prohibit restrictions affecting domestic and foreign products equally if those restrictions have the effect of restricting imports. However, in the United States' view, uniform treatment is exactly what the GATT and FTA promote.³¹ The United States argued that to prohibit the application to imports of measures that do not discriminate between domestic and imported goods would be counter to the GATT and the FTA, since such a prohibition would require treatment favorable to imports.

.4 Because the terms of reference are limited to consideration of Article XI, the United States did not address in depth the consistency of the United States measures with Article III. It was nonetheless the United States' position that the 1989 amendment is plainly nondiscriminatory and, thus, consistent with Article III's national treatment requirement.

.2 Canada

.1 Canada claimed that if Article III is relevant to this case at all, the United States was misapplying it. Canada claimed that "the `object and purpose' of Article III [was] the avoidance of protectionist internal taxes or administrative measures that discriminate against imported products."<sup>32</sup> Canada noted a distinction in Articles III and XI based on the use of the words "imported" and "importation," respectively. In Canada's view, Article III's use of "imported" covers products which can enter the country but may be required to comply with national regulations, such as labelling. Article XI's use of "importation" covers products that are in the process of being brought in, but are not yet in the importing country. Ad Article III also refers to "imported" products. Canada contended that the use of the word "imported" in Ad Article III means that the products concerned are ones that will be allowed into the country. Canada distinguished the current case from the situation contemplated by Article III and the interpretative note, pointing out that live small Canadian lobsters are prohibited entry into the United States. In Canada's view, "[t]hese lobsters can in no way be considered `an imported product' subject to the terms of Article III."³³

.2 Canada also argued that the drafting history and cases make clear the distinct functions of Articles III and XI. As noted by the United Kingdom delegate at the London Conference:

.3 Canada cited the Liquor Boards case as an example of application of Article XI to a measure covering both imports and domestic products. According to Canada, the Panel in that case examined both discriminatory internal taxes or other charges, and other restrictions covering point of sale and listing requirements. Even though these measures applied internally, the Liquor Boards Panel ruled that they were import measures inconsistent with Article XI:1.

.4 Canada compared the measures implemented by the 1989 amendment to those examined by the Panel in Canada -Administration of the Foreign Investment Review Act (FIRA)³⁵ case. The FIRA Panel stated that the GATT "distinguishes between measures affecting the `importation' of products, which are regulated in Article XI:1, and those affecting 'imported products', which are dealt with in Article III".³⁶ Noting that purchase undertakings do not prevent importation as such, the Panel "reached the conclusion that they are not inconsistent with Article XI:1."³⁷ Because the 1989 amendment in effect prevents the importation of goods, Canada argued that it acts as an import restriction falling under Article XI rather than Article III.

.5 Although Canada maintained that the U.S. measuress are governed by Article XI, it nonetheless argued that the application of the 1989 amendment and state laws deny Canada national treatment in violation of Article III:4. As an example of alleged discrimination, Canada said that the 1989 amendment does not apply to intra-state trade in the United States. New Jersey and Delaware, for instance, have shorter carapace length minimums than the federal limit. Canadian lobsters of the same size are nevertheless banned from entering the United States.

.4 Article XX

.1 United States

.1 As mentioned above, the United States denied that it had the burden of proving that an exception to Article XI was applicable, since the 1989 amendment is fully consistent with GATT Article III. In the United States' view, considering the applicability of Article XX was unnecessary. However, the United States contended that if the Panel were to hold the amendment violative of Article XI, the Panel should find Article XX(g) applicable.

.2 According to the United States, Article XX(g), which excepts government measures related to conservation of exhaustible natural resources, establishes a balancing test to determine whether "a measure `relates to conservation' or is a `disguised restriction on international trade.'"³⁸ The United States cited the FTA Panel report in the Herring and Salmon case for the application of Article XX(g) in a situation similar to the present one. As specified in the report, a measure must satisfy four conditions in order to qualify for an Article XX(g) exemption:

The United States argued that the amendment meets all the conditions. First, lobsters are a natural resource that can be exhausted by overfishing. Second, United States domestic production of lobsters is limited by a series of state and federal measures. Third, the amendment applies equally to foreign and domestic lobsters. Finally, the amendment is a law enforcement measure designed to prevent harvesting of small lobsters in the United States.

.3 The Salmon and Herring Panel constructed two tests to determine whether a measure is "primarily aimed at conservation". First, the Panel sought to determine whether the measure provided real conservation benefits and, in particular, whether a genuine reason existed for choosing the actual measure or whether other measures might have accomplished the same objective. Second, the Panel sought to determine whether the measure would have been adopted had the nationals of the country adopting the measure been forced to bear its costs.

.4 The United States argued that the 1989 amendment provides genuine conservation benefits and, therefore, meets the first test. To support this argument, the United States claimed that the amendment eliminates the harvest of sub-sized lobsters in the American fishery by taking away any financial incentive at the market place. In addition, the United States argued that the amendment was carefully drafted to avoid undue trade restrictions, while serving as an important conservation measure. The United States contended that no practicable alternative to the measures implemented by the amendment exists, noting that the rebuttable presumption itself had been tried but was considered unsatisfactory by U.S. enforcement authorities and arguing that other measures, such as increased shore patrols and better documentation of Canadian shipments, would not necessarily address U.S. enforcement concerns.

.5 In the United States view, the 1989 amendment meets the second test because United States nationals have been bearing the costs of the minimum size requirements alone since 1988. In fact, the United States stated that the costs to United States firms are higher than the costs to their Canadian counterparts because United States firms may not sell sub-sized lobsters anywhere in the world, while third-country markets are open to small Canadian lobsters.

.2 Canada

.1 Canada argued that exceptions to GATT obligations must be narrowly construed,⁴⁰ and that the United States had not met its burden of proving that the 1989 amendment falls within Article XX(g). Canada contended that the 1989 amendment is a disguised restriction on international trade, adopted in response to the perception in the U.S. Congress that American lobstermen were at a competitive disadvantage.⁴¹ The United States response to political concerns resulted in prohibition of importation of Canadian small live lobster.

.2 Although Canada agreed that lobsters are an exhaustible natural resource, Canada nonetheless maintained that the amendment is not primarily aimed at conservation. Canada stated that the 1989 amendment was not directed at the catch in United States waters and did nothing to add to the conservation measure already in place. Because the 1989 amendment bans only Canadian lobsters, Canada argued it was not directed at the catch of lobsters in United States waters.

.3 Canada noted further that while the 1989 amendment makes possession of live small Canadian lobsters illegal, it does not affect lobster in United States intra-state trade. Because no direct relation exists between conservation of lobster in U.S. waters and the 1989 amendment, Canada found the measure not "primarily aimed" at conservation.

.4 Canada responded to the United States' argument that the 1989 amendment is necessary for enforcement of the United States conservation scheme by pointing out that lobster imports from Canada arrive by road or air, not where United States lobster are brought to shore. In Canada's view, the 1989 amendment deals with the enforcement problem in the most trade restrictive way possible and places the burden of the United States' enforcement efforts on Canada. Canada claimed that the clear meaning of Article XX is that GATT exceptions "cannot be used to justify the most trade restrictive approach to deal with a domestic situation."⁴²

.5 Finally, Canada argued that no effective restrictions exist on the production of lobster in the United States. Canada pointed to the lack of uniform size restrictions among the individual states and the federal government. Because state laws governing the catch of lobster within the 3-mile territorial sea can be changed regardless of federal law, Canada contended that the United States does not impose effective conservation measures concerning lobster.

.5 Trade effects

.1 Canada

.1 Based on an independent assessment prepared by a Canadian accounting and management firm, Canada argued that implementation of the 1989 amendment over the next three years will cost Canada's lobstermen $127 million.⁴³ This calculation was based on estimates of the volume and value of lobsters that would be harvested in Canada in 1990-92, based on the average growth in the Canadian harvest from 1986-88; the quantity and value of Canadian lobsters available for the live market in 1990-92, also based on the percentage destined for the live market in 1986-88; the quantity and value of live lobsters expected to be exported to the United States in 1990-92 based on the base period; and an estimate of the percentage of the live catch available for fresh consumption that falls below the United States minimum size limits for 1990-92.

.2 Canada argued that trade effects could be even greater than $127 million, as the 1989 amendment may cause an increase in Canadian lobster prices to cover extra culling for the United States' market. Increased price, in turn, might reduce the export market. Additionally, any increased supply of small fresh live lobsters could depress the price of lobster in Canada and in third countries.

.2 United States

.1 The United States claimed that the Canadian estimate of trade effect is too high because it is based on the notion that small lobsters will continue to be harvested and simply discarded. Using that assumption, the United States claimed that a more realistic figure would lie between C$11.1 million and C$23.7 million annually.

.2 More importantly, according to the United States, the 1989 amendment presents Canadian firms with viable options for marketing lobster. Specifically, the United States listed four options for Canadian firms in responding to the amendment:

The United States believed that should Canada choose option "a", 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. Canada would endure some short-term losses, but in 10 years, "the . . . benefits could be C$3.1 million per year". Should Canada choose options "b", "c", or a combination, the United States expected the net losses over the first three years to be C$4.7 million annually, and the net losses in the long term (30 years) not to exceed C$5.7 million annually.⁴⁴ The United States argued that without consideration of these options, the trade effects, if any, imposed on Canada by the 1989 amendment cannot be determined.

.6 Remedies

.1 Canada acknowledged the difficulty its calculations of trade effects present, but argued that GATT and FTA preference is for withdrawal of the offending measure. For support, Canada cited the recent Superfund case in which a GATT Panel "emphasized that the benefits protected were not expectations on trade volumes, but expectations regarding certain competitive conditions".⁴⁵ In addition, Canada pointed out that Article 1807:8 of the FTA provides:

For these reasons, Canada asked that the 1989 amendment be withdrawn.

.2 The United States requested that the Panel make no specific recommendations regarding ways to achieve conservation results, but rather rule on the specific issue at hand. If the Panel finds that there is no violation of Article XI, such a finding would sustain the United States' position. If the Panel should rule otherwise, the United States requested that the Panel simply state that the 1989 amendment is in violation of Article XI, that it is not saved by Article XX, and that the trade effects are of a certain amount. The United States requested that the Panel not suggest any kind of alternative regime that might be applicable for the United States.⁴⁷

To Continue with What Is Not Covered

¹⁶ Canadian submission of 31 January 1990 ("Canadian Submission"), p. 5.

¹⁷ Canadian Presentation at the Oral Hearing, p. 13 (citing H.R. 1668, 101st Cong., 2nd Sess., 135 Cong. Rec., S16,136 (1989)). See also the letter, dated 6 November 1987, from Richard Roe, the Director of the Northeast Region of the United States National Marine Fisheries Service, to Blair G. Hankey, Counsellor, Canadian Embassy, same source, Appendix F. In the letter, Mr. Roe informs Mr. Hanley that the "nation-wide prohibition or non-conforming lobsters will not impede the importation of lobsters legally harvested from Canadian waters into the United States". 

¹⁸ Same source, p. 13 (citing Annex D of the U.S. Submission of February 21, 1990, Letter of November 9 from James Warren, Chairman, New England Fisheries Management Council to Senator George Mitchell).

¹⁹ Opening statement of Canada by Serge April, p. 5.

²⁰ EEC - Programme of Minimum Import Prices (the "Tomato Concentrate" case), L/4687, 4 October, 1978.

²¹ Japan - Trade in Semi-Conductors L/6309, 24 March 1988, paras. 104-106.

²² Import, Distribution and Sale of Alcoholic Drinks by Canadian Provincial Marketing agencies, L/6304, 5 February, 1988.

²³ Canadian submission, p. 6 (citing In the Matter of Canada's Landing Requirement for Pacific Coast Salmon and Herring, Final Report of the FTA Panel, October 16, 1988, para. 6.07).

²⁴ Canadian Presentation at the Oral Hearing, p. 14.

²⁵ Same source, p. 14.

²⁶ U.S. Submission, p. 10 (emphasis in original).

²⁷ Transcript of Proceedings, Volume I (March 5, 1990), pp. 197-198; see also U.S. Submission, p. 11.

²⁸ EEC - Programme of Minimum Import Prices (The Tomato Concentrate case), L/4687, 4 October, 1978. Import, Distribution and Sale of Alcoholic drinks by Canadian Provincial Marketing Agencies, L/6304, 5 February, 1988.

²⁹ Japan - Trade in Semi-Conductors L/6309, 24 March 1988.

³⁰ U.S. Submission, p. 11. The United States argued that Canada had, in fact, admitted the relevance of Article III by arguing that restriction of Canadian lobster imports was "unfair" because Canada enjoyed a comparative advantage (Transcript of Proceedings, Vol. I, 5 March 1990, p. 31-32).

³¹ U.S. Submission, p. 12; Transcript, Vol. I, pp. 235 - 236, 5 March 1990.

³² Canadian Presentation at the Oral Hearing, March 5, 1990, p. 20, citing Article 31 of the Vienna Convention on the Law of Treaties for the proposition that Article III must be interpreted in good faith, according ordinary meaning to the terms in light of its object and purpose.

³³ Same source, p. 21.

³⁴ Canadian Presentation at the Oral Hearing, p. 21 (quoting from Preparatory Committee of the International Conference on Trade and Employment, U.N. Economic and Social Council, EPCT/C.II/PV/10, 19 November 1946) (editorial changes made by the Canadian Presentation).

³⁵ Canada - Administration of the Foreign Investment Review Act, L/5504, 25 July 1983.

³⁶ Same source, para. 5.14

³⁷ Same source.

³⁸ United States Written Summary of Oral Arguments on Article XX(g) and Trade Effects, p. 1.

³⁹ Same source, p. 2 (citing In the Matter of Canada's Landing Requirement for Pacific Coast Salmon and Herring, Final Report of the FTA Panel, 16 October 1989 at para. 7.02) (emphasis in the United States Written Summary).

⁴⁰ Canadian Presentation at the Oral Hearing, p. 16 (citing Canada - Import Restrictions on Ice Cream and Yoghurt, L/6568, 27 September 1989, para. 59; Japan - Restrictions on Imports of Certain Agricultural Products, L/6253, 18 November 1987, para. 5.1.3.7; and EEC Restrictions on Imports of Apples, L/6513, 9 June 1989, para. 5.13).

⁴¹ Same source, p. 17.

⁴² Same source, p. 19 (citing United States - Section 337 of the Tariff Act, L/6439, 16 January 1989, para. 5.26).

⁴³ Same source, p. 26.

⁴⁴ United States Written Summary of Oral Arguments on Article XX(g) and Trade Effects, p. 16-17.

⁴⁵ Same source (citing United States, Taxes on Petroleum and Certain Imported Substances, L/6175, June 1987); see also same source, p. 25, n. 45 and accompanying text.

⁴⁶ Submission by Canada, 31 January 1990, p. 7 (deletions made in Canadian presentation). Canada stated: "A decision by the Panel that the United States must remove the measure is the correct resolution of this dispute."

⁴⁷ Transcript of Proceedings, Vol. I at 231, 5 March 1990.