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

5 What Is Not Covered

.1 Certain aspects of the Magnuson Act, as well as particular aspects of the FTA disputes settlement procedures were not before the Panel. These limitations were set by the Parties in formulating the terms of reference for the Panel and were further noted by the Parties during the proceedings.

.2 The terms of reference confined the Panel's task to reporting on the question of the applicability or nonapplicability of FTA Article 407 and GATT Article XI to the Magnuson Act, as amended in 1989, and, in the event of certain findings, on the related questions of the applicability of the GATT exception in Article XX (g) and of possible trade effects. As confirmed during the proceedings, the Panel's assignment did not call for recommendations relating further to the possible resolution of the dispute.

.3 Also, in any analysis the Panel was to give to the applicability of Article III, it was not to proceed to a subsequent determination of the possible consistency or inconsistency of the U.S. measures with the "national treatment" requirements of Article III.

.4 Finally, the Panel's consideration also excluded consideration of the laws and regulations of individual states regarding the marketing of lobsters under stipulated size, as well as the treatment of egg-bearing or "scrubbed" lobsters.

6 Contrasting Views On The Possible Applicability Of Article Xi

.1 The two Parties had directly opposing views on the applicability of Article XI and Article III.

.1 Canada based its case on Article XI, asserting that the U.S. measures were inconsistent with U.S. obligations under that Article. It said that Article III was irrelevant. The United States said that Article XI was irrelevant and said that the measures were of a type that would come under Article III. It went on to say that it was not proceeding further to argue that, as internal measures subject to Article III, the measures were in conformity with the "national treatment standard" of that Article, although it believed they were in conformity with that rule.

.2 Canada argued that the U.S. measures were restrictions on importation, that is, that they were in form or in effect measures prohibiting the entry of sub-sized Canadian lobsters into the United States and therefore came under the ban in Article XI against quantitative restrictions ("QRs") applied at the border. Canada argued that the measures were not internal measures under Article III, either because they were applied at the border or had the same effect as measures applied at the border. In contrast, the United States argued that the measures did not protect domestic production and were covered by Article III, because -- whether applied internally or at the border -- they applied equally to domestic and imported lobsters. The United States viewed the interpretative Ad Article III as dispositive in that it declares that nontariff trade barriers (NTBs) of any kind, including QRs, as well as internal taxes and other charges, of the kind referred to in Article III:1 may be imposed at the time or point of importation.

.2 The relative treatment of imported and domestic products is a key to GATT rules.

.1 The treatment of an imported product relative to the treatment of a like domestic product is important in applying many GATT rules. Indeed, it is essential to a discussion of GATT rules applicable in the case here at hand. But the question of that treatment is separate from the definitional, and consequent jurisdictional, question of whether a measure applicable to imported goods is a border or an internal measure.

.2 What the Panel confronted, in respect to the question of whether Article XI or, alternatively, III applied concerned a) the coverage and the substantive rule of Article XI but b) only the coverage and not the substantive rule of Article III. This difference in its terms of reference caused the Panel some concern over a certain lack of balance in the question it was asked to answer.

.3 The Panel arrived at differing views.

.1 The Panel arrived at differing views as to whether Article XI applied to the U.S. measures. It believed that it would be preferable in the circumstances to present its analysis, findings, and conclusions on the two views. The conclusions are discussed in the following sections, first, as Article XI being inapplicable and, then, as Article XI being applicable.

.2 The views of the majority of members are identified as those of "the Panel"; the differing views are attributed to "some members of the Panel" or "the minority".

.3 With regard to the possible application of Article XX(g) as an exception to Article XI and the evaluation of information on possible trade effects, the Report presents views that stem from the position, here held by the Panel minority, that Article XI is applicable.

7 The Majority View: That Article Xi Is Inapplicable -- And Article Iii Is Applicable

.1 What are the key provisions of the amended Magnuson Act, Article XI, and Article III?

.1 The Magnuson Act, as amended in 1989, makes it unlawful, as previously noted in this Report, for any person

that are below a stipulated size.⁴⁸

.1 The pertinent part of Article XI (incorporated into the FTA by Article 407) is set forth in paragraph 1 of that Article, and reads:

Several exceptions, conditions, and interpretations are applicable to the basic rule of paragraph 1. In essence, Article XI says that contracting parties shall not impose on imports (and exports in some cases) any QRs. The only exception to Article XI that the Panel has been asked to consider is Article XX (g).⁴⁹ The exception in Article XX (g) relates to measures an importing country is allowed to take for conservation of exhaustible natural resources. Its possible relevance is discussed in detail later in this Report.

.2 Article III enters the analysis pursuant to the terms of reference, in which the Parties agreed that

Article III, in summary, prohibits the use of any form of NTB to afford protection to domestic production. The NTBs include all "laws, regulations and requirements affecting the internal sale, offering for sale, purchase, transportation, distribution or use of products." This no-protection principle is supported by an explicit ban on the use of such measures in a discriminatory manner against imported products, whether imposed on them at the time they are at the border or after they have entered the commerce of the importing country. Although Canada framed its complaint in terms of Article XI, Article III was a part of the question posed and was discussed extensively by both Parties in their written and oral presentations.

.3 Article III sets forth the principle of nondiscrimination or equal treatment or, more precisely, "national treatment" between imported and domestic products. As set forth at the outset of Article III in paragraph 1 (and incorporated into the FTA by Article 501), the provision reads as follows:

An interpretative note (Ad Article III) declares:

.4 Paragraph 4 of Article III expresses the no-protection principle in the following terms:

.5 These GATT principles, implementing rules, and interpretations are to be accepted by the Parties to the present dispute. FTA Article 501, which incorporates Article III into the FTA, is set forth in an FTA chapter entitled "National Treatment" and reads as follows:

.2 Articles XI and III represent the basic classifications of measures applying to foreign goods.

.1 Article XI and III -- and in some respects, Article II, as will be explained -- are the principal GATT provisions that need to be examined in order to answer the initial question facing the Panel.⁵¹

.3 Contrasting Article XI and III by the term "border/internal" may obscure the "competition" requirement and be misleading.

.1 Much of the debate as to whether Article XI or Article III is applicable to the U.S. measures on Canadian lobster was expressed in terms of differentiating between "border" and "internal" measures. The rather uneven references to a "border/internal" classification threatened to obscure the "no-protection" or "competition" principle in Article III, to confuse the comparison between Article XI and III, and to lead to possibly erroneous conclusions regarding the applicability of each of these fundamental Articles of the GATT.

.2 Article XI is the principal GATT Article containing the general ban against the use of QR's to limit importation. The measures that are banned are those that would be applied to goods at the point or time of importation, the measures often being referred to as "border" measures. The Article itself contains exceptions, such as that for certain QRs on agricultural and fisheries products. Article XI is incorporated into the FTA by Article 407, which is in a chapter entitled "Border Measures".

.3 Article III is the principal GATT Article limiting the use of "border" and "internal" measures on imported goods. The rule of "national" treatment that it specifies to carry out the competition principle noted earlier bars a country from extending internal measures to imported goods in a way that bears more onerously on the imported products than on the like domestic products. The basic principle and operating rules of Article III are framed in terms of safeguarding a competitive relationship for an imported product -- whether the measures are applied to the imported product at the "border" or in the "internal" market. Article III is incorporated into the FTA by Article 501, which is in a chapter entitled "National Treatment".

.4 The actual classification terminology is stated in Articles XI and III.

.1 The language Articles XI and III use in stating the conditions on what importing countries may do to limit the importation or the internal marketing of imported goods differs in describing the stage of commerce at which the measures on imported goods is aimed.

.2 Article XI:1 is written in terms of

.3 Article III:1 (as well as III:4) is drafted in terms of

Ad Article III, the interpretative note, concerns measures "of the kind referred to in paragraph 1" that are "collected or enforced in the case of the imported product at the time or point of importation."

.4 In some circumstances, the distinction between border and internal is pertinent to the interpretation of a GATT rule, whereas in other circumstances, the GATT rules do not distinguish between measures imposed on foreign goods when they are at the border of the importing country from measures imposed on foreign goods when they have already crossed the frontier and have been assimilated to the internal commerce of the importing country. Article III is one such case. Where there is no need to distinguish between the latter two stages of distribution, this section of the Panel's Report follows the GATT practice of referring to the foreign goods simply as "imported."

.5 Are the U.S. measures formulated as internal or border measures?

.1 The Panel sought clarification of the statutory phraseology in the Magnuson Act, as amended, "interstate or foreign commerce" to ascertain whether that would indicate action at the border, as well as internally.⁵² The United States replied that the language did not mean that intervention was to be made at the border, although there was authorization to permit the measures to be applied there. Rather, the term "interstate or foreign commerce" is embedded in U.S. constitutional law and, in common with much other legislation, was used in the statute formally to assert the jurisdiction that the American federal government has to regulate commerce. Moreover, it said, any examination of the statute in the context of the present proceeding would be the same whether the phrase was or was not included in the statute.

.6 What is the U.S. policy on where the measures will be imposed?

.1 Although U.S. authorities are empowered under the amendment to enforce the minimum size limits at various points in the internal distribution chain, the United States said enforcement activity was expected to take place (as had already been the case) on board the lobster fishing vessels or, preferably, at the points of landings and at the lobster pounds or similar facilities where the lobsters are sorted and kept alive for further distribution. Enforcement on vessels while at sea is not the U.S. administrators' first preference, since illegally undersized lobsters can be jettisoned in the face of approaching enforcement officers or hidden in the lobster fishing vessel.

.2 As for the lobsters' physical movement in U.S. commerce, their crating was alleged to present enforcement difficulties. Lobsters sometimes are commingled in size when in the crates in which they are shipped. The American authorities indicated it was feasible to verify compliance with a minimum size standard only when lobsters arrived at pounds or holding tanks and were uncrated or at later stages of distribution, particularly at restaurants or supermarkets. Therefore, for enforcement concerning U.S.- and Canadian-origin lobsters, surveillance would be at lobster pounds or other places where they were culled for further distribution.⁵³

.3 While the measures could be applied at the border or internally, it was the intention, expectation, and current policy to apply the U.S. measures internally.

.7 Are the U.S. measures actually applied internally or at the border?

.1 The Panel looked further at the measures to determine whether, in practice, they are being applied to Canadian lobsters at the border or in the U.S. domestic market. As of the time the Panel was carrying out its assignment, there was little experience with the U.S. measures. The Magnuson Act had been in effect for many years, but the amendment that is the subject of the present proceeding had become effective only in December 1989.

.2 In reporting to the Panel on administrative and enforcement policies and activities under the Magnuson Act as amended, as well as under the Act prior to the amendment, United States authorities said that enforcement takes place at various stages of economic activity within the U.S. domestic market and not at the border. The United States reported that its customs administration had declared specifically that, while it would cooperate with other U.S. enforcement authorities, it would not be intervening with any enforcement measures at the border.

.3 Canada had a contrary understanding about the actual enforcement of the U.S. measures. In the light of its understanding that they were being imposed at the border,⁵⁴ it said the measures constituted a "trade restriction" or "import restriction" and therefore came under Article XI. The United States said that the measures were being applied alike to Canadian and domestic lobsters and that this practice had the critical consequence of bringing them under Article III.

.4 The Panel considered that the best information available on the application of the measures in the short period since the Magnuson Act amendment had been in force was that they were being applied after the Canadian lobsters had entered the United States and that the American authorities had indicated their current and expected future practice to apply them as internal measures. The Panel accepted the U.S. report on the facts of its administration of the U.S. measures on Canadian lobsters, that is, that they are being applied in the U.S. internal market.

.5 The Panel noted that enforcement might at times entail the cooperation of U.S. customs officers. Although the United States reported that those officers would not be stopping any shipments at the border, enforcement might be considered as entailing some measure of activity at the border. The Panel considered that even if the measures were imposed fully at the border, the measures would apply to domestic and Canadian lobsters, and would therefore be nonprotectionist measures of the kind covered by Article III.

.8 Does the trade effect of a measure determine whether it is covered by Articles XI or III?

.1 As between Articles XI and III, the Panel considered whether the effect on trade attributed to a measure imposed on imported products determines whether the measure is covered by one of these Articles rather than the other.

.2 Both Articles express principles and set forth specific rules to limit the use of measures that affect the trade of the importing country. Essentially, Article XI prohibits certain techniques for limiting the quantity of foreign goods that may be imported (or domestic goods that may be exported); Article III bans the use of a wide range of measures that can affect the internal marketing, and consequently the importation, of foreign goods.

.3 The trade effects on Canadian lobsters will not differ if the U.S. measures are determined to fall under one of these Articles rather than the other. Whether as Article XI measures on importation or as Article III measures on internal marketing, the U.S. limits on Canadian lobsters will have identical effects: imports of sub-sized lobsters will be zero.⁵⁵

.4 Likewise, failure to meet the requirements of either Article III or Article XI could force consideration of a readjustment of mutual obligations and benefits. That is, the readjustment would have to be considered if as an Article XI measure, Article XX (g) did not provide any exception, or if as an Article III measure, the national treatment requirement of that Article had not been met and Article XX provided no exception. However, a determination of either of these possible violations would be subsequent to, and not in place of, the determination as to which Article applies.

.5 As noted in the following section, Article III does not distinguish between the intensity or the effect of the measures it covers. It refers to "laws, regulations, and requirements affecting" internal marketing of foreign products. As paragraph 7.9.4, below, makes clear, a marking or packaging criterion can make sales just as difficult as a size specification or an internal quantitative limit or requirement on sales. It is nearly impossible to draw lines on the continuum of the effects of regulatory measures imposed on the internal sale, transportation, and marketing of goods. Accordingly, the Panel concluded that the effect of the U.S. measures on trade between the Parties in Canadian lobsters does not determine whether Article XI or III is applicable.

To Continue with In deciding possible coverage under Article XI or III

⁴⁸ The terms of reference state the question to be answered by the Panel in terms of "section 307(1)(J) of the Magnuson Fishery Conservation and Management Act," that is, of the law in force after the amendment. As noted elsewhere in this Report, Canada argued the question in terms of the 1989 amendment in contrast to the legislation that was in force prior to the amendment. The Magnuson Act, or the amendment itself, was variously referred to in the written and oral presentations.

⁴⁹ Article XI:2 contains three exceptions, one of which concerns agricultural or fisheries products. Those exceptions are subject to several conditions specified in the Article. Neither Party to the present dispute pointed to that set of exceptions as being relevant. In the light of argumentation and the terms of reference, they were not considered by the Panel as possible exceptions in the event Article XI was determined applicable in the present dispute.

⁵⁰ The remaining sentence of Article III:4 concerns differential transportation charges, a subject not relevant to the present proceeding. Paragraph 1 of Article III sets out the basic no-protection principle of the Article. Paragraph 4 presents the rule concerning the application of all NTBs -- that is, all laws, regulations, and requirements -- pertinent to the present dispute. Other paragraphs of Article III treat aspects not directly relevant to the issue here at hand, for example, paragraph 2 dealing with internal taxes or other internal charges and other paragraphs dealing with "mixing" requirements.

⁵¹ The GATT does include articles additional to XI and III that specify QR rules, or exceptions to QR rules, applicable to foreign goods when they are presented at the border of an importing country or are in the internal commerce of the importing country. As illustrations, GATT Article XII deals with quantitative restrictions on imports applied because of need to safeguard the balance of payments. Article IV presents "special provisions" for internal quantitative regulations relating to exposed cinematographic film, such as those taking the form of "screen quotas." However, these additional QR provisions are essentially particularized rules that can be regarded as subclassifications of those in Articles XI and III and need not enter into the analysis here. Indeed, they have not been raised by the Parties in their submissions.

⁵² As noted earlier, the legislation now in force declares that "It is unlawful . . . for any person . . . to ship, transport, offer for sale, sell, or purchase, in interstate or foreign commerce, any whole live lobster of the species Homarus americanus . . . " below stipulated sizes.

⁵³ Canadian authorities asserted that the "typical" lobster shipment is sorted in Canada "according to size to meet prescribed U.S. buyer demands" (Supplemental Submission by Canada," March 13, 1990, para. 3).

⁵⁴ "They are measures imposed at the border. That is our understanding. And therefore, they fall within Article XI of the GATT, in our view" (Transcript, March 6, 1990, Morrissey, p. 129). In its written presentation at the Oral Hearing, Canada said: The amendment applies specifically to shipments and transport in "foreign commerce". Therefore the United States has effectively restricted the import of Canadian lobster at the border (para. 45).

⁵⁵ That U.S. enforcement of the measures only in the internal market would allow Canadian lobsters into U.S. territory only to have them prevented from entering the internal market is not realistic and does not alter the conclusion that the U.S. measures, whether under Article XI or III, or enforced at the border or internally, will lead to zero imports of undersized lobsters.