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

.9 In deciding possible coverage under Article XI or III, does it matter that the measures are a prohibition rather than a restriction?

.1 The Panel considered whether the fact that a measure applied to an imported product as a prohibition to its internal marketing (whether applied at the border or internally) called for a determination different from that concerning a lesser measure, that is, a measure restricting but not prohibiting the marketing of the product.

.2 For determining coverage, neither Article XI:1 nor III distinguishes measures in terms of their intensity. Article XI:1 deals explicitly with "prohibitions or restrictions" on importation. Article III -- in paragraph 1 (the basic principle of nonprotection), in paragraph 4 (the national treatment rule applying to NTBs and other measures), and in Ad Article III (the interpretation concerning the imposition of internal measures at the border) -- does not explicitly differentiate between prohibitions and restrictions. The coverage of Article III is stated, in part, as "laws, regulations and requirements affecting" the internal marketing of foreign products.

.3 Some provisions of the GATT do distinguish between prohibitions and restrictions. In particular, some of the exceptions in Article XI to the ban laid down in paragraph 1 of that Article make this distinction. Although those particular exceptions are not relevant to the present dispute, it is pertinent to note the apparent intentions of the drafters of the Agreement. Article XI:2 (a) and (b) set rules for "prohibitions and restrictions," whereas (c) sets a rule for "[i]mport restrictions." It appears, where the drafters believed it necessary to make a distinction between prohibitions and restrictions, they did so. In the case of Article III, the degree of intensity of a permissible measure applied to imported goods is to be determined by the degree of intensity of the measure as it applies to like domestic goods.

.4 The degree to which the marketing prospects for an imported product would be "affected" might be greater under a prohibition than under a restriction, but the imported product would still be "affected." Moreover, a restriction imposed on the internal marketing of an imported product, depending on the circumstances, could be just as fatal commercially as a prohibition. Putting an annual import quota on widgets at 10,000 units when trade has been 80,000, or requiring a marking or packaging specification, can make sales just as difficult -- or impossible -- as setting a quota at zero.

.5 Accordingly, the Panel considered that, for determining the possible application of Article XI:1 or Article III, the relative intensity, or absoluteness, of a measure (notably, a prohibition or a restriction) would not itself determine under which of these GATT provisions the measure would fall. Further, they believed that a measure imposed on imports, otherwise eligible for coverage under Article III, would not be disqualified from that coverage because it was a prohibition rather than a restriction. Conversely, a measure does not escape the coverage of one of these provisions or the other by being partially limiting rather than totally limiting. (Consistent with this view, the trade effects of the measure might or might not differ depending on the degree of restrictiveness, but that aspect concerns the separate issue of nullification or impairment of benefits and of a trade effects assessment.)

.10 Other prohibitions and restrictions presently embraced under Article III

.1 In testing each of the two alternative interpretations -- that Article III or that Article XI applies to the U.S. measures -- the Panel took note of the treatment of certain prohibitions and restrictions that each Party imposes in its own country on marketing various products and that were cited by the Parties in the proceeding. Although both countries were understood to impose many such measures, one list, submitted for illustrative purposes, identified a half dozen as internal Canadian marketing restrictions.⁵⁶

.2 The import counterpart of some of these measures would presumably be permitted by one of the general exceptions listed in Article XX, for example, any that could be justified as necessary to protect human, animal, or plant life or health. But many such prohibitions or restrictions affecting imported goods clearly would not. The internal marketing counterparts of these measures therefore would not be permissible under GATT if they were to fall under Article XI. Article III, on the other hand, was structured to permit governments to impose internal regulatory measures, subject to the national treatment standard, whether or not such measures met the specific exceptions of Article XX. A regulatory measure which falls within an Article XX exception may be discriminatory. Otherwise the demanding nonprotection, national treatment standard of Article III, in conjunction with the nullification and impairment provisions of GATT, protects foreign products from discriminatory treatment with regard to regulatory measures other than quantitative restrictions imposed on importation at the border. If this were not the case, governments would actually be forced to give foreign products more favorable treatment than that given to their own products with regard to internal regulations not falling squarely within an Article XX exception.

.11 Is there a case history to aid in analyzing the main issue in the present case?

.1 The Panel examined a number of GATT actions that were relevant to the task of judging the appropriate coverage of measures applied to imported goods at the border or internally. The Panel examined also the report in the only other case decided under FTA Chapter 18. The Panel found considerable support in the record for a determination that the U.S. measures applicable to U.S.- and Canadian-origin lobsters are of the type covered by Article III. Of those cases reviewed and cited by one Party or the other in the present proceeding, several supported this interpretation, one was ambiguous, and another was not relevant to the main issue.

.2 In reviewing the case record, the Panel focused on GATT determinations concerning QRs and other NTBs, as well as internal taxes and charges, which had to be classified between those that apply only to importation and those that apply to internal marketing of foreign goods (applied after their importation or to their importation) and also to internal marketing of corresponding domestic products. For the most part, the cases had implications for coverage under Article XI or III, but in some cases -- notably involving measures purporting to be internal taxes or charges -- for coverage under Article II or III.⁵⁷

.3 The reports of GATT panels and working parties that the present Panel drew on were those that had been adopted by the GATT Contracting Parties collectively, either in full session or through their GATT Council of Representatives.

.12 An early set of criteria: from a Havana Sub-Committee

.1 The issue of the classification of a trade-affecting measure in the present proceeding has a parallel in the classification issue that confronted governments in the earliest days of the GATT. That early discussion concerned a determination as to whether a particular governmental measure was to come under provisions on "importation" or "internal marketing." Whereas the Panel in the present proceeding focused on the classification question as it involves a nontariff measure on an imported product, the question in that early period concerned import charges.⁵⁸

.2 The issue arose during the deliberations at the Havana Conference of 1947-48 that led to the drafting of the Charter for an International Trade Organization (ITO). It may be recalled that the GATT was to be integrated into the ITO Charter. At the time the Charter was still being negotiated, the GATT contracting parties agreed to observe to the fullest extent of their executive authority the general principles of some of the chapters of the ITO Charter, including those on commercial policy, pending their acceptance of the Charter.⁵⁹ Interpretations considered in the course of the negotiation of the Havana Charter, often intended to perfect the language developed in the negotiation of the GATT a few months earlier than the Havana ITO Conference, continue to be applicable to questions arising under the GATT.

.3 During the Havana Conference, the negotiating countries considered certain charges imposed by Chile, Lebanon, and Syria. Conference records report the consideration that was given to the importation/internal marketing interpretation and, in particular, listed specified criteria for classifying measures. The passage, especially pertinent to the classification issue at hand here, reads as follows:

.4 Using the criteria delineated at Havana, the U.S. measures imposed on Canadian lobsters are not measures applying only to imports and thus not covered by Article XI:1. They are not to be regarded as measures falling under the prohibition concerning importation because they are not imposed "at the time of, and as a condition to, the entry of the goods into the importing country" and they are not applied exclusively to imported goods without being related in any way to similar charges collected (or, related to their counterpart, QRs imposed) internally on like domestic products.

.5 Even if the U.S. measures were imposed on Canadian lobsters at the time they crossed the border, they could still be classified as internal measures because of the rule clearly laid down in GATT Ad Article III. But the facts in the lobster case and the criteria specified at Havana make it clear that they are not border measures.

.13 GATT Panel Report on the Canadian Foreign Investment Review Act (FIRA).

.1 The GATT Panel on the Canadian Foreign Investment Review Act (FIRA) expressed itself on the issue of mutual exclusivity of Articles XI and III, a position that both Canada and the United States have espoused in the present proceeding.

.2 The FIRA panel was assigned the task of considering a United States-Canadian dispute that involved, among other things, written undertakings which obliged investors in Canada to purchase goods of Canadian origin in preference to imported goods, to purchase Canadian goods in specified amounts or proportions, or to purchase goods from Canadian sources (referred to in the Panel's report as "purchase undertakings").⁶¹

.3 The United States argued that the purchase undertakings were inconsistent with both Article III (paragraphs 4 and 5) and Article XI, as well as Article XVII (state trading -- specifically paragraph 1(c)).⁶²

.4 The GATT Panel drew conclusions regarding Article III, as noted herein below, and Article XI. As to Article XI, it found the purchase undertakings do not prevent importation and therefore those provisions are not inconsistent with Article XI:1.⁶³

.5 Having stated this conclusion, it went on to say

The GATT Panel went on further to say that if Article XI:1 were interpreted broadly to cover also internal requirements, Article III would be partly superfluous. Moreover, it reasoned, if Article XI were interpreted to apply to internal measures, the exceptions that Article XI itself contained

.6 In the present proceeding, Canada confirmed that it continues to share the view of the GATT Panel in the FIRA case.

.7 The GATT Panel considered the purchase undertakings against Article III. The GATT Panel found those undertakings to be "`requirements' within the meaning of Article III:4".⁶⁵ In the light of additional conclusions about the relationship between the measures and the national treatment obligation of Article III (that aspect of the Article being excluded from the present, lobster proceeding), the GATT Panel held them to be in conflict with Article III.⁶⁶

.8 The GATT Panel decision on FIRA is pertinent to the issue of categorizing a measure between Articles XI and III. The distinction it made -- supported then and in this proceeding by Canada -- was clearly stated: 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".

.14 GATT Panel on U.S. Section 337 Procedures

.1 A GATT Panel reported in early 1989 on a complaint filed by the European Economic Community (EEC) against U.S. measures applied to protect intellectual property, the particular case involving procedures under U.S. patent law. In this GATT proceeding, entitled United States - Section 337 of the Tariff Act of 1930, the dispute centered on GATT Articles dealing with internal measures (Article III) and on a general exception to the GATT (Article XX (d)) but did entail an analysis of the border/internal issue and GATT precedent thereon. The GATT Panel ultimately found that the U.S. Section 337 law to be inconsistent with Article III:4 because, for reasons it detailed, it accorded to imported products alleged to infringe U.S. patents treatment that was less favorable than it accorded, under certain judicial procedures, to like domestic products and that was not permissible under Article XX.⁶⁷ However, it is not that finding (on the national treatment issue not embraced by the terms of reference in the present Lobster case) that is of interest here; rather, it is its consideration of the principle underlying Article III as a measure affecting imported goods that is pertinent.

.2 The parties to the Section 337 dispute agreed: (a) that Article III:4 applies to substantive patent law, since such law affects the "internal sale, offering for sale, purchase, transportation or use" of imported and domestic products; (b) that the consistency of the substantive provisions of U.S. patent law with the GATT is not an issue; and (c) that Section 337, when applied in cases of alleged patent infringement, is a means to secure compliance with U.S. patent law in respect of imported products. The parties disagreed, however, whether a measure to secure compliance with patent law -- in contrast to the substantive patent law itself -- is covered by Article III:4. The United States believed such measures were covered by Article XX (d); the EEC believed Article III:4 applied and that Article XX (d) provided an exception only after a measure has been found inconsistent with another GATT provisions. The Panel decided to turn to a consideration of the measures in the light of Article III:4 and then to consider an exception under Article XX (d) if they found the measure inconsistent with Article III:4.

.3 When the GATT Panel turned to its examination of Article III:4, it took note of a determination by a previous GATT Panel on the border/internal issue and on the basic principle underlying the differentiation. Having pondered the Article III terminology of "affecting" the internal sale of imported products, the GATT Panel in the Section 337 case said:

.4 The U.S. measures in the present case certainly modify the conditions of competition between U.S.-origin and Canadian-origin lobsters -- and indeed provide the basis for the Canadian complaint about being deprived of a natural comparative advantage and being faced with a restriction on the access to the U.S. market that did not exist before the legislation was enacted.

.15 GATT Panel on Italian Discrimination Against Imported Agricultural Machinery

.1 In deliberating on a complaint against an Italian law that gave certain credit facilities to purchasers of Italian agricultural machinery but not to purchasers of imported agricultural machinery, a GATT Panel considered how, in principle, Article III is to affect imported goods.⁶⁹ The Panel said this in its Report:

.16 Classification of Internal Taxes between Articles Applying to Importation and Article III on Internal Marketing

.1 GATT Panels have made determinations in several cases in which they had to classify taxes between coverage under Article II (in a sense the counterpart for tariffs or charges of Article XI with respect to QRs) and Article III.

.2 In the case of Belgian Family Allowances, the GATT Panel said the levy in question "was to be treated as an `internal charge' within the meaning" of Article III:2 and not as an import charge within the meaning of Article II:2.⁷¹ The Panel had noted that the levy was collected on products purchased by public bodies for their own use and "not on imports as such" and "that the levy was charged, not at the time of importation, but when the purchase price was paid by the public body."

.3 In the dispute entitled EEC - Measures on Animal Feed Proteins,⁷² a GATT panel examined an EEC requirement that traders either purchase a certain quantity of denatured skimmed milk powder or provide a security and a requirement for a protein certificate. It carried out its study under terms of reference that dealt with Article II (bound import tariffs) and Article III. It found that these "administrative requirements, including the protein certificate," were inconsistent with Article III:4 (national treatment on NTBs). On the subsequent determination of "whether the EEC measures should be examined both as internal measures under Article III and border measures under Article II," the GATT Panel reviewed drafting history and application concerning Ad Article III, the Havana Sub-Committee criteria, the language of Articles II:2(c) and III, and the decision in Belgian Family Allowances. It concluded "that the EEC measures should be examined as internal measures under Article III and not as border measures under Article II." ⁷³

.17 A Case Cited that Is Ambiguous: GATT Panel on Canadian Provincial Alcoholic Beverage Distribution

.1 Canada drew on a GATT Panel Report on Canadian Provincial Liquor Marketing Agencies to say that "internal practices concerning listing/delisting requirements" for alcoholic beverages sold in official, provincial marketing agencies "and the availability of points of sale of a product were judged to be `import requirements' contrary to Article XI:1."⁷⁴ The present Panel finds the GATT Panel's report ambiguous on the classification of measures under Article XI.

.2 In that GATT proceeding, the analysis focused largely on Article XVII, which lays down principles for the behavior of state trading agencies. An interpretative note (located in the GATT before an interpretative note to Article XI) says: "Throughout Articles XI, XII, XIII, XIV, and XVIII, the terms `import restrictions' or `export restrictions' include restrictions made effective through state trading operations." This note apparently was the source of uncertainty in the GATT Panel's deliberations.

.3 The GATT Panel concluded that

The GATT Panel noted that Canada believed Article III to be not relevant because "the interpretative note to Articles XI, XII, XIII, XIV and XVIII made it clear that provisions other than Article XVII applied to state-trading enterprises by specific reference only." The GATT Panel then skipped over Article III but seemed to have second thoughts about having done so. The Report said:

.4 It may be of interest to observe that the GATT Panel reported that Canada, in arguing against the applicability to Article III in that proceeding, had said that its view of the classification question was as follows:

.5 The ambiguous tenor of the GATT Panel's Report in so far as it concerns a classification of measures between border and internal is brought out conspicuously in that Panel's comment about the interpretative note to state-trading rules as they relate to several GATT Articles. The comment is as follows:

.6 Thus, the GATT Panel report does not provide the basis for a conclusion that the type of practices involved in the Lobster case should be judged to be import restrictions and subject to Article XI.

To Continue with A Cited Case that Is Not Relevant

⁵⁶ Cleaning agents and water conditioners containing nutrients in greater than prescribed concentrations; packaged products unless packaged in a manner prescribed by Canadian regulations; precious metals unless bearing an authorized "mark"; textiles without labels describing the fiber content of the article; fertilizers and feeds, unless registered and conforming to Canadian standards; and peaches, apples, plums, and lobsters below certain minimum sizes (Supplementary Submission by the United States, March 13, 1990, p. 20., n. 6).

⁵⁷ The pertinent part of Article II reads: 1(b) The products described in Part I of the Schedule . . . shall, on their importation into the territory to which the Schedule relates . . . be exempt from ordinary customs duties in excess of those set forth and provided for therein . . . Such products shall also be exempt from all other duties or charges of any kind imposed on or in connection with importation in excess of those imposed on the date of this Agreement . . . .

⁵⁸ In the present proceeding, Article XI, which concerns QRs, is being contrasted with Article III, which involves taxes and other charges, QRs, and any law, regulation, or other requirement. In that earlier review, Article II, which concerns import duties (bound against increase), was being contrasted with Article III.

⁵⁹ Article XXIX of the GATT, entitled "The Relation of this Agreement to the Havana Charter," reads in part as follows: The contracting parties undertake to observe to the fullest extent of their executive authority the general principles of Chapters I to VI inclusive and of Chapter IX of the Havana Charter pending their acceptance of it in accordance with their constitutional procedures. The commercial policy provisions of the Charter, including the GATT counterparts discussed in the present Report, were contained in Chapter V.

⁶⁰ Havana Reports, p. 62, paras. 42-43; E/CONF.2/C.3/A/W.30, p. 2, as reproduced in the GATT Analytical Index, Fourth Revision (GATT/LEG/2, section Article III, p. 3).

⁶¹ Canada - Administration of the Foreign Investment Review Act, Report of the Panel adopted on 7 February 1984 (L/5504), reprinted in GATT Basic Instruments and Selected Documents, Thirtieth supplement (hereafter "BISD", 30S). The aspect of the application of FIRA to exports was also a part of the proceeding, an aspect not further discussed here.

⁶² Same source, para. 3.1.

⁶³ Same source, para. 5.14.

⁶⁴ Same source.

⁶⁵ Same source, para. 5.4.

⁶⁶ Same source, paras. 5.9 and 5.10. See also conclusions in para. 6.1.In the present Lobster proceeding, the Canadian representative said that he regarded the FIRA purchase undertakings to have been no restriction at all on the entry of goods into the foreign market, but that foreign companies investing under FIRA had committed themselves to "buy local sources rather than imports," and that therefore the GATT Panel considered the measures to be a breach of Article III:4.

⁶⁷ United States - Section 337 of the Tariff Act of 1930, Report of the Panel accepted on 16 January 1989 (L/6439), reprinted in BISD 35S, paras. 5.20 and 5.35.

⁶⁸ Same source, para. 5.10, underscoring added. The GATT Panel Report was cited by Canada in connection with that Government's argumentation about Article XX and GATT exceptions in general (Canadian written submission [March 5, 1990], para. 65). The quoted material is footnoted in the Section 337 Report to "Panel on Italian Discrimination Against Imported Agricultural Machinery," cited further and discussed herein below. While both the Section 337 case and the Italian Discrimination Against Imported Agricultural Machinery case considered measures under the substantive requirements of Article III:4, their conclusions offer perspective on the intended scope of Article III.

⁶⁹ Italian Discrimination Against Imported Agricultural Machinery, Report [of the Panel] adopted on 23 October 1958 (L/833), reprinted in BISD 7S/60-69.

⁷⁰ GATT Panel Report, paras. 11 and 12, underscoring added.

⁷¹ BISD 1S/60, as quoted in the GATT Analytical Index, Fourth Revision, cited above, section on Article III, pp. 7-8.

⁷² GATT Panel Report adopted on 14 March 1978 (L/4599), BISD 25S/49-68.

⁷³ Same source, paras. 4.12 and 4.18.

⁷⁴ Canadian Submission of 31 January 1990, p. 15, para. 51.

⁷⁵ Canada - Import, Distribution and Sale of Alcoholic Drinks by Canadian Provincial Marketing Agencies, Report of the Panel adopted on 22 March 1988 (L/6304), reprinted in BISD 35S/37-99.

⁷⁶ Same source, para. 4.26, underscoring added. The Report also concluded  that it was not necessary to decide in this particular case whether the practices complained of were contrary to Article XVII because it had already found that they were inconsistent with Article XI (GATT Panel Report, para. 4.27).

⁷⁷ Same source, para. 3.34.

⁷⁸ Same source, para. 4.24, underscoring added.