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

.18 A Cited Case that Is Not Relevant: GATT Panel on Tomato Concentrate

.1 Although the Tomato Concentrate case⁷⁹ was referred to in the present proceeding as a finding on the relationship between minimum price support programs and Article XI which provided precedent for the minimum size requirement at issue in the current case, the Panel concluded that the case did not provide a basis for analogyzing between a program that sets minimum prices and one that sets minimum sizes as a condition for importation of internal marketing. The critical factor in the GATT Panel's determination (with a dissent) that some aspects of the program were inconsistent with Article XI was the use of an import certificate and of an "additional security" as condition for the issuance of an import certificate and thus as a condition for importation.

.2 In the Tomato Concentrate case, the import licensing and the security deposits used as enforcement devices were discussed by both parties under GATT provisions on "border" measures. Article XI was in question; Article III was not at issue. Thus, the Panel in the present proceeding did not look to this case for precedent on the issue of alternative coverage of Articles XI and III.⁸⁰

.19 The Irrelevancy of Cases involving Measures on Exports

.1 During the proceedings, some references were made to a GATT decision regarding measures applied to exports. Care must be taken in drawing conclusions from such cases in so far as lessons are sought for principles of applying Article XI in contrast to Article III (or II). Some of the decisions cited for this purpose are not relevant.⁸¹

.2 Article XI:1 applies to imported and exported goods. With regard to imported goods, it covers measures (QRs) that apply at the border; with regard to exported goods, it covers measures (QRs) that apply at the border and internally.⁸²

.3 Article III applies to imported goods only. The Article covers a wide range of measures (internal taxes and charges, QRs, and other NTBs) applied at the border and internally.

.4 This "matrix" of provisions needs to be kept in mind. One reason for so doing is to avoid drawing on GATT interpretations relating to exported goods that do not apply to situations involving imported goods. Another reason is to recognize that the basic principle of Article XI:1 on imported goods applies to measures imposed at the border and that the basic principle of Article III on imported goods (the Article is confined to imported goods) applies to both border and internal measures.

.20 Is the Policy Objective of a Measure Relevant to a Classification under Article III?

.1 In determining whether a measure imposed on imported goods is or is not covered by Article III, there is no GATT requirement that the measure have a particular policy objective. That question is pertinent to the present case, since the U.S. measures have been put forward in the framework of a fisheries conservation program. In the case of many exceptions to basic GATT rules, there is such a requirement to determine the purpose of the measures. For example, an exception may be made for a measure to achieve a stated conservation objective or to enforce customs laws or farm price support programs. But that is not the case with determining eligibility under Article III. The tests for coverage turn on what might be regarded as a measure's protective or nonprotective character.

.2 Reporting on a dispute over U.S. taxes imposed on petroleum and certain other substances that were levied under U.S. environmental legislation (the so-called Superfund Act), a GATT Panel stated conclusions about the question of possible policy requirements for a measure to be eligible for border tax adjustment and, consequently, whether it was subject to Article III (and consistent with it).

.3 Regarding U.S. taxes on "certain imported substances," the GATT Panel discussed a U.S. contention that the taxes should be considered a "border tax adjustment," that is, a tax on imports "corresponding in effect to the internal tax on certain chemicals from which these substances were derived," and an EEC contention about the relevance of the policy objective of a tax to a determination of its GATT consistency. Here, the GATT Panel observed that the GATT tax adjustment rules "do not distinguish between taxes with different policy purposes." It went on to say:

.4 That interpretation is consistent with the view expressed by an earlier panel in a case concerning Greek internal taxes that a country imposing a measure on imported goods must give attention to whether the measure is "internal" in the sense of Article III (and, not here at issue, whether it accords national treatment) and not to whether it has some particular (good or bad) policy purpose. In the present proceeding, the Panel did confine itself to that narrower, factual, and nonpolicy examination.

.21 FTA Panel on Canada's Landing Requirement for Pacific Coast Salmon and Herring

.1 In the report that the FTA Chapter 18 Panel submitted in October 1989, those experts concluded that restrictions affecting internal marketing were not covered by Article XI but, rather by Article III. They declared:

.22 Conclusions

.1 The Panel concluded that the appropriate principle to be used in determining whether the U.S. measures were covered by Article III was the nonprotection principle of paragraph 1 of that Article. They considered a classification based on the border/internal differentiation for purposes of Article III was relevant but subsidiary to the basic principle of avoiding protection of domestic production in the use of internal measures. In this connection, they regarded Ad Article III as making a meaningful contribution to the practical application of Article III.

.2 The Panel determined that the U.S. measures imposed on live U.S. and Canadian lobsters were covered by Article III and not by Article XI. In particular, they considered that the measures, as now applied in the U.S. internal market, or as they might be imposed at the border, came within the scope of "laws, regulations requirements affecting the internal sale, offering for sale, purchase, transportation, distribution or use of products." The Panel made no determination as to whether these Article III measures were consistent with the national treatment requirements of that Article, since such a determination was outside the terms of reference laid down by the Parties.

8 The Minority View: That Article Xi Is Applicable

.1 The issue

.1 Canada argued that the 1989 amendment is a border measure imposing a prohibition on imports of Canadian sub-sized lobsters and is therefore in violation of GATT Article XI. The United States argued that the 1989 amendment is rather an internal measure applied to the marketing and sale of sub-sized lobsters and is therefore subject to GATT Article III.

.2 Both GATT Articles XI and III regulate the restraints importing countries may impose on goods of foreign origin.

.3 Some have argued that Article XI deals with border measures while internal measures are subject to Article III. Others have argued that the distinction has to do with whether measures simply tip the scales of competition (Article III) or whether they exclude competition altogether (Article XI). Some members of the Panel consider that these distinctions rely on no specific wording found in Article III or Article XI and can be misleading; helpful as they may be in particular cases, they are not necessarily applicable as general propositions. The critical differences between the two types of measures are illustrated by, on the one hand, the very language of GATT Articles XI and III and, to the extent that language needs assistance, the interpretation given to those provisions by FTA and GATT Panel precedent.

.4 In the view of these members, it is also not logically necessary that a given measure fall only into Article III or Article XI but never both. A measure not prohibited by Article XI might be covered and have to respect Article III but there is nothing logically to exclude the possibility that a measure which appears to fit within Article III and to respect its requirements can nevertheless be prohibited by Article XI. Similarly, of course, a measure may fall into neither Article.

.2 The language of GATT Articles XI and III

.1 Paragraph 1 of Article XI reads as follows:

That is, Article XI:1 prohibits all measures instituted by a Contracting Party that prohibit or restrict the importation of products from another Party, unless those measures are "duties, taxes or other charges" or unless they are saved by exceptions appearing later in Article XI or elsewhere in the GATT.

.2 Some members of the Panel considered that the language used in Article XI determines the scope of this provision. These members noted that the wording of Article XI:1 refers to "prohibitions or restrictions" made effective through "quotas, licenses or other measures" instituted or maintained on the "importation of any product". In the view of these members, a measure will fall within Article XI if it meets the three following criteria.

.3 First, the measure must be a prohibition or restriction which puts a quantitative limitation (total or partial) on imports. These members agreed with author J.H. Jackson⁸⁵ and noted that Article XI (as well as Articles XII through XIV) was drafted for the purpose of eliminating quotas and QRs.

.4 The second criterion suggested by the wording of Article XI is that the prohibitions or restrictions must be made effective through quotas, licenses or other measures. These members examined the interpretation given to these terms in previous FTA and GATT Panels and agreed with the FTA Salmon and Herring Panel that "GATT interpretations of Article XI:1 support a liberal approach stressing that the article should be interpreted broadly enough to accomplish its basic purpose".⁸⁶ As a matter of fact, these members noted that not only has Article XI been broadly and liberally interpreted by FTA and GATT Panels, but Panels have repeatedly held that a broad and liberal interpretation is necessary if Article XI is to have its intended effect.⁸⁷ These members also examined the GATT Panel Report on Import, Distribution and Sale of Alcoholic Drinks by Canadian Provincial Marketing Agencies⁸⁸, which held that Article XI applied also to restrictions made effective through state-trading operations. These members agree that the term "other measures" is authority enough to give to Article XI:1 an interpretation liberal enough to ensure its application according to the intention of those who drafted it: a measure will not escape Article XI by clever drafting; the Parties to GATT agreed not to resort to certain measures and that agreement must be respected.

.5 Thirdly, these members noted that an Article XI prohibition or restriction must be instituted on the importation of a product rather than on goods already in the internal commerce of the importing country. These members concluded that a prohibitive or restrictive measure must, if Article XI is to apply, take effect before the product enters the commerce of the domestic market, that is, before it can be subject to internal laws and regulations. On that point, these members shared the view of the GATT Panel on the Canadian Foreign Investment Review Act⁸⁹, which held 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".⁹⁰ In the FIRA case, the GATT Panel voted that purchase undertakings did not prevent the importation of goods as such, and that, therefore, they were not inconsistent with GATT Article XI.

.6 In sum, in the view of these members of the Panel, the very language of Article XI suggests that a quantitative limitation, whatever its form or wording, will fall within Article XI if its effect is felt before the foreign product enters the commerce of the importing country.

.7 As far as GATT Article III is concerned, these members observed that it imposes a standard of national treatment in respect of internal taxation and regulation. This principle of national treatment requires that imported goods be accorded the same treatment as goods of local origin with respect to matters under a government's control such as taxation and regulation. The general principle is stated at paragraph 1 of Article III and reads:

Article III thus prohibits the contracting parties from using internal taxes or other forms of regulations to discriminate against imported products relative to domestic products.

.8 The wording of Article III differs quite substantially from the language of Article XI. While Article XI is only concerned with "prohibitions or restrictions other than duties, taxes or other charges", Article III has a much wider scope and includes "internal taxes and other internal charges" as well as "laws, regulations and requirements". Article III refers to "regulations and requirements affecting the internal sale, offering for sale, purchase, transportation, distribution, or use of products" that should not be applied so as to discriminate against "imported products". In the view of some members of the Panel, a measure will fall within Article III if it meets the three following criteria.

.9 First, the measure must "affect" the internal sale, use or transportation of a product. These members noted that the word "affecting" is not defined in the GATT and concluded that it must therefore be given its usual and common meaning, that is, "to have an effect on, to influence or to produce a change in something".

.10 In addition, these members looked at previous GATT Panel Reports which commented on the selection of the word "affecting" in GATT Article III. 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, the GATT Panel on Italian Discrimination Against Imported Agricultural Machinery⁹¹ noted that, by using the word "affecting" at Article III⁹², the drafters intended to cover "not only laws and regulations which directly governed the conditions of sale or purchase but also any laws or regulations which might adversely modify the conditions of competition between the domestic and imported products on the internal market". GATT Panel Reports on United States-Taxes on Petroleum and Certain Imported Substances⁹³ and on United States-Section 337 of the Tariff Act of 1930⁹⁴ made similar comments.

.11 Use of the word "affecting" in Article III presumes the real or potential existence of internal "sale, use or transportation" of "imported" products in competition with domestic products. On this reading, Article III necessarily excludes from its scope the complete prohibition of the sale, transportation or use of an imported product. These members of the Panel found that Article III could thus apply only to laws, regulations or requirements influencing or modifying the conditions of internal sale, use or transportation of an imported product, but not to those measures prohibiting completely the sale of foreign goods. These members of the Panel also noted that Article III does not apply to measures "affecting" the internal production of goods.

.12 Secondly, Article III applies to imported products, that is, to products already entered into the market of the importing country. The GATT Panel Report on the Canadian Foreign Investment Review Act makes the same point.

.13 Thirdly, some members of the Panel believe it is noteworthy that, broadly drafted and encompassing as Article III appears, the one thing to which it does not apply is "importation". A measure "affecting" importation itself, rather than what comes after importation, would seem not to be covered by Article III.

.14 The United States relies on the interpretative note to Article III. This note states:

This note holds that the fact that a measure is enforced at the border is not dispositive of whether it is a border or an internal measure⁹⁵. This does not mean that a measure falls within Article III as soon as it is applied to both imported and domestic products, no matter if it is enforced at the border or internally⁹⁶. The interpretative note does not define what is an internal measure covered by Article III; it only says that an internal measure does not stop being one simply by being enforced at the border. Indeed, this interpretative note seems to stand for the common sense principle that a measure falls within Article III or Article XI, or conceivably both, depending on what it truly is rather than on the manner of its enforcement.

.15 In sum, some members of the Panel consider that a measure will fall within Article III if it is not a prohibition and it applies to foreign products which have entered the domestic market of the importing country and are in competition with domestic products. It will fall within Article XI if it prevents or restricts importation in the first place.

.3 Precedent regarding the interpretation of GATT Articles XI and III

.1 Some members of the Panel consider that the wording of GATT Articles III and XI provides the basic elements necessary to classify a measure⁹⁷. Nevertheless, they were of the opinion that, in addition to the GATT language, the interpretation given to these GATT Articles by the drafters of the Agreement and by Panel Reports provide helpful comments on the scope of Articles XI and III.

.2 The Panel examined the GATT precedents referred to by the Parties.

.3 Some of the members observed that there is no GATT Panel precedent in which a complete prohibition on the sale, use or transportation of imported products, as is the 1989 amendment in regard to Canadian sub-sized lobsters, was held to fall within Article III.

.4 They also noted no Panel precedent in which Article XI was clearly applied to a measure which, as the 1989 amendment under review, applies to both imported and domestic products. Canada argued⁹⁸ that the GATT Panel Report on Canadian Provincial Marketing Agencies⁹⁹, offered a case in which a measure applied to both imported and domestic products and was held to be in violation of GATT Article XI. However, this GATT Panel Report must be distinguished from the present case since it concerned state enterprises enjoying a monopoly on both importation and distribution of the products in the domestic market. Indeed, the GATT Panel expressly held that the "distinction normally made in the GATT between restrictions affecting the importation of products and restrictions affecting imported products lost much of its significance" in such a case "since both types of restrictions could be made effective through decision by the monopoly".

.5 Nevertheless, some members of the Panel believe it is of interest that both the restrictions on sale of the imported products and the restrictions on imports made by the provincial marketing agencies were held to be quantitative restrictions prohibited by GATT Article XI. GATT Panel Reports on Japan - Semi-Conductors and EEC - Tomato Concentrate, to which Canada referred in support of its argument, did not involve measures covering both imported and domestic products.

.6 In any event, the fact that a measure applies to both imported and domestic products does not answer the question of its classification. In the view of some members of the Panel, a measure is not necessarily an Article III measure just because, if it were, it meets Article III's requirements.

.7 Some members of the Panel considered whether the mere wording used in the importing country's law or regulation would alone suffice to classify a measure under either Article III or Article XI. For that purpose, they examined the committee report of the Havana Conference¹⁰⁰. This report established, when commenting on the meaning of "internal tax or charges" referred to in Article III, that the fact that "charges are described as internal taxes in the laws of the importing countries would not of itself have the effect of giving them the status of internal taxes under" Article III of the GATT.

.8 These members also looked at the GATT Panel Report on Semi-Conductors from Japan¹⁰¹. This GATT Panel analyzed the structure and elements of the measure, the operation of the supply and demand forecasts and the operation of the measure and concluded that the administrative structure created by the Japanese government amounted to a coherent system restricting trade in violation of Article XI.

.9 Even without this precedent, these members believe one would be hard put to conclude otherwise than that one must look to the substance rather than the simple form or language of a measure to determine whether it constitutes a violation of GATT Articles XI or III. The mere wording used in the importing country's law will not suffice to classify a measure as either a border or an internal measure. (In that respect, GATT Article XX, though relevant to another question, is an explicit enjoinder against "disguised restriction(s) on international trade" and an encouragement to look beyond the mere wording of the legislative measure.)

.10 The United States argued that a measure will only fall within Article XI if it is a government restriction to the entry of foreign goods and if it does not apply as well to domestic products. Some members of the Panel consider that nothing in the wording of Article XI holds explicitly or implicitly that the prohibition or restriction of which it speaks must apply exclusively to importation. On the contrary, they consider that the very wording of Article XI rejects this hypothesis. Were it to prevail, the exception stated at Article XI (2) (c) (i) would be meaningless. Article XI (2) (c) (i) states that a restrictive measure in violation of Article XI will be valid if the existence of import restrictions are necessary to the enforcement of measures which operate to restrict the quantities of like domestic products; this paragraph necessarily presumes the existence of restrictions applied to both imported and domestic products. Interestingly, this use of the word "restrict" was addressed at the 1948 Havana Conference where the committee agreed that, in interpreting the term "restrict", the essential point was that the measure of domestic restriction must effectively "keep output below the level which it would have attained in the absence of restriction"¹⁰²

.11 The principle was also applied in recent GATT Panels on Semi-Conductors from Japan¹⁰³ and on Yoghurt from Canada¹⁰⁴.

.12 Furthermore, were the United States' argument to prevail, an importing party could escape the prohibition of Article XI with impunity by prohibiting the sale of any product not produced by the importing party.

.13 Some members of the Panel consider that there is no precedent establishing that an Article XI restriction must apply solely to imported products. GATT precedents in which measures applying to both imported and domestic product were held to fall within Article III concerned measures which clearly established conditions on the sale of the imported products¹⁰⁵ and therefore do not answer the question.

To Continue with Precedent regarding the interpretation of GATT Articles XI and III

⁷⁹ European Community Programme of Minimum Import Prices, Licenses and Surety Deposits for Certain Processed Fruits and Vegetables, Report of the Panel adopted on 18 October 1978 (L/4687), BISD 25S/68/107.

⁸⁰ GATT Panel report in Japan - Semi-Conductors was cited by Canada in support of its view on the need for a broad interpretation of Article XI. As noted in the section immediately following, GATT rules on export measures are broader than the GATT rules on import measures, and interpretations on provisions relating to exports cannot be readily carried over to provisions relating to imports.

⁸¹ Cited in this connection was: Japan - Trade in Semi-Conductors, Report of the Panel adopted 4 May 1988 (L/6309), reprinted in BISD 35S/116-163 (Canadian Written Presentation, 5 March 1990, para. 43, n. 24 and para. 51, n. 29).

⁸² This difference within Article XI:1 is highlighted in the Report of the FTA Panel on Canada's Landing Requirement for Pacific Coast Salmon and Herring, Final Report of the Panel, October 16, 1989, paragraph 6.05. For a fuller discussion of the FTA Panel's reasoning on the import and export scope of Article XI, see its Report, paras. 6.03 through 6.09.

⁸³ United States - Taxes on Petroleum and Certain Imported Substances, Report of the Panel adopted on 17 June 1987, para. 5.2.4, underscoring added, reprinted in BISD 34S/136-166.See also a GATT Panel Report, adopted 3 November 1952, on a complaint relating to special import taxes initiated by Greece and concerning the irrelevancy of the government's intent to a determination of the applicability of Article III (quoted in the GATT Analytical Index under section (b) of the part on Article III).

⁸⁴ FTA Panel Report, cited above, para. 6.05.

⁸⁵ See J.H. Jackson, World Trade and the Law of GATT, Ch. 13.

⁸⁶ Canada's Landing Requirements for Pacific Coast Salmon and Herring, 16 October 1989, para. 6.07.

⁸⁷ European Community Programme on Minimum Import Prices, Licenses and Surety Deposits for Certain Processed Fruits and Vegetables, L/4687, BIDS 25S/68, 4 October 1978, para. 49; Japan - Trade in Semi-Conductors, para. 106.

⁸⁸ L/6304, BISD 35S/37, 5 February 1988, para. 4.25.

⁸⁹ Canada - Administration of the Foreign Investment Review Act, L/5504, BISD 30S/140, 25 July 1983, para. 5.14.

⁹⁰ See also GATT Panel Report on Canadian Provincial Marketing Agencies, para. 4.23-4.24, and FTA Panel Report on Salmon and Herring, para. 6.04.

⁹¹ L/833, BISD 7S/60, 23 October 1958, para. 12.

⁹² The GATT Panel Report dealt with paragraph 4 of Article III, the wording of which is similar to paragraph 1.

⁹³ L/6715, BISD 34S/136, 17 June 1987, para. 5.1.9.

⁹⁴ L/6439, 16 January 1989, para. 5.13.

⁹⁵ Transcripts of March 5 Hearing, p. 233; Canadian Submission of March 5, p. 18.

⁹⁶ U.S. Submission, pp. 10-11; Transcript of March 5 Hearing, pp. 192-195 and 234-234; United States Supplementary Submission, pp. 3-6.

⁹⁷ Logically, a measure meeting the definition of both will be prohibited under Article XI; an Article III measure must meet Article III criteria unless it is also captured by Article XI, in which case it is prohibited.

⁹⁸ Transcripts of March 6 Hearing, p. 21. 

⁹⁹ GATT Panel Report on Canadian Provincial Marketing Agencies, para. 4.24.

¹⁰⁰ Havana Reports, p. 63.

¹⁰¹ GATT Panel Report on Semi-Conductors from Japan, para. 117.

¹⁰² Havana Reports, p. 87, para. 17.

¹⁰³ Japan - Trade in Semi-Conductors, L/6309, BISD 35S/116, 4 May 1988, para. 105.

¹⁰⁴ Canada - Import Restrictions on Ice Cream and Yoghurt, L/6568, 27 September 1989, para. 79.

¹⁰⁵ See, for example, GATT Panel Report on EEC - Measures on Animal Feed Proteins, L/4599, BISD 25S/49, 14 March 1978, para. 4.17.