3.47 Article III:2, first sentence, governs taxes applied directly or indirectly to products. Canada's argument that the tax is actually on advertising services confuses how the tax is measured (i.e., in terms of advertising fees) with what the tax applies to (i.e., split-run editions). There is ample additional evidence that the excise tax is a tax applied to split-run magazines as a product:

• The Task Force's recommendation - which the Canadian Government adopted and which the Canadian Parliament enacted - describes the tax as a tax "imposed on a magazine or periodical".


• In introducing the bill to enact the excise tax, Minister of Canadian Heritage Dupuy stated that the excise tax "would apply to all periodicals distributed in Canada and containing more than 20 per cent of reused editorial material as well as one or more advertisements aimed at Canadians", and that "[t]he publisher, the distributor, the printer or the wholesaler of any magazine subject to the tax would be responsible for paying the tax".


• Following House of Commons passage of the excise tax bill, Canadian Heritage issued a press release describing the tax as follows: "The amendment to the Excise Tax Act will place an excise tax on split-run magazines distributed in Canada that contain more than 20 per cent recycled material . . . and one or more advertisements aimed at Canadians".

Thus, during the time the excise tax was being formulated and enacted, Canadian officials had considered the tax to be a tax imposed on split-run magazines. It is only in the context of this panel proceeding, and in the light of US claims that the tax is inconsistent with Article III of GATT 1994, that Canada has advanced the argument that the tax is really a tax on advertising services and not a tax on split-run magazines. Indeed, given the statements of Canadian Government officials that the excise tax was designed to eliminate split-runs from its market, Canada's argument that split-run magazines are neither directly nor indirectly subject to the excise tax is not credible.

3.48 Even if the tax is not applied directly to split-runs, it is at a minimum applied indirectly to them because it is based on one of the two key uses to which magazines are put - in this case, the placement of advertisements. Moreover, it is impossible to separate the advertising that goes into a magazine from the magazine itself. Advertising is a significant component of commercial magazines, typically accounting for half or more of total pages. A magazine's advertisements can significantly affect its appeal and usefulness to readers. In addition to virtually eliminating their use as advertising vehicles - thus drastically reducing the revenues available to market such magazines - the tax reduces the appeal of such magazines to Canadian readers by effectively eliminating advertisements of interest to them.

3.49 Canada argued that the excise tax does not apply "indirectly" to a good within the meaning of Article III:2. In discussions at the London session of the Preparatory Committee, it was suggested that the word "indirectly" covers a tax not on a product as such but on the processing of the product".⁵⁷ The panel report in Japan - Customs Duties, Taxes and Labelling Practices on Imported Wines and Alcoholic Beverages⁵⁸ gave an interpretation of the term "indirectly" that was consistent with this reading:

"The Panel...found that the wording "directly or indirectly" and "internal taxes... of any kind" implied that, in assessing whether there is tax discrimination, account is to be taken not only of the rate of the applicable internal tax but also of the taxation methods (e.g. different kinds of internal taxes, direct taxation of the finished product or indirect taxation by taxing the raw materials used in the product during the various stages of its production) and of the rules for the tax collection (e.g. basis of assessment)".

The concept of "indirectly" in Article III:2 does not capture measures that are disciplined under GATS. It is intended to capture taxes that apply to "inputs" that contribute to the production of a good - raw materials, service inputs, intermediate inputs, etc. The question of whether the excise tax is covered by Article III:2 of GATT 1994 by reason of the expression "indirectly" must be examined in light of the relationship between GATS and GATT 1994.

3.50 Article III:2, to the extent that it allows a challenge of measures relating to services that "indirectly" impact on trade in goods, covers only measures concerning inputs such as raw material or services inputs that are directly involved in the production of a good. Taxes on such production inputs are properly subject to Article III:2 because they affect the costs and prices, and therefore the competitive position of goods that are subject to Article III:2. It is important, however, for the Panel to distinguish service inputs that are directly involved in the production of a good and services that are "end-products" in their own right. The publishers' advertising services, although closely associated with the magazines, are separate products. They are not involved in the production process of the magazines. The advertising services of the publisher are not, like labour in the production of a car, an input in the production of a good.

3.51 In order for a measure with respect to services to fall "indirectly" under Article III:2 of the GATT 1994, it has to affect the competitive situation of the importer on the market. In other words, the provision of the service has to be ancillary to the provision of the good in that market. The situation is reversed where the good produced by the exporter is used to gain access to a service market. In such an instance, the provision of the good becomes ancillary to the provision of the service which has the effect of transferring jurisdiction from GATT 1994 to GATS. Consequently, the argument on Article III:2 (and Article III:4) does not hold. Otherwise, such a restrictive interpretation could considerably diminish the scope of GATS and could lead to absurd situations such as those provided as examples by the United States. For example, irrespective of a Member's right not to make commitments with respect to foreign legal services, it would be impossible to maintain measures that restrict access when provided in a printed format. If allowed, the US interpretation of the expression "indirectly" would force Canada to accord national treatment to foreign publishers with respect to advertising services when it did not make any commitments in that respect in GATS. Such an interpretation would create an imbalance in carefully negotiated concessions on services sectors made by WTO Members during the last round of Multilateral Trade Negotiations. It would also void GATS of its effectiveness as it concerns Canada's right not to make commitments on advertising services.

3.52 If the United States is successful in persuading the WTO to condemn Canada's measures as inconsistent with GATT, the United States will be able to obtain direct access to a market from which it is otherwise properly precluded under international law. The measures in question are designed to protect access to Canada's advertising services market and they are effective in doing so. If the measures are struck down under the guise of GATT inconsistency, the WTO will have facilitated an unnegotiated concession on the part of Canada. The consequences of such an effect are far reaching. If the WTO is in any doubt about the nature of the dispute, it must simply look at what the United States will gain if successful. The United States will not gain greater access for its magazines. These magazines in exactly the same form as they are distributed in the United States already enter unimpeded. It will gain access to Canada's advertising market and the revenues to be had in that market.

3.53 The periodical publication industry is one which combines two commercial activities which are economically linked, the production of periodicals and the sale of advertising services. It cannot be denied that the autonomous economic activity which is the sale of advertising services significantly contributes to the financial viability of the publishing industry. However, this has nothing to do with the designation of two separate activities of an industry for the purposes of the application of GATT 1994 and GATS. The fact that an integrated industry uses some of its commercial activities and revenues so generated in order to facilitate the marketing of some of its other activities should not influence the characterization of the activities for the purposes of determining which sections of the WTO apply to them. The key element in the application of Article III:2, when considering whether a tax applies indirectly to a good, is whether this tax affects indirectly the global income generated by the industry under consideration. Hence the distinction made by Canada between a service as an input in the production of a good, which is within the scope of Article III:2, and a service which is a product of an independent activity such as the advertising services of a publisher, which are within the scope of Article I:1 of GATS. Canada also raised the further distinction which must be made between the services that are within the scope of GATT 1994 and GATS on the basis of the accessory or principal nature of the service. A service, as an input in the production of a good, is an accessory in the production of a good. However, the advertising services of a publisher are the principal product for which a periodical is the accessory.

3.54 A large number of services result in the production of a good. The fact that the result of the provision of the service is physically incorporated in the production of a good is not in itself a key factor in the characterization of the measure which relates to such a service. It is because of the economic integration of the two activities which form the periodical publication industry that advertising, in its physical form, is incorporated into periodicals. It is because a periodical is the accessory of the advertising service, its vehicle, that advertising in its physical form is incorporated into a periodical. It is not because advertising is physically "necessary" to the material production of a periodical as an editorial vehicle. Unlike printing services (the work of the printers), the advertising services of the publisher have nothing to do with the physical production of periodicals. Those services only relate to the financial viability of the integrated activities of the periodical publishing industry. This has nothing to do with the protection found in Article III:2 of GATT 1994. To extend the scope of Article III:2 and of the phrase "indirectly" would result in en extension beyond natural and reasonable meaning in the circumstances. The level of integration of an industry cannot be a factor in the characterization of a measure which relates to one of its activities for the purposes of determining which WTO treaties applies thereto. The only factors applicable are the nature of the measure and the scope of application of each of the two treaties.

3.55 There are no contradictions in the Canadian approach. Canada provided a general description of the periodical publishing industry and pointed out the integration of advertising and publishing activities. This explains the close relationship of these activities as far as overall income for the industry is concerned as well as the accessory nature of periodicals for the advertising services of publishers. Canada's main position is very clear. There is no doubt that the advertising services of publishers are services that are not accessory services or inputs in the production of periodicals. The fact that these services are part of the integrated activities of a publisher and that the income which results from them contributes to the overall financial viability of the industry does not affect the characterization of the activity for the purposes of the applicability of Article III:2. The latter does not apply to measures relating to the ability of a publisher to market its advertising services. Part V.1 of the Excise Tax Act is beyond the scope of Article III:2 of GATT 1994.

3.56 The United States asserted that neither the plain meaning of the term "indirectly" in Article III:2, nor the limited negotiating history concerning it, supports a restrictive meaning of that term. Rather, the negotiating history reveals that a tax with respect to the processing of a product was one example, but not necessarily the only example, of an "indirect" tax on a product. Advertisements are a substantial feature or component of a magazine as a product, accounting for half or more of the pages of a typical magazine sold in Canada. It is not logical to say, as Canada does, that a tax with respect to inputs - that is to say, things that are consumed in making a product - is a tax directly or indirectly on a product, but a tax that concerns a major feature or component of that actual product is not. If anything, the latter is more directly a tax applied to the product itself. Advertisements affect a magazine's price, cost, and competitive position as much as any input consumed in the production of a product. The carrying of advertisements is, moreover, a major use to which magazines are put. A tax with respect to a substantial use of a product can be viewed as a tax, directly or indirectly, applied to the product.

(ii) Conformity of Part V.I with Article III of GATT 1994

3.57 Canada observed that there is an artificial quality to any attempt to assess how Article III applies to a tax that has never been applied to a foreign product. It has been assumed that the tax does not apply to imported products in view of the maintenance of Tariff Code 9958. Article III:2 requires a comparison of an imported and a domestic product, a comparison that has to remain purely hypothetical in this case. Subject to this observation, Canada provides an alternative argument to be considered in the event the Panel is of the view that Part V.I is a taxation measure that applies to magazines as "goods" and that an examination of the application of Article III of GATT 1994 has to be conducted.

3.58 The United States remarked that, by Canada's own admission, the excise tax applies to imported (as well as domestically produced) magazines. To the extent that the tax had not actually been levied on imported split-runs, it is because those imports had been completely banned by Canada. It is entirely possible that even if there were no import ban the excise tax would still not be levied because the tax is set at such a high level that it would likely discourage producers from marketing imported split-runs in the first place. It is well-settled in GATT that the level of actual imports is not the basis for assessing whether a violation of GATT Article III exists. The 1949 Working Party on Brazilian Internal Taxes stated that the obligations of Article III "were equally applicable whether imports from other contracting parties were substantial, small or non-existent".⁵⁹ This is because the purpose of Article III is not to protect expectations on trade volumes, but rather "expectations on the competitive relationship between imported and domestic products".⁶⁰

3.59 Thus, the plain fact that the excise tax is mandatory legislation that applies by its terms to imported magazines brings it within the purview of Article III. The principle that actual imports are not required is especially appropriate in this case because Canada has banned the relevant imports to which the tax would otherwise apply. A WTO Member cannot use a GATT-inconsistent import prohibition to shield its discriminatory domestic regulations from scrutiny. In the absence of the import prohibition, the excise tax would immediately affect imported split-run magazines. By making imported split-runs prohibitively expensive to sell in Canada, the tax would accomplish what the import ban now does: the absence of imported split-runs in the Canadian market. The effect of this scheme is that dozens of US split-runs would be sold in Canada but for barriers Canada has erected to their sale. This case is not based on Canada's treatment of US publishers' split-run magazines produced in Canada. Such magazines are not imported products within the scope of GATT Article III.

(a) Article III:2, first sentence

Like product issue

3.60 The United States argued that the Canadian excise tax created an artificial distinction between otherwise entirely like products - split run and non-split run magazine editions - based on the extent to which the same or a similar version of the product was sold abroad. The excise tax defines a split-run magazine entirely in terms of its relationship to another magazine sold outside Canada. It is, therefore, impossible to determine whether a magazine is a split-run based simply upon an examination of its physical form, its editorial content, or its advertising content. The fact that a similar edition of a magazine is sold in a country other than Canada does not differentiate the magazine from another magazine in terms of physical characteristics, end-uses, content, advertising, or any other attribute. In fact, the defining characteristic of a split-run magazine under the excise tax - the existence of another magazine sold outside Canada - is an extraneous factor having nothing to do with the character of the split-run itself.

3.61 Canada argued that periodicals with editorial content developed for the Canadian market and split-runs substantially reproducing foreign editorial content are not "like products" within the meaning of Article III:2 and are distinguishable on the basis of their content, the essential characteristic of any magazine. Magazines are distinct from ordinary articles of trade. Magazines are intended, by their very nature, for intellectual consumption as opposed to physical use (like a bicycle) or physical consumption (like food). It follows that the intellectual content of a cultural good such as a magazine must be considered its prime characteristic. Consequently, the "like product" analysis of whether imported split-run magazines share the same characteristics as domestic magazines with editorial content developed for the Canadian market must be approached in terms of intellectual content as opposed to the traditional approach of examining material or physical characteristics. The periodical industry is keenly aware of the importance of editorial content. It is editorial content and its ability to attract readers that determine the ability of a periodical to attract advertising revenues to securing its financial viability.

3.62 Periodicals with editorial content developed for the Canadian market and split-run periodicals envisaged by the legislation are distinct products on the basis of their editorial content. The definition of "split-run edition" reflects this distinction. Editorial material developed for the Canadian market reflects a Canadian perspective and contains specific information of interest to Canadians. The content is qualitatively different from editorial material copied from foreign publications.

3.63 What has been said of the essential properties of magazines is equally applicable to their end-use. The end-use of a magazine is not simply reading; it is the transmission and acquisition of specific information. The information in, for example, a sports magazine, cannot be considered essentially the same as that in a philosophical journal. Any attempt to characterize the "end-use" of products so broadly that they all end up in the same category would deprive this consideration of any real meaning and would run afoul of the principle that the expression "like" in this context is to be narrowly construed.⁶¹

3.64 The United States argued that a distinction of the type Canada had drawn in its excise tax should be inherently suspect under Article III because it is founded on distinctions other than differences between the products being sold in the importing country. In US - Standards for Gasoline, the panel rejected an argument that the US "Gasoline Rule" did not provide less favourable treatment to imported products as compared to like domestic products because it treated similarly situated parties similarly noting that

"in the Malt Beverages case, a tax regulation according less favourable treatment to beer on the basis of the size of the producer was rejected".

and observing that, under the US argument in that case

"imported goods would be exposed to a highly subjective and variable treatment according to extraneous factors. This would thereby create great instability and uncertainty in the conditions of competition as between domestic and imported goods in a manner fundamentally inconsistent with the object and purpose of Article III". ⁶²

3.65 The same concerns about "highly subjective and variable treatment according to extraneous factors" that the panel identified also apply in this case. The "extraneous factors" on which application of Canada's excise tax depends are the existence or non-existence of a product sold in a country other than Canada, and the extent of that product's similarities to, and differences from, the product sold in Canada. The United States described examples that it considered showed how Canada's distinction between split-runs and other magazines produced odd and arbitrary results based on sales of products outside Canada.

3.66 Canada argued that the point is not whether originality could be perceived as such, but whether there was a difference between the two products at issue - the split-run replicating a foreign magazine, on the one hand, and the domestic magazine with original content, on the other. This had nothing to do with "subjective and variable treatment according to extraneous factors" as identified in the panel on US - Standards for Gasoline. It made no difference in terms of product characteristics whether the gasoline was handled by refiners, blenders, or producers. Gasoline was gasoline, but any careful examination would show that content differences between split-runs and original Canadian magazines were characteristics of the products themselves. A recurring theme of the United States argument is that the Canadian legislation is not based upon objective product differences; that it is based on a distinction unrelated to product characteristics. This is said to be the result of a definition that depends entirely on the existence of a foreign companion edition with sales outside Canada. In the words of the United States, this is an extraneous factor that has nothing to do with the character of the split run itself. On the contrary, it has everything to do with the character of the split-run itself. The legislation does not focus on the existence of a so­called companion edition as a factor unrelated to the characteristics of a split-run marketed in Canada. It focuses on the fact that the split-run marketed in Canada is to a substantial degree no more than a reproduction of a foreign edition, with the content characteristics invariably associated with such material. It is not the existence of a foreign companion edition, or sales of that edition outside Canada, that counts. It is the reproduction in the Canadian split-run of content that originated in that foreign edition. Contrary to the United States argument, this is a product characteristic of the split-run magazine. The replication of foreign content is not only an attribute of the split-run - a defining attribute, in fact - it is readily discernible from an examination of the product itself.

3.67 Canada further considered that the United States' approach to like products is necessarily over-broad because it ignores the only basis on which one magazine can be distinguished from another - the content. If magazines are treated as ordinary articles of manufacture, defined only by the fact that they are physically made up of printed paper and staples, then it would obviously have to follow that all magazines are exactly the same. The United States submission even implies when it refers to Canada's tariff item 49.02, that newspapers, journals and periodicals are like goods. This leads to the second basic principle Canada referred to in this connection: that "like product" determinations under Article III.2 are to be made on a case-by-case basis. The reason for proceeding case-by-case is obvious: to avoid over-generalization and a mechanical or automatic transfer of criteria that are suitable in one context to another context where they no longer properly apply. A case-by-case approach is one that takes account of the particular circumstances. It cannot be denied that cultural products are different, that they have their own distinguishing characteristics. By treating them as if they were ordinary items of merchandise trade, the United States has ignored the entire rationale of the case-by-case approach.

3.68 The chief and for all practical purposes the only distinguishing characteristic of a magazine is its content. Content plays a role in the case of cultural products that is analogous to physical properties in the case of ordinary items of trade. Content is what the reader is looking for - the message and not the medium. The end-use of a magazine is the transmission of specific information. A magazine has a utilitarian function - it may be to keep up on current events; to acquire information about specific topics like computers or investments; in some cases, to provide entertainment - but in every case, the function and value of the magazine to the reader is inseparably linked to its specific content or subject matter. The United States' emphasis on physical properties leads inevitably to a lumping together of all magazines as indistinguishable commodities, contrary to the principle of narrow construction and the case-by-case approach. The approach that Canada advocates, giving content the decisive role, does not lead to the opposite extreme. Magazines can easily be classified by type, either broadly or narrowly, on the basis of content. Exactly where the lines are to be drawn can be a matter of judgment, but no more so than in the case of any other like product determination.

3.69 The legislation uses the concept of original material as the defining element - material that is not, to quote the statute, "the same or materially the same as editorial material" in editions that circulate primarily in foreign markets. This criterion of original versus replicated material might seem abstract at first, but in its practical effect it refers to a dividing line that is very easily recognized. Original material means content developed for and aimed at the Canadian market - this means Canadian content in terms of subject matter as opposed to authorship or production. The idea that Canadian content is the same as foreign content is simply not tenable. The events, topics and people covered will be Canadian. They may not be exclusively Canadian, but the balance will be recognizably and even dramatically different than in a replicated foreign publication, where articles on Canada are close to non-existent. Foreign magazines are almost devoid of content dealing with Canada, and what little there is quite logically fails to reflect a Canadian perspective. Even where the topics covered are the same, the perspective will be different. Some of these qualities like "perspective" are admittedly somewhat intangible; but where cultural products are at issue, these assessments cannot be avoided. And they fall well within the legitimate range of the kind of "discretionary judgment" the Appellate Body has identified as inherent in like products determinations for the purposes of Article III - discretionary but not arbitrary. It is the prevailing characteristics of each category that we should look at in determining whether or not publications created for Canada are the same as publications replicated from foreign editions. There may be individual articles that might conceivably have appeared in either type of magazine. Some issues might be more different or less different than others. But the prevailing pattern is what counts. Canadian content and foreign content are significantly different. Local publications deal with local topics. People are preoccupied with their own affairs and communities. Periodicals are the mirror image of those communities. The content of a periodical created for one community will necessarily differ from what is created for another community.

3.70 Further, the only actual magazines the United States has chosen to exhibit in this case are Pulp & Paper,⁶³ which is not a split-run and has no relevance to the Excise Tax Act, Paris Match and The Economist. Paris Match is an imported non-split-run and The Economist is an imported split-run that is exempt from the tax as a North American edition without advertising specifically directed at the Canadian market. None of these magazines is relevant to the comparison between domestic and imported products that has to be made under Article III:2, first sentence. But the evidence is readily available, because there are grand-fathered split-runs in Canada that can be compared with other domestic Canadian magazines. This evidence has been filed by Canada, although Canada does not bear the burden of proof. The evidence consists of Time US, Time Canada and Maclean's - what the United States would call a foreign companion magazine, a split-run that would be taxable without the grandfathering provision, and an original domestic magazine. And the issue, in a nutshell, is whether the last two - Time Canada and Maclean's - are "like" products, having regard to the narrow construction and the case-by-case approach mandated by the Japan - Alcoholic Beverage Appellate ruling.

3.71 Canada's evidence in the form of actual magazines provides typical examples of a split-run in the form of Time Canada, the parent edition in the form of Time US, and a domestic magazine in the form of Maclean's. The proper basis of comparison is of course Maclean's and Time Canada. Almost every article in Maclean's deals with Canada. This is true of the editorial, the letters, the business news, the entertainment coverage, the arts, crime, people, the law, much of the news - everything in fact but the lead international stories covering about 8 out of 88 pages. Next, a comparative look at Time Canada shows that it has practically no reference to Canada or Canadian subject. There are two out of 21 letters from Canadian sources. There is a travel advisory on Montreal, but it turns out to be about an exhibit dedicated to an American landscape architect. The difference between Time Canada and Maclean's is striking. It would escape no reader and no consumer. This is about as typical an example as one could find. These are mainstream, mass circulation magazines. Canada suggests that there is a significant, objective, discernible difference between a split-run and a magazine created with original content for the Canadian market.

3.72 The United States contested Canada's argument that imported split-runs were not like or directly competitive or substitutable with non-split runs because non-split-runs contain original content that is from a Canadian perspective. An examination of the structure of the tax showed this to be false. Moreover, even if this assertion were true it would not form a legitimate basis for distinguishing between otherwise like products. First, by its terms the tax applied or did not apply, to particular magazines irrespective of their editorial "perspective". For example, a magazine published solely for the Canadian market, or that contained no advertising specifically directed at Canadians, automatically avoided the tax regardless of how "foreign" its contents might be. However, the very same magazine became subject to the tax if it had a somewhat different foreign companion edition. Second, the editorial content need not be "original" at all. Rather, a magazine could avoid the tax, but still be identical to what is sold abroad, as long as the publisher did not advertise to Canadians. This suggested that the real basis for the distinction is simply whether the magazine might compete for advertising revenues with purely domestically produced Canadian magazines. That, indeed, is a purpose that Canada did not hide. Finally, even if one could somehow credit Canada's argument that it is seeking through the excise tax to ensure "original content" in magazines sold in Canada this purpose would be equally illegitimate. If GATT permitted governments to require that imported goods be designed exclusively or primarily for their markets, they could easily insulate their markets from the comparative economic advantages of other WTO Members. Such a result would undermine the foundations of international trade.

3.73 The recent Appellate Body report in Japan - Alcoholic Beverages shares the focus of the US - Standards for Gasoline panel report on objective product differences in judging product likeness. There the Appellate Body observed:

"The Report of the Working Party on Border Tax Adjustments, adopted by the CONTRACTING PARTIES in 1970, set out the basic approach for interpreting 'like or similar products' generally in the various provisions of GATT 1947:

...The interpretation of the term should be examined on a case-by-case basis. This would allow a fair assessment in each case of the different elements that constitute a "similar" product. Some criteria were suggested for determining, on a case-by-case basis, whether a product is "similar"; the product's end-uses in a given market; consumers' tastes and habits, which change from country-to-country; the product properties, nature and quality.

This approach was followed in almost all adopted panel reports after Border Tax Adjustments".⁶⁴

The Appellate Body found that the term "like product" in Article III:2, first sentence must be "construed narrowly" in light of the existence of the second sentence of Article III:2 which covered "directly competitive or substitutable" products, and that distinguishing between "like products" and "directly competitive or substitutable" products "is a discretionary decision that must be made [by panels] in considering the various characteristics of the products in individual cases".⁶⁵

3.74 Thus the Appellate Body in Japan - Alcoholic Beverages, like the US - Standards for Gasoline decision, endorsed a case-by-case approach that focused on differences in products, rather than on distinctions based on extraneous factors such as the production method. The illustrative list of like-product factors cited by the Appellate Body - end-uses, the product's properties, and so forth

- are identical for a magazine sold only in Canada and a magazine for which a companion edition is sold abroad. While "like product" in Article III:2, first sentence, must be interpreted narrowly, it cannot be interpreted so narrowly as to permit less favourable treatment based on distinctions between literally identical products depending on whether a companion product is sold in another market. This interpretation would be so narrow as to eliminate "like product" altogether from Article III:2, first sentence.

3.75 Canada considered that the US arguments on the like product issue failed to present any positive evidence that an imported split-run had enough in common with original-content Canadian magazines to allow them to be considered like products. The absence of such evidence is fatal because the United States had the burden of proof. Canada was not suggesting that a magazine had only one attribute. Nor did it back away from the proposition that the assessment had to take into account all the relevant circumstances. But the circumstances had to be weighed and balanced according to their importance, and editorial content was the most important distinguishing feature and was the chief and for all practical purposes the only distinguishing characteristic of a magazine. A magazine is nothing without its content which was what defined the end-use and the value of a magazine to its readers. Treating content as "one attribute among many" as the United States would say, would tend to sweep all or at least very broad classes of magazines into the same category. This would disregard the narrow characterization of like products required by the Appellate Body in Japan - Alcoholic Beverages.

3.76 As the complainant, the United States bears the burden of proving that Canada acted inconsistently with its obligations under Article III:2, first sentence. This is a principle of long standing in GATT jurisprudence. To date the United States has made no effort to discharge this burden. Instead, it has relied upon general allegations and assertions such as the following: "there is no identifiable difference between split-run magazines, on the one hand, and magazines without a companion edition, on the other hand, in terms of their physical characteristics, appearance, uses, tariff classifications, or even editorial content". Such statements do not constitute the empirical evidence required to both substantiate the claim made by the United States that all magazines are the same or that magazines based on local content are the same as magazines replicating foreign content; and to fulfil the burden of proof borne by the United States.

3.77 While Canada also recognized the definition of what constitutes a "like product" by the Working Party on Border Tax Adjustments, it considered that the "like products" test requires a much more sophisticated analysis than that suggested by the United States. The Working Party had concluded that the determination of what constitutes "like products" must be made on a case-by-case basis in order to allow for the consideration of the specific circumstances of each case. In that context the Working Party suggested some criteria: "... the product's end-uses in a given market; consumers' tastes and habits, which change from country to country; the product's properties, nature and quality".⁶⁶ This line of thinking evolved into an established GATT practice and was recently reaffirmed by the panel in US - Standards for Gasoline.

3.78 The United States considered that with Canada's argument - that the US like product analysis is incomplete because it relies solely on the physical characteristics of magazines, and ignores their editorial content - Canada appears to concede that there is no other basis to consider split-run magazines and other magazines to be "unlike" based on the specific criteria established by the Appellate Body in Japan - Alcoholic Beverages. By focusing solely on "editorial content", Canada ignores the Appellate Body's instruction that the analysis of "like product" must take into account "the various characteristics of products in individual cases".⁶⁷ Editorial content is only one attribute of a magazine, among many. The type, texture, colour, thickness, and even the perfume, of the paper can be important factors to market appeal. The dimensions of the magazine, the manner in which its pages are bound, the typesetting, and the appearance of the ink, can also be significant. The type, appearance, and frequency of advertisements may be a factor in a consumer's purchasing decision as well. Readers may purchase a magazine in part for the information its advertisements contain about where and how to purchase products or services locally. All of these attributes - including editorial content - combine to form an overall package that a consumer may or may not be attracted to. For the Canadian and US magazine industries, editorial content generally represents substantially less than 20 per cent of the cost of producing a consumer magazine.

3.79 Even if one were to examine editorial content in isolation, Canada's argument that magazines can be differentiated solely according to the percentage of "original" versus "non-original" editorial content they contain is untenable. There simply is no readily identifiable difference in actual editorial content between what the excise tax deems to be "original" and "non-original" content. That is because the distinction drawn by the excise tax is not based on the specific contents of magazines distributed in Canada but simply on whether those contents are used in magazines distributed abroad. A magazine reader in Canada cannot discern whether a magazine is "original" or not based on an examination of the magazine's contents, and thus could not be expected to consider "non-original" magazines to be any different from "original" magazines. For purposes of consumer use - as well as use by advertisers

- magazines are judged by what they themselves offer, not by what a companion edition may contain.

3.80 In fact, Canada's "original content" requirement is not really meant to ensure that magazines sold in Canada have any particular type of content. Rather, it is meant to ensure that one type of production method - regional or split-runs - cannot be employed for magazines sold in the Canadian market. A distinction drawn to favour one type of production method has obvious protectionist implications and is not one that GATT should countenance for distinguishing between otherwise-like products.

3.81 Further, Canada's argument that split-runs usually differ from magazines sold only in Canada with respect to the perspective and orientation of their editorial content is legally irrelevant. A panel must assess the distinction that a measure actually draws, not a distinction a measure might have drawn but does not. In this case, to the extent the excise tax concerns content, it differentiates between magazines whose content is contained in a product sold in another country and magazines whose content is sold only in Canada. Thus, the excise tax simply does not differentiate between content based on its Canadian focus or perspective. Application of the excise tax does not turn merely on a magazine's "originality". A magazine distributed both inside and outside Canada becomes subject to the tax based solely on the inclusion of a single advertisement that is not identical in both editions. The very same magazine whose several editions do not differ in advertising is not taxed. Canada has advanced no basis for distinguishing between magazines based on the type of advertisements they contain.

3.82 For example, a science magazine escapes from the tax even if it contains absolutely no articles about Canadian scientists or Canadian scientific research so long as it is not sold outside Canada. The very same magazine would be subject to the tax if it is sold both in Canada and abroad and contained an advertisement that differed between the version sold in Canada and the version sold abroad. Yet the same magazine would not be subject to the tax if it is sold both inside and outside Canada but did not contain such an advertisement. Thus, the excise tax does not, in fact, distinguish between magazines based on their editorial content, let alone based on the orientation of the content. Rather, it applies based on factors related to whether a magazine was produced for more than one market, and advertising content. Article III:2 does not permit governments to distinguish between otherwise like products based on such business and trade factors.

3.83 With regard to the Canadian assertion that the US analysis of like product with respect to the excise tax is unacceptably general and would necessarily lead to the conclusion that all magazines are the same like product, regardless of content, the Appellate Body made clear in Japan - Alcoholic Beverages that product likeness for purposes of Article III must be addressed on a case-by-case basis and in the light of all relevant circumstances. Thus, no sweeping once-and-for-all product likeness determinations are appropriate for magazines or other products. The distinction between "original" and "non-original" content was not based on objective content differences, or any differences at all, based on a comparison of products sold in Canada. Whether or not distinctions may ever properly be drawn between magazines based on their editorial content is not an issue that is before this Panel. The excise tax distinguishes between products based on whether a similar product is sold abroad, not on objective content differences between products being sold in Canada.

3.84 Canada argues that because magazines contain intellectual or cultural content, they should receive unique treatment under GATT. Many products, as diverse as works of art, designer clothing, phonograph records and cinematographic films contain intellectual or cultural content. Like magazines, these products were in widespread use prior to the adoption of GATT 1947. But of these products, only cinematographic films were accorded special treatment in GATT 1947. Had the drafters of GATT 1947 sought to treat other intellectual or cultural products differently from products in general, they would have done so.

3.85 Canada argued that the United States insists that it is impossible to determine whether a magazine is a split-run simply upon an examination of its physical form, its editorial content, or its advertising. This simply misses the point. A casual reader might not in fact know whether a magazine is a split-run or simply an imported foreign magazine. There might be practically no difference between the two. Time US and Time Canada are very close. But that basis of comparison is irrelevant, because the comparison is not between imported magazines and imported magazines. The comparison is between imported split-run with the domestic magazine -Time Canada and MacLean's. And here the reader would have no difficulty in seeing that the two are very different products, offering completely different benefits to the prospective reader. The point, in sum, is not whether a split-run can be identified as such by the consumer. It is whether it can be identified as a significantly different product when compared to a domestic magazine that is not a split-run.

3.86 The United States makes the same point when it says a magazine reader in Canada cannot discern whether a magazine is original or not, based on an examination of the magazine's contents, and thus could not be expected to consider non­original magazines to be any different from original magazines. This is based on the same misperception. The point is not whether originality can be perceived as such, but whether there is a difference between the two products at issue - the split-run replicating a foreign magazine, on the one hand, and the domestic magazine with original content, on the other. And nothing the United States has said casts any doubt on the proposition that difference would be obvious to any reader. This has nothing to do with subjective and variable treatment according to extraneous factors, as identified in the panel report on US - Standards for Gasoline. That situation obviously had nothing to do with objective product differences. It makes no difference in terms of product characteristics whether the gasoline is handled by refiners, blenders, or producers, or what data these various companies are likely to hold. Gasoline is gasoline, but any careful examination will show that content differences between split-runs and original Canadian magazines are characteristics of the products themselves.

3.87 At some points the United States refers to split-runs as a production method. In fact it is not a production method, it is a specific type of magazine. The United States says that a distinction drawn to favour one production method over another has protectionist implications that GATT should not countenance. This reflects a passage of the United States - Measures Affecting Alcoholic and Malt Beverages ("US - Malt Beverages") decision that was specifically overruled in Japan - Alcoholic Beverages.⁶⁸ In any event, it mischaracterizes the legislation, which distinguishes not on the basis of production method but of product content. The United States argument on like products is based on a highly abstract reading of the Canadian legislation taken out of its real­world context. It is based in fact on a refusal to take account of the effect of the distinction between original and reproduced content on which the legislation is based. But it is only on the basis of the effect of the distinction that one can determine whether in fact the legislation has the effect of taxing imported products in excess of like domestic products.

3.88 Canada noted the United States' contention that Canadian content or Canadian perspective are legally irrelevant, and that a panel must assess the distinction a measure actually draws, not a distinction it might have drawn but does not. In fact, the point is to assess what the legislation actually does - not simply what it says but what it does. It is obvious that the basis of the legislation - content reproduced from foreign sources - has concrete effects. These are effects that any reader can see - from the stories, the people, the subjects and - indeed - the perspective. They determine the character and the subject matter of the publication. The suggestion that these are not objective, visible product differences makes no sense. When the United States says that the nature of the content is irrelevant because that is not the distinction the legislation actually draws, they are asking the Panel simply to close its eyes to the actual operation and effect of the legislation in a real­world context. The implication is that one should look at the form, not the substance; that the assessment should be in the abstract and that the concrete effect should be ignored. None of this makes sense in the context of Article III:2, first sentence, which requires a finding of excess taxation in fact. One of the reasons why Canadian magazines do not sell well in the US market is precisely that they have a different content, content designed for Canadians. The American public is not attracted to this content. If American consumers can recognize the difference between an American and a Canadian magazine, surely Canadians can recognize it just as easily.

TO CONTINUE WITH CANADA - CERTAIN MEASURES CONCERNING PERIODICALS

⁵⁴ Task Force Report at vi, 64 .

⁵⁵ Commons Debates at 14790, Sept. 25, 1995 (emphasis added).

⁵⁶ House of Commons Passes Bill C-103, News Release, Department of Canadian Heritage, Nov. 3, 1995 at 2 (emphasis added).

⁵⁷ EPCT/A/PV/9 at 19; and EPCT/W/181 at 3.

⁵⁸ Panel Report on Japan - Customs Duties, Taxes and Labelling Practices on Imported Wines and Alcoholic Beverages, adopted on 10 November 1987, BISD 34S/83 at 118, para. 5.8.

⁵⁹ The 1949 Working Party on Brazilian Internal Taxes, adopted on 31 June 1949, BISD II/181, 185, para. 16 .

⁶⁰ Panel Report on United States - Taxes on Petroleum and Certain Imported Substances, adopted on 17 June 1987, BISD 34S/136, 158, para. 5.1.9.

⁶¹ Appellate Body Report on Japan - Taxes on Alcoholic Beverages, adopted 11 July 1996, WT/DS8/R, WT/DS10/R and WT/DS11/R .

⁶² United States - Standards for Reformulated and Conventional Gasoline, op. cit., paras. 6.11-6.12 (emphasis added). The United States added that in United States - Taxes on Automobiles, DS31/R (29 Sept. 1994, unadopted), the panel (para. 5.55) found that "Article III:4 does not permit treatment of an imported product less favourable than that accorded to a like domestic product, based on factors not directly relating to the product as such. The Panel found therefore that, to the extent that treatment under the CAFE measure was based on factors relating to the control or ownership of producers/importers, it could not in accordance with Article III:4 be applied in a manner that also accorded less favourable treatment to products of foreign origin" (emphasis added).

⁶³ Referred to in paragraph 3.91.

⁶⁴ Appellate Body Report on Japan - Taxes on Alcoholic Beverages, op. cit.,at 20.

⁶⁵ Ibid., at 21 (emphasis added).

⁶⁶ Border Tax Adjustments (Report of the Working Party adopted on 2 December 1970), BISD 18S/97.

⁶⁷ Appellate Body Report on Japan - Taxes on Alcoholic Beverages, op. cit., at 21 (emphasis added).

⁶⁸ Panel Report on United States - Measures Affecting Alcoholic and Malt Beverages, adopted on 19 June 1992, BISD 39S/274, para. 5.25.