3.89 The United States asserted that the terms of the excise tax itself define the distinction Canada has drawn and this is what is at issue in this case. An analysis of the way the tax is structured shows the two to be like products. Canada's claim that the United States had failed to produce evidence of imported split-runs ignores the fact that Canada has banned imported split-runs. Canada could not, on the one hand, ban the relevant imported product, then argue on the other hand that there are no "real-life" examples of how that (banned) product is actually similar to domestic products, or actually competes. In fact, Canada's own example - Time Canada and Maclean's - does not involve an imported split-run magazine. Moreover, one simply could not say that the concrete effects of the terms of the excise tax are to separate out imported split-runs (of which there are none) that have no Canadian content from domestic non-split-runs that do.

3.90 In the US - Section 337 panel report, the panel stated that it "had to assess whether or not Section 337 may lead to the application to imported products of treatment less favourable than that accorded to products of the United States [i.e. domestic] origin. It noted that this approach is in accordance with previous practice of the Contracting Parties in applying Article III, which has been to base their decisions on the distinctions made by the laws, regulations or requirements themselves and on their potential impact, rather than on the actual consequences for specific imported products" (emphasis added). In this case, the excise tax law itself did not distinguish between editorial content that is about Canada and editorial content that is not, but is instead based on the existence or non-existence of a similar product in a foreign country, and on advertising.

3.91 The United States questioned the necessity for specific product examples in light of this analysis of the US - Section 337 panel report and Canada's longstanding import ban. The United States argued that while there were no specific examples of imported split-runs because none exist; should the Panel find specific examples relevant, a useful comparison to demonstrate the "likeness" of imported and Canadian-produced magazines exists between a US (non-split-run) magazine, Pulp & Paper, and Pulp & Paper Canada, a Canadian magazine unconnected to Pulp & Paper (US). The two publications have substantially similar editorial content and subject matter - pulp and paper technology, products, processes and marketing. Both contain a number of technical reports on various paper and pulp subjects that have little, if any, connection with particular paper and pulp operations in either Canada or the United States. Both contain information about paper and pulp operations and statistics in both Canada and the United States. Both contain a wide variety of advertisements from suppliers of products and services directly related to the pulp and paper products. Both contain classified advertising sections, and both contain an advertisers' index. Only a handful of pages out of the 78 pages in Pulp & Paper Canada were devoted to exclusively Canadian pulp and paper, and the vast majority of the publication consists of advertisements and feature articles that did not focus specifically on Canadian production or issues. Moreover, a Canadian paper industry publication reader study conducted by an independent advertising agency indicated that the two magazines have comparable readership and that readers use these magazines for the same purposes such as product information and mill news. Based on these and other similarities, the United States argued there can be no doubt that Pulp & Paper Canada is "like" Pulp & Paper (US). The United States further argued that these examples also show the importance of advertisements to the usefulness and appeal of magazines as products. The ads in the pulp and paper magazines are so obviously highly useful to those in the pulp and paper business. Both the Canadian and the US publications go so far as to contain an advertisement directory so that readers can more readily access pertinent advertisements.

3.92 In response to Canada's reliance on the editorial content of the Time Canada and Maclean's, the United States argued that this editorial content does not show that split-run and non-split-run magazines are not like products. First, one example out of over 1,000 magazines sold in Canada hardly proves the point. The fact is that, under the terms of the excise tax, a non-split-run magazine need not contain any "Canadian" editorial content, as long as the content is not sold outside Canada, or the advertisements in the Canadian and foreign editions are identical. Second, even as to these two magazines, Canada ignores the similarities between the two products, in terms of all factors other than Canadian focus. Indeed, the similarities are so great - including with respect to subject matter - that the two magazines were recognized to be direct competitors by industry witnesses in testimony before a Canadian Senate committee.⁶⁹

3.93 The United States considered that Canada sought to minimize the significance of the fact that its WTO tariff commitments did not distinguish between split-runs and non-split runs. Canada's relevant tariff binding also includes newspapers, which are obviously not like products. However, the fact that Canada's tariff binding reflects the single Harmonized System (HS) heading for all magazines does provide support for a finding that split-runs and non-split-runs are the same like product. The Appellate Body in Japan - Alcoholic Beverages stated that, while broad GATT tariff bindings that cut across HS headings may not be useful to determine product likeness, GATT 1947 practice has looked to similar categorization in the HS itself in determining like product:

"Uniform classification in tariff nomenclatures based on the Harmonized System (the 'HS') was recognized in GATT 1947 practice as providing a useful basis for confirming 'likeness' in products. However, there is a major difference between tariff classification nomenclature and tariff bindings or concessions made by Members of the WTO under Article II of GATT 1994. There are risks in using tariff bindings that are too broad as a measure of product 'likeness'.... Many of [the] least-developed countries, as well as other developing countries, have bindings in their schedules which include broad ranges of products that cut across several different HS tariff headings . . .".⁷⁰

3.94 Thus, the Appellate Body distinguished between the situation in which products fell within common HS categories, and the situation in which a Member made broad tariff bindings that cut across multiple HS categories. In this case, all periodicals, whether split-run or not, and whether or not they contain advertising, are included within the same HS category: HS 49.02. The fact that the distinction Canada is drawing in this case is not one reflected in the HS supports our claim that split-runs and non-split-runs are the same like product.

3.95 With regard to the Canadian argument that implementation of its import ban through a provision in its tariff code is proof that there are differences in tariff classification between split-runs and non-split-runs, the Appellate Body in Japan - Alcoholic Beverages referred to universally-accepted HS nomenclature, not to one Member's protectionist restrictions that happen to find themselves in that Member's "Customs Tariff". The reason why it was practice under GATT 1947 to look to HS nomenclature is because it generally reflects an objective assessment of the intrinsic similarity of products. As far as the United States knew, Canada is unique in drawing lines (in a "tariff-related" provision or elsewhere) based on an artificial distinction such as "split-run" versus "non-split-run". Thus, the Panel should reject Canada's effort to be rewarded for its import ban, and find that the common HS classification of split-runs and non-split-runs provides additional support for a finding that split-runs and non-split-runs are the same like product.

3.96 Canada considered that the US reference to the Canadian tariff classification in heading 49.02 had the effect of sweeping not only all periodicals, but newspapers as well into a single very comprehensive classification. The inappropriateness of this kind of result was pointed out by the Appellate Body in its recent decision on Japan - Alcoholic Beverages, when it said that "tariff bindings that include a wide range of products are not a reliable criterion for determining or confirming product "likeness" under Article III:2".⁷¹ The use of tariff classifications in this case is especially inappropriate. The categories of products listed under tariff item 49.02 are as diverse as periodicals and newspapers. Where the policy framework relates to periodicals and their intellectual content, the argument that the two media are "like" would be difficult to sustain. Tariff Code 9958 has effectively carved split-runs out of the general tariff classification; it has been in effect for over 30 years, through several GATT rounds, including the most recent Uruguay Round. The de facto exclusion of split-runs from the general tariff classification means at the very least that the US position can derive no support from tariff classification.

3.97 With respect to the support the United States seeks in the HS category, the fact is that this classification is far too broad to serve as a basis for identifying like products. Surely the fundamental point in the Appellate Body decision is that any very broad tariff classification is inappropriate, whether it is based on the HS or on tariff bindings. The short answer to the United States argument based on the common HS classification is that, at least in the case of this category, it is far too broad. It puts all magazines and all newspapers into a single global grouping. It also has the practical effect of making editorial content irrelevant. In the circumstances of this case, the use of tariff classifications is inconsistent with the requirement stipulated by the Appellate Body that "like products" under Article III:2, first sentence, should be narrowly construed.

Discrimination

3.98 Canada considered that the first sentence of Article III:2 speaks of products "imported into the territory" of a contracting party, and it deals with tax discrimination against imported products. There is no such discrimination on the facts of this case. To get around this difficulty, the United States has introduced the notion of "foreign-based" split-runs meaning periodicals produced in Canada but replicating foreign editorial content. This is a concept that simply has no legal meaning in the context of Article III:2. If the product is domestically produced, and is not physically moved across the border, it is not an imported product. And if there is no imported product, then there is nothing to which Article III can apply. But even if there were imported split-runs on the Canadian market, the absence of discrimination would be clear. Some imported magazines might attract the tax, but not to any greater extent than the domestically produced split-runs which were and remain the primary object of the legislation. For this reason, the measure is consistent with Article III:2 on its face and in its operation and practical effect. There is no reason why a measure that is non-discriminatory in both form and effect - de jure and de facto - should be considered inconsistent with Article III:2.

3.99 As the Appellate Body has observed in US - Standards for Gasoline in connection with Article III:4 that where there is "identity of treatment - constituting real, not merely formal, equality of treatment ... it is difficult to see how inconsistency would have arisen in the first place". The same conclusion is equally valid here. That the tax is free from any taint of overt discrimination is clear from the terms of the legislation, which make no distinction between domestic and imported products. Canada provided an example of the Canadian-owned magazine, Harrowsmith Country Life. Before the adoption of Part V.1, this magazine had two editions - a Canadian edition and a US edition. The Canadian and the US editions had different advertisements and a certain amount of common editorial content. Because more than 20 per cent of the editorial content in the Canadian edition was the same as that in the US edition, the tax would have applied to the Canadian edition (even if the editorial content was entirely produced in Canada). As a result of the excise tax, Harrowsmith Country Life stopped publishing its US edition. It could hardly be suggested that the tax is discriminatory in its practical operation, since it was designed to prevent the production in Canada of split-runs.

3.100 The Appellate Body on Japan - Alcoholic Beverages⁷² held that where imported products are taxed in excess of "like domestic products", the general principle set out in Article III:1 may be assumed to have been violated. There is consequently no need to apply that principle as a "separate test" in order to find an inconsistency with Article III:2, first sentence. The Appellate Body has thus established a balance in the interpretation of Article III:2. The concept of "like products" is to be very narrowly construed, on a case-by-case basis in a way that requires "discretionary judgment"; but once the determination is made, excess taxation of imported products entails a violation without any need to conduct a further inquiry under paragraph 1. The essential elements of the interpretation of this provision have thus been authoritatively identified.

3.101 One question, however, was not addressed in the recent decision: whether taxation of imported products "in excess of" like products is to be determined in terms of classes of products, or whether any single instance of differential taxation creates an automatic per se violation even when it results from fiscal classifications that are not themselves discriminatory in form or in fact. The answer is clear both from the wording of Article III:2, first sentence, and from the object and purpose of Article III as a whole, which is the prevention of discrimination against imported products. The use of the plural in referring to "imported products" and "like domestic products" indicates clearly that the concern is with classes of products, not with the isolated instances of differential taxation that necessarily result when product "A" is taxed at a different rate than product "B" because it happens to fall into a different, but non-discriminatory, fiscal classification.

3.102 This interpretation also seems necessary to create a workable rule. Article III:2 is not intended to impose fiscal harmonization in rates, methods or classifications. It therefore remains not only possible but inevitable that domestic fiscal classifications may in certain instances have the effect of subdividing or straddling "like product" categories, or otherwise crossing "like product" category lines. Since fiscal classifications have no other purpose than to allow differences in tax treatment, any such classifications that failed to correspond precisely to "like product" categories under Article III:2, first sentence, would automatically lead to a violation. Quite apart from imposing a degree of harmonization that goes beyond the language or the purpose of this provision, such an interpretation would lead to an intolerable unpredictability so long as "like product" determinations are to be made on a case-by-case basis, as the recent decision has reaffirmed.

3.103 It could also lead, paradoxically, to results that would make nonsense of the Appellate Body's assumption that excess taxation under Article III:2 automatically entails a departure from the general principles in Article III:1; and that would in fact make nonsense of the underlying purpose of Article III. It could lead to situations where fiscal classifications decisively favouring imported products would be considered inconsistent with the first sentence of Article III:2, so long as the tax classification attracting the higher rate contained at least some imported products. It makes no sense to say that Article III is automatically violated in any case where tax differences result from domestic classifications that are "origin-neutral" in form and that might even favour imported products in effect - as might well be true of the tax at issue here. A particular instance of differential taxation in such circumstances should not create a per se violation, absent a discriminatory effect or cause to believe such an effect to be probable.

3.104 The United States considered that the Canadian argument that under Article III:2, first sentence, a "single" or "particular" instance of higher taxation of a certain subset of a broader category of imported like products "should not create a per se violation, absent a discriminatory effect or cause to believe such an effect to be probable", meritless for a number of reasons. First, the United States is not confronted with a mere "single" or "particular" instance of higher taxation of imported products than domestic like products in this case. Rather, a broad group of imported products - split-run magazines

- is taxed at higher, not lower, rates than a broad group of like Canadian products - non-split run magazines. Canada has neither defined nor identified what it considers to be a "single instance" of discriminatory treatment in the context of this case.

3.106 The United States considered that Canada's argument that, in the absence of such a "discriminatory effect" test, a scheme that, overall, favoured imports over domestic products, might be found to violate Article III:2, first sentence, suggested that less favourable treatment of certain imported products could be counterbalanced by more favourable treatment of others. The US - Section 337 panel decisively rejected any such "balancing" of less-favourable and more-favourable treatment, observing that "such an interpretation would lead to great uncertainty about the conditions of competition between imported and domestic products and thus defeat the purpose of Article III".⁷³ Similarly, in the panel report on US - Malt Beverages report, the panel observed that "Article III...requires treatment of imported products no less favourable than that accorded to the most-favoured domestic products".⁷⁴ Thus, the fact that imported and domestic split-run magazines receive the same tax treatment is irrelevant. Rather, the fact that imported split run magazines are taxed more heavily than like domestic non-split-run magazines establishes the requisite higher taxation under Article III:2, first sentence.

3.107 According to the United States, the fact that Article III:2 is phrased in terms of "products" does not mean that tax discrimination with respect to one product is outside the scope of Article III:2, or that such discrimination would be GATT-consistent as long as it is restricted to one product. In this case the drafters clearly intended non difference between the treatment of the plural and the treatment of the singular. This fact is confirmed by the drafting of the Note Ad Article III (which refers to the "like domestic product" and the "imported product") and Article III:3, a special case of application of Article III:2 which refers to the "taxed product". The 1970 Working Party report on Border Tax Adjustments, which is often referred to in this connection, uses the singular and plural forms in free variation. It is not necessary to demonstrate that all imported magazines are taxed more heavily than all domestic like magazines, or even that the average tax on all imported magazines is higher than the average tax on all like domestic magazines.

3.108 Finally, Canada's proposed "discriminatory effect" test appears to be based on predictions of the level of future trade flows. It is well-established that Article III is not designed to protect expectations of relative trade flows, but rather to ensure equal competitive conditions for imported products. Moreover, in this case, the type of effects analysis Canada suggests would be impossible. There is no basis for judging future levels of split-run magazine imports because Canada has completely eliminated them from its market for the last 30 years. Given its GATT-inconsistent ban, Canada should not be permitted to defend the excise tax on grounds that a small volume of imports would be subject to it.

3.109 Canada responded that its interpretation of discrimination under Article III:2 would not require any overall balancing test as the United States stated. It would not require prediction of trade flows and is not an aim-and-effect test in another guise. It says only that if the fiscal categories of a contracting party are origin-neutral and exhibit no inherent bias against imported products, then the mere existence of such categories, with differential rates of taxation, does not violate Article III:2. A simplified example illustrates this point. Suppose raspberries are taxed higher than strawberries, and that all red berries are determined to be like products. Under the Canadian view, there is no violation if the two categories apply to both imported and domestic products and there is no inherent bias against imported products. The United States would say there is a violation because a box of imported raspberries is taxed higher than a box of domestic strawberries. This is accurate only if a single instance of differential taxation creates a violation. Canada submits that there is no violation because imported products as a class are not being subjected to excess taxation over domestic products. The US interpretation leads to results that are close to absurd and would not reflect the language of Article III:2, first sentence, in particular the use of the plural, nor its object and purpose which is non-discrimination or more specifically to protect expectations of the competitive relationship between imported and domestic products. Further, in the Japan - Alcoholic Beverages case, it is clear from paragraph 5.19 of the report that the panel based its findings on the assumption that shochu was largely a domestic product.

3.110 The United States responded that Canada's attempt to distinguish this case from the Japan -Alcoholic Beverages case based on the fact that most shochu was produced domestically in Japan, while in this case one could not show that split-run magazines have a comparable import focus, is inappropriate. Canada has banned the relevant imports. Of course there is no preponderance of imported split-run magazines over domestic split-runs. There is also no basis for judging future levels of split-run magazine imports because Canada has completely eliminated them from its market for the last 30 years. Given its GATT-inconsistent ban, Canada should not be permitted to defend the excise tax on grounds that a small amount of imports would be subject to it, or that a small percentage of split-run magazines would be imported. Moreover, the United States contested Canada's claims that the US argument would prevent differential taxation of strawberries and raspberries, if the two fruits were found to be like products. In fact, the distinction the excise tax draws is not analogous to distinguishing between raspberries and strawberries (which are different fruits), but is instead analogous to distinguishing between raspberries and raspberries. Specifically, it is analogous to distinguishing between raspberries produced in fields whose harvest is sold only in one country, and raspberries produced in fields whose harvest is sold in multiple countries.

(b) Article III:2, second sentence

Directly competitive or substitutable

3.111 The United States argued that in the event the Panel does not find split-runs and non-split-runs to be "like products" for purposes of Article III:2, first sentence, it should find them to be "directly competitive or substitutable" products within the meaning of Article III:2, second sentence, of GATT 1994. The Appellate Body in Japan - Alcoholic Beverages provided that, in assessing an allegation of a violation of Article III:2, second sentence, one must examine whether:

"(1) the imported products and the domestic products are "directly competitive or substitutable products" which are in competition with each other;

(2) the directly competitive or substitutable imported and domestic products are "not similarly taxed"; and

(3) the dissimilar taxation of the directly competitive or substitutable imported [and] domestic products is "applied . . . so as to afford protection to domestic production".⁷⁵

Canada has not challenged the fact that split-runs and non-split runs are "not similarly taxed". The 80 per cent tax applies solely to split-runs. Split-runs and non-split runs are "directly competitive or substitutable", and the excise tax is "applied so as to afford protection to domestic production". Thus, the excise tax violates Article III:2, second sentence.

3.112 The Appellate Body in Japan - Alcoholic Beverages indicated that "directly competitive or substitutable" products was a "broader category" of products than "like products" in Article III:2.⁷⁶ The Appellate Body observed that it was appropriate to examine such factors as physical characteristics, common end-uses, tariff classifications, and the "market place", but that the "decisive criterion" in determining whether products were directly competitive or substitutable was "common end-uses".⁷⁷ Split-runs and non-split runs compete in the Canadian market and have common end-uses. Magazines covering the same general subject matter - e.g., current events magazines, hobby magazines, technical journals - compete with each other whether or not they are split-runs. Whether a magazine is split-run or not cannot be determined simply by examining the magazine, but is based, instead, on how similar the magazine is to a magazine sold outside Canada in another country. Split-runs, as defined by the excise tax, do not differ from other magazines in any way related to their ability to compete with other magazines. Indeed, the excise tax is applied precisely, and solely, because split-runs compete with wholly domestically produced magazines for readers and advertising. As discussed above with respect to the issue of like product, the distinction between split-runs and other magazines is not based on content. Even if one could somehow credit Canada's assertion that the content of non-split-runs has more of a "Canadian perspective" than split-runs, this distinction could not possibly be considered a different "end-use".

3.113 Canada argued that split-run edition periodicals are not "directly competitive with or substitutable for" periodicals with editorial content developed for the Canadian market. Although they may be substitutable advertising vehicles, they are not competitive or substitutable information vehicles. Moreover, as mentioned above, the excise tax on advertising contained in split-run editions was not introduced so as to protect the Canadian production of periodicals and it does not have this effect. Rather, it was adopted to prevent an unfair practice in the advertising service sector. Under the second sentence of Article III:2 and the Ad Article III, Paragraph 2, the complaining party must demonstrate that a tax is being applied to imported products or domestic products that are "directly competitive or substitutable" and that the tax is being applied "in such a way as to protect domestic production". The complainant bears the burden of proof. The United States must therefore demonstrate that split-run edition periodicals and periodicals with editorial content developed for the Canadian market are competitive or substitutable products, and that the Parliament of Canada imposed the 80 per cent tax on split-run edition periodicals in order to protect Canadian production of periodicals which are not split-run editions.

3.114 The interpretation of this phrase shares many characteristics with the interpretation of "like products". A case-by-case approach is required here as well - in other words, an interpretation that takes account of all the relevant circumstances, and in particular the unique characteristics of cultural products. It's also a multi-factorial analysis, as it is for like products as well - no single test is decisive. To a significant extent, one takes account of all the factors that go into a like products determination, including properties and end-uses. Because of this common ground, many of the points Canada has made in the context of like products, and how the concept has to be adapted to reflect the special nature of cultural products, are also relevant here.

3.115 Canada noted the United States' unsubstantiated assertion that split-runs and other magazines clearly compete with each other. They do of course compete for the advertising dollar because a split-run recycling foreign content offers a far cheaper vehicle. But competition for advertising is not the issue and is not subject to GATT 1994 disciplines. The only legitimate focus is competition in the consumer marketplace. And the United States has not demonstrated, as it is required to do, that the products at issue are competitive or substitutable, or that they meet the threshold test implied by the word "directly". Substitution implies interchangeability. Once content is accepted as relevant it seems obvious that magazines created for different markets are not interchangeable. They are not substitutes, and certainly not direct substitutes. They serve different end-uses. Canadian periodical consumers have a demand for periodicals containing information that specifically addresses their interests. Canadian magazines contain information developed for and directed to the interests of Canadian consumers over a broad range of genres. Split-runs and magazines with editorial material developed for the Canadian market cannot be considered direct substitutes as information vehicles; and for the same reason they are not in direct competition. Ultimately, of course, there may be some degree of competition for disposable income between all cultural products and all luxury products - for everything beyond the necessities of life - but this is far too remote. It is not direct competition and it does not therefore fall within the rule. There would not be 1440 different magazine titles produced in Canada alone if the products were directly substitutable, or directly competitive, in the sense contemplated by the Ad Article to Article III:2.

3.116 Without embarking on an exercise in economic analysis, there are important respects in which price and demand comparisons are more complicated in the case of magazines and other cultural products than in the case of ordinary commodities. It is not the same as comparing consumer behaviour in response to price changes on a bottle of shochu and a bottle of vodka. There are too many qualitative differences in the case of magazines. To give one example, if the ratio of editorial content to advertisements decreases this can be the same as a price increase. That is a fairly objective, measurable variation, but other qualitative differences of equal importance can also have an effect tantamount to a price change - the quality of the content, the attractiveness of the graphics, the intrinsic interest of the articles.

3.117 The United States considered that the very existence of the tax was itself proof of competition of split-runs and non-split-runs in the market. Canada would not have gone to such extraordinary lengths to keep split-runs out of its market if they did not compete with other magazines in the Canadian market. As Canada itself has acknowledged, split-runs compete with wholly, domestically produced magazines for advertising revenue, which demonstrates that they compete for the same readers. The only reason firms place advertisements in magazines is to reach readers. A firm would consider split-runs to be an acceptable advertising alternative to non-split-runs only if that firm had some reason to believe that the split-run products themselves would be an acceptable alternative to non-split-runs in the eyes of readers. According to the United States, Canada acknowledges that "[r]eaders attract advertisers", and that: "The Canadian publishers are ready to compete with magazines published all over the world in order to keep their readers, but the competition is fierce".

3.118 The Report of the Task Force on the Canadian Magazine Industry provides further acknowledgment of the substitutability of magazines produced for the Canadian market and other magazines:

"[Canadian publishers'] English-language consumer magazines face significant competition for sales from imported consumer magazines. In large measure, this is because the majority of the magazines are from the United States and are a close substitute. ...It is reasonable to expect that the content of American magazines will be of interest to Canadians...".

This report also observes that "there is considerable price competition" on newsstands between domestic and imported magazines",⁷⁸ and that:

"the initial effect of the entry of Canadian regional editions of foreign magazines into the Canadian advertising market would be a loss of advertising pages in Canadian publications offering advertisers a readership with similar demographics".⁷⁹

Minister of Canadian Heritage the Honourable Michel Dupuy described the situation as follows:

"Canadians are much more interested in American daily life, be it political or sports life or any other kind, than vice versa. Therefore, the reality of the situation is that we must protect ourselves against split-runs coming from foreign countries and, in particular, from the United States".⁸⁰

Canadian Government officials have repeatedly acknowledged outside this proceeding the close substitutability and competitiveness of split-run and non-split-run magazines. Canada affirmed this fact where it refers to domestic and imported magazines competing for readers. Furthermore, Canada admits that split-run and non-split-run magazines compete for advertising; this itself demonstrates that the two are directly competitive and substitutable, since carrying advertising is a principal to which magazines are put.

3.119 Canada argued that the US reference to the Task Force in the preceding paragraph does not look into the supporting evidence. The evidence before the Task Force, on which its conclusions were at least partially based, was a study by the economist Leigh Anderson⁸¹ which states:

"US magazines can probably provide a reasonable substitute for Canadian magazines in their capacity as an advertising medium, although some advertisers may be better served by a Canadian vehicle. In many instances however, they would provide a very poor substitute as an entertainment and communication medium".

So as to afford protection to domestic production

3.120 The United States argued that the excise tax is applied so as to afford protection to Canadian magazine publishers. In Japan - Alcoholic Beverages, the Appellate Body indicated that proof of protective intent is not required in order to establish a violation of the second sentence of Article III:2, and that the issue is "how the measure in question is applied":

"Although it is true that the aim of a measure may not be easily discerned, nevertheless its protective application can most often be discerned from the design, the architecture, and the revealing structure of a measure. The very magnitude of the dissimilar taxation in a particular case may be evidence of such a protective application, as the panel rightly concluded in this case. Most often, there will be other factors to be considered as well ...".⁸²

3.122 Canada argued that it is not applying the excise tax to imported periodicals so as to afford protection to the Canadian production of periodicals. Part V.I of the Excise Tax Act has no effect on the ability of foreign periodicals to enter Canada and to hold a very large share of the Canadian market. The Excise Tax Act applies to all split-run periodicals - wherever produced - in the same way. Contrary to the US contention, the purpose of Part V.I of the Excise Tax Act is not to protect the production of periodicals in Canada, but to prevent the diversion of advertising revenues to magazines based on content produced for foreign markets, and thus to ensure the production of editorial content for Canadians.

3.123 The purpose of Article III is to protect the competitive relationship between domestic and imported goods. As stated in the report on United States - Taxes on Petroleum and Certain Imported Substances:

"... The general prohibition of quantitative restrictions under Article XI ... and the national treatment obligation of Article III ... have essentially the same rationale, namely to protect expectations of the contracting parties as to the competitive relationship between their products and those of the other contracting parties".⁸³

Therefore, when Article III:1 specifies that a contracting party must not adopt measures "so as to afford protection to domestic production", the object is to prevent the adoption or maintenance of measures that protect domestic products to the disadvantage of products imported from the territory of another party.

3.124 Part V.I of the Excise Tax Act is not a protectionist measure adopted "so as to afford protection to domestic production" for the following reasons:

(a) It does not affect the competitive relationship between imported and domestically-produced periodicals;


(b) it is not based on the physical origin of periodicals, which is what is contemplated by the reference to "domestic production"; and


(c) far from having a protectionist aim, it is a legitimate response to an anti-competitive abuse in the advertising field, with the ultimate object of ensuring the survival of a distinct Canadian culture.

3.125 Because GATT 1994, including Article III, applies to trade in goods, the expression "domestic production" must refer to the physical production of the good. This refers to its manufacturing, cultivation, extraction, etc. Article III of GATT 1994 cannot address the competitive relationship between service-providers such as the authors and artists contributing to the intellectual material contained in periodicals. Nor does it protect the competitive relationship between publishers in their capacity as sellers of advertising space. In terms of physical production, the sole perspective that is relevant to Article III, Part V.I of the Excise Tax Act is entirely neutral. It does not have the effect of protecting the production of periodicals in Canada; indeed its principal target was the production in Canada of split-run magazines as defined in the Act.

3.126 The measure has valid policy objectives that fit within what the US - Malt Beverages decision called a "public policy purpose" that is consistent with Article III. The immediate objective of Parliament was directed against the aggressive marketing of advertising services in Canada by publishers who were recycling in Canada editorial material whose production costs had already been covered in a larger market. The net result of this practice was to cut into the small share of the advertising market available to Canadian publishers, who were producing editorial content specific to Canadians. Part V.I of the Excise Tax Act was drafted in such a way as to curtail this advertising practice and not so as to prevent the entry into Canada of foreign periodicals or in such a way as to disadvantage foreign periodicals in the Canadian market.

3.127 Canada noted that it had never intended to decrease the level of competition between imported and domestic magazines. On the contrary, the members of the Task Force on the Canadian Magazine Industry wrote: "We are convinced that what is being proposed interferes as little as possible with freedom of expression or choice. Indeed, in the final analysis, we are seeking to expand choice by ensuring the continued availability of magazines with original content".⁸⁴ These measures did not prevent and were not intended to prevent foreign periodicals from competing in the Canadian market on an equal footing with Canadian periodicals.

3.128 Further, the United States has completely misrepresented the true trade position. There is an enormous penetration of American magazines in Canada, and nothing in the Canadian tax measure would change this or is designed to change this. Nor are there any significant trade effects to the measure. This tax concerns a very narrow segment of the total number of American periodicals streaming across the border daily. This very narrow segment was affected in the same way that a narrow segment of Canadian periodicals was affected. And this narrow segment of both the Canadian and the US industry was affected because the Parliament of Canada believed that a certain practice, a services practice, had to be discouraged.

3.129 Protectionism means protection against imported products. There is no protectionist application to be found in a measure that is not aimed at imported products as such, and that does not in fact have a disproportionate impact on imported products. The excise tax is not aimed at imported split-runs and - more important - it has (or would have) no greater effect on imported split-runs than it does on domestically produced magazines of the same kind. There is no doubt that the tax insulates Canadian magazines from a certain form of competition in the advertising sector. It does not, however, insulate Canadian producers from competition resulting specifically from imported split-runs. The United States has fundamentally mischaracterized the situation when it says "the measure...insulates the domestic Canadian magazine industry from competition from imported split-runs". This is not the effect of the tax. It affects split-runs in general, not just imported products. It is wrong to think of split-runs as an inherently or a presumptively imported product. The actual effect of the tax in practice has so far been very clear. It caused Sports Illustrated to move its production for the Canadian market out of Canada and back to the United States. The effect was to substitute imported products for domestic products. This is exactly the opposite of what is understood by protectionism. Even apart from what happened in the case of Sports Illustrated, the local production of a split-run - a regional edition - makes eminent business sense.

3.130 The United States considered the protectionist nature of the tax is evident from its confiscatory character, the statements of the Canadian Government regarding the tax both before and after its enactment, and from the manner in which it applies. The effective date of the tax was deliberately set to eliminate the split-run edition of Sports Illustrated magazine. The tax applies only to those split-runs that began publication after 26 March 1993, a few weeks before Sports Illustrated launched its Canadian split-run edition, but more than two years prior to enactment of the tax. The excise tax applies in a manner that inherently favours Canadian-based producers, who are much more likely than foreign producers to publish magazines directed solely at Canadian readers. Foreign-based producers who wish to expand operations by entering the Canadian market must create a new magazine for distribution exclusively in Canada (or sell their foreign editions in identical form in Canada). The Canadian magazine tax is designed to ensure that foreign-based publishers forego the commercially attractive option of publishing a split-run edition of an existing magazine for the Canadian market. In introducing the excise tax bill to the House of Commons, Minister of Canadian Heritage Michel Dupuy asked, "Why is this tax necessary?", and answered: "Canadian publishers would be at a grave disadvantage if they were forced to compete for advertising revenues with magazines that have recovered their editorial costs in markets which are much larger than the Canadian market".

3.131 Mr. Dupuy's reference to "markets which are much larger than the Canadian market" was undoubtedly a reference to the United States, whose production of Canadian-edition split-runs was significant prior to the 1965 import ban, and whose potential for re-establishing split-run editions in the Canadian market was the basis for the imposition of the excise tax in 1995. The 1961 O'Leary Report, which preceded the import ban, noted that there were 76 US magazines offering split run or regional editions in Canada.⁸⁵ In 1994 the Government-appointed Task Force on the Canadian Magazine Industry concluded that it in the absence of additional legislation it was highly likely that a significant number of US split-runs would be sold in Canada. The Task Force estimated that there were 53 potential US consumer magazine entrants into the Canadian market, and 70 potential US business and trade magazine entrants, and that the majority of these would actually enter the Canadian market.⁸⁶ (By contrast, although the Task Force report describes in some detail the structure of the Canadian magazine industry, it makes no mention of the existence of split-run editions of Canadian publications.) The effect of the 80 percent excise tax is to keep the potential US entrants out of the Canadian market, whether they choose to transmit their magazines electronically for printing in Canada or - should Canada's GATT-illegal import prohibition be removed - to import them. By its terms, the tax applies to all split-runs, whether imported or domestically-produced. The tax makes it unprofitable for split-runs to be sold in Canada. Indeed, this is the whole - and the stated - purpose of the tax. As Minister Dupuy stated: "[The tax] could be designed and implemented in order to avoid split run editions".⁸⁷

TO CONTINUE WITH CANADA - CERTAIN MEASURES CONCERNING PERIODICALS

⁶⁹ See, e.g. Senate of Canada, Proceedings of the Standing Senate Committee on Banking, Trade and Commerce, Issue no. 49 (30 November 1995) at 57, 64 (testimony of officials of Canadian Magazine Publishers Association).

⁷⁰ Appellate Body Report on Japan - Taxes on Alcoholic Beverages, op. cit., at 22.

⁷¹ Ibid. at 22.

⁷⁵ Ibid.

⁷³ Panel Report on United States - Section 337 of the Tariff Act of 1930, op. cit., at para. 5.14.

⁷⁴ Panel Report on United States - Measures Affecting Alcoholic and Malt Beverages, op. cit., para. 5.17.

⁷⁵ Appellate Body Report on Japan - Taxes on Alcoholic Beverages, op. cit., at 24 (emphasis in original).

⁷⁶ Ibid., at 25.

⁷⁷ Ibid. (emphasis added).

⁷⁸ Task Force Report at 40 and 42.

⁷⁹ Ibid., at 53.

⁸⁰ Statement of Minister of Canadian Heritage Michel Dupuy before Canada's Standing Senate Committee on Banking, Trade and Commerce, 5 December 1995, Issue No. 50 at 14.

⁸¹ Anderson, Leigh, An Analysis of Advertising Revenues to the Canadian Magazine Industry: the effect of foreign split-run magazines (19 January 1994). Prepared by Leigh Anderson for the Task Force on the Canadian Magazine Industry.

⁸² Appellate Body Report on Japan - Taxes on Alcoholic Beverages, op. cit., at 28, 29.

⁸³ Panel Report on United States - Taxes on Petroleum and Certain Imported Substances, op. cit., at 160, para. 5.2.2.

⁸⁴ Task Force Report at 64.

⁸⁵ Report, Royal Commission on Publications, May 1961 ("O�Leary Report") at 36.

⁸⁶ Task Force Report at 50-52.

⁸⁷ Commons Debates at 14790