3.132 The Canadian argument that the tax is not applied so as to afford protection because it is reasonable to assume that, in the absence of the import ban, split-runs would be published in Canada as much as in the United States was dubious as a factual matter. More importantly, it is legally irrelevant because the tax protects domestic non-split-runs from competition from imported split-runs. The appropriate comparison is between the treatment of imported split-runs and domestic non-split-runs, not between domestic and imported split-runs. "Article III...requires treatment of imported products no less favourable than that accorded to the most-favoured domestic products"⁸⁸, not the least-favoured. Further, regardless of what Canada's legislators may have intended, the tax does apply, by its terms, to imported split-run magazines. If the import ban were lifted, it would have an immediate and exclusionary effect on imported split-runs.

3.133 In its argument that its excise tax on split-run magazines is meant to address an "anti-competitive abuse in the advertising field", Canada has completely failed to indicate in what way split-run magazines constitute such an abuse, why it has concluded that all, as opposed to some such magazines represent such an abuse, and why its has chosen to apply a tax measure to address such abuses. It is apparent that the "anti-competitive abuse" Canada is concerned about in connection with split-run magazines is competition itself. Canada's real quarrel with split-runs is that they are produced in a manner that takes advantage of economies of scale, in which costs are spread out over a greater number of units produced. This means simply that split-run producers may have a lower cost structure than other producers, which may put them at a competitive advantage.

3.134 Competitive advantage is not competitive abuse, however. Canada has well-developed competition laws to address any such abuses. If Canada were truly interested in remedying competitive abuses, it would have employed those laws. Those laws do not permit application of remedies in a vacuum, however. They require a detailed analysis of the conduct of particular actors and their position in the market, and do not have as their goal the removal of entire product categories from the market. Indeed, it would be difficult to imagine a less pro-competitive remedy than one that effectively removes competing products from the marketplace.

3.135 Further, Canada's claim that marketing split-runs in Canada is akin to dumping is equally untenable. Dumping is generally understood to mean pricing products in a foreign market below the sales price in the home market, or selling products below cost. Canada has not alleged either such practice in this case. There are well-developed WTO procedures for conducting anti-dumping investigations and for determining dumping margins. These procedures do not allow for imposition of duties in arbitrary amounts (e.g., 80 per cent) across the entire range of imported products on the basis of legislative fiat.

3.136 Canada argued that protection is afforded to domestic production for the purpose of Article III:2, second sentence, if there is a "discriminatory or protective effect against imported products". "Imported products" means products physically transported into the territory of a Member. The United States concedes that the Sports Illustrated innovation that led to the legislation involved a domestic product, where the only thing "imported" was the electronically-transmitted foreign content. The United States has thus conceded, in the case of Sports Illustrated Canada, that there was no discrimination or protective effect against imported products. It follows that "foreign based" split-runs are not imported products if they are printed and published in Canada.

3.137 The Excise Tax Act thus applies to domestic and imported products without distinction, and it is primarily aimed at a form of domestic product. While the tax secures advertising revenues for Canadian publishers, protection in the sense of Article III:1 as read into III:2 means protection against imported products. As the preceding paragraph has shown, split-runs are not intrinsically imported products. Even if there were no import prohibition, given the economies of local production and distribution and the ease of electronic transmission, it is likely that most split-runs would be locally produced. It is highly significant, moreover, that, as the United States noted in response to a question at the hearing, the effect of the tax was to induce Sports Illustrated to cease its Canadian production and to resume direct imports from the United States. The substitution of imports for domestic products, as the result of a public policy measure, is the direct opposite of what almost everyone understands by protectionism. It suffices by itself to refute the contention that the Excise Tax Act operates to "afford protection to domestic production".

3.138 The excise tax measure is designed to prevent the diversion of advertising to low-cost publications reproducing recycled editorial content, at the expense of publications created for Canadians. It does not guarantee the survival of Canadian magazines that the public does not want. What it targets, very simply put, is the combination of recycled editorial content plus Canadian advertisements. This combination, because the crucial input of content comes with minimal cost, is destructive of fair competition in the market place and consumer choice. It eliminates any possibility of a "level playing field". It would lead ultimately to a reduction of material dealing with the Canadian scene and in turn to a Canadian public that is less well-informed on Canadian affairs. These are not only legitimate legislative concerns; they are far removed from the idea of protecting domestic production which is referred to in Article III. Ultimately, of course, the concern behind this legislation is with the preservation of Canadian culture in the face of an extraordinary challenge from across the border. It is not Canadian public policy to restrict the importation or circulation of imported magazines. It does, however, reinforce the validity of the distinction Canada makes between original content and domestic production as one that is based upon a public policy purpose that has nothing to do with trade protectionism. Split-run editions of magazines compete unfairly for advertising revenues with regular magazines, since their editorial costs are largely paid for in their original market.

3.139 As to the United States' inquiry why Canada failed to apply the WTO dumping procedures, those procedures, and the Canadian domestic legislation that implements them, have never been applied, and would probably not even be applicable, to advertising as a service sector not covered by GATT. The United States also asks, in effect, why Canada has not used the Canadian Competition Act. There is no reason why specially-tailored measures cannot be adopted for specific sectors of the economy that have their own unique characteristics. Competition issues in Canada have never been reserved exclusively to the Competition Act. They are addressed, in the context of specific sectors, through a variety of regulatory statutes. Split-runs and the magazine advertising market are unique. There is no reason why their problems should not be addressed through special legislation. And there is no reason why that legislation should not take the form of a tax. Fiscal incentives and disincentives that have little or nothing to do with raising revenue - ranging from child tax credits to super-depletion allowances - are familiar techniques in Canadian legislative practice.

3.140 The United States asserted that, in addition to characterizations by Canadian officials, Canada's submissions to the Panel themselves confirm that the excise tax was structured to protect domestic production. A statement in Canada's submission is instructive:

"The object of the excise tax is not to discourage readership of foreign magazines, but to maintain an environment in which Canadian magazines can exist in Canada alongside with imported magazines. It is also intended to foster conditions in which indigenous magazines can be published, distributed and sold in Canada on a commercial basis..."(emphasis added).

Although couched in the best possible light, this statement does not disguise the fact that the purpose of the excise tax is to protect Canadian magazines from import competition. It appeared to be Canada's position that because it does not completely restrict imports of magazines, it should be free to impose certain import barriers to benefit its domestic industry. There is absolutely no basis in GATT for this position. Canada's contractual obligations under GATT Article III are not limited to affording a certain amount of national treatment to imports; Canada must provide full national treatment, comparative trade advantages (i.e. to protect domestic producers from legitimate import competition). Tariffs (within bound rates) and certain types of domestic subsidies are among the permitted measures. Internal taxes imposed at rates higher for imported products than domestic like products are not. Moreover, Canada's submissions consistently imply an import penetration much higher than it actually is. Canada's Task Force Report states that , in reality, "Canadian publications account for 67.6 per cent of the magazines sold in Canada in a year".

3.141 Canada asserts repeatedly that the excise tax is designed to encourage "original content", as though such a purpose would justify imposition of a discriminatory excise tax. In fact, the whole notion of "original content" is protectionist in nature. Permitting a Member to require that a product be sold in its territory be a different product than that sold abroad would open up the WTO system to serious abuses. For example, a Member concerned about the ability of a local industry to compete with foreign manufacturers of the same product (automobiles, footwear, jewellery, etc.) could impose a prohibitive tax - on the pretext of ensuring that local consumers can purchase products designed exclusively for them - on "non-original" product designs, in order to keep foreign producers from exporting their best-selling products to the Member's market. In order to sell into such a market, the foreign manufacturer would be required to design products and set up new production lines exclusively for that market. That would erase any scale efficiencies the foreign manufacturer might otherwise have gained from sales in its domestic market and to other countries.

3.142 Canada considered that the US reliance on the concept of economies of scale is misplaced. The concept is normally associated with large production runs, typically for an international market. A local production run for a single regional market is by definition a relatively low volume production run that does not fit the definition. What the legislation is against is not economies of scale but the clearly unfair competitive advantage that comes from prepaid costs, providing what amounts to a free ride in the Canadian advertising market. The US industry gets tremendous economies of scale through its ordinary operations of publishing large runs in the United States for the international export market. The US publisher is free to produce and then to promote and sell as many copies of the magazine in Canada as possible. None of this is touched by the legislation. The tax does not insulate the domestic Canadian magazine industry from competition for readers. Harper's, Sports Illustrated, and Vanity Fair can all benefit fully from economies of scale of which a Canadian publisher, and in fact most publishers outside the United States, could never dream.

3.143 The United States submits further that the "whole notion of original content" is protectionist in nature, and that the policy has the same protectionist characteristics as if local product designs were to be required. The argument is revealing, because it amounts to a blanket denial that cultural products have any specificity that distinguishes them from ordinary items of trade. Content distinguishes one magazine from another. Original content created for a specific national community differentiates magazines in a way that product design seldom if ever does. The United States has raised a spectre that is not only far-fetched; it is based on a false analogy, and a failure to recognize the distinctive characteristics of cultural products, and of magazines above all. "Original content" does not have to be domestically-produced. Canadian content, in terms of subject matter, does not have to be content produced by Canadians or in Canada. Most often it will, but the assertion that "original content" is inherently protectionist is incorrect.

(c) Article III:4

3.144 The United States argued that if the Panel decides that the excise tax does not fall within the scope of Article III:2, the tax should then be viewed as a measure affecting the sale or use of split-run magazines within the meaning of GATT Article III:4. The excise tax provides less favourable treatment to imported split-runs than to like domestic non-split-runs and therefore violates Article III:4. The excise tax clearly affects the sale of split-run magazines. In fact, it is set at a level so high as to prevent any sales of split-runs in the Canadian market. Indeed, Canadian officials have repeatedly stated that to be the purpose of the tax. An 80 per cent excise tax is obviously not intended to generate tax revenue. The excise tax also affects the use of split-run magazines, by applying a prohibitive tax whenever they are used to convey advertising to the Canadian public. Moreover split-run magazines and non-split-run magazines are "like products" for purposes of Article III:2 and should thus be considered "like products" for purposes of Article III:4 as well. The panel in US - Standards for Gasoline considered that similar factors were relevant to like product analyses under paragraphs III:2 and III:4.⁸⁹

3.145 Finally, the excise tax accords less favourable treatment to imported split-run magazines than to other domestically-produced magazines. As discussed above, by its terms the tax applies to imported split-runs. The excise tax treats imported split-runs less favourably than other purely domestic magazines because it effectively prevents split-runs from being sold profitably in the Canadian magazine market, and makes it effectively impossible for split-runs to be used to carry domestic advertising. Thus, if the excise tax is not covered by Article III:2, it falls within the scope of, and is inconsistent with, Article III:4.

C. Funded and Commercial Postal Rates

(i) Article III:4

"Regulations and requirements affecting the internal sale, offering for sale, purchase, transportation, distribution or use"

3.146 The United States argued that Canada's postal rates for magazines are openly discriminatory and in contravention of III:4 of GATT 1994. Canada Post is a Canadian Government entity that charges domestic magazines lower rates (either "commercial" or "funded" depending on the magazine) than it charges imported magazines that are mailed in Canada. Canada Post also offers certain discounts (such as for "palletization" and "pre-sort") only to domestic magazines. These measures amount to "regulations" or "requirements" that affect the internal sale, transportation, or distribution of magazines in Canada, and provide less favourable treatment to imported magazines than to like domestic magazines, in violation of GATT Article III:4.

3.147 In the report on EEC - Parts and Components, the panel recognized that requirements that an enterprise voluntarily accepts to gain government-provided advantages are nonetheless "requirements":

"The Panel noted that Article III:4 refers to "all laws, regulations or requirements affecting (the) internal sale, offering for sale, purchase, transportation, distribution or use". The Panel considered that the comprehensive coverage of "all laws, regulations or requirements affecting" the internal sale, etc. of imported products suggests that not only requirements which an enterprise is legally bound to carry out, . . . but also those which an enterprise voluntarily accepts in order to obtain an advantage from the government constitute "requirements" within the meaning of that provision. . . ."⁹⁰

Magazine publishers that sought to make use of the Canadian mails have to agree to pay the postal fees charged by Canada Post. Those charges are requirements - or regulations - within the meaning of Article III:4.

3.148 Canada Post's postal rates also clearly "affect" the sale, transportation and distribution of imported magazines, because they specify the cost of using the services of Canada Post to transport or distribute magazines to subscribers in Canada. A publisher seeking to have Canada Post transport and distribute its magazines to subscribers in Canada - and virtually all subscription magazines sold in Canada were distributed in this manner - would have to pay the postal fees prescribed by Canada Post. The postal fees directly affected the competitive conditions under which the product is transported, distributed, and sold to subscribers. These rates therefore "affect" the sale, transportation, and distribution of magazines in Canada.⁹¹

3.149 Canada's discriminatory postal rates have a particular impact on the transportation of magazines in Canada. The drafters of GATT clearly intended to include the rates charged for government-provided transportation services under the disciplines of Article III. Canada Post's divergent postal rates are not based on neutral economic considerations, but explicitly discriminatory criteria - namely, whether the magazine is Canadian or foreign in origin.⁹²

3.150 Canada underscored the importance of the distinction between the subsidized rates, those rates available as a result of a subsidy granted exclusively to domestic publishers by Canadian Heritage, and commercial publications rates, those rates available to all publishers (Canadian or otherwise) that do not qualify for the subsidy granted by Canadian Heritage. Whereas the subsidized rates are the result of an expressed intention on the part of the Government to assist domestic publishers (as specifically permitted by GATT Article III:8(b)), the commercial publications rates are the result of generally accepted commercial and marketing practices and are not influenced by government policy. Unfortunately, the United States has failed to make this important distinction.

3.151 Canada Post is a corporation in its own right, with a legal personality distinct from that of the Government, and considerable autonomy in the conduct of its operation; far more than would ever be accorded to a government department. Canada Post is a Crown corporation and its objectives are set out in the CPC Act. In addition, under the FA Act, as a Schedule III, Part II Crown Corporation, Canada Post is expected to: operate in a competitive environment; earn a return on equity; not depend on government appropriation; and finally, provide a reasonable expectation that it would pay dividends. Both the CPC Act and the FA Act essentially establish a commercial mandate for Canada Post comparable to a private sector interest.

3.152 This legislative framework provides Canada Post with the legal and operational flexibility to implement its commercially-oriented mandate. With respect to publications, i.e., newspapers and periodicals, Canada Post is not a government monopoly and does not have the exclusive right of delivery. Canada Post does not have the power of a monopoly when it sets commercial rates for the delivery of publications.⁹³ It competes in an open competitive market for its share of the publications delivery market. Any publisher, foreign or domestic, is free to arrange for the delivery of his newspaper or periodical via Canada Post or with any other distributor. Section 14(2) of the CPC Act states that "[n]othing in this Act shall be construed as requiring any person to transmit by post any newspaper, magazine, book, catalogue or goods". Pursuant to Section 2 of the Act,"post" means to leave in a post office or with a person authorized by the Corporation to receive mailable matter. Foreign publishers have the additional option of mailing their copies addressed to Canadian addresses with their own postal administration at the applicable international printed matter rates.

3.153 The principle of national treatment of Article III:4 of GATT 1994 does not apply to the commercial postal rates charged by Canada Post. The United States contends that commercial rates set by Canada Post are "regulations" or "requirements" affecting the internal sale of imported publications. The term "regulation" in the context of GATT 1994 means the rules or orders having the force of law that are issued by executive or administrative authorities of government. The rates for the delivery of letters in Canada are set by regulations.⁹⁴ However, the commercial rates for publications are set by market forces and fluctuate with commercial imperatives - not to mention that in many cases they are the result of negotiations with both domestic and international large volume customers pursuant to specific agreements. The responsibility for setting those rates rests exclusively with senior management of the Corporation who exercise their discretion based on commercial principles without government intervention.

3.154 The term "requirement" in the context of GATT also implies a demand or direction proclaimed by an authority within government. Again, commercial imperatives and market forces dictate the commercial rates for publications charged by the Corporation to its customers. The government has never issued a directive to the Corporation regarding publications mail. The Corporation's prices are set to meet market demands and opportunities (as in the case of any private sector company), and are clearly not the product of "laws, regulations or requirements" of Canada. It is incorrect to suggest, as does the United States, that the differential between the commercial rate provided to Canadian publishers and the commercial rate provided to non-Canadian publishers is calculated to place non-Canadian publishers at a competitive disadvantage. Canada Post has no policy of giving a competitive advantage to one segment of its customers over another, and has no interest in pursuing any such practice. For their part, customers have access to competing delivery channels and, as in all open markets, have the ability to negotiate rates in a manner reflecting their purchasing power.

3.155 The international commercial rates reflect the reality that suppliers in any competitive market would attempt to obtain the best possible price. Pricing is set to maximize contribution while remaining competitive. Factors such as the availability and cost to customers of competing distribution channels, currency exchange rates, service standards, etc., are all taken into consideration by Canada Post (as would any company in a competitive market) when setting its pricing. As a Crown corporation with a commercial mandate, Canada Post operates on the same basis as a private sector interest. The commercial postage rate applicable to non-Canadian publications is set on the basis of the commercial business reality that the next-best option faced by mailers of publications that are printed outside Canada is the much higher international rate charged by the postal administration in the country of publication. In the case of publications from the United States, this means a rate for deposit in Canada with Canada Post that is about half of what they would have to pay the United States Postal Service (USPS) for delivery of the same items to Canada. The commercial mandate given to Canada Post requires it to obtain the best possible rate in order to maximize its returns.

3.156 Almost half the direct-deposit foreign periodicals business Canada Post receives is contracted through specific agreements, negotiated on a case-by-case basis subject to customer- and market-specific needs and opportunities as opposed to generic pricing policies. Canada Post's commercial pricing policies are determined by the demands of the markets in which it operates and not by governmental directives or public policy considerations. In the case of commercial publications, there is no direction, instruction or any other obligation to provide this service or to provide this service at certain rates. This means that the management of Canada Post is free to establish commercial services and rates for publications purely on commercial principles and market realities so as to maximize the financial advantage to Canada Post providing such commercial publication services. The decision to maintain a separate, higher rate for international as opposed to Canadian commercial publications is made purely by Canada Post management for commercial reasons and in no way reflects any explicit or implicit request by government that Canada Post use its rate structure to disadvantage foreign commercial publications relative to Canadian commercial publications. The Canadian Government could express its views on commercial and international rates much in the same way it might choose to comment on pricing of a private sector firm. However, to compel change, the Government would have to instruct Canada Post under the directive power in Section 22 of the CPC Act. Indeed, Canada Post has received no instruction or advice - implicit or explicit - to set international commercial rates in excess of domestic commercial rates for periodicals. This action is of Canada Post's own creation based on its perception of market opportunity.

3.157 The United States argued that the Government of Canada is responsible for Canada Post's activities, including its so-called commercial postal rates. Canada's argument implicitly concedes that Canada Post is a governmental entity, and exercises a governmental function, when it applies "funded" (subsidized) postal rates to, and provides for the delivery of, certain domestically produced magazines. Canada seeks to convince the Panel that Canada Post sheds its governmental character when it applies its so-called "commercial" rates and provides for the delivery of magazines subject to those rates.

3.158 Canada Post is a wholly, government-owned, government-created chartered body, subject to the control of a board of directors appointed by the Minister responsible for Canada Post. (The existence of a Government Minister responsible for Canada Post is further proof that Canada Post is an arm of the Canadian Federal Government.) The Chairman of the Board and the President of Canada Post are both appointed by the Governor-in-Council. Section 5(2)(e) of the CPC Act provides explicitly that Canada Post is "an institution of the Government of Canada". The Canadian Parliament created Canada Post and fixed its operating mandate. Moreover, Canada Post's mandate to operate, in part, on a "commercial" basis is itself set by the Government. An important oversight role is played by the Minister responsible for Canada Post. In "The Mandate of Canada Post Corporation and its Development", Canada acknowledged that: "Section 22 of the CPC Act provides that Canada Post is required to comply with directions issued by the Minister responsible for the corporation. This gives the Minister powers analogous to those exercisable by shareholders of other privately held corporations through unanimous shareholders agreements".⁹⁵ Thus, Canada Post is entirely a creature of the Canadian Government, subject to its direct supervision and control.

3.159 Recent events confirm that the Canadian Government considers Canada Post to be a government entity fully subject to Canadian Government direction, and a vehicle for the expression of Government policy - including through Canada Post's "commercial" operations. On 8 October 1996, Diane Marleau, the Minister responsible for Canada Post Corporation, presented the Canadian Government's reaction to a report issued by an independent task force chaired by Mr. George Radwanski (the "Radwanski Report"). The report addressed financial and policy issues related to the future of Canada Post.

3.160 The Radwanski Report was highly critical of Canada Post and, inter alia, charged Canada Post with engaging in unfair competition with its private sector competitors in the delivery of commercial services, such as courier and advertising mail services.⁹⁶ In her press conference responding to the report, Ms. Marleau stated:

"I want to emphasize that the government regards Canada Post as a significant federal institution, and that it sees Canada Post continuing to carry out a public policy role based on the provision of mail to all Canadians, no matter where they live...The federal government is expected to embody certain values and principles in how it carries out its affairs, in particular: fairness, transparency, openness and accountability. Canada Post is part of the federal government and must live up to these standards. As Minister Responsible for Canada Post, I expect immediate corrective action wherever these values and principles have been compromised. To this end, I have asked Mr. Ouellet, as Chair of Canada Post Corporation, to develop an action plan for improving the transparency of Canada Post's activities, and addressing these issues...The government will consider the rest of the recommendations of the report of the Mandate Review, recognizing that there are certain basic principles which must guide our deliberations:...
* Canada Post is a valuable federal institution. Canadians have invested in it, and the government must protect this value.

* Canada Post will remain a Crown corporation and not be privatized, as long as it continues to fulfil a public policy role."...⁹⁷

3.161 With respect to Canada Post's commercial courier service activities, Minister Marleau stated that:

"[A]s long as Canada Post remains in this line of business, it must compete on a level playing field. As I noted earlier, Canada Post's operations must be conducted under the tenets of fairness, transparency, openness, and accountability".⁹⁸

These excerpts confirm that the Canadian Government considers Canada Post to be a Canadian federal government institution and that the Government is fully responsible for Canada Post's activities - even those carried out in commercial sectors.

3.162 Canada Post's so-called "commercial" (non-subsidized) postage rates reflect an overlay of Canadian government policy having nothing to do with marketplace considerations. Notwithstanding Canada's statement that commercial publications rates "are available to all publishers (Canadian or otherwise) that do not qualify for the subsidy granted by Canadian Heritage", in fact only certain types of publications qualify for commercial mail rates. Among the eligibility criteria are: the content of the publication (e.g., devoted to religion, the sciences, social or literary criticism), the amount of space it devoted to advertising, and whether the publisher is a person whose principal business is publishing. These criteria are all irrelevant as commercial considerations, but are indicative of types of publications which a government might wish to support as a matter of public policy. This suggests that Canada Post continues to operate as an instrument of the Canadian Government in its commercial mail operations and does not operate according to purely commercial considerations.

3.163 Finally, the United States considered that Canada's claim that the disparity in "commercial" rates between imports and domestic magazines reflects the lack of commercially feasible alternative delivery options for imports as compared to domestic magazines is dubious as a factual matter. Also, Canada's explanation that the disparity in rates does not reflect Government policy is suspect in light of the existence of a whole set of Canadian Government policy measures whose explicit goal is to benefit domestic magazines. Even if true, Canada's explanation would not remove this measure from the scope of Article III:4. Article III:4 is precise - a Member must accord "treatment no less favourable" to imports as compared to domestic products - regardless of whether imports have fewer commercial alternatives as compared with domestic magazines. It is in the nature of imported products that they often are in an inferior economic and political bargaining position. Article III was included in the GATT because imports are vulnerable to discrimination.

3.164 Canada argued that government ownership is not in itself sufficient to qualify the practices of an enterprise as regulations for the purposes of Article III:4 of GATT 1994. The independent nature of Canada Post's commercial operations for the distribution of publications and the competitive environment within which it operates and sets its rates removes such rates from the provisions of Article III:4. Although at one time the Post Office was an integral part of the Government of Canada and its rates were set by statute and regulation, that relationship was changed in a fundamental way in 1981. Concerned with issues relating to service, management, labour relations and the financial performance of the Post Office Department, the Government decided to turn over the postal administration to a Crown corporation with a commercial orientation and an independent management charged with attaining financial self-sufficiency. The CPC Act gave the Corporation the powers of a natural person, an attribute more typical of a private sector corporation than of traditional Crown corporations. The FA Act later confirmed the Corporation's status as an entity expected to operate in a competitive environment, not to be dependent on appropriations, earn a return on equity and pay dividends to its shareholder.

3.165 At the time of the creation of Canada Post, there were those who suggested that it should remain under the direct control of the Government. It was proposed that its activities be overseen by the Postmaster General assisted by a Secretariat. However, what had happened was that supervision of the Corporation had been entrusted to a board of directors composed of independent outside directors and officers of the Corporation (none of whom are civil servants). The Board, like traditional private sector boards of directors, is empowered to establish the general policy of the Corporation, including the making of decisions concerning finance, personnel management and commercial orientation, without the restrictions inherent in government departments. The Board has, since incorporation, pursued the goal of financial self-sufficiency by allowing management the latitude, in commercial operations, to generate revenues through rate and product management and to manage the Corporation's expenditures in a manner consistent with any competitive enterprise, essentially free of government intervention.

3.166 Crown corporations are distinct legal entities wholly owned by the Crown with boards of directors that oversee the management of the corporation and hold management accountable for the company's performance. The board of directors, through the chair, is accountable to the responsible minister and the responsible minister functions as the link between the corporation and both the Cabinet and Parliament. It is the duty of the board of directors to oversee the management of their Crown corporation with a view to the best interests of both the corporation and the long-term interests of the shareholder. This concept is similar to that of private sector corporations. Boards of directors of Crown corporations are expected to exercise judgement in the broad areas of: the establishment of a corporation's strategic direction; the safeguarding of the corporation's resources; the monitoring of corporate performance; and reporting to the Crown. Each Crown corporation is accountable to Parliament for the conduct of its affairs through a minister who represents the Crown. It is through the minister that the Crown corporation reports on its plans and its performance to the Government and to Parliament.

3.167 Canadian and international commercial categories of rates had been set by Canada Post outside of the regulations since March 1994 and March 1992, respectively. Non-subsidized publications formerly subjected to the rates set out in the Newspapers and Periodicals Regulations are now subject to commercial Canadian Publications Mail and International Publications Mail rates, respectively, which are established and approved by Canada Post senior management. They are not established by Canadian Government regulations.

3.168 Canada Post is a corporation with a distinct legal personality. It can contract separately from the Government. It contracts with the Government for the supply of postal and other services. The Corporation is obligated to pay corporate income tax to the Government on its revenues.⁹⁹ Contrary to US assertions, employees of the Corporation are not employees of the Government. Indeed, Section 12 of the CPC Act authorizes Canada Post to hire employees, fix the terms and conditions of their employment and pay them their remuneration. The statutory regime¹⁰⁰ applicable to employees of the Government does not apply to employees of Canada Post, whose employment conditions and labour relations are governed by the same provisions of the Canada Labour Code that apply to the federal private sector.¹⁰¹ Furthermore, if Canada Post employees had government employee status, there would have been no need to include a special "deeming" provision in the Act in order to preserve employees' pension rights at the time of the creation of Canada Post. The above attributes are certainly not those of a corporation over which the Canadian Government maintains a "hands-on level of administrative control" as the United States would like the Panel to believe.

3.169 The degree of control that the Government exercises over Canada Post's commercial operations is one dictated by the Government shareholder's interests. The Government requires sound financial administration of the Corporation's business and a fair return on its equity investments. To achieve this goal, the Corporation must offer satisfactory services to customers at a competitive price that will maximize profits. In a competitive environment, pricing policies of Canada Post must take into account basic economic principles of supply and demand. It must consequently consider the effects that its commercial postal rates will have on current or potential competition.

3.170 Canada Post does not have a monopoly with respect to the delivery of publications (newspapers and periodicals) in Canada. Canada Post, through the CPC Act, does have a limited exclusive privilege with respect to the collection, transmission and delivery of "letters" in Canada including addressed advertising mail, but the Corporation has no statutory protection for the remainder of its business and has to compete with existing or potential competition, as the case may be.

3.171 Almost 50 per cent of foreign publications mailed in Canada are accorded special rates negotiated by major foreign publishers pursuant to long-term agreements with Canada Post. Those rates are substantially less than the commercial International Publications Mail rate and relatively close to the commercial Canadian Publications Mail rate¹⁰². The willingness of the Corporation to enter into such special-rate agreements reflects the reality that large foreign publishers have the resources and purchasing power to credibly threaten full or partial delivery in Canada via current and potential private distributors. Smaller foreign publishers have neither the volume nor the density of mailings to warrant their effort to access private distribution (often organised on a city by city basis) in Canada. Canadian commercial publishers have credibly threatened to move to private distribution in the past¹⁰³. This motivated the Corporation to develop commercial Publications Mail rates that are financially attractive when compared to that of current or potential private distributors.

3.172 Canada Post currently faces competition for delivery of addressed publications.¹⁰⁴ The principal form of competition for the delivery of addressed subscriber copies of daily and weekly newspapers (those not eligible for subsidized postal rates) is delivery by the publishers themselves. In general, almost all such newspapers choose to deliver their own publications wherever volume densities warrant, with the residual volumes being mailed to subscribers via Canada Post's commercial Publications Mail rates. There is somewhat less competition for the delivery of addressed periodicals, where competition exists mainly in the dense urban areas. Competition for the delivery of addressed periodicals is limited because commercial publications rates are designed to attract the delivery of addressed periodicals not eligible for subsidized rates. It is also limited due to Canada Post's successful bid to Canadian Heritage for the delivery of publications eligible for funded rates. Canada Post's competitors cannot enter into the same arrangement with Canadian Heritage because all available program dollars have been committed to the arrangement signed with Canada Post.

3.173 Canadian Heritage agreed to a fixed price contract with Canada Post, taking into account the fact that this would be an exclusive contract for the delivery of eligible publishers' publications at subsidized rates, and therefore committing all of its funding available for distribution assistance of these publications. Obviously, this precludes any alternative supplier of delivery services from signing a similar agreement with Canadian Heritage during the three-year term of the current agreement. However, Canada Post won the exclusive three-year arrangement in the context of a real possibility of a direct-to-publishers funding program without exclusive suppliers. Such an option or an option of awarding an exclusive supply contract to a supplier or suppliers other than Canada Post is again a possibility at the expiry of the current three-year contract. It should be noted that Canada Post is obliged under the current agreement to provide service without limitation at the agreed funded rates to all existing and new publications that are deemed by Canadian Heritage to meet the agreed eligibility conditions. If the publisher of an eligible publication chooses to deliver the publication via another carrier, the publisher would not have access to special rates given that Canadian Heritage has chosen to negotiate an exclusive supplier contract with Canada Post for the term of the contract.

3.174 With respect to the use of the Radwanski Report by the United States, the mandate review was partially a review of the appropriateness of the monopoly that the Government has granted to Canada Post on letter delivery. The Report recommends, among other things: (1) that providing universality of service and uniformity of price for lettermail be regarded as integral elements of the mandate of Canada Post; and (2) that the exclusive privilege of Canada Post with regard to lettermail be maintained in its current form. Secondly, the mandate review was a review by the shareholder of the validity of the strategic, operational and financial direction of Canada Post and in this regard the mandate review is similar in nature to periodic reviews conducted in the private sector by shareholders of both publicly and privately held corporations. The recommendations contained in the Report, in whole or in part, are not government policy but rather recommendations to the government for consideration. The government has rejected certain of the recommendations, adopted others and taken the balance under advisement. The Radwanski Report did not address Canada Post's distribution services for publications.

3.175 The United States asserted that the fact that the Government has to date not intervened to put a stop to Canada Post's discriminatory postal rates does not mean that it is not responsible for them. A WTO Member cannot create a government institution, allow it to take actions inconsistent with the Member's WTO obligations, and then claim it has no responsibility for the actions of the institution. The market access concessions that WTO Members have negotiated over the years would not be secure if governments could escape their obligation to provide national treatment to imported products by creating government corporations and then claiming that they are not responsible for the discrimination imposed by the entities they themselves created. Intervention by the Government to ensure that Canada Post complies with Canada's international obligations under the GATT is within the power of the Canadian Government. It is especially important that the Canadian Government take remedial action because publishers of imported magazines have only limited alternatives to using Canada Post's services for delivery and transportation of magazines to Canadian subscribers. Indeed, Canada Post itself boasts that, "We are the only national distribution service that reaches every single address in Canada. No one does this - no other competitor comes close".¹⁰⁵ Canada acknowledges that Canada Post faces only limited competition for the delivery of addressed magazines. Magazines seeking to reach destinations other than business addresses in major cities have no practical alternative to using the delivery services of Canada Post.

3.176 Because of Canada Post's status as a Canadian Government institution that delivers and transports magazines and other mail, its actions - including the rates it applies - in respect of these activities are necessarily regulations or requirements affecting the internal sale, distribution or transportation of magazines within the meaning of Article III:4. If the Canadian Government told private Canadian delivery services to charge more for delivering imported goods than for delivering domestic goods, it would be in clear violation of Article III:4. If the Canadian Government accomplishes this same result through rate discrimination in its own delivery services, Article III:4 should apply with equal force. With respect to Canada's arguments concerning the Radwanski report, the United States responded that although that report did not refer to publications mail, it was primarily concerned with advertising mail and courier services, which are both commercial services. Thus, the statements made by Minister Marleau with respect to these services as commercial services are equally applicable to publications mail.

Like product issue

3.177 The United States argued that imported magazines are "like" domestic magazines for the purposes of Article III:4. Canada Post's rates distinguish between magazines based on whether they are imported or produced in Canada. In particular, Canada established two rate classes for magazines that are printed and published in Canada (the "commercial" and "funded" rates) and a third rate class for imported magazines (the "international" rate). Magazines eligible for "funded" rates are not only printed and published in Canada, but have to meet other requirements, namely: (a) the periodical must be typeset and edited in Canada; (b) the exclusive right to produce and publish the periodical must be held by a Canadian citizen, or a corporation controlled by Canadian citizens; and (c) the issue can not be published under license from a foreign publisher, or contain editorial content substantially the same as an issue printed outside Canada that was not first edited in Canada.¹⁰⁶

3.178 However, all of these categories of magazines are "like products" for purposes of Article III:4 and the distinction that Canada has drawn between them is solely, indeed openly, intended to favour domestic production. Domestic and imported magazines share the same physical characteristics and commercial uses. Neither the location of production, nor the ownership of the right to publish, nor whether editorial content appeared in an issue printed outside Canada, make imported magazines unlike domestically-produced magazines in terms of physical characteristics or end uses. The rates established by Canada Post for imported and domestically-produced magazines draw an impermissible distinction based on the origin of the magazine, a distinction that, on its face, is applied "so as to afford protection to domestic production".

Treatment of imported and domestic magazines

3.179 The United States stated that the rates established by Canada Post discriminate against imported magazines. Canada Post charges rates for domestically-produced magazines that are either 10 or 80 per cent lower on average than the rates applicable to imported magazines. These rates accord manifestly less favourable treatment to imported magazines by comparison to their domestically-produced counterparts. Moreover, Canada Post routinely makes discounts (such as "palletization" and "bypass" options) available to domestic magazines but not to imported magazines that increase the degree of discrimination still further. The higher postal rates for imported magazines are calculated to place them at a competitive disadvantage by comparison to competing domestically-produced magazines by creating a disparity between the distribution and transportation costs for imported and domestic magazines. Article III:4, second sentence, confirms that discrimination with respect to transportation based on the "nationality of a product" is not consistent with Article III:4. Canada has made no secret of the fact that the explicit purpose for its varying postal rates is to protect the Canadian publishing industry from import competition. Canada's discriminatory magazine postal rates represent precisely the kind of protectionist regulatory measure that GATT Article III:4 condemns.

3.180 It is no answer for Canada to assert that Canada Post enters into special lower-rate arrangements with certain larger foreign magazines. Canada Post's standard commercial rates for imported magazines are higher than for domestic magazines. Smaller foreign publishers, who cannot enter into special arrangements, are subject to the standard discriminatory rates. Moreover, negotiations for special rates between Canada Post and larger publishers (both foreign and domestic) presumably use the standard discriminatory commercial rates as the starting point. Thus, the resulting negotiated rates are in all likelihood discriminatory as well. Indeed, Canada states that the negotiated rates offered to large foreign publishers are only "relatively" close to the standard commercial rates are offered to Canadian publishers.

TO CONTINUE WITH CANADA - CERTAIN MEASURES CONCERNING PERIODICALS

⁸⁸ Panel Report on United States - Measures Affecting Alcoholic and Malt Beverages, op. cit. para. 5.17 (emphasis added).

⁸⁹ Panel Report on United States - Standards for Reformulated and Conventional Gasoline, op.cit., para. 6.8.

⁹⁰ Panel Report on European Economic Community - Regulations on Parts and Components, op.cit., at 132, 197, para. 5.21, Italics in original. See also, "Canada - Administration of the Foreign Investment Review Act", adopted on 7 February 1984, BISD 30S/140, 158 para. 5.4.

⁹¹ Panel Report on Italian Discrimination Against Agricultural Machinery, adopted on 23 October 1958, BISD 7S/64 para. 12.

⁹² The United States recommended the Panel to see also, U.S. - Malt Beverages (panel found that restrictions on private delivery of imported, but not domestic beer, was inconsistent with Article III:4).

⁹³ Canada added that Canada Post does have a limited exclusive privilege with respect to the collection, transmission and delivery of "letters" in Canada, including addressed advertising mail. This exclusive privilege represents in aggregate approximately 50 per cent of total corporate revenues. Canada Post has no statutory protection for the remainder of its business and must compete with existing or potential competitors, as the case may be. The Corporation's exclusive privilege is defined in Section 14 and 15 of the Canada Post Corporation Act.

⁹⁴ Letter Mail Regulations, SOR/88-430 as amended to April 30, 1996.

⁹⁵ "The Mandate of Canada Post Corporation and its Development".

⁹⁶ The report did not specifically discuss Canada Post�s publications mail activities.

⁹⁷ Speaking Notes for the Honourable Diane Marleau, Minister Responsible for Canada Post Corporation, Release of the Canada Post Mandate Review Report, 8 October 1996, at 1-3 (emphasis added).

⁹⁸ Ibid., at 3.

⁹⁹ Income Tax Regulations, amendment, SOR/94-405.

¹⁰⁰ Canada states that employees of the Government are appointed by the Public Service Commission under the unique provisions of the Public Service Employment Act. Employment conditions and labour relations are governed by the Public Service Staff Relations Act and the Public Service Employment Act.

¹⁰¹ Canada notes that the federal private sector includes such industries as banks, interprovincial trucking, radio, television, railways, ports and the aeronautics industry.

¹⁰² Canada asserts that contrary to what the United States contends, several large foreign publishers enjoy discounts, pursuant to long-term agreements, similar to the mail preparation discounts offered to Canadian publishers.

¹⁰³ Canada notes that those threats are substantiated by certain factors such as the proximity of the Canadian publications to their markets, generally greater density of those markets (typically commercial trade publications oriented towards businesses in urban areas) and concentration of ownership in the industry.

¹⁰⁴ Examples of such competitors are Globe and Mail Distribution Services Ltd., A1Tours Ltd. (bundle distribution of magazines to business/professional offices), C.D. Woods Ltd., (Vancouver B.C.), Roltek Ltd., Insurance Courier Services Ltd. and an emerging co-operative delivery venture of Canadian trade publications.

¹⁰⁵ Canada Post, Publications Mail, Product Guide at B-1 (bold in original).

¹⁰⁶ Regulations Respecting Newspapers and Periodicals, Section 3(2) (definition of "Canadian Periodical"), S.O.R./91-179, 28 February, 1991.