25 July 1983
CANADA - ADMINISTRATION OF THE FOREIGN INVESTMENT REVIEW ACT
Report of the Panel adopted on 7 February 1984
(L/5504 - 30S/140)
(b) Undertakings to manufacture in Canada goods which would be imported otherwise
3.17 The United States stated that undertakings which required a firm to manufacture goods in Canada with the purpose of substituting a domestically produced good for one that would be imported in the absence of the undertaking (henceforth referred to as manufacturing undertakings) violated Article III:4. Such undertakings reserved a portion of the internal market for products of domestic origin, to the exclusion of imported products. Undertakings obliging the investor to manufacture in Canada specified parts or components of a particular product were also inconsistent with Article III:5 because they constituted internal quantitative regulations relating to the mixture, processing or use of products which required that a specified amount or proportion of a product be supplied from domestic sources.
3.18 Canada stated that Article III:4 did not deal with the manufacture or production of goods and therefore did not apply to manufacturing undertakings. The undertakings to manufacture parts or components of particular products in Canada reflected the individual investor's intention and were firm-specific. They were therefore not "regulations" within the meaning of Article III:5. In the view of both parties, their arguments on the applicability or non-applicability of Articles XI and XVII:1(c) to purchase undertakings also applied to manufacturing undertakings (see paragraphs 3.4 - 3.16 above).
3.19 In the view of Canada the manufacturing undertakings were not only fully in conformity with its obligations under GATT but also outside the Panel's terms of reference. It therefore requested the Panel not to examine these undertakings.
(c) Undertakings to export specific amounts or proportions of production
3.20 The United States stated that Article XVII:1(c), which prohibited government interference with the operation of commercial considerations, was also applicable to undertakings to export specified amounts or proportions of production. The export levels of companies subject to such undertakings could not be assumed to be the result of a decision-making process based on commercial considerations. No enterprise would bind itself voluntarily to export fixed amounts or proportions of its production given the uncertainty of markets and conditions of competition. Once the undertakings were accepted, the investor could not adjust its export sales in accordance with commercial considerations, but was dependent on the consent of the Canadian government to make a change in the undertaking. He might therefore be forced to dump products abroad to meet his obligations.
3.21 Canada reiterated that Article XVII:1 only contained a most-favoured-nation obligation and could therefore not be applied to export undertakings, none of which made distinctions among contracting parties. Canada also rejected the contention that an investor might dump goods in order to fulfil an undertaking. This argument lacked credibility because export undertakings were given by the investors on the basis of their expectations of future export market prospects and in the knowledge of the flexible manner in which Canada monitored compliance with the undertakings.
(d) Article XX(d)
3.22 Canada contended that, in the event that the Panel were to consider the undertakings to be inconsistent with Articles III, XI or XVII, then they would fall within the exception provided for in Article XX(d) of the General Agreement. Within the meaning of Article XX(d), the Foreign Investment Review Act constituted a law which was not inconsistent with the provisions of the General Agreement and the administrative practices under that Act with respect to undertakings fell well within the scope of the types of measures envisaged under this Article as being necessary to secure compliance with this law. Under any scheme under which a state granted authority to a foreign investor to invest in its territory, there had to be some means of ascertaining the nature of the investment for which authority was being granted and that the investment was implemented in a manner consistent with the authority granted. The written undertakings describing the intentions of investors served both these purposes. They were the means by which the investment for which authority was being granted was defined with some precision and, together with the monitoring procedures of the government, buttressed by Sections 19 to 22 of the Act, they were also the means by which the government ensured that investments were implemented within the terms of the authority granted.
3.23 If the government did not have the possibility to enforce undertakings the only recourse it would have in a case of non-implementation of the terms of the authority granted to invest would be to render the investment nugatory. This could entail economic hardship and loss of employment. The enforceability of undertakings and their flexible application provided a reasonable recourse for the government in cases of non-implementation of the proposal as allowed. Moreover, undertakings provided the government with a means of assessing, with confidence, that a proposed investment is, or is likely to be, of significant benefit. Undertakings may be provided with respect to any aspect of the proposed investment as set out in the criteria listed in the Act to be taken into account in assessing significant benefit. An investor's plans with respect to the use of Canadian goods and to exports may properly be considered in assessing the effect of a proposed investment. Many investors submitting proposals, including those involving services and distributorships, may have no other means than through purchase or export undertakings to demonstrate significant benefit. If purchase and export undertakings were not permitted, many potential investors would be denied an equitable opportunity to demonstrate significant benefit.
3.24 The measures the Canadian government took to secure compliance with the Foreign Investment Review Act were, insofar as they related to the purchase or sale of goods, identical in all respects to the measures pertaining to any other aspects of investments allowed under the law. The Canadian practices in this regard were therefore not disguised restrictions on trade within the meaning of the opening sentence of Article XX. The detailed explanation given on the need for undertakings also showed that the undertakings and related administrative practices were not disguised restrictions on trade.
3.25 The United States stated that the undertakings at issue were not necessary to implement the Foreign Investment Review Act and that they constituted disguised restrictions on foreign trade. Two of the conditions of the Article XX(d) exception were therefore not met. The Foreign Investment Review Act itself did not require any undertakings, not to mention undertakings requiring preference for purchase or use of Canadian products or adherence to export performance targets. The Act itself required only that investment proposals be submitted for review to determine whether the proposal was, or was likely to be, of significant benefit to Canada. The effect of the investment on the use of Canadian parts and components and on exports was only one of many factors to be taken into account by the government of Canada in assessing whether a proposal was, or was likely to be, of significant benefit to Canada. Eliciting or accepting binding undertakings to give preference to Canadian products or to meet export targets was therefore an exercise of administrative authority under the Act, rather than a measure necessary to secure compliance with the Act. The undertakings at issue also operated as disguised restrictions on international trade. A preference requiring purchase or use of domestically produced goods obviously restricted trade. Export performance requirements restricted trade by creating artificial export targets for products with which the industries of other contracting parties had to compete. The undertakings at issue, moreover, went far beyond what was necessary to address the concerns that had led to the enactment of the Foreign Investment Review Act.
4. Position of Argentina
4.1 Argentina was heard by the Panel in accordance with paragraph 15 of the Understanding Regarding Notification, Consultation, Dispute Settlement and Surveillance (see paragraph 1.5 above). Argentina said that a distinction should be made between the purchase and export undertakings and their compatibility with the General Agreement on the one hand, and Canada's investment legislation as such on the other. While the former subject could be considered as falling within the competence of GATT, the latter clearly fell outside the purview of the General Agreement. In this connection Argentina recalled that it had been decided not to include the question of investments in the Ministerial declaration in November 1982. The question of GATT competence would need to be taken into consideration by the Panel in interpreting its terms of reference.
4.2 Argentina further said the dispute before the Panel involved two developed contracting parties. The provisions and arguments invoked against Canada were not necessarily those which could legitimately be invoked against developing countries, considering the protection which those countries had the right to grant under the General Agreement to their developing industries. Argentina asked the Panel to take this into account in its deliberations.
5.1 In view of the fact that the General Agreement does not prevent Canada from exercising its sovereign right to regulate foreign direct investments, the Panel examined the purchase and export undertakings by investors subject to the Foreign Investment Review Act of Canada solely in the light of Canada's trade obligations under the General Agreement. This approach is in accordance with the Chairman of the Council's conclusions at the close of the discussion of this question at the Council meeting of 2 November 1982.
5.2 In its statement before the Panel, Argentina also pointed out that the provisions and arguments invoked against Canada in this case were not necessarily those which could be legitimately invoked against less-developed contracting parties, given rights to protect national industries which these contracting parties enjoyed under the General Agreement. The Panel recognizes that in disputes involving less-developed contracting parties full account should be taken of the special provisions in the General Agreement relating to these countries (such as Article XVIII:C). The Panel did not examine the issues before it in the light of these provisions since the dispute only involved developed contracting parties.
5.3 The Panel considered that the examination of undertakings to manufacture goods which would be imported otherwise, as requested by the United States (paragraphs 3.1(b), and 3.17 to 3.19 above), was not covered by its terms of reference which only refer to "the purchase of goods in Canada and/or the export of goods from Canada". Accordingly the Panel did not examine this question.
(b) Undertakings to purchase goods of Canadian origin in preference to imported goods or in specified amounts or proportions, or to purchase goods from Canadian sources
5.4 Article III:4. The Panel first examined whether the purchase undertakings are to be considered "laws, regulations or requirements" within the meaning of Article III:4. As both parties had agreed that the Foreign Investment Review Act and the Foreign Investment Review Regulations - whilst providing for the possibility of written undertakings - did not make their submission obligatory, the question remained whether the undertakings given in individual cases are to be considered "requirements" within the meaning of Article III:4. In this respect the Panel noted that Section 9(c) of the Act refers to "any written undertakings ... relating to the proposed or actual investment given by any party thereto conditional upon the allowance of the investment" and that Section 21 of the Act states that "where a person who has given a written undertaking ... fails or refuses to comply with such undertaking" a court order may be made "directing that person to comply with the undertaking". The Panel further noted that written purchase undertakings - leaving aside the manner in which they may have been arrived at (voluntary submission, encouragement, negotiation, etc.) - once they were accepted, became part of the conditions under which the investment proposals were approved, in which case compliance could be legally enforced. The Panel therefore found that the word "requirements" as used in Article III:4 could be considered a proper description of existing undertakings.
5.5 The Panel could not subscribe to the Canadian view that the word "requirements" in Article III:4 should be interpreted as "mandatory rules applying across-the-board" because this latter concept was already more aptly covered by the term "regulations" and the authors of this provision must have had something different in mind when adding the word "requirements". The mere fact that the few disputes that have so far been brought before the CONTRACTING PARTIES regarding the application of Article III:4 have only concerned laws and regulations does not in the view of the Panel justify an assimilation of "requirements" with "regulations". The Panel also considered that, in judging whether a measure is contrary to obligations under Article III:4, it is not relevant whether it applies across-the-board or only in isolated cases. Any interpretation which would exclude case-by-case action would, in the view of the Panel, defeat the purposes of Article III:4.
5.6 The Panel carefully examined the Canadian view that the purchase undertakings should be considered as private contractual obligations of particular foreign investors vis-à-vis the Canadian government. The Panel recognized that investors might have an economic advantage in assuming purchase undertakings, taking into account the other conditions under which the investment was permitted. The Panel felt, however, that even if this was so, private contractual obligations entered into by investors should not adversely affect the rights which contracting parties, including contracting parties not involved in the dispute, possess under Article III:4 of the General Agreement and which they can exercise on behalf of their exporters. This applies in particular to the rights deriving from the national treatment principle, which - as stated in Article III:1 - is aimed at preventing the use of internal measures "so as to afford protection to domestic production".
5.7 The Panel then examined the question whether less favourable treatment was accorded to imported products than that accorded to like products of Canadian origin in respect of requirements affecting their purchase. For this purpose the Panel distinguished between undertakings to purchase goods of Canadian origin and undertakings to use Canadian sources or suppliers (irrespective of the origin of the goods), and for both types of undertakings took into account the qualifications "available", "reasonably available", or "competitively available".
5.8 The Panel found that undertakings to purchase goods of Canadian origin without any qualification exclude the possibility of purchasing available imported products so that the latter are clearly treated less favourably than domestic products and that such requirements are therefore not consistent with Article III:4. This finding is not modified in cases where undertakings to purchase goods of Canadian origin are subject to the qualification that such goods be "available". It is obvious that if Canadian goods are not available, the question of less favourable treatment of imported goods does not arise.
5.9 When these undertakings are conditional on goods being "competitively available" (as in the majority of cases) the choice between Canadian or imported products may frequently coincide with normal commercial considerations and the latter will not be adversely affected whenever one or the other offer is more competitive. However, it is the Panel's understanding that the qualification "competitively available" is intended to deal with situations where there are Canadian goods available on competitive terms. The Panel considered that in those cases where the imported and domestic product are offered on equivalent terms, adherence to the undertaking would entail giving preference to the domestic product. Whether or not the foreign investor chooses to buy Canadian goods in given practical situations, is not at issue. The purpose of Article III:4 is not to protect the interests of the foreign investor but to ensure that goods originating in any other contracting party benefit from treatment no less favourable than domestic (Canadian) goods, in respect of the requirements that affect their purchase (in Canada). On the basis of these considerations, the Panel found that a requirement to purchase goods of Canadian origin, also when subject to "competitive availability", is contrary to Article III:4. The Panel considered that the alternative qualification "reasonably available" which is used in some cases, is a fortiori inconsistent with Article III:4, since the undertaking in these cases implies that preference has to be given to Canadian goods also when these are not available on entirely competitive terms.
5.10 The Panel then turned to the undertakings to buy from Canadian suppliers. The Panel did not consider the situation where domestic products are not available, since such a situation is not covered by Article III:4. The Panel understood the choice under this type of requirement to apply on the one hand to imported goods if bought through a Canadian agent or importer and on the other hand to Canadian goods which can be purchased either from a Canadian "middleman" or directly from the Canadian producer. The Panel recognized that these requirements might in a number of cases have little or no effect on the choice between imported or domestic products. However, the possibility of purchasing imported products directly from the foreign producer would be excluded and as the conditions of purchasing imported products through a Canadian agent or importer would normally be less advantageous, the imported product would therefore have more difficulty in competing with Canadian products (which are not subject to similar requirements affecting their sale) and be treated less favourably. For this reason, the Panel found that the requirements to buy from Canadian suppliers are inconsistent with Article III:4.
5.11 In case undertakings to purchase from Canadian suppliers are subject to a "competitive availability" qualification, as is frequent, the handicap for the imported product is alleviated as it can be obtained directly from the foreign producer if offered under more competitive conditions than via Canadian sources. In those cases in which Canadian sources and a foreign manufacturer offer a product on equivalent terms, adherence to the undertaking would entail giving preference to Canadian sources, which in practice would tend to result in the purchase being made directly from the Canadian producer, thereby excluding the foreign product. The Panel therefore found that requirements to purchase from Canadian suppliers, also when subject to competitive availability, are contrary to Article III:4. As before (paragraph 5.9), the Panel considered that the qualification "reasonably available" is a fortiori inconsistent with Article III:4.
5.12 The Panel considered the Canadian view expressed in paragraph 3.9 above that the word "requirements" in Article III:4 of the General Agreement should be interpreted in the light of Article 12 of the Havana Charter, the general principles of which the contracting parties, in Article XXIX of the General Agreement, agreed to observe to the fullest extent of their executive authority. The Panel noted that the deletion of Article XXIX of the General Agreement was proposed in 1955 and accepted by all but one contracting party2, and that - although this Article is technically still in force - it refers to an instrument which itself has never been implemented and the acceptance of which is no longer pending as is assumed in Article XXIX. This leaves considerable doubt as to the manner in which its provisions would have been interpreted if they had entered into force. The Panel further noted that paragraph l(c) of Article 12 of the Charter was to apply "without prejudice to existing international agreements to which Members are parties", and that paragraph 1(a), (b) and (d) as well as paragraphs 2 and 3 of this Article tended to encourage international investments (including international co-operation in this field). It is therefore doubtful whether paragraph l(c) which reserved the rights of Members to prescribe "reasonable requirements" should by itself be considered as a "general principle" in the sense of Article XXIX:1 of the General Agreement. The wording of this latter provision suggests that it was not the intention of its drafters that contracting parties should "undertake to observe to the fullest extent of their executive authority" what they would in any case judge to be in their own interest, nor that they should invoke the Charter to detract from their obligations under the General Agreement, but rather that they should observe general principles which reinforced or added to these obligations.
5.13 Article III:5. The Panel then considered the United States contention that purchase undertakings which obliged the investor to purchase in Canada a specified amount or proportion of his requirements were also contrary to Article III:5. The Panel noted that these cases had been characterized by both parties as purchase undertakings (paragraph 2.5) and had also been presented as such by the United States (paragraphs 3.l(a) and 3.12). In this regard the Panel noted that in paragraph 5 of Article III the conditions of purchase are not at issue but rather the existence of internal quantitative regulations relating to the mixture, processing or use of products (irrespective of whether these are purchased or obtained by other means). On the basis of the presentations made, the Panel (which was unable to go into a detailed examination of individual cases where purchase undertakings referred to percentages or specific amounts) therefore did not find sufficient grounds to consider the undertakings in question in the light of Article III:5, but came to the conclusion that they fell under the purchase requirements that had been found inconsistent with Article III:4.
5.14 Article XI. The United States further asked the Panel to find that the purchase undertakings operate as restrictions on the importation of products into Canada and are therefore contrary to Article XI:1. The Panel shares the view of Canada that the General Agreement distinguishes between measures affecting the "importation" of products, which are regulated in Article XI:1, and those affecting "imported products", which are dealt with in Article III. If Article XI:1 were interpreted broadly to cover also internal requirements, Article III would be partly superfluous. Moreover, the exceptions to Article XI:1, in particular those contained in Article XI:2, would also apply to internal requirements restricting imports, which would be contrary to the basic aim of Article III. The Panel did not find, either in the drafting history of the General Agreement or in previous cases examined by the CONTRACTING PARTIES, any evidence justifying such an interpretation of Article XI. For these reasons, the Panel, noting that purchase undertakings do not prevent the importation of goods as such, reached the conclusion that they are not inconsistent with Article XI:1.
5.15 Article XVII:1(c). The United States requested the Panel to find that the purchase undertakings obliging investors to give less favourable treatment to imported products than to domestic products prevent the investors from acting solely in accordance with commercial considerations and that they therefore violate Canada's obligations under Article XVII:1(c).
5.16 The Panel takes the view that, through its reference to sub-paragraph (a), paragraph l(c) of Article XVII of the General Agreement imposes on contracting parties the obligation to act in their relations with state-trading and other enterprises "in a manner consistent with the general principles of non-discriminatory treatment prescribed in this Agreement for governmental measures affecting imports or exports by private traders". This obligation is defined in sub-paragraph (b), which declares, inter alia, that these principles are understood to require the enterprises to make their purchases and sales solely in accordance with commercial considerations. The fact that sub-paragraph (b) does not establish a separate general obligation to allow enterprises to act in accordance with commercial considerations, but merely defines the obligations set out in the preceding sub-paragraph, is made clear through the introductory words "The provisions of sub-paragraph (a) of the paragraph shall be understood to require ...". For these reasons, the Panel considers that the commercial considerations criterion becomes relevant only after it has been determined that the governmental action at issue falls within the scope of the general principles of non-discriminatory treatment prescribed by the General Agreement. The Panel saw great force in Canada's argument that only the most-favoured-nation and not the national treatment obligations fall within the scope of the general principles referred to in Article XVII:1(a). However, the Panel did not consider it necessary to decide in this particular case whether the general reference to the principles of non-discriminatory treatment referred to in Article XVII:1 also comprises the national treatment principle since it had already found the purchase undertakings at issue to be inconsistent with Article III:4 which implements the national treatment principle specifically in respect of purchase requirements.
(c) Undertakings to export specified quantities or proportions
5.17 The United States requested the Panel to find that the undertakings which oblige investors to export specified quantities or proportions of their production are inconsistent with Article XVII:1(c) because the export levels of companies subject to such undertakings cannot be assumed to be the result of a decision-making process based on commercial considerations.
5.18 As explained in paragraph 5.16 above, Article XVII:1(b) does not establish a separate obligation to allow enterprises to act in accordance with commercial considerations but merely defines the obligation of the enterprises, set out in sub-paragraph (a) of Article XVII:1, to "act in a manner consistent with the general principles of non-discriminatory treatment" prescribed in the General Agreement. Hence, before applying the commercial considerations criterion to the export undertakings, the Panel first had to determine whether Canada, in accepting investment proposals on the condition that the investor export a certain quantity or proportion of his production, acts inconsistently with any of the general principles of non-discriminatory treatment prescribed in the General Agreement. The Panel found that there is no provision in the General Agreement which forbids requirements to sell goods in foreign markets in preference to the domestic market. In particular, the General Agreement does not impose on contracting parties the obligation to prevent enterprises from dumping. Therefore, when allowing foreign investments on the condition that the investors export a certain amount or proportion of their production, Canada does not, in the view of the Panel, act inconsistently with any of the principles of non-discriminatory treatment prescribed by the General Agreement for governmental measures affecting exports by private traders. Article XVII:1(c) is for these reasons not applicable to the export undertakings at issue.
(e) Article XX(d)
5.19 Canada contended that, in the event that the Panel were to consider the purchase undertakings to be inconsistent with Article III:4, these would fall within the exception provided for in Article XX(d) of the General Agreement because, within the meaning of that provision, the Foreign Investment Review Act constitutes "a law which is not inconsistent with the provisions of the General Agreement" and the purchase undertakings are "measures necessary to secure compliance" with that law.
5.20 Since Article XX(d) is an exception to the General Agreement it is up to Canada, as the party invoking the exception, to demonstrate that the purchase undertakings are necessary to secure compliance with the Foreign Investment Review Act. On the basis of the explanations given by Canada the Panel could not, however, conclude that the purchase undertakings that were found to be inconsistent with Article III:4 are necessary for the effective administration of the Act. The Panel is in particular not convinced that, in order to achieve the aims of the Act, investors submitting applications under the Act had to be bound to purchasing practices having the effect of giving preference to domestic products. It was not clear to the Panel why a detailed review of investment proposals without purchasing requirements would not be sufficient to enable the Canadian government to determine whether the proposed investments were or were likely to be of significant benefit to Canada within the meaning of Section 2 of the Foreign Investment Review Act.
(f) Other undertakings
5.21 To avoid any misunderstanding the Panel wishes to underline that some of the undertakings mentioned in paragraph 2.5 above, such as undertakings to set up a purchasing division in the Canadian subsidiary or to consult with Canadian industry specialists in drawing up tender lists, - although related to the purchase of goods in Canada - have not been the subject of United States contention in the Panel proceedings and were therefore not examined. The Panel also wishes to stress that the considerations relating to the purchase undertakings examined in paragraphs 5.1 to 5.20 remain strictly without prejudice to the status of other undertakings agreed upon in the context of the Foreign Investment Review Act and referred to in paragraph 2.4 but pertaining to employment, investment, research and development and other subjects which clearly fall outside the scope of the General Agreement.
6.1 In the light of the considerations set out in paragraphs 5.4 to 5.12, the Panel concluded that the practice of Canada to allow certain investments subject to the Foreign Investment Review Act conditional upon written undertakings by the investors to purchase goods of Canadian origin, or goods from Canadian sources, is inconsistent with Article III:4 of the General Agreement according to which contracting parties shall accord to imported products treatment no less favourable than that accorded to like products of national origin in respect of all internal requirements affecting their purchase. The Panel further concluded that in relation to Article III:5, there were insufficient grounds to consider the purchase undertakings which refer to specific amounts or proportions under its provisions (paragraph 5.13). Noting that purchase undertakings do not prevent the importation of goods as such, the Panel reached the conclusion that they are not inconsistent with Article XI:1 (paragraph 5.14). Further, having reached a decision on purchase requirements in relation to Article III:4, the Panel did not consider it necessary to make a specific finding on the interpretation of Article XVII:1(c) in the context of this case, and therefore did not reach a separate conclusion regarding the consistency of purchase requirements with this provision (paragraphs 5.15 and 5.16). On the basis of the evidence before it, the Panel could not conclude that the purchase undertakings that were found to be inconsistent with Article III:4 are necessary within the meaning of Article XX(d) for the effective administration of the Foreign Investment Review Act (paragraphs 5.19 to 5.20).
6.2 For the reasons set out in paragraphs 5.17 and 5.18, the Panel found that Canada does not act inconsistently with Article XVII:1(c) of the General Agreement when allowing certain investments subject to the Foreign Investment Review Act conditional upon undertakings by investors to export a specified amount or proportion of their production. Finally, the Panel considered that the examination of undertakings to manufacture goods which would be imported otherwise was not covered by its terms of reference (paragraph 5.3).
6.3 The Panel is aware that inconsistency with Article III:4 was not intended by the Foreign Investment Review Act, which does not require the submission of undertakings, but that this practice developed as the administration of the Act evolved, to the point that "they are now routinely submitted in support of nearly all larger investment proposals" (paragraph 2.4 above). This evolution may partly reflect the need for foreign investors to demonstrate, by this and other means, to the Canadian administration that their proposed investment would be of significant benefit to Canada. The Panel sympathizes with the desire of the Canadian authorities to ensure that Canadian goods and suppliers would be given a fair chance to compete with imported products. However, the Panel holds the view that the purchase requirements under examination do not stop short of this objective but tend to tip the balance in favour of Canadian products, thus coming into conflict with Article III:4.
6.4 The Panel recognizes that purchase requirements may reflect plans which the investors would have carried out also in the absence of the undertakings; that undertakings with such provisos as "competitive availability" have an adverse impact on imported products only in those cases in which imported and Canadian goods are offered on equivalent terms; and that the undertakings are enforced flexibly. Many of the undertakings, though technically in violation with the General Agreement, therefore possibly do not nullify or impair benefits accruing to the United States under the General Agreement. However, understanding GATT practice, a breach of a rule is presumed to have an adverse impact on other contracting parties (BISD 26S/216), and the Panel also proceeded on this assumption.
6.5 As to the extent to which purchase requirements reflect plans of the investors, the Panel does not consider it relevant nor does it feel competent to judge how the foreign investors are affected by the purchase requirements, as the national treatment obligations of Article III of the General Agreement do not apply to foreign persons or firms but to imported products and serve to protect the interests of producers and exporters established on the territory of any contracting party. Purchase requirements applied to foreign investors in Canada which are inconsistent with Article III:4 can affect the trade interests of all contracting parties, and impinge upon their rights.
6.6 The Panel carefully considered the effects of the purchase requirements on trade. The Panel concluded that an evaluation of these effects would entail scrutiny and analysis of the implementation of several thousands of often differently worded undertakings as well as speculation on what the purchasing behaviour of foreign investors would have been in their absence. The Panel could not undertake such an evaluation and it is therefore not in a position to judge how frequently the purchase requirements cause investors to act differently than they would have acted in the absence of the undertakings and how frequently they therefore adversely affect the trade interests of other contracting parties. The Panel, however, believes that an evaluation of the trade effects was not directly relevant to its findings because a breach of a GATT rule is presumed to have an adverse impact on other contracting parties (see paragraph 6.4 above).
6.7 Taking into account all the above considerations, the Panel considered what scope might exist for modifications of administrative practices under the Foreign Investment Review Act so as to bring them into conformity with Canada's obligations under the General Agreement. In this connection, the Panel considered the following Canadian submission contained in paragraph 3.6 of particular relevance:
"Since both the investor and the Canadian government had to act in the context of markets in which the investor's competitors were not subject to undertakings, it was highly unlikely that purchase undertakings would either be offered or sought that departed significantly from the purchasing practices the investor would follow in the absence of the undertaking."
On the face of it, this statement and the above-mentioned considerations seem to suggest that there may be scope for adapting the administration of the Foreign Investment Review Act in such a way as to remove the implication that imported products are treated less favourably than domestic products. The Panel notes that in a previous case another Panel had been confronted with a somewhat similar situation and had suggested a solution along these lines.3 In the case at issue, the Panel considers that the Canadian authorities might resolve the problem by ensuring that any future purchase undertakings will not provide more favourable treatment to Canadian products in relation to imported products. The Panel's findings also apply to existing purchase undertakings. However, the Panel recognizes that an immediate application of its findings to these undertakings might cause difficulties in the administration of the Foreign Investment Review Act. Consequently, the Panel suggests that the CONTRACTING PARTIES recommend that Canada bring the existing purchase undertakings as soon as possible into conformity with its obligations under the General Agreement, and invite Canada to report on the steps taken to that effect before the end of 1985.
2 Protocol Amending Part I and Articles XXIX and XXX of the General Agreement on Tariffs and Trade, annexed to the Final Act adopted at the Ninth Session of the CONTRACTING PARTIES, published 10 March 1955. This protocol did not enter into force (see Status of Legal Instruments, page 2-7.1).
In the light of the foregoing facts and considerations the Panel could not subscribe to the assumption that the drafters of Article III had intended the term "requirements" to exclude requirements connected with the regulation of international investments and did not find anything in the negotiating history, the wording, the objectives and the subsequent application of Article III which would support such an interpretation.
3 BISD 7S/66-67: "The Panel considered, furthermore, that if the considered view of the Italian Government was that these credit facilities had not influenced the terms of competition on the Italian market, there would not seem to be a serious problem in amending the operation of the Law so as to avoid any discrimination as regards these credit facilities between the domestic and imported tractors and agricultural machinery."