5 February 1988

3.21 The European Communities maintained that there had been numerous breaches of the Statement of Intentions on the part of the Canadian provinces. The European Communities said that since 1979 a number of increases in the mark-up differentials had taken place and that no satisfactory evidence of the commercial considerations which might justify these increases had been provided. It was precisely because the Communities were not satisfied with the implementation of the Statement and because there were no legal means of securing its enforcement, that the Communities concluded that it had no option other than to invoke its rights under the General Agreement.

3.22 Canada said that it was incorrect to assert that there had been numerous breaches of the agreement. The provinces had, in fact, provided the EC on a number of occasions with an itemized and detailed breakdown of the rationale behind the increases in mark-up differentials and that the EC had never provided any evidence to the contrary. Canada also provided additional extensive information supplied by ten Canadian provinces and concerning provincial adherence to the 1979 Statement. It was Canada's view that the provinces were generally living up to the Statement. In a few instances, it was acknowledged that some further changes were still required to bring a particular practice into line with the Statement and that commitments had been made to comply fully by the time the Statement was to be fully implemented, i.e. by 31 December 1987. Canada noted that it was premature and quite inaccurate to claim that provincial commitments had not been fully met or implemented.

3.23 The European Communities agreed that Article II:4 should, in accordance with its interpretative note, be interpreted in the light of Article 31 of the Havana Charter, in particular its paragraph 4. Accordingly, the imposition by import monopolies of mark-ups on imported products could only be justified by commercial considerations on the basis of: (i) transportation, distribution and other expenses incident to the purchase, sale or further processing and (ii) a reasonable margin of profit. The European Communities did not argue that mark-up differentials between imported and domestic products could never be justified by additional costs associated with imported products. However, in the EC's view, the existence of such differentials constituted prima facie evidence of the protective character of the mark-ups. In the EC's view, Canada had not presented evidence which would justify, in these terms, the various mark-up differentials. It also said that no evidence had been presented which could explain, on the basis of cost differentials, the wide variety of mark-ups applied from province to province. In this context, the Communities noted that a number of provinces did not apply any mark-up differentials, whereas Ontario, British Columbia and Quebec maintained high differential levels. The Communities noted substantial increases in differentials of mark-up between domestic and imported wines. It argued that these increases were not justified by "normal commercial considerations" and were contrary to Canada's commitments contained in the 1979 Statement of Intentions. The European Communities noted that "the environmental cost" invoked by one of the provinces did not seem to represent a "normal commercial consideration" and it did not understand how application of the latter criteria might be compatible with such a wide variety in the mark-up differentials from province to province.

3.24 Canada disagreed that the existence of mark-up differentials between imported and domestic products constituted prima facie evidence of protectionism. First, Canada noted that whereas domestic wine producers were themselves responsible for transporting their products to the stores, provincial liquor boards were responsible for store delivery of imported products. Great distances in a number of Canadian provinces meant that there were significant costs associated with the transportation and distribution of imported products, costs which the provinces tried to recover through their pricing policies. Canada further said that the provincial liquor boards, consistent with the practice of private commercial enterprises, charged what they believed the market could bear. Since liquor boards marketed imported products as premium products, it was only normal that the products tended to obtain high prices. Canada noted that the Statement of Intentions itself provided an explanation of the various mark-up differentials found amongst the provinces. For example, the wine mark-up provision of the Statement called for the differential to be frozen at 1979 levels (except for any commercially justifiable increases). Canada argued that EC had thus agreed to permit the provincial monopolies to differentiate between imported and domestic products. Canada recalled that there was no undertaking in the Statement which addressed the question of beer mark-ups, even though differential mark-ups did exist in this Sector in 1979 and were well-known to Canada's trading partners at the time the Statement was negotiated. In Canada's view the justification for certain isolated increases in mark-up differentials above 1979 levels had been previously provided to the EC and were provided to the Panel.

3.25 Referring to the variety of mark-up differentials applied from province to province, Canada noted that there were in Canada ten independent provincial systems each with its own associated costs and objectives and that there was a substantial degree of regional variations in consumption patterns. In addition, the terms of the Statement itself provided an indication as to why different mark-up differentials existed across the country.

3.26 The European Communities argued that the application of generally higher mark-ups on imported than on domestic products might not be justified on the basis of a "reasonable margin of profit". In the Communities' view, the standard of reasonableness could not be one which distinguished between the origin of the products. Neither was the actual development of the Communities' exports to Canada and of their share in the Canadian market in any way related to the notion of a "reasonable margin of profit". In the EC's view, the development did not say what would have occurred in the absence of the mark-up differentials. The Communities argued that Canada had failed to provide evidence that it conformed with the requirement of a "reasonable margin of profit" and to show on what basis profit margins were calculated.

3.27 Canada said that it also provided a commercial justification for the existence of differential mark-ups drawing, in particular, from the drafting history of Article II:4. Canada argued that in the light of the provisions of Article 31 of the Havana Charter, particularly Article 31:4 the provinces had not applied an amount of protection in excess of that permitted under Article II:4. First, Canada said that the differential mark-ups in each of the provinces generally reflected transportation, distribution and other expenses incident to the purchase as well as a reasonable margin of profit which according to Article 31:4 of the Havana Charter should be excluded from calculation of the amount of protection permitted under Article II:4. In Canada's view, the drafting history of Article II:4 implied that a reasonable margin of profit was initially meant to be a margin in the case of an export monopoly which "should not be so excessive as to restrict the volume of trade in the product concerned" (Report of the First Session of the Preparatory Committee of the United Nations Conference on Trade and Employment - October 1946, page 17). Canada argued that at a later stage of the drafting history of Article II:4, it was made clear that the phrase "reasonable margin of profit" applied to import monopolies as well. Canada showed that its total imports of alcoholic beverages registered significant increases in value signifying that only "reasonable margins of profit" were applied.

3.28 Canada also noted that Ad Article II:4 referred to Article 31 of the Havana Charter as a whole, including the fiscal purposes set out in Article 31:6. It acknowledged that in certain instances differential mark-ups reflected revenue maximization objectives, and that these were particularly important in the wine sector. Canada argued, however, that this was exceptional and that generally mark-up differentials reflected the additional commercial costs associated with imported products and that this was agreed to in 1979 under the Statement of Intentions. Finally, Canada said that in the light of the EC's agreement to the mark-up provisions of the Statement of Intentions - an agreement as foreseen in the Interpretative Note Article II:4 - it was Canada's view that provincial mark-ups which were consistent with the different mark-up obligations under Statement of Intentions were, ipso facto, consistent with Article II:4 and did not provide protection ... in excess of the amount of protection provided for in [the Canadian] Schedule.

3.29 The European Communities argued that the high mark-ups and mark-up differentials were set in order to maximize profit for revenue-generating purposes. In the EC's view it was therefore evident that the mark-ups were at a higher level than could be considered to be a reasonable margin of profit, i.e. a margin which could reasonably be expected under normal conditions of competition.

3.30 The European Communities said revenue maximization per se did not justify the imposition of higher mark-ups on imported than on domestic products. Such mark-up differentials were to be considered equivalent to an import duty and the EC maintained that there was no basis in Article II for their justification on grounds of revenue generation. In the Communities' view, it was also doubtful whether Article 31:6 of the Havana Charter was relevant to the interpretation of Article II:4 of the General Agreement. The Communities argued that in any event Article 31:6 could not be interpreted as to justify higher mark-ups on imported than on domestic products. The EC noted that Article II:4 did not take into consideration the fiscal character of a state-trading monopoly and that literal interpretation of Article 31:4 of the Havana Charter suggested that mark-ups applied to imported products for revenue purposes in excess of reasonable profit margins were to be assimilated in their total amount to import duties. The Community did not contend, however, that the entire amount of the mark-up applied for fiscal purposes was necessarily equivalent to an import duty. It accepted instead that Article II:4 could be interpreted to cover only the mark-up differentials since fiscal mark-ups could be assimilated to internal taxes. The EC noted that Article 31:4 of the Havana Charter did not regard internal taxes conforming to the provisions of Article 18 (Article III of the General Agreement) as import duties. This corresponded to the principle of Article II:2 (a) of the General Agreement and to the definition of "import mark-up" in the Interpretative Note to Article XVII:4 (b). In the Communities' view, fiscal mark-ups applied in conformity with the national treatment requirement of Article III:2 were not covered by Article II:4. A contrario, fiscal mark-ups applied to imported products in excess of those applied to like domestic products were to be treated as protective monopoly margins coming under Article II:4.

(c) Article III

3.31 The European Communities considered that fiscal objectives were the primary purpose of the provincial marketing agencies and that fiscal mark-ups should be also dealt with under Article III. In the Communities' view these mark-ups constituted a form of taxation of the consumption of alcoholic beverages. Such mark-ups came under the broad notions of "internal charges" in Article III:1 and "internal charges of any kind" in Article III:2. In the EC's view these mark-ups were applied to imported alcoholic beverages in excess of those applied to domestic products and were therefore inconsistent with Article III:2. They thereby afforded protection to domestic production and were therefore also inconsistent with Article III:1. The European Communities noted that both the 1967 Report of the Ontario Committee on Taxation (Smith Report) and the 1971 Report of the (Quebec) Commission of Enquiry into Trade in Alcoholic Beverages (Rapport Thinnel) concluded that the revenues derived from the mark-ups imposed by the respective provincial liquor monopolies constituted a form of taxation and severely criticised the protectionist character of the mark-up differentials.

3.32 The European Communities quoted examples of discriminatory requirements relating to listing and delisting procedures and sales outlets and noted that Canada recognized the existence of such practices. In the Communities' view the measures were laid down generally, and in a binding manner, by the provincial authorities and were not merely the result of individual decisions by the managers of the marketing agency outlets. They did apply "across-the-board" and contained conditions which had to be met by a foreign exporter in order to obtain access to the Canadian market. The Communities said that the provincial authorities laid down the conditions for obtaining a listing and pre-established the conditions for a product to remain on that listing, such as minimum sales requirements. The Communities noted that the exclusion of imported alcoholic beverages from certain sales outlets was also prescribed generally and in a binding manner. An importer would only obtain a listing or have access to a sales outlet if the conditions laid down by the provincial authorities were met. The measures in question therefore constituted regulations or at least requirements within the meaning of Article III. In the Communities' view, it followed from the Panel Report on "Canada - Administration of the Foreign Investment Review Act" (BISD 30S/140) that the term "requirement" used in Article III, paragraphs 1 and 4 was given a wide interpretation.

3.33 In the view of the Communities, the discriminatory provincial measures constituted prima facie evidence of protection to domestic production inconsistent with Article III:1. They constituted, in particular, less favourable treatment than that accorded to like products of national (or domestic) origin inconsistent with Article III:4. In the European Communities' view the discriminatory measures could not be justified on the basis of the Statement of Intentions since the Community had not waived its GATT rightS by taking note of the Statement. The European Communities also noted that the Statement provided, in the second paragraph or Article 6, for national treatment with respect to access to listings for imported distilled spirits.

3.34 Canada argued firstly that there were no internal discriminatory measures being applied by the Federal Government of Canada and that the Importation of Intoxicating Liquors Act had no relevance to Article III since it was not an internal tax, charge, law, regulation or requirement. In Canada's view, Article III spoke of "imported" products, i.e. product that had already crossed the border and cleared customs, and the federal legislation in question related to the "importation" of product. Secondly, Canada recalled that the Importation of Intoxicating Liquors Act constituted existing legislation within the meaning of paragraph l(b) of the Protocol of Provisional Application. Thirdly, it was the view of Canada that since the General Agreement specifically addressed the question of mark-ups under Article II:4 in the context of customs duties, they should not deal with the issue under Article III. It was the view of Canada that Article III was not relevant in this case, given the provisions of Article XVII. First, Canada argued referring to the drafting history cf Article XVII, to the subsequent changes in the title of Article XVII of GATT and to the Analytical Index to the GATT (see paras 3.39 and 3.41-3.42) that it clearly was not the intention of the drafters to introduce, with respect to activities carried out by state trading enterprises, the principle of national treatment with respect to Article XVII. Secondly, Canada referred to the Panel report relating to Canada's administration of its Foreign Investment Review Act and concluded that the provincial marketing agencies might legitimately provide more favourable treatment to domestic products than that accorded to imported products because the provincial marketing agencies were not required to observe the principle of national treatment in respect to their mark-up listing or distribution practices (see para 3.43). Notwithstanding this position Canada also argued that differential internal charges resulting from different commercial costs associated with imported products were permitted under Article III.

3.35 Canada also said that by accepting the Statement of Intentions, in particular its mark-up provision for spirits, the EC had recognized that there were different costs associated with imported products. It noted that the Interpretative Note to Article XVII:4 defined the term "import mark-up" as exclusive of what is generally described as 'commercial considerations' in Article XVII:1(b). Moreover, since in the view of Canada the Statement of Intentions constituted an agreement of the type envisaged under Article II:4, differential mark-ups could not be, ipso facto, inconsistent with Article III.

3.36 It was furthermore the view of Canada that Article III was not relevant to this case, given the provisions of Article XVII (see paras 3.47-3.49). Neither did Canada accept the argument that many commercial practices referred to by the EC were truly regulatory "requirements" as contemplated by Article III. Canada said that the two reports quoted by the EC did not reflect the position of the provincial governments concerned. In Canada's view, the texts quoted by the Communities were also taken out of context and were somewhat misleading.

(d) Article XVII:1

3.37 The European Communities asserted that Article XVII:1 contained a national treatment obligation. First, in the EC's view, sub-paragraph (a) of Article XVII:1 referred to the general principles of non-discriminatory treatment in the plural which appeared to cover national treatment. Second, sub-paragraph (b) required state-trading enterprises to have due regard to the other provisions of the Agreement, thereby referring also to Article III, and to act solely in accordance with commercial considerations. This suggested in the EC's view that these enterprises might not treat imported products less favourably than products of national origin. Third, Article XVII:2 contained an exemption from Paragraph 1 for imports of products for consumption in governmental use which paralleled the provisions of Article III:8(a). In the second sentence it contained, with respect to such imports, an obligation to accord to the trade of the other contracting parties fair and equitable treatment which meant essentially most-favoured-nation treatment. Article XVII:2 appeared superfluous and self-contradictory if the obligations under paragraph 1 only covered most-favoured-nation treatment.

3.38 Canada considered that Article XVII:1 only contained the most-favoured-nation principle. First Canada argued that the drafting history of the Article XVII:1(b) did not support the EC's claim that it referred, inter alia, to Article III. In Canada's view Article XVII:(b) referred directly to Article XVII:1(a) where the most-favoured-nation principle applies. Canada considered that the purpose of Article XVII:1(b) was to clarify the meaning of Article XVII:l(a) - i.e. to provide some commercial guidelines to purchasing and selling by these enterprises. In this regard, Canada noted that the Canadian delegate had made a specific reference to the phrase "commercial considerations" during the Geneva Conference. The delegate had called attention to the fact that the expression "Commercial considerations" should not be defined in narrow terms. "These words did not mean simply the lowest price but referred to other legitimate considerations which the enterprise would be entitle to take into account they did not simply mean to buy and sell at lowest and highest prices." Second, Canada recalled that "the activities of marketing boards which do not purchase or sell must be in accordance with the other provisions of GATT" (BISD 9S/180, paragraph 8). In Canada's view, the clause indicated that the activities of marketing boards which did purchase and sell were governed by Article XVII and did not need to be in accordance with other provisions of GATT. Third, Canada recalled that the Family Allowance panel report (BISD 1S/60, paragraph 4) noted:

3.39 Canada also said that it could not agree that the wording of Article III:8 paralleled that of XVII:2 and said that, at the Geneva Conference (E/PC/T/A/PV-37; 12 August 1947) one delegate, discussing the differences in wording of the two articles had indicated that the wording "should not necessarily correspond because the nature of the subject was different". Canada also recalled the basis of the language which now formed Article XVII:2 as first suggested by one delegation at the London Conference (E/PC/T/CII 52, page 1) and concluded that this language was not introduced to provide for the concept of national treatment. Canada argued that a Geneva Conference reference (from E/PC/T/A/PV37 12 August 1947) also confirmed this. At the Conference one delegate had said "In the case of Article 15, we find it a question of national treatment and here in the case of state trading such as is envisaged in this Article [read XVII] there is no question of national treatment". Canada also referred to a statement by another delegate to the Geneva Conference who had argued that state-trading enterprises should be subject to the same standard of conduct to which private enterprises adhered (E/PC/T/A/PV37 - 12 August 1947). This was, in Canada's view, noteworthy because private enterprises had no national treatment obligation under the GATT. Canada recalled that at the 1947 Geneva Conference, Article 30, bore the title "Non-discriminatory Treatment" and suggested that a state enterprise should, "in its purchases or sales involving either imports or exports, act in a manner consistent with the general principles of non-discriminatory treatment applied in this Charter to governmental measures affecting imports or exports by private traders." It noted that the Analytical Index to the GATT (Third Revision pages 93-94) suggested that the words "General Principles of Non-discriminatory Treatment" were inserted at Geneva "in order to allay the doubt that "commercial principles" meant that exactly the same price would have to exist in different markets" (EPCT/A/SR.14 page 3). In the view of Canada it clearly was not the intention of this amendment to introduce the principle of national treatment into Article XVII.

3.40 Intensive research which Canada had undertaken into the drafting history had revealed no reference to the inclusion of national treatment in the discussion leading to the adoption of Article XVII:1. Under Article 26 of the United States "Suggested Charter for an International Trade Organization of the United Nations", which served as a basis for the London Conference in October-November 1946, state-trading enterprises were to accord "non-discriminatory treatment, as compared with the treatment accorded to the commerce of any country other than that in which the enterprise is located". At the London Conference the non-discrimination obligation was reformulated to read: "... the commerce of other Members shall be accorded treatment no less favourable than that accorded to the commerce of any country, other than that in which the enterprise is located ...". Three references to the Article on state-trading in the records of the London Conference confirmed, in the view of Canada, that this Article was understood to establish only a most-favoured-nation obligation. A delegate had said introducing the Article that the rule of non-discrimination applied to state trading in the same manner as the most-favoured-nation principle applied to duties, and that the obligation of a country engaged in state trading was to make its purchases in accordance with commercial considerations (E/PC/T/C.II.36, page 11). Canada argued that this reference and others cited at E/PC/T/C.II.52 pages 2 and 3 confirmed that national treatment was not envisaged in the Article but only MFN treatment.

3.41 Canada argued that the Geneva language, with minor editorial changes, was the language incorporated into the Havana Charter and the original text of the General Agreement. The title of Article XVII of the GATT had been modified to read "Non-discriminatory Treatment on the part of the State-Trading Enterprises". The change in the title to the present title "State Trading" only occurred in 1955 because the scope of the Article was expanded to include provisions for negotiations and notification (XVII:3 and XVII:4). Referring to the secretariat analysis connected with this revision of Article XVII (W.9/99, 15 December 1954) Canada noted that there was nothing in this document to suggest that the phrase "non-discriminatory treatment" had evolved to include "national treatment".

3.42 Canada also recalled that during the Second Session of the Preparatory Committee of the United Nations Conference on Trade and Employment, on at least two separate occasions, delegations referred explicitly to the scope of the State Trading provisions. One delegate said that the Article on State Trading was limited "to most-favoured-nation treatment and not to national treatment" (EPCT/A/SR.10). Canada also noted that no disagreement had been expressed at the Conference to the interpretation of Article 31 (read Article XVII) by another delegate suggesting that provisions in Chapter V, which include those pertaining to national treatment "would be inoperative" in the case of state enterprises (E/PC/T/A/SR/15, pages 6-7). This interpretation of the scope of Article XVII was also shared by an academic authority on world trade law.

3.43 Canada recalled that the panel on Canada's Administration of its Foreign Investment Review Act "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)".

3.44 The European Communities did not contest that this might have originally been the intention behind a number of earlier drafts to include only an obligation of most-favoured-nation treatment in Article XVII. It noted, however, that this intention was not reflected in the present wording which was based on a text introduced into Article 30 of the draft at the 1947 Geneva Conference. The Communities argued that the interpretation advanced by Canada only appeared to be consistent with the general principles of GATT if the reference in Article XVII:1(a) to "purchases and sales involving either imports or exports" were interpreted to cover only the purchases from foreign sources and the sales to foreign markets, but not the resale of products bought from foreign sources in the domestic market. In the Communities' view the Canadian interpretation would narrow considerably the scope of Article XVII. The European Communities also argued that if this interpretation were correct then it would appear all the more imperative to apply the provisions of Article III, and in particular its paragraph 4, to discriminatory measures imposed by governmental agencies affecting the internal sale, offering for sale, purchase, transportation, distribution or use of imported products. The European Communities said that if, on the other hand, Article XVII:1 was interpreted to cover the resale of imported products on the domestic market by state-trading enterprises, as the Community believed was correct, then it would seem quite inconsistent to limit the obligations under this provision to most-favoured-nation treatment.

(e) Article XVII:4 Notification

3.45 The European Communities considered that Canada had not fully complied with its notification obligations under Article XVII:4(a) because the information provided by Canada had been inadequate in the light of the procedures for notifications and reviews adopted on 9 November 1962 (BISD 11S/58) and, in particular, in the light of the questionnaire to be used in submitting notifications (BISD 9S/184). The Communities noted that in one key section contracting parties were invited to provide a description of: "How export prices are determined. How the mark-up on imported products is determined. How export prices and resale prices of imports compare with domestic prices." It also noted that the routine notifications by Canada of national production figures for wine and spirits did not provide a breakdown according to the main product groups (e.g. document L/5445/Add.9). The Communities argued that resolution of its long-standing dispute with Canada over the issue before the Panel would have been facilitated if the notification requirements had been met as the CONTRACTING PARTIES intended.

3.46 Canada held that it had met its obligations under Article XVII:4 as it had been providing information to the CONTRACTING PARTIES since 1977 concerning provincial liquor boards practices, including information pertaining to the determination of provincial mark-ups. Contracting Parties were advised in Canada's 1982 state-trading notification that the provisions of the Statement of Intentions applied to the mark-up policies of the individual provincial liquor control agencies. Given that there were ten provinces and a great number of different mark-up policies involved, Canadian authorities had decided that it would be impracticable to go into such detail on a product-by-product, province-by-province basis. However, Canada said that it had always been willing to provide greater details on the determination of mark-ups in response to any question put by a contracting party. Since 1977 only one such request had been received (from the EC) and Canadian authorities had responded by providing detailed information showing the different costs associated with domestic versus imported products which justified the application of differential mark-ups. Similar information had been provided to the EC on a number of occasions in the context of the 1979 Statement of Intentions. In some instances, information had not been provided for reasons of commercial confidentiality as permitted under Article XVII:4. Moreover, Canada noted that under the 1979 Statement of Intentions, the provinces undertook to have every liquor board outlet maintain an up-to-date price list of all alcoholic beverages sold within the province and that such price lists were readily available to anyone requesting them. Canada also stated that the mark-up reference in Article XVII:4(b) referred to a product "which is not the subject of a concession under Article II" and that in Canada's tariff schedule in the alcoholic beverage sector every item was bound. Moreover, it pointed out that the EC referred to a number of questions in the questionnaire related to exports. In Canada's view these questions were irrelevant because the liquor boards had no export interests. Statistics provided in the Canadian notification were consistent with agreed notification procedures since there was no requirement for an itemized breakdown as suggested by the EC. Canada also noted that its statistics itemized import and export statistics on a monthly basis.

(f) Relationship between Article III and Article XVII

3.47 Canada contended that Article III was not relevant in this case, given the provisions of Article XVII which contained the only obligation related to state trading, that was, most favoured nation treatment. Canada argued that there was no national treatment obligation applicable to state-trading enterprises. It argued that the Interpretative Note to Articles XI, XII, XIII, XIV and XVIII showed that other GATT provisions applied to state-trading enterprises by specific reference only. In Canada's view this Note would be redundant if all GATT provisions were to apply to state-trading enterprises. In addition, if all provisions of the GATT were to apply equally to state-trading enterprise, this would mean that Article XVII was redundant. In Canada's view, this was certainly not the case. Canada rejected as irrelevant the EC's reference to the Panel Report on Canada - Administration of the Foreign Investment Review Act because, in its view, the Panel was not examining the operation of state-trading enterprises. It also noted that in the light of paragraph 8 of the Panel Report on the Notification of State-Trading Enterprises (BISD 9S/179) and paragraph 4 of the Belgian Family Allowance Panel Report (BISD 1S/60) the activities of trading enterprises, such as liquor boards, need not be in accordance with Article III. Canada also recalled that no disagreement had been expressed at the United Nations Conference on Trade and Employment as to the interpretation of Article 31 (read Article XVII) suggesting that provisions in Chapter V, which include those pertaining to national treatment "would be inoperative", in the case of state enterprises (E/PC/T/SR/l5, pages 6-7).

3.48 The European Communities argued that Article XVII did not exclude application of Article III but imposed certain additional obligations with respect to purchasing and selling by state-trading enterprises. The objective of Article XVII was to submit the operations of state-trading enterprises to certain rules which did not apply to private enterprises, but clearly not to privilege such enterprises and exempt contracting parties from their other obligations as far as the operation of state-trading enterprises was concerned. It noted that the provisions of Article III, and in particular the national treatment requirement of paragraph 4, applied to all laws, regulations and requirements governing the commercial activities of governmental agencies outside the scope of paragraph 8(a). The Communities also argued that the Interpretative Note to Articles XI, XII, XIII, XIV and XVIII implied that Article XVII was not a lex specialis exempting state-trading from all other provisions of the General Agreement. In the EC's view, both the London Report and the Panel Report on the Notification of State-Trading Enterprises (BISD 9S/180) confirmed that the other provisions of GATT might apply to the activities of marketing boards and did not say that these provisions were not applicable in the context of marketing boards which purchase and sell. In the view of the Community, Article XVII being of a subsidiary character applied only to the extent that the measures in question were not covered by other provisions of the General Agreement. The Communities argued that this opinion was also confirmed by paragraph 5:6 of the Panel report on "Canada - Administration of the Foreign Investment Review Act" (BISD 30S/140), which stated the following: "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."

3.49 Canada argued that the EC's claim of "additional obligations" for state-trading enterprises was also not sustainable in the light of the discussions during the Geneva Conference. At the Conference one delegation had felt it had to fight to ensure that the state-trading enterprise was subject to the same standard of conduct to which a private enterprise adhered (E/PC/T/A/PV.14 at 28-29). This same theme was found in E/PC/T/A/SR/17 (24 June 1947, pages 11-12) where another delegation argued that "[t]he Charter should not impose exclusive burdens upon any country ..." and still another delegation noted that the Charter represented a compromise between free trading and controlled foreign trade. Moreover, Canada recalled that one delegate to the Conference had also highlighted the special nature of Article XVII when he noted that "Article 31 [read Article XVII] and 32 were intended to operate only when the special difficulties of the post-war period disappeared, and international trade functioned under normal conditions (E/PC/T/A/SR/14 - 19 June 1947 at 1). Against this background Canada concluded that Article XVII was a special article designed to address the peculiarities of state-trading enterprises.

(g) Article XI

3.50 The European Communities expressed the view that the discriminatory provincial measures restricting access of foreign alcoholic beverages to listings and sales outlets should also be examined under Article XI in the light of the Interpretative Note to Articles XI, XII, XIV and XVIII, which provided that the term "import restrictions" included restrictions made operative through state-trading operations. The European Communities argued that these measures operated as restrictions on the importation of alcoholic beverages into Canada and could therefore be considered contrary to Article XI:1.

3.51 Canada argued that no "prohibitions or restrictions other than duties, taxes or other charges, whether made effective through quotas, import or export licences or other measures", were instituted or maintained by Canada on the importation of any alcoholic beverages into Canada. In Canada's view the measures in question were provincial measures, not measures taken by Canada. The measures applied to "imported" product and were not associated with the "importation" of product. Finally, Canada argued that the practices were consistent with the Statement of Intentions. Consequently, Canada believed that the provincial measures in question were consistent with Article XI.

(h) Article XXIV:12

3.52 The European Communities maintained that Article XXIV:12 could not be interpreted as limiting the applicability of other provisions of the GATT but only as qualifying the obligation of Federal States to secure the implementation of these provisions. The Communities argued that the "limited applicability" approach would upset the balance of rights and obligations between unitary and federal states and would open the door to wide and uncontrollable: possibilities to escape from many of the most fundamental GATT obligations. The Communities argued that the provisions should be interpreted in the light of the fundamental principle of international law embodied in Article 27 of the Vienna Convention, namely "that a party may not invoke the provisions of its internal laws as justification for its failure to perform a treaty".

3.53 Canada objected to the EC suggestion that federal state clauses should be given a restrictive interpretation in order to avoid "imbalances" in the rights and obligations created by the treaty. Canada also noted that it was not attempting to rely on the provisions of its internal law as a "justification" for "failure to perform a treaty", in contravention of Article 27 of the Vienna Convention. On the contrary in Canada's view, it was the application of the treaty itself which required a consideration of Canada's internal law. Canada said that Article XXIV:12 was a federal state clause, and by definition, the internal constitutional law of contracting parties with a federal structure, was central to the interpretation and application of such a clause. Canada's internal law was relevant not in order to suspend the application of the treaty or to excuse a breach of any of its provisions, but rather in order to give a proper effect to the provisions of the treaty as a whole, including Article XXIV:12.

3.54 The European Communities recalled that the question of the interpretation of Article XXIV:12 had been examined in detail by the Panel on Measures affecting the Sale of Gold Coins and it requested the present Panel to confirm the interpretation of this provision by the Panel. The Communities supported the finding that according to the drafting history "Article XXIV:12 applied only to those measures taken at a regional or local level which the Federal Government could not control because they fell outside its jurisdiction under the constitutional distribution of competence" (L/5867, paragraph 56). It recalled that the Gold Coins Panel came to the conclusion that "as an exception to a general principle of law favouring certain contracting parties, Article XXIV:12 should be interpreted in a way that met the constitutional difficulties which federal states might have in ensuring the observance of the provision of the General Agreement by local governments, while minimizing the danger that such difficulties led to imbalances in the rights and obligations of contracting parties. Only an interpretation according to which Article XXIV:12 did not limit the applicability of the provision of the General Agreement but merely limited the obligations of federal states to secure their implementation would achieve this aim".

3.55 Canada argued that the Gold Coins Panel went beyond interpreting Canada's current GATT obligations and elaborated a new balance of rights and obligations. Canada said that it had never understood the suggestion that provincial action could lead to a prima facie case of nullification and impairment without regard to whether the contracting party had discharged its obligations under Article XXIV:12. In Canada's view, there was no such thing as a prima facie case without a breach of the treaty, and there could be no breach if reasonable measures had been taken as required by Article XXIV:12. The Gold Coins Panel had considered a prima facie case existed because the Ontario measure was "inconsistent" with Article III:2. Canada argued that there was a logical inconsistency in this finding. If Article XXIV:12 qualifies the obligations, as the Panel had suggested, then surely it made no sense to read Article III or any of the other substantive provisions of the GATT in isolation from this clause. Canada suggested that nothing could properly be described as "inconsistent" with a treaty that did not in fact amount to a breach or violation of the treaty terms. In Canada's view, it followed that there could not be a prima facie case involving provincial action unless it was first established that the contracting party had failed to take reasonable measures in any case where Article XXIV:12 applied. In Canada's opinion, the foregoing analysis was equally valid whether one accepted Canada's view that Article XXIV:12 went to applicability or whether one accepted the opposite view urged by the EC. Canada said that the interpretation of Article XXIV:12 found in the Gold Coins report - a report which had no status in GATT and with which Canada and Brazil could not agree - ought to be ignored by this Panel.

3.56 The European Communities argued that if Canada's arguments were accepted no redress would be available in cases where observance of GATT provisions by local governments could not be assured, except perhaps where a tariff concession had been impaired.

3.57 Canada noted that nothing precluded a contracting party from seeking redress through Article XXIII if it believed that a benefit accruing to it directly or indirectly under GATT was being nullified or impaired by, inter alia, an action inconsistent with another Contracting Party's GATT obligations or " the existence of any other situation" (i.e. non-violation nullification or impairment).

3.58 Canada considered that given the lack of GATT jurisprudence referring to Article XXIV:12 it was necessary to analyse the drafting history to determine the basis on which contracting parties made their decision on accession to the General Agreement. Canada recalled that the question of local and regional governments arose very soon after the start of the first preparatory meeting of the UN Conference on Trade and Employment in London in October 1946 where one delegate, in particular, noted that "in several countries it would be constitutionally impossible to control the actions of states and other lower taxing authorities" (E/PC/T/C.II/W.2; page 5). As a result of the ensuing discussion, a revised Article 9 was presented on 31 October 1946 in paragraph 4 of which it read: "Each member agrees that it will take all measures open to it to ensure that the objectives of this Article are not impaired in any way by taxes, charges, laws, regulations or requirements of subsidiary governments within the territory of the member government". (E/PC/T/C.II/W.5 31 October 1946). Canada recalled that already at that time its delegation expressed concerns that the "acceptance of such a commitment would mean that the Canadian Government would be legally bound to exercise in this connection the right of veto, which had been established for dealing with important constitutional matters". (E/PC/T/C.II/W.14, pages 4-5). One delegation noted in that context that "all measures open to it" meant "all measures legally possible" and would not require any action inconsistent with a national constitution (E/PC/T/C.II/W.14, page 7). In Canada's view the aforementioned intervention did indicate that there was an immediate recognition of the need to address the question of to what extent was a member obliged to act with respect to the action of a sub-national level of government and showed that Canada immediately disagreed with the view that "it would take all measures open to it".

3.59 In the context of continuing discussions on this provision at the 1947 Geneva session, one delegation, reflecting the views of the majority, referred to local authorities "which are not strictly bound, so to speak, by the provisions of the Agreement, depending of course upon the constitutional procedure of the country concerned." (UN doc. E/PC/T/TAC/PV.19, pages 32-3). Canada concluded that delegations at the early drafting conferences recognized (i) that in the context of the discussions on the General Agreement and the ITO Charter, it was necessary to come to terms with measures taken by another level of government in a federal state; (ii) that several countries would not be in a position to adopt the General Agreement if such local level measures were to create a direct breach of the basic GATT obligations of the national government which was the contracting party; and, therefore, (iii) that a separate obligation was required in order to attempt to come to terms with such a special case, an obligation which was to cover the entire Agreement. This separate obligation was that contained in Article XXIV:12. Canada further argued that this view was reinforced by proposals made at the Havana Conference to extend even further the scope of what was, in effect, the Article XXIV:12 obligation by suggesting the following addition: "Each Member... shall be responsible for any act or omission to act contrary to the provisions of this Charter on the part of any such governments and authorities." (i.e. of a regional and local nature). This amendment was proposed twice and was twice withdrawn, as several delegations could not accept it. (E/CONF.2/C.6/12, page 28; E/CONF.2/C.6/48/rev.1, page 4; E/CONF.2/C.6/12/add.18, page 1; E/CONF.2/C.6/SR.32, page 5). In Canada's view these events clearly indicated that delegations accepted that, depending on the precise nature of specific constitutional regimes, the obligation of a contracting party with respect to measures taken by other levels of government did not necessarily include direct responsibility in terms of basic GATT obligations for such measures but rather responsibility in terms of Article XXIV:12. Canada noted that this position was further reinforced by the statement of the Canadian delegation at Havana (i.e. as reflected in a Canadian Government document entitled the "Report of the Canadian Delegation to the United Nations Conference on Trade and Employment at Havana" (July 13, 1948).

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