5 February 1988

3.60 Canada went on to state that the GATT was a contract which provided an overall balance and that in the case at hand this balance was provided by Article XXIV:12. It considered it necessary and proper to address the nature and scope of Canada's Article XXIV:12 obligations only if the Panel were to find that provincial measures did not observe certain provisions of the GATT. Canada noted that the language of Article XXIV:12 introduced the concept of "observance" of the other provisions of the General Agreement by regional or local levels of government and it was the view of Canada that lack of observance by another level of government did not, in itself, entail a breach of an obligation by the contracting party and represented a distinct and important GATT concept. In Canada's view Article XXIV:12 limited the applicability of the other provisions of the General Agreement because otherwise the paragraph would be deprived of its practical content. This signified that provincial measures, even if not in observance of the GATT, could not be regarded as being inconsistent with the General Agreement and, therefore, could not in themselves be the basis for prima facie case of nullification and impairment.

3.61 The European Communities responded that an interpretation of Article XXIV:12 as limiting the obligation of federal states to secure the implementation of the provisions of the General Agreement would not mean that the Article was redundant. It noted that the CONTRACTING PARTIES had in the past always ruled that measures found to be inconsistent with the General Agreement should be withdrawn and that compensation should be resorted to only if the immediate withdrawal of such measures was impracticable and as a temporary measure pending this withdrawal (BISD 26S/216, paragraph 4). Under the implementation approach redress would be limited to the subsidiary right to compensation, pending the success of reasonable measures taken in accordance with Article XXIV:12. The European Communities considered that this consequence respected the objective of Article XXIV:12 to avoid situations in which a government would be obliged to take actions inconsistent with its constitution, but it respected also the right to redress of a contracting party in cases of nullification or impairment of benefits as a result of a failure of another contracting party to carry out its GATT obligations. In the view of the Communities the drafting history of Article XXIV:12 pre-supposed the application of the GATT provisions to all levels of government and merely addressed the question of how these obligations had to be implemented in situations which were beyond the direct control of central governments. Canada argued that the 1979 Understanding Regarding Notification, Consultation, Dispute Settlement and Surveillance (BISD 26S/216, paragraph 4) did not sustain the view that a contracting party had to remove a measure which was inconsistent with, or did not observe, the GATT, nor did GATT practice. Canada noted that clearly, such a removal should "usually" be the "first objective", but in its view, this approach was not absolute; it was not unqualified. Canada argued that a contracting party might choose not to remove a measure found to be inconsistent with or not to observe the GATT; that was why procedures were available for compensation and compensatory withdrawals. If the "implementation" approach to Article XXIV:12 were adopted, it would mean, when comparing a very decentralized federal system like Canada with a more centralized constitutional system, there would be (a) no difference related to the possibility of establishing prima facie nullification or impairment with respect to GATT provisions other than Article XXIV:12; and (b) no difference with respect to securing the removal of a measure inconsistent with or not observing other GATT provisions. Yet, in Canada's view, Article XXIV:12 had to have practical content.

3.62 The European Communities argued that the provincial measures in question and in particular the imposition of discriminatory mark-ups were ultra vires and that the Federal Government had the power to rectify this situation. First, it quoted a Canadian legal authority who, on the basis of two decisions of the Supreme Court of Canada (Murphy v. C.P.R. (1958), S.C.R. 626, Caloil v. A.G. for Canada (1971) S.C.R. 353), came to the conclusion that the Federal Parliament, because of its exclusive competence over the regulation of trade and commerce, possessed all the necessary powers to assure the observance of the provisions of the GATT by the provinces. In the Communities' view the case was all the more convincing with respect to action by import monopolies authorized by federal legislation and with respect to the imposition of discriminatory mark-ups inconsistent with Canada's tariff concessions. Second, the Communities recalled that both the Commission of Enquiry on Trade in Alcoholic Beverages in Quebec and the Ontario Committee on Taxation, had considered that the protectionist measures by the provincial liquor monopolies were not in line with the distribution of powers under the Canadian Constitution.

3.63 In Canada's view there could not be a serious argument that the provincial legislation was itself invalid because of its allegedly protectionist character, at least as far as the basic principles of that legislation were concerned. Canada recalled that the provinces had full authority to set up the boards and to control their pricing and retail policies and that the Canadian courts had upheld these powers. Canada argued that liquor was a commodity like any other and that provincial marketing boards controlling internal transactions had been upheld on many occasions (e.g. in the Home Oil case of 1940). So in Canada's view there was no question about the validity of the legislation as such. Canada also noted that the situation was different in the Gold Coins case in which Canada did concede the existence of a valid question about the constitutionality of the legislation as such.

3.64 Canada called attention to a number of constitutional limitations on the manner in which the provinces could exercise their constitutional authority over the internal distribution of imported products. On the one hand, it was recognized that provincial legislation respecting local commerce might validly have an effect on international or interprovincial trade. On the other hand, Canada argued, that cases decided in the field of agricultural marketing showed that the provinces could not set up a monopoly board with the specific object of interfering with such trade. Canada argued, however, that the essential principle of exclusive provincial control over internal retailing practices was, nonetheless, beyond dispute.

3.65 Referring to the legal opinion suggesting that the Federal Parliament had all the necessary powers to assure respect of the GATT provisions by the provinces, Canada argued that no decided case justified such sweeping conclusions. In Canada's view the question of whether the Canadian Federal Authority had the legislative authority to control the provincial measures relating to the treatment of imported alcoholic beverages, involved Canadian constitutional law touching on the ultimate scope of the "Trade and Commerce" power (s. 91(2), Constitution Act, 1867) and the issue of treaty implementation. In Canada's view these were issues which could only be authoritatively resolved by the Supreme Court of Canada. Canada said that the constitutional jurisprudence in Canada had undergone a constant evolution since Confederation in 1867, and that it was conceivable that future decisions of the Supreme Court would have the effect of expanding federal powers in these fields. However, Canada recalled that the decided cases did not support the proposition that the Federal Government could exercise direct control over these matters. First, unlike almost all other federations, the treaty implementation powers of Canada's federal legislation were limited. The Labour Conventions Case of 1937 held that the Canadian Federal Parliament could not intrude into areas of exclusive provincial jurisdiction on the ground that treaty obligations were involved. Second, the "Trade and Commerce" power had been given an extremely restrictive interpretation by the Canadian Courts. Essentially, it had been limited to control over transboundary transactions, excluding any authority over the internal distribution of imported or local products. There were isolated decisions which had allowed, by way of exception, very limited controls over subsequent distribution when such controls had been deemed indispensable to a regulatory scheme respecting import policies. In Canada's view these decisions could not, however, be seen as a basis for any form of comprehensive regulation of retailing policy, either generally or in connection with a particular economic sector. Canada noted that a series of more recent supreme court decisions seemed to reverse the trend towards an expansion of federal "Trade and Commerce" power and effectively to re-establish the traditional limitation of federal authority to transboundary transactions.

3.66 Canada said that the courts had from time to time referred to a nebulous concept know as a "general" Trade and Commerce power. This concept had never been given practical effect and had remained essentially a dead letter. In Canada's view, this aspect of the "Trade and Commerce" power did not extend to the detailed regulation of local commerce. On numerous occasions, the Courts had stressed that the "Trade and Commerce" power in its general sense could not serve as a basis for the control of a "particular business or trade" - i.e., a specific economic sector. Canada said that in a series of early cases arising out of "temperance" and "prohibition" legislation, the Courts had recognized that the Federal Parliament (along with the provinces) could deal with liquor control as a matter of public order and morality. However, this extraordinary power gave the Federal Government absolutely no authority over the purely commercial aspects of retail marketing. In Canada's opinion, the Courts had stressed that it was a power to prohibit and not to regulate (see e.g. Gold Seal Ltd. v. A.G. Alta (1921) 62 S.C.R. 424 at 465). In any event, the Federal Government had withdrawn from the field of "temperance" or "prohibition" legislation. Finally, Parliament could not enact legislation in the form of general principles that would act as constraints on provincial legislative power. That was something that could only be accomplished by a constitutional amendment. Canada quoted the following opinion of a Canadian constitutional scholar: "Our courts, in contrast to those of the United States and Australia, now refuse to supersede provincial law for mere abstract or theoretical conflict with an allegedly paramount federal statute. There must be 'operating incompatibility' in the sense that compliance with a provincial statute implies breach of a federal statute in the particular circumstances." Canada argued that the "paramountcy", doctrine dealt with situations of overlapping jurisdiction and allowed federal legislation to suspend the operation of a provincial law where the two were in direct conflict. Under recent jurisprudence, this doctrine applied only where two rules of a concrete nature were in direct conflict. It did not allow for any interference with provincial legislation that might be said to conflict with a general principle set forth in a federal statute. Referring to the views expressed by the Commission of Enquiry on Trade in Alcoholic Beverages in Quebec and the Ontario Committee on Taxation cited by the EC in support of its constitutional argument, Canada noted that these were not authorities with any legal status and that the reports were policy documents that made no pretence of addressing an issue of constitutional validity.

3.67 The European Communities did not consider that Canada had taken such reasonable measures as were available to it to ensure observance of the provisions of the General Agreement by the provinces. The European Communities recalled that according to the Interpretative Note to Article III:1 in determining which measures were 'reasonable', the consequences of non-observance by the local government for trade relations with other contracting parties were to be weighed against domestic difficulties of securing observance. First, the Communities considered that the mark-up differentials and the discriminatory market access conditions had serious consequences for the other contracting parties because they nullified or impaired trade concessions negotiated with Canada. It also had negative consequences for Canada because it could impair its ability to exchange tariff concessions with other contracting parties. Second, the Communities argued that it was not evident that a rectification of the situation would cause serious administrative or financial difficulties to the provinces. The Communities said that the inadequate character of Canada's measures followed already from the fact that Canada considered erroneously that the Statement of Intentions set out the full extent of the provinces' obligations in this sector. The European Communities accepted that the implementation of the Statement would represent a step towards ensuring observance of the provisions of the General Agreement by the Canadian provinces. However, in the Communities' view, the measures envisaged under the Statement were clearly insufficient to ensure full observance since with respect to certain GATT inconsistent practices they only related to a standstill undertaking and since other practices, such as discriminatory mark-ups on imported beer, were not covered. The implementation of the Statement would not therefore satisfy fully the obligations under Article XXIV:12. In the Communities' view, the obligations of Article XXIV:12 could only be met by measures ensuring the elimination of all GATT inconsistent practices by the Canadian liquor boards over a reasonable period of time. The European Communities noted that Canada had not ensured the respect of the Statement of Intentions since the undertakings had in many areas not been progressively implemented, certain mark-up differentials had been increased, and certain new differentials introduced.

3.68 Canada disagreed that the Interpretative Note to paragraph 1 of Article III supported the EC position with respect to Article XXIV:12. First, the examples used in this Interpretative Note referred to "national enabling legislation authorizing local government to impose internal taxes ...". Canada argued that with respect to the provincial measures at issue, the Federal Government did not authorize anything since provincial authority was derived from Canada's Constitution. Second, the first sentence of Ad Article III:1 made it clear that the application of this paragraph to internal taxes by local governments was subject to the provisions of Article XXIV:12, and not the reverse. Referring to the Communities' comments about negative consequences of mark-up differentials Canada argued that GATT provided a balance in its entirety and that the case at hand was clearly an instance in which this balance was provided by Article XXIV:12. Canada said that this confirmed the view that the Canadian obligation was that contained in Article XXIV:12. In order to clarify the meaning of the phrase "such reasonable measures" Canada conducted an extensive research into the drafting history of Article XXIV:12. It noted that during the 1946 London preparatory meeting one delegation referred to "our best efforts" (E/PC/T/13, at 1) and another noted "the obligation to accord fair and equitable treatment in awarding contracts applied to both central and local governments where the central government was traditionally or constitutionally able to control the local government." (E/PC/T/C.II/27, at 1). Canada noted that the subsequent attempts of tightening the obligation to take "all necessary measures open to it", (E/PC/T/C.II/54, at 6) did not survive and that the draft agreements that emerged from the New York Conference (Article 88(5) of the draft Charter) referred to "such reasonable measures as may be available", (E/PC/T/34, at 53 and E/PC/T/34, at 79). Similarly, Canada noted, that a number of other attempts by one delegation during the Havana Conference to tighten the formula (see: E/CONF.2/C.6/12, at 28, E/CONF.2/C.6/48/Rev.1, at 4 and E/CONF.2/C.6/12/Add.18, at 1) had been abandoned "because some countries could not for administrative reasons accept it" (E/CONF.2/C.6/SR.32, at 5).

3.69 Finally, Canada recalled that in its report to the Canadian Government on the Havana Conference, the Canadian delegation commented as follows on what was then Paragraph 3 of Article 104 of the draft Charter: "Paragraph 3, which is independent in operation and applied to all obligations under the Charter was taken without change from the Geneva draft. It deals with the question of the powers of the Members in relation to those of regional and local governments and authorities within that Member's territory. Attempts were made by non-federal states to insert provisions which would have obligated Members to 'take all necessary measures' to ensure observance of the provisions of the Charter by the regional and local governments and authorities within its territory. This, for obvious reasons, proved unacceptable. The text, as was agreed upon, requires each Member to 'take such reasonable measures as may be available to it' to ensure observance of the provisions of the Charter." The Canadian delegation went on to report: "It should be noted that even though a measure may be 'available' (e.g., constitutionally or, in the case of Canada under the British North America Act [now the Constitution Act, 1867]), it may not be 'reasonable'. In such a case there is no obligation on the part of a Member to take any measure which that Member itself considers unreasonable." Canada recalled its view at the time of the Havana Charter - which it still held - that there was no obligation on a contracting party to take any measure, which that contracting party considered to be unreasonable. Clearly "reasonable" meant something less than "all measures open" to the federal authority or "all necessary measures". Canada accepted that it had to take such measures as might be reasonable in the circumstances to attempt to convince the provinces to observe the provisions of the General Agreement with respect to their provincial liquor board policies and practices. It also suggested that the following general guidelines were of assistance in applying this standard:

3.70 In Canada's view, "reasonable measures" in this case meant ensuring that the provinces lived up to their obligations under the Statement of Intentions. Canada said that since 1979 the Federal Government had been in constant contact with provincial authorities on a large number of occasions to review the provinces' progress in implementing the Statement. There had also been numerous communications received from Canada's trading partners since 1979 and in each case Canada had used its good offices in the preparation of responses. Moreover, in Canada's view, the extensive information provided by the provinces and submitted to the Panel, concerning provincial adherence to the 1979 Statement suggested that the provinces were generally living up to the Statement. In a few instances, Canada acknowledged that some further changes were still required to bring a particular practice into line with the Statement, but commitments had been made to comply fully by the time the Statement was to be fully implemented (i.e. by 31 December 1987).

3.71 The European Communities argued that a reasonable measure for the federal legislature to take would be legislative action requiring that the provinces respected Canada's GATT obligations. Canada had, however, not even taken the measures clearly available to the Federal Government in order to eliminate the breaches of the tariff concessions or at least reduce their importance, such, for example as a reduction of the customs duties collected at the border. In the view of the European Communities these duties, together with the imposition of the import mark-ups, constituted protection in excess of the tariff concessions given by Canada, inconsistent with Article II.

3.72 The European Communities argued that the initiation by the federal government of a formal constitutional challenge to the provincial rules on import mark-ups and discriminatory market access requirements in violation of Canada's GATT obligations could also be considered a reasonable measure. It recalled an expert's view with respect to a similar case which recommended that the Federal Government tests the limits of its authority by presenting a formal constitutional challenge to the provincial measures. Consequently, in the EC's view, the failure of the Federal Government of Canada to take any legislative or judicial action in order to rectify the situation was evidence that Canada had not complied with its obligations under Article XXIV:12.

3.73 Canada argued that any overriding federal legislation would have to be of a detailed, regulatory character and would have to intervene directly in the specifics of retailing policy. However, in Canada's view the federal power did not allow for the regulation of a single industry or trade. It did not allow the federal government to take over the detailed regulation of a specific economic sector in its local aspects. Canada recalled that, while the exact outer limits of the Trade and Commerce power were not always clear, the courts had always insisted on the above limitation. In Canada's view this ruled out detailed overriding legislation that would be required to deal with the matter under consideration here. Canada again pointed out that the Canadian constitution was subject to evolution and nothing was cast in stone, but on this point at least the EC theory of the scope of federal legislative power was extremely dubious. In Canada's view, if there was a constitutional question related to the provincial legislation on liquor boards it was not one that appeared on the face of the legislation but only in its detailed implementation in practice.

3.74 Canada said that, in a nutshell, there were two ways in which constitutional cases came before the Canadian courts. First, in the vast majority of cases - hundreds each year - the issues came up in ordinary litigation brought by private parties in the trial level courts of each province. Second, in extremely rare and exceptional cases the federal government itself took the initiative by way of a direct "Reference" to the Supreme Court of Canada, the highest court in the land. The provinces could also make direct "References" to their own Courts of Appeal, but in Canada's view that was not an option that had any practical relevance here. Canada noted that there were major differences between these two procedures. Ordinary litigation started off with a trial. This was where the factual evidence was developed, through witnesses and discoveries. After the trial decision, there was a possibility of two further appeals, ending up in the Supreme Court of Canada. Although the litigation was generally private, the federal government had an opportunity to participate as an intervenor. In some of the major Trade and Commerce cases, Canada had done just that. The Reference procedure was completely different, even apart from its rarity. There was no trial, no witnesses, no evidence in the ordinary sense and there was only one stage in the whole procedure. In Canada's view, the Reference procedure could play an important role in certain exceptional circumstances. It was generally used to obtain a definitive ruling in emergency situations of national importance. Canada noted, however, that the Reference procedure was used where novel, untested constitutional theories were at stake. In Canada's view, References were of exceptional character (there have only been about eight in the last 20 years and this contrasts with hundreds of constitutional cases brought in the ordinary way). Canada argued that there were important reasons of principle behind this practice. A Supreme Court Reference bypasses the provincial court system. In several recent cases the Supreme Court had emphasized that the provincial courts were the pivot of the Canadian constitutional system. Canada argued that that role would be undermined if the Reference procedure initiated by the federal government were used in any but the most exceptional circumstances. In Canada's view the idea of a Federal Government Reference in this case might be characterized as an abuse of the process of the Supreme Court.

3.75 Canada recognized that the federal legislation undoubtedly enhanced the effective functioning of the provincial regimes, but in its view it could not be characterized as an essential condition of their constitutional validity or their viability. Nor, did the legislation involve any control over the retailing policies of these boards. Canada argued that if the federal legislation were repealed, direct private imports bypassing the boards would, of course, cease to be prohibited, but the provincial monopoly over the subsequent retail distribution of the product would remain intact. Consequently, Canada argued that, whatever the exact scope "reasonable measures" under Article XXIV:12, they could not, include legislation on matters that had traditionally been considered the exclusive constitutional prerogative of the local governments, nor legislation that would constitute a radical departure from established constitutional practice and that would be open to serious legal challenge under the internal law of the relevant contracting party.

(i) Nullification or Impairment

3.76 Canada argued that since April 1979, imports and the share of total Canadian alcoholic beverage imports from the EC/10 had increased substantially. It agreed that examination of sales by volume was one measure that could be examined, but it also said that it was misleading to examine sales of imported product without examining the overall sales of those products. In Canada's view, the demonstrable reasons for changing sales also included changes in Canadian tastes and consumption patterns, with sales of some types of products increasing while sales of other products decreased. Canada noted that the EC appeared to be a major beneficiary of these changes.

3.77 Canada said that total sales of wine in Canada had shown a steady increase since the early 1970's. In its view, a detailed comparison of differences of annual sales of various types of wine, by volume, between 1980 and 1985, indicated that sales of product imported from the Communities outperformed sales of Canadian product in almost all categories. In instances where consumption of a product type had increased, the sales of EC product had increased to a greater extent than domestic sales. In other instances where overall consumption of a product decreased, sales of Canadian product suffered more than sales of EC product. Canada argued that EC sales had not decreased because of provincial measures, but because of changing Canadian tastes. Further, in Canada's view, these changing tastes had hurt the Canadian industry much more than the EC. Canada noted that while sales of wine had increased, total Canadian sales of spirits had declined almost steadily since 1979. For example, between 1979 and 1985 total Canadian sales of brandy, gin and whisky had all declined. During this period, sales of imported gin and whisky had experienced a decline, but domestic sales of these products had declined at a greater rate. Sales of imported brandy had actually increased during this period while sales of domestic brandy had decreased. Therefore, in Canada's view, over the period in question, the imported product in those categories for which the EC was the major supplier, had increased their market shares while domestic market share had decreased.

3.78 In Canada's view, examination of trade statistics clearly showed that EC access to the Canadian market had not been, nor was it being, nullified or impaired. It was also noted that the EC had not substantiated their claim that liquor board practices constituted obstacles to EC trade. In Canada's view, such a demonstration would be impossible because there had been a substantial increase in EC exports since 1979.

3.79 The European Communities considered that the application of measures which were judged to be inconsistent with the GATT obligations of the contracting party concerned constituted, prima facie, a case of nullification or impairment. The Communities argued that it was therefore not necessary to provide evidence of the actual damage to its trade caused by the discriminatory measures. The Communities noted that Canada tended to assess trade performance in terms of the Community's share of the total import market without taking into consideration the development of domestic production and shipments in the main product categories. Due attention should be also given to trade volumes rather than value. In this regard the European Communities noted that if one took an average of 1983-85 period and compared it with the situation before 1979, increases in volume of total wine sales over that period coincided with substantial decreases in volume of sales of certain categories of wine or distilled spirits.

3.80 The European Communities considered that the statistics provided by Canada gave no indication of imports which could have taken place in the absence of the discriminatory practices. In addition the European Communities noted that on the basis of information provided by Canada, it was clear that imports as a percentage share of total Canadian sales (in value) of wine had fallen between 1979 and 1985 in six out of ten provinces, including the three most populous provinces of Ontario, Quebec and British Colombia. It argued that the Communities had concentrated its analysis mainly on trade volume and it drew attention to a decline in Canada's imports of a number of major product categories of alcoholic drinks in the period 1978-1985. Moreover, in the Communities view information relating to Communities exports to Canada for the period 1978-1985 confirmed that in volume terms there had been only a modest overall increase in Community exports of alcoholic drinks.

(1) Statement by Australia

3.81 In a statement to the Panel Australia supported the EC position set out in L/5777 with regard to mark-ups and restrictions on the points of sale available to imported products. In Australia's view, the latter practices effectively formed a quantitative restriction on imports. Listing requirements particularly disadvantaged new or specialist products such as specific Australian wines. Australia considered the listings requirements to be a breach of Article III:4. Australia also said that through higher mark-ups, Australian products received less favourable treatment than those provided for in the schedule and Australia considered the mark-ups to breach Article II:4. In Australia's view, Canada had obligations under Article XXIV to use "reasonable measures" to secure from the provincial marketing agents an open import regime in Canada for wines, spirits and other alcoholic beverages particularly as the measures were applied by all the Canadian provinces and therefore, had the characteristics of a national policy. Australia recalled the following particular instances where the Canadian Government had not taken reasonable measures to ameliorate provincial practices despite representations from Australia:

3.82 Despite numerous bilateral representations to the Canadian Government the Australian Government did not consider that the Canadian Government had fully utilized all reasonable measures available to it within its constitutional system. At the same time, Australia considered that the introduction of federal legislation which might have an overriding effect on the political balance of a federation, by impinging on constitutional arrangements and the division of powers between the national and provincial governments, as not being 'reasonable measures'.

3.83 Australia said that at the time of the Canada/Australia Tokyo Round settlement, it had pointed out that the provincial Statement of Intentions would not resolve the Australian wine industry's problems with the Canadian provincial marketing agencies and therefore Australia was not prepared to offer further payment for the inclusion of the statement in a settlement. Australia recalled that the Canadian Government had acknowledged that the statement would not resolve all difficulties experienced by Australia but had seen the statement as 'giving suppliers a foot in the door'. The Canadian Government had indicated its hope that, if the statement were to form part of an Australia/Canada bilateral settlement, Australia could indicate that it welcomed the statement as a positive step which had been 'taken into account' in arriving at the overall settlement. It was argued that this would give the Canadian Government a little more leverage over the provincial governments. In Australia's view the Canadian Government had not sought payment for the inclusion of the statement in the bilateral settlement. The Canadian Statement of Intentions had been passed to the Australian Government under a cover note which included a reference to the preparedness of the Canadian Government to use 'its good offices' to take up Australian concerns with the provincial agencies. The Canadian Government had argued this would help reassure Australia that the Canadian Federal Government would adopt an active (rather than a liaison) role in intervening with the provincial agencies on behalf of foreign governments. Accordingly, it was Australia's understanding that the Canadian Government had not put the statement forward as an intention of the provincial liquor boards alone. Rather it would appear that the intent of the Canadian Government had been to undertake a greater degree of obligation under Article XXIV(12) in regard to this matter than would otherwise have been the case. Australia argued that this view was supported by the Canadian Government's action in extracting promises collectively from the provinces and linking these promises through itself in an international settlement. In Australia's view a reasonable action by the Canadian Government on a complaint would be for it to establish the facts of that complaint with the liquor board concerned and demand rectification in accordance with the agreement. Australia was concerned by the proposition put forward by Canada that the liquor board undertaking modified, in a less onerous way, its obligations. Australia said that it had not accepted such an interpretation at the time of the Tokyo Round negotiations nor did it now.

3.84 Responding to Australia's comment on a link between the listing requirements and the sales volume, Canada noted that quotas were supplied to ensure that sales, and therefore profits, justify the liquor board's investment in ordering, warehousing, distributing and retailing these products. While Australia argued that this practice discriminated against new or lesser known products, in Canada's view the sales quota policy was applied to virtually all products - domestic and imported. In some provinces, sales quotas for some imported products, such as spirits, were actually lower than for domestic spirits. In addition, through generating private stock orders by individuals and licensed establishments, agents had ample opportunity to demonstrate to the liquor board that a particular product would be capable of meeting the required sales quota. In response to Australia's comment on distribution of shelf space, Canada noted that shelving decisions were made by individual store managers to reflect individual store product mixes and sales. It also recalled that the rationale for differential mark-ups was spelled out in detail elsewhere in the report and noted that non-quota based specialty listing were also available to foreign suppliers. Canada also submitted to the Panel a copy of a letter from the Australian Mission in Geneva to the Geneva Mission of Canada and a text signed by the Canadian and Australian delegations, both dated 22 January 1980, concerning the results of the bilateral negotiations between the two countries during the Tokyo Round. Canada said that both documents confirmed that the Provincial Statement of Intentions with Respect to Sales of Alcoholic Beverages by Provincial Marketing Agencies in Canada formed part of the results of bilateral negotiations between Canada and Australia in the Tokyo Round. The submitted text also stated that the offer (Statement of Intentions) and its acceptance was made subject to GATT rights and obligations. Canada also noted that in its submission to the Panel, Australia indicated that in giving the Statement of Intentions, the Government of Canada was undertaking specific 'obligations' reflecting the combined intentions of the Provincial Governments. In Canada's view, this showed that Australian authorities recognized the significance of the Statement as a negotiated obligation.

(m) Statement by the United States

3.85 The United States noted that there were three types of restrictive practices by various provincial liquor boards which it believed were in conflict with the GATT (i) charging higher price mark-ups on the sale of imported beverages than provincially produced beverages or, in the alternative, beverages produced elsewhere in Canada; (ii) allowing the sale of imported beverages through fewer retail outlets than domestically produced beverages; and (iii) "listing" restrictions that restrict the number of brands of imported products that may be sold.

3.86 The practices in question were maintained by various provincial governments in Canada, with some variations among Canadian provinces. The provinces acted through provincial liquor boards under the control of the provincial governments. While Canada had in the past argued that the boards were state-trading enterprises, in the United States' view they were in fact under the control of the provincial governments, which appointed the boards and which, in a "Provincial Statement of Intentions" of 1979, assumed responsibility for the practices of the boards. The United States argued that the practices in question thus should be viewed as governmental practices, rather than those of a state enterprise in the sense of Article XVII.

3.87 In the United States' opinion, all three types of restrictions referred to above were inconsistent with Article III of the GATT, in that imported products were treated less favourably than domestic products. In addition, the higher mark-ups imposed might also be considered to violate Article II, and Article XI, in that they resulted in an additional charge on imports above the bound Canadian rates of duty, and they constituted a de facto quantitative limitation on imports. The United States further believed that many of the provincial listing practices violated Articles I and XIII of the GATT, because provincial liquor boards permitted proportionately far fewer listings of American wines than other imported wines. Finally, the United States considered that all these restrictions impaired the benefit of tariff concessions granted by Canada in the GATT.

3.88 With regard to mark-up policy on wine, the United States was specifically concerned about the practices of Ontario, Quebec, British Colombia, Saskatchewan, Manitoba and Alberta. It provided statistical evidence suggesting that imported products were marked up more than the provincial product or other Canadian products in these provinces. The United States had the same concerns about discriminatory mark-ups on beer and other alcoholic beverages in all provinces.

3.89 In the view of the United States such discriminatory mark-ups, imposed by state agencies, contravened Article III:2, because they constituted a higher charge on the sale of imported products. They were also inconsistent with Article III:4, in that the requirement of higher mark-ups on imported products than on like products produced within the province clearly treated imported products less-favourably than like domestic products. The fact that in some cases provincial liquor boards also discriminated against like products of other Canadian provinces did not exempt these measures from Article III, since GATT Article III obligations could not be avoided by discriminating in part against other domestic products.

3.90 The United States considered that, in the alternative, the mark-ups might be viewed as a form of import charge, since the provincial boards that established these mark-ups also had a monopoly on importation of the products into the provinces. As such, the mark-ups were inconsistent with Article II, paragraphs l(b) and 4. Since the United States had not had the opportunity to hear the positions of the parties on these matters, it did not know which alternative approach the Panel or the parties would consider, but in its view these practices clearly contravened the General Agreement, regardless of whether one was considering them in the light of Article II or Article III.

3.91 The United States noted that in its bilateral discussions with Canada, the Canadians had at times argued that the higher mark-ups on imports were justified by the smaller volume of retail sales of imported products, which they said entailed a higher per unit cost of handling which must be passed on to the Canadian consumer. However, in the view of the United States, the lower sales volume resulted from restrictions imposed on imports; it was hardly likely that, in the absence of such restrictions, imports would all be sold at low volumes and domestic products would all be sold at high volumes so as to justify the arbitrary discrimination imposed by the provincial governments.

TO CONTINUE WITH IMPORT, DISTRIBUTION AND SALE OF ALCOHOLIC DRINKS BY CANADIAN PROVINCIAL MARKETING AGENCIES