5 February 1988

3.92 The United States noted that the provincial liquor control boards delegated domestic beer wholesaling to the local breweries who acted as distribution agents. In some provinces, beer could be sold in grocery stores. Imported beer, however, could only be sold in the liquor control board stores (about 10 per cent of the distribution system) and only after a listing had been granted. The United States had been particularly concerned about the British Columbia "cold beer stores" and sales outlets for wine products in British Columbia and Quebec. In Quebec, domestic bottled wines could be sold in grocery stores while most imported wines may not. Only imported bulk wine, bottled in Quebec, might be sold in grocery stores. In British Columbia, imported bottled wines might not be sold in certain types of outlets that were permitted to sell wine produced in British Columbia. In the view of the United States such restrictions on distribution of imported products relative to like domestic products clearly contravened Article III:4, in that they treated domestic products more favourably than like imported products.

3.93 With regard to the number of listings granted to US wine products, the United States noted that provincial products might be automatically listed but that imports were not and that listing policies prevented competition among all sources. The United States said that its wines as well as other alcoholic beverages and beer were generally given few listings and it provided statistical evidence to illustrate this point. In the view of the United States, these listing policies were inconsistent with Article III:4, in that they treated imported products less favourably than domestic products. These policies also violated Articles I and XIII in so far as the US wines were treated less favourably than other imported wines. While in this respect the United States claim differed from that of the EC, the United States noted that Canadian compliance with Article III would result in improved treatment for wines of both the United States and the EC.

3.94 The United States said that Canada had in the past contended that the provinces had control over importation and sale of alcoholic beverages, and that the Canadian Federal Government's only obligation with respect to matters under provincial control was to take "such reasonable measures as may be available ... to ensure observance of the provisions" of the GATT. The implication of Canada's argument was that the federal government could do nothing about even such blatantly discriminatory practices as those discussed above, while other contracting parties had no rights other than, presumably, to ask the Canadian Government to exhort the provinces to do better. The United States said that it could not agree with this attitude.

3.95 In the view of the United States Canada could, and had to, do more than merely try to persuade its provincial governments to comply with Canada's GATT obligations. The United States was not convinced that the Federal Government of Canada could not challenge the provincial practices in its courts. The United States considered that the determination of what measures by Canada were "reasonable" to ensure the observance of GATT provisions by provincial governments was not a determination left solely to Canada to make. The United States urged the Panel to recommend that Canada ensure the removal of these GATT-inconsistent measures applied by the provincial liquor boards.

3.96 Referring to the United States' comment on types of restrictive practices Canada argued that one first had to assess whether the differential practices were consistent with the Statement of Intentions. Canada argued that when this test was undertaken, it became clear that the provinces were generally living up to their 1979 commitments. In response to the arguments relating to restrictions on the number of brands imported, fewer listings of United States wineries and alleged less favourable treatment, Canada recalled that in exercising their business judgement, the liquor boards considered new listings on the merits of individual products using the following criteria: quality, price, public demand, marketability, relationship to other products of the same type already listed, performance in other markets. Canada recalled that the Statement of Intentions required MFN treatment for listings of imported products. It concluded, therefore, that differential treatment of domestic products was allowed. Canada noted that the rationale for the differential mark-ups was considered elsewhere in this report and said that "cold beer stores" should read "licensed retail stores". With respect to imported products, Canada argued that no country carried an equal number of listings from each of its trading partners. Consumer preference was the determining factor for the number of listings carried from each country. In Canada's view in the private sector, similar differences would also exist. Canada also provided additional listing information to the Panel following, what it considered to be, inaccurate data provided by the US delegation and discussed several US arguments which, in its view, failed to take account of more recent changes that had been made.

4.1 The Panel noted that two questions were posed in its terms of reference, namely "whether certain practices of provincial agencies which market alcoholic beverages (i.e. liquor boards) are in accordance with the provisions of the General Agreement" and "whether Canada has carried out its obligations under the General Agreement". It decided to deal with the first question before examining the second.

4.2 The Panel recalled that the practices complained of related to mark-up practices, including restaurant discounts on domestic alcoholic beverages; and restrictions on points of sale and listing/delisting procedures.

- Mark-Ups

4.3 Since Canada's Schedule of Concessions includes tariff bindings on all imported alcoholic beverages, the Panel first examined the European Communities' contention that the mark-up practices were not in conformity with Article II of the General Agreement.

4.4 The Panel recalled that Canada and the European Communities agreed on the fact that Canada had, through the Importation of Intoxicating Liquors Act, authorized a monopoly of the importation of alcoholic beverages. The Panel noted therefore that the amount of protection admissible under Article II:4 was thus either the amount provided for in the Canadian Schedule or "as otherwise agreed between the parties which had initially negotiated the concession".

4.5 The Panel recalled in this context its terms of reference, which requested the Panel to take into account, "in carrying out its examination ..., inter alia, the Provincial Statement of Intentions concluded in the context of the Tokyo Round of multilateral trade negotiations with respect to sales of alcoholic beverages by provincial marketing agencies in Canada". The Panel examined, therefore, whether the parties had, by the Provincial Statement of Intentions and the related exchange of letters, "otherwise agreed" in the sense of Article II:4, as claimed by Canada, on an amount of protection different from that provided for in the Canadian Schedule.

4.6 The Canadian Government's letter of 5 April 1979 made it clear that the Provincial Statement of Intentions was put forward on behalf of the provincial authorities. The title and wording of the Provincial Statement of Intentions indicated that it expressed "intentions" and was, as confirmed in the letter, "necessarily non-contractual in nature". The only undertaking expressed by the Government of Canada in the letter of 5 April 1979 was that it "will be prepared to use its good offices with the provincial authorities concerned regarding any problem which may arise with respect to the application of provincial policies and practices set forth in the statement". Canada's emphasis on the non-binding nature of the undertaking seemed to indicate that it was not meant to affect Canada's rights and obligations under Article II:4. Nor did the letters of the EC Commission, dated 5 April and 29 June 1979, express an acceptance of an agreement concerning its rights and obligations under Article II:4. The first of these letters restricted itself to acknowledging the receipt of the Canadian letter and the second only expressed "some disquiet" concerning the terms "Normal commercial considerations" in the Provincial Statement of Intentions.

4.7 The Panel noted that the Provincial Statement of Intentions and related letters had not been included among the texts listed in the Procès-Verbal embodying the results of the Tokyo Round, that the letters were classified as confidential and had not been notified to the CONTRACTING PARTIES. While the Council has stated in the terms of reference of the Panel that the Provincial Statement had been "concluded in the context of the Tokyo Round of Multilateral Trade Negotiations" it appeared to the Panel that for the Statement to satisfy the conditions of Article II:4, it would have had to be binding to the same extent as the concession in the Schedule which it was intended to supersede.

4.8 The Panel therefore concluded that the Provincial Statement of Intentions and the related exchange of letters could not be held to constitute an agreement in terms of Article II:4 and did not, therefore, modify Canada's obligations arising from the inclusion of alcoholic beverages in its GATT Schedule.

4.9 The Panel then proceeded to examine whether the mark-ups imposed on imported alcoholic beverages plus the import duties, which were collected at the bound rate, afforded protection on the average in excess of the amount of protection provided for in Canada's Schedule contrary to Article II:4, as claimed by the European Communities. The Panel noted that according to the Interpretative Note to Article II:4 the paragraph was to be applied "in the light of the provisions of Article 31 of the Havana Charter." The text of Article 31, including its interpretative note, is contained in Annex II.

4.10 The Panel noted that Article II:4, applied in the light of Article 31:4, prohibited the charging of prices by the provincial liquor boards for imported alcoholic beverages which (regard being had to average landed costs and selling prices over recent periods) exceeded the landed costs; plus customs duties collected at the rates bound under Article II; plus transportation, distribution and other expenses incident to the purchase, sale or further processing; plus a reasonable margin of profit; plus internal taxes conforming to the provisions of Article III.

4.11 The Panel also noted that the retail prices charged by the provincial liquor boards for imported alcoholic beverages were composed of the invoice price; plus federal customs duties collected at the bound rates; plus standard freight to a set destination; plus additional price increases ("mark-ups") which were sometimes higher on imported than on like domestic alcoholic beverages ("differential mark-ups"); plus federal and provincial sales taxes.

4.12 The Panel proceeded to examine the Canadian contention that such differential mark-ups generally reflected higher transportation, distribution and other expenses associated with imported products, such as storage, as well as reasonable margin of profit, and were therefore in accordance with the provisions of the General Agreement.

4.13 The Panel considered that differential mark-ups could be justified to offset any additional costs of transportation, distribution and other expenses incident to the purchase, sale or further processing, such as storage, necessarily associated with importing products and that such calculations could be made on the basis of average costs over recent periods.

4.14 The Panel noted Canada's statement that, in some instances, the differential mark-ups also reflected a policy of revenue maximization on the part of the provincial liquor boards, which charged higher mark-ups on imported than on domestic alcoholic beverages because they marketed imported products as premium products and exploited less-price elastic demand for these products, and that this policy was in accordance with the General Agreement because revenue maximization was justified by normal commercial considerations.

4.15 The Panel considered that a monopoly profit margin on imports resulting from policies of revenue maximization by provincial liquor boards could not normally be considered as a "reasonable margin of profit" in the sense of Article II:4, especially if it were higher on imported products than on domestic products.

4.16 The Panel considered that the phrase "a reasonable margin of profit" should be interpreted in accordance with the normal meaning of these words in their context of Article II and Article 31 of the Havana Charter, and that "a reasonable margin of profit" was a margin of profit that would be obtained under normal conditions of competition (in the absence of the monopoly). The margin of profit would have on the average to be the same on both domestic and the like imported products so as not to undermine the value of tariff concessions under Article II.

4.17 The Panel also noted Canada's argument that the drafting history implied that a reasonable margin of profit was a margin which "should not be so excessive as to restrict the volume of trade in the product concerned", and that since the volume of imports from the European Communities of the products in question had not declined, the margin of profit was a reasonable one. The Panel noted that the fact that these imports had not declined did not say anything about what they would have been in the absence of a policy of monopolistic profit maximization by the provincial liquor boards.

4.18 The Panel examined Canada's reference to normal commercial considerations and noted that the term "commercial considerations" was mentioned in Article XVII:1(b). It considered that this reference was not relevant to its examination of Article II:4 as the context in which the term 'commercial considerations' had been used was different.

4.19 The Panel therefore concluded that the mark-ups which were higher on imported than on like domestic alcoholic beverages (differential mark-ups) could only be justified under Article II:4, to the extent that they represented additional costs necessarily associated with marketing of the imported products, and that calculations could be made on the basis of average costs over recent periods. The Panel also concluded that the burden of proof would be on Canada if it wished to claim that additional costs were necessarily associated with marketing of the imported products.

4.20 The Panel noted that Article 31:6 of the Havana Charter provided that "in applying the provisions of this Article, due regard shall be had for the fact that some monopolies are established and operated mainly for social, cultural, humanitarian or revenue purposes". While the drafting history indicated that Article 31 should be applied to the extent that it was relevant to the context of the General Agreement, the Panel considered that Canada had the right to use import monopolies to raise revenue for the provinces, consistently with the relevant provisions of the General Agreement. The Panel also considered that its conclusions on Article II:4 did not affect this right, because Article II:4, applied in the light of Article 31:4 of the Charter, permitted the charging of internal taxes conforming to the provisions of Article III. It noted that federal and provincial sales taxes were levied on alcoholic beverages and asked itself whether the fiscal elements of mark-ups, which produced revenue for the provinces, could also be justified as "internal taxes conforming to the provisions of Article III", noting that Article III:2 itself referred, not only to internal taxes, but also to "other internal charges". The Panel was of the view that to be so considered, the fiscal element of mark-ups must of course meet the requirements of Article III, e.g. they must not be applied to imported or domestic products so as to afford protection to domestic production. The Panel also considered it important that, if fiscal elements were to be considered as internal taxes, mark-ups would also have to be administered in conformity with other provisions of the General Agreement, in particular Article X dealing with the Publication and Administration of Trade Regulations.

4.21 The Panel noted the view put forward by the European Communities as well as by Canada that the EC's complaint did not necessitate - at least not at this stage of the proceedings - a detailed factual analysis by the Panel of the cost differentials calculated by individual liquor boards for individual imported products in this respect. The Panel did not therefore pursue the matter.

- Restrictions on the Points of Sale and on Listing

4.22 The Panel then examined the contention of the European Communities that the application by provincial liquor boards of practices concerning listing/delisting requirements and the availability of points of sale which discriminate against imported alcoholic beverages was inconsistent with Canada's obligations under Articles III:4, XI or XVII of the General Agreement.

4.23 The Panel first examined the arguments relating to the relevance of Article XI to these requirements. The Panel noted Canada's claim that the practices referred to were not "restrictions" in the sense of Article XI because they were not associated with the "importation" of the products, because they were provincial measures and because they were consistent with the Provincial Statement of Intentions.

4.24 The Panel observed that the note to Articles XI, XII, XIII, XIV and XVIII provided that throughout these Articles "the terms 'import restrictions' and 'export restrictions' include restrictions made effective through state-trading operations". The Panel considered it significant that the note referred to "restrictions made effective through state-trading operations" and not to "import restrictions". It considered that this was a recognition of the fact that in the case of enterprises enjoying a monopoly of both importation and distribution in the domestic market, the distinction normally made in the General Agreement between restrictions affecting the importation of products and restrictions affecting imported products lost much of its significance since both types of restriction could be made effective through decision by the monopoly. The Panel considered that systematic discriminatory practices of the kind referred to should be considered as restrictions made effective through "other measures" contrary to the provisions of Article XI:1. It also noted that an agreement or arrangement would have to be consistent with the General Agreement. The Panel noted that the relevance of the fact that the measures concerned were provincial measures would be examined in the second part of its findings.

4.25 The Panel therefore concluded that the practices concerning listing/delisting requirements and the availability of points of sale which discriminate against imported alcoholic beverages were restrictions made effective through state-trading operations contrary to Article XI:1. The Panel considered that it was not necessary at this stage to make a detailed factual analysis by the Panel of the restrictions on points of sale and the discriminatory listing/delisting practices by the individual provincial liquor boards.

4.26 The Panel then examined the contention of the European Communities that the practices complained of were contrary to Article III. The Panel noted that Canada did not consider Article III to be relevant to this case, arguing that the Interpretative Note to Articles XI, XII, XIII, XIV and XVIII made it clear that provisions other than Article XVII applied to state-trading enterprises by specific reference only. The Panel considered that it was not necessary to decide in this particular case whether the practices complained of were contrary to Article III:4 because it had already found that they were inconsistent with Article XI. However, the Panel saw great force in the argument that Article III:4 was also applicable to state-trading enterprises at least when the monopoly of the importation and monopoly of the distribution in the domestic markets were combined, as was the case of the provincial liquor boards in Canada. This interpretation was confirmed e contrario by the wording of Article III:8(a).

4.27 The Panel next turned its attention to the relevance of Article XVII and in particular to the contention of the European Communities that the practices under examination contravened a national treatment obligation contained in paragraph 1 of that Article. The Panel noted that two previous panels had examined questions related to this paragraph. The Panel report on Belgian Family Allowances (BISD 1S/60) said that "as regards the exception contained in paragraph 2 of Article XVII, it would appear that it referred only to the principle set forth in paragraph 1 of that Article, i.e. the obligation to make purchases in accordance with commercial considerations and did not extend to matters dealt with in Article III". The Panel on Canada - Administration of the Foreign Investment Review Act (BISD 30S/163) "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)". The Panel considered, however, that it was not necessary to decide in this particular case whether the practices complained of were contrary to Article XVII because it had already found that they were inconsistent with Article XI.

4.28 The Panel recalled Canada's claim that the Importation of Intoxicating Liquors Act of 1928 constituted existing legislation within the meaning of paragraph 1(b) of the Protocol of Provisional Application which provided that Part II was applied to the fullest extent not inconsistent with existing legislation. The Panel noted that the CONTRACTING PARTIES had decided in August 1949 that this paragraph only referred to legislation of a mandatory character (BISD II/62) and that this decision had been confirmed on many subsequent occasions, most recently in 1984 (BISD 31S/88). The Panel concluded that the Importation of Intoxicating Liquors Act did not make mandatory restrictions on points of sale and discriminatory listing requirements.

4.29 The Panel wished to stress that nothing in its conclusions on restrictions on points of sale and discriminatory listing requirements affected the right of Canada to use import monopolies for purposes foreseen in the General Agreement, such as the protection of health of its population (Article XX), provided that it was done consistently with the relevant provisions of the General Agreement.

4.30 The Panel examined the European Communities' contention that Canada had not fully complied with its notification obligations under Article XVII:4(a), which should be interpreted in the light of the CONTRACTING PARTIES' decisions of 1960 and 1962 (BISD, 9S/182, 11S/58). The Panel found that these decisions did not interpret Article XVII:4(a), but were separate instruments. The Panel found that Canada had complied with its obligations under Article XVII:4(a), but that it should supply the information called for by the decisions of 1960 and 1962 to the extent that it had not already done so.

4.31 The Panel then turned to the second question raised in its terms of reference, namely "whether Canada has carried out its obligations under the General Agreement".

4.32 The Panel noted that the main question related to the interpretation of Article XXIV:12 which states: "Each contracting party shall take such reasonable measures as may be available to it to ensure observance of the provisions of this Agreement by the regional and local governments and authorities within its territory".

4.33 The Panel noted that there was no dispute that the provincial liquor boards were "regional authorities" within the meaning of Article XXIV:12.

4.34 The Panel noted that Canada had taken the position that the only authority that could judge whether all reasonable measures had been taken under Article XXIV:12 was in this case the Canadian government. While noting that in the final analysis it was the contracting party concerned that would be the judge as to whether or not specific measures could be taken, the Panel concluded that Canada would have to demonstrate to the CONTRACTING PARTIES that it had taken all reasonable measures available and that it would then be for the CONTRACTING PARTIES to decide whether Canada had met its obligations under Article XXIV:12.

4.35 The Panel noted that the Government of Canada considered that it had already taken such reasonable measures as were available to it to ensure observance of the provisions of the General Agreement by the provincial liquor boards. The Panel, however, also noted that the efforts of the Canadian federal authorities had been directed towards ensuring the observance of these provisions as they themselves interpreted them and not as interpreted in these findings. The Panel therefore concluded that the measures taken by the Government of Canada were clearly not all the reasonable measures as might be available to it to ensure observance of the provisions of the General Agreement by the provincial liquor boards, as provided in Article XXIV:12 and that therefore the Government of Canada had not yet complied with the provisions of that paragraph. The Panel was of the view, however, that in the circumstances the Government of Canada should be given a reasonable period of time to take such measures to bring the practices of the provincial liquor boards into line with the relevant provisions of the General Agreement.

4.36 In the light of the findings set out above, the Panel recommends that the CONTRACTING PARTIES request Canada:

17-19 Ch du Champ d'Anier
1209 Geneva

April 5, 1979

Mr. P. Luyten
Head of Delegation
Permanent Delegation of the EEC
37-39, rue de Vermont
1202 Geneva

Dear Paul,

Yours sincerely,
signed R. de C. Grey
Ambassador and
Head of Delegation

1. Information on the policies and practices of provincial marketing agencies for all alcoholic beverages will be made available on request to foreign suppliers and governments. Any enquiries from foreign governments will receive a response within a reasonable period of time; the Government of Canada agrees to be the channel of communication with foreign governments for such purposes.

2. In each branch store of the provincial marketing agencies, a catalogue of all the products offered for sale by the agency will be available, in order that customers may be aware of what products are available in addition to those carried in the particular branch.

3. Any differential in mark-up between domestic and imported distilled spirits will reflect normal commercial considerations, including higher costs of handling and marketing which are not included in the basic delivery price.

4. Any differential in mark-up between domestic and imported wines will not in future be increased beyond current levels, except as might be justified by normal commercial considerations.

5. Each provincial marketing agency for alcoholic beverages will entertain applications for listing of all foreign beverages on the basis of non-discrimination between foreign suppliers, and commercial criteria such as quality, price, dependability of supply, demonstrated or anticipated demand, and other such considerations as are common in the marketing of alcoholic beverages. Standards with respect to advertising, health and the safety of products will be applied in the same manner to imported as to domestic products.

Access to listings for imported distilled spirits will in the normal course be on a basis no less favourable than that provided for domestic products and will not discriminate between sources of imports.

6. Any changes which may be necessary to give effect to the above will be introduced as soon as practicable. However, some of these changes, particularly with respect to mark-up differentials, may be introduced progressively over a period of no longer than eight years.

12 April 1979

COMMISSION
DES Genève, April 5, 1979
COMMUNAUTES EUROPEENES

Délégation permanente
auprès des organisations internationales
à Genève

Dear Rodney,

Yours sincerely,

P. Luyten
Head of the Permanent Delegation

H.E. Mr. Rodney de C. Grey
Ambassador
Head of the Canadian Delegation to the
Multilateral Trade Negotiations

17-19, chemin du Champ d'Anier
1209 Geneva

COMMISSION
OF THE Brussels 29 June 1979
EUROPEAN COMMUNITIES

DIRECTORATE-GENERAL FOR
AGRICULTURE

The Director General

Dear Mr. Ambassador,

Sincerely,

Cl. Villain
H.E. Mr. R. de Charnoy GREY

Ambassador and Head of Delegation
Canadian Delegation
17-19 - Chemin du Champ d'Anier
1209 Geneva

1. If a Member establishes, maintains or authorizes, formally or in effect, a monopoly of the importation or exportation of any product, the Member shall, upon the request of any other Member or Members having a substantial interest in trade with it in the product concerned, negotiate with such other Member or Members in the manner provided for under Article 17 in respect of tariffs, and subject to all the provisions of this Charter with respect to such tariff negotiations, with the object of achieving:

2. In order to satisfy the requirements of paragraph 1(b), the Member establishing, maintaining or authorizing a monopoly shall negotiate:

3. In any case in which a maximum import duty is not negotiated under paragraph 2(a), the Member establishing, maintaining or authorizing the import monopoly shall make public, or notify the Organization of, the maximum import duty which it will apply in respect of the product concerned.

4. The import duty negotiated under paragraph 2, or made public or notified to the Organization under paragraph 3, shall represent the maximum margin by which the price charged by the import monopoly for the imported product (exclusive of internal taxes conforming to the provisions of Article 18, transportation, distribution and other expenses incident to the purchase, sale or further processing, and a reasonable margin of profit) may exceed the landed cost; Provided that regard may be had to average landed costs and selling prices over recent periods; and Provided further that, where the product concerned is a primary commodity which is the subject of a domestic price stabilization arrangement, provision may be made for adjustment to take account of wide fluctuations or variations in world prices, subject where a maximum duty has been negotiated to agreement between the countries parties to the negotiations.

5. With regard to any product to which the provisions of this Article apply, the monopoly shall, wherever this principle can be effectively applied and subject to the other provisions of this Charter, import and offer for sale such quantities of the product as will be sufficient to satisfy the full domestic demand for the imported product, account being taken of any rationing to consumers of the imported and like domestic product which may be in force at that time.

6. In applying the provisions of this Article, due regard shall be had for the fact that some monopolies are established and operated mainly for social, cultural, humanitarian or revenue purposes.

7. This Article shall not limit the use by Members of any form of assistance to domestic producers permitted by other provisions of this Charter.

Paragraphs 2 and 4

The maximum import duty referred to in paragraphs 2 and 4 would cover the margin which has been negotiated or which has been published or notified to the Organization, whether or not collected, wholly or in part, at the custom house as an ordinary customs duty.

Paragraph 4

With reference to the second proviso, the method and degree of adjustment to be permitted in the case of a primary commodity which is the subject of a domestic price stabilization arrangement should normally be a matter for agreement at the time of the negotiations under paragraph 2 (a).

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