16 October 1991

B. Listing/delisting practices

4.3 The United States recalled that the 1988 Panel had found that practices concerning listing and delisting which discriminated against imports were restrictions made effective through state-trading operations contrary to Article XI:1 of the General Agreement. It stated that in all 10 provinces imported beer continued to be subject to conditions and formalities with regard to listing and delisting that were more onerous than those applied to domestic beer. The same could be said for the manner in which those criteria were applied.

4.4 Canada rejected the United States' assertion that its beer continued to be subject to discriminatory listing/delisting practices in all 10 provinces. It was Canada's view that this issue was limited to the practices of the provincial liquor boards and that Canada's obligation in that regard had been fully addressed in its 1988 agreement with the EEC. The EEC had acknowledged this in its submission. The 1988 EEC agreement provided that the listing and delisting of beer "shall be non-discriminatory, based on normal commercial considerations, transparent and not create barriers to trade, and be published and made available to persons with an interest in the trade and listing or decisions to delist products". All liquor board listing/delisting practices met these criteria. The 1988 EEC Agreement required national treatment to be given to EEC products, and this Agreement was being applied on an m.f.n. basis. The listing/delisting practices were thus in conformity with the provisions of Article III of the General Agreement. In British Columbia, Manitoba, New Brunswick, Newfoundland, Nova Scotia, Ontario, Prince Edward Island and Saskatchewan, regardless of where sold, beer had to be listed according to the same criteria. In some cases, the treatment of imported beer with respect to listing and delisting was now better than that afforded to domestic beer from other provinces: in a number of provinces, for example Manitoba, the minimum sales requirements were significantly lower for imported than for domestic products; in Ontario, domestic brewers were entitled to only one brand listing per liquor-board retail store, while no such restriction limited the listings of foreign suppliers. Canada also stated that in the past year, nine domestic beers had been delisted in Manitoba for failure to meet the minimum sales requirement; in Ontario, 62 domestic beers had been delisted since 1987. No United States beer had been delisted in either Manitoba or Ontario during this period.

4.5 The United States stated that the Ontario listing restrictions on domestic beer cited by Canada applied in liquor-board stores only when there were private retail outlets in the vicinity.

4.6 Canada stated that, in Ontario, domestic brewers were permitted a full range of listings at some liquor board outlets, but that this was a special measure designed to serve small rural and northern communities. These stores accounted for less than 4 per cent of total beer sales and were located in sparsely populated areas.

4.7 The United States claimed that the following specific practices discriminated against imported beer, while Canada stated that, in each case the practice was either fully GATT-consistent and based on the commercial interests of the liquor board, or was actually operating to favour imported products.

Alberta:

The Panel noted that the Parties could not agree as to the facts of the listing practices in Alberta.

Manitoba:

New Brunswick:

Nova Scotia:

Ontario:

Prince Edward Island:

Quebec:

Saskatchewan:

C. Restrictions on access to points of sale

4.8 The United States recalled that the 1988 Panel had found that practices concerning the availability of points of sale which discriminated against imported alcoholic beverages were restrictions made effective through state-trading operations contrary to Article XI:1 of the General Agreement. The United States stated that, with the exception of New Brunswick and Prince Edward Island, locally-produced or domestic beer benefited from the availability of points of sale additional to those available for the sale of imported beer. In some cases (e.g. cold beer stores in Manitoba), certain outlets were prohibited from selling imported beer, while in others (e.g. British Columbia) the discrimination against imported beer with respect to availability of points of sale resulted from the fact that the liquor board did not distribute imported beer to certain types of outlets. Some of the additional outlets available for the sale of domestic beer only, for example cold beer stores, were outlets for which there was a strong consumer preference and they accounted for a large proportion of total beer sales. The United States argued that Canada had failed to address its extensive discriminatory point-of-sale practices since the 1988 Panel report.

4.9 Canada stated that the issue of points of sale was a complex one and that practices varied from province to province. Canada said that, as a starting point, it was necessary to distinguish between the existence of import monopolies, which were recognized under GATT, and the existence of private companies that distributed beer in several of the Canadian provinces. An import monopoly carried with it certain rights, for example to have the imported product sold only through the monopoly. This was consistent with the provisions of the General Agreement. All provinces had government liquor stores situated throughout their territory and the obtaining of a listing provided access to them for the product concerned. The favourable treatment provided to imported beer in those government stores had meant that imported beer had access to the private domestic consumer which was unparalleled in the world. As to private companies, the system of having locally-produced beer available for sale at privately-authorized outlets had evolved as a result of a long tradition and had not been established with a view to discriminating against imported beer. The establishment of local private distribution systems in the 1920s and 1930s pre-dated Canada's GATT obligations and were a reflection of the ability of the local authority to regulate the local industry and at the same time provide a service to its population. In Alberta, New Brunswick, Nova Scotia, Prince Edward Island and Saskatchewan, imported and domestic beer could be sold at the same government retail stores, agencies, franchises or private outlets (in Alberta, all privately-owned vendors could stock and sell any imported or domestic beer, whether listed or not). In the remaining provinces (British Columbia, Manitoba, Newfoundland, Ontario and Quebec), various forms of private distribution systems had been established; they were limited to provincial breweries which were under the regulatory control of the provincial authority. In these provinces, imported beer was sold at the liquor-board stores or at agency or vendor stores operated under the authority of the liquor board. It was not possible to generalise, however, with respect to the private distribution systems; locally-produced beer could be sold through a variety of combinations of liquor-board stores or agencies and private licensed outlets - in Quebec exclusively in private licensed outlets. The private distribution systems, although regulated by the provincial authorities, were without any state involvement in their ownership or management structure. They were commercially separate and distinct from the provincial control boards. They were not an emanation of government, nor agents of the provincial control boards and had no power over imports. The Ontario and Quebec systems, while different, had both been in place since the 1920s, were the reflection of the ability of the local authority to regulate the local industry, and had developed to reflect social objectives unique to each province. Ontario breweries established Brewers' Retail Inc. (BRI) in 1927 pursuant to provincial legislation. Under that legislation, the liquor boards could authorize only Canadian brewers to sell beer in the province. Although regulated by the liquor board, BRI remained a purely private-sector corporation. It provided beer throughout the province at uniform prices in a manner consistent with the various control practices maintained by the province, and operated a comprehensive container return handling system. There was no law, regulation or government-imposed restriction preventing BRI from selling imported beer; however, it would have to purchase it from the liquor board and whether it did so was a matter within its own discretion. In Quebec, the one exception to the liquor board's monopoly was that beer brewed in Quebec was sold through grocery stores and not through the liquor board. This separate system was established by law in 1921, when the liquor board was created. To sell beer, local brewers had to obtain a permit from the provincial authority. In Manitoba, the system of having locally-produced beer available for sale at privately-authorized outlets had been in place since 1934, established through an amendment of the Liquor Control Act to provide improved service to consumers. Similarly in British Columbia and Newfoundland, the system of having locally-produced beer available for sale at privately-authorized outlets had been in place since the end of prohibition.

4.10 The United States disputed Canada's argument that the restrictions imposed by the liquor boards system reflected a social policy objective. Controlling only foreign-produced beer could not serve to implement a social policy but only to protect domestic production. The United States also stated that nothing in Canada's description of legislation pre-dating GATT suggested that the liquor boards in question could not as a matter of law provide sales of imported beer at points of sale commensurate in number and level of service to those for domestic beer. The United States further stated that Canada appeared to argue that the points of sale provided separate but equal treatment to imported and domestic beer, and thus were not inconsistent with the national treatment obligation of Article III:4 of the General Agreement. However, the denial of access by imported products to cold beer stores of itself amply demonstrated that less favourable treatment was being provided to imported than to domestic beer; private outlets were also more responsive to consumer demand than the liquor boards, which suffered, as Canada had stated was the case for Ontario, from operational limitations. The United States claimed that the 1988 Panel had found these practices to be inconsistent with Article III:4 of the General Agreement.

4.11 Canada recalled that what it had stated was that Ontario liquor board outlets, like all retail businesses, were subject to certain operational limitations which simply prevented it from handling and selling large-size packages in unlimited quantities and from stocking beer without regard to sales levels. Canada also felt that, as far as restrictions on access to points of sale in the form of private retail outlets were concerned, the 1988 Panel had not addressed the issue with the degree of specificity that would allow Canada to determine how to comply with its GATT obligations. The fact that different systems existed in some provinces with respect to where imported and domestic beer might be purchased by the consumer did not in itself mean that this constituted a breach of Article III:4 of the General Agreement. The national treatment standard did not mean equal treatment; different treatment might be provided where imports were not treated less favourably than the domestic product.

4.12 The United States also argued that, because domestic beer was permitted to be sold at points of sale not operated by the liquor boards and thus not subject to some or all of the service charges, cost-of-service charges discriminated against imported beers. Similarly, because domestically-brewed beer was distributed largely outside the provincially-managed system and thus escaped the application of the strict listing/delisting criteria applied to imported products, the listing/delisting practices of the liquor boards, even when in conformity with the strict national-treatment criteria, still operated in a discriminatory fashion. Thus:

Manitoba:

Ontario:

Newfoundland:

The United States recalled that the Panel on EEC fruits and vegetables had found that two measures acting as a system (a minimum price associated with a deposit) constituted a restriction other than duties, taxes or other charges within the meaning of Article XI:1.

4.13 Canada argued that, in face of the long history of provincial practices which predated GATT, it was reasonable to expect that the Canadian industry would require time to adapt and to make any remaining changes which would lead to a liberalization of distribution rules. In order to ensure that Canada's industry would survive in the face of liberalization, the necessary step was the opening of the Canadian market for Canadian producers. This was being done. The federal and provincial governments were treating points of sale as a priority issue in the Intergovernmental Agreement on Beer Marketing Practices, which would provide the basis for meeting Canada's international obligations. (Also see Section 4.I. below.)

4.14 Canada argued that the private system of delivery and sale of domestic beer in Ontario was covered by paragraph 1(b) of the Protocol of Provisional Application (PPA), according to which Canada applied Part II of the General Agreement to the fullest extent not inconsistent with existing legislation. Canada stated that the complaint before the Panel had been brought as the result of an action taken by a United States firm under Section 301 of the United States Trade Act. This Act provided for trade action by the United States Government where it considered that obligations under international treaties had not been met or that United States trade interests had been affected. Canada was firmly of the view that such trade action must be in accordance with GATT rules. This would require authorization by the CONTRACTING PARTIES of any suspension of concessions or other obligations under Article XXIII:2 of the General Agreement. Bearing in mind the procedures in Section 301, which required a determination on whether trade action was appropriate, Canada requested the Panel to examine the legislation of Ontario as it related to the sale of foreign beer in light of the PPA. Canada stated that what was in question was the consistency of provincial laws with the provisions of the General Agreement, and argued that, just as the Panel would look at the exception clauses of the General Agreement with respect to such provincial laws, so it should consider the applicability of the PPA to these laws. Canada accepted the interpretations of the PPA by previous panels - most recently in the Norwegian apples case (BISD 36S/306) - namely that the relevant legislation must (a) be legislation in a formal sense; (b) predate the Protocol; and (c) be mandatory in character by its terms or expressed intent, i.e. impose on the executive authority requirements which could not be modified by executive action. The Ontario Liquor Control Act (R.S.O. 1937. Ch 294) was in effect on 30 October 1947. The Act restricted the sale of beer in Ontario. In addition to sales of beer by the liquor board, section 46 of the Act provided that the liquor board could authorize only a "brewer duly authorized by the Dominion of Canada" to sell beer in Ontario. Through this reference to federally-licensed brewers (the federal Excise Act (S.C. 1934 c. 32) required that any person manufacturing beer in Canada obtain a license), the Ontario legislation made mandatory a prohibition on authorizing foreign brewers to sell beer in Ontario except through the liquor board. This provision had remained in force verbatim until 1975, when minor amendments were made that had not substantively changed the legislation. These remained in effect. The relevant sections of the current legislation (Liquor Control Act R.S.O. 1980 c. 243 as amended) were sections 3 and 1(d), which defined manufacturer as a person authorized under federal law to manufacture liquor in Canada, again a reference to the federal Excise Act. Currently, as a matter of law, the only persons that could sell beer in Ontario were the liquor board, manufacturers of beer as defined in section 1(d), and the BRI whose members were all Canadian manufacturers. In the event that the Panel were to conclude that Ontario's delivery and sales system was inconsistent with the provisions of the General Agreement, Canada requested that it find that these measures were entitled to the benefit of the PPA since they existed pursuant to mandatory legislation in effect in Ontario in 1947.

4.15 The United States stated that the "existing legislation" question did not arise with respect to Part I of the General Agreement. Accordingly, Canada's obligations with respect to Article II would not be affected by the PPA question. The GATT standard on mandatory legislation was that the requirements imposed on the executive authority could not be modified by executive action. As stated in the Belgian family allowances case (BISD 1S/59), the party claiming exception under the PPA must prove that the executive authority could not, as a matter of law, modify its practices to bring them into conformity with the GATT. Canada thus bore a heavy burden to demonstrate that its provincial authorities could not administer their respective laws relating to alcoholic beverages in a GATT-consistent, non-discriminatory manner. The United States further stated that the 1988 Panel had concluded that Canada had failed to meet that burden with respect to federal legislation. The United States did not believe that the Ontario legislation included a clause making it mandatory by the GATT standard. The United States stated, for example, the use of the term "may" in subsection 1 of section 46 of the Liquor Control Act, which appeared not to mandate restrictions on the importation of foreign brewed beer or discrimination against imported beer. The United States also argued that the later amendments to the legislation were more GATT-inconsistent than the pre-existing legislation.

4.16 Canada stated that the legislation was mandatory both in its terms and in its expressed intent. It could not have been altered by the discretionary action of either the federal or the provincial executive. Moreover, the later amendments to the legislation were not more GATT-inconsistent than the original legislation; they merely restructured it, by taking the definition of manufacturer out of the operative section and putting it into a separate definition section, and clarified that BRI had been authorized to sell beer since 1927. The mandatory nature of the prohibition on authorizing foreign manufacturers to sell beer in the province remained in place. Canada reiterated that the Ontario legislation prevented the liquor board from authorizing a foreign brewer to sell beer in Ontario in 1947 and this prohibition could not have been altered by executive action.

D. Restrictions on private delivery

4.17 The United States stated that, in all 10 provinces, Canadian brewers were allowed to operate private warehousing and delivery systems. These brewers were licensed to perform these functions by the various liquor boards. Private distribution cartels operated in Alberta, British Columbia, Manitoba, Ontario, Quebec and Saskatchewan; in Quebec, provincial brewers could also distribute their product directly. Except in Saskatchewan, foreign brewers were permitted neither to participate in these arrangements nor to form private distribution systems. Such practices were inconsistent with the provisions of Article III:4 of the General Agreement, which required that imported products be accorded treatment no less favourable than that accorded to like products of national origin in respect of all laws, regulations and requirements affecting their internal sale, offering for sale, purchase, transportation, distribution or use. The national treatment issue here was similar to that raised in the context of Canada's Foreign Investment Review Act, when a GATT Panel had found that differential treatment of imports which added to the cost of purchase or imposed other unattractive conditions that prevented such imports from competing fairly with domestic products was inconsistent with the provisions of Article III:4 of the General Agreement (BISD 30S/140). Given the discriminatory restrictions on delivery imposed by the liquor boards on imported beer, the latter clearly faced unfair handicaps in competing with Canadian products. The United States, therefore, claimed that these discriminatory delivery practices were inconsistent with the provisions of Article III:4 of the General Agreement.

4.18 Canada rejected the United States' claim that the difference in how imported and domestic beer could be delivered to points of sale was inconsistent with the provisions of Article III:4 of the General Agreement. Canada argued that Article III:4 of the General Agreement did not require identical treatment for imported and domestic products, only treatment no less favourable than that accorded to like products of national origin. The United States had not demonstrated that the existing difference in treatment constituted less favourable treatment for imported beer. The private corporations (not cartels) which delivered domestic beer did so under authority granted by the liquor board; their activities were closely regulated. In some provinces they were required to distribute beer to all outlets and to have it available at a uniform price throughout the province. Furthermore, Canada did not agree that the national treatment issue raised here by the United States was similar to that raised in the context of the Panel on Canada's Foreign Investment Review Act. That Panel had addressed a situation where no monopoly existed. In the present case, no governmental measure prevented foreign membership in the private corporations that operated in Alberta, British Columbia, Manitoba, Newfoundland, Ontario and Saskatchewan, and thus there was no contravention of the national treatment obligation under Article III. In Quebec, private brewers did not operate a joint distribution system. Access to an existing private corporation did not, in any case, remove the right of the liquor board to first receivership. Nor was it inconsistent with GATT provisions for the import monopoly to move the product from its warehouse to the different points of sale.

4.19 The United States claimed that the discriminatory delivery practices, in addition to being inconsistent with the provisions of Article III:4 of the General Agreement, were inconsistent with the provisions of Article XVII.

4.20 Canada stated that the liquor boards were state-trading enterprises operating within the provisions of Article XVII of the General Agreement. Article 31.6 of the Havana Charter recognized that monopolies could be established for a variety of reasons - social, cultural, humanitarian or revenue-raising - and Article 31.4 made it clear that import monopolies were permitted to control the transportation and distribution of imported products by allowing them to charge for these activities as part of their control over importation. The liquor boards exercised the right to deliver imported products to retail outlets as an extension of their control over the importation and sale of beer. The right to first receivership was fully in accordance with the provisions of Article XVII. These provisions contained an m.f.n. obligation to act on the basis of commercial considerations with respect to purchases or sales involving imports or exports; the 10 liquor boards fully met these obligations.

4.21 The United States argued that Canada had not met the standards laid down in the Havana Charter. For example, Canada had not adopted arrangements "designed to limit or reduce any protection that might be afforded through the operation of the monopoly to domestic producers of the monopolized product" (Article 31.1(b)); also, the inherent limitations of the liquor boards, conceded by Canada, indicated that they could not "import and offer for sale such quantities of the products as will be sufficient to satisfy the full domestic demand" for imported beer (Article 31.5).

4.22 Canada said that it had not conceded that the liquor boards had operational limitations, "inherent" or other, which other retailers did not face. Like other commercial operators, the liquor boards faced limits on type and quantity of product that they stocked. Because they were profit-making operations, they could not be expected to handle products without regard to customer preference and other commercial considerations. Canada also rejected the United States' claim that Canada had not complied with the standards laid down in Article 31 of the Havana Charter. Article 31.1 of the Havana Charter called for the Members to negotiate, in the manner provided for under Article 17 of the Charter, in respect of tariffs. Article 31.1(b) dealt with the case of an import monopoly and called for arrangements designed to limit or reduce any protection that might be afforded through the operation of the monopoly to domestic producers of the monopolized product, or to relax any limitation on imports of the product comparable with a limitation made subject to negotiation under the Charter. Canada stated that there were no limitations on imports of beer into Canada. Article 31.2 of the Havana Charter went on to set out how Members might meet the requirements of Article 31.1(b). This could be done either by the establishment of a maximum import duty on the product concerned or through any other mutually satisfactory arrangement consistent with the provisions of the Charter. Canada stated that it had negotiated its tariff on beer with the United States in fulfilment of Article 31.2(a). Indeed, the United States held an initial negotiating right on this product. Canada further submitted that it had fully complied with Article 31.4 of the Havana Charter, which allowed the import monopoly concerned to add to the price of the imported product "transportation, distribution and other expenses incident to the purchase, sale and further processing, and a reasonable margin of profit". Compliance with these requirements had been demonstrated in the arguments submitted by Canada with respect to the cost-of-service issue (see paragraph 4.41 below). Article 31.4 was specifically related to the import duty negotiated under Article 31.2, which in turn satisfied the requirements referred to under Article 31.1. Further, Canada submitted that it imported and offered for sale quantities of beer sufficient to satisfy the full domestic demand for the imported product. The United States had provided no evidence in support of its claim to the contrary. There was no restriction on the quantity of imports of any beer into any province in Canada.

4.23 In response to a question from the Panel, Canada recalled that Article II:4 of the General Agreement, together with Article 31.4 of the Havana Charter, envisaged the existence of a monopoly. The audits were intended to address the points relating to these provisions and to demonstrate that Canada was meeting its obligations under Article II:4. Furthermore, the provincial monopolies had been in existence since well before 1947. The negotiations on the tariff concession on beer had been carried out in accordance with the provisions of Article 31.4 of the Havana Charter and under expectations concerning the competitive relationship between imported and domestic beer that took into account the existence of the monopolies.

4.24 The United States also argued that the restrictions on private delivery meant that other practices operated in a discriminatory manner; thus (1) the possibility afforded to domestic brewers of organising private delivery systems enabled them to avoid cost-of-service (COS) charges. This practice was inconsistent with the provisions of Article III of the General Agreement; (2) the fact that foreign suppliers were prevented from establishing private distribution systems, which could then be used as a basis for commercially viable systems for the collection of empty containers, meant that the taxes on beer containers operated in a discriminatory manner; (3) in British Columbia, the prohibition on the private delivery of imported packaged beer added an element of discrimination to the mark-up differential on draught beer; importers were forced to form a delivery system solely to handle draught beer, while domestic producers could enjoy the economies of scale of a delivery system which could handle both draught and packaged beer. The United States recalled that the Panel on EEC fruits and vegetables had found that two measures acting as a system (a minimum price associated with a deposit) constituted a restriction other than duties, taxes or other charges within the meaning of Article XI:1.

4.25 Canada rejected the United States' contention that domestic brewers avoided COS charges. The COS differential reflected the difference in the services rendered by the liquor boards to domestic and imported beer. These services quite naturally resulted in additional costs to the liquor boards. All liquor boards provided a range of services for imported beer, such as handling and delivery, which were not generally available to domestic products. Domestic suppliers had to bear these external delivery and handling costs themselves, whereas the liquor boards performed this service for imported products. This constituted better than national treatment. The ability to sell through the public system provided significant economies of scale, without the need to invest in a wholesale/delivery system. Licensed establishments had access to listed imported products without additional cost to the supplier. For domestic beer sold privately, the liquor boards incurred no costs and applied no COS fee; the costs were incurred by the breweries and reflected in their prices. For domestic beer sold through liquor-board stores, the liquor boards incurred no out-of-store costs and no out-of-store COS fee was applied. For imported beer sold through liquor-board stores, the liquor boards incurred out-of-store costs and these were recovered. Both imported and domestic beer involved in-store costs and those were applied on an equal, i.e. national treatment, basis to each. Canada further stated that the imposition of an environmental tax did not violate the provisions of Article III:4 of the General Agreement. Nor did the expense for a foreign brewer to establish a container return system constitute a violation of the provisions of Article III:4.

E. Import mark-ups

(i) Mark-ups

4.26 The United States recalled that the 1988 Panel had found that mark-ups which were higher on imported than on like domestic alcoholic beverages could only be justified under Article II:4 of the General Agreement 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 United States stated that following the adoption of the 1988 Panel report, some liquor boards had moved from discriminatory mark-ups to the imposition of discriminatory cost-of-service (COS) charges. However, some liquor boards continued to apply discriminatory mark-ups in establishing the retail price of beer.

4.27 Canada stated that its 1988 agreement with the EEC contained a provision for a standstill, applied on an m.f.n. basis, on any mark-up differential as of 1 December 1988 - mark-up differential having been defined, in this context, as the difference between the mark-up on a product of the Community and the mark-up on the like product of Canada other than the additional costs of service associated with imported products of the Community. Canada stated that, going beyond the requirements of that agreement, Canada had, with minor exceptions, moved to a mark-up system that was fully justified under GATT, reflecting both cost of service and profit. Such a system was applied to both domestic and imported beer, consistently with the principle of national treatment. In the context of the agreement, Canada had committed itself to bringing pricing into GATT conformity once the interprovincial negotiations had been successfully concluded. In fact, pricing changes made since 1988 had mainly brought provincial pricing systems into conformity with GATT obligations.

New Brunswick:

4.28 The United States argued that the discriminatory mark-ups applied by New Brunswick constituted import charges inconsistent with the provisions of Article II:4 of the General Agreement.

4.29 Canada stated that New Brunswick imposed only differential mark-ups and no COS charge as such; costs of service had been audited and the mark-up differential was well within the audited COS differential. However, the New Brunswick policy to retail imported beer at a price no less than a Canadian, out-of-province beer of equivalent size and package type superseded, where necessary, the normal mark-ups.

Newfoundland:

4.30 The United States stated that Newfoundland also applied differential mark-ups on beer.

4.31 Canada stated that, in Newfoundland, the rate of mark-up depended on delivery point and not on origin of beer. Thus the mark-up on beer, domestic or imported, delivered to stores was lower than the mark-up on beer, domestic or imported, delivered to port.

Nova Scotia:

4.32 The United States argued that the discriminatory mark-ups applied by Nova Scotia, which had actually been increased on 1 January 1988, constituted import charges inconsistent with the provisions of Article II:4 of the General Agreement.

4.33 Canada stated that, in Nova Scotia, the calculation of the mark-up on imported bottled beer and provincial bottled beer in 12-packs was based on equivalent landed costs at the retail store and the rate of mark-up of 70.4 per cent was the same for both. For such provincial beer the landed price was the invoiced price because the brewers incurred all delivery costs to the stores; for imported bottled beer the landed price consisted of the invoice price based on delivery to the central warehouse plus the cost-of-service charge to move the product from the warehouse to the retail store. A mark-up of 72.9 per cent applied to provincial bottled beer in six-packs and of 66.9 per cent to provincial bottled beer in 24-packs. Imported and provincial beer in cans was assessed a 72.9 per cent mark-up.

Ontario:

4.34 The United States argued that the discriminatory mark-ups applied by Ontario constituted import charges inconsistent with the provisions of Article II:4 of the General Agreement.

4.35 Canada stated that, in Ontario, for historical reasons, separate systems had evolved for the pricing of imported and domestic beer. However, the charges applied under each system were intended to generate equivalent revenue, namely to recover costs of service and provide a reasonable element of profit. The liquor board provided only in-store services to domestic beer, whose landed price, however, included out-of-store costs such as the delivery and warehousing costs (upon which the domestic licensing fee was calculated). Thus, the mark-up on imports needed to be higher not only to reflect the higher costs incurred by the liquor board, but also because it was applied to a lower base. The net effect was equivalent for imported and domestic beer. In fact, the difference in effective mark-up rates between imported and domestic beer was in all cases less than the audited COS differential. Canada stated that this demonstrated that there was no discrimination in mark-up between imported and domestic products. In July 1989, Ontario had introduced minimum COS and profit charges to ensure that the liquor board was recovering operating expenses and generating a minimum profit on all beers. For imported beer, the minimum per unit charges applied only if the mark-up failed to generate an amount greater than the sum of these minimum charges. In practice, the mark-up applied to the vast majority of imported beer. For domestic beer, the in-store COS charge was applied in all cases, the minimum net profit only if it generated more than the ad valorem licensing fee levied on provincial brewers; in practice, the minimum net profit did not apply because Ontario historically maintained a floor price for domestic beer which generated more revenue through the licensing fee. The net effect of the 1989 changes had been to increase charges on all domestic beers and on a dozen lower-priced imported beers. The independent audit of the COS charges carried out following the report of the 1988 Panel had found that applied charges underestimated the actual costs; the liquor board had not, however, increased them.

Quebec:

4.36 The United States argued that the discriminatory mark-ups applied by Quebec constituted import charges inconsistent with the provisions of Article II:4 of the General Agreement.

4.37 Canada stated that the Quebec mark-up on imported beer was calculated on the basis of a formula which applied equally and on a non-discriminatory basis to all imported beer.

British Columbia:

4.38 The United States stated that British Columbia had, in April 1988, replaced a prohibition on the sale of imported draught beer by a mark-up differential, although the liquor board did not distribute either domestic or imported draught beer. The United States argued that, in the light of the findings of the 1988 Panel and of the fact that the liquor board bore no costs with respect to imported draught beer, the differential in the mark-up applied to imported draught beer in British Columbia was inconsistent with the provisions of Articles II:4 and XVII of the General Agreement.

4.39 Canada argued that British Columbia was clearly moving in the direction of bringing its practices on this issue into compliance with the provisions of the General Agreement, in line with the 1988 Panel report. The introduction of imported draught beer on a permanent basis for the first time in 1989 had constituted a major policy change and entailed significant adjustments on the part of the liquor board and the local industry. There were currently 22 listings of foreign draught beer, but no United States brewer had as yet applied for a listing of draught beer. There was at present no provision for listing of draught beer from other Canadian provinces, although it was envisaged in the context of the interprovincial agreement. British Columbia had committed itself to that agreement and expected that the process underway to liberalize trade within Canada would enable its industry to achieve the competitiveness that would make possible the removal of the mark-up differentials on draught beer. Canada would continue its efforts to have British Columbia bring its practices into full conformity with Canada's international obligations.

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