16 October 1991

(ii) Cost-of-service charges and differentials

4.40 The United States recalled that the 1988 Panel had considered that differential mark-ups could be justified to offset additional costs of transportation, distribution and other expenses incident to the purchase, sale or further processing, such as storage, necessarily associated with importing products. It had concluded that the mark-ups which were higher on imported than on like domestic alcoholic beverages could 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 burden of proof would be on Canada if it wished to claim that additional costs were necessarily associated with marketing of the imported products. The United States considered that those Canadian liquor boards imposing a cost-of-service differential on imported beer (Alberta, British Columbia, Manitoba, Nova Scotia, Ontario, Quebec, Saskatchewan) had failed to show that additional costs were incurred in the handling of imported beer or, if they were incurred, that the differentials accurately reflected them. It appeared that the "additional" costs were the product not only of inappropriate accounting methodologies, but also of discriminatory practices maintained by the boards. Imports generally, and United States beers in particular, were further penalized by the COS methodologies because they were based on a noncompetitive cost structure and an unfairly small volume of sales. For example, in Saskatchewan the COS differential for all imported beer was derived from figures for a period during which sales of United States beer were absolutely prohibited in the province. The United States argued that, to the extent that costs were generated by practices inconsistent with the provisions of the General Agreement, they could not legitimately be included in the calculations. The United States concluded that the methodologies used in calculating the COS differentials applied to imported beer operated in such a way as to afford protection in excess of the amount of protection provided for in Canada's Schedule of Concessions and were, therefore, inconsistent with the provisions of Articles II:4 and XVII of the General Agreement.

4.41 Canada stated that it had the right to operate import monopolies consistent with Article XVII of the General Agreement and to have these monopolies include in their price for the imported product charges incident to the purchase and sale of these products, consistent with Article 31.4 of the Havana Charter. Furthermore, the 1988 Panel had found that the liquor boards were free to apply differential mark-ups on imported alcoholic beverages provided they represented the additional costs necessarily associated with marketing of the imported products. Canada considered that the United States and EEC had had unrealistic expectations of the change which would be yielded by strict application of the provisions of Article II:4 of the General Agreement in the light of Article 31 of the Havana Charter. The United States had not substantiated its claim that the liquor boards had failed to show that additional costs were incurred in the handling of imported beer or, if they were incurred, that the differentials accurately reflected them. Canada rejected that claim. Canada stated that the liquor boards imposed COS charges relating to the services they provided, incident to transportation, distribution, purchase and sale, as well as to facilities used in distribution and marketing. The COS charges might be different for imports and provincial products because there were different or additional services to be provided. Canada and the provinces had taken steps to ensure that such additional charges with respect to imports were justified in a manner which would satisfy the requirement of the 1988 Panel's conclusion. The provinces had provided audits to verify the claim of additional costs incurred by the liquor boards in the importation and marketing of beer. The audits had been carried out by independent, internationally recognized accounting firms, except in the case of Manitoba, where the audit had been conducted by the Provincial Auditor General who operated at arm's length from the liquor board and provincial government. These auditors had been asked to determine whether the allocations of costs were in accordance with proper accounting methodology, taking into account the GATT requirements as expressed in the 1988 Panel report. Canada considered that the audits fully met the objections raised by the United States and satisfied the obligation to demonstrate that the COS differentials accurately reflected the additional costs which were incurred in the importation and marketing of imported products. The range of COS differentials reflected the variety of conditions under which different liquor boards operated and the differences in liquor-board practices. Canada concluded that the audited COS differentials were consistent with Article II:4 of the General Agreement interpreted in the light of the provisions of Article 31.4 of the Havana Charter, and that it had discharged the burden of proof, as required by the 1988 Panel report, in the best way it could.

4.42 The United States argued that an independent auditor could offer an opinion as to whether certain types of costs had been properly accounted for, but was neither trained nor equipped to determine which types of costs were necessarily associated with marketing of a product. The United States further argued that Canada had given insufficient guidance to the auditors concerning the standards laid down by the CONTRACTING PARTIES in adopting the 1988 Panel report; as a result the audit methodologies were flawed. This was apparent in the case of Saskatchewan, where the auditors believed that all costs, rather than all "additional" costs, necessarily associated with marketing of imported beer could be included in the COS differential.

4.43 Canada stated that the audits had been conducted according to generally accepted auditing standards and argued that the methodology employed in an audit was a matter which professional auditors were qualified to determine. Canada stated also that the letter addressed by the federal authorities to the provinces outlining the cost-of-service audit obligations, while not referring explicitly to GATT obligations, did so implicitly by referring to the terms of the Canada/EEC agreement, which had been negotiated in line with the findings of the 1988 Panel. In the case of those provinces which provided audits, the auditors had been instructed to address the relevant requirements outlined in the 1988 Panel report. The auditors had thus followed the criteria laid down in the 1988 Panel report to ensure that all costs included were necessarily associated with marketing of imported beer. Canada believed that independent auditors, equipped with those criteria, were not only qualified to determine which types of costs were necessarily associated with marketing of imports, but were in the best position to do so. The audits had been provided to the United States and the EEC, and Canada had requested and been prepared to deal with any detailed comments or concerns. Canada stated that audits were the required method for verification of costs of service both in the Canada/United States Free Trade Agreement and in the Canada/EEC agreement. In the specific case of Saskatchewan, Canada stated that the liquor board distributed only imported beer and included these distribution costs in its COS differential on a basis comparable to the practice of domestic brewers.

4.44 The United States stated that the experience with audits under the Free Trade Agreement had also been unsatisfactory. The costing methodology applied in that context with respect to wine and spirits (i.e. full-absorption costing) was subject to the same objections as in the case of beer. However, the audits for wine and spirits were not based on the same factual circumstances, and accordingly might not be generally applicable to beer. The United States suggested that it would be helpful if the present Panel could specify in its findings which were the costs that could be considered to be necessarily associated with marketing of the imported beer. It believed that "additional" costs should not include general overhead costs that were incurred regardless of the volume of sales, "imputed" costs that were not actually incurred by the liquor boards, or variable costs over which foreign brewers had no control. In its view, costs had to meet the following criteria in order to be included in a GATT-consistent COS differential: (1) they must be average costs actually incurred; (2) they must be additional or marginal costs that varied directly because the product was imported rather than domestic; (3) they must be necessarily associated with the importing and marketing of foreign beer: costs incurred as a result of GATT-inconsistent practices could not be deemed to be necessary; (4) they must be incident to the purchase, sale or processing of beer. The United States stated that it was not aware of any costs other than customs clearance and warehouse control (e.g. palletization) that must be incurred by the liquor boards because the product was imported. Canada would bear the burden of proving that any other types of costs were necessarily involved in the marketing of imported beer. The United States stated that beer coming from different countries of origin might generate different costs; if the liquor boards continued to do business in the way they had been doing so far, then the method of calculating costs should not be such as to penalize United States beer. The United States argued, however, that the provincial monopolies need not continue to perform a whole range of services; they could, for example, license operators to deliver imported beer within the province.

4.45 Canada considered that the concept of "necessarily associated with" could only mean all costs associated with importation and marketing. It was normal for any commercial enterprise, publicly or privately owned, to recover all its costs. This meant that a portion of overhead as well as variable costs had to be borne by imported as well as domestic products. Any other standard would mean that imports would be subsidized and domestic products treated less favourably than imports, which would go beyond the requirement of Article III of the General Agreement. In response to the criteria enunciated by the United States, Canada argued that: (1) the imputation of costs in the Ontario audit was due to the accounting policies of the province; the latter could be altered without any change occurring in the economics of the transactions, and hence the determination of the costs of service; (2) the conclusions of the 1988 Panel did not prohibit the recovery of an appropriate allocation of fixed costs, nor indeed of any costs, so long as they were incident to the importation and marketing of a foreign product consistently with Article 31.4 of the Havana Charter. Canada, thus, rejected the view that there should not be a charge for fixed assets employed, proportional to the use of these assets by a particular product. Examples of pricing based on full-absorption costing were to be found throughout the commercial realm and this costing principle had been recognized by the GATT Group of Experts on Anti-Dumping and Countervailing Duties in 1960. Canada argued further, in reply to the United States, that, in cases where marginal costs were lower than average costs, the United States standard would lead to imported products being costed lower than domestic products; (3) the United States appeared to be arguing that, because imported beer had to be sold through outlets that might differ from those for domestic beer, the cost of service was not necessarily associated with importing and marketing of the imported product. Canada argued that import monopolies were envisaged under the provisions of Articles XVII and II:4 of the General Agreement and that, to the extent that these monopolies sold the imported product, they were permitted to recover the properly allocated fixed and variable costs associated with doing so. If no import monopoly existed, the costs would be borne by each producer; (4) the audits proved that the costs included met the criterion of being incident to the purchase, sale or processing of imported beer. Canada argued that allowable costs for inclusion in COS charges should include all additional costs associated with importing and marketing of foreign products, in addition to the marketing costs shared equitably between imported and domestic products; they should, therefore, include the costs, properly allocated in accordance with generally accepted accounting principles, associated with receiving, purchasing, warehousing, shipping, delivery, retailing, financing, and administrative expenses. Canada stated that, while domestic brewers incurred costs in delivering their products to liquor board outlets, the liquor boards ensured the delivery of imported products and could legitimately charge for doing so.

4.46 The United States stated that what was at issue was not a standard commercial system and that, therefore, standard commercial accounting practices could not apply. The United States argued further that discriminatory COS differentials were also inconsistent with the provisions of Article III of the General Agreement, in that they were assessed after importation without the provision of national treatment.

4.47 Canada considered that the concept of "necessarily associated with" could only mean all costs associated with importation and marketing of foreign beer. Any standards which were adopted which did not permit the recovery of all costs would force a government to treat local products less favourably than imported. This went beyond the requirement of Article III of the General Agreement.

(iii) Methods of assessing mark-ups and taxes on imported beer

4.48 The United States argued that, as the landed cost of imported beer included federal import duties which did not apply to domestic beer, a COS charge calculated, and apparently applied in Nova Scotia and New Brunswick, on an ad valorem basis magnified the differential applied to imports. The practice was inconsistent with the provisions of Article III:2 of the General Agreement.

4.49 Canada stated that the provinces which currently imposed a COS fee applied it on a dollar-per-unit basis, which in some cases was the result of the conversion of an ad valorem rate. Canada considered, however, that the assessment of COS charges on either a per unit or an ad valorem basis was fully consistent with the conclusions and spirit of the 1988 Panel report, which did not specify the manner in which COS charges should be assessed. Those provinces which had chosen to calculate the COS charges on an ad valorem basis had done so following a methodology which was fully consistent with normal commercial considerations. Canada argued that the United States' statement that inclusion of federal duty charges in landed costs magnified or inflated COS differentials was incorrect. In Ontario, for example, both the calculation and the application of COS charges were unaffected by federal duty rates.

4.50 The United States stated that, in Alberta, British Columbia, Nova Scotia, Quebec and Saskatchewan, a COS differential was applied before the mark-up was assessed. The United States argued that this practice had a "cascading" effect which magnified the difference in the final prices of imported and domestic beer and that it was inconsistent with the provisions of Article III:2 of the General Agreement.

4.51 Canada stated that the practice of applying the COS fee before the mark-up was assessed was fully consistent with the findings of the 1988 Panel and with normal commercial practice of applying the mark-up on the full cost of goods: with respect to domestic beer, domestic brewers were responsible for distribution and the costs incurred were included in the price to the liquor boards, on which the mark-up was applied: with respect to imported beer, the distribution costs were borne by the liquor board and similarly applied before the mark-up. In the five provinces in question, the mark-ups applied were equal for domestic and imported beer. Furthermore, while Saskatchewan and British Columbia did apply a two-stage COS differential, it was applied on a dollar-per-unit basis and, therefore, had no cascading effect. Canada stated that corporations, as a matter of practice, charged their operating divisions a charge on capital employed, to reflect the actual costs of operation. They were entitled to a return on assets employed. Additionally, Canada submitted that it was common commercial practice for a mark-up to be applied to the laid-in cost at the warehouse or point of sale, which could include other charges such as the cost of service. Examples of pricing based on full absorbed cost were found throughout the commercial realm. Canada stated that, in the case of public utilities in the United States, it was a well-established fact that prices were set on a rate-base calculated on the totality of relevant costs, including production costs, operating expenses, value of fixed assets, depreciation, wages and administrative costs, in determining an appropriate return for services and assets employed. Canada referred to the conclusions of the 1960 GATT Group of Experts on Anti-Dumping and Countervailing Duties report in paragraphs 12 and 13 in support of its position (see also paragraph 4.45 above).

4.52 The United States also argued that the application of provincial taxes and of the federal Goods and Services Tax (GST) at the end of the price calculation, as was done in the provinces of British Columbia, Nova Scotia and Ontario, increased the discriminatory impact of the COS differentials. This constituted an application of internal taxes in a manner less favourable to imported products than to domestic products and, as found in the case of the United States taxes on petroleum and certain imported substances (BISD 34S/136), was inconsistent with the provisions of Article III:2 of the General Agreement.

4.53 Canada stated that the provincial taxes and the federal Goods and Services Tax were taxes of general application and in no way singled out imported products. Both provincial taxes and the federal GST were internal taxes: the provincial sales taxes were applied on the sale in the province at the retail level and calculated on the selling price of the goods; the GST was a uniform-rate tax applicable to domestic and imported goods and services, collected by the liquor boards and remitted to the federal government. Canadian legislation effectively provided that the GST be imposed on the excise and duty-paid value of imported goods. The "value added" to both imported and domestic beer by the liquor boards went into the respective retail price calculations and, thereafter, the GST and provincial sales taxes were levied at a rate to the consumer which was the same for imported and domestic products. Canada argued that the Panel on United States taxes on petroleum and certain imported substances had not addressed the computations of the base value for the purposes of application of the tax, but had found that, to be in conformity with the provisions of Article III:2 of the General Agreement, the tax had to be applied at a common tax rate for domestic and imported products. This was the case with respect to provincial sales taxes and the federal GST, whose application was, therefore, consistent with Canada's obligations under Articles II and III of the General Agreement. Canada argued that its position was supported by the findings of the 1988 Panel, which had stated, at paragraph 4.10 of its report, that Article II:4, applied in the light of Article 31.4 of the Havana Charter, "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".

4.54 The United States further argued that looked at overall, the approach to price determination by the liquor boards of Alberta, British Columbia, Nova Scotia, Ontario, Quebec and Saskatchewan was also plainly discriminatory and inconsistent with the provisions of Article II:4 of the General Agreement, in that it afforded protection to domestic beer in excess of the amount of protection provided for in Canada's Schedule of Concessions.

4.55 Canada could not accept the United States' allegations and indicated that price determination in all of the above provinces was non-discriminatory and fully consistent with the provisions of the General Agreement.

F. Minimum price requirements

Ontario:

4.56 The United States argued that the "Non-discriminatory Reference Price" (NDRP) applied in Ontario since September 1990 established a minimum price for imported and domestic beer and prevented United States brewers from competing on the basis of price. As such, the NDRP was equivalent to the minimum import price considered by the Panel on EEC fruits and vegetables to constitute a restriction other than duties, taxes or other charges within the meaning of Article XI:1 of the General Agreement (BISD 25S/68). The United States argued that the NDRP was similarly inconsistent with the provisions of Articles XI:1 and XVII of the General Agreement.

4.57 Canada rejected the United States' claim that Ontario's NDRP operated as a minimum import price and was, as such, inconsistent with the provisions of Articles XI and XVII of the General Agreement. Since 1927, the setting of a minimum price for domestic beer had been a social-policy objective of the liquor board to ensure responsible use of beverage alcohol through an across-the-board pricing mechanism; the NDRP had extended this objective to imported beer and its introduction had had no effect on retail prices. The NDRP was not an import restriction as no products were refused entry into the province. It did not apply at Canada's border, but was a strictly internal requirement which applied to the minimum price at which the liquor board would purchase all beer, imported and domestic, for sale within the province. This distinguished it from the EEC fruits and vegetables case, where the EEC legislation had been specifically designed to apply a minimum price to imports at the border. The consistency of the NDRP with the provisions of the General Agreement had, therefore, to be looked at in the light of Article III obligations only. The latter were specific to internal taxes, charges, laws, regulations and requirements as they affected domestic and imported products, while Article XI obligations were specific to measures affecting importation. Canada further argued that, as the difference between the NDRP and a lower supplier quote would accrue to the supplier and not to the government, the NDRP was not a charge within the meaning of Article III:2 of the General Agreement, but an internal requirement affecting the internal sale of beer within the meaning of Article III:4. However, in either case Article III permitted governments to regulate the treatment of both domestic and imported goods in the internal market, provided that the measure met the national treatment standard and did not afford protection to domestic production.

4.58 The United States rejected Canada's contention that the NDRP should be examined in the light of the provisions of Article III of the General Agreement. This was a border issue as it related to the purchase, by the liquor board, of beer from abroad. The NDRP affected the price of imported beer at the border in a manner that restricted the ability of foreign producers to compete on a commercially reasonable basis. Accordingly, it acted as a quantitative restriction inconsistent with the provisions of Article XI of the General Agreement, as had been found in the EEC fruits and vegetables case.

4.59 Canada argued that, subject to limited exceptions, Article XI of the General Agreement prohibited restrictive border measures on goods other than duties, taxes or other charges. Article XI was not relevant to the minimum reference price because this was not a border measure applied to prohibit or restrict the importation of beer. Article III, on the other hand, applied to "internal measures" that regulate, inter alia, the purchase, sale and distribution of a product. When the same measure was applied to both domestic and imported products, it was an internal measure within the meaning of Article III. Article III was not intended to prevent contracting parties from exercising their sovereignty to promote domestic policy goals (in place for social and cultural reasons) through internal regulations, provided these did not treat imported products less favourably than the domestic product.

4.60 Canada stated that the purpose of the NDRP was to ensure that suppliers would not offer deep price discounting, thereby encouraging excessive consumption. When the NDRP was introduced in 1989, it was set at a level which was just below the existing purchase price for domestic and imported beer. N° supplier had been affected. Canada explained that the NDRP, the wholesale floor price below which both imported and domestic beer would not be purchased by the liquor board, included the supplier quote, plus federal excise tax and duty and the liquor-board freight and in-store and out-of-store cost-of-service charges. These components had been chosen because they represented that point in the price structure at which imported and domestic beer costs were most comparable. Because domestic delivery and retail costs were subject to an ad valorem charge (as opposed to imported beer whose delivery and retail costs were not subjected to a provincial charge), the NDRP resulted in a higher retail price for domestic beer than for imported beer. Furthermore, the fact that imported beer was selling at a lower price in Ontario than provincial beer was evidence that foreign beer could compete on a commercially reasonable basis. As the NDRP did not afford less favourable treatment to imported than to domestic beer, Canada's obligations under Article III:4 were being honoured.

4.61 Canada further argued that the existence of a tariff binding on a product did not prevent a government from introducing an internal regulation consistent with Article III. Were the application of such a measure to affect trade in a product subject to a binding, redress might be had through a determination of whether this GATT-consistent measure nonetheless nullified or impaired benefits accruing to a contracting party. In such circumstances, however, the contracting party claiming impairment would, under the terms of the Understanding Regarding Notification, Consultation, Dispute Settlement and Surveillance (Annex, paragraph 5), "be called upon to provide a detailed justification".

4.62 The United States further argued that, to the extent that United States beer was more efficiently brewed and competitively priced, the NDRP discriminated against United States beer in particular and was thus also inconsistent with the provisions of Article XIII of the General Agreement.

4.63 Canada stated that the United States had not provided any evidence that United States beer had been affected by the NDRP. Since 1985, no foreign supplier had submitted a quote below the current NDRP level. Implementation of the NDRP had had no effect on imported beer retail prices and there continued to be scope for price competition among domestic and imported beers. Given the fact that the NDRP did not constitute a prohibition or restriction on importation, Canada rejected as not relevant the United States' contention that its application violated obligations under Article XIII of the General Agreement.

British Columbia:

4.64 The United States argued that the minimum reference price for draught beer applied since 1989 in British Columbia was, similarly to Ontario's NDRP, inconsistent with the provisions of Articles XI, XIII and XVII of the General Agreement.

4.65 Canada stated that its observations on Articles III and XI of the General Agreement applied to provincial minimum pricing policies. British Columbia's minimum reference price was a retail price below which provincial or imported beer may not be sold to licensees. A supplier must charge a wholesale price such that after application of all taxes and mark-ups, the minimum reference price was met or exceeded. British Columbia's minimum reference price should be examined under Article III:4 and not Article XI. The liquor board did not sell draught beer below a set wholesale price. As this was not a border measure, it should be examined in light of Article III, not Article XI.

New Brunswick:

4.66 The United States stated that Canada's description of the operation of mark-ups in New Brunswick indicated that a floor price applied through the linking of imported beer prices to prices of out-of-province beer prices.

4.67 Canada stated that, given the nature and size of the New Brunswick market, the floor price was applied to prevent deep discounting which could easily destroy the local industry. The floor price was somewhat above the price of provincial beer. The practice had been in place since 1927.

4.68 The United States also stated that a minimum floor price operated below which imported beer could not be sold at retail outlets in Newfoundland.

4.69 Canada stated that the Newfoundland floor price was, for reasons similar to those relating to the New Brunswick floor price as well as for social policy reasons, equal to the lowest-priced provincial beer. The practice had been in place since 1973.

4.70 The Panel noted that, for Ontario, Canada had provided an explanation as to the stage at which the minimum price was applied, but that for neither British Columbia nor Ontario was any indication given as to the criteria for setting the current level of the minimum price.

G. Taxes on beer containers

4.71 The United States stated that in Manitoba, Nova Scotia and Ontario, beer containers were assessed a tax per unit, which was refundable on domestic beer containers because domestic producers were able to collect used cans and bottles through the private delivery systems they were entitled to operate. As imported beer could not be distributed privately, a separate collection system would need to be set up, which would be prohibitively expensive. The United States recalled that the Panel on United States taxes on petroleum and certain imported substances had found that the discriminatory imposition of taxes on imported products could not be justified under Article III:4 of the General Agreement. The United States argued that the imposition of an internal tax that was refundable for domestic but not for imported products was inconsistent with the provisions of Articles III:4 and XVII of the General Agreement.

4.72 Canada rejected the United States' claim that the tax was inconsistent with the provisions of Articles III:4 and XVII of the General Agreement. Canada stated that this issue had not been raised by the United States in the consultations held under Article XXIII of the General Agreement in July 1990, and did not feature directly among the practices specifically mentioned in the Panel's terms of reference. However, given the importance of the environmental issue, Canada would welcome the Panel's views. Canada stated that, in Manitoba and Ontario, a container charge was levied on all beverage alcohol containers, domestic and imported, which were not part of a deposit/return system; in Nova Scotia, the charge was levied per unit of non-refillable containers, imported and domestic, that were shipped to the liquor board. The charges were designed to encourage the establishment of systems in which consumers returned bottles for refilling and cans for recycling; and where no such system had been established, they helped offset the cost of disposal of the containers. N° government measure prevented foreign brewers either from establishing, in Manitoba or Ontario, collection systems that included a refund, or from using refillable bottles in Nova Scotia, and thereby being relieved of paying the tax. Canada could not accept that the cost of setting up such a system was relevant when the environmental costs to the province of disposal were high. Canada argued that the issue was not the refundability of the tax, but rather that the imposition of the tax was dependent on the type of container used or the existence of a system for refunding returned containers; such conditions did not violate Article III:4 of the General Agreement. Canada stated that the fact that Canadian breweries had established systems for the return of their own bottles was a private commercial decision, not a law, regulation or requirement within the meaning of Article III:4. Nor did the practice, in Manitoba and Ontario, whereby privately-owned retail outlets collected only containers for which a refund system existed, constitute a government measure within the meaning of Article III:4. Further, there was no discriminatory treatment in liquor-board stores, since in Manitoba and Ontario they did not collect any beer containers and in Nova Scotia they collected all refillable bottles. The expense to a foreign supplier of establishing a collection system for imported beer did not in itself constitute a violation of Article III:4. Canada argued that the case of United States taxes on petroleum and certain imported substances was not relevant, as that Panel's findings had rested on the fact that the rate of tax applied to imported products was higher than that applied to domestic products. The tax on beer containers, in contrast, was applied at the same rate and under the same conditions irrespective of origin of the product. What the United States appeared to be seeking was either an exemption from the environmental tax, which would amount to better than national treatment, or an obligation on the liquor boards to provide a container collection or deposit refund system for imported beer. Canada stated that liquor boards would be entitled to charge for such a system as a cost of service.

4.73 Canada stated, in response to the statement by Australia, that it had not invoked Article XX(d) of the General Agreement because it was of the firm belief that the environmental tax was applied in a manner consistent with Article III. In the event that the Panel should find otherwise, Canada requested that consideration be given to the exception in Article XX(b). The environmental tax was a measure intended and implemented solely to protect the environment. Environmental measures protected human and animal health and therefore qualified for the exception under Article XX(b) provided they were "necessary". This term had been interpreted in the Panel on United States Section 337 (BISD 36S/345) and in the Thai cigarette Panel (DS10/R) to mean that there must not be a less GATT-inconsistent manner which the government could use to accomplish its objective. In Canada's view there could be no less trade-restrictive measure than one that applied equally to domestic and foreign beer. The General Agreement was not designed to protect the commercial considerations that led foreign brewers not to establish collection systems; nor should cost be cited to prevent a government from implementing environmental measures pursuant to Article XX(b).

4.74 The United States argued that, as foreign suppliers were prevented from establishing a system for collecting empty containers on commercially reasonable terms, fewer empty containers were collected and recycled than would otherwise be properly disposed of. Canada could not, therefore, justify the measure under Article XX(b) of the General Agreement. Not only was the measure not necessary, but it appeared to work against the interests of public health and safety.

H. Notification procedures for new practices

4.75 The United States stated that the liquor board had shared with domestic brewers the results of the audit of its COS differentials several months before importers were advised of the change in pricing policy that followed from these audits. The United States argued that this practice was inconsistent with the provisions of Article X of the General Agreement.

4.76 Canada argued that it had no obligation to produce COS audits; the provinces had, however, chosen to do so as an independent means of substantiating the COS charges. The British Columbia COS study and audit had not been completed until the latter part of October 1990. A copy of the audit had been provided to United States authorities. The mark-up schedule effective 1 January 1991, together with changes relating to the proposed GST legislation, had been communicated to all suppliers of domestic and imported beer on 29 November 1990 by way of a memorandum from the General Manager of the liquor board.

4.77 The United States stated that, on 5 July 1989, the Minister of Economics of Ontario had announced a new pricing policy for beer sold in liquor-board stores to become effective on 10 July 1989; this had denied importers a meaningful opportunity to adjust to the new policy. The United States argued that this practice was inconsistent with the provisions of Article X of the General Agreement.

4.78 Canada argued that an announcement in a provincial legislature in advance of the introduction of a measure fully met the Article X requirement that regulations affecting the sale of imports be published promptly in a manner that enabled government and traders to become acquainted with them.

I. Obligations under Article XXIV:12

4.79 The United States stated that the Government of Canada had had since 1988 to ensure that the liquor boards brought their practices into conformity with the provisions of the General Agreement. However, it had failed to meet its obligations under Article XXIV:12 of the General Agreement, namely to take "such reasonable measures as may be available to it to ensure observance of the provisions of the Agreement by the regional and local governments and authorities within its territory". The operation of import monopolies with respect to alcoholic beverages for the purpose of revenue-raising was not, in and of itself, inconsistent with obligations under the General Agreement: but their revenue-raising objectives should be carried out without interference with the importation, delivery and sale of beer. The United States stated that liquor-board practices had changed since 1988, but argued that these changes had had either no effect or a negative effect on market access for imported beer. The agreement concluded by Canada and the EEC provided for national treatment to be accorded to imported beer with respect to the provinces' listing and delisting practices; however, the United States stated that this was not being done. Furthermore, Canada had not agreed to eliminate discriminatory mark-ups but merely not to increase the differentials. Points of sale were not addressed at all. In any case, Canada had an obligation to all contracting parties, not just the EEC, to eliminate GATT-inconsistent measures. The United States stated that not all 10 provinces were signatories of the interprovincial agreement and that the agreement did not address access of imported beer; in fact, improved access for Canadian out-of-province beer under current competitive conditions for imports would only serve to increase discrimination against imported beer. The United States stated that the question of time-frame for bringing measures into GATT-conformity was also subject to consideration of what was reasonable.

4.80 Canada rejected as unfounded the claim by the United States that Canada had failed to meet its obligations under Article XXIV:12 of the General Agreement. Canada had taken and continued to take such reasonable measures as might be available to it to ensure observance of the provisions of the General Agreement by the provincial governments and authorities with respect to the operation of the provincial liquor boards. The right of Canada's provinces to operate provincial monopolies for the sale and distribution of alcoholic beverages and to use these monopolies for achieving certain social and revenue objectives was not at issue. Canada stated that, since efforts towards resolving the remaining issues were still actively engaged, the steps to date did not constitute "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". Canada was committed to bringing the liquor-board practices into line with GATT obligations and significant progress had already been accomplished in the context of two major initiatives: the agreement which Canada had concluded with the EEC following the adoption of the 1988 Panel report and which was being applied on an m.f.n. basis, and the intergovernmental agreement. Canada stated that the 1988 Panel had examined essentially the public systems for distribution and sale of beer, and that these had now largely been brought into conformity with GATT provisions. The 300 per cent increase in United States exports of beer to Canada since 1988 belied the statement by the United States that changes in liquor-board practices had had no effect or a negative effect. The agreement with the EEC had settled the long-standing dispute with the EEC over wines and spirits. With respect to beer, it had resulted in national treatment being provided in listing/delisting practices and included an undertaking to bring measures on pricing into conformity with GATT provisions upon successful conclusion of the interprovincial negotiations; however, pricing had been brought largely into conformity with GATT obligations ahead of that target, by the introduction of audited COS charges. Canada underlined that long-standing provincial regulations, policies and practices had shaped the current structure of the Canadian brewing industry, creating in effect 10 distinct regional markets. Following the 1988 Panel report, it had become clear that significant and comprehensive adjustment would have to be made. This process was now engaged but could not be accomplished overnight if Canada was to have a viable, internationally-competitive industry. The intention of the interprovincial agreement was not to erect barriers to trade. The agreement set out to eliminate discrimination in the way beer was treated from one province to another with respect to listing, pricing and distribution and was thus a critical component in building the international competitiveness of the Canadian brewing industry. While not all the provinces had signed the agreement, all were committed to the work of the Technical Committee, which was preparing a plan, including specific time-frames, for the elimination of all remaining discriminatory practices. All the provinces, as well as the federal government, had recognized that it was essential to resolve this matter satisfactorily and had endorsed the process of change at the highest political level. The creation of a truly national market would provide the basis for bringing all remaining practices into compliance with Canada's international trade obligations. Without the necessity for Canada to respond to the findings of the 1988 Panel, the Canadian brewing industry would not be under threat and the need to deal with interprovincial barriers would not have the same political urgency. The interprovincial agreement had specifically recognized the need for the process of elimination of discriminatory practices to "be consistent with Canada's international obligations". It had set a deadline of 30 June 1993 for establishing a timetable for the elimination of remaining discriminatory practices in each province. Bearing this in mind, Canada had proposed to consult with the EEC in the second half of 1993 with the objective of resolving concerns regarding any remaining discrimination relating to access for foreign beer to private distribution systems. Canada was thus continuing to take such reasonable measures as were available to it; these complementary processes had already produced substantial results and provided the most effective means of completing the process.

4.81 The United States suggested that an example of a reasonable measure available to Canada was to be found in the implementing legislation for the Canada/United States Free Trade Agreement. This gave the federal authorities power to promulgate regulations for the implementation of provisions of the Free Trade Agreement relating to the internal sale and distribution of wines and spirits, with the possibility of exempting those provinces whose practices were already in conformity with the relevant provisions of the Agreement. This legislation demonstrated that there were means available to Canadian federal authorities for imposing discipline on provincial liquor board practices concerning beer.

4.82 Canada restated its view, put to the Council at the time of the adoption of the 1988 Panel report, that what was reasonable and what was available ultimately had to be judged in a domestic context, taking into account the sensitive issues of domestic politics and policies. Therefore, with respect to the conclusions in paragraph 4.34 of the 1988 Panel report, Canada thought it inconceivable that contracting parties would consider substituting their views on a question of internal constitutional and political options for those of the federal government. Canada stated that there could, in a federal state, be circumstances under which it was simply not possible, for a variety of reasons not necessarily legal, to achieve a particular result. What had emerged from the Uruguay Round Negotiating Group on GATT Articles was that, if a federal state had said that it had taken such reasonable measures as were available to it and yet the practice persisted, the issue that the CONTRACTING PARTIES would have to address was the question of compensation or withdrawal of concessions. Canada considered that, subsequently to the 1988 Panel report, liquor-board practices had been brought fully into compliance with GATT obligations as concerned wine and spirits on the one hand, and the distribution and sale of beer in the public system on the other. Canada's current approach was the most effective route for achieving full compliance with its GATT obligations.

4.83 Canada stated that both the EEC agreement and the interprovincial agreement recognized the need to allow time for phasing in the required changes in liquor board practices relating to beer. As the distribution systems long predated GATT, it would be in order to have a reasonable period of adjustment to avoid undue disruption to the domestic industry. It was normal GATT practice to permit time for adjustment to change and Canada anticipated further progress within the reasonable period of time normally envisaged under the dispute settlement process. What was to be considered a reasonable period of time was ideally arrived at through negotiation, and past experience - such as in the case of Japanese imports of beef and Canadian imports of wine - had shown that it could be quite a lengthy period.

J. Statement by Australia

4.84 Australia considered that its rights under the General Agreement continued to be nullified and impaired in respect of Articles II and XI of the General Agreement as a result of Canada's failure to implement, with regard to beer, the findings of the 1988 Panel. A number of practices, already examined by the 1988 Panel, imposed more onerous conditions on imported than on domestic beer. Some listing/delisting requirements effectively applied only to foreign beer. For example, the quota conditions attached to listing gave an edge to domestic suppliers given their capacity to meet such conditions within a short time-frame. The barring, in some provinces, of a delisted supplier for a two-year period amounted to a selective quantitative restriction on imports. Figures for retail outlets for domestic and imported beer demonstrated continuing discrimination.

4.85 The 1988 Canada/EEC agreement only partially implemented the 1988 Panel's findings. It had not removed mark-up differentials; moreover, the provisions of Article V of the agreement relating to non-discrimination did not extend to mark-ups, giving rise to an inconsistency with Article I of the General Agreement, in addition to the inconsistencies with Articles II and III. Certain other aspects of the agreement required clarification, namely: what interpretation was being given to non-discrimination; whether Canada was ensuring m.f.n. treatment for products from other countries in terms of Article XXIV:12 of the General Agreement or by concrete undertakings from the provinces to the federal government; whether the agreement defined beer that was the product of the EEC; whether "national treatment" was defined in terms of Article III of the General Agreement. In the absence of a national beer market in Canada, the question of national treatment rested on the relative treatment of foreign beer and beer of the province concerned. Australia stated that the agreement with the EEC had not been fully notified to the CONTRACTING PARTIES. By this agreement Canada had sought to implement the 1988 Panel's findings in a manner which, prima facie, constituted a breach of Article I of the General Agreement in the granting of an advantage, favour or privilege to another contracting party. Australia thus considered that its benefits under Article I had been nullified and impaired. Such action was also inconsistent with Canada's obligations under paragraph A.2 of the 1989 Decision on Improvements to the GATT Dispute Settlement Rules and Procedures which stated that "all solutions to matters formally raised under the GATT dispute settlement system ... shall be consistent with the General Agreement and shall not nullify or impair benefits accruing to any contracting party under the General Agreement, nor impede the attainment of any objective of the General Agreement". Australia considered Canada to be bound by the 1989 Decision with respect to all actions which it had taken since its adoption regarding implementation of the 1988 Panel report, and stated that the terms of reference of the present Panel were pursuant to the 1989 Decision.

4.86 Australia stated that the recently concluded interprovincial agreement did not remedy the measures found by the 1988 Panel, to be inconsistent with the General Agreement. The relevance of this agreement to the resolution of the issue of retail outlets was not clear. The agreement addressed only practices relating to domestic beer and could result in even more discrimination against imported beer. The involvement of the federal government of Canada in such an agreement, which might give rise to further GATT-inconsistent measures, did not satisfy the provisions of Article XXIV:12. Australia failed to understand why Canada had not resorted to the same "reasonable measures" with respect to imported beer as it had used in this agreement with respect to domestic beer. Furthermore, Canada had not given any indication of what further progress was being anticipated or what constituted a reasonable period for implementation of the 1988 Panel findings, although it had cited no specific barrier to setting a timetable for implementation.

4.87 Australia argued that Canada could not claim that all the matters ruled on by the previous Panel needed to be re-examined, except possibly in an Article XXIV:12 context. In Australia's view, the Panel did not need to rule on the GATT consistency of measures which had been found by the 1988 Panel to be GATT-inconsistent and which remained so on Canada's own evidence. Canada's claim that only the EEC enjoyed any rights as a result of the 1988 Panel's findings denied any precedence status to panel findings in the GATT dispute settlement process and was inconsistent both with Canada's obligations under Article I of the General Agreement and with the 1989 Decision on Improvements to the GATT Dispute Settlement Rules and Procedures, which included provisions on the nullification and impairment of benefits accruing to any contracting party.

4.88 Australia also pointed to other practices which imposed more onerous conditions on imported than on domestic beer. In Australia's view, non-identical treatment of imported and domestic beer would be less favourable unless identical treatment proved impossible. Canada had not demonstrated why it could not provide identical treatment with respect to distribution of beer. While the liquor boards retained exclusive rights of first receivership of imported beer, they applied a de facto barrier to participation in private distribution systems. With respect to pricing, Australia stated that domestic suppliers faced lower costs because they did not have to sell through the monopoly. In addition, new discriminatory measures had been introduced since the adoption, by the CONTRACTING PARTIES, of the 1988 Panel report, including minimum reference prices and environmental taxes. It was not clear whether Ontario's Non-discriminatory Reference Price applied to sales at all retail outlets; if not, Article XI:1 of the General Agreement was relevant. Nor was it clear why delivery practices entered into the calculation of minimum prices, given that the stated object of the measure was social. The environmental tax was, in effect, only levied on imported beer, as importers were precluded by law from establishing their own distribution systems and by cost factors from setting up individual collection systems. Australia therefore believed that the environmental tax might be contrary to Article III:2 of the General Agreement. If this were found to be the case, Australia further considered that Canada could not justify such a tax under Article XX(d) unless it could demonstrate, as found by the Thai cigarette Panel (DS10/R), that there were no reasonable GATT-consistent measures available to it. If the objective of the environmental tax was as indicated by its name, then the provinces should be equally concerned with devising a means for recycling containers of foreign beer, e.g. by means of a collection system operated by the liquor boards.

4.89 Australia considered that Canada's actions in proceeding to implementation of the CONTRACTING PARTIES' decision with respect to wine, while maintaining or introducing discrimination on beer, had given rise to further breaches of the General Agreement in respect of Articles I and III and were inconsistent with the 1989 Decision on Improvements to the GATT Dispute Settlement Rules and Procedures. These actions could not be justified under Article XXIV:12 of the General Agreement. Beer and wine were like products as alcoholic beverages and had been traditionally regarded as such in relation to the controls exercised by the respective provincial liquor boards. The Panel on imported wines and alcoholic beverages in Japan (BISD 34S/83), basing itself on the report of the Panel on Spanish tariff treatment of unroasted coffee (BISD 28S/102), had accepted that wines and spirits were like products for the purposes of Article III. Australia contended that beer enjoyed an even closer tariff and statistical correlation with wine than did wine with spirits.

4.90 In reply to the arguments by Australia (also see paragraph 4.73 above), Canada indicated that Ontario's NDRP was an internal requirement and that it operated in the same way for all beer regardless of where it was sold. Importers were not precluded from establishing a container retrieval/collection system. Canada did not accept Australia's arguments to the effect that, because the collection and retrieval of used containers required additional investments, it was not justified under the General Agreement. The levy was a means of securing public revenues to finance waste management systems. Domestic producers were subject to equivalent measures, where they failed to establish their own systems for container retrieval. Australia had raised Article XX(d) of the General Agreement. Canada had not relied on the exception in Article XX to justify the environmental tax because it was applied in a manner consistent with Article III of the General Agreement. In the event that the Panel should find otherwise, Canada would request that consideration be given to the exception in Article XX(b), the conditions of which were met by the environmental tax.

4.91 Canada rejected Australia's observations about the non-discriminatory application of the Canada-EEC Agreement. Canada confirmed that the agreement was being applied on an m.f.n. basis and that the terms "non discrimination" and "national treatment" were being used in their GATT sense. Canada indicated surprise at Australia's comments, as the Australian Government had kept itself well informed on this issue, as would be expected given their important interests in the Canadian wine market. At no time had the Australian authorities requested consultations to take up these concerns.

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