16 October 1991

1.1 In July 1990, the United States held consultations with Canada under Article XXIII:1 concerning practices relating to imports of beer. The consultations did not lead to a solution and the United States requested the establishment of a GATT panel under Article XXIII:2 to examine the matter (DS17/2 of 6 December 1990).

1.2 On 6 February 1991, the Council agreed to establish a panel and authorized the Council Chairman to designate the Chairman and members of the Panel in consultation with the parties concerned (C/M/247, page 14).

1.3 The terms of reference are as follows:

1.4 Pursuant to the authorization by the Council and after securing the agreement of the parties concerned, the Chairman of the Council decided on the following composition of the Panel (DS17/4):

The composition of the Panel is the same as that of a GATT Panel which, in 1988, examined a complaint by the EEC relating to some of the practices of Canadian provincial marketing agencies of alcoholic beverages ("liquor boards").

1.5 The Panel met with the Parties on 23 April, 23-24 May and 29 July 1991. The delegations of Australia and EEC were heard by the Panel on 23 April 1991. The Panel submitted its report to the Parties to the dispute on 18 September 1991.

2.1 The liquor boards are created by provincial statutes and their monopoly with respect to the supply and distribution of alcoholic beverages within their provincial borders is based on provincial legislation. The provinces are constitutionally empowered to enact such legislation under Section 92 of the Constitution Act, 1867, in particular the heads referring to 'Property and Civil Rights' and 'Local Matters within the Province'. The importation of alcoholic beverages into Canada is, on the other hand, regulated by federal legislation. By means of the 1928 Importation of Intoxicating Liquors Act (now R.S.C, 1985), the Canadian Parliament restricted the importation of alcoholic beverages into a province except under the provisions established by a provincial agency vested with the right to sell alcoholic beverages. This has resulted in a monopoly on the importation of alcoholic beverages by provincial liquor boards, whether the importation is from a foreign country or from another province. By virtue of the Act, importers and consumers in Canada cannot bypass the intermediary of the provincial liquor boards by making direct imports.

2.2 Each Canadian province requires a licence to be obtained from the designated provincial authority to manufacture and/or keep and sell beer in the province. Except in the case of Prince Edward Island where no beer is produced, most domestic beer must, as a matter of practice, be brewed in the province in which it is sold. No foreign brewer is permitted to sell beer in a province except through the liquor board. On the basis of the provincial legislation governing the right to sell beer, each province has developed its own system for the delivery and sale at retail outlets.

2.3 All provinces have government liquor stores situated throughout their territory. In addition, most provinces also allow beer sales at a variety of privately-owned and -operated retail outlets, as well as at on-site (brewery) stores. In Prince Edward Island and Saskatchewan, imported beer has access to the same retail outlets as domestic beer. In Alberta, New Brunswick and Nova Scotia, imported beer has the same access to retail outlets as domestic beer, with the exception of provincial brewers' own outlets. In Manitoba, two out-of-province breweries have access to privately-owned outlets. In the four other provinces, provincial beer is sold through certain outlets that do not stock or sell imported beer. These additional outlets are privately owned and operated: Licensee Retail Stores and on-site micro-brewers' outlets in British Columbia; hotel vendors for off-premise consumption in Manitoba; Brewers Agent and Retail stores in Newfoundland; Brewers' Retail Inc. stores and on-site brewers' stores in Ontario; and licensed grocery stores in Quebec. Table 1 summarizes the situation.

Table 1: Points of sale for beer in Canadian provinces

Table 2: Delivery systems for beer in Canadian provinces.

2.5 While the situation varies somewhat from province to province, generally any supplier of alcoholic beverages, domestic or imported, wishing to sell a product in a province must first obtain a "listing" from the provincial marketing agency. In Alberta, unlisted products, both imported and domestic, may be sold in licensee outlets. In Ontario, except under the "Vintages programme" or a test-market programme (where in both cases imported beer may be sold without a listing on a one-time basis), all beer for sale in the province requires a listing. In Quebec, where the liquor board does not handle provincial beer, all provincial brewers are required to hold permits from the provincial authority for brewing, warehousing and distribution of beer. In all other provinces, all beer for sale in the province must be listed. If a listing is granted, it can be subject to conditions under which the product in question may be sold in the province (e.g. minimum sales quotas, bottle or package sizes). The listing of an alcoholic beverage by a provincial liquor board ensures the availability of that product in outlets operated by that board. In certain provinces (Alberta, Manitoba, New Brunswick, Nova Scotia, Ontario, Prince Edward Island, Quebec), the listing and delisting practices, conditions and formalities for imported and domestic products differ from one another.

2.6 The retail price of beer sold in a Canadian province is established by adding applicable federal customs duties and taxes, provincial mark-ups and taxes to the base price. British Columbia applies both a volume and a percentage mark-up. Ontario also applies a volume levy. Most provincial liquor boards apply a cost-of-service charge, which can be higher for imported beer depending, inter alia, on the extent of the service prescribed or otherwise provided. The provincial mark-ups and cost-of-service charges are applied in addition to the customs duties bound under Canada's GATT tariff schedule. Four provinces (British Columbia, New Brunswick, Newfoundland and Ontario) also apply a minimum purchase or floor price. The United States and one other contracting party have initial negotiating rights on a concession granted by Canada on beer. Table 3 summarizes the situation.

Table 3: Summary of mark ups, cost of service (COS) charges and minimum pricing practices applied by Canadian provinces.

2.7 In support of their case, both parties supplied the present Panel with extensive data relating to imports and domestic sales of beer, mark-ups, cost-of-service charges and other policies and practices affecting sales of beer in Canada.

2.8 The 1988 GATT Panel had examined a complaint by the EEC relating to some of the practices of Canadian provincial liquor boards, namely discriminatory practices relating to listing requirements, to price mark-ups and to the availability of points of sale. In its report ¹, the 1988 Panel concluded that (i) the mark-ups which were higher on imported than on like domestic alcoholic beverages (differential mark-ups) could only be justified under Article II:4, to the extent that they represented additional costs necessarily associated with marketing of the imported products, and that calculations could be made on the basis of average costs over recent periods; (ii) 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; (iii) the practices concerning listing/delisting requirements and the availability of points of sale which discriminate against imported alcoholic beverages were restrictions made effective through state-trading operations contrary to Article XI:1. The Panel recommended "that the CONTRACTING PARTIES request Canada to take such reasonable measures as may be available to it to ensure observance of the provisions of Articles II and XI of the General Agreement by the provincial liquor boards in Canada", and "to report to the CONTRACTING PARTIES on the action taken before the end of 1988, to permit the CONTRACTING PARTIES to decide on any further action that might be necessary". The report of the Panel was adopted by the CONTRACTING PARTIES on 22 March 1988.

2.9 In December 1988, Canada informed the Council that, as a result of the Panel findings, an Agreement had been concluded with the EEC concerning trade and commerce in alcoholic beverages (C/M/227). It later confirmed that the Agreement would be implemented by the provinces on a most-favoured-nation basis. In addition to its provisions on spirits and wine, the Agreement provides that the Canadian Competent Authorities shall accord national treatment to beer that is the product of the Community in respect of measures affecting the listing or delisting of such beer, and shall not increase any mark-up differential that existed on 1 December 1988 between beer that is the product of the Community and beer that is the product of Canada. The Agreement further provides that listing or delisting of alcoholic beverages shall be non-discriminatory, based on normal commercial considerations, transparent and not create disguised barriers to trade, and be published and made available to interested persons. In the context of the Agreement, Canada undertook to bring measures on pricing of beer into conformity with its GATT obligations; this undertaking was contingent on and would follow the successful conclusion of federal-provincial negotiations concerning the reduction or elimination of interprovincial barriers to trade in alcoholic beverages, including beer. An Intergovernmental Agreement on Beer Marketing Practices was concluded in early 1991 between the governments of a number of Canadian provinces and territories representing over 80 per cent of the Canadian beer market. This Agreement is aimed at eliminating long-standing provincial regulations, policies and practices that have effectively precluded interprovincial trade in beer. The Agreement is being implemented in stages, with listing, pricing and other practices which discriminate against products from other provinces being dealt with in various time-frames. While this Agreement applies only to Canadian products, it has been designed to facilitate a rationalization and adjustment process for the domestic market that could ultimately lay the basis for Canada meeting its international obligations. In their argumentation, the Parties referred to their Free-Trade Agreement, the text of which was submitted to the CONTRACTING PARTIES on 26 January 1989 (L/6464). Chapter 5 of the Agreement incorporates the provisions of Article III of the General Agreement (National Treatment) into the Free-Trade Agreement. However, Chapter 12 of the Free-Trade Agreement, while recognizing that the Parties retain their rights and obligations under the GATT (Article 1205), exempts from the provisions of Chapter 5 non-conforming provisions of existing measures relating to the internal sale and distribution of beer and malt beverages, as long as such provisions are not made more discriminatory than they were on 4 October 1987 (Article 1204). The Free-Trade Agreement was implemented in Canada in large measure by an Act of Parliament which, inter alia, ensures compliance by the provinces with Canada's obligations under that Agreement.

A. Main arguments

3.1 The United States argued that Canada had failed to bring into conformity with the General Agreement the provincial liquor board practices relating to beer which had explicitly been found in the 1988 liquor board Panel report to be inconsistent with Canada's obligations under Articles II:4 and XI:1 of the General Agreement, specifically discriminatory practices relating to listing, mark-ups and points of sale. It requested that, with respect to these practices, which would not involve extensive factual analysis, the present Panel make its findings and recommendations before considering the status under the General Agreement of the other Canadian provincial liquor board practices covered by documents DS17/2 and DS17/3. In the United States' view, Canada had not fulfilled its obligation "to take such reasonable measures as may be available to it to ensure observance of the provisions of Articles II and XI of the General Agreement by the provincial liquor boards in Canada", and the continued application of these practices resulted in the nullification or impairment of benefits accruing to the United States under the General Agreement.

3.2 Canada argued that the United States could not assert rights automatically under the 1988 Panel report since it had not been a complaining party. Canada further submitted that it had taken, and was continuing to take, such reasonable measures as were available to it to ensure observance of the provisions of the General Agreement by the provincial governments and authorities with respect to the operations of the provincial liquor boards. Because such extensive and substantial changes had occurred since the 1988 Panel report had been adopted, and given the very basic differences of view that existed between the Parties as to the facts of the case, it was inappropriate for the present Panel to make any findings or recommendations with respect to practices maintained by provincial governments or agencies until it had conducted a full investigation of the existing facts and of the relevance thereto of the provisions of the General Agreement. Finally, there was a close inter-relationship between the practices which existed in 1988 and practices currently in place, and the present Panel could not make a full and fair assessment of the relevant facts if it were to sever its consideration of the "new" practices from that of the practices that existed in 1988.

3.3 The United States requested that, should the Panel decline to examine some of the complaints on an expedited basis, it address the question whether any and all of the Canadian provincial liquor board practices identified by the United States were inconsistent with Canada's obligations under the General Agreement and nullified or impaired United States rights under the General Agreement. It would be the understanding of the United States that the Panel would then consider the GATT consistency of existing practices only and not consider as relevant the recently concluded agreements or any other prior measures.

B. Decision of the Panel

3.4 The Panel gave careful consideration to the United States' request for expedited proceedings, i.e. for the Panel to make an immediate determination that benefits accruing to the United States under the General Agreement had been nullified or impaired as a result of the practices maintained by the Canadian provincial marketing agencies and examined by the 1988 Panel. In 1988, the Panel had indeed found that certain provincial practices were contrary to the provisions of the General Agreement. Following its recommendation, the CONTRACTING PARTIES had requested Canada to take "such reasonable measures as may be available to it to ensure observance of the provisions of Articles II and XI of the General Agreement by the provincial liquor boards in Canada". However, as noted in paragraphs 4.21 and 4.25 of the Panel's report, it had not made a detailed factual analysis of the practices complained against. The present Panel had now been informed by Canada that changes had occurred with respect to most of the matters dealt with by the Panel in 1988. It, therefore, believed that, before it could make the immediate determination sought by the United States, it would have to make this detailed factual analysis before it could consider whether the Government of Canada had, since 1988, taken such reasonable measures as were available to it to have the provincial agencies bring their practices into line with the 1988 Panel's findings. In other words, it could not proceed on an expedited basis with respect to the measures addressed in the 1988 Panel report. Under these circumstances, it would accede to the request made by the United States, namely to issue findings and recommendations jointly concerning any and all Canadian provincial liquor board practices which were identified in the submissions of the United States.

A. General

4.1 The United States requested that the Panel find that:

and that the Panel recommend that the CONTRACTING PARTIES request Canada to take such reasonable measures as may be available to it to ensure observance of the provisions of Articles II, III, X, XI, XIII and XVII of the General Agreement by the provincial liquor boards in Canada.

4.2 Canada requested that the Panel find that the provincial practices with respect to importation, delivery and conditions of sale, including all aspects of price determination, were in conformity with the provisions of Articles III:4, XI and XVII of the General Agreement, specifically that:

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

¹ Outlets for on premise consumption include restaurants, hotels, bars, etc.