ARBITRAL PANEL ESTABLISHED
PURSUANT TO
THE NORTH AMERICAN FREE TRADE AGREEMENT
Article 2008

Tariffs applied by Canada to certain U.S.-Origin Agricultural Products
(Continued)

VI. ARGUMENTS OF THE PARTIES

A. The United States position and the Parties' characterization of the dispute

49. The central contention of the United States is that Canada has imposed tariffs on over-quota imports of specified U.S.-origin agricultural goods beyond the rates that applied on December 31, 1993. This imposition of tariffs amounts to an increase in tariffs contrary to NAFTA Article 302(1). This increase in tariffs also ²⁶ constitutes a breach of the undertaking of the Parties in NAFTA Article 302(2) progressively to eliminate tariffs on originating goods. The United States also points to NAFTA Annex 302.2(8), noting that "[t]his is a complicated way of saying that Canada (like the United States) agreed in the NAFTA to carry forward its FTA tariff phase-out for imports of agricultural goods produced in the other country's territory"^.27

50. Focusing on the language of NAFTA Article 302(1) and (2) - "[e]xcept as otherwise provided in this Agreement" - and on Rule 34 of the Model Rules, the United States further contends "that the burden is on the ²⁸ Government of Canada to demonstrate that Canada's tariffs are excused by an exception in the NAFTA".²⁹

51. Canada takes issue with this characterization of the dispute by the United States. In Canada's contention, this dispute is not just about the fact Canada has imposed new customs duties or their rates. We say it is more fundamentally about a negotiated market access and the interaction between Chapters Three and Seven of the NAFTA. Canada and the United States have never come to a bilateral agreement on the terms of market access for the over-quota goods under dispute ..^.30

52. The Canadian submissions emphasize the nature of the "deal" that was concluded in respect of trade in agricultural goods under the NAFTA: The essential principle underlying the agricultural "deal" for these goods in the FTA, carried forward through explicit incorporation into the NAFTA, was preferential market access for in-quota imports, coupled with an agreement to apply the multilateral regime to over-quota imports.³¹

53. The "deal" was thus, in Canada's contention, "fundamentally about market access and not about establishing ‘rules’ from which ‘the level of trade follows’". "There is no dispute", in Canada's submission, ³² "that under the FTA and then the NAFTA, Canada and the United States were entitled to limit market access for certain agricultural goods through quantitative restrictions".³³

54. On the question of the burden of proof, Canada, pointing to Rule 33 of the Model Rules, contends that ³⁴ "[a]s complainant, the United States bears the burden of proving its complaint".³⁵

B. Canada's substantive defence

55. On the substance of the United States contention, Canada argues that, although it had imposed tariffs on over-quota imports of certain U.S.-origin agricultural goods in the period after December 31, 1993, it did so pursuant to an obligation to tariffy non-tariff barriers. The Parties had agreed within the NAFTA that over-quota trade in agricultural goods between Canada and the United States would be governed by the arrangements that would emerge from the Uruguay Round negotiations. Consequently, the obligation to tariffy existing non-tariff barriers pursuant to the WTO Agreement on Agriculture, and the application of these tariff equivalents to the trade in agricultural goods between Canada and the United States, was consistent with Canada's commitments under the NAFTA.

56. Canada also points out that, [b]ecause these tariff equivalents are merely conversions of previous non-tariff measures, they are not new or additional restrictions on U.S. access to the Canadian agricultural market. The result of the WTO Agreement on Agriculture is that the United States has not lost any access to the Canadian agricultural market; either it enjoys the access it already had or it enjoys enhanced access.³⁶

57. Canada also draws attention to the fact that the United States, while challenging the legitimacy under the P>NAFTA of certain Canadian tariffs on over-quota agricultural imports, is applying "exactly the same type of measure as it impugns on over-quota quantities of certain Canadian agricultural products".³⁷

58. Canada's defence to the United States allegations thus rests on two central, substantive propositions and two ancillary propositions. On the substance, Canada contends:

(a) that it was obliged, under the WTO Agreement on Agriculture, to tariffy its existing non-tariff barriers to agricultural imports, and

(b) that it is entitled under the NAFTA to apply the tariffs thereby created to over-quota imports of U.S.-origin agricultural goods. In an ancillary way, Canada contends

(i) that tariffication has not affected United States access to the Canadian market and

(ii) that the United States is pursuing vis-à-vis Canada the very policy that it is challenging in these proceedings.

C. The obligation to tariffy

59. In support of its contention that it was required to tariffy existing non-tariff barriers to trade in agricultural goods, Canada points to the WTO Agreement on Agriculture, noting that this obliged Canada, the United States and all other WTO Members "to convert or tariffy all import-restrictive measures to tariffs of equivalent protective effect". In particular, Canada points to Article 4.2 of the WTO Agreement on ³⁸ Agriculture and the Modalities Document, the latter of which, in Canada's contention, "provided the formal ^{39 40} framework" within which tariffication occurred. ⁴¹

60. In response to questions from the Panel, Canada noted that "the modalities was the foundation for the final conclusion of the Agreement on Agriculture". While ⁴² [t]he Modalities Document may not itself have treaty status, ... it is an essential part of the context and background without which Article 4.2 [of the Agreement on Agriculture] cannot be understood.⁴³

61. The United States challenges this construction of the WTO Agreement on Agriculture and the Modalities Document. In the United States contention, there is no requirement to tariffy. There is a requirement not to maintain these barriers once the Agreement on Agriculture entered into force, but there is no requirement to have to substitute a tariff equivalent for them.⁴⁴

62. Tariffication was, therefore, in the view of the United States, an option, a permitted facility, not an obligation or requirement.

D. The application of the tariffs resulting from tariffication to over-quota imports of U.S.-origin agricultural goods under the NAFTA

(a) The Canadian case

63. Canada's argument in support of its contention that it is entitled under the NAFTA to apply the tariffs created by the process of tariffication to over-quota imports of U.S.-origin agricultural goods rests on its view of the interrelationship of the FTA, the NAFTA and the WTO Agreement on Agriculture. The central element of this argument is that, through NAFTA Annex 702.1, which incorporated FTA Article 710, Canada and the ^{45 46} United States agreed that over-quota trade in agricultural goods would continue to be governed by multilateral arrangements. Thus, prior to the entry into force of the WTO Agreement on Agriculture, bilateral trade in the goods in question had been subject to quantitative import restrictions justified by reference to GATT Article XI:2(c)(i), the GATT PPA or a GATT waiver. With the entry into force of the WTO Agreement on Agriculture on January 1, 1995, and pursuant to the obligation therein to tariffy existing non-tariff barriers, over-quota trade in the goods in question could no longer be subject to non-tariff barriers but would be subject instead to the tariff equivalents that had been established in the context of tariffication.

64. In Canada's view, the proposal to tariffy, first advanced in the Uruguay Round by the United States, and the obligation so to do subsequently assumed under the WTO Agreement on Agriculture, referred "not to the abandonment of protective measures but [to] the conversion from non-tariff barriers to tariff measures which offered equivalent protection".⁴⁷

65. So, by incorporating FTA Article 710, ... the NAFTA also incorporates the tariffication regime resulting from the Uruguay Round of GATT multilateral negotiations; that is, as a matter of pure textual interpretation, the Uruguay Round results are within the ambit of Article 710 of the FTA as incorporated into the NAFTA^.48

66. Canada's argument rests on the following chain of reasoning. First, under the FTA, Canada and the United States agreed, in FTA Chapter Four, on a staged elimination of tariffs. In respect of trade in certain agricultural goods, however, they also agreed in FTA Chapter Seven to the maintenance of various non-tariff barriers to imports. In particular, the continued application of non-tariff barriers was addressed in FTA Article 710 in which the Parties retained "their rights and obligations ... under the General Agreement on Tariffs and Trade (GATT) and agreements negotiated under the GATT, including their rights and obligations under GATT Article XI". 67. On this basis, under the FTA, Canada maintained quantitative restrictions on over-quota imports of the goods which are the subject of the present proceedings.

68. Second, unable to reach agreement on a new regime on market access in respect of agricultural trade in the NAFTA negotiations, Canada and the United States agreed instead to continue the arrangements adopted under the FTA. The NAFTA, therefore, in Canada's contention, simply carried forward the FTA deal "lock, stock and barrel, by incorporating those relevant articles of the Free Trade Agreement by reference". In this regard, ⁴⁹ Canada points to NAFTA Annex 702.1 which, in paragraph 1, expressly incorporates into the NAFTA FTA ⁵⁰ Articles 701, 702, 704, 705, 706, 707, 710 and 711.

69. Third, Canada argues that a central aspect of the incorporation of the FTA agricultural arrangements into the NAFTA was agreement by the Parties to defer agreement on over-quota access until the multilateral trade negotiations. In this context, Canada relies on various statements by United States officials and agencies.

70. Canada also notes that throughout the NAFTA negotiations the Parties "were well aware of the possible level of tariff equivalents in Canada if the Uruguay Round proposals were to be accepted". In Canada's view, ⁵¹ therefore, the agreement by the Parties to defer agreement on over-quota access until the Uruguay Round negotiations was made in full knowledge of the possibility of tariffication and of the implications that this would have.

71. Fourth, Canada contends that the agreement of the Parties to address the issue of over-quota access in respect of their bilateral trade in the context of multilateral arrangements under the Uruguay Round is embodied in NAFTA Article 702(1) and Annex 702.1. In particular, Canada points to NAFTA Annex 702.1(1) which incorporates into the NAFTA, inter alia, FTA Article 710 thereby preserving the rights and obligations of the Parties under the GATT and "agreements negotiated under the GATT". Canada also relies on the text of the NAFTA more broadly, on the travaux préparatoires of the NAFTA, on various other statements and documents said to indicate the intention of the Parties in the period of the negotiations, and on the subsequent practice of the Parties.

72. In this regard, Canada contends that the WTO Agreement on Agriculture is an "agreement negotiated under the GATT" within the meaning of FTA Article 710. This is apparent, Canada asserts, both from the language of the Punta del Este Declaration of September 20, 1986, which launched the Uruguay Round ⁵² negotiations, and from the Final Act Embodying the Results of the Uruguay Round of Multilateral Trade Negotiations. Canada also relies on the language of FTA Article 710, a common sense interpretation of its ⁵³ terms and the fact that, at the time of negotiation of both the FTA and the NAFTA, the Parties had the Uruguay Round negotiations in contemplation and an expectation that its results should be reflected in the operation of the FTA and the NAFTA.

73. As regards the language of FTA Article 710, Canada notes that nowhere does it refer to the "existing" rights and obligations of the Parties, the form of words used elsewhere in both the FTA and the NAFTA to refer to an already established set of rights or obligations. Canada further argues that ... the context points unequivocally toward a dynamic interpretation. The GATT has never been a static body of rules ... the rights and obligations that the Parties agreed to retain are those arising under the GATT as an evolving system of law, including the network of subsidiary agreements it has generated. This conclusion flows from the language of the agreement and from the negotiating context. It is confirmed by the inherent absurdity of freezing in 1989 a set of rights and obligations that was about to become obsolete -- if not already so -- and that would become increasingly anachronistic as time went on.⁵⁴

74. It follows, in Canada's view, that the incorporation into the NAFTA of FTA Article 710 preserved the Parties' rights and obligations not only under the GATT as it was at the time the NAFTA was concluded but also under the emerging WTO Agreement on Agriculture, an agreement concluded "within the framework and under the aegis of" the GATT. By incorporating FTA Article 710, the NAFTA therefore also incorporated the tariffication regime on which the WTO Agreement on Agriculture was based.

75. Canada also draws support from the language of the NAFTA more broadly. In particular, Canada relies on NAFTA Article 309(1) which "preserves the right of the Parties to impose import restrictions in accordance ⁵⁵ with Article XI of the GATT or in accordance with any ‘equivalent provision of a successor agreement’". Since, ⁵⁶ in Canada's view, tariff equivalents are the direct result of the renegotiation of the GATT Article XI disciplines, they are protected by the provisions of NAFTA Article 309 as the "equivalent provisions of a successor agreement".

76. Canada also relies on NAFTA Note 5 which, in its view, confirms the Parties' agreement "... to accept ⁵⁷ the application of these tariff equivalents to the agricultural goods in question for quantities beyond those granted preferential or in-quota access under the FTA and NAFTA".⁵⁸

77. By way of alternative to its central proposition, Canada contends that, in the event of a conflict between its obligations under the NAFTA and under the WTO Agreement on Agriculture, its obligations under the WTO Agreement on Agriculture must prevail as, in accordance with accepted principles of international law, the "WTO Agreement on Agriculture is a later-in-time agreement between the same parties regarding the same subject matter".⁵⁹

78. More generally, addressing the United States reliance on NAFTA Article 302(1) and (2), Canada notes that, while these provisions may be relevant, the dispute does not begin and end with NAFTA Chapter Three. In this regard, Canada relies both on NAFTA Article 300 and NAFTA Article 701 describing, respectively, ^{60 61} the scope and coverage of NAFTA Chapter Three and the Section on agriculture in NAFTA Chapter Seven. In Canada's contention, while NAFTA Chapter Three provides for on-going market liberalization and applies to all goods, including agricultural goods, the arrangements set out therein are subject to the more specific sectoral rights and obligations set out elsewhere in Part Two of the NAFTA, including in Chapter Seven. The general rules on tariff reduction and elimination in NAFTA Chapter Three are therefore, in Canada's view, subject to the more specific conditions of market access in NAFTA Chapter Seven. In this context, the Parties agreed, in respect of the goods which are the subject of the present dispute, that over-quota imports would be governed by their rights and obligations under the GATT and agreements negotiated under the GATT.

79. In Canada's contention, therefore, the first point of reference in this dispute must be NAFTA Chapter Seven, not Chapter Three. More particularly, "with respect to agricultural goods, Chapter Seven is paramount as between these two chapters" although Canada accepts that whether Chapter Seven is paramount to Chapter ⁶² Three or merely an exception within the meaning of NAFTA Article 302(1) and (2), the result would be the same.

80. Finally, Canada contends that the approach advocated by the United States would lead to absurd and unreasonable results as

(a) it would lead to conflict between the NAFTA and the WTO Agreement on Agriculture, a situation which the Parties did not intend, and

(b) it would restore the status quo ante as between the Parties as, if FTA Article 710 does not incorporate the results of the Uruguay Round, the GATT Article XI regime as it existed when the FTA or the NAFTA entered into force would be retained as between Canada and the United States and would continue to govern the Parties' bilateral over-quota trade in the products in issue.

(b) The United States reply

81. The United States response to Canada's argument rests on a different appreciation of the interrelationship of the FTA, the NAFTA and the WTO Agreement on Agriculture in the context of the present dispute. Central to this approach is the proposition that tariffs and non-tariff barriers are two distinct trade instruments: "tariffs are not interchangeable with non-tariff barriers"; different rules apply to each. This dispute, in the United States ⁶³ contention, is about tariffs, not about non-tariff barriers. The critical issue is, therefore, in the United States view, whether there is some provision in the NAFTA which permits Canada to maintain the tariffs that it has imposed.

82. Also prominent in the United States response is the perception that Canada, in failing to engage in negotiations over tariffication within the NAFTA because of the initiative it was pursuing in the Uruguay Round ⁶⁴ negotiations, "took a high-stakes gamble with its barriers to imports of agricultural goods, and lost". Within ^{65 66} the NAFTA, signed in December 1992, Canada agreed to eliminate its tariffs on imports of all U.S.-origin agricultural products. It did so, in the United States contention, in the belief that it would be able to continue to protect its market by imposing non-tariff barriers on those products, expecting that either there would be no multilateral obligation prohibiting all non-tariff barriers to imports of agricultural products (and even possibly that further exceptions would be created to the general ban on non-tariff barriers) or that it would reach a separate agreement with the United States to permit Canada to permanently rescind its NAFTA tariff commitments.⁶⁷

83. However, the United States suggests that the reality was different. The WTO Agreement on Agriculture, the text of which was adopted on December 15, 1993, some 12 months after the NAFTA was signed and 17 days before it entered into force, required the elimination of all non-tariff barriers to imports of agricultural goods. By this time, Canada had, however, within the NAFTA, agreed to eliminate its tariffs on imports of U.S.-origin agricultural goods. It was thus faced with the obligation under the WTO Agreement on Agriculture to eliminate its non-tariff barriers and the prohibition under the NAFTA on increasing tariffs. As a result of its negotiating gamble, Canada was therefore faced with a requirement to remove its non-tariff barriers under one agreement and a prohibition on tariffying under another. The inability to resolve this conflict in negotiations with the United States, coupled with the imposition of tariffs on over-quota imports of U.S.-origin agricultural goods, led to the present dispute.

84. A third element of the United States reply is that, under GATT Article XXIV, the NAFTA is an exception to the GATT, not subject to it. As a free trade agreement, the NAFTA is to eliminate the duties and other restrictive regulations of commerce on trade between the Parties. GATT Article XXIV specifically recognizes that as a result of the establishment of a free trade area, the free trade partners will not be applying to each other the tariff rates that they apply to their other multilateral trading partners. Instead, the free trade partners will be eliminating tariffs on each other's goods. As a result, the whole object and purpose of the NAFTA is precisely the opposite of what the Government of Canada is arguing should be the result in this case. The object and purpose of the NAFTA is to exempt the NAFTA partners' products from each other's multilateral tariffs.⁶⁸

85. Thus, in the United States contention, it is not sufficient for Canada simply to point to the WTO Agreement on Agriculture to establish an obligation to tariffy (assuming that such an obligation existed, which the United States denies ). Canada must also show that that multilateral obligation applied in the bilateral ⁶⁹ context of the agricultural provisions of the NAFTA which, prima facie, in view of GATT Article XXIV, operate outside the WTO trade in goods framework. In the United States contention, it is an "absurd proposition" to suggest that WTO tariff bindings constitute an exception to the NAFTA tariff bindings. This argument would, ⁷⁰ in the United States view, "render meaningless all the NAFTA tariff bindings for agricultural, food, beverage and certain related goods".⁷¹

86. The United States also relies on GATT Article XXIV to rebut the Canadian argument that, in the event of a conflict between Canada's obligations under the NAFTA and its obligations under the WTO Agreement on Agriculture, its obligations under the latter agreement must prevail as the Agreement on Agriculture is an agreement later-in-time.

... [T]he WTO clearly contemplates [in Article XXIV of the GATT 1994] that free trade agreements may establish preferential tariff regimes among the parties to such free trade agreements, notwithstanding the tariff levels that would otherwise apply under the WTO.

Accordingly, the WTO is not a later in time treaty that would prevail over the NAFTA.⁷²

87. On this point, the United States also contends that the later-in-time rule has no application in the context of the present dispute as, "[i]n this instance, the WTO is not a successive treaty relating to the same subject matter as the NAFTA. The NAFTA is a free trade agreement establishing preferential treatment among the NAFTA parties. The WTO is a multilateral trade agreement providing for multilateral trading rules".⁷³

88. The United States also refers to GATT Article XXIV in response to the Canadian argument of potential inconsistency between the Parties' obligations under the NAFTA and under the WTO Agreement on Agriculture.

89. On the substance, the United States responds to the Canadian argument as follows. First, the WTO Agreement on Agriculture is not an "agreement negotiated under the GATT" within the meaning of FTA Article 710. In this regard, the United States points to the language of the article and, in particular, the use therein of the word "retain" which, in the United States view, points to "the retrospective intent of FTA Article 710". ^{74 75} It is difficult to conceive how, when Article 710 entered into effect in 1989, the Parties were "retaining" rights and obligations under agreements that had not been negotiated yet and would not enter into force until six years later.⁷⁶

90. In further support of this proposition, the United States points to NAFTA Annex 702.1(4) which, in ⁷⁷ its contention, "explains what the Parties understood at the time to be the effect of incorporating FTA Article 710". In the United States view, this paragraph qualifies or clarifies the scope of FTA Article 710 as ⁷⁸ incorporated into the NAFTA. In particular, the absence from this paragraph of any reference to "agreements negotiated under the GATT" is instructive. Since the Parties explicitly stated that what Article 710 does is incorporates [sic] their GATT rights, ... it can be inferred that, since they deliberately did not say that they incorporated the rights under any agreements negotiated under the GATT, they were not intending that incorporation to have that effect.⁷⁹

91. More generally, the United States contends that the reference to "agreements negotiated under the GATT" in FTA Article 710 "is not to the WTO, but to the existing agreements negotiated under the GATT at the time the FTA was concluded". In this regard, the United States draws attention to various agreements, or ⁸⁰ Codes, concluded as a result of the Tokyo Round multilateral trade negotiations.

92. Also in support of the proposition that FTA Article 710 is not forward-looking, the United States notes that, where the Parties wanted to refer, in the FTA and the NAFTA, to future arrangements, they did so clearly by the use of different language. Thus, the United States points to various places in the FTA where explicit reference was made to the Uruguay Round. Similarly, the NAFTA refers on occasion to "any successor agreement", thereby, in the United States view, "making it clear that agreements negotiated under the GATT ⁸¹ were distinct from future agreements".⁸²

93. The United States further contends that Canada had itself previously expressed the view that FTA Article 710 does not incorporate the results of the Uruguay Round. In this regard, the United States points to statements made by Canada recorded in the GATT Report of the Working Party on the Free-Trade Agreement between Canada and the United States ("GATT Working Party Report").⁸³

94. Second, in the alternative, the United States contends that, even if the WTO Agreement on Agriculture is an "agreement negotiated under the GATT" pursuant to FTA Article 710, there is nothing in that agreement which constitutes an exception to the NAFTA tariff bindings. This proposition rests on two contentions: (a) that the WTO Agreement on Agriculture does not require tariffication; and (b) that, pursuant to GATT Article ⁸⁴ XXIV, "[t]here is no inconsistency between the tariffs a country maintains under the WTO with respect to imports from the rest of its trading partners and the preferential tariffs the country provides to its free trade agreement partners".⁸⁵

95. Third, whether or not the WTO Agreement on Agriculture is an "agreement negotiated under the GATT" pursuant to FTA Article 710, the United States contends that FTA Article 710 was focused on non-tariff barriers:

... Article 710 was only intended ... [to bring] in the Protocol [of] Provisional Application, Article XI and the waiver, or Section 22 ... It has never been used for anything else. Whatever it might say about tariffs, it certainly is not saying that a party maintains its GATT tariffs with respect to the Parties on these goods. So, to that extent, with respect to tariff treatment, it is not covering tariff treatment in that sense.⁸⁶

97. The United States also notes that, where Canada sought to incorporate tariffication into its NAFTA commitments, it did so expressly. In this regard, the United States points to NAFTA Annex 703.2, Section B, paragraph 4 which, in addressing the agricultural arrangements that apply between Canada and Mexico, refers specifically to tariffication. More particularly, the United States also observes that Canada and the United ⁸⁷ States did in fact have some limited discussions on tariffication within the NAFTA in the course of 1992 but that those talks broke down. The incorporation of FTA Article 710 into the NAFTA does not therefore represent agreement by the Parties to incorporate tariffication.

98. Fourth, the United States also takes issue with Canada's reliance on NAFTA Article 309(1) and NAFTA Note 5. In respect of NAFTA Article 309(1), referring to the text of that provision, the United States notes that ⁸⁸ the obvious equivalent provision under the WTO to Article XII [sic] of the GATT 1947 is Article XI of the GATT 1994. Furthermore, Article XI is a rule prohibiting non-tariff barriers with certain narrow exceptions that are subject to numerous and difficult conditions, whereas Canada's tariff bindings are first tariffs, rather than non-tariff barriers, and secondly, not a provision or rule but simply the maximum tariff level that Canada may apply under the WTO. It is impossible to see how a broad rule applicable to all GATT 1947 contracting parties prohibiting an entire range of non-tariff barriers is equivalent to a particular tariff rate in Canada's tariff schedule.⁸⁹

99. In respect of Canada's reliance on NAFTA Note 5, the United States observes that "[t]he Note ⁹⁰ embodied a trilateral understanding that Article 302 should not be read to prohibit GATT-approved trade retaliation". In the United States contention, the Note refers "only to tariff increases authorized through dispute ⁹¹ settlement".⁹² 100. The United States also rejects, by reference to the plain language of the text, the Canadian argument that NAFTA Chapter Seven prevails over NAFTA Chapter Three. In the United States contention, therefore, Canada needs to establish a specific exception to NAFTA Article 302.

101. Similarly, the United States takes issue with Canada's reliance on the travaux préparatoires of the NAFTA and the WTO Agreement on Agriculture, and other documentation referred to for the purpose of ascertaining the attitude of the Parties during the period of negotiation, and on subsequent practice. In this regard, while noting that the Panel's terms of reference do not permit it to examine the application by the United States of tariffs on over-quota imports from Canada, the United States nevertheless notes that "these measures do not establish any agreement of the parties that the NAFTA is to be interpreted contrary to its terms, object, purpose and context ..."⁹³

102. The United States also notes that its position on the effect of WTO tariffication under the NAFTA was known to Canada at an early stage, and certainly before the conclusion of the NAFTA negotiations. The risks associated with the Canadian negotiating strategy in both the NAFTA and the Uruguay Round were thus readily apparent. Canada cannot, therefore, now rely on the incorporation of FTA Article 710 as an indicator of the agreement of the Parties on the application of WTO tariffication under the NAFTA.

103. Finally, referring to the 1989 GATT Panel Report on Canada - Import Restrictions on Ice Cream and Yoghurt the United States notes that ⁹⁴ there was no agreement that Canada could maintain any particular non-tariff barriers under the FTA. ... any barriers that either Party were to maintain against each other would have had to be justified under the rules of the [GATT] ... So one cannot assume that the non-tariff barriers that Canada was maintaining against the United States were in fact consistent with the FTA or with the NAFTA.⁹⁵

104. The United States also rejects Canada's contention that the United States approach would have the effect of restoring the status quo ante between the Parties, thereby enabling Canada to re-apply its non-tariff barriers to over-quota imports of the U.S.-origin goods in question.⁹⁶

c) The Canadian rejoinder

105. In addition to the arguments already noted, Canada responds to the United States reply on the question of the interpretation of FTA Article 710 noting, in particular, that t]he United States has presented the Panel with two absolute positions. Either FTA Article 710 is wholly inapplicable to tariff measures of any kind, or else it gives overriding effect to all WTO tariffs, in which case the entire basis for preferential trade in agricultural goods is destroyed. ...

The Panel need not choose between the two unreasonable extremes postulated ... The correct position is one that gives "appropriate effects" to the language, but not unlimited or destructive effects.⁹⁷

106. In this regard, Canada also notes, in response to the United States argument based on NAFTA Annex 702.1(4) that this provision was specifically intended to address United States concern over alcoholic beverages ⁹⁸ and was not therefore intended as an amendment or repeal of the original FTA Article 710. Annex 702.1(4), on its face, is a clarification and not an amendment of Article 710. It is a paraphrase and not, as implied by this U.S. submission, a partial repeal. It is properly resorted to as a means of clarifying the content of Article 710, but not as a means of reducing its scope^.99

107. On the issue of its import restrictions on ice cream and yogurt, Canada contends that tariffication was intended to apply to all non-tariff measures, regardless of whether they were previously GATT-compatible. "Tariffication was therefore used by a number of participants as an amnesty for measures of varying degrees of conformity with the GATT". Whatever might have been the status of the Canadian non-tariff barriers under ¹⁰⁰ GATT Article XI:2(c)(i), "[f]ollowing the conclusion of the Uruguay Round, there is no basis for looking behind the WTO Agreement to examine the legitimacy of any of Canada's tariffied measures".¹⁰¹

E. Observations of Mexico

108. Noting that it has no specific commercial interest in the dispute, Mexico nonetheless stresses that it has a substantial interest in the legal relationship between the NAFTA and the WTO Agreements, as well as with respect to other issues concerning the interpretation of NAFTA provisions that may be examined in the procedure.¹⁰² 109. While, in Mexico's view, the NAFTA Parties intended to liberalize trade between them to a greater extent than was provided in the GATT, the NAFTA does not eliminate all barriers to trade. Furthermore, "[i]nsofar as Chapter Seven (Agriculture and Sanitary and Phytosanitary Measures), the NAFTA Parties were clearly mindful of the then on-going trade negotiations of the Uruguay Round".¹⁰³

110. Highlighting the considerable number of provisions in the NAFTA which refer in terms to the GATT, "agreements negotiated under the GATT", "successor agreements", the "Uruguay Round" and other agreements concluded within the framework of the GATT, Mexico submits, therefore, that the interaction between the Parties' multilateral, trilateral, and bilateral rights and obligations must be carefully analyzed on a case by case basis. ... [G]eneralizations about NAFTA's primacy over the WTO (or vice versa) cannot be made.¹⁰⁴

111. In particular, Mexico expresses some concern lest the Panel construe the NAFTA in a manner which could have implications beyond this case by reference to provisions of the FTA, an agreement to which Mexico was not a party. The NAFTA should, therefore, in Mexico's submission, be interpreted on the basis of its own terms and conditions. 112. Mexico also expresses some concern at the argument advanced by Canada, in the context of its reliance on subsequent practice, that non-objection or silence by one Party in the face of conduct by another equals consent or acquiescence to conduct that may be in violation of the Agreement. In particular, Mexico contends that the fact that an objection to a given statement or conduct "was not made at the due time ... does not mean that the right is being renounced of invoking the objection or the possible violation at a later time"^.105

Continue on to Section VII: Decision of the Panel

²⁷ First Submission of the United States, para.14, note 6.

²⁸ Rule 34: "A Party asserting that a measure is subject to an exception under the Agreement shall have the burden of establishing that the exception applies."

²⁹ Oral Submission of the United States, Transcript, at p.18.

³⁰ Oral Submission of Canada, Transcript, at p.88.

³¹ Second Submission of Canada, at para.7.

³² Second Submission of Canada, at para.8.

³³ Counter-Submission of Canada, at para.22.

³⁴ Rule 33: "A Party asserting that a measure of another Party is inconsistent with the provisions of the Agreement shall have the burden of establishing such inconsistency."

³⁵ Counter-Submission of Canada, at para.20.

³⁶ Counter-Submission of Canada, at para.17.

³⁷ Counter-Submission of Canada, at para.21 and Schedule.

³⁸ Counter-Submission of Canada, at para.67.

³⁹ See paragraph 39 supra.

⁴⁰ See paragraphs 36-37 supra.

⁴¹ Counter-Submission of Canada, at para.70.

⁴² Oral Submission of Canada, Transcript, at p.127.

⁴³ Oral Submission of Canada, Transcript, at p.350. Elsewhere in its submissions, Canada states: "Whether the Modalities is treated as part of the context under Article 31(2)(b) of the Vienna Convention, or simply as a form of travaux préparatoires, its significance is [sic] illuminating the intention of Article 4.2 is clear." (Second Submission of Canada, at para.63, note S-47.)

⁴⁴ Oral Submission of the United States, Transcript, p.235.

⁴⁵ See paragraph 47 supra.

⁴⁶ See paragraph 26 supra.

⁴⁷ Oral Submission of Canada, Transcript, at pp.85-86.

⁴⁸ Oral Submission of Canada, Transcript, at p.109.

⁴⁹ Oral Submission of Canada, Transcript, at p.104.

⁵⁰ See paragraph 47 supra.

⁵¹ Counter-Submission of Canada, at para.72.

⁵² See paragraph 28 supra.

⁵³ See paragraph 38 supra.

⁵⁴ Second Submission of Canada, at para.42.

⁵⁵ See paragraph 43 supra.

⁵⁶ Counter-Submission of Canada, at para.105.

⁵⁷ Note 5 provides as follows:

Article 302(1) and (2): paragraphs 1 and 2 are not intended to prevent a Party from maintaining or increasing a customs duty as may be authorized by any dispute settlement provision of the GATT or any agreement negotiated under the GATT.

⁵⁸ Counter-Submission of Canada, at para.67 and note 43.

⁵⁹ Second Submission of Canada, at para.127.

⁶⁰ See paragraph 41 supra.

⁶¹ See paragraph 44 supra.

⁶² Oral Submission of Canada, Transcript, at p.94.

⁶³ Supplementary Written Submission of the United States, at para.50.

⁶⁴ See paragraphs 45-46 supra.

⁶⁵ See paragraphs 30 and 34 supra.

⁶⁶ Oral Submission of the United States, Transcript, at p.13.

⁶⁷ Supplementary Written Submission of the United States, at para.19.

⁶⁸ Supplementary Written Submission of the United States, at para.23.

⁶⁹ See paragraphs 61-62 supra.

⁷⁰ Oral Submission of the United States, Transcript, at pp.19-20.

⁷¹ Oral Submission of the United States, Transcript, at p.20.

⁷² Supplementary Written Submission of the United States, at para.118.

⁷³ Supplementary Written Submission of the United States, at para.115.

⁷⁴ "Unless otherwise specifically provided in this Chapter, the Parties retain their rights and obligations ..." (emphasis added)

⁷⁵ Supplementary Written Submission of the United States, at para.58.

⁷⁶ Supplementary Written Submission of the United States, at para.58.

⁷⁷ See paragraph 47 supra.

⁷⁸ Supplementary Written Submission of the United States, at para.54.

⁷⁹ Oral Submission of the United States, Transcript, at p.65.

⁸⁰ Supplementary Written Submission of the United States, at para.57.

⁸¹ See, for example, NAFTA Article 2005(1).

⁸² Supplementary Written Submission of the United States, at para.60.

⁸³ GATT Document L/6927; BISD 38S/47.

⁸⁴ See paragraphs 61-62 supra.

⁸⁵ Oral Submission of the United States, Transcript, at p.25.

⁸⁶ Oral Submission of the United States, Transcript, at p.256.

⁸⁷Paragraph 4 provides:

Notwithstanding Article 302(2) (Tariff Elimination), where an agreement resulting from agricultural multilateral trade negotiations under the GATT enters into force with respect to a Party pursuant to which it has agreed to convert a prohibition or restriction on its importation of an agricultural good into a tariff rate quota or a customs duty, that Party may not apply to such good that is a qualifying good an over-quota tariff rate that is higher than the lower of the over-quota tariff rate in:

(a) its Schedule to Annex 302.2, and

(b) that agreement, and paragraph 3 shall no longer apply to the other Party with respect to that good.

⁸⁸ See paragraph 43 supra.

⁸⁹ Oral Submission of the United States, Transcript, at p.39.

⁹⁰ See note 57 supra.

⁹¹ Supplementary Written Submission of the United States, at para.111.

⁹² Oral Submission of the United States, Transcript, at p.41.

⁹³ Supplementary Written Submission of the United States, at para.105.

⁹⁴ Report of the Panel adopted at the Forty-fifth Session of the CONTRACTING PARTIES on 5 December 1989; L/6568; BISD 36S/68.

⁹⁵ Oral Submission of the United States, Transcript, at pp.269-270.

⁹⁶ See paragraph 80 supra.

⁹⁷ Second Submission of Canada, at paras.22-23.

⁹⁸ See paragraph 90 supra.

⁹⁹ Second Submission of Canada, at para.50.

¹⁰⁰ Second Submission of Canada, at para.112.

¹⁰¹ Second Submission of Canada, at para.116.

¹⁰² First Submission of Mexico (English translation), at para.3.

¹⁰³ First Submission of Mexico (English translation), at para.10(d).

¹⁰⁴ First Submission of Mexico (English translation), at para.11.

¹⁰⁵ Oral Submission of Mexico, Transcript (English translation), at pp.6-8.