In parts I and II of our review of Canada’s defence of the supply management system, we reviewed details of Canada’s supply management system, including its origins, how it works, and the rationale for keeping it in place. We also looked back to the original GATT trade pact which established the provisions for the co-existence of open and freer trade with the import barriers necessary to ensure the survival of Canada’s regime for the production of dairy, poultry and other products. We saw that as part of the package that created the World Trade Organization (WTO) in 1995, GATT negotiators agreed to convert agricultural trade restrictions on a wide range of products into tariffs – very high, prohibitive tariffs at the outset with the objective of having them negotiated down over time. The NAFTA, which took effect in 1994, effectively eliminated tariffs between the three Parties (Canada, Mexico and the U.S.). However, less than a year after the agreement was signed, the United States challenged the “new” Canadian tariffs claiming that they were incompatible with NAFTA and further claiming that the old import restrictions – abandoned for all WTO partners including the United States – could not be re-introduced In the Matter of Tariffs Applied by Canada to Certain U.S.- Origin Agricultural Products [NAFTA Secretariat No. CDA-USA-1995-2008-01].
The reaction in Canada at the news of the NAFTA challenge’s initiation was quick and included predictions that a U.S. win could result in unlimited American imports and that “ … rural Canada could be devastated …” with a loss of 138,000 jobs and $16 billion in government revenues by the year 2000. [Francis Russell, “Canada’s Lame Defence” Winnipeg Free Press, February 5, 1995, A6]. However, up against the simple logic of the U.S. claim that Canada had “gambled and lost” in the Uruguay Round, Canada’s response included a complex defence that relied upon the provisions of the 1988 Canada –U.S. Free Trade Agreement (FTA), arguing that the FTA exception that provided for the supply management exception had been carried forward into the NAFTA and that the “WTO tariff equivalent” for supply managed products had been incorporated by reference into the NAFTA by the FTA provisions found in Article 710:
Unless otherwise specifically provided in this Chapter, the Parties retain their rights and obligations with respect to agricultural, food, beverage and certain related goods under the General Agreement on Tariffs and Trade (GATT) and agreements negotiated under the GATT, including their rights and obligations under GATT Article XI.
Chapter 7 of NAFTA consists of three separate bi-lateral agreements and the Canada-U.S. FTA is essentially a renewal of the FTA obligations vis-à-vis agricultural products. Paragraph 4 of Annex 702.1 of NAFTA provides:
The Parties understand that Article 710 of the Canada – United States Free Trade Agreement incorporates the GATT rights and obligations of Canada and the United States with respect to agricultural, food, beverage and certain related goods, including exemptions by virtue of paragraph 1(b) of the Protocol of Provisional Application of the GATT and waivers granted under Article XXV of the GATT.
Canada took the position that the WTO Agreement on Agriculture was an “agreement under the GATT” within the meaning of Article 710 of the Canada-U.S. FTA, and that the tariffication process therefore was covered by, and protected by these provisions. In response, the U.S. claimed that Article 710 did not apply to future actions and that the word “retain” merely grandfathered existing rights. Further, the Americans argued that the distinction between tariffs and non-tariff restrictions were fundamental and that Article 710 did not apply to tariffs. Finally, the United States submitted that Article 710 of the Canada-U.S. FTA referred to GATT rights and obligations but that tariffication was neither – but rather only an element of a trade round negotiation. The United States argued that if Canada had wanted the WTO deal to apply to the NAFTA it should have negotiated the tariffication deal in the context of the NAFTA negotiations.
Canada countered with one of the basic tools in international law – the interpretation of treaties, and in particular the principles codified in the Vienna Convention on the Law of Treaties (Vienna Convention). Canada’s case was built on the premise that the language of the treaties at play and the intention of the parties when the agreements were negotiated supported an expansive interpretation that brought Article 710 into full effect. The Panel applied the principles of Articles 31 and 32 of the Vienna Convention based on the fact that NAFTA is a treaty and that NAFTA Article 102(2) states that the agreement is to be applied “in accordance with the applicable rules of international law.” The Panel reviewed the “ordinary meaning” of the texts at issue and the “object and purpose” of the provisions. To the U.S. objection that the retention of GATT rights under Article 710 was simply a grandfathering provision, the Panel noted that:
The GATT is more than a static set of rights and obligations. Based on a set of principles embodied in the General Agreement, the GATT has been developed, clarified and supplemented by subsequent legal instruments through successive negotiating rounds into a complex of substantive and procedural rules. [Panel Report para 139]
The Panel accepted Canada’s contention that the GATT body of law was an evolving system. As to the U.S. argument that the process of tariffication was neither a GATT right nor obligation, the Panel found that as part of the WTO Agreement, the Members had the “right to establish tariff equivalents” and;
… To bring into the NAFTA only the obligation to eliminate non-tariff barriers without the quid pro quo for their elimination would ignore the agreement that made the elimination of the non-tariff barriers acceptable. [Panel Report para 183]
Ultimately, the Panel concluded that the object and purpose of the original Canada-U.S. FTA Article 710 “ … was to preserve for both Parties the agricultural protection permitted by the GATT … “ [Panel Report para. 197] In a decision that was both praised and criticised by commentators, the Panel looked beyond the language of the trade provisions and examined the nature of the “bargain” between the parties. In doing so, they decidedly addressed the ambiguity that can often result from international trade negotiations. As with the general evolution of GATT and WTO dispute settlement process at the time, the NAFTA Panel relied upon and applied the principles of treaty interpretation in a way that demonstrated that trade law should be examined pursuant to the overall corpus of international law. Fortunately, the Panel took on the challenge of interpreting the interplay of the FTA, NAFTA, GATT and the WTO Agreement on Agriculture in a way that searched for both the underlying intent of the trade negotiators and that brought coherence to a set of intertwined but separate agreements. At the end of the day, Canada had successfully defended a direct attack on its supply management system under the NAFTA’s first state to state dispute.
