In our recent articles on GATT 1994 Article XXI – the national security exception – we referred to the potential of a “non-violation” claim as a possible response by a WTO member country whose trade is affected by a national security exception measure. This is the first of a series of articles which examines the unique and rarely applied provisions of non-violation nullification and impairment (“NVNI”).
We will start with one of the few Chapter 18 (state-to-state) trade panels under the original Canada-U.S. Free Trade Agreement (FTA). In 1993, Canada challenged a Puerto Rican measure that prohibited the sale of ultra-high temperature UHT Milk in Puerto Rico. Pursuant to the terms of the FTA and the NAFTA which supersedes it, the United States (as with the other NAFTA members) is responsible for the measures of its subnational bodies.
The Panel –Puerto Rico Regulations on the Import, Distribution and Sale of UHT Milk from Québec [USA-CDA-1993-1807-01]- found that there was no violation by the U.S. of FTA obligations with respect to the probation on import restrictions pursuant to Article 407 or of the rules in Chapter 7 governing trade in agricultural products. The Panel declined to rule on Canada’s national treatment arguments under Articles 501 and 502. Nevertheless, Canada won the case. How? Simply put, the Panel determined that the Puerto Rico measures in question defeated the “reasonable expectation” of benefit that Canada could “expect to derive form the FTA”. In essence, Canada had included a “non-violation nullification and impairment” claim in its complaint and it ultimately proved to be the “trump card.”
The case involved aseptically processed ultra-high temperature milk (”UHT milk”) which is produced by treating fluid milk to a high temperature for a specified period of time. The milk is then cooled to room temperature and is aseptically packaged in hermetically sealed containers. The shelf life of properly processed and handled UHT milk is between six and twelve months at room temperature. From 1977 until 1991, UHT milk from Québec, which was exported throughout the Caribbean, dominated the Puerto Rico market. It was sold in Puerto Rico on the basis of the Puerto Rico Secretary of Health’s determination that it was produced and processed under conditions and standards that were ”essentially equivalent” to those under the territory’s domestic regulations. No shipment of UHT milk from Québec was ever rejected as unsafe.
In 1991, responding to pressure from the U.S. Food and Drug Administration (“FDA”) to upgrade its milk regulatory system, Puerto Rico authorities changed their milk regulations and Québec producers were advised that their UHT milk could no longer be sold in Puerto Rico. The Puerto Rico Departments of Health and Agriculture joined the National Conference on Interstate Milk Shipments (”NCIMS”) to adopt the Pasteurized Milk Ordinance (”PMO”). The new U.S. milk program was premised on prevention and was designed to enforce strict milk industry adherence to safe sanitation standards and practices. The related procedures provided for a mandatory certification process, to ensure compliance with health and safety requirements. Québec producers were told that they would need to adopt regulations in accordance with the PMO. FDA officials noted that Québec was not a member of the NCIMS and thus could not implement either the PMO or related procedures.
The Canadian response was: (a) that UHT milk from Québec qualified for entry into Puerto Rico under provisions of the PMO, which authorizes the sale of milk outside ”routine official supervision” if it is processed under conditions ”substantially equivalent” to the PMO; and (b) that technical standards under which UHT milk was produced in Québec were at least equivalent to the PMO. This lead to a lengthy exchange between Canadian and U.S. officials with the Canadian side being invited to adopt the NCIMS standards and processes and Canadian officials responding that Canada’s domestic standards already met and surpassed those in the United States. Canada and Québec sought to establish the equivalency of the Québec and Puerto Rico UHT milk regulatory systems and to agree upon a modus operandi for rating the Québec UHT milk in the future. The FDA responded that:
If the Canadian Federal Government, or by separate agreement with a provincial government, has a desire to participate in the NCIMS program, we stand ready to assist in the implementation of these ”Procedures” and certification processes. However, due to budgetary constraints, we will not be able to standardize/certify Canadian government officials, unless they are working toward full participation in the NCIMS. This would be a major expenditure of FDA resources which we could only justify if it were used to solve a broad problem between governments. We would not be able to justify this large expense at the present time to afford relief to only one Canadian
Canada’s Ambassador to the United States replied;
The long-term solution is recognition of equivalence in our countries’ technical regulatory requirements pursuant to FTA Article 708.1.a. Canada will request, therefore, that the FTA working group on dairy, fruit, vegetable and egg inspection determine the equivalence of Québec’s milk standards and the PMO.
The continued exchanges centred around the provisions of the FTA which acknowledged the right of the Parties to adopt new technical standards, while recognizing the very real danger of governments raising new trade barriers under the guise of health or other technical standards. When it became apparent that a negotiated settlement was not forthcoming and the market remained closed, Canada took the matter to an FTA Panel arguing that that the Puerto Rico licensing requirements governing the import, sale and distribution of milk (Department of Health Regulation 138 and Department of Agriculture Regulation 5) constituted a prohibition or quantitative limitation upon importation, breaching Article XI of the GATT which is incorporated into the FTA under Articles 407 and 710. Alternatively, Canada argued that the Puerto Rico licensing requirements breached GATT Article III as incorporated into the FTA under Articles 501 and 502 because the Québec UHT milk was being treated less favourably than a like domestic product. Canada also submitted that Puerto Rico’s treatment of Québec UHT milk breached several provisions of the FTA’s Chapter 7 which requires the parties to “facilitate trade in agricultural products” by working together “to improve access to each other’s markets through the elimination or reduction of import barriers” and to be guided by “principles ” to make equivalent their respective technical regulatory requirements and inspection procedures” where full “harmonisation” is not feasible.
Canada’s final argument was that in the event that the Puerto Rico measures were found to be consistent with U.S. obligations under the FTA, the application of the measures nullified and impaired the benefits Canada could reasonably have expected to achieve under the FTA.
In this only FTA dispute on standards related issues, the Panel was careful to make the point that there was no question as to the right of the United States and Puerto Rico to adopt new higher standards. However, the dispute relates to the manner in which the authorities of the United States and Puerto Rico responded to requests by Canada that UHT milk from Québec might continue to be marketed in Puerto Rico. The Panel agreed with the U.S. position that the Puerto Rico regulations could be characterized as quantitative restrictions and was more properly characterized as a domestic measure. It found no violation of FTA Article 407 or GATT XI by the United States. However, in a somewhat curious twist the Panel indicated that it would not rule on the Articles 501 and 502 arguments with respect to national treatment. The Panel went on to conclude that the issue was best reviewed in application to the specific context of product standards as best addressed in the context of the FTA Chapter 7. The Panel concluded that:
In the circumstances, while the United States’ handling of this matter was far from exemplary for the reasons given in paragraph 5.48, the Panel cannot find that the United States’ exclusion of UHT milk from Québec is a clear violation [of Chapter 7] &of Article 708.2(a). In reaching this conclusion, the Panel is mindful of the fact that the determination of the terms of reference and the conduct of an equivalency study is inherently a consensual process which can neither be imposed nor conducted unilaterally. Under the FTA the Parties must cooperate and work together.
The Panel reviewed Canada’s argument that the exclusion of UHT milk from Québec had nullified and impaired Canada’s reasonable expectations under the FTA. The applicable provisions of the FTA were Articles 1801:1 and 2011:
1801:1….the provisions of this Chapter shall apply with respect to the avoidance or settlement of all disputes regarding the interpretation or application of this Agreement or whenever a Party considers that an actual or proposed measure of the other Party is or would be inconsistent with the obligations of this Agreement or cause nullification or impairment in the sense of Article 2011….
2011:1 If a Party considers that the application of any measure, whether or not such a measure conflicts with the provisions of this Agreement, causes nullification or impairment of any benefit reasonably expected to accrue to that Party, directly or indirectly under the provisions of this Agreement, that Party may, with a view to satisfactory resolution of the matter, invoke the consultation provisions of Article 1804 and, if it considers it appropriate, proceed to dispute settlement pursuant to Articles 1805 and 1807….
The Panel noted that the origin of Article 2011 of the FTA was to be found in GATT Article XXIII:1 and that Article 2011 explicitly links nullification and impairment with the reasonable expectations of the parties under the FTA . It determined that the matter should be decided consistently with GATT practice which requires that:
- the parties have negotiated a tariff concession,
- one party has subsequently introduced a government measure which has upset the competitive relationship between like imported and domestic products,
- the measure could not reasonably have been anticipated at the time of the negotiation of the tariff concession.
The Panel concluded:
In The United States asserted that Canada must have been aware that Puerto Rico would eventually adopt the PMO as part of a general move to upgrade the standard of milk production in its territory. With respect to the adoption of the PMO itself, the Panel is in full agreement with the United States’ position. The issue, however, relates not so much to the adoption of the PMO itself, as to the manner of its application and interpretation in Puerto Rico with respect to UHT milk from Québec. In this regard the Panel considers that Canada’s reasonable expectations under the FTA were indeed upset and to this extent, Canada has suffered nullification and impairment of the benefits which it could reasonably expect. These expectations flow from both the history of the product and from the FTA.
In making its determination, the Panel noted that Québec UHT milk was consumed around the world and in Puerto Rico for over 14 years and that the UHT process was regulated by measures which mirrored the U.S. Low-Acid Canned Food Regulations.
In these circumstances, the Panel believes that Canada did have a reasonable expectation that an equivalency study would be undertaken, and that, in the midst of a difficult negotiation concerned with reaching an acceptable method of determining the equivalence of Québec’s UHT milk production standards to those of the PMO, the authorities of Puerto Rico would not unilaterally close their market to UHT milk from Québec before the issue had been resolved between the Parties on the basis of the FTA.
The Panel concluded by recommending an expeditious and conclusive equivalency study be conducted without delay in order to determine as rapidly as possible whether UHT milk was produced in Québec under conditions having the same effect as those set out in the PMO. If the Canadian standards are found to have the same effect as the PMO, UHT milk from Québec should be re-admitted forthwith and permitted to be sold in the market in Puerto Rico.
In our next article we will review the implications of this case and use of NVNI in the GATT and WTO context.
