Canadian trade negotiators appear to be under a great deal of pressure from our trade partners with respect to supply management. In fact, that may be an understatement as reports and analytical pieces on the progress of the Trans Pacific Partnership (TPP) negotiations continue to surface. This post will be the first of a series looking back at some of the international trade disputes (GATT, WTO, and NAFTA) in which some elements of Canada’s supply management system have come under scrutiny. Both partners at Woods, LaFortune LLP were heavily involved in some of Canada’s big trade disputes during their tenure at External Affairs (now the Department of Foreign Affairs, Trade, and Development or DFATD). Since 1947, Canadian trade policy and trade lawyers have been called upon to defend the system as advocates in international dispute resolution as well as through various negotiation tables.
One of the first large trade disputes focused on access to Canada’s dairy, poultry, egg, barley, and margarine market and attempted to attack the competitive advantages Canadian producers enjoyed in those respective sectors [The NAFTA Panel in the Matter of Tariffs Applied by Canada to Certain U.S. Origin Agricultural Products (Secretarial File No. CDA-95-2008) December 2, 1996]. In this case, the U.S. alleged that Canada increased tariffs for a range of agricultural products contrary to Canada’s NAFTA undertakings. More technically what was being litigated was a sub-clause of a provision of the General Agreement on Tariffs and Trade (GATT). The term “supply management” does not appear in the GATT, instead, the sub-clause in question appears in GATT Article XI which prohibits quantitative restrictions (import prohibitions).
In 1947, the original 23 GATT members (Contracting Parties) agreed to both the general principals of liberalized trade and the need for a series of exceptions. Professor John Jackson who wrote the original “GATT bible” in 1969 (Word Trade and the Law of GATT) recalls that the exceptions to export restrictions and prohibitions set out in Article XI reflected an original draft proposal by the United States, that the need for exceptions in the agricultural sector created a dynamic that weakened the ability to achieve a greater level of free trade in this sensitive sector, and that the exceptions in Article XI:2(c) reflected the needs of the U.S. domestic sugar program. The exceptional manner in which agriculture has been treated in international trade agreements is one that has warranted the attention of many authors and there is little doubt that it will continue to create debate and controversy. For the purpose of this post, it is enough to remind ourselves that the exception under which Canada’s supply management system has operated for almost 70 years was forged as part of a multinational bargain which viewed agriculture in a special and protective light.
GATT Article XI:2(c)(i) set out that the general rule against import restrictions and prohibitions
…. shall not extend to the following:
- c) Import restrictions on any agricultural or fisheries product, imported in any form,* necessary to the enforcement of governmental measures which operate:
(i) to restrict the quantities of the like domestic product permitted to be marketed or produced, or, if there is no substantial domestic production of the like product, of a domestic product for which the imported product can be directly substituted;
GATT Article XI:2(c) concludes with a series of conditions for the application of the above restriction:
Any contracting party applying restrictions on the importation of any product pursuant to subparagraph (c) of this paragraph shall give public notice of the total quantity or value of the product permitted to be imported during a specified future period and of any change in such quantity or value. Moreover, any restrictions applied under (i) above shall not be such as will reduce the total of imports relative to the total of domestic production, as compared with the proportion which might reasonably be expected to rule between the two in the absence of restrictions. In determining this proportion, the contracting party shall pay due regard to the proportion prevailing during a previous representative period and to any special factors* which may have affected or may be affecting the trade in the product concerned.
The text of the two GATT articles above sets out both the international trade law justification and the basis of the architecture of Canada’s supply management system – a particularly Canadian model that has evolved from co-operative efforts in the 1930’s by Canadian dairy farmers who came together to establish some degree of stability in a domestic market afflicted by unpredictable production cycles. As dairy farmers joined in, and other sectors showed interest, marketing boards were introduced with the aim of setting and monitoring overall production targets and common floor prices. Provincial governments stepped in to give marketing boards the needed legally binding authority to establish pricing and supply restrictions. These marketing boards’ powers to establish pricing and supply restrictions were limited to provincial territory and the federal government remained responsible for ensuring co-ordinated Canadian marketing plans and for the introduction of import restrictions. Surplus production from other countries (and provinces) were seen as a fatal threat to the internal integrity of the system and the stability of production and producer income. By following the path set out in Article XI:2(c)(i) Canada had GATT cover for the required import restrictions.
Today supply-managed commodities represent a major portion of Canada’s farm economy. In July 1995, with the ink barely dry on the North American Free Trade Agreement (NAFTA), the United States requested the establishment of a NAFTA Panel to mount a direct attack on Canada’s supply management system. This was an extremely high stakes case and the U.S. team argued that Canada had gambled, and lost in the GATT Uruguay Round, its ability to preserve its rights to maintain import restrictions. We will examine this case and have a further look at Canada’s defence of supply management in Part II.