In the second part of our examination of Canada’s defence of the supply management system in international trade disputes, we will take a closer look at the NAFTA Panel, In the Matter of Tariffs Applied by Canada to Certain U.S. – Origin Agricultural Products [NAFTA Secretariat No. CDA-USA-1995-2008-01]
In its Report, the NAFTA Panel recalled that “… the United States has argued that Canada ‘gambled’ that it could convince participants in the Uruguay Round to preserve the right to maintain agricultural quotas …” and that Canada lost both that gamble and the right to impose the tariffs that replaced them on U.S. products as a result of the subsequent NAFTA deal. At this particular point in time, many Canadians whose livelihoods where tied to supply management, where concerned about this U.S. attack which went to the heart of the system and represented, “the most serious threat Canada has experienced since free trade with the United States began …” [Francis Russell, “Canada’s Lame Defence” Winnipeg Free Press, February 5, 1995, A6]
In Part I, we briefly summarised Canada’s supply management system, which has grown significantly since the 1930’s into a large and complex program that is founded on three pillars:
- Domestic production control, based on demand and administered through a program of government administrated quotas;
- Set prices based on cost of production and negotiated between the government and producers; and
- Import controls designed to plan domestic production and avoid pressure on pricing.
For the system to work, there must be strict limits on imports of supply-managed products. Following the GATT Article XI:2(c)(i) provision, Canada instituted a system of import controls which prevent imports of any of the supply managed commodities over a set volume or quota. Imports above the annual set quota were prohibited and set through a complex process that establishes total demand and total Canadian domestic supply, with a low, pre-determined global volume of imports to be allowed. These import quotas were allocated to individual importers through an import permit system.
Until 1995, import quotas, which operated through quantitative restrictions (or import bans for any product beyond the authorized amount), were permitted. As part of the conclusion of the GATT Uruguay Round, the newly created World Trade Organization (WTO) was formed and the WTO Agreement on Agriculture became part of the new rules. WTO Members agreed to eliminate quantitative import restrictions with tariffs and tariff rate quotas. The tariff equivalents were set at levels intended to provide protection that would be equivalent in effect to the restrictions that were replaced. For Canada’s supply managed products, this meant prohibitive tariffs, which remain in place today, ranging from 168% for eggs to 300% for butter. The import quota was replaced by a tariff-rate quota at zero or low-rate duties. This was the approach that the WTO Members agreed to use to address their sensitive and heretofore protected agricultural products. The U.S. proposal known as “tariffication” provided the protection of prohibitive tariffs while setting in motion a process of gradual liberalization as WTO Members were expected to negotiate the very visible tariff to much lower rates over time.
While the promise of global liberalization in agriculture sputtered and died with the failure of the Doha Round of negotiations, the United States took a more immediate tact in the bilateral context. The U.S. logic in the 1995 NAFTA challenge was fairly simple – the elimination of tariffs is an essential feature of a free trade agreement. Article 302 of NAFTA (“Tariff Elimination”) prohibits any new customs duties on trade between the parties and promotes the progressive elimination of existing tariffs. According to the U.S. position, the new tariffs Canada introduced as part of the GATT negotiations were incompatible with NAFTA ‘s rule against any new tariffs. In addition, the United States argued that NAFTA took precedence over WTO rules.
Canada’s rebuttal was more complex and centred on the agreement struck in 1988 when Canada and the United States entered into the Canada-U.S. Free Trade Agreement (FTA). Article 710 of the FTA was incorporated into Chapter 7 of the NAFTA and provides that rights under the GATT and under “agreements negotiated under the GATT” are “retained” with respect to agricultural goods. Canada argued that the WTO Agreement on Agriculture was an “agreement under the GATT.”
The two sides then addressed a series of questions. Did Article 710 of the FTA apply to tariffs or only to non-tariff barriers? Did “retain” apply to future agreements under the WTO or was it simply retrospective? Did the WTO Agreement actually require tariffication? The Panel was left to interpret the bargain- what was it that Canada and the United States had agreed to in the FTA.
In Part III we will analyse the Panel’s finding in what was then, and likely remains, Canada’s single most important trade defence. For a preview, please see a joint article by Michael Woods, Senior Partner at Woods, LaFortune LLP and General Counsel, Alan Willis QC that appeared in The Canadian Yearbook of International Law 1997. The NAFTA Panel Decision on Supply Management: Gamble or Bargain?