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The NAFTA Panel Decision on Supply Management: Gamble or Bargain?

  • Allan Willis and Michael G. Woods

Summary

In July 1995, the United States requested the establishment of the first Panel under Chapter 20 procedures of the North American Free Trade Agreement (NAFTA) and challenged Canada's duties on its “supply-managed” dairy, poultry, egg, barley, and margarine products. These industries had grown and prospered under supply management – a system intended to establish stability in a domestic market afflicted by unpredictable production cycles. The import restrictions were designed in conformity with the international trade rules as set out in the General Agreement of Tariffs and Trade (GATT). These rules changed in 1995 as a result of the WTO Agreement on Agriculture under which Canada and WTO members replaced quantitative import restrictions with tariffs and tariff-rate quotas. The United States claimed that the duties contravened the basic NAFTA obligation to not rahe tariffs. Canada countered that the new tariff rates were justified under the new WTO Agreement on Agriculture that had been negotiated in Geneva after NAFTA. The resulting decision in favour of Canada was both praised for its consideration of the case in the context of the complex interplay of relevant trade obligations and criticized for finding “an implied bargain among negotiators … that was never struck.” The Panel assumed that if tariff eqivalents could not be applied – which in effed would render the WTO Agreement on Agriculture inoperative – the result would be that the parties would be entitled to apply Article XI restrictions as if the Uruguay Round had never happened. The logic was impeccable – the NAFTA was “not to be read in clinical isolation from public international law.”

Sommaire

En juillet 1995, les États-Unis ont demandé la formation du premier groupe special en vertu des procédures du chapitre 20 de l'Accord de libre-échange nord-améerican (ALÉNA) en contestant les droits de douane appliqués par le Canada aux produits laitiers, à la volaille, aux oeufs, à l'orge et à la margarine “soumis à la gestion de l'offre.” Ces industries se sont développées et ont prospéré grâce à la gestion de l'offre, système qui vise à stabiliser un marché national soumis à des cycles de production imprévisibles. Les restrictions à l'importation étaient conformes aux régles du commerce international énoncées dans l'Accord général sur les tarifs douaniers et du commerce (GATT). Elles ont été modifiées en 1995, à la suite de l'Accord sur l'agriculture de l'OMC, aux termes duquel le Canada et les membres de cette organisation ont remplacé les restrictions à l'importation quantitative par des droits de douane et des contingents tarifaires. Les États-Unis alléguaient que les droits de douane contrevenaient à l'obligation fondamentale contractée aux termes de l’ALENA de ne pas augmenter les tarifs douaniers. Le Canadia a riposté que les nouveaux taux étaient justifiés en raison de l'Accord sur l'agriculture de l'OMC, qui a été négoàé à Genève après l'ALÉNA. La décision en faveur du Canada qui en a résulté a été à la fois louée pour son analyse de l'affaire dans le contexte de l'interaction complexe des obligations commerciales pertinentes, et critiquée pour avoir invoqué “un marché implicite entre les négociateurs … qui n'a jamáis été conclu.” Le groupe spécial a présumeé que si des équivalents tarifaires ne pouvaient pas être appliqués, ce qui en fait rendrait l'Accord sur l'agriculture de l'OMC inopérant, il en résultaerait que les parties auraient le droit d'appliquer les restrictions prévues à l'article XI, comme si l'Uruguay Round n'avait jamais eu lieu. Le raisonnement était sans faille — l'ALÉNA, ne devait “pas être isolé cliniquement de droit international public.”

Copyright

References

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1 In The Matter of Tariffs Applied by Canada to Certain U.S.-Origin Agricultural Products, NAFTA Secretariat File No. CDA-95-2008-01, December 2, 1996, para. 160 [hereinafter Panel Report].

2 Clark, Peter, quoted in “Canada Bracing To Fight for Tarrifs,” Globe and Mail, July 9, 1995, A1.

3 Panel Report, supra note 1. Full text and other information about NAFTA available at the Secretariat website <http//www.nafta-sec-alena.org>.

4 General Agreement on Tariffs and Trade, done at Geneva, Oct. 30, 1947, in forcejan. 1, 1948, 55–61 UNTS 194, 4 Basic Instruments and Selected Documents (BISD) (Geneva, 1969) [hereinafter GATT 1947].

5 Agreement Establishing the World Trade Organization (1994) 33 ILM 1144 [hereinafter WTO Agreement].

6 [Hereinafter WTO Agreement on Agriculture].

7 McNeil, Dale E., “The NAFTA Panel Decision on Canadian Tariff Rate Quotas: Imagining a Tariffying Bargain” (1997) 22 Yale Journal of International Law 346.

8 Canada-United States Free Trade Agreement, 2 January 1988; in force 1 January 1989 (1988) 27 ILM 281 [hereinafter FTA].

9 Globe and Mail, July 9, 1995, A1.

10 Ibid.

11 Clark, Mel, quoted in Russell, Francis, “Canada’s Lame Defence,” Winnipeg Free Press, February 5, 1995, A6.

12 Russell, ibid., A6.

13 Globe and Mail, July 9, 1995, A1.

14 Fagan, Drew, “U.S. Mega-Farms Do Mean Business,” Globe and Mail, August 12, 1995.

15 Ibid.

16 Department of Foreign Affairs / Agriculture and Agri-Food Canada, “The Supply Management System,” see website at <http//accis.agc.cc/cb/news/n60227.ec.html>; Kenny, John, “Structure and Issues of the Dairy Industry,” see website at <http.//www.ofns.ualberta.ca/dairt/dp472.ihtm> ; Hart, Michael, Damned If You Do and Damned If You Don’t: The Triah and Tribulations of Canada-U. S. Agricultural Trade (Ottawa: Centre for Trade Policy and Law, 1996), 712.

17 “The Supply Management System,” supra note 16.

18 GATT, supra note 4.

19 Ice Cream and Yogurt, 5 December 1989 L/6568, BISD 365/68, p. 87. See also EPCT/A/PV/19, p. 42.

20 Chalifour, Nathalie J. and Buckingham, Donald, “Counting Chickens Before They Hatch: New Hope or No Hope for Discipline to International Agricultural Trade” (1994) 22 Canadian Yearbook of International Law 122.

21 Department of Foreign Affairs and International Trade / Agriculture and Agri-Food Canada, “World Trade Organization Tariffication,” see website at <http//aceis.agr.ca/cb/news/n6o227ce.html>.

22 Johnson, Jon, The North American Free Trade Agreement: A Comprehensive Guide (Aurora, ON: Canada Law Book, 1994), 181.

23 See United States-Canada Free Trade Agreement: Communication from the President of the United States Transmitting the Final Legal Text of the Canada-U.S. Free-Trade Agreement, the Proposed U.S.-Canada Free Trade Implementation Act of 1988, and a Statement of Administrative Action, H.R. Doc. No. 216, 100th Congress, 2d Sess. 196–97 (1988) IJuly 26, 1988] [hereinafter Statement of Administrative Action].

24 McNeil, supra note 7, 346.

25 Panel Report, supra note 1, paras. 55–80.

26 GATT 1994 consists of GATT 1947 and all protocols, decisions, and understandings in effect on the entry into force of the WTO.

27 Ibid., paras. 49–50. Rule 34 reads as follows: “A Party asserting that a measure is subject to an exception under the Agreement shall have the burden of establishing that the exception exists.” Despite the language of Chapter 3 with respect to exceptions, Canada did not accept the proposition that it bore the burden of justification as the party invoking an exception. Chapter 3 and 7 did not, in its view, stand in the relation of rule and exception. The introductory article of Chapter 7 — Article 701 — provided that Chapter 7 would be given overriding effect in the event of inconsistency — a relationship that was inconsistent with the treatment of the provisions on agriculture as mere “exceptions” to the general provisions on tariffs.

28 In this article, a reference to Article 710 refers to Article 710 of the 1988 FTAas incorporated into NAFTA by Annex 702.1 of the latter agreement. See supra note 8.

29 Paragraphs 1 and 4 of NAFTA, Annex 702.1, read as follows:

  • 1.

    1. Ardeles 701, 702, 704, 705, 706, 707, 710 and 711 of the Canada — United States Free Trade Agreement, which Articles are hereby incorporated into and made a part of this Agreement, apply as between Canada and the United States.

  • 4.

    4. 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.

30 The footnote to Article 4.2 of the WTO Agreement on Agriculture reads as follows: “These measures include quantitative import restrictions, variable import levies, minimum import prices, discretionary import licensing, non-tariff measures maintained through state-trading enterprises, voluntary export restraints, and similar border measures other than ordinary customs duties, whether or not the measures are maintained under country-specific derogations from the provisions of GATT 1947, but not measures under balance-of-payments provisions or under other general, non-agriculture-specific provisions of GATT 1994 or of the other Multilateral Trade Agreements in Annex 1A to the WTO Agreement.”

31 Panel Report, supra note 1, paras. 81–104.

32 The United States found support in the wording of para. 4 of NAFTA Annex 702.1, which referred to the retention of GATT rights and obligations, but which, in contrast to FTA Article 710, made no reference to “Agreements under the GATT,” such as the WTO Agreement on Agriculture. Canada noted, however, that the paragraph had been included to clarify one particular aspect of Article 710 — its application to alcoholic beverages — but not to amend it or reduce its scope. The United States also disputed the proposition that the non-tariff barriers that Canada had tariffied were consistent with the GATT. The Ice Cream and Yoghurt decision of a 1989 GATT Panel (supra note 19) showed that some, at least, of the measures were not GATT-consistent. Canada replied that the tariffication provision of the WTO Agreement on Agriculture was intended to be comprehensive and to provide an “amnesty” with respect to tariffied non-tariff measures that might have been inconsistent with the GATT prior to their conversion into tariffs.

33 GATT Document, MTN. GNG/MA/W/24.

34 See NAFTA Annex 703.2, sections A and B.

35 Vienna Convention on the Law of Treaties, May 23, 1969, Can.T.S. 1980 N0.37, 1155 U.N.T.S. 331, (1989) 8 ILM 679 [hereinafter Vienna Convention].

36 As confirmation of its reading of the intentions of the parties, Canada saw further support for its position in two other NAFTA provisions, although neither was central to its argument. Article 309, under the heading “Non-Tariff Measures,” provided that not only Article XI of the GATT, but any “equivalent provision of a successor agreement…” would be incorporated into and made part of NAFTA. The provision might be seen as an indication of a general intention to give effect to any replacement regime negotiated at the Uruguay Round to replace the Article XI quotas. On the other hand, as the United States pointed out, the “equivalent provision of a successor agreement” could simply be Article XI of GATT 1994, which was identical in every respect to Article XI of the GATT 1947. Canada also referred to Note 5 of the agreement, which states that Article 301 (1) and (2) were not intended to prevent a party from increasing a customs duty as authorized by “any dispute settlement provision of the GATT or any agreement negotiated under the GATT.” The United States replied that Note 5 was addressed solely to the issue of GATT-approved trade retaliation.

37 The application of the principles codified in the Vienna Convention, Panel Report, supra note 1, para. 119. The Vienna Convention reflects the practice of arbitral panels under the FTA and of panel and appellate body decisions of the WTO Dispute Settlement Body.

38 Panel Report, supra note 1, para. 122.

39 Model Rules of Procedure for Chapter Twenty of the North American Free Trade Agreement, 13 July 1995.

40 Panel Report, supra note 1, para. 127.

41 Ibid., para. 135.

42 Ibid., para. 137. As a countervailing consideration, the United States had pointed to a number of clauses in NAFTA, in which “successor agreements” are referred to, and submitted that the absence of such language in Article 710 and other relevant provisions was significant. However, the Panel answered this point by noting that Article 710 was open to a “forward-looking” interpretation. Furthermore, the effect of the U.S. interpretation was that some provisions relevant to agricultural trade would be prospective (such as Article 309, which refers to “successor agreements”), while others would be static. The Panel thought this was not likely to have been the intention. The United States had also noted that while Article 710 refers to “agreements under the GATT,” the latter phrase was not to be found in paragraph 4 of Annex 703.1, where the parties set out their understanding of the intent of Article 710. The Panel agreed, however, with the Canadian position that this paragraph was intended to clarify Article 710 — notably by providing that waivers and Protocol of Provisional Application (PPA) exemptions were covered — but not to change the meaning or to narrow its scope.

43 Panel Report, supra note 1, para. 139.

44 Ibid., para. 139.

45 Ibid., para. 158.

46 Ibid., para. 159.

47 Ibid., para. 167.

48 Ibid., para. 162.

49 Ibid., para. 171.

50 Ibid., paras. 176–79. Draft Final Act Embodying the Results of the Uruguay Round of Multilateral Trade Negotiations [hereinafter Dunkel Draft] was circulated on 20 December 1991 as GATT Doc. MTN. TNC/W/FA.

51 Ibid., para. 179.

52 Ibid., para. 181.

53 Ibid.

54 Ibid., para. 183. See also ibid., para. 198.

55 Ibid., para. 196.

56 Ibid., para. 197.

57 Ibid., para. 198.

58 Ibid.

59 Annex 702.1, incorporating Article 710, forms part of Section A of Chapter 7.

60 Hart, supra note 16.

61 See “At the Department of External Affairs in 1991-2 / Au Ministère des Affaires extérieures en 1991–2” (1992) 20 Canadian Yearbook of International Law 352–55.

62 Chalifour and Buckingham, supra note 20 at 131. Article 30 of the Vienna Convention, which is referred to here, includes the rule that of two inconsistent treaties, the later-in-time will prevail.

63 Panel Report, supra note 1, para. 183.

64 Ibid., para. 119.

65 Ibid., para. 132.

66 Ibid., para. 179.

67 Japan — Taxes and Alcoholic Beverages, AB-1996-2 WT/DS8/AB/R, Report of the Appellate Body, pp. 10–11.

68 Dale E. McNeil, supra note 7 at 346.

69 Ibid., 369.

70 Statement of Administrative Action, supra note 23.

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The NAFTA Panel Decision on Supply Management: Gamble or Bargain?

  • Allan Willis and Michael G. Woods

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