Canada Certain Measures Affecting the Automotive Industry Facts In 1965 the Auto Pact and the measures

s Canada adopted to implement it the Motor Vehicles Tariff Order (MVTO) and the Special Remission Orders (SROs) allowed a company that made automobiles in Canada to import cars and car parts duty-free if two main conditions were met: i. ii. a Canadian value-added (CVA) content requirement that applies to both goods and services; and a manufacturing and sales requirement.

On 3 July 1998, Japan requested consultations with Canada in respect of measures being taken by Canada in the automotive industry. Japan contended that under Canadian legislation implementing an automotive products agreement (Auto Pact) between the US and Canada, only a limited number of motor vehicle manufacturers are eligible to import vehicles into Canada duty free and to distribute the motor vehicles in Canada at the wholesale and retail distribution levels. In its implementation of the treaty however, Canada extended the same duty-free treatment to all GATT members. The extended eligibility for non-US auto manufacturers for the duty-free treatment ended, however, in 1989 with the Canada-US Free Trade Agreement. At the insistence of the US trade negotiators, this treaty closed the right of other companies to participate in the Auto Pact. No longer would car manufacturers from other countries be entitled to duty-free imports even if they met the CVA and production-to-sales ratio requirements. In other words, Auto Pact members who continued to meet the CVA and production-to-sales ratio requirements retained the right to import new cars without paying duties, unlike their non-Auto Pact competitors. Japan alleges that these measures are inconsistent with inter alia Articles I:1 of GATT 1994. On 17 August 1998, the EC requested consultations with Canada in respect of the same measures raised by Japan in WT/DS139 and cites the same provisions alleged to be in violation. At the heart of the European and Japanese WTO complaints, therefore, was the belief that there needed to be a level playing field in the Canadian market. Issue To assess whether there is any inconsistency with Article I:1 of the GATT 1994, one must answer the following questions: (i) Has the advantage accorded to the products originating in particular WTO Members been accorded "immediately and unconditionally" to all like products originating in the territories of all other WTO Members?

Issue 1: Whether the import duty exemption is awarded "immediately and unconditionally" Japan: By making the import duty exemption conditional upon criteria which are unrelated to the imported product itself, Canada fails to accord the import duty exemption immediately and unconditionally to like products originating in all WTO Members. By "criteria unrelated to the imported products themselves," Japan means the various conditions which confine the eligibility for the exemption to certain motor vehicle manufacturers in Canada. Definition of the word "unconditional" as meaning "not subject to conditions", for the proposition that the subjecting of an advantage to any condition unrelated to the product is inconsistent with Article I:1.

Canada:

Article I:1 contains no prohibition of origin-neutral terms and conditions on importation that apply to the importers as opposed to the products being imported. Article I:1 prohibits only conditions related to the national origin of the imported product. it is entitled to treat like products differently so long as the distinction in treatment is based on criteria other than national origin. Canada argues that in the instant case the conditions under which the import duty exemption is accorded are consistent with Article I:1 in that they are based on the activities of importing manufacturers and not on the origin of the products.

Decision: the panel decisions and other sources referred to by Japan do not support the interpretation of Article I:1 advocated by Japan in the present case according to which the word "unconditionally" in Article I:1 must be interpreted to mean that subjecting an advantage granted in connection with the importation of a product to conditions not related to the imported product itself is per se inconsistent with Article I:1, regardless of whether such conditions are discriminatory with respect to the origin of products. Rather, they accord with the conclusion from our analysis of the text of Article I:1 that whether conditions attached to an advantage granted in connection with the importation of a product offend Article I:1 depends upon whether or not such conditions discriminate with respect to the origin of products. reject Japan's argument that, by making the import duty exemption on motor vehicles conditional on criteria that are not related to the imported products themselves, Canada fails to accord the exemption immediately and unconditionally to the like product originating in the territories of all WTO Members. In our view, Canada's import duty exemption cannot be held to be inconsistent with Article I:1 simply on the grounds that it is granted on conditions that are not related to the imported products themselves. Rather, we must determine whether these conditions amount to discrimination between like products of different origins.

Issue 2: Whether the import duty exemption discriminates in favour of motor vehicles of certain countries Japan: by virtue of the eligibility restriction, the import duty exemption accorded by Canada on motor vehicles discriminates in practice by according an advantage to motor vehicles from certain countries while effectively denying the same advantage to like motor vehicles originating in the territories of other WTO Members. Although the beneficiaries of the import duty exemption are ostensibly permitted to import motor vehicles of any national origin, in practice they have chosen and will continue to choose to import the products of particular companies from particular countries, in consideration of their previous history of transactions, capital relationships, and the nationality of companies investing in the beneficiaries. this means that the eligibility restriction and other conditions attached to the exemption effectively limit access to the advantage to certain Members having the companies with which the beneficiaries have certain commercial relationships. Both Japan and the European Communities argue that their claim that the import duty exemption gives rise to de facto discrimination

Canada: no basis in GATT and WTO case law for the view that a de facto violation of Article I:1 can be established on the basis of the commercial decisions of importers with respect to their sources of supply.

Decision Art I:1 covers not only de jure but also de facto discrimination. Conclusion The tribunal members at both the Panel and the Appellate Body recognized that although on the face of it the Canadian measures were not discriminating against products based on their country of origin, that was their effect. The duty exemption at issue in reality was given only to the imports from a small number of countries in which an exporter was affiliated with eligible Canadian manufacturers/importers. Consequently, it was held that Canadas measures were inconsistent with the MFN provisions set out in Article I:1 of the GATT 1994. The Appellate Body usefully clarified the scope of Article I:1 by ruling the words of Article I:1 refer not to some advantages granted with respect to the subjects that fall within the defined scope of the Article, but to any advantage; not to some products, but to any product; and not to like products from some other Members, but to like products originating in or destined for all other Members. The Panel rejected Canada's defence that Art. XXIV allows the duty exemption for NAFTA members (Mexico and the United States), because it found that the exemption was provided to countries other than the United States and Mexico and because the exemption did not apply to all manufacturers from these countries

The panel inquired into the source countries of the imports, which in practice benefited from the duty exemption. It found that the regime favored products of certain origins and concluded that Canada did not accord the advantage on equal terms to like products of different origin. The panel based its decision on the discriminatory effects of the measure with respect to origin and did not merely look for some like product from another country. The Appellate Body supported this finding on the basis of both the text and the practical operation of the facially origin-neutral measure. It concluded that Canada had granted an advantage "to some products from some Members" and not "to `like' products `originating in or destined for the territories of all other Members.'"