CANADA. Chapter 8. Quantitative Restrictions 1) EXPORT RESTRICTIONS ON LOGS

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1 Chapter 8 CANADA Japan needs to monitor Canada s service sector. Canada has continued the use of policies which protect culture-related industries, and in June 2000 a proposal was made for tougher inspection of foreign asset investments. Quantitative Restrictions 1) EXPORT RESTRICTIONS ON LOGS Since 1906, the Province of British Columbia has limited exports of logs and chips, except for surplus stockpiles, in order to protect domestic industries. In 1986, the Province banned exports of high-quality Douglas fir, spruce, and red cedar that do not have the permission of the Provincial Secretary of Forestry regardless of whether any surplus existed. Because these quantitative restrictions are designed to protect the domestic industry, it is highly likely that they violate Article XI. Although these measures are implemented by a provincial government not directly committed to obligations under the WTO Agreements, the government of Canada must take such reasonable measures as may be available to it to ensure observance of the provisions, pursuant to Article XXIV:12. Japan should continue to request that the government of Canada take reasonable measures to ensure the WTO consistency of these measures by local governments. 2) US-Canada Softwood Lumber Dispute 171

2 The United States argued before a GATT panel and the US-Canada Free Trade Agreement panel that cheap stumpage in provincial Canadian forests constitutes a government subsidy that makes the price of coniferous products imported into the United States unreasonably low and injures the U.S. industry. The United States, however, lost both cases because of insufficient evidence. Unsatisfied with these results, the United States pursued the issue through bilateral negotiations, which resulted in a formal agreement (Softwood Lumber Agreement) in May Under the Agreement, the Canadian federal government will levy an export tax on lumber companies for any exports from British Columbia, Alberta, Ontario, or Quebec in excess of a set volume (14.7 billion board feet, or about 35 million cubic meters). The term of the Agreement is for five years beginning 1 April Also during this time period, U.S. lumber producers agree that the government of the United States will take no trade-restrictive measures against Canada. As originally agreed, the Agreement lapsed at the end of March In April of the same year the U.S. government received a complaint from manufacturers and producers and launched anti-dumping and countervailing duty investigations. The U.S. Department of Commerce came to provisional affirmative determinations in both cases -- the countervailing duty investigation in August and the anti-dumping investigation in November. Provisional duties have been levied on Canadian softwood lumber, and the Commerce Department reasonably issued final duties of almost 30 percent. The investigations are still proceeding and final determinations by the U.S. International Trade Commission are due to be made in May In response, Canada has filed a complaint with the WTO that the United States provisional determination on countervailing duties infringes upon the Agreement on Subsidies and Countervailing Measures and GATT Article 6. Following bilateral consultations a dispute settlement panel is due to be set up in December. At the same time, the United States and Canada are holding intermittent meetings to find a solution to the issue through bilateral dialog. Japan s position is that the above Softwood Lumber Agreement could constitute a restraint on exports prohibited under Article 11, Clause 1b (Note 2) of the Safeguard Agreement. Thus, Japan needs to monitor how this issue unfolds since there are concerns that similar measures could be reintroduced. 172

3 Tariff 1) High Tariff Canada s average tariff rate on non-agricultural products will be 4.9 percent after the implementation of Uruguay Round commitments, a somewhat higher rate than those of Japan, the United States, and the EU. Tariffs on glass fibres (maximum 15.5 percent) is another example of high tariffs. Subsidies and Countervailing Measures 1) Export Subsidy Programs In the Uruguay Round Agreement on Agriculture, Canada provided concessions on the amount and volume of export subsidies for specific items. In actual practice, the country paid a small subsidy for butter and non-fat dry milk during fiscal year 1996/1997, and no export subsidies after fiscal year 1997/1998. Canadian export subsidies, like those of the United States and the EU, have the potential to influence international prices for agricultural products and to distort world trade. 2) Measures Similar to Export Subsidies for Dairy Products An agreement between the Canadian federal and provincial governments resulted in the National Marketing Plan, under which the country regulates the supply of raw milk. The purpose of the programme is to use market-sharing quotas (MSQs) to balance the supply and demand for milk to be used in processing. The system allocates quotas to individual dairy farms and provincial producers groups in response to domestic demand. However, Canada has an excessive supply of milk products (in particular, non-fat dry milk) because of demand and supply imbalances. For this reason, prior to the Uruguay Round negotiations, producers whose shipments exceeded their quotas were subject to stiff levies, and these levies in turn funded subsidies to exporters, thereby encouraging the surplus to be exported. As a result of the 173

4 Uruguay Round, these levies were defined as export subsidies by the WTO and were therefore abolished by Canada in August At that time, however, Canada overhauled its price classifications for milk for processing and established a Special Milk Class. Prices for the Special Milk Class are set with reference to U.S. market prices, but at levels lower than the domestic consumer price. This enables processors to export dairy products at prices below those of the domestic market. This system was referred to the WTO by the United States and New Zealand as an export subsidy and a measure to circumvent the prohibition on export subsidies. Japan participated as a third party. In its May 1999 report, the panel found that subsidies under the programme constituted export subsidies as defined in Article 9 of the Agreement on Agriculture and were inconsistent with Article 10 of that Agreement. Canada appealed the decision, but the report of the Appellate Body in October 1999 did not overturn the final conclusions reached by the panel. During a meeting of the Disputes Settlement Body that month, both the panel and the appellate reports were adopted. In line with these reports, the federal government finally completed the necessary procedures for a new system in December 2000, and at the DSB meeting in February 2001, a Canadian official reported that Canada had completely reformed the old policy in accordance with the recommendation. The core principle of the new policy is that processors or exporters with foreign customers will negotiate directly with dairy farmers in each province for milk price without control of the government. The United States and New Zealand insisted that the new policy was still providing export subsidies because the Canadian government is substantially maintaining the system that low milk price is provided only for export. In March 2001, they requested the establishment of a panel based on Article 21.5 of DSU. In its July 2001 panel report, the Panel agreed with the United States and New Zealand. The Canadian government appealed to the Appellate Body. Although the Appellate Body reversed several of the Panel s findings in its December report, it was unable to complete the analysis for several of the claims made by New Zealand and the United States based on the factual findings on record. Given the Appellate Body s findings, the United States will 174

5 likely request the establishment of another panel for those allegations that were not decided by the Appellate Body. 3) Grain Exports by the Canadian Wheat Board The Canadian Wheat Board (CWB) has a substantial monopoly on the shipment and export of the wheat and barley produced in the western plains provinces. The CWB shares the same problems as other government export companies (see above, Australia; Centralized Management of Wheat Exports by the Government Trade Companies.) Services in Trade 1) Cross-sectoral Regulations The Investment Canada Act requires notification to the Canada Investment Agency before controlling rights in existing businesses may be purchased. Although WTO Members receive favourable treatment under separate standards, investments are still subject to review when they are direct investments (in Canadian companies) of C$5 million or more, indirect investments (indirect acquisition of a Canadian subsidiary by an investment in a non-canadian parent company) of C$50 million or more, or investments of 50 percent or more of total assets. (For investments in finance, transportation, culture, and uranium mining, all direct investments in excess of C$5 million and indirect investments in excess of C$50 million are subject to review regardless of whether the investor is a WTO Member.) In reviewing investments, Canada considers the benefits and costs of the acquisition of a Canadian company to Canada. All foreign investments in cultural industries (publishing and distribution of books; production, distribution and sale of films, video, and music; and entertainment) are subject to examination by the Ministry of Canadian Heritage. 2) Construction 175

6 The province of Alberta requires that bidders from Alberta or from within Canada be given preference in large resource development projects if the terms of tender are otherwise equal. The province of Ontario requires that out-ofprovince construction companies entering into contracts with the provincial government deposit the equivalent of 4 percent of the contract value with the provincial government as a guarantee. Japan urges Canada to correct these discriminatory measures. 3) Audio-Visual Services and Advertising Services Canada has enacted laws and regulations to protect its cultural industries, including books, periodicals, cinema, video, music, and broadcasting. Canada s rationale for such measures is that without them, such industries would encounter heavy competition from the United States, and would be dominated by the U.S. industry because the domestic industry cannot compete in this sector in terms of cost. Canada's identity as a country, moreover, would be threatened. In 1999, the Government of Canada moved reviews of foreign capital investments in cultural industries from the Canada Investment Bureau to the Ministry of Canadian Heritage. The Minister of Canadian Heritage announced the decision to pursue policies to support systems and distributions that would encourage diverse Canadian cultural content in cinema, video, audio, books, and magazines. The Committee of Canadian Heritage proposed to strengthen reviews under the Canada Investment Law in June Japan believe this is an area that must be vigilantly monitored in the future. 176