WORLD TRADE WT/DS31/R
14March 1997
ORGANIZATION(97-0939)
Original: English
CANADA -CERTAIN MEASURES CONCERNING PERIODICALS
Report ofthePanel
Thereport ofthePanel onCanada -Certain Measures Concerning Periodicals isbeing
circulated toallMembers, pursuant totheDSU. Thereport isbeing circulated asan
unrestricted document from 14March 1997 pursuant totheProcedures forthe
Circulation andDerestriction ofWTO Documents (WT/L/160/Rev.1). Members are
reminded thatinaccordance withtheDSU onlyparties tothedispute mayappeal a
panel report, anappeal shallbelimited toissues oflawcovered inthepanel report
andlegalinterpretations developed bythepanel, andthatthere shallbenoexparte
communications with thepanel orAppellate Body concerning matters under
consideration bythepanel orAppellate Body.(i)
TABLE OFCONTENTS
I. INTRODUCTION ..........................................1
II. FACTUAL ASPECTS ........................................1
A. Tariff Code 9958 -Import Prohibition .........................1
B. PartV.IoftheExcise TaxAct..............................2
C. Funded andCommercial Postal Rates .........................4
(i) "Funded" rates...................................4
(ii) Commercial "Canadian" andcommercial "International" rates .....6
III. MAIN ARGUMENTS ........................................8
A. Tariff Code 9958 -Import Prohibition .........................8
(i) Article XI:1 ....................................8
(ii) Article XX(d) ...................................9
"Secure compliance" ...............................9
"Necessary" ....................................11
(iii) Chapeau toArticle XX .............................12
B. PartV.IoftheExcise TaxAct..............................13
(i) Article III:2versus coverage under theGeneral Agreement onTrade
inServices (GATS) ................................16
Applicability ofArticle IIIofGATT 1994 .................16
"Taxes applied directly orindirectly toproducts" .............19
(ii) Conformity ofPartV.IwithArticle IIIofGATT 1994 ........24
(a) Article III:2, firstsentence ......................24
Likeproduct issue ...........................24
Discrimination ..............................35
(b) Article III:2, second sentence ....................38
Directly competitive orsubstitutable ................38
Soastoafford protection todomestic production ........42
(c) Article III:4 ...............................48
C. Funded andCommercial Postal Rates .........................48
(i) Article III:4 ....................................48
"Regulations andrequirements affecting theinternal sale,offering for
sale,purchase, transportation, distribution oruse" ............48
Likeproduct issue ................................56
Treatment ofimported anddomestic magazines ..............57
(ii) Article III:8(b) ...................................58
IV. INTERIM REVIEW .........................................65
V. FINDINGS ...............................................66
A. Introduction .........................................66
B. Tariff Code 9958 ......................................67
C. TheExcise TaxAct ....................................69
(i) Applicability ofGATT 1994 ..........................69
(ii) GATT Article III:2 ................................71
(iii) Likeproduct issue ................................72
(iv) Taxation inexcess: "directly orindirectly" .................74
D. Postal Rates .........................................74
(i) "International" versus "commercial Canadian" and"funded" rates...75
(ii) Applicability ofArticle III:8(b) tothe"funded" ratescheme ......77(ii)
E. Concluding Remarks ....................................78
VI. CONCLUSIONS ...........................................78WT/DS31/R
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I. INTRODUCTION
1.1 On11March1996,theUnitedStatesrequestedCanadatoholdconsultationspursuanttoArticle4
oftheUnderstanding onRules andProcedures Governing theSettlement ofDisputes (DSU) and
Article XXIII oftheGeneral Agreement onTariffs andTrade 1994(GATT 1994) oncertain measures
maintainedbyCanada,namely,measuresprohibitingorrestrictingtheimportationintoCanadaofcertain
periodicals; taxtreatment ofso-called "split-run" periodicals; andtheapplication offavourable postage
ratestocertain Canadian periodicals (WT/DS31/1). These consultations wereheldon10April 1996.
Astheydidnotresult inasatisfactory adjustment ofthematter, theUnited States, inacommunication
dated 24May1996, requested theDispute Settlement Body (DSB) toestablish apanel toexamine the
matter (WT/DS31/2).
1.2 TheDSB, atitsmeeting on19June1996, established apanel onthematter inaccordance with
Article 6oftheDSU. Indocument WT/DS31/3, theSecretariat reported thatthePanel would have
thefollowing standard terms ofreference andcomposition:
"Toexamine, inthelightoftherelevant provisions ofthecovered agreements citedbythe
United States indocument WT/DS31/2, thematter referred totheDSBbytheUnited States
inthatdocument andtomake such findings aswillassist theDSB inmaking the
recommendations oringiving therulings provided forinthose agreements".
1.3 On25July1996, thePanel wasconstituted withthefollowing composition:
Chairman: Mr.LarsAnell
Panelists: Mr.Victor LuizdoPrado
Mr.Michael Reiterer
1.4 NoMembers reserved theirrights toparticipate inthePanel proceedings asathirdparty.
1.5 ThePanel metwiththeparties tothedispute on11October 1996and14-15 November 1996.
ThePanel submitted itsreport totheparties on21February 1997.
II. FACTUAL ASPECTS
2.1 ThisPanelconcernsthreeCanadianmeasures:TariffCode9958whichprohibitstheimportation
intoCanada ofcertain periodicals; PartV.IoftheExcise TaxAct,asenacted byBillC-103 of
15December 1995, which imposes anexcise taxoncertain "split-run" periodicals; andtheapplication
ofcertain postal rates tocertain Canadian periodicals including through actions ofCanada Post
Corporation andtheDepartment ofCanadian Heritage.
A. Tariff Code 9958 -Import Prohibition
2.2 In1965, theCanadian Government enacted Tariff Code 9958, inSchedule VIIoftheCustoms
Tariff. Itisputintoeffect byArticle 114oftheCustoms Tariff which provides that"theimportation
intoCanada ofanygoods enumerated orreferred toinSchedule VIIisprohibited".1Tariff Code 9958
applies ifanissue ofaperiodical imported intoCanada isaspecial edition, including asplit-run or
regional edition, thatcontains anadvertisement thatisprimarily directed toamarket inCanada and
1R.S.C. 1985, c.41(3rdSuppl.) asamended to30April 1996, s.114, Sch.VII,Item9958, (1996 Customs Tariff:
Departmental Consolidation) Ottawa: Minister ofSupply &Services Canada, 1996.WT/DS31/R
Page2
thatdoesnotappear inidentical forminalleditions ofthatissueoftheperiodical thatweredistributed
intheperiodical 'scountry oforigin. TheCode defines an"issue" toinclude aspecial annual issue,
anda"periodical" tomean aperiodical, theissues ofwhich other thanthespecial annual issue, are
published atregular intervals ofmore thansixdaysandlessthanfifteen weeks andaredistributed
asissues ofadistinct publication orasasupplement tomore thanonenewspaper, butdoesnotinclude
acatalogue, anewspaper, oraperiodical, theprincipal function ofwhich istheencouragement,
promotion ordevelopment ofthefinearts,letters, scholarship orreligion.
2.3 Forthepurposes ofdetermining whether ornotanadvertisement isprimarily directed atthe
Canadian market, anumber offactors aretaken intoconsideration suchaswhether thereareenticements
totheCanadian market, references tothegoods andservices tax,listing ofCanadian addresses as
opposed toforeign addresses, andspecific invitations toCanadian consumers only.
2.4 TheCode alsoapplies where anissue ofaperiodical imported intoCanada isanedition in
which more thanfivepercentoftheadvertising content consists ofadvertisements directed tothe
Canadian market. Advertisements directed totheCanadian market include those thatindicate specific
sources ofproduct orservice availability inCanada orwhich include specific terms orconditions relating
tothesaleofgoods orservices inCanada.2Thepublisher ofaperiodical isnotified bytheDepartment
ofNational Revenue forCustoms andExcise when aperiodical isfound tobeincontravention ofTariff
Code 9958.3
2.5 In1988, theCanadian Parliament enacted anexception toTariff Code 9958 which allows
Canadian publishers tohavetheirperiodicals, which mustotherwise beCanadian issues ofCanadian
periodicals, typeset orprinted wholly orpartially intheUnited States.
B. PartV.IoftheExcise TaxAct
2.6 In1995, BillC-103, which added PartV.I-TaxonSplit-run Periodicals totheExcise Tax
Act,became law.4Theamendment callsfortheimposition, levyandcollection, inrespect ofeach
split-run edition ofaperiodical, ataxequal to80percentofthevalue ofalltheadvertisements contained
inthesplit-run edition. Thetaxislevied onaperissue basis. Thevalue ofalladvertisements ina
split-run edition ofaperiodical isthetotalofallthegross feesforalltheadvertisements contained
intheedition.5Theterm"periodical" means printed material thatispublished inaseries ofissues
thatappear notlessthantwice ayearandnotmore thanonceaweek. Where anissue ofaperiodical
ispublished inseveral versions, eachversion isanedition oftheissue. Eachedition oftheissuemust
beconsidered separately when determining whether anedition isasplit-run edition. Thedefinition
of"periodical" explicitly excludes acatalogue which issubstantially made upofadvertisements.6
2.7 Theamendment defines asplit-run edition asanedition ofanissue ofaperiodical that:
(i) isdistributed inCanada;
2TheDepartment ofNational Revenue forCustoms andExcise hasadopted andpublished guidelines providing details
relating totheapplication andadministration ofCode 9958 oftheCustoms Tariff (Revenue Canada Memorandum D9-1-10,
21May 1993).
3TheImportation ofPeriodicals Regulations (C.R.C., c.533asamended on30April 1996) describe thereview process
ascarried outbyanofficer ortheDeputy Minister oftheDepartment ofNational Revenue forCustoms andExcise.
4AnActtoamend theExcise TaxActandtheIncome TaxAct,S.C. 1995, c.46.
5Ibid.,s.38.
6Ibid.,ss.35(1) and35(5).WT/DS31/R
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(ii) inwhich more than20percentoftheeditorial material isthesame orsubstantially
thesame aseditorial material thatappears inoneormore excluded editions ofone
ormore issues ofoneormore periodicals; and
(iii) contains anadvertisement thatdoesnotappear inidentical form inalltheexcluded
editions.
There aretwoexclusionary provisions. Under thefirst,theparticular edition isnotasplit-run edition
ifitisanedition thatisprimarily circulated outside Canada. Ineffect, thisisanexemption foreditions
thataredistributed inCanada, butaremainly distributed outside Canada. Under thesecond, aparticular
edition ofanissue ofaperiodical thatwould otherwise beasplit-run edition isnotasplit-run edition
ifalltheadvertisements intheparticular edition appear inidentical form inoneormore editions of
thatissue thatareprimarily distributed outside Canada andthathaveacombined circulation outside
Canada thatisgreater thanthecirculation inCanada oftheparticular edition. Thepurpose istoprevent
apublisher fromqualifying forthisexemption byhaving alltheadvertisements initsCanadian split-run
edition alsoappear inoneofitsexcluded editions thathasaverysmall circulation.7
2.8 Further,agrandfatheringprovisionprovideslimited"grandfathering"treatmenttocertainexisting
periodicals thatdistributed Canadian split-run editions priorto26March 1993. Aparticular periodical
iseligible for"grandfathering" treatment andtherefore notsubject tothetaxonsplit-runs ifthenumber
ofsplit-run editions peryeardoesnotexceed thenumber ofsplit-run editions thatwere distributed
during the12-month period ending on26March 1993, provided thattheperiodicals continue tobe
similar ineditorial content anddirection tothesplit-run editions distributed before thatdate. Ifthe
number ofsplit-run editions peryearisincreased, thetaxapplies totheadditional split-run editions.8
2.9 Depending onthecircumstances, theperson responsible forpaying thetaxisthepublisher,
aperson connected withthepublisher, thedistributor, theprinter orthewholesaler ofthesplit-run
edition. (TheExcise TaxActstipulates thataperson isconsidered tobeconnected toanother person
ifoneofthem iscontrolled bytheother orifbothofthem arecontrolled bythesame person.9A
corporation iscontrolled byaparticular person if50percentormore ofitsshare ofcapital withvoting
rights belongs tothatperson ortopersons withwhom thatperson doesnotdealatarm'slength. A
partnership iscontrolled byaparticular person iftheperson orpersons withwhom thatperson does
notdealatarm'slength isorareentitled to50percentormore ofthepartnership 'sincome.10)The
responsible person isthefirstofthese persons whoresides inCanada.11Theresponsible person can
bedomestic- orforeign-owned orcontrolled. Inorder toensure enforcement andcollection ofthe
tax,thetaxisimposed onaperson whoresides inCanada. Thepersons connected withtheresponsible
person arejointly andseverally liable forpayment ofthetax.12Aswell, where theresponsible person
isadistributor, aprinter orawholesaler (andifthere ismore thanone), theyarejointly andseverally
liable forpayment ofthetax.13Where aperson other thanthepublisher paystheexcise taxinrespect
ofasplit-run edition, theperson isdeemed tohavepaidthetaxonbehalf ofthepublisher ofthe
periodical. Thelegislation authorizes theperson torecover theamount ofthetaxfromthepublisher
7Ibid.,ss.35(5).
8Ibid.,s.39.
9Ibid.,ss.35(2).
10Ibid.,ss.35(3).
11Ibid.,ss.35(1).
12Ibid.,s.41.1.
13Ibid.,s.41.2.WT/DS31/R
Page4
inacourt ofcompetent jurisdiction ortodeduct orwithhold theamount from anyamount payable
bytheperson tothepublisher ordistributor oftheperiodical.14
C. Funded andCommercial Postal Rates
2.10 In1981, theCanada PostCorporation (hereafter called Canada Post) wasestablished bythe
Parliament ofCanada asaCrown corporation pursuant totheCanada PostCorporation Act(CPC Act).15
Crown corporations arecreated byoneofthree methods: anActofParliament; letters patent under
theCanada Business Corporations Act; orArticles ofIncorporation under theCanada Business
Corporations Act. According toatreatise onCrown lawcitedbyCanada, Crown corporations are
created toseparate themanagement ofanactivity fromcontinuous partisan intervention andtoprovide
independence fromtheclose financial controls within thegovernment departmental structure.16The
Government ofCanada gains control over, andaccountability from, Crown corporations primarily
through theFinancial Administration Act(FAAct)anditsRegulations. TheFAActendeavours to
strike abalance between thedesires forpublic accountability andforprivate industry independence.
Parliamentisrequiredtoapprovethecreation,mandate,andfinancingofnewparentCrowncorporations.
Government approval isrequired forannual corporate plans operating andcapital budgets, andmajor
corporate acquisitions. TheFAActandtheCPCActdefine theresponsibilities forthedirection and
daily operation ofthecorporations.
2.11 TheCanada Postpublication entitled Publications MailPostal Rates,(effective 4March 1996),
describes thethree categories ofpublications mailpostal rateswhich arethesubject ofthisdispute:
the"funded" publications rates andthecommercial "Canadian" andcommercial "International"
publications rates. Thefirsttwocategories apply toperiodicals published andprinted inCanada.
"Funded" ratesareratesthataresubsidized bytheCanadian Government andcommercial ratesare
forpublications ineligible for"funded" rates. "Canadian" rates arecommercial rates available to
Canadian publications and"International" commercial ratesapply toallforeign publications mailed
inCanada.
(i) "Funded" rates
2.12 Since itsincorporation, theGovernment ofCanada hasprovided funding toCanada Postto
support special ratesofpostage foreligible publications through thePublications Distribution Assistance
Program (hereafter called theProgram). TheProgram, which wasdeveloped topromote Canadian
culture, provided funding through Canada Posttoeligible Canadian publications, including periodicals,
mailed inCanada fordelivery inCanada. "Funded" postal ratesareavailable toCanadian-owned and
-controlled paidcirculation publications thatarepublished andprinted inCanada andmeet certain
editorial andadvertising requirements. InJanuary 1990, theGovernment announced plans togradually
phase outtheProgram andreplace itwithasystem ofdirect funding toeligible publications. Since
theannouncement, funding available fortheProgram hasbeengradually reduced. On30April 1996,
thecurrent policy andfunding agreement concerning theProgram between Canada Postandthe
Department ofCanadian Heritage (hereafter called Canadian Heritage) wassettoexpire. Atthattime,
available funding would havebeendirected toeligible publishers through areplacement program.17
14Ibid.,ss.41.3(2).
15R.S.C. 1985, c.C-10.
16P.Lordon, Crown Law(Toronto: Butterworths 1991) at49,57and58.Thenextfivesentences arealsofrom this
source.
17Canada Gazette ,PartII,Vol130,No.10,Newspapers andPeriodicals Regulations, repeal, SOR/96-209, 23April
1996, Regulatory Impact Analysis Statement.WT/DS31/R
Page5
2.13 TheProgram anditsfunding structure wasextended forthree years through aMemorandum
ofAgreement (MOA), signed inMarch 1996 andeffective 1May1996, between theDepartment of
Communications (now theDepartment ofCanadian Heritage) andCanada Post.18Thisnewagreement
provides forpayments offunds inquarterly instalments byCanadian Heritage toCanada Post"in
exchange forproviding prescribed postage ratesforpublications deemed eligible tothePublications
Assistance Program", andthetransfer oftheprogram administration from Canada PosttoCanadian
Heritage.19Canadian Heritage hadrequested within thenewagreement thatCanada Postinitiate the
completeremovaloffundedpublicationsmailfromtheregulationsassociatedwiththeCPCAct,effective
April 1996.20On23April 1996, Canada Gazette published arepeal oftheNewspapers andPeriodicals
Regulations pursuant toSubsection 19(1) oftheCPCAct. Therevocation wasintended tofacilitate
thetransfer ofeligibility assessment fromCanada PosttoCanadian Heritage, toreduce theProgram 's
administrative costswhile expediting andsimplifying modifications toitspolicies21,andtoallow Canada
PostandCanadian Heritage torespond more appropriately andmore rapidly toProgram andcustomer
needs.
2.14 TheamountsauthorizedbytheMOAareCD$58millionfortheperiodcommencing1May1996
andending 31March 1997; CD$57.9 million fortheperiod 1April 1997 to31March 1998; and
CD$47.3 million fortheperiod 1April 1998 to31March 1999.
2.15 Canadian Heritage administers theeligibility requirements fortheProgram based onthecriteria
specified inSchedule AtotheMOA. Canadian Heritage isresponsible fortheadministration ofthe
eligibility requirements fortheProgram, andCanada Postmustaccept fordistribution allpublications
thatareeligible under theProgram oncethepublication isapproved byCanadian Heritage. Foreligible
publications toreceive funded rates, thepublisher mustfirstenter intoasalesagreement withCanada
Postpriortoposting under theProgram. Rates ofpostage forpublications eligible under theProgram
aresetoutinSchedule CoftheMOA andareasfollows:
a)First 10,000 copies ofanissue addressed toBona FideSubscribers andnewsdealers in
Canada:
perkgorfraction thereof: Year 1:$0.390
Year 2:$0.395
Year 3:$0.405
or,perindividually addressed copywhichever isthegreater:
Year 1:$0.078
Year 2:$0.079
Year 3:$0.081
b)Copies exceeding thefirst10,000 copies ofanissue addressed toBona FideSubscribers
andnewsdealers inCanada:
perkgorfraction thereof: Year 1:$0.430
Year 2:$0.435
Year 3:$0.445
or,perindividually addressed copy, whichever isthegreater:
Year 1:$0.086
Year 2:$0.087
18Memorandum ofAgreement (MOA) Concerning thePublications Assistance Program Between theDepartment of
Communications andCanada PostCorporation.
19Canada Gazette ,PartII,Vol130, No.10.
20Ibid.
21Ibid.WT/DS31/R
Page6
Year 3:$0.089
(Year 1:1May1996 to31March 1997; Year 2:1April 1997 to31March 1998;
Year 3:1April 1998 to31March 1999.)
2.16 Inorder tobeeligible forfunded rates, Canadian publications mustgenerally meetthefollowing
criteria: (i)produced byaperson orcompany whose primary business ispublishing22;(ii)Canadian
ownership andcontrol; (iii)published, printed andmailed inCanada; (iv)edited inCanada23;(v)
eligible editorial categories24;(vi)minimum paidcirculation requirement25;(vii)maximum advertising
allowance26;(viii) frequency27;and(ix)minimum price.28
(ii) Commercial "Canadian" andcommercial "International" rates
2.17 CanadaPosthasauthoritytosetitscommercialratesoutsideofregulation,pursuanttosubsections
16(1) and21(a) oftheCPCAct,foranyperson whohasentered intoanagreement withCanada Post
for(a)thevariation ofratesofpostage onthemailable matter ofthatperson inconsideration ofhis
mailing inbulk, preparing themailable matter inamanner thatfacilitates theprocessing thereof or
receiving additional services inrelation thereto;...".29Inorder totakeadvantage ofthisprovision and
receive commercial postal ratesandservice, apublisher must enter intoanagreement withCanada
Post.ForaCanadianpublication,thisagreementisthe"PublicationsMailProductServiceAgreement"30,
andforaforeign publication mailed inCanada, thisagreement isthe"International Publications Mail
Product (Canadian Distribution) Sales Agreement".31These arrangements areintended tobenefit
Canadianandforeignpublicationsandtheirsubscribersbyreducingmailingcostsandimprovingdelivery
standards. Appendix Aofeach"Agreement" contains thecommercial "Canadian" andcommercial
"International" rates. These ratesareidentical tothose found inthePublications MailPostal Rates
(referred toinparagraph 2.11) which divides commercial ratesintothose thatapply for(i)mailservice
forCanadian publications thatareineligible for"funded" rates(Rate Code 5);and(ii)mailservice
forinternational publications (Rate Code 6orwhat arecalled "International" ratesinthisdispute).
Further, special agreements maybeentered intoforbothCanadian andnon-Canadian publications
whereby terms andconditions (including ratesofpostage) maybeestablished onacase-by-case basis.
22Funded rates cannot beusedtopromote aspecific business, service, fraternal, trade orprofessional organizations
(MOA).
23AneligiblepublicationmustbeeditedbypersonsresidinginCanada (editingencompasses thecommi ssioningofeditorial
material andartwork, supervising writers, illustrators andphotographers regarding thefinalformat ofthematerial, aswell
aslaying out,copy editing andproofreading, andotherwise preparing thecontents forprinting) (MOA).
24Eligible publications must bepublished forthedissemination tothepublic consisting ofeither news, comment and
analysis ofnews andarticles ontopics ofcurrent public interest; orarticles onreligion, thesciences, agriculture, forestry,
thefisheries, social orliterary criticism, reviews ofliterature orthearts,orbeanacademic orscholarly journal; orarticles
promoting public health andpublished byanon-profit organization administered onanational orprovincial basis (MOA).
25Nolessthan50percentofaneligible publication 'stotalcirculation must bepaidcirculation (MOA).
26Nomore than70percentofthespace, including advertising inserts, inaneligible publication maybedevoted to
advertising (MOA).
27Itmust bepublished notlessthantwice ayearandnotmore than56times ayear(MOA).
28Itmust have astated subscription price of$0.50 ormore percopy and$6.00 ormore peryear.
29R.S.C. 1985, c.C-10, s.21(a).
30Canadian Publications Mail Products Sales Agreement, 1March 1995.
31International Publications Mail Product (Canadian Distribution) Sales Agreement, 1March 1994.WT/DS31/R
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2.18 Publications mustmeetthesixcriteria enumerated below inorder fortheirpublishers toenter
intoeithera"PublicationsMailProductsSalesAgreement"oran"InternationalPublicationsMailProduct
Sales Agreement". Additionally fortheformer, thepublication "must beanewspaper, newsletter or
periodical, published, printed andmailed inCanada".32Additionally forthelatter, thepublications
"must beanewspaper, newsletter orperiodical printed outside ofCanada orregistered under Rate
Code 5prior to1March 1992".33
Sixcriteria:
(i)published forthepurposes ofdisseminating tothepublic news, articles containing comments
onoranalysis ofthenews, andarticles withrespect toother topics currently ofinterest tothe
general public;
(ii)devoted primarily tooneormore ofreligion, thesciences, agriculture, forestry, the
fisheries, social orliterary criticism orreviews ofliterature orthearts,oracademic orscholarly
writings;
(iii)published atafrequency ofnotlessthanfourtimes ayear;
(iv)addressed toasubscriber, non-subscriber, company ortoanewsdealer inCanada;
(v)containing notmore than70percentofthespace devoted toadvertising inmore than
50percentoftheissues published during anytwelve month period; and
(vi)published byoratthedirection ofaperson whose principal business ispublishing.
2.19 Theratesforthecommercial "Canadian" andcommercial "International" publications mail
service aresummarized asfollows:
Commercial "Canadian" rates:
Minimum postage peraddressed copy(100g orless) Price percopy
Local rural rates $0.103
Local urban rates $0.231
Regional rates $0.184
National rates $0.378
Commercial "International" rates:
Minimum postage peraddressed copy(100g orless) Price percopy
Rates forforeign magazines, newspapers or
newsletters mailed inCanada (inbound) $0.436
Twosub-categoriesincludediscountsforpalletizationandby-pass.Non-subsidizedCanadianpublications
canreceive discounts of$0.01 to$0.02 percopyifpalletized, anddiscounts ranging from $150.00
to$200.00 pertruckloadforaby-pass ordownstream entry. These discounts arenotavailable generally
toforeign publications mailed inCanada. Further, thecommercial "Canadian" andcommercial
"International" categories havenotbeensubject toregulation since 1994 and1992, respectively.34
32Canadian Publications Mail Products Sales Agreement, para. 5.1.
33International Publications Mail Product (Canadian Distribution) Sales Agreement, para. 4.1.
34SOR/94-210, 24February 1994 andSOR/91-641, 7November 1991.WT/DS31/R
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III. MAIN ARGUMENTS
3.1 TheUnited States asked thePanel tofindthat:
(a) Tariff Code 9958 isinconsistent withArticle XIofGATT 1994;
(b) PartV.IoftheExcise TaxActisinconsistent withArticle III:2ofGATT 1994, or
inthealternative, Article III:4ofGATT 1994; and
(c) Theapplication byCanada Postoflower postal rates todomestically-produced
periodicals under the"funded" and"commercial" ratesystems isinconsistent with
Article III:4ofGATT 1994, andisnotadomestic subsidy within themeaning of
Article III:8ofGATT 1994.
3.2 Canada asked thePanel tofindthat:
(a) Tariff Code 9958 isjustifiable under Article XX(d) oftheGATT 1994;
(b) Article IIIofGATT 1994 doesnotapply toPartV.IoftheExcise TaxAct,andif
thePanel decides thatitdoesapply, PartV.Iisconsistent withArticle IIIofGATT
1994;
(c) Article III:4ofGATT 1994doesnotapply tothecommercial ratescharged byCanada
Post, andthefunds paidbytheDepartment ofCanadian Heritage toCanada Postfor
the"funded" ratesareallowable subsidies pursuant toArticle III:8(b) ofGATT 1994.
A. Tariff Code 9958 -Import Prohibition
(i) Article XI:1
3.3 TheUnited States argued thattheCanadian import prohibition ontheproducts listed inTariff
Code 9958 isaviolation ofArticle XI:1ofGATT 1994, which prohibits quantitative restrictions on
imports. Byitsterms, Tariff Code 9958 applies bothtospecial Canadian editions ofmagazines that
arealsopublished inversions targeted atreaders inother countries (i.e.split-runs) andtomagazines
produced solely fortheCanadian market. Ineither case,theimport banapplies iftheperiodical contains
evenasmall amount ofadvertising directed primarily atCanadian readers -single advertisement in
thecaseofsplit-runs andfivepercentormore oftheadvertising space inthecaseofmagazines
generally. Thebaneliminates these magazines fromtheCanadian magazine market, andensures that
onlyCanadian magazines cancompete fordomestically-oriented advertising. Canada didsoforthe
specific purpose ofensuring thatCanadian magazines canenjoy amonopoly onthesaleofmagazines
containing suchadvertisements. Advertising isanimportant source ofrevenue formagazine publishers.
Thus, granting domestic magazines amonopoly onlocal advertising provides them acompetitive
advantage overforeign-produced magazines thataredenied therighttocarry suchadvertisements.
3.4 Canada argued thattheUnited States claim thattheCanadian legislation creates a"monopoly"
forCanadian publishers ofadvertisements directed attheCanadian market isinconceivable intheNorth
American environment. Theexistence of"spillover" advertising, whereby advertisements forgenerally-
available products inwide-circulation USmagazines automatically reach theCanadian public, with
verysignificant consequences forthecompetitiveness oftheCanadian industry, issufficient byitself
toprevent thecreation ofanytruemonopoly. The"monopoly" effect complained ofbytheUnited
States hasnothing todowiththefirstpartoftheCode, dealing withsplit-runs, orwiththeExcise
TaxAct. Itistruethatthesecond partoftheTariff Code prevents theentry offoreign magazinesWT/DS31/R
Page9
withsubstantial amounts ofadvertising directed specifically atCanadian, asameans ofpreventing
aneasywaytogetaround thesplit-run prohibition. However, the5percentruleapplies onlytoa
limited typeofadvertising withCanadian addresses andphone numbers, andthisaspect ofthepolicy
hasnotbeencarried forward totheexcise taxprovisions, which arestrictly limited tothesplit-run
phenomenon.
(ii) Article XX(d)
3.5 Canada added thatTariff Code 9958 isameasure intended tosecure theattainment ofthe
objectives ofSection 19oftheIncome TaxAct.Theissueiswhether Tariff Code 9958canbejustified
asanecessary measure within themeaning ofArticle XX(d). Because itforms anintegral partofa
package ofmeasures withasingle objective, itcanbesojustified onanatural andreasonable reading
ofthetreaty language. Canadian public policy forthemagazine industry isdesigned toprovide
Canadians withadistinctive vehicle fortheexpression oftheirownideas andinterests. Suchavehicle
facesenormous competition fromforeign magazines forbothadvertising andreadership. Public policy
measures aimtobalance theneedtoestablish andmaintain aplace forCanadian periodicals intheir
owndomestic market while atthesametimeensuring thatCanadians haveunrestricted access toforeign
periodicals. Toachieve thislong-standing policy objective, government policy hasfocused ontwo
areas: advertising anddistribution. TheGovernment ofCanada hasintroduced aseries ofmeasures
toensure thatmagazines witheditorial content developed fortheCanadian market cancompete for
thelimited advertising revenues. These measures include Tariff Code 9958, Sections 35-41 ofthe
Excise TaxActandSection 19oftheIncome TaxAct. Section 19oftheIncome TaxActallows a
deduction foradvertising directed attheCanadian market. Tariff Code 9958restricts theimportation
intoCanadaofperiodicalswhoseadvertisinghasbeenpurchasedespeciallytoreachaCanadianaudience.
Thegeneral objective ofthese measures istohelptheCanadian periodical industry raiseadvertising
revenues. Tariff Code 9958ensures theachievement ofthisgoal, withSection 19oftheIncome Tax
Act.
"Secure compliance"
3.6 TheUnited States referred tothepanel onUnited States -Standards forReformulated and
Conventional Gasoline ("US-Standards forGasoline") which states thataparty invoking anexception
under Article XX(d) hastodemonstrate thefollowing elements:
"(1) thatthemeasures forwhich theexception arebeing invoked -thatis,the
particular trade measures inconsistent withtheGeneral Agreement -secure
compliancewithlawsorregulationsthemselvesnotinconsistentwiththeGeneral
Agreement;
(2) thattheinconsistent measures forwhich theexception isbeing invoked are
necessary tosecure compliance withthose lawsorregulations; and
(3) thatthemeasures areapplied inconformity withtherequirements ofthe
introductory clause ofArticle XX.
Inorder tojustify theapplication ofArticle XX(d), alltheabove elements havetobesatisfied".35
35Panel Report onUnited States -Standards forReformulated andConventional Gasoline ,adopted on20May1996,
WT/DS2/R, para. 6.31 (emphasis inoriginal).WT/DS31/R
Page10
3.7 Canada ’simport prohibition failstomeetanyofthese requirements. Withrespect tothefirst
requirement, Canada hasfailed todemonstrate thatitsimport bansecures compliance withSection 19
oftheIncome TaxAct. Canada hasnotclaimed thattheimport banismeant toenforce theincome
taxprovisions,onlythattheimportbanandtheincometaxmeasuresadvancethesameobjective(through
different means), which istochannel alldomestic advertising todomestic magazines.
3.8 Canada noted thattheconformity oftheIncome TaxActwithGATT 1994 isnotbeing
challenged. Tariff Code 9958 andSection 19oftheIncome TaxActareconceived todealwiththe
problem ofsplit-runs withinserted Canadian advertising. Theideaisthattheincome taxprovision
wouldcovermagazinesprintedinCanadaandthebordermeasurewouldcovermagazinesprintedoutside
thecountry. Theeffectiveness ofthenon-deductibility provision standing byitself would obviously
beverylimited. Theproblem isthatofforeign companies thatsoldintotheCanadian market butare
notsubject toCanadian income tax.Thiswould bemore thanaloophole, given theopennature of
theCanadian economy andthedegree ofimport penetration. Itwould largely destroy theeffectiveness
oftheincome taxmeasures.
3.9 Canada drew thePanel'sattention tothepanel report onEEC-Regulations onParts and
Components36("EEC-Parts andComponents ")which introduces averystringent testfortheapplication
ofArticle XX(d), under which thenon-conforming measures havetobenecessary fortheenforcement
ofanother law,andnotmerely inorder toensure thattheobjectives ofthatlawbefulfilled. This
testisentirely appropriate where theissueistheenforcement ofregulatory statutes andordinary fiscal
measures designed toraiserevenue, where compliance withthestatute isvirtually synonymous with
theattainmentofitsobjectives.If,forexample,anenvironmentalmeasureiscompliedwith,itsobjective
isipsofacto attained.
3.10 TheEEC-Parts andComponents panel interpreted Article XX(d) interms ofenforceability
asopposed tomeasures designed toensure thattheobjectives ofanother measure arenotundermined.
Canada isnotchallenging thatdecision oritsreasoning. Itmakes sense inthecontext ofregulatory
statutes withprohibitions oreventaxstatutes thataredesigned toraiserevenue andprevent taxevasion.
Itisdoubtful, ontheother hand, thatanenforceability testismeaningful inthecaseofafiscal orother
economic incentive where formal compliance isnottherealobject, andsubstantial compliance can
notbeseparated fromtheunderlying social andeconomic objectives themeasure isdesigned tosecure.
Inthecaseofafiscal incentive whose solepurpose istoinfluence business decisions inacertain
direction, compliance hastobejudged interms ofeffectiveness. Canada suggests, therefore, thatthe
application oftheexception inArticle XX(d) should takeaccount ofthenature ofthemeasures under
consideration, andthatthetestintheEEC-Parts andComponents panel decision should notberigidly
applied without taking account ofthese circumstances.
3.11 Further, theUSconsideration thatcompliance isalways amatter ofenforceability, nomore
noless,maybeavalidproposition, asheldinEEC-Parts andComponents ,formandatory legislation
based onprohibitions orexactions. Compliance andeffectiveness aresynonymous inthecaseofthe
vastmajority oflegislative measures. ButSection 19isnotanordinary taxmeasure, designed toraise
revenue forthepublic purse orprevent taxevasion. Inthecaseofafiscal orother economic incentive
whose solepurpose istoinfluence business decisions inacertain direction, compliance hastobejudged
interms ofeffectiveness aswellasenforceability. Thedistinction isbetween formal compliance and
realorsubstantial compliance, which inthiscasehasnothing todowithwhether deductions areproperly
claimed butwiththepolicy behind thisentire setofmeasures.
36Panel Report onEuropean Economic Community -Regulations onParts andComponents, adopted on16May1990,
BISD 37S/132.WT/DS31/R
Page11
3.12 TheUnited States argued thatthepanel onEEC-Parts andComponents dismisses theargument
thatArticle XX(d) permits governments tomaintain GATT-inconsistent measures to"ensure the
attainment oftheobjectives of[GATT-consistent] lawsandregulations" rather thantoprevent violations
oftheGATT-consistent lawsorregulations.37Thatpanel stated thattheinterpretation itrejects would
make thefunction ofArticle XX(d) "substantially broader" andwould notbeconsistent withthefact
thatArticle XX(d) applies onlyinthespecific circumstances setoutinthatparagraph -namely, to
secure compliance withGATT-consistent lawsorregulations.
3.13 Canada 'sclaim thattheimport bandoesnotseek"formal compliance" withSection 19ofthe
Income TaxAct,butrather "real orsubstantial compliance", which Canada admits "hasnothing to
dowithwhether deductions areproperly claimed", issimply another wayofstating thattheimport
banhelps advance thesame overall (protectionist) aimasSection 19.However, theimport bandoes
not"secure compliance" withSection 19,andthusdoesnotfallwithin thepurview ofArticle XX(d).
Ifaccepted, Canada 'sviewofArticle XX(d) would allow WTO Members toadopt allmanner ofGATT-
inconsistentmeasuresonthegroundthattheyfurtherthesameobjectivesasotherprotectionistlegislation.
AstheEEC-Parts andComponents panel makes clear, thephrase "secure compliance" doesnotreach
measures thatmerely helpensure thatdomestic policy goals arerealized.
"Necessary"
3.14 TheUnited States noted thatthepanel report onUnited States -Section 337oftheTariff Act
of1930 ("US-Section 337")observed that:
"[A]contracting party cannot justify ameasure inconsistent withanother GATT provision as
'necessary 'interms ofArticle XX(d) ifanalternative measure which itcould reasonably be
expected toemploy andwhich isnotinconsistent withother GATT provisions isavailable to
it".38
Thenormal wayfortaxauthorities toenforce income taxprovisions istoaudittherelevant taxreturns,
andtomake adjustments tothose returns where necessary tosecure compliance. Tax,civil, orcriminal
penalties maybeimposed where warranted inindividual cases. Such measures would normally be
entirely consistent withGATT andinanyevent would beapplied toparticular taxpayers, nottoimports.
Itisextraordinary forincome taxenforcement measures totaketheform ofrestrictions ontrade in
goods. Canada hasdemonstrated nobasisforwhy, ofallpossible measures, itisnecessary toimpose
ablatantly GATT-inconsistent import bantosecure compliance withSection 19oftheIncome Tax
Actnorwhynormal taxenforcement procedures were insufficient.
3.15 Canada stated thatthepanel inUS–Section 33739heldthattheterm"necessary" required
theuseoftheleasttrade-restrictive measure available. Canada submits thattherearenoothermeasures,
lessrestrictive orotherwise, thatwould accomplish theobjective. Ifsplit-runs could beimported,
withCanadian advertisements oftenplaced bybusinesses forwhich Canadian taxliability isirrelevant,
theprogram would simply nolonger work.
3.16 Canada therefore reiterates itssuggestion thattheapplication oftheexception inArticle XX(d)
should takeaccount ofthenature ofthemeasures under consideration, andthatthetestintheEEC-
Parts andComponents andtheUS-Section 337panel decisions should notberigidly applied without
37Ibid., para. 5.17 (emphasis added).
38Panel Report onUnited States -Section 337oftheTariff Actof1930,adopted on7November 1989, BISD 36S/345,
para. 5.26.
39Ibid.,at392, paras. 5.25-5.27.WT/DS31/R
Page12
taking account ofthese circumstances. ThePanel should recall thatCode 9958 andtheincome tax
provisionhavealwaysbeenconsideredpartofasingle,indivisiblepackageofcomplementary,indivisible
measures andshould betreated assuchforthepurposes ofArticle XX(d).
3.17 TheUnited States stated thatevenifoneweretocredit Canada 'sargument thatArticle XX(d)
covers measures necessary tosecure theattainment ofthedomestic policy goals embedded inother
laws, theimport banwould stillnotbe"necessary" forsuchapurpose. Theobjective ofSection 19
istosupport Canada 'smagazine industry. Canada hasnotshown whyGATT-consistent measures
(such assubsidies paiddirectly toproducers) would notreasonably beavailable toitforadvancing
thisobjective.
(iii) Chapeau toArticle XX
3.18 Canada noted thateachterm ofArticle XX(d), including itsPreamble, should begiven
consideration when examining whether Tariff Code 9958 could bejustified asanecessary measure
within themeaning ofthetreaty. Since Tariff Code 9958isa"measure" directed against imports from
allforeign countries andnotonlytheUnited States, itis"notapplied inamanner which would constitute
ameansofarbitraryorunjustifiablediscriminationbetweencountrieswherethesameconditionsprevail",
asstated inthepreamble toArticle XX. Similarly, having regard totheapplication ofTariff Code
9958 since itsadoption, itcould notbeclaimed thatithasbeen"applied inamanner which would
constitute ...adisguised restriction oninternational trade". Tariff Code 9958 isnotapplied insuch
awayastoconstitute arestriction oninternational trade, astheevidence sostrongly demonstrates,
nordoesitprohibit theimportation offoreign periodicals intoCanada orthreaten theirdominant position
intheEnglish-Canadian market place.
3.19 TheUnited States considered thatbecause theimport bandoes notsatisfy theterms of
paragraph (d)ofArticle XX,thePanel doesnotneedtoascertain whether ornotitisinconformity
withtheintroductory clause ofArticle XX. However, were thePanel toreach thisissue, itshould
findthatCanada ’simport bandoesnotmeettherequirements oftheintroductory clause, because the
import banconstitutes "ameans ofarbitrary andunjustifiable discrimination between countries where
thesame conditions prevail," andisalso"adisguised restriction oninternational trade." IntheUS
-StandardsforGasolinecase,theAppellateBodystatesthatwhateverelsetheterm"disguisedrestriction
oninternational trade" means, itcould bereadtoencompass any"...restrictions amounting toarbitrary
orunjustifiable discrimination ininternational tradetaken under theguise ofameasure formally within
theterms ofanexception listed inArticle XX".40Theimport ban’s"arbitrary" and"unjustifiable"
nature isapparent fromtheverystructure ofTariff Code 9958. Application oftheimport bandepends
onadvertising content andonsalesinmore thanonecountry -factors thatarerelevant onlyforpurposes
ofdistinguishing between those categories offoreign-produced magazines thatcompete withCanadian
magazines forCanadian advertising revenues andthose thatdonot.Theimport bantherefore constitutes
a"disguised restriction oninternational trade".
3.20 Moreover, theexpression "between countries" inthechapeau toArticle XXincludes a
comparison between Canada andother countries aswellasbetween countries other thanCanada. The
import prohibition barsonlymagazines produced outside Canada, thusdiscriminating infavour of
magazines produced inCanada. There arenorelevant conditions prevailing inCanada orelsewhere
thatwould justify thediscrimination imposed onforeign-produced split-runs. Thus, forthereasons
discussed above, theimport banconstitutes "arbitrary orunjustifiable discrimination between countries
where thesame conditions prevail".
40Appellate Body Report onUnited States -Standards forReformulated andConventional Gasoline ,adopted on20May
1996, WT/DS2/AB/R at25.WT/DS31/R
Page13
3.21 Canada considered thattheUnited States argued thattheprohibition onarbitrary orunjustifiable
discriminationrequiresacomparisonbetweenothercountriesandCanada,andnotjustbetweencountries
other thanCanada. This, ineffect turns thisArticle intoanational treatment proviso. Animport
prohibition orrestriction could never meetthistest.Theeffect would betoremove Article XIalmost
completely fromtherange ofmeasures thatcanpotentially besubject toArticle XXderogations. The
interpretation suggested hereisnovel. Itdoesnotcorrespond tothewaythechapeau toArticle XX
hasbeeninterpreted inthepast,asshown bythe1982decision onUnited States -Prohibition onImports
ofTunaandTunaProducts fromCanada41,andthe1983decision onUnited States -Imports ofCertain
Automotive Spring Assemblies .42Inboththose decisions, aUSimport prohibition washeldnottobe
discriminatory within themeaning ofthechapeau toArticle XX,because itapplied equally toallforeign
countries exporting totheUnited States.
B. PartV.IoftheExcise TaxAct
3.22 TheUnited States argued thattheexcise taxwasdesigned specifically toshore upCanada 's
GATT-inconsistent import prohibition. Canada didnotdenythatthisisso,orthatthetaxwasdesigned
toeliminate thecompetition between split-run magazines anddomestically produced magazines. The
purpose ofthetaxisprotectionist -namely, toensure thatonlyCanadian magazine producers capture
alloftherevenues associated withadvertisements directed specifically atCanadian readers. The
Canadian magazine taxisdesigned toensure thatforeign-based publishers forego thecommercially
attractive option ofpublishing asplit-run edition ofanexisting magazine fortheCanadian market.
Anysuchedition willbehitwithaprohibitive 80percentexcise tax.Thismeans thatforeign magazine
producers contemplating salesintheCanadian market cannotmake useoftheeconomies ofscalethat
split-run editions provide. Split-run editions drive down perunitproduction costs byspreading the
expense ofproducing articles andphotographs overagreater number ofmagazines. TheCanadian
taxensures thatnoforeign-based publisher cantakeadvantage ofthose lower coststocompete inthe
Canadian market against wholly Canadian-produced magazines.
3.23 Canada 'spolicy ofprotecting itsdomestic publishing industry fromimport competition islong-
standing. Since theearly 1900s, Canada hasprovided subsidized, lower postal ratesexclusively to
Canadian-produced magazines.43More recently, Canada sought toprotect itsindustry bytargeting
imported periodicals soldintoCanada as"split-run" or"regional" editions. Apublisher produces a
"split-run"editionofasingleissueofamagazinebyseparating("splitting")theeditorialcontent(articles,
photographs, artwork, etc.)andtheadvertising content ofthemagazine. Thepublisher thenproduces
twoormore separate regional editions oftheissue ofthemagazine. Each edition shares some orall
oftheeditorial content, buttheadvertising content ineachedition maydiffer, because eachedition
isdistributed inadifferent geographic market andtheadvertising isdirected atthatspecific market.
3.24 Concerned thatimported split-run editions ofmagazines would divert advertising revenues
from domestic competitors, Canada enacted Tariff Code 9958 in1965 specifically toprohibit the
importation ofsplit-run editions aswellasanyother magazine containing amore thanademinimis
amount ofadvertising directed attheCanadian public, andin1976prohibited income taxdeductions
foradvertisements placed inforeign-owned publications. Within amatter ofafewdecades, however,
technological advances made itpractical forforeign-based publishers totransmit editorial material
electronically across theborder intoCanada andtopublish split-run editions inCanada, thusavoiding
41Panel Repor tonUnitedStates-ProhibitiononImportsofTunaandTunaProductsfromCanada,adoptedon22February
1982, BISD 29S/91 .
42Panel Repor tonUnitedStates-ImportsofCertainAutomotiveSpringAssemblies,adopted26May1993, BISD30S/107.
43AQuestion ofBalance, Report oftheTask Force ontheCanadian Magazine Industry ,1994 ("Task Force Report ")
at72.WT/DS31/R
Page14
theapplication ofTariff Code 9958. Toplugthisperceived loophole -andensure thatsplit-run editions
couldnotcompeteinthedomesticmarketplace-Canadaenactedapunitiveexcisetaxonsplit-runeditions
inDecember 1995.
3.25 Inanopinion dated 15August 1990, Investment Canada advised Time Canada Ltd.,acompany
controlled byTime Warner, Inc.ofNewYork, N.Y., thatitsproposal topublish aCanadian edition
ofSports Illustrated wasnotinconsistent withSection 15oftheInvestment Canada Act. Based on
thatopinion,on11January1993,Time-WarnerannouncedplanstopublishinCanadaaspecialCanadian
edition ofSports Illustrated magazine. Recognizing thatTariff Code 9958 could notberelied upon
tokeepaCanadian-produced version ofSports Illustrated orother foreign-based magazines outof
theCanadian market, theCanadian Government responded toTime’sannouncement on26March 1993,
byestablishing aTaskForce ontheCanadian Magazine Industry whose mandate was"torecommend
ways inwhich thecurrent measures [supporting theCanadian magazine industry] could bebrought
up-to-date".44
3.26 TheTaskForce concluded thatitintheabsence ofadditional legislation itwashighly likely
thatasignificant number ofUSsplit-runs would besoldinCanada. TheTaskForce estimated that
there were 53potential USconsumer magazine entrants intotheCanadian market, and70potential
USbusinessandtrademagazineentrants,andthatthemajorityofthesewouldactuallyentertheCanadian
market.45InDecember 1994, theCanadian Government announced itsintention toimplement theTask
Force ’srecommendation toimplement anewexcise taxonallsplit-run magazines thatcontain ads
directed atCanadians.46On25September 1995, theGovernment formally introduced BillC-103,
theexcise taxbill,intheCanadian House ofCommons. Inintroducing BillC-103, Minister ofCanadian
Heritage Dupuy stated: "Sports Illustrated Canada managed togetaround custom tariff9958, because
most ofitscontent wassentelectronically from theUnited States. Itwassimply aloophole inthe
tariff lawssince electronic transmission made itpossible toavoid tariff regulations. ...TaskForce
members explored several avenues andfinally concluded thattheproposed excise taxwasthebest
solution. Itcould bedesigned andimplemented inorder toavoid split-run editions".47Inthe
Parliamentary debate, oneMember described thebillinthefollowing terms:
"[I]tisimportant tobeveryclearabout thenature ofthebill.Inessence itisdesigned
tokillinternational competition between magazines, morespecifically magazines which
come intoCanada. Thekilling ofthatcompetition killsalotofgood things which
flowfrom competition".48
3.27 Canada argued thattheexcise taxmeasure isdesigned toprevent thediversion ofadvertising
tolow-cost publications reproducing recycled editorial content, attheexpense ofpublications created
forCanadians. TheExcise TaxActiscarefully designed todealwithaparticular combination of
circumstances. What ittargets isthecombination ofrecycled editorial content plusCanadian
advertisements. Magazines derive theirrevenues predominantly from thesaleofadvertising space
andfromthecirculation ofthemagazine. Advertising revenue isbyfarthemostimportant revenue
streamforCanadianmagazines,accountingfor60percentoftotalrevenue.Circulationrevenueaccounts
for33percentoftotalrevenue, or$287 million. Advertising revenue iscrucial fortheCanadian
44Task Force Report atiii.
45Task Force Report at50-52.
46News Release, Canadian Heritage, December 22,1994 at1.
47Commons Debates at14790-1 (Sept. 25,1995).
48Commons Debates at14795 (statement ofMr.Monte Solberg).WT/DS31/R
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magazine industry, allowing thepublisher toprovide themagazine atanaffordable costor,insome
cases, freeofcharge.
3.28 Canada explained thatthere isadirect correlation between circulation, advertising revenue
andeditorial content. Thelarger thecirculation, themore advertising amagazine canattract. With
greater advertising revenue, apublisher canafford more tospend oneditorial content. Themore a
publisher spends, themore attractive themagazine islikely tobetoitsreaders, resulting incirculation
growth. Similarly, alossofadvertising revenue willproduce a"downward spiral". Lessadvertising
entails lesseditorial, areduction inreadership andcirculation andadiminished ability toattract
advertising. Magazines canbesoldonnewsstands, orthrough subscriptions, ordistributed atnocost
toselected consumers. TheCanadian market isnotlarge, particularly when compared totheUSmarket.
Itisalsohighly fragmented fromalanguage perspective. There aretwoofficial languages inCanada
aswellasanumber ofotherlanguages. Canadian English-language publications facetough competition
onnewsstands; theyaccount foronly18.5percentofEnglish-language periodicals distributed on
newsstands, where space isdominated byforeign publications. Subscriptions arethemain source of
circulation revenue formost Canadian magazines.
3.29 Theconstraints imposed bythedemographics oftheCanadian market haveasignificant impact
ontheability ofamagazine primarily addressed toCanadian interests toobtain thebroad baseof
circulation thatisnecessary toachieve economic viability. Canadian magazine publishers compete
withother media forthesamelimited amount ofadvertising dollars intheCanadian market. Magazines
havebeenlosing market share toother media forms suchasdirect mailandtelevision. Itisunlikely
thattheshare heldbymagazines willincrease. Theamount ofmoney spent byadvertisers toreach
Canadian consumers isalsonotlikely togrow. Inaddition, "spillover" advertising (theability of
advertisers ofinternationally distributed products toreach Canadian consumers through USmagazines)
isafurther limitation onthecompetitive position oftheCanadian industry. Canadian periodical
publishers faceamajor competitive challenge intheirbusiness environment thatisnotcommon to
theircounterparts incountries withalarger population toserve. Thepivotal factisthepenetration
oftheCanadian market byforeign magazines. Canadian readers haveunrestricted access toimported
magazines. Atthesame time, Canadian readers havedemonstrated thattheyvalue magazines that
address theirdistinct interests andperspectives. However, foreign magazines dominate theCanadian
market. They account for81.4percentofallnewsstand circulation andslightly more thanhalf(50.4
percent) oftheentire circulation ofEnglish-language magazines destined forthegeneral public in
Canada.
3.30 Magazines areaparticularly good medium foradvertisers wishing toreach aspecific market
defined byregional location. BothCanadian andforeign magazines currently haveregional editions
intheirrespective home markets. Publishers andadvertisers recognize theimportance ofregional
editions asanadvertising vehicle. Themarketing strategy behind regional editions isthattheyallow
publishers toofferveryspecific advertising vehicles foradvertisers interested intargeting aparticular
audience,hencetheymaximizeadvertisingrevenues.SomeforeignpublishersviewCanadaasaseparate
"region"withintheirownnationalmarket.The"Canadian"regionaleditionproducedbysuchpublishers
generally contains thesame editorial content astheother editions butdifferent advertising content,
reflecting theaddition ofadvertisements from Canadian advertisers. Theterm"split-run" isusedin
Canada torefertosuchaCanadian regional edition. Foraforeign publisher, theincentive toproduce
aCanadian regional edition ofitsmagazine containing advertising directed atCanadians is,ofcourse,
profit. Aprofit fortheforeign publisher onlyrequires thattheincremental revenue fromadvertising
intheregional edition exceeds thecosts ofproducing thesplit-run. Since itsfixed costshavealready
beenrecovered inthelarger home market, thisoffers aninviting prospect foraforeign magazine.
3.31 TheTaskForce ontheCanadian Magazine Industry wasestablished asaresult oftheanticipated
publication ofSports Illustrated Canada .Sports Illustrated Canada wasasplit-run edition thatwasWT/DS31/R
Page16
printed inCanada using textthatwaselectronically transmitted fromtheUnited States. Theeditorial
content ofSports Illustrated Canada waslargely thesame asthecontent intheAmerican editions of
SportsIllustratedbutitcontainedadvertisementsthathadbeenspecificallypurchasedtoreachaCanadian
audience. Tariff Code 9958 wasnotapplicable toSports Illustrated Canada because itwasprinted
inCanada rather thanbeing imported. Theemergence ofSports Illustrated Canada asanewsplit-run
edition revealed thelimitations ofCanada 'sexisting policy instruments. Accordingly, theTaskForce
wascreated torecommend ways tobring these policy instruments uptodate. TheTaskForce 'smain
recommendation wasthatanexcise taxbeimposed onadvertising contained insplit-run editions of
periodicals thataredistributed inCanada. Theobject oftheexcise taxisnottodiscourage readership
offoreign magazines, buttomaintain anenvironment inwhich Canadian magazines canexistinCanada
alongside withimported magazines. Itisalsointended tofoster conditions inwhich indigenous
magazines canbepublished, distributed andsoldinCanada onacommercial basis. Thetaxisconsistent
withthebroad principles ofthecultural andmedia policies ofsuccessive federal governments.
(i) Article III:2 versus coverage under theGeneral Agreement onTrade in
Services (GATS)
Applicability ofArticle IIIofGATT 1994
3.32 TheUnitedStatesarguedthatCanada's80percentexcisetaxonsplit-runeditionsisinconsistent
withArticle III:2, firstsentence, ofGATT 1994 because itcreates anartificial distinction between
"split-run" magazines andallothertypesofmagazines andapplies the80percenttaxsolely tosplit-runs.
Itthereforeappliesahighertaxtocertaintypesofimportedmagazinesthanto"like"domesticmagazines.
3.33 Canada argued thatthisdispute concerns theprovision ofadvertising services toCanadian
advertisers andthatPartV.IoftheExcise TaxActwasameasure pertaining toadvertising services.
Amagazine publisher derives revenue fromboththesaleofthemagazine toconsumers andfromthe
saleofadvertising space toadvertisers. Thesaleoftherighttoadvertise toamagazine 'saudience
isanadvertising service. Asthetaximposed bytheExcise TaxActisimposed ontherevenues earned
through theprovision ofadvertising services byamagazine publisher, itisataxinrespect ofthe
provision ofanadvertising service. Multilateral trade disciplines onadvertising services fallwithin
GATS andnotGATT 1994; Article IIIofGATT 1994 doesnotapply toPartV.IoftheExcise Tax
Act.However, theterms ofreference direct thePanel toexamine onlytradematters within thepurview
ofGATT 1994. Thus, theexamination ofPartV.IoftheExcise TaxActinlightofGATS isnotcovered
bytheterms ofreference. Thefirstdistinctive aspect ofamagazine isitscharacter asapublic good
which islargely defined byitscontent. Thesecond distinctive feature isthemagazine 'sdualnature
inthatitisbothaconsumer good andanadvertising service withtwodistinct revenue streams. The
twoseparate revenue streams arecirculation revenue, which isderived from thesaleofagood, and
advertising revenue, which isderived fromthesaleofaservice. Thetwoconsumers arereaders and
advertisers. Allmagazines exhibit thisessential duality, which represents twodistinct economic outputs.
3.34 GATT 1994 establishes thestandards thatgovern international trade ingoods. Thecentral
obligations ofGATT 1994arethetariff concessions bywhich WTO Members commit themselves (in
Article IIandtheSchedules) tolimittheleveloftariffs theywillimpose onimports fromotherMembers.
Asecond obligation isthatofthemost-favoured-nation ("MFN") obligation inArticle I.Articles III
through XVII comprise mostoftheother substantive obligations ofGATT 1994. These obligations
apply togoods only. Article IIIofGATT 1994 setsoutthenational treatment obligation pertaining
totreatment ofimported goods. TheUruguay Round hasproduced asimilar framework fortrade in
services. Specific commitments arerecorded innational schedules thatareattached to,andform an
integralpartof,theGATS.EveryundertakingcontainedinascheduletoGATSisabindingcommitment
toallow thesupply oftheservice inquestion ontheterms andconditions specified andtonotimposeWT/DS31/R
Page17
anynewmeasures thatwould restrict entry intothemarket ortheoperation oftheservice. Intheabsence
ofanyscheduled commitments, there arenodisciplines ontheintroduction orthemaintenance of
measures ofanytype, eventhose thatmaybeinconsistent withmarket access ornational treatment
commitments. Advertising services appear ontheServices Sectoral Classification ListoftheSecretariat
under thebusiness sector.49Theprovision ofadvertising services isconsequently aGATS matter,
notaGATT matter.50Canada hasnotundertaken anycommitments inrespect oftheprovision of
advertising services initsSchedule ofSpecific Commitments. Intheabsence ofanyscheduled
commitments, therearenorestrictions onCanada inrespect oftheintroduction ofmeasures concerning
theprovision ofadvertising services. Inparticular, Canada isnotbound, norinanywayobliged,
toprovide national treatment toMembers oftheWTO inrespect oftheprovision ofadvertising services
intheCanadian market.
3.35 Thischallenge inrespect oftheExcise TaxActmeasures isanindirect attempt bytheUnited
States toobtain trading benefits thatithasbeenunable toobtain directly. Intheguise ofaGATT
goods argument, theUnited States nowattempts topersuade thePanel toallow ittohaveaccess to
aservice sector towhich, infullaccordance withtheterms ofinternational trade law,itispresently
notentitled. Should thePanel agree thataMember canobtain benefits under acovered agreement
thathavebeen expressly precluded under another covered agreement, thePanel risks introducing
uncertainty intotherelationship between GATS andGATT disciplines.
3.36 TheUnited States argued thattheCanadian argument wasbaseless because: (1)nothing in
GATS purports toreduce oreliminate theobligations thatGATT hasimposed since 1947; (2)GATS
doesnothaveprimacy overGATT withrespect tomeasures affecting trade ingoods; and(3)Canada
canobserve itsobligations under GATT Article IIIconsistently withtheprovisions ofGATS. There
isnoindication intheAgreement Establishing theWTO, GATT, orGATS, thatadoption ofGATS
wasintended asalimitation onthescope ofGATT 1994. Hadthenegotiators intended toadopt a
principle asfundamental astheoneCanada nowputsforward, theycertainly would haveprovided
foritinthetextofGATT, GATS orWTO Agreement. Intheabsence ofsuchanindication, oran
irreconcilable conflict -neither ofwhich Canada canpoint tohere-GATT andGATS mustbeapplied
according totheirterms. (Itistheoretically possible thatthesame measure maybecovered by,and
mayevenviolate, bothagreements. Indeed, ameasure mayviolate more thanonegoods agreement
aswell, provided themeasure iswithin thescope ofeachagreement andisinconsistent withthe
provisions ofeach.) Bycontrast, thenegotiators oftheWTO didestablish aruleforaddressing conflicts
between GATT 1994 andthemultilateral agreements ontrade ingoods inAnnex 1AtotheWTO
Agreement.51Bytheirterms,GATTArticleIII:2coverstaxesappliedtoproducts"directlyorindirectly",
andGATT Article III:4applies even tomeasures affecting services connected togoods, suchas
"distribution" and"transportation".
49Canada notes thatthere arethree Articles inPartIIIoftheGATS onSpecific Commitments, entitled Market Access,
National Treatment, andAdditional Commitments (Articles XVI, XVII andXVIII respectively). Ingeneral, theclassification
ofsectors innational schedules isbased ontheSecretariat 'sServices Sectoral Classification List. Thisreference listofthe
Secretariat isbased ontheCentral Product Classification (CPC) oftheUnited Nations. SeeServices Sectoral Classification
List: NotebytheSecretariat, MTN.GNS/W/120 (10July1991). SeealsoScheduling ofInitial Commitments inTrade in
Services: Explanatory Note, MTN.GNS/W/164 (3September 1993).
50Canada citesUnitedNations,Dept.ofInternationalEconomi candSocialAffairs,StatisticalOfficeoftheUnitedNations,
Provisional Central Product Classification ,Statistical Papers, Series MNo.77,U.N. Doc. ST/ESA/STAT/SER.M/77 (New
York: United Nations, 1991) at147-148, 173.Item8711states: saleorleasing services ofadvertising space ortime. Services
provided insoliciting advertising space ortimefornewspapers, other periodicals, andtelevision stations. Item8712 states:
planning, creating andplacement services ofadvertising. Planning, creating andplacement services ofadvertisements to
bedisplayed through theadvertising media. Item8719 states: other advertising services. Other advertising services not
elsewhere classified, including outdoor andaerial advertising services anddelivery services ofsamples andother advertising
material.
51SeeGeneral interpretive notetoAnnex 1A.WT/DS31/R
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3.37 Canada 'sdecision nottoinscribe relevant commitments onadvertising services initsGATS
schedule ofspecific commitments means thatCanada isnotassuming certain GATS obligations asto
those services. Canada doesnotthereby insulate allmeasures having anyconnection toadvertising
fromreview under anyotherWTO agreement. Sucharesult would improperly exaltGATS overGATT
andother WTO agreements. Canada 'sviewwould openahugeholeinGATT because there isno
shortage of"service-related" measures thatcould beusedtodiscriminate against imported goods. Under
Canada 'sinterpretation, aMember could, consistently withGATT: taxtherental offoreign cars,
place aprohibitive surcharge ontelecommunication services thatarecarried outusing imported
equipment, orimpose aroom taxonpersons staying athotels thatwerebuiltusing imported construction
materials. Although eachofthese measures relates totheprovision orconsumption ofaservice, each
alsoobviously imposes acompetitive disadvantage onimported products andprovides protection to
domestic production, andeachwould bewithin thescope ofGATT Article III.Itisirrelevant whether
ornottheexcise taxcould beameasure affecting trade inadvertising services. Theexcise taxisa
direct orindirect taxonaproduct, split-run magazine editions, within themeaning ofArticle III:2.
3.38 Canada noted thatitdoesnotclaim thatthere isaconflict between GATT 1994 andGATS
inthiscase. Thetwotreaties mayverywellapply intheirownrespective jurisdiction. GATS does
nothaveasitsobject, anddoesnotresult in,thecarving outofpartofthejurisdiction ofGATT 1994.
Thenegotiators ofGATS havemerely developed newrulesforasector ofinternational tradetowhich
theexisting rulesdidnotapply. Theyhavenot,indoing so,redefined thescope ofArticle IIIofGATT
1994. Theinterpretation suggested byCanada oftheareaofapplication ofArticle IIIwithrespect
totheprovisions relating toservices would havebeenthesame in1993before theGATS treaty came
intoforce. Theinterpretation isautonomous andbased onspecific terms ofArticle III:2aswellas
onitsintent anditsoriginal scope. Theissue ofoverlapping obligations orconflicts arises because
oftheexistence oftwotreaties, GATT 1994andGATS, which contain different sanctions withrespect
totheprovisions relating toservices. Because oftheexistence ofthese twotreaties which mayapply
toagiven measure, itisnecessary tointerpret thescope ofapplication ofeachsuchastoavoid any
overlap. Such overlaps between theareas ofGATT 1994 andGATS could leadtoconflicts inthe
application ofthetreaties which should beresolved onthebasisoftherulesofinterpretation ofpublic
international law.
3.39 TheCanadian interpretation ofthescope ofArticle III:2ofGATT 1994andArticle I:1ofGATS
avoids suchoverlaps, respects theautonomy ofeachtreaty andensures theharmonious application
thereof. Itisnotnecessary intheinstant casetodetermine theprimacy ofonetreaty overtheother.
ThePanel doesnothavetodecide thisquestion since there isnoconflict. What must bedecided is
theindividual scope ofArticle III:2ofGATT 1994 andArticle I:1ofGATS. PartV.1oftheExcise
TaxActisameasure regarding theprovision ofservices which isdealtwithbyArticle I:1ofGATS.
Itisonthebasis ofaninterpretation ofthespecific terms ofArticle III:2ofGATT 1994 andof
Article I:1ofGATS, made inaccordance withArticle 31oftheVienna Convention ontheLawof
Treaties, thatthescope ofapplication ofeachofthetwotreaties must bedetermined. Theanalysis
ofthemeasure which isthesubject ofthedispute leadstothedetermination ofwhich ofthetwotreaties
apply. Canada doesnotrelyontherules ofconflict toresolve thequestion oftheapplicability of
Article III:2ofGATT toPartV.IoftheAct. Itistheinterpretation oftheword "indirectly" in
Article III:2which enables Canada toconclude thattheArticle doesnotapply tothismeasure.
3.40 Todetermine which disciplines apply toagiven measure, onemustexamine notonlytheobject
ofthetaxandthefiscal mechanism used, butmostofallonemustexamine theeffects ofthetax,by
distinguishing between principal andincidental effects. Some relevant factors forsuchadetermination
are:thenature oftheeconomic activity covered bythemeasure, thestructure andeffects ofthemeasure
andtheintention ofthemeasure. Ameasure mayhavedifferent aspects andmay, asaresult, attract
different disciplines under different agreements, butnosingle aspect ofameasure should besubject
tobothdisciplines atthesame time. Inanycaseatthemargins ofthetwodisciplines, Canada suggestsWT/DS31/R
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thatthedominant oressential characteristics oftheeconomic activity atissue should control the
determination ofwhether GATT orGATS isapplicable. Inthecaseoftheexcise taxonsplit-run
periodicals, theprincipal effect istorestrict theaccess offoreign publishers totheCanadian advertising
market since, inprinciple theperiodical could verywellbesoldontheCanadian market withadvertising
notspecifically addressed toCanada. Thisisevidenced bythefactthatplans forprospective split-runs
fortheCanadian market arebased onactual salesinCanada oftheoriginal version ofthemagazine
which doesnotcontain specific advertising forthatmarket.
3.41 Thetaxisintended toprevent thepenetration oftheCanadian advertising market bypublishers
whoselltheiradvertising services inassociation withsplit-run magazines. Itisclearthatthemeasure
pertains tothesupply ofaservice andassuchisameasure thatWTO Members intended tobedisciplined
under GATS. Thiswasrecognized bytheUnited States Trade Representative, inthe1995 National
Trade Estimate Report onForeign Trade Barriers (NTE), where Canada 'spractices withrespect to
split-run advertising were listed anddescribed under theheading Services Barriers.52
3.42 TheUnited States responded thatCanada 'ssuggestion thatGATT orGATS should apply based
onthe"dominant oressential characteristics oftheeconomic activity atissue" wassimply atestCanada
hadinvented. LikeCanada 'sother assertions relating totheGATS, itfound nosupport inanyofthe
WTO Agreements ortheirnegotiating history. Adoption ofsuchatestwould altertherights and
obligations ofWTO Members, inviolation ofArticle 3.2oftheDSU. TheUnited States submitted
thatwhereas Canada referred totheneedtoavoid conflicts between GATT andGATS, ithadfailed
toidentify exactly whatthose conflicts were. Atrue"conflict" between twoagreements arose only
where compliance withoneagreement necessarily resulted innon-compliance withtheother. This
simply wasnotthecasewithrespect totheexcise tax.Applying taxestoimported split-run magazines
inaGATT-consistent manner (i.e., ataratenohigher forsplit-run thanfornon-split-run magazines)
innowayrequires Canada tobreach itsGATS obligations withregard toadvertising services orany
other service sector. Moreover, there isnothing thatiseven"inconsistent" about theobligations that
thetwoagreements impose onCanada. TheUnited States alsoasserted that,although USTR 's1995
NTEReport listed theexcise taxandother similar Canadian barriers under theheading of"services
barriers",thereportnotedthatthesepractices"restrictUSaccesstotheCanadianmarketforpublications
andmedia advertising" (emphasis added). Inthe1996NTEreport, theUnited States discussed Canadian
restriction onUSpublications under theheading "Import Policies", not"Services Barriers".
"Taxes applied directly orindirectly toproducts"
3.43 TheUnited Statesfurther argued thatthetaxiscovered byArticle IIIbecause itisimposed
onthesplit-run edition which, likeallmagazines, are"products" forpurposes ofGATT. Magazines
arephysical goods thataremanufactured, traded, andintheabsence ofabansuchasCanada 's,imported.
While theamount ofthetaxismeasured interms of"thevalue ofalladvertising intheedition," the
taxisapplied toeachsplit-run edition. Byitsterms thetaxisapplied "inrespect ofeachsplit-run
edition ofaperiodical". Moreover, thetaxisapplied ona"perissue" basis. Inaddition, theobligation
topaythetaxisimposed onthose whoproduce ortrade inthemagazine asafinalproduct, suchas
thepublisher, distributor, printer orwholesaler, asopposed tothosewhodesign orpurchase advertising .
Finally, eventhemethod ofcalculating thetaxisbased onrevenues derived fromanintegral element
ofthephysical magazine itself -theprinted advertisements. Thus, theexcise taxisapplied directly
onsplitruneditions themselves, notonaservice offered inconnection withsucheditions.
52See1995 National Trade Estimate Report onForeign Trade Barriers (Washington, D.C.: United States Trade
Representative, 1995) at38.WT/DS31/R
Page20
3.44 Canada argued thatthetaxisnotapplied directly toasplit-run magazine andinparticular
itisnotbased on,orapplied to,theprice ofasplit-run magazine. Thetaxisapplied tothevalue
ofadvertising carried byeachissue ofasplit-run magazine andisassessed against thepublisher of
thesplit-run magazine, astheseller oftheadvertising service. Theexpression "inrespect ofeach
edition" serves asabasis fordetermining andcalculating liability thatrelates toadvertising revenue
asthesubject matter ofthetax.Thesignificant point, which decisively identifies thesubject matter
ofthetax,isthatthetaxismeasured notinterms oftheprice ofthemagazine butinterms ofthe
advertising revenues itgenerates.
3.45 Thetaxisimposed onthepublisher inthepublisher 'scapacity asaprovider ofadvertising
services. Thetaxistiedtotheservice provided rather thanthegood. Thepublisher istheperson
responsible forthepayment ofthetax. Thedistributor, theprinter andthewholesaler havebeen
identified aspotentially liable where itwould beimpossible tocollect thetaxinCanada from the
publisher. Insuchcases, theActgrants those persons aright ofrecovery against thepublisher.53
Accordingly, there isnodoubt thattheultimate liability fallsonthepublisher, andbecause thead
valorem basis ofthetaxisadvertising, thisliability arises directly outoftheservices dimension of
thepublisher 'sbusiness. Thecollection mechanism isdesigned toensure thatthereisalways aperson
inCanada from whom thetaxcanbecollected. Itisdoubtful whether collection machinery should
everbeusedasabasis forcharacterizing thenature ofatax,andintheparticular circumstances of
thiscaseitwould beentirely inappropriate.
3.46 TheUnited States responded thatCanada 'sallegation thattheexcise taxiscollected fromthe
publisher inconnection withitsprovision ofadvertising services ignored thatthepublisher wasthe
producer ofthemagazine asaproduct. With regard toimported magazines, Canada admitted that
itisthedistributor "who hastopaythetax". Amagazine 'sdistributor hadabsolutely noconnection
totheprovision ofany"advertising services". Moreover, iftheforeign publisher oftheimported
magazine didnothaveasufficient business presence inCanada, themagazine 'sdistributor whopaid
thetaxwould beunlikely toobtain indemnification from thepublisher atall.Indeed, theexcise tax
onsplit-run magazines wascollected inafashion similar toother excise taxes onproducts, suchas
theexcise taxes intheJapan -Alcoholic Beverages case, andthefederal excise taxes intheUS-Malt
Beverages case. Likethesplit-run tax,inthose cases theexcise taxeswithrespect todomestic products
werecollected fromtheproducer, andtheexcise taxeswithrespect toimported products werecollected
from theimporter, whowasessentially atypeofdistributor.
3.47 Article III:2, firstsentence, governs taxesapplied directly orindirectly toproducts. Canada ’s
argument thatthetaxisactually onadvertising services confuses howthetaxismeasured (i.e.,interms
ofadvertising fees)withwhatthetaxapplies to(i.e., split-run editions). There isample additional
evidence thattheexcise taxisataxapplied tosplit-run magazines asaproduct:
- TheTaskForce’srecommendation-whichtheCanadianGovernmentadoptedandwhich
theCanadian Parliament enacted -describes thetaxasatax"imposed onamagazine
orperiodical ".54
- Inintroducing thebilltoenact theexcise tax,Minister ofCanadian Heritage Dupuy
stated thattheexcise tax"would apply toallperiodicals distributed inCanada and
containing more than20percentofreused editorial material aswellasoneormore
advertisementsaimedatCanadians",andthat"[t]hepublisher,thedistributor,theprinter
53Excise TaxAct,R.S.C. 1985, c.E-15 asamended byS.C. 1995, c.46,s.41.3(2).
54Task Force Report atvi,64.WT/DS31/R
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orthewholesaler ofanymagazine subject tothetaxwould beresponsible forpaying
thetax".55
- Following House ofCommons passage oftheexcise taxbill,Canadian Heritage issued
apress release describing thetaxasfollows: "The amendment totheExcise TaxAct
willplace anexcise taxonsplit-run magazines distributed inCanada thatcontain more
than20percentrecycled material ...andoneormore advertisements aimed at
Canadians".56
Thus,duringthetimetheexcisetaxwasbeingformulatedandenacted,Canadianofficialshadconsidered
thetaxtobeataximposed onsplit-run magazines. Itisonlyinthecontext ofthispanel proceeding,
andinthelightofUSclaims thatthetaxisinconsistent withArticle IIIofGATT 1994, thatCanada
hasadvanced theargument thatthetaxisreally ataxonadvertising services andnotataxonsplit-run
magazines. Indeed, given thestatements ofCanadian Government officials thattheexcise taxwas
designed toeliminate split-runs fromitsmarket, Canada 'sargument thatsplit-run magazines areneither
directly norindirectly subject totheexcise taxisnotcredible.
3.48 Even ifthetaxisnotapplied directly tosplit-runs, itisataminimum applied indirectly to
them because itisbased ononeofthetwokeyusestowhich magazines areput-inthiscase, the
placement ofadvertisements. Moreover, itisimpossible toseparate theadvertising thatgoesintoa
magazine fromthemagazine itself. Advertising isasignificant component ofcommercial magazines,
typically accounting forhalformore oftotalpages. Amagazine ’sadvertisements cansignificantly
affect itsappeal andusefulness toreaders. Inaddition tovirtually eliminating theiruseasadvertising
vehicles -thusdrastically reducing therevenues available tomarket suchmagazines -thetaxreduces
theappeal ofsuchmagazines toCanadian readers byeffectively eliminating advertisements ofinterest
tothem.
3.49 Canada argued thattheexcise taxdoesnotapply "indirectly" toagood within themeaning
ofArticle III:2. Indiscussions attheLondon session ofthePreparatory Committee, itwassuggested
thattheword "indirectly" covers ataxnotonaproduct assuchbutontheprocessing oftheproduct".57
Thepanel report inJapan -Customs Duties, Taxes andLabelling Practices onImported Wines and
AlcoholicBeverages58gaveaninterpretationoftheterm"indirectly"thatwasconsistentwiththisreading:
"ThePanel...found thatthewording "directly orindirectly" and"internal taxes... ofanykind"
implied that,inassessing whether there istaxdiscrimination, account istobetaken notonly
oftherateoftheapplicable internal taxbutalsoofthetaxation methods (e.g.different kinds
ofinternal taxes, direct taxation ofthefinished product orindirect taxation bytaxing theraw
materials usedintheproduct during thevarious stages ofitsproduction) andoftherulesfor
thetaxcollection (e.g.basis ofassessment)".
Theconcept of"indirectly" inArticle III:2doesnotcapture measures thataredisciplined under GATS.
Itisintended tocapture taxes thatapply to"inputs" thatcontribute totheproduction ofagood–raw
materials, service inputs, intermediate inputs, etc.Thequestion ofwhether theexcise taxiscovered
55Commons Debates at14790, Sept. 25,1995 (emphasis added).
56House ofCommons Passes BillC-103, News Release, Department ofCanadian Heritage, Nov. 3,1995 at2(emphasis
added).
57EPCT/A/PV/9 at19;andEPCT/W/181 at3.
58Panel Report onJapan -Customs Duties, Taxes andLabelling Practices onImported Wines andAlcoholic Beverages ,
adopted on10November 1987, BISD 34S/83 at118, para. 5.8.WT/DS31/R
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byArticle III:2ofGATT 1994 byreason oftheexpression "indirectly" must beexamined inlight
oftherelationship between GATS andGATT 1994.
3.50 Article III:2, totheextent thatitallows achallenge ofmeasures relating toservices that
"indirectly" impact ontrade ingoods, covers onlymeasures concerning inputs suchasrawmaterial
orservices inputs thataredirectly involved intheproduction ofagood. Taxes onsuchproduction
inputs areproperly subject toArticle III:2because theyaffect thecosts andprices, andtherefore the
competitive position ofgoods thataresubject toArticle III:2. Itisimportant, however, forthePanel
todistinguish service inputs thataredirectly involved intheproduction ofagood andservices that
are"end-products" intheirownright. Thepublishers 'advertising services, although closely associated
withthemagazines, areseparate products. They arenotinvolved intheproduction process ofthe
magazines. Theadvertising services ofthepublisher arenot,likelabour intheproduction ofacar,
aninput intheproduction ofagood.
3.51 Inorder forameasure withrespect toservices tofall"indirectly" under Article III:2ofthe
GATT 1994, ithastoaffect thecompetitive situation oftheimporter onthemarket. Inother words,
theprovision oftheservice hastobeancillary totheprovision ofthegoodinthatmarket. Thesituation
isreversed where thegood produced bytheexporter isusedtogainaccess toaservice market. In
suchaninstance, theprovision ofthegood becomes ancillary totheprovision oftheservice which
hastheeffect oftransferring jurisdiction from GATT 1994 toGATS. Consequently, theargument
onArticle III:2(andArticle III:4) doesnothold. Otherwise, sucharestrictive interpretation could
considerably diminish thescope ofGATS andcould leadtoabsurd situations suchasthose provided
asexamples bytheUnited States. Forexample, irrespective ofaMember 'sright nottomake
commitments withrespect toforeign legalservices, itwould beimpossible tomaintain measures that
restrict access when provided inaprinted format. Ifallowed, theUSinterpretation oftheexpression
"indirectly" would force Canada toaccord national treatment toforeign publishers withrespect to
advertising services when itdidnotmake anycommitments inthatrespect inGATS. Such an
interpretation would create animbalance incarefully negotiated concessions onservices sectors made
byWTO Members during thelastround ofMultilateral Trade Negotiations. Itwould alsovoidGATS
ofitseffectiveness asitconcerns Canada 'srightnottomake commitments onadvertising services.
3.52 IftheUnited States issuccessful inpersuading theWTO tocondemn Canada 'smeasures as
inconsistent withGATT, theUnited States willbeabletoobtain direct access toamarket fromwhich
itisotherwise properly precluded under international law. Themeasures inquestion aredesigned
toprotect access toCanada 'sadvertising services market andtheyareeffective indoing so.Ifthe
measures arestruck down under theguise ofGATT inconsistency, theWTO willhavefacilitated an
unnegotiated concession onthepartofCanada. Theconsequences ofsuchaneffect arefarreaching.
IftheWTO isinanydoubt about thenature ofthedispute, itmust simply lookatwhattheUnited
States willgainifsuccessful. TheUnited States willnotgaingreater access foritsmagazines. These
magazines inexactly thesameformastheyaredistributed intheUnited States already enterunimpeded.
Itwillgainaccess toCanada 'sadvertising market andtherevenues tobehadinthatmarket.
3.53 Theperiodical publication industry isonewhich combines twocommercial activities which
areeconomically linked, theproduction ofperiodicals andthesaleofadvertising services. Itcannot
bedenied thattheautonomous economic activity which isthesaleofadvertising services significantly
contributes tothefinancial viability ofthepublishing industry. However, thishasnothing todowith
thedesignation oftwoseparate activities ofanindustry forthepurposes oftheapplication ofGATT
1994andGATS. Thefactthatanintegrated industry usessomeofitscommercial activities andrevenues
sogenerated inorder tofacilitate themarketing ofsome ofitsother activities should notinfluence
thecharacterization oftheactivities forthepurposes ofdetermining which sections oftheWTO apply
tothem. Thekeyelement intheapplication ofArticle III:2, when considering whether ataxapplies
indirectly toagood, iswhether thistaxaffects indirectly theglobal income generated bytheindustryWT/DS31/R
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under consideration. Hence thedistinction made byCanada between aservice asaninput inthe
production ofagood, which iswithin thescope ofArticle III:2, andaservice which isaproduct of
anindependent activity suchastheadvertising services ofapublisher, which arewithin thescope of
Article I:1ofGATS. Canada alsoraised thefurther distinction which mustbemade between theservices
thatarewithin thescope ofGATT 1994 andGATS onthebasis oftheaccessory orprincipal nature
oftheservice. Aservice, asaninput intheproduction ofagood, isanaccessory intheproduction
ofagood. However, theadvertising services ofapublisher aretheprincipal product forwhich a
periodical istheaccessory.
3.54 Alarge number ofservices result intheproduction ofagood. Thefactthattheresult ofthe
provision oftheservice isphysically incorporated intheproduction ofagood isnotinitself akey
factor inthecharacterization ofthemeasure which relates tosuchaservice. Itisbecause ofthe
economic integration ofthetwoactivities which formtheperiodical publication industry thatadvertising,
initsphysical form, isincorporated intoperiodicals. Itisbecause aperiodical istheaccessory ofthe
advertising service, itsvehicle, thatadvertising initsphysical formisincorporated intoaperiodical.
Itisnotbecause advertising isphysically "necessary" tothematerial production ofaperiodical asan
editorial vehicle. Unlike printing services (thework oftheprinters), theadvertising services ofthe
publisher havenothing todowiththephysical production ofperiodicals. Those services onlyrelate
tothefinancialviabilityoftheintegratedactivitiesoftheperiodicalpublishingindustry.Thishasnothing
todowiththeprotection found inArticle III:2ofGATT 1994. Toextend thescope ofArticle III:2
andofthephrase "indirectly" would result inenextension beyond natural andreasonable meaning
inthecircumstances. Thelevelofintegration ofanindustry cannot beafactor inthecharacterization
ofameasure which relates tooneofitsactivities forthepurposes ofdetermining which WTO treaties
applies thereto. Theonlyfactors applicable arethenature ofthemeasure andthescope ofapplication
ofeachofthetwotreaties.
3.55 There arenocontradictions intheCanadian approach. Canada provided ageneral description
oftheperiodical publishing industry andpointed outtheintegration ofadvertising andpublishing
activities. Thisexplains thecloserelationship oftheseactivities asfarasoverall income fortheindustry
isconcerned aswellastheaccessory nature ofperiodicals fortheadvertising services ofpublishers.
Canada 'smain position isveryclear. There isnodoubt thattheadvertising services ofpublishers
areservices thatarenotaccessory services orinputs intheproduction ofperiodicals. Thefactthat
theseservices arepartoftheintegrated activities ofapublisher andthattheincome which results from
them contributes totheoverall financial viability oftheindustry doesnotaffect thecharacterization
oftheactivity forthepurposes oftheapplicability ofArticle III:2. Thelatter doesnotapply tomeasures
relating totheability ofapublisher tomarket itsadvertising services. PartV.1oftheExcise Tax
Actisbeyond thescope ofArticle III:2ofGATT 1994.
3.56 TheUnitedStatesassertedthatneithertheplainmeaningoftheterm"indirectly"inArticleIII:2,
northelimited negotiating history concerning it,supports arestrictive meaning ofthatterm. Rather,
thenegotiating history reveals thatataxwithrespect totheprocessing ofaproduct wasoneexample,
butnotnecessarily theonlyexample, ofan"indirect" taxonaproduct. Advertisements areasubstantial
feature orcomponent ofamagazine asaproduct, accounting forhalformore ofthepages ofatypical
magazine soldinCanada. Itisnotlogical tosay,asCanada does, thatataxwithrespect toinputs -
thatistosay,things thatareconsumed inmaking aproduct -isataxdirectly orindirectly onaproduct,
butataxthatconcerns amajor feature orcomponent ofthatactual product isnot.Ifanything, the
latter ismore directly ataxapplied totheproduct itself. Advertisements affect amagazine 'sprice,
cost,andcompetitive position asmuch asanyinput consumed intheproduction ofaproduct. The
carrying ofadvertisements is,moreover, amajor usetowhich magazines areput.Ataxwithrespect
toasubstantial useofaproduct canbeviewed asatax,directly orindirectly, applied totheproduct.WT/DS31/R
Page24
(ii) Conformity ofPartV.IwithArticle IIIofGATT 1994
3.57 Canada observed thatthereisanartificial quality toanyattempt toassess howArticle IIIapplies
toataxthathasnever beenapplied toaforeign product. Ithasbeenassumed thatthetaxdoesnot
apply toimported products inview ofthemaintenance ofTariff Code 9958. Article III:2requires
acomparison ofanimported andadomestic product, acomparison thathastoremain purely hypothetical
inthiscase. Subject tothisobservation, Canada provides analternative argument tobeconsidered
intheevent thePanel isoftheviewthatPartV.Iisataxation measure thatapplies tomagazines as
"goods" andthatanexamination oftheapplication ofArticle IIIofGATT 1994 hastobeconducted.
3.58 TheUnitedStatesremarked that,byCanada 'sownadmission, theexcise taxapplies toimported
(aswellasdomestically produced) magazines. Totheextent thatthetaxhadnotactually beenlevied
onimported split-runs, itisbecause those imports hadbeencompletely banned byCanada. Itisentirely
possible thatevenifthere werenoimport bantheexcise taxwould stillnotbelevied because thetax
issetatsuchahighlevelthatitwould likely discourage producers frommarketing imported split-runs
inthefirstplace. Itiswell-settled inGATT thatthelevelofactual imports isnotthebasisforassessing
whether aviolation ofGATT Article IIIexists. The1949Working Party onBrazilian Internal Taxes
stated thattheobligations ofArticle III"were equally applicable whether imports fromothercontracting
parties weresubstantial, small ornon-existent".59Thisisbecause thepurpose ofArticle IIIisnotto
protect expectations ontradevolumes, butrather "expectations onthecompetitive relationship between
imported anddomestic products".60
3.59 Thus, theplain factthattheexcise taxismandatory legislation thatapplies byitsterms to
imported magazines brings itwithin thepurview ofArticle III.Theprinciple thatactual imports are
notrequired isespecially appropriate inthiscasebecause Canada hasbanned therelevant imports to
which thetaxwould otherwise apply. AWTO Member cannot useaGATT-inconsistent import
prohibition toshield itsdiscriminatory domestic regulations fromscrutiny. Intheabsence oftheimport
prohibition, theexcise taxwould immediately affect imported split-run magazines. Bymaking imported
split-runs prohibitively expensive tosellinCanada, thetaxwould accomplish what theimport ban
nowdoes: theabsence ofimported split-runs intheCanadian market. Theeffect ofthisscheme is
thatdozens ofUSsplit-runs would besoldinCanada butforbarriers Canada haserected totheirsale.
Thiscaseisnotbased onCanada ’streatment ofUSpublishers ’split-run magazines produced inCanada.
Such magazines arenotimported products within thescope ofGATT Article III.
(a) Article III:2, firstsentence
Likeproduct issue
3.60 TheUnited States argued thattheCanadian excise taxcreated anartificial distinction between
otherwise entirely likeproducts -splitrunandnon-split runmagazine editions -based ontheextent
towhich thesameorasimilar version oftheproduct wassoldabroad. Theexcise taxdefines asplit-run
magazine entirely interms ofitsrelationship toanother magazine soldoutside Canada. Itis,therefore,
impossible todetermine whether amagazine isasplit-run based simply upon anexamination ofits
physical form, itseditorial content, oritsadvertising content. Thefactthatasimilar edition ofa
magazine issoldinacountry other thanCanada doesnotdifferentiate themagazine from another
magazine interms ofphysical characteristics, end-uses, content, advertising, oranyother attribute.
Infact,thedefining characteristic ofasplit-run magazine under theexcise tax-theexistence ofanother
59The1949 Working Party onBrazilian Internal Taxes, adopted on31June 1949, BISD II/181, 185, para. 16.
60Panel Report onUnited States -Taxes onPetroleum andCertain Imported Substances ,adopted on17June1987, BISD
34S/136, 158, para. 5.1.9.WT/DS31/R
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magazine soldoutside Canada -isanextraneous factor having nothing todowiththecharacter ofthe
split-run itself.
3.61 Canada argued thatperiodicals witheditorial content developed fortheCanadian market and
split-runs substantially reproducing foreign editorial content arenot"likeproducts" within themeaning
ofArticle III:2andaredistinguishable onthebasisoftheircontent, theessential characteristic ofany
magazine. Magazines aredistinct from ordinary articles oftrade. Magazines areintended, bytheir
verynature, forintellectual consumption asopposed tophysical use(likeabicycle) orphysical
consumption (likefood). Itfollows thattheintellectual content ofacultural goodsuchasamagazine
must beconsidered itsprime characteristic. Consequently, the"like product" analysis ofwhether
imported split-run magazines share thesamecharacteristics asdomestic magazines witheditorial content
developed fortheCanadian market must beapproached interms ofintellectual content asopposed
tothetraditional approach ofexamining material orphysical characteristics. Theperiodical industry
iskeenly aware oftheimportance ofeditorial content. Itiseditorial content anditsability toattract
readers thatdetermine theability ofaperiodical toattract advertising revenues tosecuring itsfinancial
viability.
3.62 Periodicals witheditorial content developed fortheCanadian market andsplit-run periodicals
envisaged bythelegislation aredistinct products onthebasisoftheireditorial content. Thedefinition
of"split-run edition" reflects thisdistinction. Editorial material developed fortheCanadian market
reflects aCanadian perspective andcontains specific information ofinterest toCanadians. Thecontent
isqualitatively different from editorial material copied from foreign publications.
3.63 What hasbeensaidoftheessential properties ofmagazines isequally applicable totheirend-use.
Theend-use ofamagazine isnotsimply reading; itisthetransmission andacquisition ofspecific
information. Theinformation in,forexample, asports magazine, cannot beconsidered essentially
thesame asthatinaphilosophical journal. Anyattempt tocharacterize the"end-use" ofproducts
sobroadly thattheyallendupinthesamecategory would deprive thisconsideration ofanyrealmeaning
andwould runafoul oftheprinciple thattheexpression "like" inthiscontext istobenarrowly
construed.61
3.64 TheUnited States argued thatadistinction ofthetypeCanada haddrawn initsexcise tax
should beinherently suspect under Article IIIbecause itisfounded ondistinctions otherthandifferences
between theproducts being soldintheimporting country. InUS-Standards forGasoline, thepanel
rejected anargument thattheUS"Gasoline Rule" didnotprovide lessfavourable treatment toimported
products ascompared tolikedomestic products because ittreated similarly situated parties similarly
noting that
"intheMaltBeverages case, ataxregulation according lessfavourable treatment to
beeronthebasis ofthesizeoftheproducer wasrejected".
andobserving that,under theUSargument inthatcase
"imported goods would beexposed toahighly subjective andvariable treatment
according toextraneous factors. Thiswould thereby create great instability and
61Appellate Body Report onJapan -Taxes onAlcoholic Beverages ,adopted 11July1996, WT/DS8/R, WT/DS10/R
andWT/DS11/R .WT/DS31/R
Page26
uncertainty intheconditions ofcompetition asbetween domestic andimported goods
inamanner fundamentally inconsistent withtheobject andpurpose ofArticle III".62
3.65 Thesame concerns about "highly subjective andvariable treatment according toextraneous
factors" thatthepanel identified alsoapply inthiscase. The"extraneous factors" onwhich application
ofCanada ’sexcise taxdepends aretheexistence ornon-existence ofaproduct soldinacountry other
thanCanada, andtheextent ofthatproduct ’ssimilarities to,anddifferences from, theproduct sold
inCanada. TheUnited States described examples thatitconsidered showed howCanada 'sdistinction
between split-runs andother magazines produced oddandarbitrary results based onsalesofproducts
outside Canada.
3.66 Canada argued thatthepointisnotwhether originality could beperceived assuch, butwhether
therewasadifference between thetwoproducts atissue-thesplit-run replicating aforeign magazine,
ontheonehand, andthedomestic magazine withoriginal content, ontheother. Thishadnothing
todowith"subjective andvariable treatment according toextraneous factors" asidentified inthepanel
onUS-Standards forGasoline .Itmade nodifference interms ofproduct characteristics whether
thegasoline washandled byrefiners, blenders, orproducers. Gasoline wasgasoline, butanycareful
examination would show thatcontent differences between split-runs andoriginal Canadian magazines
werecharacteristics oftheproducts themselves. Arecurring theme oftheUnited States argument is
thattheCanadian legislation isnotbased upon objective product differences; thatitisbased ona
distinction unrelated toproduct characteristics. Thisissaidtobetheresult ofadefinition thatdepends
entirely ontheexistence ofaforeign companion edition withsalesoutside Canada. Inthewords of
theUnited States, thisisanextraneous factor thathasnothing todowiththecharacter ofthesplitrun
itself. Onthecontrary, ithaseverything todowiththecharacter ofthesplit-run itself. Thelegislation
doesnotfocus ontheexistence ofaso-called companion edition asafactor unrelated tothecharacteristics
ofasplit-run marketed inCanada. Itfocuses onthefactthatthesplit-run marketed inCanada isto
asubstantial degree nomore thanareproduction ofaforeign edition, withthecontent characteristics
invariably associated withsuchmaterial. Itisnottheexistence ofaforeign companion edition, or
salesofthatedition outside Canada, thatcounts. Itisthereproduction intheCanadian split-run of
content thatoriginated inthatforeign edition. Contrary totheUnited States argument, thisisaproduct
characteristic ofthesplit-run magazine. Thereplication offoreign content isnotonlyanattribute of
thesplit-run –adefining attribute, infact–itisreadily discernible fromanexamination oftheproduct
itself.
3.67 Canada further considered thattheUnited States ’approach tolikeproducts isnecessarily over-
broad because itignores theonlybasis onwhich onemagazine canbedistinguished from another -
thecontent. Ifmagazines aretreated asordinary articles ofmanufacture, defined onlybythefactthat
theyarephysically made upofprinted paper andstaples, thenitwould obviously havetofollow that
allmagazinesareexactlythesame.TheUnitedStatessubmissionevenimplieswhenitreferstoCanada's
tariff item49.02, thatnewspapers, journals andperiodicals arelikegoods. Thisleads tothesecond
basic principle Canada referred tointhisconnection: that"likeproduct" determinations under Article
III.2aretobemade onacase-by-case basis. Thereason forproceeding case-by-case isobvious: to
avoid over-generalization andamechanical orautomatic transfer ofcriteria thataresuitable inone
context toanother context where theynolonger properly apply. Acase-by-case approach isonethat
62United States -Standards forReformulated andConventional Gasoline, op.cit.,paras. 6.11-6.12 (emphasis added).
TheUnited States added thatinUnited States -Taxes onAutomobiles ,DS31/R (29Sept. 1994, unadopted), thepanel (para.
5.55) found that"Article III:4doesnotpermit treatment ofanimported product lessfavourable thanthataccorded toalike
domestic product, based onfactors notdirectly relating totheproduct assuch. ThePanel found therefore that,totheextent
thattreatment under theCAFE measure wasbased onfactors relating tothecontrol orownership ofproducers/importers,
itcould notinaccordance withArticle III:4beapplied inamanner thatalsoaccorded lessfavourable treatment toproducts
offoreign origin" (emphasis added).WT/DS31/R
Page27
takes account oftheparticular circumstances. Itcannot bedenied thatcultural products aredifferent,
thattheyhavetheirowndistinguishing characteristics. Bytreating themasiftheywereordinary items
ofmerchandise trade, theUnited States hasignored theentire rationale ofthecase-by-case approach.
3.68 Thechief andforallpractical purposes theonlydistinguishing characteristic ofamagazine
isitscontent. Content plays aroleinthecaseofcultural products thatisanalogous tophysical properties
inthecaseofordinary items oftrade. Content iswhatthereader islooking for–themessage and
notthemedium. Theend-use ofamagazine isthetransmission ofspecific information. Amagazine
hasautilitarian function –itmaybetokeepuponcurrent events; toacquire information about specific
topics likecomputers orinvestments; insome cases, toprovide entertainment –butinevery case, the
function andvalue ofthemagazine tothereader isinseparably linked toitsspecific content orsubject
matter. TheUnited States ’emphasis onphysical properties leads inevitably toalumping together of
allmagazines asindistinguishable commodities, contrary totheprinciple ofnarrow construction and
thecase-by-case approach. Theapproach thatCanada advocates, giving content thedecisive role,does
notleadtotheopposite extreme. Magazines caneasily beclassified bytype,either broadly ornarrowly,
onthebasis ofcontent. Exactly where thelinesaretobedrawn canbeamatter ofjudgment, but
nomore sothaninthecaseofanyother likeproduct determination.
3.69 Thelegislation usestheconcept oforiginal material asthedefining element –material that
isnot,toquote thestatute, "thesame ormaterially thesame aseditorial material" ineditions that
circulate primarily inforeign markets. Thiscriterion oforiginal versus replicated material might seem
abstract atfirst, butinitspractical effect itrefers toadividing linethatisveryeasily recognized.
Original material means content developed forandaimed attheCanadian market –thismeans Canadian
content interms ofsubject matter asopposed toauthorship orproduction. TheideathatCanadian
content isthesame asforeign content issimply nottenable. Theevents, topics andpeople covered
willbeCanadian. They maynotbeexclusively Canadian, butthebalance willberecognizably and
evendramatically different thaninareplicated foreign publication, where articles onCanada areclose
tonon-existent. Foreign magazines arealmost devoid ofcontent dealing withCanada, andwhatlittle
there isquite logically failstoreflect aCanadian perspective. Even where thetopics covered arethe
same, theperspective willbedifferent. Some ofthese qualities like"perspective" areadmittedly
somewhat intangible; butwhere cultural products areatissue, these assessments cannot beavoided.
Andtheyfallwellwithin thelegitimate range ofthekindof"discretionary judgment" theAppellate
Body hasidentified asinherent inlikeproducts determinations forthepurposes ofArticle III–
discretionary butnotarbitrary. Itistheprevailing characteristics ofeachcategory thatweshould look
atindetermining whether ornotpublications created forCanada arethesameaspublications replicated
fromforeign editions. There maybeindividual articles thatmight conceivably haveappeared ineither
typeofmagazine. Some issues might bemore different orlessdifferent thanothers. Buttheprevailing
pattern iswhat counts. Canadian content andforeign content aresignificantly different. Local
publications dealwithlocaltopics. People arepreoccupied withtheirownaffairs andcommunities.
Periodicals arethemirror image ofthose communities. Thecontent ofaperiodical created forone
community willnecessarily differ from whatiscreated foranother community.
3.70 Further, theonlyactual magazines theUnited States haschosen toexhibit inthiscasearePulp
&Paper ,63which isnotasplit-run andhasnorelevance totheExcise TaxAct,Paris Match andThe
Economist .Paris Match isanimported non-split-run andTheEconomist isanimported split-run that
isexempt from thetaxasaNorth American edition without advertising specifically directed atthe
Canadian market. Noneofthesemagazines isrelevant tothecomparison between domestic andimported
products thathastobemade under Article III:2, firstsentence. Buttheevidence isreadily available,
because therearegrand-fathered split-runs inCanada thatcanbecompared withotherdomestic Canadian
63Referred toinparagraph 3.91.WT/DS31/R
Page28
magazines. Thisevidence hasbeenfiledbyCanada, although Canada doesnotbeartheburden of
proof. Theevidence consists ofTimeUS,TimeCanada andMaclean ’s–whattheUnited States would
callaforeigncompanionmagazine,asplit-runthatwouldbetaxablewithoutthegrandfatheringprovision,
andanoriginal domestic magazine. Andtheissue, inanutshell, iswhether thelasttwo–TimeCanada
andMaclean 's–are"like" products, having regard tothenarrow construction andthecase-by-case
approach mandated bytheJapan -Alcoholic Beverage Appellate ruling.
3.71 Canada 'sevidence intheform ofactual magazines provides typical examples ofasplit-run
intheform ofTime Canada ,theparent edition intheformofTime US,andadomestic magazine in
theform ofMaclean ’s.Theproper basis ofcomparison isofcourse Maclean ’sandTime Canada .
Almost every article inMaclean ’sdeals withCanada. Thisistrueoftheeditorial, theletters, the
business news, theentertainment coverage, thearts,crime, people, thelaw,much ofthenews –
everything infactbuttheleadinternational stories covering about 8outof88pages. Next, acomparative
lookatTimeCanada shows thatithaspractically noreference toCanada orCanadian subject. There
aretwooutof21letters fromCanadian sources. There isatravel advisory onMontreal, butitturns
outtobeabout anexhibit dedicated toanAmerican landscape architect. Thedifference between Time
Canada andMaclean ’sisstriking. Itwould escape noreader andnoconsumer. Thisisabout astypical
anexample asonecould find. These aremainstream, mass circulation magazines. Canada suggests
thatthere isasignificant, objective, discernible difference between asplit-run andamagazine created
withoriginal content fortheCanadian market.
3.72 TheUnitedStatescontestedCanada'sargumentthatimportedsplit-runswerenotlikeordirectly
competitive orsubstitutable withnon-split runsbecause non-split-runs contain original content that
isfrom aCanadian perspective. Anexamination ofthestructure ofthetaxshowed thistobefalse.
Moreover, evenifthisassertion weretrueitwould notformalegitimate basisfordistinguishing between
otherwise likeproducts. First, byitsterms thetaxapplied ordidnotapply, toparticular magazines
irrespective oftheireditorial "perspective". Forexample, amagazine published solely fortheCanadian
market, orthatcontained noadvertising specifically directed atCanadians, automatically avoided the
taxregardless ofhow"foreign" itscontents might be.However, theverysamemagazine became subject
tothetaxifithadasomewhat different foreign companion edition. Second, theeditorial content need
notbe"original" atall.Rather, amagazine could avoid thetax,butstillbeidentical towhatissold
abroad, aslongasthepublisher didnotadvertise toCanadians. Thissuggested thattherealbasis for
thedistinction issimply whether themagazine might compete foradvertising revenues withpurely
domestically produced Canadian magazines. That, indeed, isapurpose thatCanada didnothide.
Finally, evenifonecould somehow credit Canada 'sargument thatitisseeking through theexcise
taxtoensure "original content" inmagazines soldinCanada thispurpose would beequally illegitimate.
IfGATT permitted governments torequire thatimported goods bedesigned exclusively orprimarily
fortheirmarkets, theycould easily insulate theirmarkets fromthecomparative economic advantages
ofother WTO Members. Such aresult would undermine thefoundations ofinternational trade.
3.73 Therecent Appellate Body report inJapan -Alcoholic Beverages shares thefocus oftheUS
-Standards forGasoline panel report onobjective product differences injudging product likeness.
There theAppellate Body observed:
"The Report oftheWorking Party onBorder TaxAdjustments ,adopted bythe
CONTRACTING PARTIES in1970, setoutthebasic approach forinterpreting 'like
orsimilar products 'generally inthevarious provisions ofGATT 1947:
...The interpretation ofthetermshould beexamined onacase-by-case basis. This
would allow afairassessment ineachcaseofthedifferent elements thatconstitute a
"similar" product. Some criteria weresuggested fordetermining, onacase-by-case
basis, whether aproduct is"similar"; theproduct 'send-uses inagiven market;WT/DS31/R
Page29
consumers 'tastes andhabits, which change from country-to-country; theproduct
properties, nature andquality.
ThisapproachwasfollowedinalmostalladoptedpanelreportsafterBorder TaxAdjustments ".64
TheAppellate Body found thattheterm"likeproduct" inArticle III:2, firstsentence mustbe"construed
narrowly" inlightoftheexistence ofthesecond sentence ofArticle III:2which covered "directly
competitive orsubstitutable" products, andthatdistinguishing between "likeproducts" and"directly
competitive orsubstitutable" products "isadiscretionary decision thatmust bemade [bypanels] in
considering thevarious characteristics oftheproducts inindividual cases".65
3.74 Thus theAppellate Body inJapan -Alcoholic Beverages ,liketheUS-Standards for
Gasoline decision, endorsed acase-by-case approach thatfocused ondifferences inproducts, rather
thanondistinctions based onextraneous factors suchastheproduction method. Theillustrative list
oflike-product factors citedbytheAppellate Body -end-uses, theproduct ’sproperties, andsoforth
-areidentical foramagazine soldonlyinCanada andamagazine forwhich acompanion edition is
soldabroad. While "like product" inArticle III:2, firstsentence, must beinterpreted narrowly, it
cannot beinterpreted sonarrowly astopermit lessfavourable treatment based ondistinctions between
literally identical products depending onwhether acompanion product issoldinanother market. This
interpretation would besonarrow astoeliminate "like product" altogether from Article III:2, first
sentence.
3.75 Canada considered thattheUSarguments onthelikeproduct issuefailed topresent anypositive
evidence thatanimported split-run hadenough incommon withoriginal-content Canadian magazines
toallow themtobeconsidered likeproducts. Theabsence ofsuchevidence isfatalbecause theUnited
States hadtheburden ofproof. Canada wasnotsuggesting thatamagazine hadonlyoneattribute.
Nordiditbackaway fromtheproposition thattheassessment hadtotakeintoaccount alltherelevant
circumstances. Butthecircumstances hadtobeweighed andbalanced according totheirimportance,
andeditorial content wasthemostimportant distinguishing feature andwasthechiefandforallpractical
purposes theonlydistinguishing characteristic ofamagazine. Amagazine isnothing without itscontent
which waswhatdefined theend-use andthevalue ofamagazine toitsreaders. Treating content as
"oneattribute among many" astheUnited States would say,would tendtosweep alloratleastvery
broad classes ofmagazines intothesame category. Thiswould disregard thenarrow characterization
oflikeproducts required bytheAppellate Body inJapan -Alcoholic Beverages .
3.76 Asthecomplainant,theUnitedStatesbearstheburdenofprovingthatCanadaactedinconsistently
withitsobligations under Article III:2, firstsentence. Thisisaprinciple oflongstanding inGATT
jurisprudence. TodatetheUnited States hasmade noeffort todischarge thisburden. Instead, ithas
relied upongeneral allegations andassertions suchasthefollowing: "there isnoidentifiable difference
between split-run magazines, ontheonehand, andmagazines without acompanion edition, onthe
other hand, interms oftheirphysical characteristics, appearance, uses, tariff classifications, oreven
editorial content". Suchstatements donotconstitute theempirical evidence required tobothsubstantiate
theclaim made bytheUnited States thatallmagazines arethesame orthatmagazines based onlocal
content arethesame asmagazines replicating foreign content; andtofulfiltheburden ofproof borne
bytheUnited States.
3.77 While Canada alsorecognized thedefinition ofwhatconstitutes a"likeproduct" bytheWorking
Party onBorder TaxAdjustments, itconsidered thatthe"like products" testrequires amuch more
64Appellate Body Report onJapan -Taxes onAlcoholic Beverages, op.cit.,at20.
65Ibid., at21(emphasis added).WT/DS31/R
Page30
sophisticated analysis thanthatsuggested bytheUnited States. TheWorking Party hadconcluded
thatthedetermination ofwhatconstitutes "likeproducts" mustbemade onacase-by-case basisinorder
toallow fortheconsideration ofthespecific circumstances ofeachcase. Inthatcontext theWorking
Party suggested some criteria: "...theproduct 'send-uses inagiven market; consumers 'tastes and
habits, which change fromcountry tocountry; theproduct 'sproperties, nature andquality".66This
lineofthinking evolved intoanestablished GATT practice andwasrecently reaffirmed bythepanel
inUS-Standards forGasoline .
3.78 TheUnited States considered thatwithCanada 'sargument -thattheUSlikeproduct analysis
isincomplete because itrelies solely onthephysical characteristics ofmagazines, andignores their
editorial content -Canada appears toconcede thatthereisnoother basistoconsider split-run magazines
andother magazines tobe"unlike" based onthespecific criteria established bytheAppellate Body
inJapan -Alcoholic Beverages. Byfocusing solely on"editorial content", Canada ignores theAppellate
Body’sinstruction thattheanalysis of"likeproduct" musttakeintoaccount "thevarious characteristics
ofproducts inindividual cases".67Editorial content isonlyoneattribute ofamagazine, among many.
Thetype, texture, colour, thickness, andeventheperfume, ofthepaper canbeimportant factors to
market appeal. Thedimensions ofthemagazine, themanner inwhich itspages arebound, the
typesetting, andtheappearance oftheink,canalsobesignificant. Thetype,appearance, andfrequency
ofadvertisements maybeafactor inaconsumer 'spurchasing decision aswell. Readers maypurchase
amagazine inpartfortheinformation itsadvertisements contain about where andhowtopurchase
products orservices locally. Allofthese attributes -including editorial content -combine toform
anoverall package thataconsumer mayormaynotbeattracted to.FortheCanadian andUSmagazine
industries, editorial content generally represents substantially lessthan20percentofthecostof
producing aconsumer magazine.
3.79 Even ifoneweretoexamine editorial content inisolation, Canada ’sargument thatmagazines
canbedifferentiated solely according tothepercentage of"original" versus "non-original" editorial
content theycontain isuntenable. There simply isnoreadily identifiable difference inactual editorial
content between whattheexcise taxdeems tobe"original" and"non-original" content. Thatisbecause
thedistinction drawn bytheexcise taxisnotbased onthespecific contents ofmagazines distributed
inCanada butsimply onwhether those contents areusedinmagazines distributed abroad. Amagazine
reader inCanada cannot discern whether amagazine is"original" ornotbased onanexamination of
themagazine ’scontents, andthuscould notbeexpected toconsider "non-original" magazines tobe
anydifferent from"original" magazines. Forpurposes ofconsumer use-aswellasusebyadvertisers
-magazines arejudged bywhattheythemselves offer, notbywhatacompanion edition maycontain.
3.80 Infact,Canada ’s"original content" requirement isnotreally meant toensure thatmagazines
soldinCanada haveanyparticular typeofcontent. Rather, itismeant toensure thatonetypeof
production method -regional orsplit-runs -cannot beemployed formagazines soldintheCanadian
market. Adistinction drawn tofavour onetypeofproduction method hasobvious protectionist
implications andisnotonethatGATT should countenance fordistinguishing between otherwise-like
products.
3.81 Further, Canada ’sargument thatsplit-runs usually differ frommagazines soldonlyinCanada
withrespect totheperspective andorientation oftheireditorial content islegally irrelevant. Apanel
mustassess thedistinction thatameasure actually draws ,notadistinction ameasure might havedrawn
butdoesnot. Inthiscase, totheextent theexcise taxconcerns content, itdifferentiates between
magazines whose content iscontained inaproduct soldinanother country andmagazines whose content
66Border TaxAdjustments (Report oftheWorking Party adopted on2December 1970), BISD 18S/97.
67Appellate Body Report onJapan -Taxes onAlcoholic Beverages, op.cit.,at21(emphasis added).WT/DS31/R
Page31
issoldonlyinCanada. Thus, theexcise taxsimply doesnotdifferentiate between content based on
itsCanadian focus orperspective. Application oftheexcise taxdoesnotturnmerely onamagazine ’s
"originality". Amagazine distributed bothinside andoutside Canada becomes subject tothetaxbased
solely ontheinclusion ofasingle advertisement thatisnotidentical inbotheditions. Theverysame
magazine whose several editions donotdiffer inadvertising isnottaxed. Canada hasadvanced no
basis fordistinguishing between magazines based onthetypeofadvertisements theycontain.
3.82 Forexample, ascience magazine escapes fromthetaxevenifitcontains absolutely noarticles
about Canadian scientists orCanadian scientific research solongasitisnotsoldoutside Canada. The
verysame magazine would besubject tothetaxifitissoldbothinCanada andabroad andcontained
anadvertisement thatdiffered between theversion soldinCanada andtheversion soldabroad. Yet
thesame magazine would notbesubject tothetaxifitissoldbothinside andoutside Canada butdid
notcontain suchanadvertisement. Thus, theexcise taxdoesnot,infact,distinguish between magazines
based ontheireditorial content, letalone based ontheorientation ofthecontent. Rather, itapplies
based onfactors related towhether amagazine wasproduced formore thanonemarket, andadvertising
content. Article III:2doesnotpermit governments todistinguish between otherwise likeproducts based
onsuchbusiness andtrade factors.
3.83 Withregard totheCanadian assertion thattheUSanalysis oflikeproduct withrespect tothe
excise taxisunacceptably general andwould necessarily leadtotheconclusion thatallmagazines are
thesame likeproduct, regardless ofcontent, theAppellate Body made clear inJapan -Alcoholic
Beverages thatproduct likeness forpurposes ofArticle IIImustbeaddressed onacase-by-case basis
andinthelightofallrelevant circumstances. Thus, nosweeping once-and-for-all product likeness
determinations areappropriate formagazines orother products. Thedistinction between "original"
and"non-original" content wasnotbased onobjective content differences, oranydifferences atall,
based onacomparison ofproducts soldinCanada. Whether ornotdistinctions mayeverproperly
bedrawn between magazines based ontheireditorial content isnotanissue thatisbefore thisPanel.
Theexcise taxdistinguishes between products based onwhether asimilar product issoldabroad, not
onobjective content differences between products being soldinCanada.
3.84 Canadaarguesthatbecausemagazinescontainintellectualorculturalcontent,theyshouldreceive
unique treatment under GATT. Many products, asdiverse asworks ofart,designer clothing,
phonograph records andcinematographic filmscontain intellectual orcultural content. Likemagazines,
these products wereinwidespread useprior totheadoption ofGATT 1947. Butofthese products,
onlycinematographic filmswereaccorded special treatment inGATT 1947. Hadthedrafters ofGATT
1947 sought totreatother intellectual orcultural products differently fromproducts ingeneral, they
would havedoneso.
3.85 CanadaarguedthattheUnitedStatesinsiststhatitisimpossibletodeterminewhetheramagazine
isasplit-run simply uponanexamination ofitsphysical form, itseditorial content, oritsadvertising.
Thissimply misses thepoint. Acasual reader might notinfactknow whether amagazine isasplit-run
orsimply animported foreign magazine. There might bepractically nodifference between thetwo.
Time USandTime Canada areveryclose. Butthatbasis ofcomparison isirrelevant, because the
comparison isnotbetween imported magazines andimported magazines. Thecomparison isbetween
imported split-run withthedomestic magazine –Time Canada andMacLean ’s.Andherethereader
would havenodifficulty inseeing thatthetwoareverydifferent products, offering completely different
benefits totheprospective reader. Thepoint, insum, isnotwhether asplit-run canbeidentified as
suchbytheconsumer. Itiswhether itcanbeidentified asasignificantly different product when
compared toadomestic magazine thatisnotasplit-run.
3.86 TheUnited States makes thesamepointwhen itsaysamagazine reader inCanada cannot discern
whether amagazine isoriginal ornot,based onanexamination ofthemagazine ’scontents, andthusWT/DS31/R
Page32
could notbeexpected toconsider non-original magazines tobeanydifferent fromoriginal magazines.
Thisisbased onthesame misperception. Thepoint isnotwhether originality canbeperceived as
such, butwhether there isadifference between thetwoproducts atissue –thesplit-run replicating
aforeign magazine, ontheonehand, andthedomestic magazine withoriginal content, ontheother.
Andnothing theUnited States hassaidcastsanydoubt ontheproposition thatdifference would be
obvious toanyreader. Thishasnothing todowithsubjective andvariable treatment according to
extraneous factors, asidentified inthepanel report onUS-Standards forGasoline .Thatsituation
obviously hadnothing todowithobjective product differences. Itmakes nodifference interms of
product characteristics whether thegasoline ishandled byrefiners, blenders, orproducers, orwhat
datathese various companies arelikely tohold. Gasoline isgasoline, butanycareful examination
willshowthatcontent differences between split-runs andoriginal Canadian magazines arecharacteristics
oftheproducts themselves.
3.87 Atsome points theUnited States refers tosplit-runs asaproduction method. Infactitisnot
aproduction method, itisaspecific typeofmagazine. TheUnited States saysthatadistinction drawn
tofavour oneproduction method overanother hasprotectionist implications thatGATT should not
countenance. Thisreflects apassage oftheUnited States -Measures Affecting Alcoholic andMalt
Beverages ("US-Malt Beverages ")decision thatwasspecifically overruled inJapan -Alcoholic
Beverages .68Inanyevent, itmischaracterizes thelegislation, which distinguishes notonthebasis
ofproduction method butofproduct content. TheUnited States argument onlikeproducts isbased
onahighly abstract reading oftheCanadian legislation taken outofitsreal-world context. Itisbased
infactonarefusal totakeaccount oftheeffect ofthedistinction between original andreproduced
content onwhich thelegislation isbased. Butitisonlyonthebasis oftheeffect ofthedistinction
thatonecandetermine whether infactthelegislation hastheeffect oftaxing imported products inexcess
oflikedomestic products.
3.88 Canada noted theUnited States 'contention thatCanadian content orCanadian perspective are
legally irrelevant, andthatapanel mustassess thedistinction ameasure actually draws, notadistinction
itmight havedrawn butdoesnot.Infact,thepoint istoassess whatthelegislation actually does–
notsimply what itsaysbutwhat itdoes. Itisobvious thatthebasis ofthelegislation –content
reproduced from foreign sources –hasconcrete effects. These areeffects thatanyreader cansee–
fromthestories, thepeople, thesubjects and–indeed –theperspective. They determine thecharacter
andthesubject matter ofthepublication. Thesuggestion thatthese arenotobjective, visible product
differences makes nosense. When theUnited States saysthatthenature ofthecontent isirrelevant
because thatisnotthedistinction thelegislation actually draws, theyareasking thePanel simply to
closeitseyestotheactual operation andeffect ofthelegislation inareal-world context. Theimplication
isthatoneshould lookattheform, notthesubstance; thattheassessment should beintheabstract
andthattheconcrete effect should beignored. None ofthismakes sense inthecontext ofArticle III:2,
firstsentence, which requires afinding ofexcess taxation infact. Oneofthereasons whyCanadian
magazines donotsellwellintheUSmarket isprecisely thattheyhaveadifferent content, content
designed forCanadians. TheAmerican public isnotattracted tothiscontent. IfAmerican consumers
canrecognize thedifference between anAmerican andaCanadian magazine, surely Canadians can
recognize itjustaseasily.
3.89 TheUnited States asserted thattheterms oftheexcise taxitselfdefine thedistinction Canada
hasdrawn andthisiswhatisatissueinthiscase. Ananalysis ofthewaythetaxisstructured shows
thetwotobelikeproducts. Canada 'sclaim thattheUnited States hadfailed toproduce evidence of
imported split-runs ignores thefactthatCanada hasbanned imported split-runs. Canada could not,
68Panel Report onUnited States -Measures Affecting Alcoholic andMaltBeverages ,adopted on19June1992, BISD
39S/274, para. 5.25.WT/DS31/R
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ontheonehand, bantherelevant imported product, thenargue ontheother hand thatthere areno
"real-life" examples ofhowthat(banned) product isactually similar todomestic products, oractually
competes. Infact,Canada 'sownexample -TimeCanada andMaclean 's-doesnotinvolve animported
split-run magazine. Moreover, onesimply could notsaythattheconcrete effects oftheterms ofthe
excise taxaretoseparate outimported split-runs (ofwhich therearenone) thathavenoCanadian content
from domestic non-split-runs thatdo.
3.90 IntheUS-Section 337panel report, thepanel stated thatit"hadtoassess whether ornotSection
337mayleadtotheapplication toimported products oftreatment lessfavourable thanthataccorded
toproducts oftheUnited States [i.e.domestic] origin. Itnoted thatthisapproach isinaccordance
withprevious practice oftheContracting Parties inapplying Article III,which hasbeentobasetheir
decisions onthedistinctions made bythelaws, regulations orrequirements themselves andontheir
potential impact, rather thanontheactual consequences forspecific imported products" (emphasis
added). Inthiscase,theexcise taxlawitselfdidnotdistinguish between editorial content thatisabout
Canada andeditorial content thatisnot,butisinstead based ontheexistence ornon-existence ofa
similar product inaforeign country, andonadvertising.
3.91 TheUnited States questioned thenecessity forspecific product examples inlightofthisanalysis
oftheUS-Section 337panel report andCanada 'slongstanding import ban.TheUnited States argued
thatwhile therewerenospecific examples ofimported split-runs because noneexist; should thePanel
findspecific examples relevant, auseful comparison todemonstrate the"likeness" ofimported and
Canadian-produced magazines exists between aUS(non-split-run) magazine, Pulp&Paper ,andPulp
&Paper Canada ,aCanadian magazine unconnected toPulp&Paper (US). Thetwopublications
havesubstantially similar editorial content andsubject matter -pulpandpaper technology, products,
processes andmarketing. Bothcontain anumber oftechnical reports onvarious paper andpulpsubjects
thathavelittle, ifany,connection withparticular paper andpulpoperations ineither Canada orthe
United States. Bothcontain information about paper andpulpoperations andstatistics inbothCanada
andtheUnited States. Bothcontain awidevariety ofadvertisements fromsuppliers ofproducts and
services directly related tothepulpandpaper products. Bothcontain classified advertising sections,
andbothcontain anadvertisers 'index. Only ahandful ofpages outofthe78pages inPulp&Paper
Canada weredevoted toexclusively Canadian pulpandpaper, andthevastmajority ofthepublication
consists ofadvertisements andfeature articles thatdidnotfocus specifically onCanadian production
orissues. Moreover, aCanadian paper industry publication reader study conducted byanindependent
advertising agency indicated thatthetwomagazines havecomparable readership andthatreaders use
these magazines forthesame purposes suchasproduct information andmillnews. Based onthese
andother similarities, theUnited States argued there canbenodoubt thatPulp&Paper Canada is
"like" Pulp &Paper (US). TheUnited States further argued thatthese examples alsoshow the
importance ofadvertisements totheusefulness andappeal ofmagazines asproducts. Theadsinthe
pulpandpaper magazines aresoobviously highly useful tothose inthepulpandpaper business. Both
theCanadian andtheUSpublications gosofarastocontain anadvertisement directory sothatreaders
canmore readily access pertinent advertisements.
3.92 Inresponse toCanada 'sreliance ontheeditorial content oftheTimeCanada andMaclean 's,
theUnited States argued thatthiseditorial content doesnotshow thatsplit-run andnon-split-run
magazines arenotlikeproducts. First, oneexample outofover1,000 magazines soldinCanada hardly
proves thepoint. Thefactisthat,under theterms oftheexcise tax,anon-split-run magazine need
notcontain any"Canadian" editorial content, aslongasthecontent isnotsoldoutside Canada, or
theadvertisements intheCanadian andforeign editions areidentical. Second, evenastothese two
magazines, Canada ignores thesimilarities between thetwoproducts, interms ofallfactors other than
Canadian focus. Indeed, thesimilarities aresogreat -including withrespect tosubject matter -thatWT/DS31/R
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thetwomagazines wererecognized tobedirect competitors byindustry witnesses intestimony before
aCanadian Senate committee.69
3.93 TheUnited States considered thatCanada sought tominimize thesignificance ofthefactthat
itsWTO tariffcommitments didnotdistinguish between split-runs andnon-split runs. Canada 'srelevant
tariff binding alsoincludes newspapers, which areobviously notlikeproducts. However, thefact
thatCanada ’stariff binding reflects thesingle Harmonized System (HS) heading forallmagazines
doesprovide support forafinding thatsplit-runs andnon-split-runs arethesame likeproduct. The
Appellate Body inJapan -Alcoholic Beverages stated that,while broad GATT tariffbindings thatcut
across HSheadings maynotbeuseful todetermine product likeness, GATT 1947practice haslooked
tosimilar categorization intheHSitself indetermining likeproduct:
"Uniform classification intariff nomenclatures based ontheHarmonized System (the
'HS')wasrecognized inGATT 1947practice asproviding auseful basisforconfirming
'likeness 'inproducts. However, thereisamajor difference between tariffclassification
nomenclature andtariffbindings orconcessions made byMembers oftheWTO under
Article IIofGATT 1994. There arerisksinusing tariff bindings thataretoobroad
asameasure ofproduct 'likeness '....Many of[the]least-developed countries, aswell
asother developing countries, havebindings intheirschedules which include broad
ranges ofproducts thatcutacross several different HStariff headings ...".70
3.94 Thus, theAppellate Body distinguished between thesituation inwhich products fellwithin
common HScategories, andthesituation inwhich aMember made broad tariffbindings thatcutacross
multiple HScategories. Inthiscase,allperiodicals, whether split-run ornot,andwhether ornotthey
contain advertising, areincluded within thesameHScategory: HS49.02. Thefactthatthedistinction
Canada isdrawing inthiscaseisnotonereflected intheHSsupports ourclaim thatsplit-runs and
non-split-runs arethesame likeproduct.
3.95 Withregard totheCanadian argument thatimplementation ofitsimport banthrough aprovision
initstariffcodeisproof thattherearedifferences intariffclassification between split-runs andnon-split-
runs, theAppellate Body inJapan -Alcoholic Beverages referred touniversally-accepted HS
nomenclature, nottooneMember ’sprotectionist restrictions thathappen tofindthemselves inthat
Member ’s"Customs Tariff". Thereason whyitwaspractice under GATT 1947 tolooktoHS
nomenclatureisbecauseitgenerallyreflectsanobjectiveassessmentoftheintrinsicsimilarityofproducts.
AsfarastheUnited States knew, Canada isunique indrawing lines(ina"tariff-related" provision
orelsewhere) based onanartificial distinction suchas"split-run" versus "non-split-run". Thus, the
Panel should reject Canada ’seffort toberewarded foritsimport ban,andfindthatthecommon HS
classification ofsplit-runs andnon-split-runs provides additional support forafinding thatsplit-runs
andnon-split-runs arethesame likeproduct.
3.96 Canada considered thattheUSreference totheCanadian tariffclassification inheading 49.02
hadtheeffect ofsweeping notonlyallperiodicals, butnewspapers aswellintoasingle very
comprehensive classification. Theinappropriateness ofthiskindofresult waspointed outbythe
Appellate Body initsrecent decision onJapan -Alcoholic Beverages ,when itsaidthat"tariff bindings
thatinclude awiderange ofproducts arenotareliable criterion fordetermining orconfirming product
"likeness" under Article III:2".71Theuseoftariffclassifications inthiscaseisespecially inappropriate.
69See,e.g.Senate ofCanada, Proceedings oftheStanding Senate Committee onBanking, Trade andCommerce, Issue
no.49(30November 1995) at57,64(testimony ofofficials ofCanadian Magazine Publishers Association).
70Appellate Body Report onJapan -Taxes onAlcoholic Beverages, op.cit.,at22.
71Ibid.at22.WT/DS31/R
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Thecategories ofproducts listed under tariffitem49.02 areasdiverse asperiodicals andnewspapers.
Where thepolicy framework relates toperiodicals andtheirintellectual content ,theargument thatthe
twomedia are"like" would bedifficult tosustain. Tariff Code 9958haseffectively carved split-runs
outofthegeneral tariff classification; ithasbeenineffect forover30years, through several GATT
rounds, including themostrecent Uruguay Round. Thedefactoexclusion ofsplit-runs fromthegeneral
tariff classification means attheveryleastthattheUSposition canderive nosupport from tariff
classification.
3.97 With respect tothesupport theUnited States seeks intheHScategory, thefactisthatthis
classification isfartoobroad toserve asabasisforidentifying likeproducts. Surely thefundamental
pointintheAppellate Body decision isthatanyverybroad tariffclassification isinappropriate, whether
itisbased ontheHSorontariff bindings. Theshort answer totheUnited States argument based on
thecommon HSclassification isthat,atleastinthecaseofthiscategory, itisfartoobroad. Itputs
allmagazines andallnewspapers intoasingle global grouping. Italsohasthepractical effect ofmaking
editorial content irrelevant. Inthecircumstances ofthiscase, theuseoftariff classifications is
inconsistentwiththerequirementstipulatedbytheAppellateBodythat"likeproducts"underArticleIII:2,
firstsentence, should benarrowly construed.
Discrimination
3.98 Canada considered thatthefirstsentence ofArticle III:2speaks ofproducts "imported into
theterritory" ofacontracting party, anditdeals withtaxdiscrimination against imported products.
There isnosuchdiscrimination onthefactsofthiscase. Togetaround thisdifficulty, theUnited
States hasintroduced thenotion of"foreign-based" split-runs meaning periodicals produced inCanada
butreplicating foreign editorial content. Thisisaconcept thatsimply hasnolegal meaning inthe
context ofArticle III:2. Iftheproduct isdomestically produced, andisnotphysically moved across
theborder, itisnotanimported product. Andifthere isnoimported product, thenthere isnothing
towhich Article IIIcanapply. Butevenifthere were imported split-runs ontheCanadian market,
theabsence ofdiscrimination would beclear. Some imported magazines might attract thetax,but
nottoanygreater extent thanthedomestically produced split-runs which wereandremain theprimary
object ofthelegislation. Forthisreason, themeasure isconsistent withArticle III:2onitsfaceand
initsoperation andpractical effect. There isnoreason whyameasure thatisnon-discriminatory in
bothform andeffect –dejureanddefacto –should beconsidered inconsistent withArticle III:2.
3.99 AstheAppellate Body hasobserved inUS-Standards forGasoline inconnection with
Article III:4thatwhere there is"identity oftreatment –constituting real,notmerely formal, equality
oftreatment ...itisdifficult toseehowinconsistency would havearisen inthefirstplace". Thesame
conclusion isequally valid here. Thatthetaxisfreefrom anytaintofovert discrimination isclear
fromtheterms ofthelegislation, which make nodistinction between domestic andimported products.
Canada provided anexample oftheCanadian-owned magazine, Harrowsmith Country Life.Before
theadoption ofPartV.1,thismagazine hadtwoeditions -aCanadian edition andaUSedition. The
Canadian andtheUSeditions haddifferent advertisements andacertain amount ofcommon editorial
content. Because more than20percentoftheeditorial content intheCanadian edition wasthesame
asthatintheUSedition, thetaxwould haveapplied totheCanadian edition (even iftheeditorial content
wasentirely produced inCanada). Asaresult oftheexcise tax,Harrowsmith Country Lifestopped
publishing itsUSedition. Itcould hardly besuggested thatthetaxisdiscriminatory initspractical
operation, since itwasdesigned toprevent theproduction inCanada ofsplit-runs.WT/DS31/R
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3.100 TheAppellate Body onJapan -Alcoholic Beverages72heldthatwhere imported products are
taxed inexcess of"likedomestic products", thegeneral principle setoutinArticle III:1maybeassumed
tohavebeenviolated. There isconsequently noneedtoapply thatprinciple asa"separate test"in
order tofindaninconsistency withArticle III:2, firstsentence. TheAppellate Body hasthusestablished
abalance intheinterpretation ofArticle III:2. Theconcept of"likeproducts" istobeverynarrowly
construed, onacase-by-case basis inawaythatrequires "discretionary judgment"; butoncethe
determination ismade, excess taxation ofimported products entails aviolation without anyneedto
conductafurtherinquiryunderparagraph1.Theessentialelementsoftheinterpretationofthisprovision
havethusbeenauthoritatively identified.
3.101 Onequestion, however, wasnotaddressed intherecent decision: whether taxation ofimported
products "inexcess of"likeproducts istobedetermined interms ofclasses ofproducts, orwhether
anysingle instance ofdifferential taxation creates anautomatic perseviolation evenwhen itresults
from fiscal classifications thatarenotthemselves discriminatory inform orinfact. Theanswer is
clearbothfromthewording ofArticle III:2, firstsentence, andfromtheobject andpurpose ofArticle III
asawhole, which istheprevention ofdiscrimination against imported products. Theuseoftheplural
inreferring to"imported products" and"like domestic products" indicates clearly thattheconcern
iswithclasses ofproducts, notwiththeisolated instances ofdifferential taxation thatnecessarily result
when product "A"istaxed atadifferent ratethanproduct "B"because ithappens tofallintoadifferent,
butnon-discriminatory, fiscal classification.
3.102 Thisinterpretation alsoseems necessary tocreate aworkable rule. Article III:2isnotintended
toimpose fiscal harmonization inrates, methods orclassifications. Ittherefore remains notonlypossible
butinevitable thatdomestic fiscal classifications mayincertain instances havetheeffect ofsubdividing
orstraddling "like product" categories, orotherwise crossing "like product" category lines. Since
fiscal classifications have noother purpose thantoallow differences intaxtreatment, anysuch
classifications thatfailed tocorrespond precisely to"likeproduct" categories under Article III:2, first
sentence, would automatically leadtoaviolation. Quite apartfromimposing adegree ofharmonization
thatgoesbeyond thelanguage orthepurpose ofthisprovision, suchaninterpretation would leadto
anintolerable unpredictability solongas"likeproduct" determinations aretobemade onacase-by-case
basis, astherecent decision hasreaffirmed.
3.103 Itcould alsolead,paradoxically, toresults thatwould make nonsense oftheAppellate Body's
assumption thatexcess taxation under Article III:2automatically entails adeparture fromthegeneral
principles inArticle III:1; andthatwould infactmake nonsense oftheunderlying purpose ofArticle III.
Itcould leadtosituations where fiscal classifications decisively favouring imported products would
beconsidered inconsistent withthefirstsentence ofArticle III:2, solongasthetaxclassification
attracting thehigher ratecontained atleastsome imported products. Itmakes nosense tosaythat
Article IIIisautomatically violated inanycasewhere taxdifferences result fromdomestic classifications
thatare"origin-neutral" inform andthatmight evenfavour imported products ineffect –asmight
wellbetrueofthetaxatissuehere. Aparticular instance ofdifferential taxation insuchcircumstances
should notcreate aperseviolation, absent adiscriminatory effect orcause tobelieve suchaneffect
tobeprobable.
3.104 TheUnited States considered thattheCanadian argument thatunder Article III:2, firstsentence,
a"single" or"particular" instance ofhigher taxation ofacertain subset ofabroader category ofimported
likeproducts "should notcreate aperseviolation, absent adiscriminatory effect orcause tobelieve
suchaneffect tobeprobable", meritless foranumber ofreasons. First, theUnited States isnot
72Ibid.WT/DS31/R
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confronted withamere "single" or"particular" instance ofhigher taxation ofimported products than
domestic likeproducts inthiscase. Rather, abroad group ofimported products -split-run magazines
-istaxed athigher, notlower, rates thanabroad group oflikeCanadian products -non-split run
magazines. Canada hasneither defined noridentified whatitconsiders tobea"single instance" of
discriminatory treatment inthecontext ofthiscase.
3.105 Inaddition, Canada claims thattheAppellate Body intheJapan -Alcoholic Beverages decision
somehow leftthedooropentoallow fordiscriminatory higher taxesapplied tocertain imported products
within acategory oflikeproducts. TheAppellate Body leftnosuchopening. Itmade itclearatpage19
that"[i]ftheimported anddomestic products are'likeproducts ',andifthetaxesapplied totheimported
products are'inexcess of'those applied tothelikedomestic products, thenthemeasure isinconsistent
withArticle III:2, firstsentence". Nofurther testof"discriminatory effect" ordiscriminatory aim,
iswarranted. Canada 'sproposed "discriminatory effect" testbased on"classes" ofproducts ifflatly
inconsistent withtherecent panel andAppellate Body decision inJapan -Alcoholic Beverages .In
thatcase, oncethepanel found vodka andshochu tobelikeproducts, thetaxation ofimported vodka
atahigher ratethandomestic shochu (even though thetaxwasfacially neutral) wasfound tobea
violation ofArticle III:2, firstsentence. Thisfinding wasaffirmed bytheAppellate Body.
3.106 TheUnited States considered thatCanada 'sargument that, intheabsence ofsuch a
"discriminatory effect" test,ascheme that,overall, favoured imports overdomestic products, might
befound toviolate Article III:2, firstsentence, suggested thatlessfavourable treatment ofcertain
imported products could becounterbalanced bymore favourable treatment ofothers. TheUS-Section
337panel decisively rejected anysuch"balancing" ofless-favourable andmore-favourable treatment,
observing that"such aninterpretation would leadtogreatuncertainty about theconditions ofcompetition
between imported anddomestic products andthusdefeat thepurpose ofArticle III".73Similarly, in
thepanel report onUS-MaltBeverages report, thepanel observed that"Article III...requires treatment
ofimported products nolessfavourable thanthataccorded tothemost-favoured domestic products".74
Thus,thefactthatimportedanddomesticsplit-runmagazinesreceivethesametaxtreatmentisirrelevant.
Rather, thefactthatimported splitrunmagazines aretaxed moreheavily thanlikedomestic non-split-run
magazines establishes therequisite higher taxation under Article III:2, firstsentence.
3.107 According totheUnited States, thefactthatArticle III:2isphrased interms of"products"
doesnotmean thattaxdiscrimination withrespect tooneproduct isoutside thescope ofArticle III:2,
orthatsuchdiscrimination would beGATT-consistent aslongasitisrestricted tooneproduct. In
thiscasethedrafters clearly intended nondifference between thetreatment oftheplural andthetreatment
ofthesingular. Thisfactisconfirmed bythedrafting oftheNoteAdArticle III(which refers tothe
"like domestic product" andthe"imported product") andArticle III:3, aspecial caseofapplication
ofArticle III:2which refers tothe"taxed product". The1970 Working Party report onBorder Tax
Adjustments, which isoften referred tointhisconnection, usesthesingular andplural forms infree
variation. Itisnotnecessary todemonstrate thatallimported magazines aretaxed more heavily than
alldomestic likemagazines, oreventhattheaverage taxonallimported magazines ishigher thanthe
average taxonalllikedomestic magazines.
3.108 Finally, Canada ’sproposed "discriminatory effect" testappears tobebased onpredictions of
theleveloffuture tradeflows. Itiswell-established thatArticle IIIisnotdesigned toprotect expectations
ofrelative trade flows, butrather toensure equal competitive conditions forimported products.
Moreover, inthiscase, thetypeofeffects analysis Canada suggests would beimpossible. There is
nobasisforjudgingfuturelevelsofsplit-runmagazineimportsbecauseCanadahascompletelyeliminated
73Panel Report onUnited States -Section 337oftheTariff Actof1930, op.cit., atpara. 5.14.
74Panel Report onUnited States -Measures Affecting Alcoholic andMalt Beverages, op.cit.,para. 5.17.WT/DS31/R
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them fromitsmarket forthelast30years. Given itsGATT-inconsistent ban,Canada should notbe
permitted todefend theexcise taxongrounds thatasmall volume ofimports would besubject toit.
3.109 Canada responded thatitsinterpretation ofdiscrimination under Article III:2would notrequire
anyoverall balancing testastheUnited States stated. Itwould notrequire prediction oftrade flows
andisnotanaim-and-effect testinanother guise. Itsaysonlythatifthefiscal categories ofacontracting
party areorigin-neutral andexhibit noinherent biasagainst imported products, thenthemereexistence
ofsuchcategories, withdifferential ratesoftaxation, doesnotviolate Article III:2. Asimplified example
illustrates thispoint. Suppose raspberries aretaxed higher thanstrawberries, andthatallredberries
aredetermined tobelikeproducts. Under theCanadian view, thereisnoviolation ifthetwocategories
apply tobothimported anddomestic products andthereisnoinherent biasagainst imported products.
TheUnited States would saythereisaviolation because aboxofimported raspberries istaxed higher
thanaboxofdomestic strawberries. Thisisaccurate onlyifasingle instance ofdifferential taxation
creates aviolation. Canada submits thatthere isnoviolation because imported products asaclass
arenotbeing subjected toexcess taxation overdomestic products. TheUSinterpretation leadstoresults
thatareclose toabsurd andwould notreflect thelanguage ofArticle III:2, firstsentence, inparticular
theuseoftheplural, noritsobject andpurpose which isnon-discrimination ormore specifically to
protect expectations ofthecompetitive relationship between imported anddomestic products. Further,
intheJapan -Alcoholic Beverages case, itisclear from paragraph 5.19ofthereport thatthepanel
based itsfindings ontheassumption thatshochu waslargely adomestic product.
3.110 TheUnited States responded thatCanada 'sattempt todistinguish thiscasefromtheJapan -
Alcoholic Beverages casebased onthefactthatmostshochu wasproduced domestically inJapan, while
inthiscaseonecouldnotshowthatsplit-runmagazineshaveacomparableimportfocus,isinappropriate.
Canada hasbanned therelevant imports. Ofcourse there isnopreponderance ofimported split-run
magazines overdomestic split-runs. There isalsonobasisforjudging future levels ofsplit-run magazine
imports because Canada hascompletely eliminated themfromitsmarket forthelast30years. Given
itsGATT-inconsistent ban,Canada should notbepermitted todefend theexcise taxongrounds that
asmall amount ofimports would besubject toit,orthatasmall percentage ofsplit-run magazines
would beimported. Moreover, theUnited States contested Canada ’sclaims thattheUSargument
would prevent differential taxation ofstrawberries andraspberries, ifthetwofruits werefound tobe
likeproducts. Infact,thedistinction theexcise taxdraws isnotanalogous todistinguishing between
raspberriesandstrawberries(whicharedifferentfruits),butisinsteadanalogoustodistinguishingbetween
raspberries andraspberries .Specifically, itisanalogous todistinguishing between raspberries produced
infields whose harvest issoldonlyinonecountry, andraspberries produced infields whose harvest
issoldinmultiple countries.
(b) Article III:2, second sentence
Directly competitive orsubstitutable
3.111 TheUnited States argued thatintheevent thePanel doesnotfindsplit-runs andnon-split-runs
tobe"likeproducts" forpurposes ofArticle III:2, firstsentence, itshould findthem tobe"directly
competitive orsubstitutable" products within themeaning ofArticle III:2, second sentence, ofGATT
1994. TheAppellate Body inJapan -Alcoholic Beverages provided that,inassessing anallegation
ofaviolation ofArticle III:2, second sentence, onemust examine whether:
"(1) theimported products andthedomestic products are"directly competitive or
substitutable products" which areincompetition witheachother;
(2) thedirectly competitive orsubstitutable imported anddomestic products are"not
similarly taxed"; andWT/DS31/R
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(3) thedissimilartaxationofthedirectlycompetitiveorsubstitutableimported[and]
domestic products is"applied ...soastoafford protection todomestic
production ".75
Canada hasnotchallenged thefactthatsplit-runs andnon-split runsare"notsimilarly taxed". The
80percenttaxapplies solely tosplit-runs. Split-runs andnon-split runsare"directly competitive or
substitutable", andtheexcise taxis"applied soastoafford protection todomestic production". Thus,
theexcise taxviolates Article III:2, second sentence.
3.112 TheAppellate Body inJapan -Alcoholic Beverages indicated that"directly competitive or
substitutable" products wasa"broader category" ofproducts than"like products" inArticle III:2.76
TheAppellate Body observed thatitwasappropriate toexamine suchfactors asphysical characteristics,
common end-uses, tariff classifications, andthe"market place", butthatthe"decisive criterion" in
determining whether products were directly competitive orsubstitutable was"common end-uses".77
Split-runs andnon-split runscompete intheCanadian market andhavecommon end-uses. Magazines
covering thesamegeneral subject matter -e.g.,current events magazines, hobby magazines, technical
journals -compete witheachother whether ornottheyaresplit-runs. Whether amagazine issplit-run
ornotcannot bedetermined simply byexamining themagazine, butisbased, instead, onhowsimilar
themagazine istoamagazine soldoutside Canada inanother country. Split-runs, asdefined bythe
excise tax,donotdiffer fromother magazines inanywayrelated totheirability tocompete withother
magazines. Indeed, theexcise taxisapplied precisely, andsolely, because split-runs compete with
wholly domestically produced magazines forreaders andadvertising. Asdiscussed above withrespect
totheissue oflikeproduct, thedistinction between split-runs andother magazines isnotbased on
content. Even ifonecould somehow credit Canada ’sassertion thatthecontent ofnon-split-runs has
more ofa"Canadian perspective" thansplit-runs, thisdistinction could notpossibly beconsidered
adifferent "end-use".
3.113 Canadaarguedthatsplit-runeditionperiodicalsarenot"directlycompetitivewithorsubstitutable
for"periodicals witheditorial content developed fortheCanadian market. Although theymaybe
substitutable advertising vehicles, theyarenotcompetitive orsubstitutable information vehicles.
Moreover, asmentioned above, theexcise taxonadvertising contained insplit-run editions wasnot
introduced soastoprotect theCanadian production ofperiodicals anditdoesnothavethiseffect.
Rather, itwasadopted toprevent anunfair practice intheadvertising service sector. Under thesecond
sentence ofArticle III:2andtheAdArticle III,Paragraph 2,thecomplaining party mustdemonstrate
thatataxisbeing applied toimported products ordomestic products thatare"directly competitive
orsubstitutable" andthatthetaxisbeing applied "insuchawayastoprotect domestic production".
Thecomplainant bears theburden ofproof. TheUnited States musttherefore demonstrate thatsplit-run
edition periodicals andperiodicals witheditorial content developed fortheCanadian market are
competitive orsubstitutable products, andthattheParliament ofCanada imposed the80percenttax
onsplit-run edition periodicals inorder toprotect Canadian production ofperiodicals which arenot
split-run editions.
3.114 Theinterpretation ofthisphrase shares many characteristics withtheinterpretation of"like
products". Acase-by-case approach isrequired hereaswell–inother words, aninterpretation that
takes account ofalltherelevant circumstances, andinparticular theunique characteristics ofcultural
products. It’salsoamulti-factorial analysis, asitisforlikeproducts aswell–nosingle testisdecisive.
Toasignificant extent, onetakes account ofallthefactors thatgointoalikeproducts determination,
75Appellate Body Report onJapan -Taxes onAlcoholic Beverages, op.cit.,at24(emphasis inoriginal).
76Ibid., at25.
77Ibid. (emphasis added).WT/DS31/R
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including properties andend-uses. Because ofthiscommon ground, many ofthepoints Canada has
made inthecontext oflikeproducts, andhowtheconcept hastobeadapted toreflect thespecial nature
ofcultural products, arealsorelevant here.
3.115 Canada noted theUnited States 'unsubstantiated assertion thatsplit-runs andother magazines
clearly compete witheachother. Theydoofcourse compete fortheadvertising dollar because asplit-run
recycling foreign content offers afarcheaper vehicle. Butcompetition foradvertising isnottheissue
andisnotsubject toGATT 1994disciplines. Theonlylegitimate focus iscompetition intheconsumer
marketplace. AndtheUnited States hasnotdemonstrated, asitisrequired todo,thattheproducts
atissue arecompetitive orsubstitutable, orthattheymeet thethreshold testimplied bytheword
"directly".Substitutionimpliesinterchangeability.Oncecontentisacceptedasrelevantitseemsobvious
thatmagazines created fordifferent markets arenotinterchangeable. They arenotsubstitutes, and
certainly notdirect substitutes. They serve different end-uses. Canadian periodical consumers have
ademand forperiodicals containing information thatspecifically addresses theirinterests. Canadian
magazines contain information developed foranddirected totheinterests ofCanadian consumers over
abroad range ofgenres. Split-runs andmagazines witheditorial material developed fortheCanadian
market cannot beconsidered direct substitutes asinformation vehicles; andforthesame reason they
arenotindirect competition. Ultimately, ofcourse, there maybesome degree ofcompetition for
disposable income between allcultural products andallluxury products –foreverything beyond the
necessities oflife–butthisisfartooremote. Itisnotdirect competition anditdoesnottherefore
fallwithin therule. There would notbe1440 different magazine titlesproduced inCanada alone if
theproducts were directly substitutable, ordirectly competitive, inthesense contemplated bythe
AdArticle toArticle III:2.
3.116 Without embarking onanexercise ineconomic analysis, thereareimportant respects inwhich
priceanddemand comparisons aremorecomplicated inthecaseofmagazines andothercultural products
thaninthecaseofordinary commodities. Itisnotthesame ascomparing consumer behaviour in
response toprice changes onabottle ofshochu andabottle ofvodka. There aretoomany qualitative
differences inthecaseofmagazines. Togiveoneexample, iftheratio ofeditorial content to
advertisements decreases thiscanbethesameasapriceincrease. Thatisafairly objective, measurable
variation, butother qualitative differences ofequal importance canalsohaveaneffect tantamount to
aprice change –thequality ofthecontent, theattractiveness ofthegraphics, theintrinsic interest of
thearticles.
3.117 TheUnited States considered thattheveryexistence ofthetaxwasitselfproof ofcompetition
ofsplit-runs andnon-split-runs inthemarket. Canada would nothavegonetosuchextraordinary lengths
tokeepsplit-runs outofitsmarket iftheydidnotcompete withothermagazines intheCanadian market.
AsCanada itselfhasacknowledged, split-runs compete withwholly, domestically produced magazines
foradvertising revenue, which demonstrates thattheycompete forthesame readers. Theonlyreason
firms place advertisements inmagazines istoreach readers. Afirmwould consider split-runs tobe
anacceptable advertising alternative tonon-split-runs onlyifthatfirmhadsome reason tobelieve that
thesplit-run products themselves would beanacceptable alternative tonon-split-runs intheeyesof
readers. According totheUnited States, Canada acknowledges that"[r]eaders attract advertisers",
andthat:"The Canadian publishers areready tocompete withmagazines published allovertheworld
inorder tokeeptheirreaders, butthecompetition isfierce".
3.118 TheReport oftheTask Force ontheCanadian Magazine Industry provides further
acknowledgment ofthesubstitutability ofmagazines produced fortheCanadian market andother
magazines:
"[Canadian publishers ']English-language consumer magazines facesignificant competition
forsalesfromimported consumer magazines. Inlarge measure, thisisbecause themajorityWT/DS31/R
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ofthemagazines arefrom theUnited States andareaclose substitute. ...Itisreasonable to
expect thatthecontent ofAmerican magazines willbeofinterest toCanadians...".
Thisreport alsoobserves that"there isconsiderable pricecompetition" onnewsstands between domestic
andimported magazines",78andthat:
"theinitial effect oftheentry ofCanadian regional editions offoreign magazines intothe
Canadian advertising market would bealossofadvertising pages inCanadian publications
offering advertisers areadership withsimilar demographics".79
Minister ofCanadian Heritage theHonourable Michel Dupuy described thesituation asfollows:
"Canadians aremuch more interested inAmerican daily life,beitpolitical orsports lifeor
anyother kind, thanviceversa. Therefore, thereality ofthesituation isthatwemustprotect
ourselves against split-runs coming fromforeign countries and,inparticular, fromtheUnited
States".80
Canadian Government officials have repeatedly acknowledged outside thisproceeding theclose
substitutability andcompetitiveness ofsplit-run andnon-split-run magazines. Canada affirmed this
factwhere itrefers todomestic andimported magazines competing forreaders. Furthermore, Canada
admits thatsplit-run andnon-split-run magazines compete foradvertising; thisitselfdemonstrates that
thetwoaredirectly competitive andsubstitutable, since carrying advertising isaprincipal towhich
magazines areput.
3.119 Canada argued thattheUSreference totheTaskForce inthepreceding paragraph doesnot
lookintothesupporting evidence. Theevidence before theTaskForce, onwhich itsconclusions were
atleastpartially based, wasastudy bytheeconomist Leigh Anderson81which states:
"USmagazines canprobably provide areasonable substitute forCanadian magazines intheir
capacity asanadvertising medium, although some advertisers maybebetter served bya
Canadian vehicle. Inmany instances however, theywould provide averypoorsubstitute as
anentertainment andcommunication medium".
Thereport wentontocharacterize therelationship asoneof"imperfect substitutability" -farfrom
thedirect substitutability required bythisprovision. Themarket share ofimported anddomestic
magazines inCanada hasremained remarkably constant overthe30-plus years between theO'Leary
Report andtheTask Force. Ifcompetitive forces hadbeeninplaytothedegree necessary tomeet
thestandard of"directly competitive" goods, onewould haveexpected some variations. Allthiscasts
serious doubt onwhether thecompetition orsubstitutability issufficiently "direct" tomeetthestandard
ofAdArticle III.
78Task Force Report at40and42.
79Ibid.,at53.
80Statement ofMinister ofCanadian Heritage Michel Dupuy before Canada 'sStanding Senate Committee onBanking,
Trade andCommerce, 5December 1995, Issue No.50at14.
81Anderson, Leigh, AnAnalysis ofAdvertising Revenues totheCanadian Magazine Industry: theeffect offoreign
split-run magazines (19January 1994). Prepared byLeigh Anderson fortheTaskForce ontheCanadian Magazine Industry.WT/DS31/R
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Soastoafford protection todomestic production
3.120 TheUnited States argued thattheexcise taxisapplied soastoafford protection toCanadian
magazine publishers. InJapan -Alcoholic Beverages ,theAppellate Body indicated thatproof of
protective intent isnotrequired inorder toestablish aviolation ofthesecond sentence ofArticle III:2,
andthattheissue is"how themeasure inquestion isapplied ":
"Although itistruethattheaimofameasure maynotbeeasily discerned, nevertheless
itsprotective application canmostoftenbediscerned fromthedesign, thearchitecture,
andtherevealing structure ofameasure. Theverymagnitude ofthedissimilar taxation
inaparticular casemaybeevidence ofsuchaprotective application, asthepanel rightly
concluded inthiscase. Most often, there willbeother factors tobeconsidered as
well...".82
3.121 TheCanadian excise taxclearly affords protection todomestic production ofmagazines directed
attheCanadian market. Itapplies inamanner thateffectively eliminates fromtheCanadian market
split-run magazines, which compete directly withandareclose substitutes formagazines produced
solely fortheCanadian market. The"very magnitude ofthedissimilar taxation" -an80percenttax
ontheformer andnotaxonthelatter -isproof oftheprotective application oftheCanadian excise
tax,asitapplies onlytosplit-runs andissetataprohibitive level. Thestructure anddesign ofthe
excise taxareclear: thetaxmakes ituneconomical tosellanymagazines thatadvertise toCanadians
andthatareproduced foranother market orforbothCanada andanother market. Themeasure thereby
insulates thedomestic Canadian magazine industry from competition from imported split-runs. The
terms ofthetaxwerecrafted deliberately totarget Sports Illustrated magazine, todirect advertising
revenues solely todomestically-produced magazines, andtoeliminate thecompetitive advantages
conferredonsplit-runsbyvirtueoftheireconomiesofscale.SportsIllustratedCanadaceasedpublication
inCanada withtheissue dated 12December 1995. Time Warner continues tosellsubscriptions of
theUSnational edition ofSports Illustrated inCanada andalsosellstheUSedition ofSports Illustrated
onthenewsstands inCanada. These copies areprinted intheUnited States andexported toCanada.
3.122 Canada argued thatitisnotapplying theexcise taxtoimported periodicals soastoafford
protection totheCanadian production ofperiodicals. PartV.IoftheExcise TaxActhasnoeffect
ontheability offoreign periodicals toenter Canada andtoholdaverylarge share oftheCanadian
market. TheExcise TaxActapplies toallsplit-run periodicals –wherever produced –inthesame
way. Contrary totheUScontention, thepurpose ofPartV.IoftheExcise TaxActisnottoprotect
theproductionofperiodicalsinCanada,buttopreventthediversionofadvertisingrevenuestomagazines
based oncontent produced forforeign markets, andthustoensure theproduction ofeditorial content
forCanadians.
3.123 Thepurpose ofArticle IIIistoprotect thecompetitive relationship between domestic and
imported goods. Asstated inthereport onUnited States -Taxes onPetroleum andCertain Imported
Substances :
"...Thegeneral prohibition ofquantitative restrictions under Article XI...andthe
nationaltreatmentobligationofArticleIII...haveessentiallythesamerationale,namely
toprotect expectations ofthecontracting parties astothecompetitive relationship
between theirproducts andthose oftheother contracting parties".83
82Appellate Body Report onJapan -Taxes onAlcoholic Beverages, op.cit.,at28,29.
83Panel Report onUnited States -Taxes onPetroleum andCertain Imported Substances, op.cit.,at160,para. 5.2.2.WT/DS31/R
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Therefore, when Article III:1specifies thatacontracting party mustnotadopt measures "soastoafford
protection todomestic production", theobject istoprevent theadoption ormaintenance ofmeasures
thatprotect domestic products tothedisadvantage ofproducts imported fromtheterritory ofanother
party.
3.124 PartV.IoftheExcise TaxActisnotaprotectionist measure adopted "soastoafford protection
todomestic production" forthefollowing reasons:
(a) Itdoesnotaffect thecompetitive relationship between imported anddomestically-
produced periodicals;
(b) itisnotbased onthephysical origin ofperiodicals, which iswhatiscontemplated by
thereference to"domestic production"; and
(c) farfromhaving aprotectionist aim,itisalegitimate response toananti-competitive
abuse intheadvertising field, withtheultimate object ofensuring thesurvival ofa
distinct Canadian culture.
3.125 Because GATT 1994, including Article III,applies totradeingoods, theexpression "domestic
production" must refer tothephysical production ofthegood. Thisrefers toitsmanufacturing,
cultivation,extraction,etc.ArticleIIIofGATT1994cannotaddressthecompetitiverelationshipbetween
service-providers suchastheauthors andartists contributing totheintellectual material contained in
periodicals. Nordoesitprotect thecompetitive relationship between publishers intheircapacity as
sellers ofadvertising space. Interms ofphysical production, thesoleperspective thatisrelevant to
Article III,PartV.IoftheExcise TaxActisentirely neutral. Itdoesnothavetheeffect ofprotecting
theproduction ofperiodicals inCanada; indeed itsprincipal target wastheproduction inCanada of
split-run magazines asdefined intheAct.
3.126 Themeasure hasvalidpolicy objectives thatfitwithin whattheUS-MaltBeverages decision
calleda"publicpolicypurpose"thatisconsistentwithArticleIII.TheimmediateobjectiveofParliament
wasdirected against theaggressive marketing ofadvertising services inCanada bypublishers who
wererecycling inCanada editorial material whose production costshadalready beencovered inalarger
market. Thenetresult ofthispractice wastocutintothesmall share oftheadvertising market available
toCanadian publishers, whowereproducing editorial content specific toCanadians. PartV.Iofthe
Excise TaxActwasdrafted insuchawayastocurtail thisadvertising practice andnotsoastoprevent
theentry intoCanada offoreign periodicals orinsuchawayastodisadvantage foreign periodicals
intheCanadian market.
3.127 Canada noted thatithadnever intended todecrease thelevelofcompetition between imported
anddomestic magazines. Onthecontrary, themembers oftheTaskForce ontheCanadian Magazine
Industry wrote: "Weareconvinced thatwhatisbeing proposed interferes aslittleaspossible with
freedom ofexpression orchoice. Indeed, inthefinalanalysis, weareseeking toexpand choice by
ensuringthecontinuedavailabilityofmagazineswithoriginalcontent".84Thesemeasuresdidnotprevent
andwere notintended toprevent foreign periodicals from competing intheCanadian market onan
equal footing withCanadian periodicals.
3.128 Further, theUnited States hascompletely misrepresented thetruetrade position. There isan
enormous penetration ofAmerican magazines inCanada, andnothing intheCanadian taxmeasure
would change thisorisdesigned tochange this. Norarethere anysignificant trade effects tothe
84Task Force Report at64.WT/DS31/R
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measure. Thistaxconcerns averynarrow segment ofthetotalnumber ofAmerican periodicals
streaming across theborder daily. Thisverynarrow segment wasaffected inthesamewaythatanarrow
segment ofCanadian periodicals wasaffected. Andthisnarrow segment ofboththeCanadian and
theUSindustry wasaffected because theParliament ofCanada believed thatacertain practice, aservices
practice, hadtobediscouraged.
3.129 Protectionism means protection against imported products. There isnoprotectionist application
tobefound inameasure thatisnotaimed atimported products assuch, andthatdoesnotinfacthave
adisproportionate impact onimported products. Theexcise taxisnotaimed atimported split-runs
and–more important –ithas(orwould have) nogreater effect onimported split-runs thanitdoes
ondomestically produced magazines ofthesamekind. There isnodoubt thatthetaxinsulates Canadian
magazines fromacertain formofcompetition intheadvertising sector. Itdoesnot,however, insulate
Canadian producers fromcompetition resulting specifically fromimported split-runs. TheUnited States
hasfundamentally mischaracterized thesituation when itsays"themeasure...insulates thedomestic
Canadian magazine industry fromcompetition fromimported split-runs". Thisisnottheeffect ofthe
tax.Itaffects split-runs ingeneral, notjustimported products. Itiswrong tothink ofsplit-runs as
aninherently orapresumptively imported product. Theactual effect ofthetaxinpractice hassofar
beenveryclear. Itcaused Sports Illustrated tomove itsproduction fortheCanadian market outof
Canada andbacktotheUnited States. Theeffect wastosubstitute imported products fordomestic
products. Thisisexactly theopposite ofwhatisunderstood byprotectionism. Even apart fromwhat
happened inthecaseofSports Illustrated ,thelocal production ofasplit-run –aregional edition –
makes eminent business sense.
3.130 TheUnited States considered theprotectionist nature ofthetaxisevident fromitsconfiscatory
character, thestatements oftheCanadian Government regarding thetaxbothbefore andafterits
enactment, andfrom themanner inwhich itapplies. Theeffective dateofthetaxwasdeliberately
settoeliminate thesplit-run edition ofSports Illustrated magazine. Thetaxapplies onlytothose split-
runsthatbegan publication after26March 1993, afewweeks before Sports Illustrated launched its
Canadian split-run edition, butmorethantwoyears priortoenactment ofthetax.Theexcise taxapplies
inamanner thatinherently favours Canadian-based producers, whoaremuch more likely thanforeign
producers topublish magazines directed solely atCanadian readers. Foreign-based producers who
wishtoexpand operations byentering theCanadian market mustcreate anewmagazine fordistribution
exclusivelyinCanada(orselltheirforeigneditionsinidenticalforminCanada).TheCanadianmagazine
taxisdesigned toensure thatforeign-based publishers forego thecommercially attractive option of
publishing asplit-run edition ofanexisting magazine fortheCanadian market. Inintroducing the
excise taxbilltotheHouse ofCommons, Minister ofCanadian Heritage Michel Dupuy asked, "Why
isthistaxnecessary?", andanswered: "Canadian publishers would beatagrave disadvantage ifthey
were forced tocompete foradvertising revenues withmagazines thathaverecovered theireditorial
costs inmarkets which aremuch larger thantheCanadian market".
3.131 Mr.Dupuy ’sreference to"markets which aremuch larger thantheCanadian market" was
undoubtedly areference totheUnited States, whose production ofCanadian-edition split-runs was
significant prior tothe1965 import ban,andwhose potential forre-establishing split-run editions in
theCanadian market wasthebasis fortheimposition oftheexcise taxin1995. The1961 O’Leary
Report, which preceded theimport ban,noted thatthere were76USmagazines offering splitrunor
regional editions inCanada.85In1994theGovernment-appointed TaskForce ontheCanadian Magazine
Industry concluded thatitintheabsence ofadditional legislation itwashighly likely thatasignificant
number ofUSsplit-runs would besoldinCanada. TheTaskForce estimated thattherewere53potential
USconsumer magazine entrants intotheCanadian market, and70potential USbusiness andtrade
85Report, Royal Commission onPublications, May 1961 ("O’Leary Report") at36.WT/DS31/R
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magazine entrants, andthatthemajority ofthese would actually enter theCanadian market.86(By
contrast, although theTaskForce report describes insome detail thestructure oftheCanadian magazine
industry, itmakes nomention oftheexistence ofsplit-run editions ofCanadian publications.) The
effect ofthe80percent excise taxistokeepthepotential USentrants outoftheCanadian market,
whether theychoose totransmit theirmagazines electronically forprinting inCanada or-should
Canada ’sGATT-illegal import prohibition beremoved -toimport them. Byitsterms, thetaxapplies
toallsplit-runs,whetherimportedordomestically-produced.Thetaxmakesitunprofitableforsplit-runs
tobesoldinCanada. Indeed, thisisthewhole -andthestated -purpose ofthetax.AsMinister
Dupuy stated: "[The tax]could bedesigned andimplemented inorder toavoid splitruneditions".87
3.132 TheCanadian argument thatthetaxisnotapplied soastoafford protection because itis
reasonable toassume that,intheabsence oftheimport ban,split-runs would bepublished inCanada
asmuch asintheUnited States wasdubious asafactual matter. More importantly, itislegally irrelevant
because thetaxprotects domestic non-split-runs from competition from imported split-runs. The
appropriate comparison isbetween thetreatment ofimported split-runs anddomestic non-split-runs,
notbetween domestic andimported split-runs. "Article III...requires treatment ofimported products
nolessfavourable thanthataccorded tothemost-favoured domestic products"88,nottheleast-favoured.
Further, regardless ofwhatCanada 'slegislators mayhaveintended, thetaxdoesapply, byitsterms,
toimported split-run magazines. Iftheimport banwere lifted, itwould have animmediate and
exclusionary effect onimported split-runs.
3.133 Initsargument thatitsexcise taxonsplit-run magazines ismeant toaddress an"anti-competitive
abuse intheadvertising field", Canada hascompletely failed toindicate inwhatwaysplit-run magazines
constitute suchanabuse, whyithasconcluded thatall,asopposed tosome suchmagazines represent
suchanabuse, andwhyitshaschosen toapply ataxmeasure toaddress suchabuses. Itisapparent
thatthe"anti-competitive abuse" Canada isconcerned about inconnection withsplit-run magazines
iscompetition itself. Canada ’srealquarrel withsplit-runs isthattheyareproduced inamanner that
takes advantage ofeconomies ofscale, inwhich costs arespread outoveragreater number ofunits
produced. Thismeans simply thatsplit-run producers mayhavealower coststructure thanother
producers, which mayputthem atacompetitive advantage.
3.134 Competitive advantage isnotcompetitive abuse, however. Canada haswell-developed
competition lawstoaddress anysuchabuses. IfCanada weretrulyinterested inremedying competitive
abuses, itwould haveemployed those laws. Those lawsdonotpermit application ofremedies ina
vacuum, however. Theyrequire adetailed analysis oftheconduct ofparticular actors andtheirposition
inthemarket, anddonothaveastheirgoaltheremoval ofentire product categories fromthemarket.
Indeed, itwould bedifficult toimagine alesspro-competitive remedy thanonethateffectively removes
competing products from themarketplace.
3.135 Further, Canada ’sclaim thatmarketing split-runs inCanada isakintodumping isequally
untenable. Dumping isgenerally understood tomean pricing products inaforeign market below the
salesprice inthehome market, orselling products below cost. Canada hasnotalleged either such
practice inthiscase. There arewell-developed WTO procedures forconducting anti-dumping
investigations andfordetermining dumping margins. These procedures donotallow forimposition
ofduties inarbitrary amounts (e.g., 80percent) across theentire range ofimported products onthe
basis oflegislative fiat.
86Task Force Report at50-52.
87Commons Debates at14790
88Panel Report onUnited States -Measures Affecting Alcoholic andMaltBeverages, op.cit.para. 5.17(emphasis added).WT/DS31/R
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3.136 Canada argued thatprotection isafforded todomestic production forthepurpose ofArticle
III:2, second sentence, ifthere isa"discriminatory orprotective effect against imported products".
"Imported products" means products physically transported intotheterritory ofaMember. TheUnited
States concedes thattheSports Illustrated innovation thatledtothelegislation involved adomestic
product, where theonlything"imported" wastheelectronically-transmitted foreign content. TheUnited
States hasthusconceded, inthecaseofSports Illustrated Canada ,thatthere wasnodiscrimination
orprotective effect against imported products. Itfollows that"foreign based" split-runs arenotimported
products iftheyareprinted andpublished inCanada.
3.137 TheExcise TaxActthusapplies todomestic andimported products without distinction, and
itisprimarily aimed ataform ofdomestic product. While thetaxsecures advertising revenues for
Canadian publishers, protection inthesense ofArticle III:1asreadintoIII:2means protection against
imported products .Asthepreceding paragraph hasshown, split-runs arenotintrinsically imported
products. Even ifthere were noimport prohibition, given theeconomies oflocal production and
distribution andtheeaseofelectronic transmission, itislikely thatmost split-runs would belocally
produced. Itishighly significant, moreover, that,astheUnited States noted inresponse toaquestion
atthehearing, theeffect ofthetaxwastoinduce Sports Illustrated tocease itsCanadian production
andtoresume direct imports fromtheUnited States. Thesubstitution ofimports fordomestic products,
astheresult ofapublic policy measure, isthedirect opposite ofwhatalmost everyone understands
byprotectionism. Itsuffices byitselftorefute thecontention thattheExcise TaxActoperates to"afford
protection todomestic production".
3.138 Theexcisetaxmeasureisdesignedtopreventthediversionofadvertisingtolow-costpublications
reproducing recycled editorial content, attheexpense ofpublications created forCanadians. Itdoes
notguarantee thesurvival ofCanadian magazines thatthepublic doesnotwant. What ittargets, very
simply put,isthecombination ofrecycled editorial content plusCanadian advertisements. This
combination, because thecrucial input ofcontent comes withminimal cost, isdestructive offair
competition inthemarket place andconsumer choice. Iteliminates anypossibility ofa"level playing
field". Itwould leadultimately toareduction ofmaterial dealing withtheCanadian scene andinturn
toaCanadian public thatislesswell-informed onCanadian affairs. These arenotonlylegitimate
legislative concerns; theyarefarremoved from theideaofprotecting domestic production which is
referred toinArticle III.Ultimately, ofcourse, theconcern behind thislegislation iswiththe
preservation ofCanadian culture inthefaceofanextraordinary challenge from across theborder.
ItisnotCanadian public policy torestrict theimportation orcirculation ofimported magazines. It
does, however, reinforce thevalidity ofthedistinction Canada makes between original content and
domestic production asonethatisbased uponapublic policy purpose thathasnothing todowithtrade
protectionism. Split-run editions ofmagazines compete unfairly foradvertising revenues withregular
magazines, since theireditorial costs arelargely paidforintheiroriginal market.
3.139 AstotheUnited States 'inquiry whyCanada failed toapply theWTO dumping procedures,
thoseprocedures, andtheCanadian domestic legislation thatimplements them, havenever beenapplied,
andwould probably notevenbeapplicable, toadvertising asaservice sector notcovered byGATT.
TheUnited States alsoasks, ineffect, whyCanada hasnotusedtheCanadian Competition Act.There
isnoreason whyspecially-tailored measures cannot beadopted forspecific sectors oftheeconomy
thathavetheirownunique characteristics. Competition issues inCanada havenever beenreserved
exclusively totheCompetition Act. They areaddressed, inthecontext ofspecific sectors, through
avariety ofregulatory statutes. Split-runs andthemagazine advertising market areunique. There
isnoreason whytheirproblems should notbeaddressed through special legislation. Andthere is
noreason whythatlegislation should nottaketheform ofatax.Fiscal incentives anddisincentives
thathavelittleornothing todowithraising revenue –ranging fromchildtaxcredits tosuper-depletion
allowances –arefamiliar techniques inCanadian legislative practice.WT/DS31/R
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3.140 TheUnited States asserted that,inaddition tocharacterizations byCanadian officials, Canada 's
submissions tothePanel themselves confirm thattheexcise taxwasstructured toprotect domestic
production. Astatement inCanada 'ssubmission isinstructive:
"The object oftheexcise taxisnottodiscourage readership offoreign magazines, butto
maintain anenvironment inwhich Canadian magazines canexistinCanada alongside with
imported magazines. Itisalsointended tofoster conditions inwhich indigenous magazines
canbepublished, distributed andsoldinCanada onacommercial basis..."(emphasis added).
Although couched inthebestpossible light, thisstatement doesnotdisguise thefactthatthepurpose
oftheexcise taxistoprotect Canadian magazines fromimport competition. Itappeared tobeCanada 's
position thatbecause itdoesnotcompletely restrict imports ofmagazines, itshould befreetoimpose
certain import barriers tobenefit itsdomestic industry. There isabsolutely nobasisinGATT forthis
position. Canada 'scontractual obligations under GATT Article IIIarenotlimited toaffording acertain
amount ofnational treatment toimports; Canada mustprovide fullnational treatment, comparative
tradeadvantages (i.e.toprotect domestic producers fromlegitimate import competition). Tariffs (within
bound rates) andcertain types ofdomestic subsidies areamong thepermitted measures. Internal taxes
imposed atrateshigher forimported products thandomestic likeproducts arenot.Moreover, Canada 's
submissions consistently imply animport penetration much higher thanitactually is.Canada 'sTask
Force Report states that,inreality, "Canadian publications account for67.6percentofthemagazines
soldinCanada inayear".
3.141 Canada asserts repeatedly thattheexcise taxisdesigned toencourage "original content", as
though suchapurpose would justify imposition ofadiscriminatory excise tax.Infact,thewhole notion
of"original content" isprotectionist innature. Permitting aMember torequire thataproduct besold
initsterritory beadifferent product thanthatsoldabroad would openuptheWTO system toserious
abuses. Forexample, aMember concerned about theability ofalocalindustry tocompete withforeign
manufacturers ofthesameproduct (automobiles, footwear, jewellery, etc.)could impose aprohibitive
tax-onthepretext ofensuring thatlocalconsumers canpurchase products designed exclusively for
them-on"non-original" product designs, inorder tokeepforeign producers fromexporting theirbest-
selling products totheMember 'smarket. Inorder tosellintosuchamarket, theforeign manufacturer
would berequired todesign products andsetupnewproduction linesexclusively forthatmarket.
Thatwould erase anyscale efficiencies theforeign manufacturer might otherwise havegained from
salesinitsdomestic market andtoother countries.
3.142 Canada considered thattheUSreliance ontheconcept ofeconomies ofscale ismisplaced.
Theconcept isnormally associated withlarge production runs, typically foraninternational market.
Alocalproduction runforasingle regional market isbydefinition arelatively lowvolume production
runthatdoesnotfitthedefinition. What thelegislation isagainst isnoteconomies ofscale butthe
clearly unfair competitive advantage thatcomes fromprepaid costs, providing whatamounts toafree
rideintheCanadian advertising market. TheUSindustry getstremendous economies ofscalethrough
itsordinary operations ofpublishing largerunsintheUnited States fortheinternational export market.
TheUSpublisher isfreetoproduce andthentopromote andsellasmany copies ofthemagazine in
Canada aspossible. None ofthisistouched bythelegislation. Thetaxdoesnotinsulate thedomestic
Canadian magazine industry from competition forreaders. Harper ’s,Sports Illustrated ,andVanity
Faircanallbenefit fullyfrom economies ofscale ofwhich aCanadian publisher, andinfactmost
publishers outside theUnited States, could never dream.
3.143 TheUnited States submits further thatthe"whole notion oforiginal content" isprotectionist
innature, andthatthepolicy hasthesame protectionist characteristics asiflocalproduct designs were
toberequired. Theargument isrevealing, because itamounts toablanket denial thatcultural products
haveanyspecificity thatdistinguishes them fromordinary items oftrade. Content distinguishes oneWT/DS31/R
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magazine from another. Original content created foraspecific national community differentiates
magazines inawaythatproduct design seldom ifeverdoes. TheUnited States hasraised aspectre
thatisnotonlyfar-fetched; itisbased onafalseanalogy, andafailure torecognize thedistinctive
characteristics ofcultural products, andofmagazines above all. "Original content" doesnothave
tobedomestically-produced. Canadian content, interms ofsubject matter, doesnothavetobecontent
produced byCanadians orinCanada. Most often itwill,buttheassertion that"original content" is
inherently protectionist isincorrect.
(c) Article III:4
3.144 TheUnited States argued thatifthePanel decides thattheexcise taxdoesnotfallwithin the
scope ofArticle III:2, thetaxshould thenbeviewed asameasure affecting thesaleoruseofsplit-run
magazines within themeaning ofGATT Article III:4. Theexcise taxprovides lessfavourable treatment
toimported split-runs thantolikedomestic non-split-runs andtherefore violates Article III:4. The
excise taxclearly affects thesaleofsplit-run magazines. Infact,itissetatalevelsohighastoprevent
anysalesofsplit-runs intheCanadian market. Indeed, Canadian officials haverepeatedly stated that
tobethepurpose ofthetax.An80percentexcise taxisobviously notintended togenerate taxrevenue.
Theexcise taxalsoaffects theuseofsplit-run magazines, byapplying aprohibitive taxwhenever they
areusedtoconvey advertising totheCanadian public. Moreover split-run magazines andnon-split-run
magazines are"likeproducts" forpurposes ofArticle III:2andshould thusbeconsidered "likeproducts"
forpurposes ofArticle III:4aswell. Thepanel inUS-Standards forGasoline considered thatsimilar
factors were relevant tolikeproduct analyses under paragraphs III:2andIII:4.89
3.145 Finally, theexcise taxaccords lessfavourable treatment toimported split-run magazines than
toother domestically-produced magazines. Asdiscussed above, byitsterms thetaxapplies toimported
split-runs.Theexcisetaxtreatsimportedsplit-runslessfavourablythanotherpurelydomesticmagazines
because iteffectively prevents split-runs frombeing soldprofitably intheCanadian magazine market,
andmakes iteffectively impossible forsplit-runs tobeusedtocarry domestic advertising. Thus, if
theexcise taxisnotcovered byArticle III:2, itfallswithin thescope of,andisinconsistent with,
Article III:4.
C. Funded andCommercial Postal Rates
(i) Article III:4
"Regulations andrequirements affecting theinternal sale,offering forsale,
purchase, transportation, distribution oruse"
3.146 TheUnited States argued thatCanada ’spostal ratesformagazines areopenly discriminatory
andincontravention ofIII:4ofGATT 1994. Canada PostisaCanadian Government entity thatcharges
domestic magazines lower rates(either "commercial" or"funded" depending onthemagazine) than
itcharges imported magazines thataremailed inCanada. Canada Postalsooffers certain discounts
(such asfor"palletization" and"pre-sort") onlytodomestic magazines. These measures amount to
"regulations" or"requirements" thataffect theinternal sale,transportation, ordistribution ofmagazines
inCanada,andprovidelessfavourabletreatmenttoimportedmagazinesthantolikedomesticmagazines,
inviolation ofGATT Article III:4.
3.147 Inthereport onEEC-Parts andComponents ,thepanel recognized thatrequirements that
anenterprisevoluntarilyacceptstogaingovernment-providedadvantagesarenonetheless"requirements":
89Panel Report onUnited States -Standards forReformulated andConventional Gasoline, op.cit. ,para. 6.8.WT/DS31/R
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"The Panel noted thatArticle III:4refers to"alllaws, regulations orrequirements affecting
(the)internal sale,offering forsale,purchase, transportation, distribution oruse". ThePanel
considered thatthecomprehensive coverage of"alllaws, regulations orrequirements affecting "
theinternal sale, etc.ofimported products suggests thatnotonlyrequirements which an
enterprise islegally bound tocarry out,...butalsothose which anenterprise voluntarily
accepts inorder toobtain anadvantage fromthegovernment constitute "requirements" within
themeaning ofthatprovision. ..."90
Magazine publishers thatsought tomake useoftheCanadian mails havetoagree topaythepostal
feescharged byCanada Post. Those charges arerequirements -orregulations -within themeaning
ofArticle III:4.
3.148 Canada Post’spostal rates alsoclearly "affect" thesale, transportation anddistribution of
imported magazines, because theyspecify thecostofusing theservices ofCanada Posttotransport
ordistribute magazines tosubscribers inCanada. Apublisher seeking tohaveCanada Posttransport
anddistribute itsmagazines tosubscribers inCanada -andvirtually allsubscription magazines sold
inCanada weredistributed inthismanner -would havetopaythepostal feesprescribed byCanada
Post. Thepostal feesdirectly affected thecompetitive conditions under which theproduct istransported,
distributed, andsoldtosubscribers. These rates therefore "affect" thesale, transportation, and
distribution ofmagazines inCanada.91
3.149 Canada ’sdiscriminatory postal rateshaveaparticular impact onthetransportation ofmagazines
inCanada. Thedrafters ofGATT clearly intended toinclude theratescharged forgovernment-provided
transportation services under thedisciplines ofArticle III.Canada Post’sdivergent postal ratesare
notbased onneutral economic considerations, butexplicitly discriminatory criteria -namely, whether
themagazine isCanadian orforeign inorigin.92
3.150 Canada underscored theimportance ofthedistinction between thesubsidized rates, those rates
available asaresult ofasubsidy granted exclusively todomestic publishers byCanadian Heritage,
andcommercial publications rates, those ratesavailable toallpublishers (Canadian orotherwise) that
donotqualify forthesubsidy granted byCanadian Heritage. Whereas thesubsidized ratesarethe
result ofanexpressed intention onthepartoftheGovernment toassist domestic publishers (as
specifically permitted byGATT Article III:8(b)), thecommercial publications ratesaretheresult of
generally accepted commercial andmarketing practices andarenotinfluenced bygovernment policy.
Unfortunately, theUnited States hasfailed tomake thisimportant distinction.
3.151 Canada Postisacorporation initsownright, withalegal personality distinct from thatof
theGovernment, andconsiderable autonomy intheconduct ofitsoperation; farmore thanwould ever
beaccorded toagovernment department. Canada PostisaCrown corporation anditsobjectives are
setoutintheCPCAct.Inaddition, under theFAAct,asaSchedule III,PartIICrown Corporation,
Canada Postisexpected to:operate inacompetitive environment; earnareturn onequity; notdepend
ongovernment appropriation; andfinally, provide areasonable expectation thatitwould paydividends.
BoththeCPCActandtheFAActessentiallyestablishacommercialmandateforCanadaPostcomparable
toaprivate sector interest.
90Panel Report onEuropean Economic Community -Regulations onParts andComponents, op.cit., at132, 197, para.
5.21, Italics inoriginal. Seealso, “Canada -Administration oftheForeign Investment Review Act”,adopted on7February
1984, BISD 30S/140, 158para. 5.4.
91Panel Report onItalian Discrimination Against Agricultural Machinery ,adopted on23October 1958, BISD 7S/64
para. 12.
92TheUnited States recommended thePanel toseealso, U.S.-MaltBeverages (panel found thatrestrictions onprivate
delivery ofimported, butnotdomestic beer, wasinconsistent withArticle III:4).WT/DS31/R
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3.152 Thislegislative framework provides Canada Postwiththelegalandoperational flexibility to
implement itscommercially-oriented mandate. With respect topublications, i.e.,newspapers and
periodicals,CanadaPostisnotagovernmentmonopolyanddoesnothavetheexclusiverightofdelivery.
Canada Postdoesnothavethepower ofamonopoly when itsetscommercial ratesforthedelivery
ofpublications.93Itcompetes inanopencompetitive market foritsshare ofthepublications delivery
market. Anypublisher, foreign ordomestic, isfreetoarrange forthedelivery ofhisnewspaper or
periodical viaCanada Postorwithanyother distributor. Section 14(2) oftheCPC Actstates that
"[n]othing inthisActshallbeconstrued asrequiring anyperson totransmit bypostanynewspaper,
magazine, book, catalogue orgoods". Pursuant toSection 2oftheAct,"post" means toleave ina
postoffice orwithaperson authorized bytheCorporation toreceive mailable matter. Foreign publishers
havetheadditional option ofmailing theircopies addressed toCanadian addresses withtheirownpostal
administration attheapplicable international printed matter rates.
3.153 Theprinciple ofnational treatment ofArticle III:4ofGATT 1994 doesnotapply tothe
commercial postal ratescharged byCanada Post. TheUnited States contends thatcommercial rates
setbyCanada Postare"regulations" or"requirements" affecting theinternal saleofimported
publications. Theterm"regulation" inthecontext ofGATT 1994 means therules ororders having
theforce oflawthatareissued byexecutive oradministrative authorities ofgovernment. Therates
forthedelivery ofletters inCanada aresetbyregulations.94However, thecommercial rates for
publications aresetbymarket forces andfluctuate withcommercial imperatives –nottomention that
inmany cases theyaretheresult ofnegotiations withbothdomestic andinternational large volume
customers pursuant tospecific agreements. Theresponsibility forsetting those ratesrestsexclusively
withseniormanagementoftheCorporationwhoexercisetheirdiscretionbasedoncommercialprinciples
without government intervention.
3.154 Theterm"requirement" inthecontext ofGATT alsoimplies ademand ordirection proclaimed
byanauthority within government. Again, commercial imperatives andmarket forces dictate the
commercial ratesforpublications charged bytheCorporation toitscustomers. Thegovernment has
never issued adirective totheCorporation regarding publications mail. TheCorporation 'sprices are
settomeetmarket demands andopportunities (asinthecaseofanyprivate sector company), andare
clearly nottheproduct of"laws, regulations orrequirements" ofCanada. Itisincorrect tosuggest,
asdoestheUnited States, thatthedifferential between thecommercial rateprovided toCanadian
publishers andthecommercial rateprovided tonon-Canadian publishers iscalculated toplace non-
Canadian publishers atacompetitive disadvantage. Canada Posthasnopolicy ofgiving acompetitive
advantagetoonesegmentofitscustomersoveranother,andhasnointerestinpursuinganysuchpractice.
Fortheirpart,customers haveaccess tocompeting delivery channels and,asinallopenmarkets, have
theability tonegotiate ratesinamanner reflecting theirpurchasing power.
3.155 Theinternational commercial ratesreflect thereality thatsuppliers inanycompetitive market
would attempt toobtain thebestpossible price. Pricing issettomaximize contribution while remaining
competitive. Factors suchastheavailability andcosttocustomers ofcompeting distribution channels,
currency exchange rates, service standards, etc.,arealltaken intoconsideration byCanada Post(as
would anycompany inacompetitive market) when setting itspricing. AsaCrown corporation with
acommercial mandate, Canada Postoperates onthesame basis asaprivate sector interest. The
commercial postage rateapplicable tonon-Canadian publications issetonthebasisofthecommercial
93Canada added thatCanada Postdoeshave alimited exclusive privilege withrespect tothecollection, transmission
anddelivery of"letters" inCanada, including addressed advertising mail. Thisexclusive privilege represents inaggregate
approximately 50percentoftotalcorporate revenues. Canada Posthasnostatutory protection fortheremainder ofitsbusiness
andmustcompete withexisting orpotential competitors, asthecasemaybe.TheCorporation 'sexclusive privilege isdefined
inSection 14and15oftheCanada PostCorporation Act.
94Letter Mail Regulations ,SOR/88-430 asamended toApril 30,1996.WT/DS31/R
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business reality thatthenext-best option faced bymailers ofpublications thatareprinted outside Canada
isthemuch higher international ratecharged bythepostal administration inthecountry ofpublication.
Inthecaseofpublications fromtheUnited States, thismeans aratefordeposit inCanada withCanada
Postthatisabout halfofwhat theywould havetopaytheUnited States Postal Service (USPS) for
delivery ofthesame items toCanada. Thecommercial mandate given toCanada Postrequires itto
obtain thebestpossible rateinorder tomaximize itsreturns.
3.156 Almost halfthedirect-deposit foreign periodicals business Canada Postreceives iscontracted
through specific agreements, negotiated onacase-by-case basissubject tocustomer- andmarket-specific
needs andopportunities asopposed togeneric pricing policies. Canada Post'scommercial pricing
policies aredetermined bythedemands ofthemarkets inwhich itoperates andnotbygovernmental
directives orpublic policy considerations. Inthecaseofcommercial publications, thereisnodirection,
instruction oranyother obligation toprovide thisservice ortoprovide thisservice atcertain rates.
Thismeans thatthemanagement ofCanada Postisfreetoestablish commercial services andratesfor
publications purely oncommercial principles andmarket realities soastomaximize thefinancial
advantage toCanada Postproviding suchcommercial publication services. Thedecision tomaintain
aseparate, higher rateforinternational asopposed toCanadian commercial publications ismade purely
byCanada Postmanagement forcommercial reasons andinnowayreflects anyexplicit orimplicit
request bygovernment thatCanada Postuseitsratestructure todisadvantage foreign commercial
publications relative toCanadian commercial publications. TheCanadian Government could express
itsviews oncommercial andinternational ratesmuch inthesame wayitmight choose tocomment
onpricing ofaprivate sector firm. However, tocompel change, theGovernment would havetoinstruct
Canada Postunder thedirective power inSection 22oftheCPCAct.Indeed, Canada Posthasreceived
noinstruction oradvice –implicit orexplicit –tosetinternational commercial ratesinexcess ofdomestic
commercial ratesforperiodicals. Thisaction isofCanada Post'sowncreation based onitsperception
ofmarket opportunity.
3.157 TheUnited States argued thattheGovernment ofCanada isresponsible forCanada Post's
activities, including itsso-called commercial postal rates. Canada 'sargument implicitly concedes that
Canada Postisagovernmental entity, andexercises agovernmental function, when itapplies "funded"
(subsidized) postal ratesto,andprovides forthedelivery of,certain domestically produced magazines.
Canada seeks toconvince thePanel thatCanada Postsheds itsgovernmental character when itapplies
itsso-called "commercial" ratesandprovides forthedelivery ofmagazines subject tothose rates.
3.158 Canada Postisawholly, government-owned, government-created chartered body, subject to
thecontrol ofaboard ofdirectors appointed bytheMinister responsible forCanada Post. (Theexistence
ofaGovernment Minister responsible forCanada Postisfurther proof thatCanada Postisanarm
oftheCanadian Federal Government.) TheChairman oftheBoard andthePresident ofCanada Post
arebothappointed bytheGovernor-in-Council. Section 5(2)(e) oftheCPC Actprovides explicitly
thatCanada Postis"aninstitution oftheGovernment ofCanada". TheCanadian Parliament created
Canada Postandfixed itsoperating mandate. Moreover, Canada Post’smandate tooperate, inpart,
ona"commercial" basis isitself setbytheGovernment. Animportant oversight roleisplayed by
theMinister responsible forCanada Post. In"The Mandate ofCanada PostCorporation andits
Development", Canada acknowledged that: "Section 22oftheCPCActprovides thatCanada Post
isrequired tocomply withdirections issued bytheMinister responsible forthecorporation. Thisgives
theMinister powers analogous tothose exercisable byshareholders ofother privately heldcorporations
throughunanimousshareholdersagreements".95Thus,CanadaPostisentirelyacreatureoftheCanadian
Government, subject toitsdirect supervision andcontrol.
95"The Mandate ofCanada PostCorporation anditsDevelopment".WT/DS31/R
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3.159 Recent events confirm thattheCanadian Government considers Canada Posttobeagovernment
entity fullysubject toCanadian Government direction, andavehicle fortheexpression ofGovernment
policy -including through Canada Post’s"commercial" operations. On8October 1996, Diane Marleau,
theMinister responsible forCanada PostCorporation, presented theCanadian Government 'sreaction
toareport issued byanindependent taskforce chaired byMr.George Radwanski (the"Radwanski
Report"). Thereport addressed financial andpolicy issues related tothefuture ofCanada Post.
3.160 TheRadwanski Report washighly critical ofCanada Postand,interalia,charged Canada Post
withengaging inunfair competition withitsprivate sector competitors inthedelivery ofcommercial
services, suchascourier andadvertising mailservices.96Inherpress conference responding tothe
report, Ms.Marleau stated:
"Iwant toemphasize thatthegovernment regards Canada Postasasignificant federal
institution, andthatitseesCanada Postcontinuing tocarry outapublic policy rolebased
ontheprovision ofmailtoallCanadians, nomatter where theylive...The federal government
isexpected toembody certain values andprinciples inhowitcarries outitsaffairs, inparticular:
fairness, transparency, openness andaccountability. Canada Postispartofthefederal
government andmustliveuptothese standards .AsMinister Responsible forCanada Post,
Iexpect immediate corrective action wherever these values andprinciples have been
compromised. Tothisend,Ihaveasked Mr.Ouellet, asChair ofCanada PostCorporation,
todevelop anaction planforimproving thetransparency ofCanada Post'sactivities, and
addressing these issues...The government willconsider therestoftherecommendations of
thereport oftheMandate Review, recognizing thatthere arecertain basic principles which
must guide ourdeliberations:...
* Canada Postisavaluable federal institution .Canadians haveinvested init,andthe
government must protect thisvalue.
* Canada Postwillremain aCrown corporation andnotbeprivatized, aslongasit
continues tofulfilapublic policy role."...97
3.161 With respect toCanada Post’scommercial courier service activities, Minister Marleau stated
that:
"[A]s longasCanada Postremains inthislineofbusiness, itmustcompete onalevel
playing field. AsInoted earlier, Canada Post’soperations mustbeconducted under
thetenets offairness, transparency, openness, andaccountability".98
These excerpts confirm thattheCanadian Government considers Canada PosttobeaCanadian federal
government institution andthattheGovernment isfullyresponsible forCanada Post’sactivities -even
those carried outincommercial sectors.
3.162 Canada Post’sso-called "commercial" (non-subsidized) postage rates reflect anoverlay of
Canadian government policy having nothing todowithmarketplace considerations. Notwithstanding
Canada ’sstatement thatcommercial publications rates"areavailable toallpublishers (Canadian or
otherwise) thatdonotqualify forthesubsidy granted byCanadian Heritage", infactonlycertain types
ofpublications qualify forcommercial mailrates. Among theeligibility criteria are:thecontent of
thepublication (e.g., devoted toreligion, thesciences, social orliterary criticism), theamount ofspace
96Thereport didnotspecifically discuss Canada Post’spublications mailactivities.
97Speaking Notes fortheHonourable Diane Marleau, Minister Responsible forCanada PostCorporation, Release of
theCanada PostMandate Review Report ,8October 1996, at1-3(emphasis added).
98Ibid.,at3.WT/DS31/R
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itdevoted toadvertising, andwhether thepublisher isaperson whose principal business ispublishing.
These criteria areallirrelevant ascommercial considerations, butareindicative oftypes ofpublications
which agovernment might wishtosupport asamatter ofpublic policy. Thissuggests thatCanada
Postcontinues tooperate asaninstrument oftheCanadian Government initscommercial mailoperations
anddoesnotoperate according topurely commercial considerations.
3.163 Finally, theUnited States considered thatCanada 'sclaim thatthedisparity in"commercial"
ratesbetween imports anddomestic magazines reflects thelackofcommercially feasible alternative
delivery options forimports ascompared todomestic magazines isdubious asafactual matter. Also,
Canada 'sexplanation thatthedisparity inratesdoesnotreflect Government policy issuspect inlight
oftheexistence ofawhole setofCanadian Government policy measures whose explicit goalistobenefit
domestic magazines. Eveniftrue,Canada 'sexplanation would notremove thismeasure fromthescope
ofArticle III:4. Article III:4isprecise -aMember must accord "treatment nolessfavourable" to
imports ascompared todomestic products -regardless ofwhether imports havefewer commercial
alternatives ascompared withdomestic magazines. Itisinthenature ofimported products thatthey
often areinaninferior economic andpolitical bargaining position. Article IIIwasincluded inthe
GATT because imports arevulnerable todiscrimination.
3.164 Canada argued thatgovernment ownership isnotinitself sufficient toqualify thepractices
ofanenterprise asregulations forthepurposes ofArticle III:4ofGATT 1994. Theindependent nature
ofCanada Post'scommercial operations forthedistribution ofpublications andthecompetitive
environment within which itoperates andsetsitsratesremoves suchratesfromtheprovisions ofArticle
III:4. Although atonetimethePostOffice wasanintegral partoftheGovernment ofCanada and
itsratesweresetbystatute andregulation, thatrelationship waschanged inafundamental wayin1981.
Concerned withissues relating toservice, management, labour relations andthefinancial performance
ofthePostOffice Department, theGovernment decided toturnoverthepostal administration toa
Crowncorporationwithacommercialorientationandanindependentmanagementchargedwithattaining
financial self-sufficiency. TheCPCActgavetheCorporation thepowers ofanatural person, anattribute
more typical ofaprivate sector corporation thanoftraditional Crown corporations. TheFAActlater
confirmed theCorporation 'sstatus asanentity expected tooperate inacompetitive environment, not
tobedependent onappropriations, earnareturn onequity andpaydividends toitsshareholder.
3.165 Atthetimeofthecreation ofCanada Post,therewerethose whosuggested thatitshould remain
under thedirect control oftheGovernment. Itwasproposed thatitsactivities beoverseen bythe
Postmaster General assisted byaSecretariat. However, whathadhappened wasthatsupervision of
theCorporation hadbeenentrusted toaboard ofdirectors composed ofindependent outside directors
andofficers oftheCorporation (none ofwhom arecivilservants). TheBoard, liketraditional private
sector boards ofdirectors, isempowered toestablish thegeneral policy oftheCorporation, including
themaking ofdecisions concerning finance, personnel management andcommercial orientation, without
therestrictions inherent ingovernment departments. TheBoard has,since incorporation, pursued the
goaloffinancial self-sufficiency byallowing management thelatitude, incommercial operations, to
generate revenues through rateandproduct management andtomanage theCorporation 'sexpenditures
inamanner consistent withanycompetitive enterprise, essentially freeofgovernment intervention.
3.166 CrowncorporationsaredistinctlegalentitieswhollyownedbytheCrownwithboardsofdirectors
thatoversee themanagement ofthecorporation andholdmanagement accountable forthecompany ’s
performance. Theboard ofdirectors, through thechair, isaccountable totheresponsible minister
andtheresponsible minister functions asthelinkbetween thecorporation andboththeCabinet and
Parliament. Itisthedutyoftheboard ofdirectors tooversee themanagement oftheirCrown corporation
withaviewtothebestinterests ofboththecorporation andthelong-term interests oftheshareholder.
Thisconcept issimilar tothatofprivate sector corporations. Boards ofdirectors ofCrown corporations
areexpected toexercise judgement inthebroad areas of:theestablishment ofacorporation ’sstrategicWT/DS31/R
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direction; thesafeguarding ofthecorporation ’sresources; themonitoring ofcorporate performance;
andreporting totheCrown. Each Crown corporation isaccountable toParliament fortheconduct
ofitsaffairs through aminister whorepresents theCrown. Itisthrough theminister thattheCrown
corporation reports onitsplans anditsperformance totheGovernment andtoParliament.
3.167 Canadian andinternational commercial categories ofrateshadbeensetbyCanada Postoutside
oftheregulationssinceMarch1994andMarch1992,respectively.Non-subsidizedpublicationsformerly
subjected totherates setoutintheNewspapers andPeriodicals Regulations arenowsubject to
commercial Canadian Publications MailandInternational Publications Mailrates, respectively, which
areestablished andapproved byCanada Postsenior management. Theyarenotestablished byCanadian
Government regulations.
3.168 Canada Postisacorporation withadistinct legalpersonality. Itcancontract separately from
theGovernment. Itcontracts withtheGovernment forthesupply ofpostal andother services. The
Corporation isobligated topaycorporate income taxtotheGovernment onitsrevenues.99Contrary
toUSassertions, employees oftheCorporation arenotemployees oftheGovernment. Indeed, Section
12oftheCPC Actauthorizes Canada Posttohireemployees, fixtheterms andconditions oftheir
employment andpaythemtheirremuneration. Thestatutory regime100applicable toemployees ofthe
Government doesnotapply toemployees ofCanada Post, whose employment conditions andlabour
relations aregoverned bythesame provisions oftheCanada Labour Code thatapply tothefederal
private sector.101Furthermore, ifCanada Postemployees hadgovernment employee status, therewould
havebeennoneedtoinclude aspecial "deeming" provision intheActinorder topreserve employees '
pension rights atthetimeofthecreation ofCanada Post. Theabove attributes arecertainly notthose
ofacorporation overwhich theCanadian Government maintains a"hands-on levelofadministrative
control" astheUnited States would likethePanel tobelieve.
3.169 Thedegree ofcontrol thattheGovernment exercises overCanada Post'scommercial operations
isonedictated bytheGovernment shareholder 'sinterests. TheGovernment requires sound financial
administration oftheCorporation 'sbusiness andafairreturn onitsequity investments. Toachieve
thisgoal, theCorporation mustoffersatisfactory services tocustomers atacompetitive pricethatwill
maximize profits. Inacompetitive environment, pricing policies ofCanada Postmusttakeintoaccount
basic economic principles ofsupply anddemand. Itmust consequently consider theeffects thatits
commercial postal rateswillhaveoncurrent orpotential competition.
3.170 Canada Postdoesnothaveamonopoly withrespect tothedelivery ofpublications (newspapers
andperiodicals) inCanada. Canada Post,through theCPCAct,doeshavealimited exclusive privilege
withrespect tothecollection, transmission anddelivery of"letters" inCanada including addressed
advertising mail, buttheCorporation hasnostatutory protection fortheremainder ofitsbusiness and
hastocompete withexisting orpotential competition, asthecasemaybe.
3.171 Almost50percentofforeignpublicationsmailedinCanadaareaccordedspecialratesnegotiated
bymajor foreign publishers pursuant tolong-term agreements withCanada Post. Those rates are
substantially lessthanthecommercial International Publications Mailrateandrelatively close tothe
99Income TaxRegulations ,amendment ,SOR/94-405.
100Canada states thatemployees oftheGovernment areappointed bythePublic Service Commission under theunique
provisions ofthePublic Service Employment Act. Employment conditions andlabour relations aregoverned bythePublic
Service StaffRelations ActandthePublic Service Employment Act.
101Canada notes thatthefederal private sector includes suchindustries asbanks, interprovincial trucking, radio, television,
railways, ports andtheaeronautics industry.WT/DS31/R
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commercial Canadian Publications Mailrate102.Thewillingness oftheCorporation toenterintosuch
special-rateagreementsreflectstherealitythatlargeforeignpublishershavetheresourcesandpurchasing
power tocredibly threaten fullorpartial delivery inCanada viacurrent andpotential private distributors.
Smaller foreign publishers haveneither thevolume northedensity ofmailings towarrant theireffort
toaccess private distribution (often organised onacitybycitybasis) inCanada. Canadian commercial
publishers havecredibly threatened tomove toprivate distribution inthepast103.Thismotivated the
Corporation todevelop commercial Publications Mailratesthatarefinancially attractive when compared
tothatofcurrent orpotential private distributors.
3.172 Canada Postcurrently facescompetition fordelivery ofaddressed publications.104Theprincipal
form ofcompetition forthedelivery ofaddressed subscriber copies ofdaily andweekly newspapers
(those noteligible forsubsidized postal rates) isdelivery bythepublishers themselves. Ingeneral,
almost allsuchnewspapers choose todeliver theirownpublications wherever volume densities warrant,
withtheresidual volumes being mailed tosubscribers viaCanada Post'scommercial Publications Mail
rates. There issomewhat lesscompetition forthedelivery ofaddressed periodicals, where competition
exists mainly inthedense urban areas. Competition forthedelivery ofaddressed periodicals islimited
because commercial publications ratesaredesigned toattract thedelivery ofaddressed periodicals not
eligible forsubsidized rates. Itisalsolimited duetoCanada Post'ssuccessful bidtoCanadian Heritage
forthedelivery ofpublications eligible forfunded rates. Canada Post'scompetitors cannot enter into
thesamearrangementwithCanadianHeritagebecauseallavailableprogramdollarshavebeencommitted
tothearrangement signed withCanada Post.
3.173 Canadian Heritage agreed toafixed price contract withCanada Post, taking intoaccount the
factthatthiswould beanexclusive contract forthedelivery ofeligible publishers 'publications at
subsidized rates, andtherefore committing allofitsfunding available fordistribution assistance of
thesepublications. Obviously, thisprecludes anyalternative supplier ofdelivery services fromsigning
asimilar agreement withCanadian Heritage during thethree-year termofthecurrent agreement.
However, Canada Postwontheexclusive three-year arrangement inthecontext ofarealpossibility
ofadirect-to-publishers funding program without exclusive suppliers. Such anoption oranoption
ofawarding anexclusive supply contract toasupplier orsuppliers other thanCanada Postisagain
apossibility attheexpiry ofthecurrent three-year contract. Itshould benoted thatCanada Postis
obliged under thecurrent agreement toprovide service without limitation attheagreed funded rates
toallexisting andnewpublications thataredeemed byCanadian Heritage tomeettheagreed eligibility
conditions. Ifthepublisher ofaneligible publication chooses todeliver thepublication viaanother
carrier, thepublisher would nothaveaccess tospecial ratesgiven thatCanadian Heritage haschosen
tonegotiate anexclusive supplier contract withCanada Postforthetermofthecontract.
3.174 With respect totheuseoftheRadwanski Report bytheUnited States, themandate review
waspartially areview oftheappropriateness ofthemonopoly thattheGovernment hasgranted toCanada
Postonletter delivery. TheReport recommends, among other things: (1)thatproviding universality
ofservice anduniformity ofprice forlettermail beregarded asintegral elements ofthemandate of
Canada Post;and(2)thattheexclusive privilege ofCanada Postwithregard tolettermail bemaintained
initscurrent form. Secondly, themandate review wasareview bytheshareholder ofthevalidity
102Canada asserts thatcontrary towhat theUnited States contends, several large foreign publishers enjoy discounts,
pursuant tolong-term agreements, similar tothemailpreparation discounts offered toCanadian publishers.
103Canada notes thatthose threats aresubstantiated bycertain factors suchastheproximity oftheCanadian publications
totheirmarkets,generallygreaterdensityofthosemarkets(typicallycommer cialtradepublicationsorientedtowardsbusinesses
inurban areas) andconcentration ofownership intheindustry.
104Examples ofsuchcompetitors areGlobe andMailDistribution Services Ltd., A1Tours Ltd.(bundle distribution of
magazines tobusiness/professional offices), C.D. Woods Ltd., (Vancouver B.C.), Roltek Ltd., Insurance Courier Services
Ltd.andanemerging co-operative delivery venture ofCanadian trade publications.WT/DS31/R
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ofthestrategic, operational andfinancial direction ofCanada Postandinthisregard themandate review
issimilar innature toperiodic reviews conducted intheprivate sector byshareholders ofbothpublicly
andprivately heldcorporations. Therecommendations contained intheReport, inwhole orinpart,
arenotgovernment policy butrather recommendations tothegovernment forconsideration. The
government hasrejected certain oftherecommendations, adopted others andtaken thebalance under
advisement. TheRadwanski Report didnotaddress Canada Post'sdistribution services forpublications.
3.175 TheUnited States asserted thatthefactthattheGovernment hastodatenotintervened toput
astoptoCanada Post'sdiscriminatory postal ratesdoesnotmean thatitisnotresponsible forthem.
AWTO Member cannot create agovernment institution, allow ittotakeactions inconsistent withthe
Member 'sWTO obligations, andthenclaim ithasnoresponsibility fortheactions oftheinstitution.
Themarket access concessions thatWTO Members havenegotiated overtheyears would notbesecure
ifgovernments could escape theirobligation toprovide national treatment toimported products by
creating government corporations andthenclaiming thattheyarenotresponsible forthediscrimination
imposed bytheentities theythemselves created. Intervention bytheGovernment toensure thatCanada
Postcomplies withCanada 'sinternational obligations under theGATT iswithin thepower ofthe
Canadian Government. Itisespecially important thattheCanadian Government takeremedial action
because publishers ofimported magazines haveonlylimited alternatives tousing Canada Post'sservices
fordelivery andtransportation ofmagazines toCanadian subscribers. Indeed, Canada Postitselfboasts
that,"Wearetheonlynational distribution service thatreaches every single address inCanada. No
onedoesthis-noother competitor comes close".105Canada acknowledges thatCanada Postfaces
onlylimited competition forthedelivery ofaddressed magazines. Magazines seeking toreach
destinationsotherthanbusinessaddressesinmajorcitieshavenopracticalalternativetousingthedelivery
services ofCanada Post.
3.176 BecauseofCanadaPost'sstatusasaCanadianGovernmentinstitutionthatdeliversandtransports
magazines andother mail, itsactions -including theratesitapplies -inrespect ofthese activities are
necessarily regulations orrequirements affecting theinternal sale,distribution ortransportation of
magazines within themeaning ofArticle III:4. IftheCanadian Government toldprivate Canadian
delivery services tocharge more fordelivering imported goods thanfordelivering domestic goods,
itwould beinclear violation ofArticle III:4. IftheCanadian Government accomplishes thissame
result through ratediscrimination initsowndelivery services, Article III:4should apply withequal
force.WithrespecttoCanada’sargumentsconcerningtheRadwanskireport,theUnitedStatesresponded
thatalthough thatreport didnotrefertopublications mail, itwasprimarily concerned withadvertising
mailandcourier services, which arebothcommercial services. Thus, thestatements made byMinister
Marleau withrespect tothese services ascommercial services areequally applicable topublications
mail.
Likeproduct issue
3.177 TheUnited States argued thatimported magazines are"like" domestic magazines forthe
purposes ofArticle III:4. Canada Post’sratesdistinguish between magazines based onwhether they
areimported orproduced inCanada. Inparticular, Canada established tworateclasses formagazines
thatareprinted andpublished inCanada (the"commercial" and"funded" rates) andathirdrateclass
forimported magazines (the"international" rate). Magazines eligible for"funded" ratesarenotonly
printed andpublished inCanada, buthavetomeetother requirements, namely: (a)theperiodical must
betypeset andedited inCanada; (b)theexclusive right toproduce andpublish theperiodical must
beheldbyaCanadian citizen, oracorporation controlled byCanadian citizens; and(c)theissue can
105Canada Post, Publications Mail, Product Guide atB-1(bold inoriginal).WT/DS31/R
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notbepublished under license fromaforeign publisher, orcontain editorial content substantially the
same asanissue printed outside Canada thatwasnotfirstedited inCanada.106
3.178 However, allofthesecategories ofmagazines are"likeproducts" forpurposes ofArticle III:4
andthedistinction thatCanada hasdrawn between them issolely, indeed openly, intended tofavour
domestic production. Domestic andimported magazines share thesame physical characteristics and
commercial uses. Neither thelocation ofproduction, northeownership oftherighttopublish, nor
whether editorial content appeared inanissueprinted outside Canada, make imported magazines unlike
domestically-produced magazines interms ofphysical characteristics orenduses. Theratesestablished
byCanada Postforimported anddomestically-produced magazines drawanimpermissible distinction
based ontheorigin ofthemagazine, adistinction that,onitsface,isapplied "soastoafford protection
todomestic production".
Treatment ofimported anddomestic magazines
3.179 TheUnited States stated thattheratesestablished byCanada Postdiscriminate against imported
magazines. Canada Postcharges ratesfordomestically-produced magazines thatareeither 10or80
percentlower onaverage thantheratesapplicable toimported magazines. These ratesaccord manifestly
lessfavourable treatment toimported magazines bycomparison totheir domestically-produced
counterparts. Moreover, Canada Postroutinely makes discounts (such as"palletization" and"bypass"
options) available todomestic magazines butnottoimported magazines thatincrease thedegree of
discrimination stillfurther. Thehigher postal ratesforimported magazines arecalculated toplace
them atacompetitive disadvantage bycomparison tocompeting domestically-produced magazines
bycreating adisparity between thedistribution andtransportation costs forimported anddomestic
magazines. Article III:4, second sentence, confirms thatdiscrimination withrespect totransportation
based onthe"nationality ofaproduct" isnotconsistent withArticle III:4. Canada hasmade nosecret
ofthefactthattheexplicit purpose foritsvarying postal ratesistoprotect theCanadian publishing
industry fromimport competition. Canada ’sdiscriminatory magazine postal ratesrepresent precisely
thekindofprotectionist regulatory measure thatGATT Article III:4condemns.
3.180 Itisnoanswer forCanada toassert thatCanada Postenters intospecial lower-rate arrangements
withcertain larger foreign magazines. Canada Post'sstandard commercial ratesforimported magazines
arehigher thanfordomestic magazines. Smaller foreign publishers, whocannot enter intospecial
arrangements, aresubject tothestandard discriminatory rates. Moreover, negotiations forspecial
ratesbetweenCanadaPostandlargerpublishers(bothforeignanddomestic)presumablyusethestandard
discriminatory commercial ratesasthestarting point. Thus, theresulting negotiated ratesareinall
likelihood discriminatory aswell. Indeed, Canada states thatthenegotiated ratesoffered tolargeforeign
publishersareonly"relatively"closetothestandardcommercialratesareofferedtoCanadianpublishers.
3.181 Canada argued thattheeconomic factors applicable toforeign anddomestic periodicals are
notthesamewhich iswhytheirrespective ratesaredifferent. Those ratesareareflection ofcompetitive
situations, nottheresult ofdiscriminatory practices aswasargued bytheUnited States. Canada Post
hasnopolicy ofgiving acompetitive advantage toonesegment ofitscustomers overanother, and
would havenointerest inpursuing anysuchpractice. Given appropriate competitive factors, itmight
verywellbethatcertain foreign periodicals would enjoy better ratesthannon-subsidized Canadian
magazines. Thisisexactly thetypeofscenario thatArticle IIIofGATT 1994isintended topreserve.
Ifforeign magazines areinbetter competitive situations, theyshould beabletotakeadvantage ofit.
Ifonthecontrary, theyarenotinsuchaposition, Article IIIshould notbetheretograntthemadvantages
106RegulationsRespectingNewspapersandPeriodicals,Section3(2)(definitionof"Canadi anPeriodical"),S.O.R./91-179,
28February, 1991.WT/DS31/R
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thatmarket forces donotprovide. Inthecommercial andcompetitive environment inwhich Canada
Postoperates, itisunder noobligation byvirtue ofArticle III:4tosubsidize USpublications bysetting
abetter postal ratethenwhattheirspecific market conditions require.
(ii) Article III:8(b)
3.182 TheUnited States argued thatCanada Post’sdiscriminatory postal ratesdonotconstitute the
payment ofsubsidies exclusively todomestic producers within themeaning ofArticle III:8(b), because
domestic producers receive nosubsidy payments. Under their1May1996 Agreement, Canadian
HeritageprovidesCanadaPostwithfixedannualpaymentstosupportCanadaPost’sbelow-cost"funded"
postal ratesforcertain magazines produced inCanada. Those payments arenotdistributed todomestic
magazine producers; instead Canada Postusesthefunds tounderwrite thelower postage ratesitcharges
domestically-produced magazines. Thus, Canada ’sdiscriminatory postal ratesarenotdirect payments
toCanadianproducers;rather,theymodifytheconditionsofcompetitionbetweendomesticandimported
products incontravention ofArticle III:4.
3.183 Aseries ofGATT 1947 panel reports hadinterpreted Article III:8(b) verynarrowly tohold
thattheonlysubsidies subject toexclusion from thenational treatment provisions ofArticle IIIare
those subsidies thatarepaiddirectly todomestic producers. So,forexample, credit facilities provided
topurchasers, andnotproducers,107andpayments whose benefits could bepartially retained by
processors,108havebeenfound nottoqualify under Article III:8(b). Nordoestheannual payment
thatCanadian Heritage makes toCanada Postconstitute asubsidy todomestic producers under
Article III:8(b). Canadian Heritage doesnotprovide itsfunds todomestic producers. Thelow-priced
"funded" postal ratethatCanada applies tocertain favoured periodicals produced inCanada donot
fallwithin theterms ofArticle III:8(b). Rather, these rates, together withthe"commercial" rateand
various discounts applicable onlytoCanadian-produced magazines, arepartofanovertly discriminatory
postal ratescheme designed tocreate further protection forCanada ’sdomestic magazine industry.
3.184 Canada argued thatthefunds paidbyCanadian Heritage toCanada Posttoenable ittogrant
Canadian publishers ofpublications reduced postal rates areallowable subsidies under GATT
Article III:8(b), which explicitly recognizes thatsubsidies todomestic producers arenotsubject to
thenational treatment rules ofArticle III.Paragraph 8(b)applies withrespect toallprovisions of
ArticleIII,includingArticleIII:4.PublicpolicyhasbeendevelopedtoensurethatCanadians,regardless
ofwhere theylive,haveaccess onareasonable basistoperiodicals. Subsidized postal ratesareprovided
tomaximize theopportunity fordistribution, particularly inlightofCanada 'srelatively small andwidely
dispersed population. Thismeasure iscritical, since Canadian magazines haveonlylimited access
tonewsstands andrelymainly onpaidsubscriptions forcirculation. Subsidized postal rateshaveenabled
Canadian magazines toreach awidely dispersed readership. Theprovision ofreduced postal rates
isawayofpaying subsidies thatiscompatible withGATT 1994. These payments aremade toCanada
Postfourtimes ayearinreturn foritsundertaking todeliver eligible publications attheagreed reduced
rates.ThebenefitofthesubsidiesflowsdirectlytoeligibleCanadianmagazinepublishers.TheCanadian
publication industry istheexclusive beneficiary ofthesesubsidies andhastoqualify forthesesubsidized
ratesinaccordance withcriteria setbyCanadian Heritage before being found tobeeligible.
3.185 Thedecision ofthepanel inUS-MaltBeverages lends nosupport totheUSposition. This
panel heldthattheexpression "payment ofsubsidies" applies onlytodirect subsidies andnottoother
107Panel Report onItalian Discrimination Against Agricultural Machinery, op.cit.,at60,64,para. 14.
108Panel Report onEuropean Economic Community -Payments andSubsidies Paid toProcessors andProducers ofOilseeds
andRelated Animal-Feed Proteins ,adopted on25January 1990, 37S/86, 124, para 137.WT/DS31/R
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kinds ofsubsidies suchastaxcredits ortaxabatements.109Thepanel wasconcerned solely withthe
distinction between subsidies, taxremissions anddifferential taxation rates, because afailure tomake
thatdistinction would destroy theeffect ofArticle III:2. Theformal distinction between taxation
measures –benefits notinvolving direct expenditures bygovernment –andsubsidies isvitaltothe
operation oftheArticle asawhole. Canada 'spostal subsidy meets therequirement ofdirectness, in
thesense inwhich thatconcept isusedintheUS-MaltBeverages decision, because apayment by
government fortheexclusive benefit oftheproducers isbeing made. Itisonlythemechanics ofpayment
thatwere indirect.
3.186 Theposition heldbytheUnited States istherefore based onadifference ofform, notsubstance.
Thespecific forminwhich thesubsidy ispaidisirrelevant totheoperation ofArticle III:8(b), provided
thatapayment ismade bythegovernment fortheexclusive benefit ofdomestic producers.110Before
being granted theprivilege ofposting using funded postal rates, apublisher hastosignaservice
agreement withCanada Post. Thissimple factisevidence thatpublishers aredirect beneficiaries.
Canada Postisanintermediary, notthebeneficiary. Whether thesubsidy ispaidtoCanada Postor
paiddirectly tothepublishers, theeconomic effect isthesame, namely thattheeligible publishers
arethebeneficiaries ofthesubsidy.
3.187 Inpractical terms, payments toindividual publishers would beacumbersome andineffective
method ofdelivering thissubsidy. Theadministrative andfinancial burden ofsuchaprocess would
erode thebenefits oftheprogram. Ifaneligible Canadian publisher ofamonthly magazine wereto
receive thepayment, theadvantages thispublisher enjoys relative toforeign competition would be
essentially unchanged. Canadian publishers would findthemselves inthesame position astheyare
innow,namelywithanadvantageovertheirforeigncompetitors.Therefore,CanadianHeritageprovides
Canada Postwithanagreed-upon payment onaquarterly basis. Thecurrent process isfarmoreefficient
inminimizing theadministrative overhead related totheprogram.
3.188 Based onthepanel report ontheEEC –Payments andSubsidies Paid toProcessors and
Producers ofOilseeds andRelated Animal-feed Proteins111("EEC-Oilseeds "),theUnited States argued
thatsubsidies notpaiddirectly toproducers arenotpaidtothem "exclusively" within themeaning
ofArticle III:8(b). Theword "exclusively" asusedinthisprovision isconcerned withthedistinction
between "domestic" asopposed to"non-domestic" producers, notwhether thirdparties benefit from
thesubsidies. Whether anincidental benefit might beconferred upon Canada Postfrom thesubsidy
payment isirrelevant. Under theinterpretation ofthisclause suggested bytheUnited States, virtually
anysubsidy payment thatwould confer athirdpartybenefit, however minimal, would benon-compliant.
Thisissurely nottheintended application oftheexemption. Subsidies haveaneconomic impact on
thirdparties inalmost allcircumstances. Thedefinition oftheterm"exclusive" proposed bytheUnited
States would lead, inpractical terms, tothenullification oftheArticle III:8(b) exemption.
3.189 TheUnited States argued thatwere Canada toprovide payments directly (andexclusively)
todomestic producers ofmagazines, theUnited States agreed thatsuchpayments would beprotected
byArticle III:8(b). Under Canada ’spostal ratescheme forperiodicals, however, domestic magazine
producers receive nogovernment payments. Theonly"payments" aremade from onegovernment
109Panel Report onUnited States -Measures Affecting Alcoholic andMalt Beverages, op.cit.
110Canada noted thattheUS-Malt Beverages panel readsubparagraph 8(b)having regard tothecontext ofthewhole
ofArticle IIIbut,except inthecontext oftaxation measures, itwasnever stated thatforevery subsidy toqualify, thepayment
must bemade directly todomestic producers. Thepanel simply saidthatthewords "payment ofsubsidies" refer onlyto
direct subsidies involving apayment, nottoother subsidies suchastaxcredits ortaxreductions (ibid.at271,para. 5.8).
111Panel Repor tonEuropeanEconomicCommunity-PaymentsandSubsidiesPaidtoProcessorsandProducersofOilseeds
andRelated Animal-Feed Proteins, op.cit.,at124-125, paras. 137-141.WT/DS31/R
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entity (Canadian Heritage) toanother (Canada Post).112Thus Canada 'spostal scheme simply does
notcomply withtherequirement ofArticle III:8(b) thattherebe"payment ...todomestic producers".
3.190 Withregard toCanada 'sargument thatitsfunded-rates system satisfied Article III:8(b) because
itincludes "payments" (toCanada Post), andbecause theresulting lower postal rates ondomestic
magazines havethesame"economic effect" ondomestic producers aspayments made directly tothem,
theUnited States stated thatthemereexistence of"payments" (from onegovernment entity toanother,
inthiscase) isnotenough. Thepayments havetogotodomestic producers. Under Canada ’spostal
ratescheme, domestic periodicals areprovided lower postal ratesthanimported magazines; domestic
periodical producers receive nopayments. Instead, so-called "funded publications" arecharged lower
postal rates. Because imported magazines donotqualify fortheserates, theyareplaced atacommercial
disadvantage interms ofthetransportation anddelivery oftheirmagazines inCanada. Thisisprecisely
thetypeofdiscrimination thatArticle III:4ismeant toprohibit. Canada Post'sdiscriminatory postal
ratesclearly confer aneconomic benefit ondomestic products ,butabenefit ofthatsortisnotwithin
thescope ofArticle III:8(b). ThatArticle applies onlyto"thepayment ofsubsidies exclusively to
domestic producers "(emphasis added).
3.191 GATT panels haveconsistently applied Article III:8(b) strictly according toitsterms. They
haverejected appeals toignore itsactual language infavour ofwhatCanada claims tobe"aneconomic
perspective". They haveuniformly denied theprotection ofArticle III:8(b) tomeasures thatprovided
nodirectpaymentstodomesticproducers,includingmeasuresthatmayhaveconferredeconomicbenefits
indirectly ondomestic producers byfavouring thepurchase oruseofdomestic products. Indeed, the
"economic benefits" argument wasexplicitly rejected bythepanel onUnited States -Measures Affecting
theImportation, Internal SaleandUseofTobacco ("US-Tobacco ").113
3.192 IfCanada ’sview-thatArticle III:8(b) encompasses theindirect provision ofeconomic benefits
todomestic producers through government advantages conferred ontheirgoods -isaccepted, itwould
dramatically expand thetypes ofmeasures exempted fromdiscipline under Article III.Thatisbecause
virtually anyformofmore-favourable treatment accorded byagovernment todomestic products could
becharacterized asproviding economic benefits similar tothepayment ofsubsidies todomestic
producers. Pastpanels haveuniformly interpreted Article III:8(b) torequire actual payments todomestic
producers. Inthepanel onItalian Discrimination Against Agricultural Machinery ,thatpanel
"agreed withthecontention oftheUnited Kingdom delegation thatinanycasetheprovisions
ofparagraph 8(b)would notbeapplicable tothisparticular casesince thecredit facilities
provided under theLawweregranted tothepurchasers oragricultural machinery andcould
notbeconsidered assubsidies accorded totheproducers ofagricultural machinery".114
3.193 Inthatcaseitcould havebeenargued thateventhough asubsidy wasgranted topurchasers
ofagricultural machinery, economic benefits alsoflowed directly orindirectly tothedomestic producer
ofthemachinery, sincetheavailability ofinexpensive credit limited tothepurchase ofdomestic goods
would stimulate thesales ofsuchgoods. However, thepanel hadcorrectly interpreted thewords
"exclusively todomestic producers" according totheirplainmeaning andfound thattheItalian credit
scheme didnotqualify fortheArticle III:8(b) exemption.
112Memorandum ofAgreement.
113Panel report onUnited States -Measures Affecting theImportation, Internal SaleandUseofTobacco ,adopted 4
October 1994, DS44/R.
114Panel Report onItalian Discrimination Against Agricultural Machinery, op.cit.para. 14.WT/DS31/R
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3.194 Thepanel report onUS-MaltBeverages ,citedbyCanada initssubmissions, doesnotdeal
withtheissueofpayments tothirdparties. Thepanel rejected aUSargument thattaxcredits forsmall
domestic producers ofbeerandwineconstituted adomestic subsidy permitted under Article III:8(b),
andholding that
"Article III:8(b) ...clarifies thattheproduct-related rulesinparagraphs 1through 7ofArticle
III‘shallnotprevent thepayment ofsubsidies exclusively todomestic producers ’(emphasis
added [inoriginal text]). Thewords 'payment ofsubsidies 'refer onlytodirect subsidies
involving apayment. .."115
Thepanel thuscontinued thepractice ofpastpanels ofinvoking anarrow andliteral interpretation
ofthatprovision. Inthiscase, theonly"payment" goesfromCanadian Heritage toCanada Post, not
tomagazine producers. Infact,this"payment" ismore akintoaninternal transfer ofgovernment
funds thanatrueeconomic "payment" toanunrelated entity.
3.195 InUS-Tobacco ,116thepanel found thatprice support payments made todomestic tobacco
farmers outoftheproceeds oftheNoNetCostAssessment ("NNCA") were within thescope of
Article III:8(b). Thepanel rejected aninterpretation ofArticle III:8(b) based onameasure ’seconomic
impact:
"The Panel wascognizant ofthefactthataremission ofataxonaproduct andthepayment
ofaproducer subsidy outoftheproceeds ofsuchataxcould havethesame economic effects.
However, thepanel noted thatthedistinction inArticle III:8(b) isaformal one,notrelated
totheeconomic impact ofameasure. Thus, inviewoftheexplicit language ofArticle III:8(b),
which recognizes thattheproduct-related rules ofArticle III"shall notprevent thepayment
ofsubsidies exclusively todomestic producers," thePanel didnotconsider, asargued bythe
complainants, thatthepayment ofasubsidy totobacco producers outoftheproceeds ofthe
NNCA resulted inaform oftaxremission inconsistent withArticle III:2".117
3.196 Finally, theEEC-Oilseeds118panel examined EEClegislation that,likethepayments bythe
Department ofCanadian Heritage toCanada Post,included government payments toamiddleman rather
thantothedomestic producer itself, onthetheory thatthepayments would induce themiddleman to
provide preferential treatment tothedomestic producer. TheEEClegislation provided forthepayment
ofsubsidies toprocessors ofoilseeds whenever theyestablished bydocumentary evidence thatthey
hadtransformed oilseeds ofCommunity origin. Inthatdecision:
"The Panel noted thatArticle III:8(b) applies onlytopayments made exclusively todomestic
producers andconsidered thatitcanreasonably beassumed thatapayment notmade directly
toproducers isnotmade "exclusively" tothem.Itnoted moreover thatiftheeconomic benefits
generated bythepayments granted bytheCommunity canatleastpartly beretained bythe
processorsofCommunityoilseeds,thepaymentsgenerateabenefitconditionaluponthepurchase
ofoilseeds ofdomestic origin inconsistently withArticle III:4. Under these circumstances
Article III:8(b) would notbeapplicable because inthatcasethepayments would notbemade
exclusively todomestic producers buttoprocessors aswell".119
115Panel Report onUnited States -Measures Affecting Alcoholic andMalt Beverages, op.cit.
116Panel Report onUnited States -Measures Affecting theImportation, Internal SaleandUseofTobacco ,op.cit.
117Ibid., para. 109(emphasis added).
118Panel Repor tonEuropeanEconomicCommunity-PaymentsandSubsidiesPaidtoProcessorsandProducersofOilseeds
andRelated Animal-Feed Proteins, op.cit.,,para. 137.
119Ibid., para. 137(emphasis added).WT/DS31/R
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3.197 Canada mischaracterizes theEEC-Oilseeds decision asstanding fortheproposition thatthe
phrase "exclusively todomestic producer," asusedinArticle III:8(b), isintended onlytodistinguish
between "domestic" asopposed to"non-domestic" producers. Theemphasized language makes itclear
thatthedistinction isbetween "direct payments toproducers" and"payments to...processors" (who
might inturnprovide anindirect benefit toproducers). So,too,inthiscase, theonly"payments"
aretoanentity other thanthedomestic producers (andthis"payment" isaninternal transfer of
government funds).
3.198 Canada considered itparadoxical ifnotcontradictory fortheUnited States tochallenge Canada
Post'sinternational commercial ratesonthegrounds thatCanada PostandtheGovernment areone
andthesame, andtoobject tosubsidized ratesonthegrounds thatthesame Corporation isobtaining,
asathird party, ashare ofthebenefits which thepostal subsidy extends toCanadian periodical
publishers. Theargument thattheCorporation isobtaining abenefit presupposes thatitisanentirely
separateentityfromtheGovernment:wereitanorganoftheGovernment,itwouldmakelittledifference
ifitbenefitted inanywayfrom thepayments, forinthiscaseitwould notbeagovernment subsidy
butsimply atransfer offunds. TheUnited States cannot maintain thatthecommercial rates and
subsidized ratesarediscriminatory because Canada PostispartoftheGovernment inthefirstcase
butnotpartoftheGovernment inthesecond case. Thisisaclear contradiction.
3.199 TheUnited States concedes thattheprotection provided byArticle III:8(b) would extend to
direct payments made exclusively todomestic periodical producers. Atthesametime, theUnited States
takesahighly formalistic approach based onaverynarrow interpretation ofArticle III:8(b). However,
theformalism which theUnited States isasking thePanel toenshrine issupported neither bythetext
ofArticle III:8(b) norbyGATT practice. Themethod ofsubsidy payment isnotinandofitself
conclusive indetermining whether Article III:8(b) applies. Theessential factor isthatthepayment
bemade bythegovernment forthebenefit ofdomestic producers.
3.200 Thepanel reports quoted bytheUnited States donotsupport theconclusion thatthesubsidy
mustalways bepaiddirectly andexclusively todomestic producers. Forexample, itcannot seriously
beargued thatthepanel onItalian Discrimination against Agricultural Machinery determined thatthe
subsidy hadtobepaidtodomestic producers through actual payments. Thepanel found that
Article III:8(b) didnotapply inthatcasebecause thecredit facilities provided bythelegislation were
extended tothepurchasers ofagricultural machinery andcould notbeconsidered tobesubsidies paid
totheproducers ofagricultural machinery. InthecaseoftheItalian legislation, government support
intheform ofcredit facilities forthepurchase ofItalian agricultural machinery wasgranted tothe
purchasers ofagricultural machinery, andintheviewofthepanel theprovisions ofArticle III:8(b)
donotapply inthese circumstances. Thepostal subsidy program involves nosimilar circumstances,
since theCanadian Government 'sassistance intheformofreduced postal ratesdoesnotgotoCanada
PostCorporation.
3.201 Itwould appear thattheformalism advocated bytheUnited States stems from thereport of
theUS–MaltBeverages panel, which dealtwithalower excise taxlevied ondomestic beerthanon
imported beer. TheUnited States argued thattheclearpurpose ofthelower taxwastosubsidize small
producers, andthatreducing theexcise taxwasawayofgranting suchasubsidy which wascompatible
withtheGATT. Thepanel concluded that"thewords ‘payment ofsubsidies 'refer onlytodirect
subsidies involving apayment, nottoother subsidies suchastaxcredits ortaxreductions". Inthe
opinion ofthepanel, theprohibition ondiscriminatory internal taxesinArticle III:2would berendered
inoperative were itpossible tooffer ageneral justification forsuchtaxes onimported goods onthe
grounds thatthese were subsidies paid tocompeting domestic producers inaccordance with
Article III:8(b).WT/DS31/R
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3.202 TheUS–Malt Beverages report must bereadandunderstood within thefullcontext of
Article III:2andwithconsideration totaxcredits andreductions. Inthatspecific case,thetaxreductions
andexemptions could notbedeemed equivalent tothesubsidies provided forbyArticle III:8(b). The
panel didnotmake adetermination onallother forms ofsubsidies. TheCanadian postal subsidy,
which hasnothing incommon withataxabatement, exemption, credit orreduction, isconsistent with
theprovisions ofArticle III:8(b) andisinnowayincompatible withtheUS-MaltBeverages decision.
Inthepresentcase,paymentsaremadefourtimesayearfortheexclusivebenefitofperiodicalproducers.
Only themechanics ofpayment areindirect.
3.203 Thisinterpretation issupported bytheUS–Tobacco report, which theUnited States quotes
andtowhich itattributes anunwarranted scope inlightofArticle III:8(b). Without entering intothe
details, theissueinthiscasewaswhether thenetself-financing levyonimported tobacco washigher
thantheself-financing levyondomestic tobacco, since thelatter received adefacto taxremission by
virtue oftheoperation ofthetobacco pricesupport program. Thepanel didnotconsider thatthepayment
ofasubsidy totobacco producers outoftheproceeds oftheself-financing levyresulted inaform of
taxremission inconsistent withArticle III:2. Thepanel noted theformal distinction between atax
remission ontheonehandandthepayment ofasubsidy ontheother, eveniftheycould havethesame
economic effect. Theeconomic impact inthecaseoftaxremission isirrelevant totheapplication
ofArticle III:8(b). Theformal distinction between taxation measures andsubsidies isvitaltothe
operation ofArticle III:2. Itcannot beconcluded from thispanel report, astheUnited States did,
thatinthecaseofaproducer subsidy, theexamination ofthemeasure 'seconomic impact isirrelevant
todetermine whether themeasure isconsistent withtheprovisions ofArticle III:8(b).
3.204 Lastly, theUnited States suggests thatArticle III:8(b) isinapplicable inlightoftheEEC–
Oilseeds report, inwhich thepanel provides anunusual interpretation oftheword "exclusively".
Contrary totheUScontention, Canada hasnotmisinterpreted thisreport. Itsimply supports amore
common interpretation oftheword "exclusively". Thegeneral thrust ofArticle IIIisagainst
discrimination between imported anddomestic products. Inthiscontext, granting agovernment subsidy
"exclusively" todomestic producers canonlymean granting asubsidy onlytotheproducers ofdomestic
products, inthesense thatitispaidtothem alone andnottoforeign producers.
3.205 Inthecaseunder study, thepayments toprocessors wereanincentive forthemtobuyoilseeds
ofEEC origin instead ofimported oilseeds. Theincentive derived from thefactthatthepayments
made toprocessors could begreater thanthedifference between theprice processors actually paid
toEEC producers andtheprice thatprocessors would havehadtopayforimported oilseeds. This
excess compensation created anincentive tobuyproducts ofEECorigin instead ofimports. Itisfor
thisreason thatArticle III:8(b) wasnotapplicable, forinthiscasethepayments were notmade to
domestic EEC producers exclusively, buttoprocessors aswell.
3.206 Thepanel demonstrated thatthepayments could constitute benefits granted toEECprocessors
ifthelatter purchased EEC products. There isnoparallel between thepostal subsidy andtheflaws
intheEECsystem. TheUnited States hasfailed todemonstrate suchaparallel. Moreover, theUnited
States claim thatthepanel developed ageneral principle ofinterpretation bywhich Article III:8(b)
doesnotapply ifthere isanintermediary between thegovernment andthebeneficiary isgroundless.
Thepanel would nothavetaken thetrouble toperform suchacomplex analysis ofthevarious prices
(inparagraphs 136through 141)were itonlyamatter ofputting forward ageneral principle. The
United States hasnotpresented anyanalysis comparable totheoneperformed bythepanel.
3.207 Moreover, there isnoparallel withthepostal subsidy because Canada Postdoesnotreceive
"bonus payments" forhandling anddistributing periodicals fromCanadian publishers rather thanfrom
foreign publishers. TheCorporation receives anamount thatisstipulated inamemorandum of
understanding orcontract inexchange fortheprovision ofreduced postal rates. Thisamount isbasedWT/DS31/R
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onestimates ofexpected eligible Canadian periodical volumes atthenegotiated reduced rates, which
estimates aredeveloped independently byeachofCanada PostandCanadian Heritage inthecourse
ofnegotiating thecontract. There isnoincentive tohandle theperiodicals ofCanadian publishers
rather thanthose offoreign publishers, since delivering alarger number ofCanadian magazines than
thatoriginally estimated byCanada Postwould notincrease theCorporation 'snetincome. Thepostal
subsidy doesnotgrant theCorporation anyparticular benefit. TheEECsystem provided incentives
favouring EEC processors whereas there arenosuch measures favouring Canada Post inthe
memorandum ofunderstanding withCanadian Heritage.
3.208 Theagreement between Canadian Heritage andCanada Postexpressly stipulates theratespaid
byeligible Canadian periodical publishers. Theterms oftheagreement ensure thatthepayments to
theCorporation secure theprice itmust charge publishers whomailtheirperiodicals atsubsidized
rates. Thecontract fortheprovision ofdelivery services foreligible publications isatafixed rate.
Canada Postreceives alump suminexchange forproviding delivery services atthereduced rate.
Itshould benoted thatthepredetermined annual payment toCanada PostfromCanadian Heritage is
anegotiated value forservice inthespirit ofanyfixedpricecontract; thatis,Canada Postmustprovide
delivery attheagreed reduced ratestoalleligible publications inreturn forthefixed amount. Both
parties areaware thatvariances upordown inagiven yearrelative toeach'sviewofexpected volume
aretobeexpected. However, itiseachparty'sstudied viewthatinspiteofthese risks, ithasanequal
chance togainorloserelative tothose expectations ofvolumes. Inviewofthefixed price nature of
theagreement, there isnorelevance toarguments ofpayments inexcess ofvalue ofservice provided.
Thevalue provided isbydefinition exactly whatwascontracted tobeprovided inreturn forthepre-
determined fixed payment.
3.209 TheUnitedStateshasconcededthatwerethepaymentsmadedirectlyandexclusivelytoCanadian
periodical publishers, thesepayments would qualify forprotection under Article III:8(b). Thequestion
thePanel mustconsider iswhether suchachange inthemethod ofsubsidy payment would place foreign
periodical publishers inamore favourable competitive position inrelation toCanadian publishers in
respect ofthepostal subsidy. There isnoreason tobelieve thatthiswould bethecase. Themethod
ofpayment ismerely thesubsidy 'stechnical, administrative aspect. Itdoesnotreveal whobenefits
fromthesubsidy. Ifpayments weremade directly topublishers, Canada Postwould increase itsrates
forthedelivery anddistribution ofthemagazines thathadpreviously enjoyed reduced rates, in
accordance withitspractice forcommercial services anditsprofit maximization objectives. Eligible
Canadian publishers would continue tobuyperiodical delivery services fromtheCorporation atacost
"lower" thanthecommercial rate,inviewofthecompensatory payments theywould receive. Asfor
foreign publishers, theywould continue tobuyperiodical delivery anddistribution services fromCanada
Postatthesame ratesasbefore.
3.210 Ifthesubsidy werepaiddirectly topublishers rather thantoCanada Post, theeffects would
bethesame. Eligible publishers would bethebeneficiaries ofthesubsidy. Onlyadministrative costs
would increase substantially. There isnovalid reason inthiscase, suchasforexample aconcern
thatprovisions ofthe1994GATT would berendered inoperative, which demand thatthePanel uphold
aninterpretation which would havetheeffect ofreplacing therelatively simple andeconomical existing
system withacostly andcomplicated system. Lastly, therearenogrounds forclaiming, astheUnited
States hasdone, thatourinterpretation ofArticle III:8(b) would havetheeffect ofencouraging the
governments ofmember states tointroduce ahostofdiscriminatory measures infavour ofdomestic
goods forthesolereason thatthese would economically benefit domestic producers. Canada isnot
proposing theabolition ofthedisciplines inthe1994GATT butonlyareading ofArticle III:8(b) that
respects itsterms.
3.211 TheUnited States concluded thatovertheyears GATT panels hadbeenverycareful toapply
theprecise language ofArticle III:8(b) andtoavoid expanding thescope ofthatArticle toencompassWT/DS31/R
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measures other thanthedirect payment ofsubsidies thatconvey economic benefits onthedomestic
producers. Thiscaution wascompletely justified because theliberal reading Canada suggests for
Article III:8(b) would permit governments toemploy awide variety ofdiscriminatory measures in
favour ofdomestic products thatcould bejustified ontheground ofconferring economic benefits on
domestic producers. Sucharesult could dramatically alterthecompetitive environment inthemarkets
ofMembers around theworld. Canada ’s"funded" postage ratescheme fordomestically-produced
periodicals wasaverygoodexample ofaproduct transportation anddistribution regime thatmaywell
confer economic benefits ondomestic producers butthatplainly altered thecompetitive relationship
between imported anddomestic products.120
IV. INTERIM REVIEW
4.1 On23January 1997, theUnited States requested thePanel toreview, inaccordance with
Article 15.2oftheDSU, precise aspects oftheinterim report thathadbeenissued totheparties on
16January 1997. Canada didnotrequest areview, butwished toreserve itsrighttorespond tothe
UScomments. ThePanel ruled that,given thecircumstances inthisparticular case, Canada could
submit itsresponse by31January 1997. Canada submitted itsresponse totheUScomments on
31January 1997, urging thePanel todisregard alarge partoftheUScomments. Neither theUnited
States norCanada requested thePanel toholdameeting. ThePanel reviewed theentire range of
arguments presented bytheparties intheirwritten submissions, andfinalized itsfindings asinSection V
below, taking intoaccount thespecific aspects itconsidered toberelevant.
4.2 Regarding Tariff Code 9958, theinterim report hadfocused onthe"split-run" rule, which
thePanel found tobetheprincipal issue, andhadnotmentioned thesecond partoftheCode, namely
thefive-per-cent rule. TheUnited States requested theinclusion ofthispartinthefindings. Canada
didnotobject tothisrequest. ThePanel agreed totheinclusion andintroduced some drafting
modifications inthefinalreport atparagraphs 5.1and5.4.
4.3 Theinterim report had,inapartcorresponding toparagraph 5.24ofthefinalreport, stated
thatthedefinition ofa"split-run" edition relied solely onfactors external totheCanadian market.
TheUnited States suggested thatthePanel change thisword todecisively .Canada objected tothis
change. However, thePanel considered theUSsuggestion tobeauseful onetoimprove theaccuracy
ofthefindings, andaccordingly modified theexpression inthewayitnowappears inparagraph 5.24.
4.4 Regarding paragraph 5.25ofthefinalreport, theUnited States suggested thatthePanel add
that"(1)anynumber ofadditional hypothetical examples could bedevised thatwould further show
thatsplit-run andnon-split-run periodicals neednotbeanydifferent, andthat(2)thisistobeexpected
because thedefinition ofsplit-run periodicals provides thattwovirtually identical products canbetaxed
differently depending onwhether ornotasimilar product issoldoutside Canada". While thePanel
didnotdisagree withthisobservation, itwasnotpersuaded thatsuchanaddition would enhance the
clarity ofthelogicinthefinalreport. ThePanel therefore decided nottointroduce thesuggested change.
120TheUnited States argued thateven ifitwere concluded thatthepayments made byCanadian Heritage toCanada
Posttosupport the"funded" postal rates somehow gave risetopayments todomestic producers within themeaning of
Article III:8(b), because domestic producers ultimately received aneconomic benefit, suchabenefit would notbeprovided
"exclusively" todomestic producers. Canada Postitself might wellbeabeneficiary. Thisisbecause Canada Post'spre-
determined annual payment from Canadian Heritage might exceed Canada Post'scostofdelivering alleligible periodicals
inagiven year. Moreover, Canada Postcould further benefit economically from having acaptive setofcustomers who
must useitsservices inorder toobtain the"funded" rates. Forthese reasons, according totheUnited States, itcannot be
saidthatthebenefits ofCanada 'sPublications Assistance Program areprovided "exclusively todomestic producers".WT/DS31/R
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4.5 Regarding thedirectness ofthetaxation (paragraphs 5.28and5.29ofthefinalreport), the
United States argued thatthiswasacaseofdirect taxation because theexcise taxwasfocused ona
particular typeofgood. ThePanel rejected thisargument. However, inthisconnection, theUnited
States pointed outthatacertain citation ofpastcasesintheinterim report could besomewhat misleading.
ThePanel accepted thispoint, andmodified theparagraphs accordingly.
4.6 Regarding thedifferences between "commercial Canadian" and"international" ratesapplied
byCanada Posttoperiodicals, theUnited States commented thattheinterim report failed tomention
certainadditionaldiscountoptionswhichwereavailableonlytoCanadianperiodicals.ThePanelaccepted
thiscomment andintroduced some drafting modifications inthefinalreport atparagraphs 5.1,5.39
and6.1.TheUnited States further requested thatthefinalreport refertothelong-term discount contracts
between Canada Postandlarge-circulation magazine publishers (seeparagraph 3.171). Canada objected
tothisrequest onthegrounds thatthese agreements orcontracts had"never beenoneoftheobjects
ofthisdispute". ThePanel considered thatthisparticular issuewasnotpresented bytheUnited States
inacoherent manner during theproceedings, andthatitwastoolatefortheUnited States toraise
thisissue asanadditional claim attheinterim review stage. Accordingly, thePanel didnotaccept
theUSrequest onthispoint.
4.7 TheUnited States suggested thatthePanel restructure paragraph 5.36ofthefinalreport as
analternative argument because, according totheUnited States, thefactthatCanada Postisanentity
oftheCanadian Government wasasufficient reason tofindaviolation ofArticle III:4ofGATT 1994
inthisinstance. However, thePanel considered suchachange unnecessary. InthePanel'sview, it
wasclearthattheSemi-Conductor casewascitedhereassupporting evidence, notasdecisive reason
forfinding theviolation.
4.8 TheUnited States questioned theappropriateness ofparagraphs 5.37and5.38ofthefinalreport,
suggesting thattheexamination ofArticle III:1ofGATT 1994wasunnecessary inthiscase. Canada
didnotobject tothiscomment. However, inthePanel'sview, theAppellate Body Report onJapan
-Taxes onAlcoholic Beverages clearly mandates ittoengage insuchanexamination. ThePanel
therefore decided toretain these paragraphs unchanged from thewayinwhich theyappeared inthe
interim report.
4.9 Regarding paragraphs 5.42to5.44ofthefinalreport, theUnited States considered thatthe
Panel erroneously concluded thatthe"funded" ratescheme constituted apayment ofsubsidies permitted
byArticle III:8ofGATT 1994. ThePanel disagreed forreasons elaborated initsfinalreport. The
Panel accordingly didnotintroduce modifications tothefinalreport inthisrespect.
4.10 TheUnited States alsomade other drafting suggestions concerning thedescriptive part,some
ofwhich thePanel accepted andintroduced initsfinalreport.
V. FINDINGS
A. Introduction
5.1 Thisdisputeessentiallyarisesfromthefollowingfacts:(a)Canadaprohibitsimportsof"split-run"
periodicals (periodicals withthesameorsimilar editorial content asthosepublished inforeign countries,
which contain anadvertisement directed totheCanadian market) through Tariff Code 9958. Tariff
Code 9958further prohibits imports ofperiodicals inwhich more thanfivepercentoftheadvertising
content consists ofadvertisements directed totheCanadian market, whether ornotanedition with
similar editorial content issoldoutside Canada; (b)Canada, through PartV.1oftheExcise TaxAct,
imposes anexcise taxof80percentonthevalue ofadvertisements in"split-run" periodicals distributedWT/DS31/R
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inCanada onaperissue basis; and(c)Canada PostCorporation ("Canada Post") applies reduced
("funded") postal rates, funded bytheDepartment ofCanadian Heritage ("Canadian Heritage"), to
certain periodicals published inCanada. Postal ratesapplied toCanadian periodicals noteligible for
the"funded" rates("commercial Canadian" rates) arelower thanthose applied toimported periodicals
("international" rates). Certain additional discount options (such asfor"palletization" and"pre-sort")
areavailable toCanadian periodicals butarenotgenerally available toimported periodicals.
5.2 TheUnited States claims that(a)Tariff Code 9958isinconsistent withArticle XIoftheGeneral
Agreement onTariffs andTrade 1994("GATT 1994"); (b)PartV.1oftheExcise TaxActisinconsistent
withArticle III:2ofGATT 1994, orinthealternative, isinconsistent withArticle III:4ofGATT 1994;
and(c)theapplication byCanada Postoflower postal ratestodomestically-produced periodicals than
toimported periodicals isinconsistent withArticle III:4ofGATT 1994, andthe"funded" ratescheme
isnotadomestic subsidy within themeaning ofArticle III:8ofGATT 1994. TheUnited States requests
thatthePanel recommend thatCanada bring itsmeasures intoconformity withitsobligations under
GATT 1994.
5.3 Canada requests thePanel todismiss theUSclaims onthegrounds that(a)Tariff Code 9958
isjustifiable under Article XX(d) ofGATT 1994; (b)Article IIIofGATT 1994 doesnotapply to
PartV.1oftheExcise TaxAct; evenifthePanel decides thatArticle IIIofGATT 1994 applies to
theseprovisions, theydonotviolate Article IIIoftheGATT 1994; and(c)Article III:4ofGATT 1994
doesnotapply tothe"commercial" rates charged byCanada Postbecause theyaretheresult ofa
commercial andmarketing policy andnotinfluenced bygovernment policy and the"funded" rate
scheme isapayment ofsubsidies allowable under Article III:8(b) ofGATT 1994.
B. Tariff Code 9958
5.4 Tariff Code 9958 prohibits theimportation intoCanada ofthefollowing:
"1. Issues ofaperiodical, oneofthefourimmediately preceding issues ofwhich has,under
regulations thattheGovernor inCouncil maymake, beenfound tobeanissueofspecial edition,
including asplit-run oraregional edition, thatcontained anadvertisement thatwasprimarily
directed toamarket inCanada, andthatdidnotappear inidentical forminalleditions ofthat
issue ofthatperiodical thatwere distributed inthecountry oforigin.
"2. Issues ofaperiodical, oneofthefourimmediately preceding issues ofwhich has,under
regulations thattheGovernor inCouncil maymake, beenfound tobeanissue ofmore than
fivepercentoftheadvertising space inwhich consisted ofspace usedforadvertisements that
indicated specific sources ofavailability inCanada, orspecific terms orconditions relating
tothesaleofprovision inCanada, ofanygoods orservices except where theindication of
suchsources ofavailability orsuchterms orconditions wasprimarily directed atpersons outside
Canada".121
5.5 Since theimportation ofcertain foreign products intoCanada iscompletely denied under Tariff
Code 9958, itappears thatthisprovision byitsterms isinconsistent withArticle XI:1ofGATT 1994.
Article XI:1reads inrelevant partasfollows:
"Noprohibitions orrestrictions other thanduties, taxes orother charges ...shallbeinstituted
ormaintained byany[Member] ontheimportation ofanyproduct oftheterritory ofanyother
[Member] ...".
121Paragraphs 2.2-2.3 supra .WT/DS31/R
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5.6 Thequestion presented hereiswhether theimport prohibition under Tariff Code 9958 may
bejustified under other provisions oftheWTO Agreement. Canada claims thatthemeasure isjustified
under Article XX(d) ofGATT 1994. Therelevant partofArticle XXofGATT 1994reads asfollows:
"Subject totherequirement thatsuchmeasures arenotapplied inamanner which would
constitute ameans ofarbitrary orunjustifiable discrimination between countries where thesame
conditions prevail, oradisguised restriction oninternational trade, nothing inthisAgreement
shallbeconstrued toprevent theadoption orenforcement byany[Member] ofmeasures: ...
(d)necessary tosecure compliance withlawsorregulations which arenotinconsistent with
theprovisions ofthisAgreement, including those relating tocustoms enforcement, the
enforcement ofmonopolies operated under paragraph 4ofArticle IIandArticle XVII, the
protection ofpatents, trade marks andcopyrights, andtheprevention ofdeceptive practices;
...".
5.7 Thepanel onUnited States -Standards forReformulated andConventional Gasoline approached
thisprovision inthefollowing fashion. Having stated thattheparty invoking anexception under
Article XXboretheburden ofproving thattheinconsistent measures came within itsscope, thepanel
observed thatthecomplainant hadtodemonstrate thefollowing elements:
"(1) thatthemeasures forwhich theexception werebeing invoked -thatis,theparticular
trademeasures inconsistent withtheGeneral Agreement -secure compliance withlaws
orregulations themselves notinconsistent withtheGeneral Agreement;
"(2) thattheinconsistentmeasuresforwhichtheexceptionwasbeinginvokedwerenecessary
tosecure compliance withthose lawsorregulations; and
"(3) thatthemeasures wereapplied inconformity withtherequirements oftheintroductory
clause ofArticle XX".122
Inorder tojustify theapplication ofArticle XX(d), according tothepanel, alltheabove elements had
tobesatisfied. Wewillfollow thesame approach inthepresent case.123
5.8 First, astowhether theimport prohibition under Tariff Code 9958 secures compliance with
alaworregulation notinconsistent withGATT 1994, Canada argues thatTariff Code 9958isameasure
intended tosecure theattainment oftheobjectives ofSection 19oftheIncome TaxAct,which allows
forthededuction ofexpenses foradvertising directed totheCanadian market oncondition thatthe
advertisements appear inCanadian editions ofCanadian periodicals. Since theUnited States isnot
challenging theGATT consistency ofSection 19oftheIncome TaxActinthisproceeding, theissue
ofGATT consistency isnotbefore thePanel. However, theUnited States claims thatTariff Code
9958 isnotameasure to"secure compliance" withtheIncome TaxAct.
5.9 Theinterpretativeissuehereiswhatismeantby"tosecurecompliancewithlawsandregulations"
inArticle XX(d) ofGATT 1994. Inthisconnection, thepanel onEuropean Economic Community
-Regulations onImports ofParts andComponents found thisphrase tomean "toenforce obligations
122Panel Report onUnited States -Standards forReformulated andConventional Gasoline ,adopted on20May1996,
WT/DS2/R, para. 6.31(emphasis inoriginal). Therelevant partofthepanel report wasnotmodified bytheAppellate Body.
123WenotethattheAppellate Body inarecent report stated asfollows: "[Adopted panel reports] create legitimate
expectations among WTO Members, and,therefore, should betaken intoaccount where theyarerelevant toanydispute".
Appellate Body Report onJapan -Taxes onAlcoholic Beverages ,WT/DS8/AB/R, WT/DS10/AB/R andWT/DS11/AB/R,
p.14.WT/DS31/R
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under laws andobligations", not"toensure theattainment oftheobjectives ofthelaws and
regulations".124Canada suggests thatthisprecedent should notberigidly followed inthecaseoffiscal
oreconomic incentives ingeneral, andparticularly inthepresent case, because Tariff Code 9958and
theincome taxprovision havealways beenconsidered partofasingle, indivisible package. Weare
notpersuaded bythisargument. Canada 'sviewwillinherently leadtoasituation where "[w]henever
theobjective ofalawconsistent withtheGeneral Agreement cannot beattained byenforcing the
obligations under thatlaw,theimposition offurther obligations inconsistent withtheGeneral Agreement
could thenbejustified under Article XX(d) onthegrounds thatthissecures compliance withthe
objectives ofthatlaw", aswaspointed outbytheaforementioned panel.125Wefailtoseeanydifferences
thatwould obviate thisproblem inthecaseoffiscal oreconomic incentives. Itshould benoted, however,
thatweareneither examining norpassing judgment onthepolicy objectives oftheCanadian measure
regardingperiodicals;weareneverthelesscalledupontoexaminetheinstrumentschosenbytheCanadian
Government fortheattainment ofsuchpolicy objectives.
5.10 Tariff Code 9958cannot beregarded asanenforcement measure forSection 19oftheIncome
TaxAct.Itistruethatifagovernment bansimports offoreign periodicals withadvertisements directed
atthedomestic market, asdoesCanada inthepresent case, thepossibility ofnon-compliance with
ataxprovision granting taxdeductions forexpenses incurred foradvertisements indomestic periodicals
willbegreatly reduced. Itwould seem almost impossible foranenterprise toplace anadvertisement
inaforeign periodical because there would bevirtually noforeign periodical available inwhich to
place it.Thus, there would benowayfortheenterprise legally toclaim ataxdeduction therefor.
However, thatisanincidental effect ofaseparate measure distinct (even though itmayshare thesame
policy objective) fromthetaxprovision which isdesigned togiveanincentive forplacing advertisements
inCanadian, asopposed toforeign, periodicals.126WethusfindthatTariff Code 9958doesnot"secure
compliance" withSection 19oftheIncome TaxAct.
5.11 Inviewoftheabove finding thatTariff Code 9958doesnotsecure compliance withSection 19
oftheIncome TaxAct,weneed notconsider whether theimport prohibition under theCode is
"necessary" tosecure compliance withthetaxprovision orwhether themeasure meets theconditions
intheintroductory clause (or"chapeau") toArticle XX. Canada hasfailed tosatisfy atleastoneof
theconditions identified inparagraph 5.7above. Thusweconclude thatTariff Code 9958isinconsistent
withArticle XI:1ofGATT 1994 andcannot bejustified under Article XX(d).
C. TheExcise TaxAct
5.12 Wenowturntotheexamination ofwhether the80percentexcise taxonadvertisements in
split-run periodicals under PartV.1oftheExcise TaxActiscompatible withCanada 'sobligations
under Article IIIofGATT 1994. TheUnited States claims thatPartV.1oftheExcise TaxActis
inconsistent withArticle III:2ofGATT 1994, orinthealternative, isinconsistent withArticle III:4.
(i) Applicability ofGATT 1994
5.13 Since Canada challenges theapplicability ofGATT 1994 tothispartoftheExcise TaxAct,
weaddress thisissue first. Canada claims thatArticle IIIofGATT 1994 doesnotapply toPartV.1
124Panel Report onEuropean Economic Community -Regulations onImports ofParts andComponents ,adopted on
16May 1990, BISD 37S/132, paras. 5.14-5.18.
125Ibid., para. 5.17.
126Animport banunder these circumstances israther likely tobeanenforcement measure inrespect ofabanonpossession
orsaleofaproduct. Animport banonalcoholic beverages might share thesame objective asacriminal statute against
drunkdriving,butifalcoholicdrinksarenotbanned ortheirsaleprohibiteddomest ically,theimportbancouldnotbeconsidered
asanenforcement measure ofthecriminal statute.WT/DS31/R
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oftheExcise TaxActbecause thelatter isameasure pertaining toadvertising services, which iswithin
thepurview oftheGeneral Agreement onTrade inServices ("GATS"). Canada further claims that
theexamination ofPartV.1oftheExcise TaxActinlightofGATS isnotcovered bytheterms of
reference ofthisPanel.
5.14 Canada 'sargument isessentially thatsince Canada hasmade nospecific commitments for
advertising services under GATS, theUnited States should notbeallowed to"obtain benefits under
acovered agreement thathavebeenexpressly precluded under another covered agreement".127Put
another way,Canada seems toargue thatifaMember hasnotundertaken market-access commitments
inaspecific service sector, thatnon-commitment should preclude alltheobligations orcommitments
undertaken inthegoods sector totheextent thatthere isanoverlap between thenon-commitment in
services andtheobligations orcommitments inthegoods sector. Canada claims thatbecause ofthe
existence ofthetwoinstruments -GATT 1994andGATS -bothofwhich mayapply toagiven measure,
"itisnecessary tointerpret thescope ofapplication ofeachsuchastoavoid anyoverlap".128
5.15 Wearenotfullyconvinced byCanada 'scharacterization oftheExcise Taxasameasure intended
toregulate trade inadvertising services, inviewofthefactthatthere isnocomparable regulation on
advertisements through othermedia andthefactthatthetaxisimposed ona"perissue" basis. However,
assuming thatCanada intended tocarve outPartV.1oftheExcise TaxActfrom thecoverage ofits
GATS commitments bynotinscribing advertising services initsSchedule129,doesthatexonerate Canada
from thePanel'sscrutiny regarding thealleged violation ofitsobligations andcommitments under
GATT 1994?
5.16 Inorder toanswer thisquestion, weneedtoexamine thestructure oftheWTO Agreement
including itsannexes. Article II:2oftheWTO Agreement istherelevant provision, which reads as
follows:
"Theagreements andassociated legalinstruments included inAnnexes 1,2and3...areintegral
parts ofthisAgreement, binding onallMembers".130
5.17 According toArticle 31(1) ofthe1969 Vienna Convention ontheLawofTreaties ("Vienna
Convention"), atreaty mustbeinterpreted ingood faithinaccordance withtheordinary meaning to
begiven totheterms ofthetreaty intheir context andinthelight ofitsobject andpurpose.
Furthermore, astheAppellate Body hasrepeatedly pointed out,"oneofthecorollaries ofthe'general
ruleofinterpretation 'intheVienna Convention isthatinterpretation must givemeaning andeffect
toalltheterms ofthetreaty. Aninterpreter isnotfreetoadopt areading thatwould result inreducing
whole clauses orparagraphs ofatreaty toredundancy orinutility".131Theordinary meaning ofthe
textsofGATT 1994andGATS aswellasArticle II:2oftheWTO Agreement, taken together, indicates
thatobligations under GATT 1994 andGATS canco-exist andthatonedoesnotoverride theother.
Iftheconsequences suggested byCanada were intended, there would havebeenprovisions similar
toArticle XVI:3 oftheWTO Agreement ortheGeneral Interpretative NotetoAnnex 1Ainorder to
establish hierarchical order between GATT 1994andGATS. Theabsence ofsuchprovisions between
127Paragraph 3.35 supra .
128Paragraph 3.38 supra .
129Wenoteinthisconnection thatPartV.1oftheExcise TaxActwasenacted in1995, afterCanada 'sacceptance of
theWTO Agreement.
130GATT 1994 isincluded inAnnex 1A.GATS isincluded inAnnex 1B.
131Appellate Body Report onUnited States -Standards forReformulated andConventional Gasoline ,adopted on20
May1996, WT/DS2/AB/R, p.23.Alsocited intheAppellate Body Report onJapan -Taxes onAlcoholic Beverages ,op.
cit.,p.12.WT/DS31/R
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thetwoinstruments implies thatGATT 1994 andGATS arestanding onthesame plain intheWTO
Agreement, without anyhierarchical order between thetwo.
5.18 Inthisconnection, Canada alsoargues thatoverlaps between GATT 1994 andGATS should
beavoided.132Wedisagree. Overlaps between thesubject matter ofdisciplines inGATT 1994 and
inGATS areinevitable, andwillfurther increase withtheprogress oftechnology andtheglobalization
ofeconomic activities. Wedonotconsider thatsuchoverlaps willundermine thecoherence ofthe
WTO system. Infact,certain types ofservices suchastransportation anddistribution arerecognized
asasubject-matter ofdisciplines under Article III:4ofGATT 1994. Itisalsonoteworthy inthisrespect
thatadvertising services havelongbeenassociated withthedisciplines under GATT Article III.As
early as1970, theWorking Party onBorder TaxAdjustment made thefollowing observation:
"The Working Party noted thatthere wasadivergence ofviews withregard totheeligibility
foradjustment ofcertain categories oftaxandthatthese could besub-divided into
(a)"Taxesoccultes"whichtheOECDdefinedasconsumptiontaxesoncapitalequipment,
auxiliary materials andservices usedinthetransportation andproduction ofothertaxable goods.
Taxes onadvertising ,energy, machinery andtransport wereamong themore important taxes
which might beinvolved. ...;
(b)Certain other taxes, ...".133
Wealsonotethatthere areseveral adopted panel reports thatexamined theissue ofservices inthe
context ofGATT Article III.Forinstance, thepanel onCanada -Import, Distribution andSaleof
Certain Alcoholic Drinks byProvincial Marketing Agencies addressed theissues ofaccess topoints
ofsaleandrestrictions onprivate delivery ofbeer.134Thepanel onUnited States -Measures Affecting
Alcoholic andMaltBeverages alsodealtwiththeissues ofdistribution ofwineandbeer.135More to
thepoint, thepanel onThailand -Restrictions onImportation ofandInternal Taxes onCigarettes
specifically addressed thequestion ofadvertising.136
5.19 Inanyevent, since Canada admits thatinthepresent casethere isnoconflict between its
obligations under GATS andunder GATT 1994137,there isnoreason whybothGATT andGATS
obligations should notapply totheExcise TaxAct.Thus, weconclude thatArticle IIIofGATT 1994
isapplicable toPartV.1oftheExcise TaxAct.
(ii) GATT Article III:2
5.20 Thenextissuetobeexamined iswhether thereisaviolation ofArticle III.Theprincipal claim
oftheUnited States isthatPartV.1oftheExcise Taxisinconsistent withArticle III:2ofGATT 1994.
Therelevant parts ofArticle IIIreadasfollows:
132Paragraphs 3.38 and5.14 supra .
133"Border TaxAdjustments", Report oftheWorking Party adopted on2December 1970(L/3464), BISD 18S/97, para.
15(emphasis added).
134Panel Report onCanada -Import, Distribution andSaleofCertain Alcoholic Drinks byProvincial Marketing Agencies ,
adopted on18February 1992, BISD 39S/27.
135Panel Report onUnited States -Measures Affecting Alcoholic andMaltBeverages ,adopted on19June1992, BISD
39S/206.
136Panel Report onThailand -Restrictions onImportation ofandInternal Taxes onCigarettes ,adopted on7November
1990, BISD 37S/200, para. 78.
137Paragraph 3.38 supra .WT/DS31/R
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"1. The[Members] recognize thatinternal taxes andother internal charges, andlaws,
regulations andrequirements affecting theinternal sale, offering forsale, purchase,
transportation, distribution oruseofproducts, andinternal quantitative regulations requiring
themixture, processing oruseofproducts inspecified amounts orproportions, should not
beapplied toimported ordomestic products soastoafford protection todomestic production.
"2. Theproducts oftheterritory ofany[Member] imported intotheterritory ofanyother
[Member] shallnotbesubject, directly orindirectly, tointernal taxesorother internal charges
ofanykindinexcess ofthose applied, directly orindirectly, tolikedomestic products.
Moreover,no[Member]shallotherwiseapplyinternaltaxesorotherinternalchargestoimported
ordomestic products inamanner contrary totheprinciples setforth inparagraph 1".
Furthermore, theInterpretative Note adArticle IIIreads inpartasfollows:
"Ataxconforming totherequirements ofthefirstsentence ofparagraph 2would be
considered tobeinconsistent withtheprovisions ofthesecond sentence onlyincases where
competition wasinvolved between, ontheonehand, thetaxed product and,ontheother hand,
adirectly competitive orsubstitutable product which wasnotsimilarly taxed".
5.21 Inthepresent case, thefollowing twoquestions needtobeanswered todetermine whether
thereisaviolation ofArticle III:2ofGATT 1994: (a)Areimported "split-run" periodicals anddomestic
non"split-run" periodicals likeproducts?; and(b)Areimported "split-run" periodicals subject toan
internal taxinexcess ofthatapplied todomestic non"split-run" periodicals? Iftheanswers toboth
questions areaffirmative, there isaviolation ofArticle III:2, firstsentence.138Iftheanswer tothe
firstquestion isnegative, weneedtoexamine further whether thereisaviolation ofArticle III:2, second
sentence.
(iii) Likeproduct issue
5.22 AstheAppellate Body confirmed initsreport onJapan -Taxes onAlcoholic Beverages ,the
definition of"likeproducts" inArticle III:2, firstsentence, should beconstrued narrowly, onacase-by-
casebasis, inlightofsuchfactors astheproduct 'sendusesinagiven market, consumer 'stastes and
habits, andtheproduct 'sproperties, nature andquality.139Inapplying these criteria tothepresent
case, itshould benoted thatourmandate under theterms ofreference ofthisPanel isnottodiscuss
thelikeness ofperiodicals ingeneral. Thequestion before us,aspresented bytheUnited States in
itsrequest fortheestablishment ofapanel (WT/DS31/2) andsubsequently elaborated140,isacomparison
between imported "split-run" periodicals anddomestic non"split-run" periodicals.
5.23 Thiscomparison, atfirstglance, might seem impossible inviewofthefactthatthere areno
imported "split-run" periodicals marketed inCanada duetotheimport prohibition under Tariff Code
9958. However, asthepanel on"United States -Taxes onPetroleum andCertain Imported Substances"
observed, therationale forthenational treatment obligation ofArticle IIIistoprotect expectations
138Inthiscontext, weneed notexamine theapplicability ofArticle III:1 separately, because, astheAppellate Body
noted initsrecent report, thefirstsentence ofArticle III:2 is,ineffect, anapplication ofthegeneral principle embodied
inArticle III:1. Therefore, iftheimported anddomestic products are"likeproducts", andifthetaxes applied totheimported
products are"inexcess of"those applied tothelikedomestic products, thenthemeasure isinconsistent withArticle III:2,
firstsentence. Appellate Body Report onJapan -Taxes onAlcoholic Bever ages, op.cit.,pp.18-9.
139Ibid.,p.20. According totheAppellate Body, thenarrow construction ofthetermwasnecessary inArticle III:2,
firstsentence, "soasnottocondemn measures thatitsstrict terms arenotmeant tocondemn".
140Seeparagraphs 3.104-3.108 supra .WT/DS31/R
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oftheMembers astothecompetitive relationship between theirproducts andthose ofotherMembers.141
Insofarasimported "split-run" periodicals aresubject totherelevant provisions oftheExcise Tax
Act(asCanada admits tobethecase)142,thecomparison canbemade onthebasis ofahypothetical
import.
5.24 Wenoteinthisregard thattheExcise TaxActdefines a"split-run" edition ofaperiodical
interms ofitseditorial content (whether more than20percentoftheeditorial material isthesame
orsubstantially thesame aseditorial material thatappears ineditions thatareprimarily distributed
outside Canada) andadvertising content (whether itcontains anadvertisement thatdoesnotappear
inidentical form inother editions distributed outside Canada). Despite theCanadian claim thatthe
purpose ofthelegislation istopromote publications oforiginal Canadian content, thisdefinition
essentially relies onfactors external totheCanadian market -whether thesame editorial content is
included inaforeign edition andwhether theperiodical carries different advertisements inforeign
editions.
5.25 Puttingtheseexternalfactorsaside,imported"split-run"periodicalsanddomesticnon"split-run"
periodicals canbeextremely similar. Inthecourse ofthePanel process, Canada made thefollowing
statement:
"Harrowsmith Country LifeisaCanadian-owned magazine. Before theadoption ofPartV.1
oftheExcise TaxAct,Harrowsmith Country Lifehadtwoeditions -ACanadian edition and
aUSedition. TheCanadian andtheUSeditions haddifferent advertisements andacertain
amount ofcommon editorial content. Because more than20percentoftheeditorial content
intheCanadian edition wasthesame asthatintheUSedition, thetaxwould haveapplied
totheCanadian edition (even iftheeditorial content wasentirely produced inCanada). As
aresult oftheexcise tax,Harrowsmith Country Lifestopped publishing itsUSedition".143
Inthecaseofthisparticular periodical, ifallthevolumes ofHarrowsmith Country Lifehadbeenprinted
intheUnited States (including itsCanadian edition) andtheCanadian edition hadbeenexported to
Canada because theywere somehow exempted from thecoverage ofTariff Code 9958, andifthe
publisher decided topublish thefinalissue oftheUSedition aftertheintroduction oftheexcise tax,
thepublisher would havebeensubject tothetaxfortheimported Canadian edition. Ifthispublisher
thereafter discontinued thepublication oftheUSedition, itwould nolonger besubject totheexcise
tax.Now, letuscompare thetwoissues ofthishypothetical Harrowsmith Country Life(Canadian
edition) before andafterthediscontinuation oftheUSedition. These twoeditions would havecommon
enduses, verysimilar physical properties, nature andqualities. Itismostlikely thatthetwovolumes
would havebeendesigned forthesame readership withthesame tastes andhabits. Inallrespects,
these twovolumes are"like", andyetoneissubject totheExcise Tax,while theother isnot.
5.26 Thus,weconcludethatimported"split-run"periodicalsanddomesticnon"split-run"periodicals
canbelikeproducts within themeaning ofArticle III:2ofGATT 1994. Inourview, thisprovides
sufficient grounds toanswer intheaffirmative thequestion astowhether thetwoproducts atissue
arelikebecause, asstated earlier, thepurpose ofArticle IIIistoprotect expectations oftheMembers
astothecompetitive relationship between theirproducts andthose ofother Members, nottoprotect
141Panel Report onUnited States -Taxes onPetroleum andCertain Imported Substances ,adopted on17June1987,
BISD 34S/136, para. 5.2.2. SeealsothePanel Reports onItalian Discrimination against Imported Agricultural Machinery ,
adopted on23October 1958, BISD 7S/60, para. 18,andonUnited States -Section 337oftheTariff Actof1930,adopted
on7November 1989, BISD 36S/345, para. 5.13.
142Paragraphs 3.58 and3.98 supra .
143Seeparagraph 3.99 supra .WT/DS31/R
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actual tradevolumes. IfTariff Code 9958werelifted, awidevariety of"split-run" periodicals ranging
fromgeneral newsmagazines tospecialty journals dedicated tospecific areas ofbusiness orprofession
could beimported intoCanada. Thissituation canhardly becalled an"isolated instance ofdifferential
taxation" asCanada describes.144
5.27 Having found thatimported "split-run" periodicals anddomestic non"split-run" periodicals
arelikeproducts, weneednotconsider thesecond sentence ofArticle III:2. Theonlyremaining question
iswhether imported "split-run" periodicals aresubject toaninternal taxinexcess ofthatapplied to
domestic non"split-run" periodicals.
(iv) Taxation inexcess: "directly orindirectly"
5.28 Inlightofthefactthattheexcise taxisapplied onlywithrespect to"split-run" periodicals,
itwould seem evident thatimported "split-run" periodicals aresubject toaninternal taxinexcess of
onethatisapplied todomestic non"split-run" periodicals. However, Canada argues thattheexcise
taxdoesnotapply "indirectly" toagood within themeaning ofArticle III:2. According toCanada,
thedrafting history ofthisparagraph suggests thattheexpression "indirectly" wasintended tocapture
taxes thatapply toinputs thatcontribute totheproduction ofagood, andnottoendproducts intheir
ownright. Canada alsoclaims thatthepanel onJapan -Customs Duties, Taxes andLabelling Practices
onImported Wines andAlcoholic Beverages interpreted theterminamanner consistent withCanada 's
position.145
5.29 Wenotethattheexcise taxisnot"directly" applied toperiodicals inthatitislevied onthe
value ofadvertisements, notonthevalue ofperiodicals perse.However, itisclear thatthetaxis
applied inrespect ofeachsplit-run edition ofaperiodical ona"perissue" basis. Therefore, thetax
isapplied "indirectly" toperiodicals within theordinary meaning oftheterms ofArticle III:2. Canada 's
narrow reading oftheterm"indirectly" issupported onlybyCanada 'sowninterpretation ofthedrafting
history, which iscontested bytheUnited States.146Since, according toArticle 32oftheVienna
Convention, thepreparatory work ofatreaty ismerely asupplementary means ofinterpretation to
berelied upon incases where theterms ofthetreaty, taken intheircontext andinlightofitsobject
andpurpose, areambiguous orobscure, orleadtoamanifestly absurd orunreasonable result, weneed
nottakethedrafting history intoaccount onthisparticular point. Furthermore, thepanel report cited
byCanada insupport ofitsargument referred totaxation onrawmaterials bywayofexample. It
didnotconclude thatthescope oftheterm"indirectly" islimited totaxation oninputs.147Wethus
conclude thatimported "split-run" periodicals aresubject toaninternal taxinexcess ofthatapplied
todomestic non"split-run" periodicals.
5.30 Having found thatPartV.1oftheExcise TaxActtobeinviolation ofArticle III:2, first
sentence, weneednotexamine whether itisinconsistent withArticle III:2, second sentence orwith
Article III:4.
D. Postal Rates
5.31 Now weproceed toexamine whether thepostal rates scheme applied byCanada Post
discriminates against foreign periodicals incontravention ofArticle IIIofGATT 1994, asargued by
theUnited States. There aretwoseparate issues involved here: (a)whether thefactthatCanada Post
144Paragraph 3.101 supra .
145Paragraph 3.49 supra .
146Paragraph 3.56 supra .
147Paragraph 3.49 supra .WT/DS31/R
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applies the"commercial Canadian" ratesorthe"funded" ratestoCanadian periodicals, which arelower
thanthe"international" ratesapplied toimported periodicals, constitute aviolation ofArticle III:4148;
and(b)whether the"funded" ratescheme forcertain periodicals isallowed asasubsidy within the
meaning ofArticle III:8(b).
(i) "International" versus "commercial Canadian" and"funded" rates
5.32 TheUnited States claims thatCanada Post'spractice ofcharging domestic periodicals lower
postal ratesthanimported periodicals isinviolation ofArticle III:4ofGATT 1994. Therelevant part
oftheArticle reads asfollows:
"4. Theproducts oftheterritory ofany[Member] imported intotheterritory ofanyother
[Member] shallbeaccorded treatment nolessfavourable thanthataccorded tolikeproducts
ofnational origin inrespect ofalllaws, regulations andrequirements affecting theirinternal
sale,offering forsale,purchase, transportation, distribution oruse.Theprovisions ofthis
paragraph shallnotprevent theapplication ofdifferential internal transportation charges which
arebased exclusively ontheeconomic operation ofthemeans oftransport andnotonthe
nationality oftheproduct".
Inexaminingtherelevanceofthisprovisioninthepresentdispute,wealsoneedtakeintoaccount
thefirstparagraph ofArticle III,which reads:
"1. The[Members] recognize thatinternal taxes andother internal charges, andlaws,
regulations andrequirements affecting theinternal sale, offering forsale, purchase,
transportation, distribution oruseofproducts, andinternal quantitative regulations requiring
themixture, processing oruseofproducts inspecified amounts orproportions, should not
beapplied toimported ordomestic products soastoafford protection todomestic production".
5.33 There isnodisagreement between theparties tothedispute that,inrespect ofthisissue, domestic
andimported periodicals arelikeproducts. We,too,sofind. NordoesCanada contest thefactthat
Canada Postapplies higher postal ratestoimported periodicals thantodomestic periodicals, which
clearly affects thesale,transportation anddistribution ofimported periodicals. Canada 'sargument
isessentially thatsinceCanada Postisaprivatized agency (aCrown corporation) withalegalpersonality
distinct fromtheCanadian Government, the"commercial Canadian" or"international" ratesitcharges
forthedelivery ofperiodicals areoutoftheGovernment 'scontrol anddonotqualify as"regulations"
or"requirements" within themeaning ofArticle III:4.
5.34 TheUnited States argues thatCanada Postisagovernment entity fullysubject toCanadian
Government direction because itisawholly-government-owned, government-created chartered body,
managed byaboard ofdirectors appointed bytheCanadian Government. Canada argues thatthe
different ratescharged byCanada Postareareflection ofcompetitive situations andthatthedegree
ofcontrol theGovernment exercises overCanada Post'scommercial operations (including delivery
ofperiodicals) isonedictated bytheGovernment shareholder 'sinterests. Inother words, Canada
argues herethatCanada Post'spricing policy isnotagovernmental measure subject toArticle III:4.
Theessential question theniswhether Canada Postisimplementing Canadian Government policy in
148Weareaware that"international" rates applied toforeign periodicals belong toasubcategory ofthe"commercial"
ratescheme inabroader sense. Seeparagraphs 2.17-2.19 supra .However, insofarasdifferent ratesareapplied between
"international" periodicals and"commercial Canadian" periodicals, itisnecessary todraw thedistinction. Wearealsoaware,
asdescribed inparagraph 5.1,thatthere areadditional discounts forCanadian periodicals which arenotgenerally available
toimported periodicals. Inourview, these additional discounts constitute partofthe"commercial Canadian" ratescheme.WT/DS31/R
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suchamanner thatitspostal rates onperiodicals maybeviewed asgovernmental regulations or
requirements forthepurposes ofArticle III:4.
5.35 First, itisclearthatCanada Postgenerally operates under governmental instructions. Canada
Posthasamandate tooperate ona"commercial" basisinthisparticular sector ofperiodical delivery:
amandate thatwassetbytheCanadian Government.149Second, Canada admits thatiftheCanadian
Government considers Canada Post'spricing policy tobeinappropriate, itcaninstruct Canada Post
tochange theratesunder itsdirective power based onSection 22oftheCanada PostCorporation Act.150
Thus, theCanadian Government caneffectively regulate theratescharged onthedelivery ofperiodicals.
5.36 Thisanalysis isunaffected bythefactthatCanada Posthasalegalpersonality distinct from
theCanadian Government. Thepanel onJapan -Trade inSemi-Conductors faced asimilar question
withrespect totheinterpretation ofthestatus of"administrative guidance" given toprivate-sector entities
ininterpreting theterm"measures" inArticle XI:1. Thepanel stated asfollows:
"Inorder todetermine [whether themeasures taken inthiscasewould besuchastoconstitute
acontravention ofArticle XI],thePanel considered thatitneeded tobesatisfied ontwoessential
criteria.First,therewerereasonablegroundstobelievethatsufficientincentivesordisincentives
existed fornon-mandatory measures totakeeffect. Second, theoperation ofthemeasures ...
wasessentially dependent onGovernment action orintervention. ThePanel considered each
ofthese twocriteria inturn. ThePanel considered thatifthese twocriteria were met,the
measures would beoperating inamanner equivalent tomandatory requirements suchthatthe
difference between themeasures andmandatory requirements wasonlyoneofform andnot
ofsubstance, andthatthere could betherefore nodoubt thattheyfellwithin therange of
measures covered byArticle XI:1".151
Applying thistwo-pronged test,mutatis mutandis ,tothepresent case, weconclude thatthepricing
policy ofCanada Postisagovernmental measure. First, inviewofthecontrol exercised bytheCanadian
Government on"non-commercial" activities ofCanada Post, wecanreasonably assume thatsufficient
incentives existforCanada Posttomaintain theexisting pricing policy onperiodicals. Second, as
analyzed intheprevious paragraph, Canada Post'soperation isgenerally dependent onGovernment
action. Thisleadsustotheconclusion thatCanada Post'spricing policy onperiodicals canberegarded
asgovernmental regulations orrequirements within themeaning ofArticle III:4ofGATT 1994.
5.37 Given thatimported anddomestic periodicals arelikeproducts andthatCanada Postcharges
lower rates ondomestic periodicals thanimported ones, thisconclusion might seem sufficient to
determine thatalessfavourable treatment isaccorded toimported products inviolation ofArticle III:4.
However, before reaching thatdetermination, astheAppellate Body hasstated, weneedtoturnto
Article III:1asageneral principle thatinforms therestofArticle III.152Article III:1constitutes part
ofthecontext ofArticle III:4, which istobetaken intoaccount inourinterpretation ofthelatter, under
Article 31(1) oftheVienna Convention.
149From theentirety ofCanada 'ssubmissions, wetakeitthattheCanadian Government considers Canada Post'spricing
policy onperiodicals tobedriven by"commercial" considerations, although wefailtounderstand whyanydocument delivery
operation aiming atprofit maximization would want tomake artificial distinctions based ontheorigin ofdocuments.
150Paragraph 3.156 supra .
151Panel Report onJapan -Trade inSemi-Conductors ,adopted on4May 1988, BISD 35S/116, para. 109.
152Appellate Body Report onJapan -Taxes onAlcoholic Beverages ,op.cit.,p.18.TheReport states: "The purpose
ofArticleIII:1istoestablishthisgeneralprincipleasaguidetounder standingandinterpretingthespecificobligationscontained
inArticle III:2 andintheother paragraphs ofArticle III,while respecting, andnotdiminishing inanyway, themeaning
ofwords actually used inthetexts ofthose other paragraphs".WT/DS31/R
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5.38 Article III:1articulates ageneral principle thatinternal measures should notbeapplied soas
toafford protection todomestic production.153Theprotective application ofameasure canmostoften
bediscerned fromthedesign, thearchitecture, andtherevealing structure ofthemeasure.154Wefind
thatthedesign, architecture andstructure ofCanada Post'sdifferent pricing policy ondomestic and
imported periodicals allpoint totheeffect thatthemeasure isapplied soastoafford protection tothe
domestic production ofperiodicals. Inthecaseof"funded" rates, thescheme isclearly designed to
promote domestic production ofperiodicals withCanadian content under thesupervision ofCanadian
Heritage. Inthecaseof"commercial Canadian" rates, thevery factthattheyarelower than
"international"rateswhichareappliedtoimportedproductsstronglysuggeststhattheschemeisoperated
soastoafford protection todomestic production.
5.39 Inlightoftheabove, wefindthatCanada Post'sapplication ofthe"commercial Canadian"
and"funded" ratestoCanadian periodicals, which arelower thanthe"international" ratesapplied to
imported periodicals (including theavailability ofadditional discounts onlytoCanadian periodicals),
isinconsistent withArticle III:4ofGATT 1994.
(ii) Applicability ofArticle III:8(b) tothe"funded" ratescheme
5.40 Having found thatthe"funded" ratescheme violates Article III:4ofGATT 1994, wenext
examine whether thisscheme isjustified under Article III:8(b) ofGATT 1994, asargued byCanada.
Therelevant partofArticle III:8reads asfollows:
"(b) Theprovisions ofthisArticle shallnotprevent thepayment ofsubsidies exclusively
todomestic producers, including payments todomestic producers derived fromtheproceeds
ofinternal taxesorcharges applied consistently withtheprovisions ofthisArticle andsubsidies
effected through governmental purchases ofdomestic products".
5.41 TheUnited States claims thatthisprovision isnotapplicable inthepresent casebecause the
payment ofsubsidies byCanadian Heritage isnotmade directly toCanadian publishers, butrather
toCanada Post. TheUnited States argues thatpastpanels haveinterpreted theterm"exclusively"
narrowly, tomean onlydirect payments todomestic producers.155Tosupport itsargument, theUnited
States quotes thefollowing paragraph from thepanel report onEuropean Economic Community -
PaymentsandSubsidiesPaidtoProcessorsandProducersofOilseedsandRelatedAnimal-FeedProteins
(the"Oilseeds "case):
"The Panel noted thatArticle III:8(b) applies onlytopayments made exclusively todomestic
producers andconsidered thatitcanreasonably beassumed thatapayment notmade directly
toproducers isnotmade "exclusively" tothem. Itnoted moreover that,iftheeconomic benefits
generated bythepayments granted bytheCommunity canatleastpartly beretained bythe
processorsofCommunityoilseeds,thepaymentsgenerateabenefitconditionaluponthepurchase
ofoilseeds ofdomestic origin inconsistently withArticle III:4. Under these circumstances
Article III:8(b) would notbeapplicable because inthatcasethepayments would notbemade
exclusively todomestic producers buttoprocessors aswell".156
153Ibid.,p.18.
154Ibid.,p.29.
155Paragraphs 3.191-3.197 supra .
156Panel Repor tonEuropeanEconomicCommunity-PaymentsandSubsidiesPaidtoProcessorsandProducersofOilseeds
andRelated Animal-Feed Proteins ,adopted on25January 1990, BISD 37S/86, para. 137(emphasis inoriginal).WT/DS31/R
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5.42 Wedonotdisagree withthispanel report. However, theUnited States hasfailed toshow that
thefactual situation inthepresent caseissimilar tothatintheOilseeds case. Particularly, theUnited
States hasnotsubmitted anyevidence toindicate thattheeconomic benefits arepartly retained byCanada
Post. Furthermore, thisargument bytheUnited States isinconsistent withitsposition regarding
Article III:4, where itmaintains thatCanada Postisagovernment agency. IfCanada Postisa
government agency, thepayment offunds fromCanadian Heritage toCanada Postismerely aninternal
transfer ofresources, andthepayment ofthesubsidy ismade directly toCanadian publishers.
5.43 Canada, ontheother hand, explains thatthepayment ofthefunds from Canadian Heritage
toCanada Postismade based onnegotiations between thetwoagencies, taking intoaccount thefact
thatCanada Postgetsanexclusive contract forthedelivery ofperiodicals atsubsidized rates.157
Following thelogic oftheOilseeds panel cited above, onecould argue thatthere isareasonable
assumption thatthe"funded" ratescheme isnotanexclusive payment ofsubsidies because thepayment
isnotmade directly tothebeneficiary. However, inourview, Canada haspresented aneffective rebuttal
tothisassumption.
5.44 Thus, wedonotfindthatCanada Postretains anyeconomic benefits fromthe"funded" rate
scheme itapplies tocertain Canadian periodicals. Thepayment ofthesubsidy ismade "exclusively"
toCanadian publishers thatqualify forthescheme. Since Article III:8(b) explicitly recognizes that
subsidies exclusively paidtodomestic producers arenotsubject tothenational treatment rules of
ArticleIII,includingthoseunderArticleIII:4,wefindthatCanada's"funded"rateschemeonperiodicals
canbejustified under thisprovision.
E. Concluding Remarks
5.45 Before concluding, inorder toavoid anymisunderstandings astothescope andimplications
ofthefindings above, wewould liketostress thattheability ofanyMember totakemeasures toprotect
itscultural identity wasnotatissue inthepresent case. Theonlytaskentrusted tothisPanel wasto
examine whether thetreatment accorded toimported periodicals under specific measures identified
inthecomplainant 'sclaim iscompatible withtherules ofGATT 1994.
VI. CONCLUSIONS
6.1 Onthebasis ofthefindings setoutinparagraphs 5.1to5.44above, thePanel concludes that
(a)Tariff Code 9958 isinconsistent withArticle XI:1ofGATT 1994 andcannot bejustified under
Article XX(d) ofGATT 1994; (b)PartV.1oftheExcise TaxActisinconsistent withArticle III:2,
firstsentence, ofGATT 1994; (c)theapplication byCanada Postoflower "commercial Canadian"
postal ratestodomestically-produced periodicals thantoimported periodicals, including additional
discount options available onlytodomestic periodicals, isinconsistent withArticle III:4ofGATT 1994;
but(d)themaintenance ofthe"funded" ratescheme isjustified under Article III:8(b) ofGATT 1994.
6.2 ThePanel recommends thattheDispute Settlement Body request Canada tobring themeasures
thatarefound tobeinconsistent withGATT 1994 intoconformity withitsobligations thereunder.
157Paragraph 3.173 supra .