RESTRICTEDWORLD  TRADE
ORGANIZATIONWT/TPR/S/53
19 November 1998
(98-4573)
Trade Policy Review Body
TRADE POLICY REVIEW
CANADA
Report by the Secretariat
This report, prepared for the  Trade Policy Review of Canada, has been drawn up
by the WTO Secretariat on its own responsibility.  The Secretariat has, as
required by the Agreement establishing the Trade Policy Review Mechanism
(Annex 3 of the Marrakesh Agreement Establishing the World Trade
Organization), sought clarification from the Government of Canada on its trade
policies and practices.
Document WT/TPR/G/53 contains the policy statement submitted by the
Government of Canada.
Note: This report is subject to restricted circulation and press embargo until the end of the meeting
of the Trade Policy Review Body on Canada.Canada WT/TPR/S/53
Page iii
CONTENTS
Page
SUMMARY OBSE RVATIONS ........................................................................................................... ................. ix
(1) I NTRODUCTION ............................................................................................................................... .......... ix
(2) E CONOMIC AND INSTITUTIONAL ENVIRONMENT ........................................................................................ ix
(3) T RADE POLICIES BY INSTRUMENT .............................................................................................................. x
(i) Tariffs..................................................................................................................... ..................... x
(ii) Non-tariff restrictions and controls ....................................................................................... ...... x
(iii) Other measures affecting production and trade.......................................................................... xi
(4) S ECTORAL POLICIES ............................................................................................................................... ... xi
(i) Agriculture ................................................................................................................. ................ xi
(ii) Manufacturing.............................................................................................................. .............xii
(iii) Serv ices.................................................................................................................. ...................xii
(5) T RADE POLICIES AND TRADING PARTNERS ..............................................................................................xiii
I. ECONOMIC ENVIRONMENT ......................................................................................................... ...... 1
(1) I NTRODUCTION ............................................................................................................................... ........... 1
(2) R ECENT MACROECONOMIC PERFORMANCE ............................................................................................... 1
(i) Output and employment....................................................................................................... ....... 1
(ii) Public finance and debt.................................................................................................... ........... 3
(iii) Monetary, exchange rate and balance-of-payments developments ............................................. 5
(3) T RADE AND INVESTMENT PATTERNS .......................................................................................................... 7
(i) Trade in goods.............................................................................................................. ............... 7
(ii) Trade in  services .......................................................................................................... ............. 11
(iii) Foreign dir ect investment................................................................................................. ......... 12
II. TRADE POLICY REGIME: FRAMEWORK AND OBJECTIVES ...................................................... 14
(1) I NTRODUCTION ............................................................................................................................... ......... 14
(2) I NSTITUTIONAL FRAMEWORK .................................................................................................................. 14
(i) General co nsiderations...................................................................................................... ........ 14
(ii) Foreign investment regulations ............................................................................................. .... 15
(iii) Domestic ma rket issues.................................................................................................... ......... 17
(3) P OLICY OBJECTIVES AND IMPLEMENTATION ............................................................................................ 18
(i) General co nsiderations...................................................................................................... ........ 18
(ii) The World Trade Organization ............................................................................................... .. 19
(iii) Regional and bilateral arrangements....................................................................................... .. 22
(4) D ISPUTE SETTLEMENT .............................................................................................................................. 2 9
III. TRADE POLICIES AND PRACTICES BY MEASURE....................................................................... 35
(1) OVERVIEW ............................................................................................................................... ................. 35
(2) I MPORT AND EXPORT CHARGES ................................................................................................................ 35WT/TPR/S/53 Trade Policy Review
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(i) Tariffs..................................................................................................................... ................... 35
(ii) Export charges............................................................................................................. .............. 44
(iii) Internal  taxation ......................................................................................................... ............... 45
(3) OTHER MEASURES DIRECTLY AFFECTING TRADE ...................................................................................... 46
(i) Licensing, prohibitions and other quan titative restrictions on trade ......................................... 46
(ii) Trade defe nce measures ..................................................................................................... ....... 49
(iii) Local-content, performance and purchase requirements........................................................... 55
(iv) Export assistance and promotion activities ............................................................................... 56
(v) Technical standards and regulations ......................................................................................... 60
(vi) State trading and exclusiv e or special privileges....................................................................... 65
(vii) Rules of origin........................................................................................................... ................ 65
(4) MARKET COMPETITION ............................................................................................................................. 67
(i) Competitio n Policy .......................................................................................................... ......... 67
(ii) Government assistance...................................................................................................... ........ 68
(iii) Government procurement.................................................................................................... ...... 73
(5) INTELLECTUAL PROPERTY RIGHTS ............................................................................................................ 77
(i) Patents..................................................................................................................... .................. 77
(ii) Copyright .................................................................................................................. ................ 79
(iii) Trade marks ............................................................................................................... ............... 79
(iv) Enforcement................................................................................................................ .............. 80
IV. TRADE POLICIES BY SECTOR .................................................................................................... ...... 81
(1) I NTRODUCTION ............................................................................................................................... ......... 81
(2) P OLICY DEVELOPMENTS IN AGRICULTURE AND AGRI -FOOD INDUSTRIES ................................................. 81
(i) Trends in agri-food pr oduction and trade.................................................................................. 81
(ii) Evolution of domestic and export subsidies.............................................................................. 82(iii) Canada's import regime for agricultural and agri-food products............................................... 85(iv) Developments in selected agricultural and agri-food sectors.................................................... 88
(3) M
OTOR VEHICLES ............................................................................................................................... ..... 90
(i) Structure and performance ................................................................................................... ..... 90
(ii) Policy in struments......................................................................................................... ............ 92
(4) T EXTILES AND CLOTHING ......................................................................................................................... 93
(i) Structure and performance ................................................................................................... ..... 93
(ii) Tariff reforms............................................................................................................. ............... 94
(iii) Integration under the WTO Agreement on Textiles and Clothing (ATC)................................. 95
(5) S ERVICES ............................................................................................................................... .................. 97
(i) Financial  services.......................................................................................................... ............ 97
(ii) Telecommunications ......................................................................................................... ...... 101
(iii) Audiovisua l serv ices ...................................................................................................... ......... 104
(iv) Professional services ...................................................................................................... ......... 107
REFERENCES ..................................................................................................................... ............................... 115
APPENDIX TABLES ................................................................................................................ ......................... 117Canada WT/TPR/S/53
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CHARTS
Page
I. ECONOMIC ENVIRONMENT
I.1 Merchandise trade by region, 1990 and 1997................................................................9
I.2 Merchandise trade by sector, 1990 and 1997...............................................................10
III. TRADE POLICIES AND PRACTICES BY MEASURE
III.1 MFN tariff aver ages, 1996 and 1998 ...........................................................................38
III.2 Tariff escalation by stage of processing, 1996 and 1998.............................................42
III.3 Time-profile of anti-dumping actions, July to June 1990-98.......................................50
III.4 Number of anti-dumping actions in force by product group, June 1998 .....................53
III.5 Number of anti-dumping actions in  force by product origin, June 1998.....................54
III.6 Exports supported by EDC financial assi stance, 1997 ................................................58
III.7 Government assistan ce to industry, 1990-96 ...............................................................69
III.8 Public expenditure on goods, services and construction, 1996....................................74
IV. TRADE POLICIES BY SECTOR
IV.1 Government expenditure in support of the agri-food sector, 1994/96-1997/98...........83
IV.2 Textiles and clothing exports to NAFTA and non-NAFTA countries, 1989-97 .........94WT/TPR/S/53 Trade Policy Review
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TABLES
Page
I. ECONOMIC ENVIRONMENT
I.1 Performance of the Ca nadian economy, 1992-98..........................................................2
I.2 Summary statement of th e Federal Budget, 1994-2000.................................................3
I.3 Commodity prices and Canada 's terms of tr ade, 1990-98 .............................................6
I.4 Balance-of-payments, 1991-97......................................................................................7
I.5 International transactions in  services, by category, 1997 ............................................11
I.6 Canada's inward and outward FDI stock, 1990 and 1997............................................13
II. TRADE POLICY REGIME:  FRAMEWORK AND OBJECTIVES
II.1 Canada's notifications under WTO Agreements, May 1996 – September 1998 .........19II.2 Dispute-related WTO matters in volving Canada, September 1998.............................30
III. TRADE POLICIES AND PRACTICES BY MEASURE
III.1 Unbound tariff items and corresponding applied rates, 1998 ......................................39
III.2 Import duties by tariff regime, 1998............................................................................41
III.3 Customs duty remission orders  in force, October 1998...............................................44
III.4 Imports subject to prohibition under the Customs Tariff, June 1998 ..........................46
III.5 Controlled or licensed  importations, June 1998 ..........................................................47
III.6 Table of Contents of Canada's Export Control List, June 1998...................................48
III.7 Initiations of anti-dumping inve stigations, January  1996-June 1998 ..........................52
III.8 Countervailing duty measures  in force, 30 June 1998.................................................54
III.9 Direct export financing, insurance and guarantees provided by the Export
Development Corporation, 1992-97 ............................................................................57
III.10 Exclusivity arrangements affectin g production or trade, October 1998 ......................65
III.11 Selected federal subsidy programmes..........................................................................70
III.12 Procurement thresholds under the GPA, the NAFTA and the AIT, June 1998...........75
IV. TRADE POLICIES BY SECTOR
IV.1 Agri-food trade by degree of processing, 1994-97 ......................................................82
IV.2 Transfers associated with agricultur al policies in sele cted countries...........................84
IV.3 Actual exports and expo rt subsidies commitmen ts......................................................84
IV.4 Tariff quota rates applicable to select ed imports according to origin, 1998................85
IV.5 Tariff quotas, fill rates and their respective administration methods, 1995-97 ...........87
IV.6 Average tariff rates for text iles and clothing, 1996 and 1998......................................95
IV.7 Estimated operating revenues by telecommunication services providers,
1995-97 ......................................................................................................................10 1
IV.8 Main federal support measures for audiovisual se rvices, 1997-98............................106Canada WT/TPR/S/53
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APPENDIX TABLES
Page
I. ECONOMIC ENVIRONMENT
AI.1 Merchandise exports by gr oups of products, 1990-97...............................................119
AI.2 Merchandise imports by groups of products, 1990-97 ..............................................120
AI.3 Merchandise exports by  destination, 1990-97 ...........................................................121
AI.4 Merchandise imports by origin, 1990-97...................................................................122
III. TRADE POLICIES AND PRACTICES BY MEASURE
AIII.1 Duty-free produc ts bound under the ITA and corresponding applied MFN
customs duties, 1996 and 1998 ..................................................................................123Canada WT/TPR/S/53
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SUMMARY OBSERVATIONS
(1) INTRODUCTION
1. Canada has continued to pursue an
outward-oriented strategy that, combined with
prudent macroeconomic policies, has been
integral to a recent strong growthperformance.  Over the last two years, Canada
has participated in regional and multilateral
initiatives that have further liberalized its
generally open economy.  It has also
demonstrated its commitment to a strongmultilateral trading system through an active
and constructive participation in all aspects of
work in the WTO.  Domestic initiatives to
lower inter-provincial trade barriers, move
forward internal deregulation, enhancetransparency, and rationalize the import
regime have helped Canadian producers to
adapt to the challenges, and to take advantage
of the opportunities resulting from greater
market access both at home and abroad.
However, a few areas have proved relatively
impervious to change and remain shelteredfrom foreign competition by trade or
investment barriers;  among those are certain
activities in the agriculture, textiles and
clothing, motor vehicles and services sectors.
Moreover, although outward-oriented,Canada's preferential arrangements give rise
to questions about their possible distortion of
trade patterns.
(2) E
CONOMIC AND INSTITUTIONAL
ENVIRONMENT
2. Canada has consolidated many of the
economic trends noted in its 1996 Trade
Policy Review, maintaining output growth and
low inflation while eliminating fiscal deficits.
Economic activity has reflected strong privateconsumption and investment, supported by
prudent monetary manag ement and the stimuli
of regulatory reform, closer internal market
integration and pressure from greater
international competition.  Reduction and
reform of public spending and increased
budgetary revenues from economic growthunderpin the improved fiscal situation.
However, reflecting the accumulation ofdeficits in earlier years, the overall debt to
GDP ratio remains at almost 100%, which
leaves the budget vulnerable to interest rate
increases or slow-downs in economic activity.
Unemployment, at 8.4%, also remains an
issue.
3. Developments in the past two years
have confirmed trade as a major determinant
of Canada's economic performance.  Exports
continued to benefit from the United States'
cyclical lead, supported by efficiency gains inthe Canadian economy.  The U.S. share in
Canadian trade has risen further, to some
83% of merchandise exports and 67% of
imports.  Canada's aggregate output thus
remains exposed to slower growth in theUnited States.  Although diversification away
from commodity exports has progressed,
primary products still account for almost one
third of total merchandise exports, reflecting
Canada's generous endowment of natural
resources.
4. The financial crisis in Asia has had so
far a limited impact on Canada's overall
economic growth, as only 8% of Canadian
exports are destined for that region.
Nevertheless, the crisis has been felt
distinctively in western Canada and, ifprotracted, could have significant indirect
effects on the economy as a whole.
Commodity prices have fallen for a broad
range of important Canadian export products.
This, together with volatility in financialmarkets, has put downward pressure on the
Canadian dollar.  The authorities responded
by increasing interest rates at various times in
1997 and the first half of 1998, followed by a
reduction in September 1998.
5. Trade and investment policies have
developed within an essentially unchanged
institutional framework characterized by
shared federal-provincial competencies.  The
federal and provincial authorities have made
steady progress in reducing inter-provincial
trade barriers, particularly through the 1995Agreement on Internal Trade (AIT).
Reflecting the key role played by foreign
capital, the authorities have also sought toWT/TPR/S/53 Trade Policy Review
Page x
ease regulations and reduce other factors that
may inhibit foreign investment.  In addition,
they have continued the process of internal
deregulation while making use of new
information and communication technologies,
notably the Internet, to enhance theeffectiveness and transparency of government
actions.  Overall, these efforts have facilitated
factor flows among the provinces, eased
distortions in the incentive system and created
a stronger basis for long-term economicexpansion.  However, Canada's constitutional
debate adds an element of uncertainty to its
future trade and investment framework.
(3) T
RADE POLICIES BY INSTRUMENT
(i) Tariffs
6. After an autonomous tariff review,
Canada adopted a new Customs Tariff in
January 1998 that greatly simplified and
rationalized its import regime.  The new
Customs Tariff incorporated the Uruguay
Round tariff reductions planned for 1999,
unified the schedule, and decreased thenumber of tariff lines from 11,000 to 8,000.  It
also converted all rates of under 2% to zero, a
conversion that will be automatic in the future.
Duty free entry also replaced special codes
that had provided for the concessionary entryof certain inputs.  Almost half of all tariff lines
are now duty free, up from a third in 1996,
and the simple average tariff is down to 7.7%
in 1998, compared to 9.2% two years ago.
7. Tariffs on dutiable items average
14%, unchanged from 1996;  sectors where
tariff protection remains significant include
food products, textiles and clothing, footwear
and shipbuilding.  Tariff escalation also
remains relatively high in certain sectors,including food products, textiles and footwear.
These features create potential impediments to
exports into Canada in sectors where
developing countries could well have a
comparative advantage.  Transparency has
been enhanced by the elimination in the new
Tariff of performance-based duty remissionprogrammes and most end-use tariff
concessions, but provisions remain that permitonly certain firms to import motor vehicles
duty-free.
8. Tariff reductions have also occurred
in the context of free-trade agreements (FTAs).
In particular, the progressive implementation
of the NAFTA has resulted in the eliminationof virtually all tariffs on trade with the United
States, the main exception being supply-
managed agricultural products.  Two new
FTAs, with Chile and Israel, bring to ten the
number of Canada's preferential tariffregimes, each involving different margins of
preference and rules of origin.
(ii) Non-tariff restrictions and controls
9. Import controls are in place
essentially for health, safety andenvironmental reasons, with the exception of
the trade restrictions applied in the
agriculture, and textiles and clothing sectors.
Over the past two years, environment-related
trade prohibitions have been challenged twice
by private companies under the investor-state
provisions of the AIT and NAFTA.
10. Canada has used countervailing and
safeguard actions sparingly over the past two
years, and there has been a reduction in anti-
dumping measures in force.  More than half of
all anti-dumping measures apply in thesensitive steel industry.  Anti-dumping actions
affect mostly U.S. suppliers;  although this
partly reflects the intensity of bilateral trade,
anti-dumping thus persists as a potential
impediment to trade in North America.Canada has continued to seek the elimination
of anti-dumping and countervailing duty
measures within the NAFTA, and in FTAs in
general.  These efforts resulted in provisions
to phase-out anti-dumping measures in theCanada-Chile FTA.
11. Recognizing the important effect of
standards and technical regulations on
international trade, Canada has actively
participated in international standardization
activities, including the adoption of
international standards, the negotiation ofmutual recognition agreements, and efforts toCanada WT/TPR/S/53
Page xi
harmonize Canadian regulations with those of
major trading partners.  These efforts should
benefit all of Canada's trading partners, in
particular those with whom harmonization is
closest.
(iii) Other measures affecting production
and trade
12. In 1995-97 there was a significant
decline in the financial assistance by the
Federal Government to economic sectors.  In
particular, outlays to the agri-food sector havebeen substantially reduced, while industry-
specific assistance appears now to be largely
limited to the cultural sector.  Although the
provinces have also participated in the fiscal
consolidation process, the impact of thisprocess on provincial subsidy programmes is
not as clear.
13. Canada made market opening
commitments in government procurement both
under the WTO Plurilateral Agreement on
Government Procurement (GPA) and the
NAFTA.  However, Canada has linked the fullimplementation of its GPA commitments to
moves that it deems economically equivalent
by the United States.  This position, unchanged
since the previous Trade Policy Review, has
continued to create frictions with other GPAsignatories.
14. The AIT has sought to remove
provincial procurement preferences, and thus
promote a more rational allocation of
resources.  Since 1997, transparency has beenenhanced by the launching of an Internet-
based tendering system and the conclusion of
an agreement to extend AIT disciplines to
municipalities, academic and health
institutions.  These moves may also benefitforeign suppliers, especially those with a
commercial presence in Canada.  On the other
hand, although the AIT prohibits buy-
provincial and other practices that
discriminate against suppliers from other
provinces, its signatories are free to employ
buy-Canadian policies where no internationalcommitments apply.  In general, the criteriaused by provinces to allocate procurement
contracts remain opaque.
(4) S
ECTORAL POLICIES
15. By and large, the Canadian economy
is open and largely free from significant
policy-induced distortions.  However, somesectors, for various reasons including
historical and political, remain subject to
interventions that have created barriers to
trade and investment.  Even these sectors, the
main focus of this report, have come underincreased scrutiny and in some of them
changes are under way.
(i) Agriculture
16. Public financial support for
agriculture has continued to contract,including the elimination of export subsidies in
1997, and important reductions in domestic
agricultural subsidies.  However, an
increasingly market-based environment for
grains and major livestock contrasts with the
retention of supply management regimes for
dairy products, poultry and eggs.  Canada'sin-quota access is in some instances reserved
for imports covered by certain preferential
arrangements, including Canada's recent
FTAs with Chile and Israel.  Tariffs on out-of-
quota supplies often stand at over 200%.
17. WTO Members have questioned the
activities of the Canadian Dairy Commission
and Canadian Wheat Board concerning trade
in dairy products and wheat.  In addition to
these two entities, Canada has notified theCanadian Freshwater Fish Marketing
Corporation, the ten provincial liquor boards
and the Ontario Bean Producers Marketing
Board as state-trading enterprises.
18. Canada's few but highly restrictive
trade measures in agriculture could help to
perpetuate some of the distortions in world
markets that Canada sought to remove in the
Uruguay Round. These restrictions, by
effectively shielding key agricultural activities
from market opening under the WTO
Agreements, also deny opportunities for tradeWT/TPR/S/53 Trade Policy Review
Page xii
with Canada to more efficient agricultural
producers, particularly those not enjoying
preferential access.  This approach detracts
from Canada's otherwise strong support for
production based on comparative advantage,
a principle that has served Canada well inother areas.
(ii) Manufacturing
19. The motor vehicle industry is the
largest manufacturing activity in Canada, and
tightly integrated with that of the UnitedStates.  A special policy regime has been
applied to the industry since the Auto Pact was
signed with the United States in 1965.  Thus,
while MFN tariffs are currently 6.7% for light
motor vehicles and aftermarket parts, and 0%for automotive original equipment, firms
specifically covered by the Auto Pact and
complying with both Canadian value-added
content and production-to-sales requirements
may import automotive products duty free
from all sources.  After the Government
announced in 1998 that it would not furtherreduce unilaterally MFN tariffs on automotive
products, instead pursuing trade liberalization
through the WTO and regional arrangements,
the European Union and Japan requested
consultations with Canada on the WTOconsistency of the Canadian automotive
regime.  For Canada itself, concerns also arise
about the cost of forgoing unilateral, efficiency
enhancing liberalization, with a view to
preserving barriers as bargaining elements forfuture negotiations.
20. Canada has implemented the product
integration programme for the first two stages
envisaged in the WTO Agreement on Textiles
and Clothing, and it has included somerestrained products among those integrated.
Canada has also effectively eliminated some
quotas and increased access under others as a
unilateral liberalizing effort.  Trade in textiles
and clothing has also undergone regional
liberalization.  Trade within the NAFTA
region has increased considerably, due in partto rules of origin (the "yarn forward rule")
designed to ensure that the benefits of free
trade accrue to producers located in NAFTAmembers.  In recent years, Canada's textile
imports from China and Hong Kong, China
have also increased significantly;  China
already accounts for the largest, and a
growing share of clothing imports.
(iii) Services
21. The process of gradual deregulation
of the Canadian services sector has continued,
spurred by the need to remain internationally
competitive in the face of rapid technological
change and competitive pressures from U.S.suppliers.  Domestic reforms have facilitated,
and been stimulated by international
commitments under both GATS and NAFTA,
thus ensuring that these reforms also benefit
foreign service providers.  Canada activelyparticipated in the WTO-sponsored
negotiations in Basic Telecommunications and
Financial Services.  In audiovisual services
Canada is still searching for a tenable balance
between international commitments and the
perceived need to promote its cultural identity
in an increasingly borderless market place.  Inthese services, as in all other activities related
to cultural industries, the Government reviews
all investments by foreigners.
22. The professional services sector
makes a significant contribution to Canada'scommercial services exports.  Professional
services are closely regulated in Canada by
provincial and territorial bodies;
incorporation of professional service firms
falls under provincial or federal authorities.Although Canada's decentralized regulatory
system has created impediments to trade in
such services, including to inter-provincial
labour mobility, steps have been taken,
notably under the AIT, for the mutualrecognition and reconciliation of occupational
standards across provinces.  In international
fora, Canada has made significant
commitments on professional services under
the GATS, and negotiated mutual recognition
agreements at the bilateral and regional level,
notably under the NAFTA.Canada WT/TPR/S/53
Page xiii
(5) TRADE POLICIES AND TRADING
PARTNERS
23. Canada follows a multi-track policy
approach to international trade and
investment relations in which multilateral and
preferential arrangements are intended to playmutually reinforcing roles.  An effective
multilateral system with universal
membership, encompassing both trade and
investment disciplines, is seen by the
authorities as the best means to attract foreigninvestment to Canada and provide a secure
and fair environment for Canadian firms
operating abroad.  Canada has thus been
actively participating in all aspects of current
work in the WTO, arguing that the core ofsuch work should be implementing the
Marrakesh built-in agenda and developing the
programme agreed in Singapore.  For future
trade talks, Canada is considering a "cluster
approach" that would group complementary
issues for negotiation, to identify areas where
early agreement might be possible.
24. Given the importance of bilateral
trade flows, Canada also grants paramount
importance to managing the relationship with
the United States.  Canada-U.S. preferential
trade arrangements, more recently through theNAFTA, have magnified the inherentadvantages of geographic proximity and, thus,
the reliance of the Canadian economy on one
trading partner.  As a counterbalance, in
addition to its solid support of the multilateral
trading system, Canada has sought to forge
preferential links with other partners,including the new FTAs with Chile and Israel
and an active participation in broader
schemes such as APEC and the Free Trade
Area of the Americas.
25. Canada's bilateral and regional
liberalization reflects an outward-oriented
strategy, which, has created however, an
elaborated system of preferential tariffs and
rules of origin that give rise to concerns about
trade diversion.  Moreover, difficulties inbalancing internal pressures in a federal
system, regional integration, and multilateral
liberalization continue to complicate Canada's
external trade relations, and WTO partners
have questioned over the last two years
Canadian measures in areas such as patent
protection, milk and dairy products pricing,film distribution, taxation of periodicals,
export support for aircraft and the automotive
trade regime.