Canada WT/TPR/S/22
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IV. SECTORAL POLICY PATTERNS AND TRENDS
(1) Overview
1. Theregulatory environment governing growth andstructural adjustment inCanada haschanged
significantly since 1994. TheNAFTA (1994), theWTO Agreements andtheAgreement onInternal
Trade (1995) areallaimed atremoving barriers toeconomic integration, bothinternally andexternally.
StructuralreformsundertheseAgreementswerecomplementedbyanautonomousprocessofderegulation
andcommercialization which wasinspired, orrequired, bygeneral efficiency considerations, technical
developments (telecommunications), fiscal austerity (elimination oftransport subsidies) andtheeffects
oncross-border competition ofregulatory reforms intheUnited States (aviation, telecommunication
andother tradeable services). Itisdifficult toconceive ofeconomic operators notdirectly exposed
topolicy changes inrecent years, whether intheareasoftariffs, subsidization, government procurement
orregulations oninterprovincial factor mobility.1Theeconomic implications may, however, differ
widely between sectors.
2. Overall, theimpact oftheNAFTA appears tobeparticularly strong inmanufacturing, where
tariff elimination coincides withstrengthened rules oforigin, andinservices industries exposed to
improved access conditions. Inareas suchasbanking andinsurance, theNAFTA paved thewayfor,
andwaslater "multilateralized" under, Canada 'sWTO commitments. Inagriculture, itwas
predominantly thenewWTO Agreement, combined withbudgetary constraints, thathelped toredefine
theplaying fieldforproducers andtraders.2Focusing ondomestic market integration, theAgreement
onInternal Trade islikely tohaveamore limited impact onexternal suppliers, although theymay
share inthebenefits ofanincreasingly flexible andcompetitive market environment. Such benefits
would befurther enhanced through broader coverage ofbasic business sectors, inparticular energy.3
3. Thesectoral effects ofthese reforms are,however, difficult totrace anddistinguish from
macroeconomicinfluences.Whileinternalactivitiesarecurrentlysufferingfromweakdomesticdemand,
buoyant exports arebolstering abroad range oftrade-oriented sectors, fromailing textiles andclothing
industries toCanada 'straditional strongholds (forestry, mining, energy andautomobiles) and"modern"
manufacturing (e.g.information technologies, aerospace).
4. Aconspicuous feature ofmany advanced manufacturing industries isthehigh share of
foreign-owned production plants with alimited research anddevelopment base inCanada.
Telecommunications remains theonly major exception. Inmany areas, thelarger players are
complemented bysmall andmedium-sized enterprises thathavebeenabletodevelop competitive market
niches. While capitalizing oncertain size-related advantages, such astechnical andcommercial
flexibility, theSMEs generally operate from alimited financial baseandmayhavedifficulties in
maintaining international supply andmarketing channels.
1Themost notable exceptions maybefound among cultural industries.
2Thefactthatsupply-managed farm sectors (eggs, poultry anddairy) have sofarescaped major changes,
contrasting withgrains, maybeattributed bothtoregional sensitivities andtheabsence offiscal pressure asthe
costofsupport isborne mainly byconsumers.
3TheAgreement 'schapter onenergy hasremained anempty shell todate(section (3)(iv)).WT/TPR/S/22
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(2) Agriculture, Food, Fisheries andForestry
(i) Main features
5. Asanetcommodity exporter andmember oftheCairns Group, Canada hasbeenanactive
supporter offarmtradeliberalization. Apart fromitsrôleintheUruguay Round, Canada hasfrequently
usedinternational dispute settlement procedures toremove barriers impeding itsexports ofagricultural,
forestry andfisheries products (Annex II.1). Current priorities include thefullelimination ofexport
subsidies andotherdistortions inworld farmtrade(Chapter II(2)(i)(b)), corresponding policy initiatives
arecomplicated, however, bythepersistence within Canada ofState-managed production andmarketing
structures inseveral foodsectors.
6. Noting thatthegrowth offoodexports hasbeenlagging overall exports inrecent years, the
Government recently launched anAgri-food Trade Strategy. Itsgoalistorecapture a3.5percent
share ofworld trade, upfrom3percentatpresent, andtoincrease exports fromtheCan$15.2 billion
recorded in1994 tosome Can$20 billion by2000. Amajor contribution isexpected from higher
value-added products, notably following theelimination ofcereal transportation subsidies.
Chart IV.1shows thecurrent structure ofCanadian farmproduction.
Canada WT/TPR/S/22
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7. Federal outlays onagriculture havedeclined by20percentsincethe1994Trade Policy Review,
andfurther reductions arebudgeted untilfiscal year1998-99.4Canada 'sProducer Subsidy Equivalent
(PSE), estimated bytheOECD, declined from 42percentofthevalue ofproduction in1989-91 to
27percentin1995. TheConsumer Subsidy Equivalent (CSE) came down from26percentto15per
centoverthesame period. Lessintensive government support forfarmincomes, asreflected inthese
figures, isattributable tobothhigher import prices following theCanadian dollar 'sdepreciation and
anongoing process ofautonomous and/or WTO-inspired policy reform. There hasbeenasignificant
decline intotaltransfers perfarmer (onafull-time basis), contrary tothegeneral trend among OECD
countries.5
8. Agriculture, foodandbeverages (the"agri-food" sector) currently represent anestimated
8percentofGDP, 12percentofexports and15percentofemployment. Forestry contributes an
additional 3percentage points toGDP. Contrasting withthefisheries sector, ailing duetodwindling
stocks, theforest industry remains amajor economic force inmostregions ofCanada. With exports
totalling Can$39 billion in1995, nearly twice the1990 level, thesector made thesingle-largest
contribution toCanada 'strade balance.
(ii) Recent developments under theWTO andNAFTA
9. Overall, theWTO Agreements appear tohavehadastronger impact onCanadian agriculture
thanonmanufacturing, contrasting withtheNAFTA. Notable changes included thephasing out,in
1995, oftransport subsidies under theWestern Grain Transportation Act,accompanied byaone-time
direct payment ofCan$1.6 billion toaffected landowners. Transport subsidies formed thelargest part
oftheWTO Total Aggregate Measure ofSupport, which comprises alldomestic support programmes
subject toa20percentreduction commitment under theWTO Agreement onAgriculture.6According
totheauthorities, theAMS for1995 and1996 willbesignificantly below therelevant commitment
levels.
10. Alsoasaresult oftheUruguay Round, Canada hasconverted itsnon-tariff import quotas and
restrictions intoasystem of22tariffquotas covering cereals, dairy products, poultry, eggsandbovine
meat(Table IV.1). In-quota imports aresubject torelatively lowduties while theduties onout-of-quota
supplies arebound atprohibitive levels, reflecting therestrictiveness ofthequota andlicensing schemes
theyreplaced. Tariff quotas apply primarily toimports competing withproducts subject tosupply
management systems, which together account forabout onequarter ofCanada 'sagri-food production.7
4OECD (1996).
5Incontrast tothesituation in1989-91, these transfers, atsome Can$14,000 in1994, were below theOECD
average andamounted tolessthanhalfthetransfers recorded forCanada 'smain trading partner.
6TheTotal Aggregate Measure ofSupport, established inthecontext oftheUruguay Round negotiations,
isanindex measure ofdomestic support, based onabound Total AMS in1986-88. Itincludes market price
support foreachproduct, non-exempt payments (support notmeeting theexemption criteria ofArticle 6:5of
theWTO Agreement onAgriculture), andother product ornon-product-specific support (e.g.fertilizer subsidies).
Canada 'smaximum allowable AMS istodecline from Can$5.2 billion in1995 toCan$4.3 billion in2000; the
latter amount corresponds to80percentoftheaggregate support provided between 1986 and1988.
7Recent actions byaprovincial marketing board against farmers found tobeselling directly tolocal cheese
producers havefurther intensified thecontroversy about Canada 'ssupply management programmes among the
farming community.WT/TPR/S/22
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TheUnitedStateshaschallengedCanada'sapplicationofout-of-quotadutiestoitsexportsasincompatible
withtheNAFTA (Chapter III(2)(i)(a)), thefinalpanel report isexpected tobeissued towards end-1996.
Table IV.1
Tariff quotas foragricultural andfoodproducts subject totariffication
(Tonnes andpercent)
Product Quota
volume
1995,
tonnesIn-quota
imports
1995,
tonnesTariff rate1996
Inquota Above quotaEligible importers
(in-quota supplies)
(percent)a(percent)a(percent)
Eggs andproducts 12,822b
(3%)12,535a
(>3%)18.0 195.0 Shell, liquid andfrozen eggs: historical importers
(based onpastimports), graders, processors,
wholesalers anddistributors (based onmarket
share). Powdered eggs: processors andfurther
processors (pro-rata basis).
Broiler hatching eggsand
chicks7,949b
(>5%)8,156a
(>5%)16.0 270.0 Registered hatcheries (based onmarket share).
Chicken, live,meat and
products39,844
(>5%)51,761
(>5%)11.0 270.0 Processors (based onmarket share), distributors
(based onmarket share) further processors (based
onproduction ofimport-competing products) and
historical importers (based onmarket demand).
Turkey, live,meat and
products4,467
(4%)4,700
(4%)11.0 170.0 Historical importers (based onmarket share),
further processors (based onproduction ofimport-
competing products) andother importers (based on
market demand).
Bovine meat 76,409
(>5%)86,563
(>5%)0.0 30.0 Processors andretailer-processors (based on
processing ofnon-NAFTA bovine meat) and
distributors (based onsales ofnon-NAFTA bovine
meat).c
Fluid milkandcream 64,500
(2.4%)64,500
(2.4%)16.0 277.0 Personal imports only(uptoCan$20).
Cream 394
(<3%)(...)
(3%)16.0 336.0 First-come-first-served forestablished importers.
Milk, concentrated,
condensed11.7
(0.01%)11.7
(0.01%)295.0 Onehistorical importer.
Whey 3,198
(>5%)...
(>3%)17.0 240.0 First-come-first-served forestablished processors.
Powdered butter milk 908
(1%)1,055
(1%)16.0 239.0 Onehistorical importer (only forsupplies from
NewZealand).
Other milkproducts 4,345
(...)2,012
(...)14.0 310.0 Applicants totheextent oftheiruseofmilk
proteins.
Yogurt 332
(<1%)239
(<1%)14.0 273.0 Historical importers based onpastimports.
Butter 1,964
(2%)1,954
(2%)16.0 352.0 Canadian Dairy Commission (1,200 tonnes reserved
forexports from NewZealand).
Cheese 20,412
(>5%)20,339
(>5%)[4.0] 282.0 Historical importers based onpastimports.d
Icecream 347
(0.2%)308
(0,2%)14.0 318.0 Historical importers based onpastimports.
Table IV.1 (cont'd)Canada WT/TPR/S/22
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Product Quota
volume
1995,
tonnesIn-quota
imports
1995,
tonnesTariff rate1996
Inquota Above quotaEligible importers
(in-quota supplies)
(percent)a(percent)a(percent)
Other dairy 70
(...) 70
(...) 14.0 288.0 Processors totheextent ofthedomestic useasinputs.
Margarine 4,535
(3%)87
(<1%)16.0 250.0 First-come-first-served (max. 200tonnes per
applicant).
Wheat andmeslin 136,130
(3%)24,036
(<1%)0.5 71.0 First-come-first-served.e
Wheat products 123,557
(>5%)140,951
(>3%)6.5 49.0 First-come-first-served.
Barley 239,400
(3%)11,267
(<1%)0.5 66.0 First-come-first-served.f
Barley products 11,478
(3%)8,659
(...)9.5 75.0 First-come-first-served.
... Notavailable.
a Share ofdomestic consumption in1986-88 (base period).
b Thousand dozen.
c TRQdoesnotcover supplies fromtheUnited States andMexico; in-quota imports arelargely reserved forAustralia (42,000 tonnes)
andNew Zealand (29,600 tonnes).
d 66percentofthetariff quota isreserved forEUsuppliers.
e Mexican andU.S. supplies enter under NAFTA rateswhen TQisfilled.
f Mexican supplies enter under NAFTA rateswhen TQisfilled.
Source: Government ofCanada.
11. Likeother developed country participants, Canada iscommitted tolowering itsduties on
agricultural andfoodproducts byanaverage of36percentovertheUruguay Round implementation
period (1995-2000), withaminimum reduction of15percentbytariff line. Theaverage tariff on
agri-food products in1996was25percent(Chart IV.2).8Canada hasnotinvoked todatethespecial
safeguard clause available under theWTO Agreement onAgriculture.
12. Given theprohibitive nature ofout-of-quota tariffs, initial quota access implies asignificant
commercial advantage. Theallocation ofaccess entitlements frequently centres ontheimporters '
traditional involvement, adjusted foranychange inutilization. Details ofthevarious approaches are
shown inTable IV.1. Beneficiaries maysellorrenttheirshares, subject toapproval bytheMinister
ofForeign Affairs.
13. Export licensing requirements havebeenintroduced toadminister access totrading partners '
tariffquotas. Quota administration ontheexport sideimplies thattheresulting rentsaccrue toCanadian
suppliers rather thantoimporters abroad. Therelevant procedures areintended toensure "orderly
export marketing" within U.Stariff quotas andapply torefined sugar (within atariff quota of
22,000 tonnes), sugar-containing products (64,709 tonnes) andpeanut butter (14,500 tonnes). Quota
entitlements areallocated totraditional exporters based ontheirpastshares.
8Foritems subject totariff quotas, thecalculations underlying Chart IV.2arebased ontheout-of-quota rates,
given thatthese constitute thedecisive import barrier.WT/TPR/S/22
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Canada WT/TPR/S/22
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14. Export subsidies havebeengranted forcereals, oilseeds anddairy products (Table IV.2). Like
other developed countries, Canada iscommitted under theWTO Agreement onAgriculture toreduce
exportsubsidiesby36percentandsubsidizedvolumesby21percentforindividualproductsorproduct
groups overthesix-year implementation period. According totheauthorities, Canada willnotgrant
export subsidies onanyproducts in1995-96, withthepossible exception ofskim milkpowder and
butter.
Table IV.2
Actual exports andexport subsidies commitments
Product Actual
spendingOutlay
commitmentActual
exportsExport
commitment
1986-90 2000-01 1986-88 2000-01
(Can $million) ('000tonnes)
Wheat andproducts 311.0 199.1 11,205 8,852
Coarse grains 116.4 74.5 4,579 3,618
Oilseeds 59.7 38.2 2,214 1,749
Skim milkpowder 48.7 31.1 56.9 44.9
Other milkproducts 35.2 22.5 38.3 30.3
Incorporated productsa31.7 20.3 ... ...
Cheese 25.4 16.2 11.5 9.1
Butter 17.2 11.0 4.4 3.5
Oilcakes 7.5 4.8 274.4 217
Vegetable oils 3.5 2.2 117.4 92.8
Vegetables 3.1 2.0 101.4 80.1
Total 659.4 421.9 ... ...
.... Notavailable.
a Products containing skim milkpowder, butter, cheese orother milkproducts.
Source: Government ofCanada.
(iii) Cereals andrelated products
15. Canada isoneoftheworld 'sleading producers ofcereals, accounting for24million tonnes
ofwheat and23million tonnes ofcoarse grains in1995. Over40percentofthevalue ofproduction,
estimated atoverCan$10 billion in1995, isexported; imports aremarginal. While cereals have
traditionally received thelion'sshare ofCanada 'sdomestic andexport subsidies, there hasbeena
significant reduction inrecent years. ThePSEforwheat declined from46percentin1989-91 to18per
centin1994; asurge to24percentin1995 wasduemainly toaone-time compensatory payment
tolandowners.
16. Withtheabolition oftheWestern Grain Transportation Acton1August 1995andtheattendant
termination oftransport assistance, Canada hascurrently over-achieved thereduction commitment forWT/TPR/S/22
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export subsidies under theWTO Agreement, according totheauthorities. Internal support, asreflected
intheAMS, issignificantly below itsbaselevel. TheGross Revenue Insurance Plan(GRIP), amajor
domestic subsidy programme, wasterminated inSaskatchewan; otherprovinces areconsidering options
forearly termination. TheGRIP istobereplaced byinitiatives focusing onwhole-farm incomes,
corroborating anoverall trend away from product-related stabilization measures.9
17. TheUruguay Round hasbrought nomajor changes intheoperations oftheCanadian Wheat
Board (CWB). TheBoard istoremain thesolemarketing agent forwheat andbarley grown inwestern
Canada fordomestic human consumption, interprovincial andinternational sales. Sales revenues are
pooled intoacommon account and,afterdeduction ofadministrative costs, redistributed tofarmers
inproportion totheirdeliveries. Some WTO members haveraised questions about these operations,
implying thattheCWB'sability tosetproducer prices andpoolsalesrevenues unduly enhances its
flexibility inexport pricing.10However, theGovernment seesnoneedtochange thecurrent system,
given itspositive contribution tothesector 'sinternational bargaining position, riskmanagement
(concerning variations inmarket return) andexport competitiveness.
18. InAugust1994,CanadasignedamemorandumofunderstandingwiththeUnitedStatesgoverning
itsbilateral supplies ofnon-durum anddurum wheat.11TheMOU, which took effect on
12September 1994foroneyear,provided forU.S.import tariffquotas onCanadian wheat, withrising
tariffs onquantities exceeding specified levels. (White winter wheat, produced outside thejurisdiction
oftheCWB andnotcovered bytheWestern Grain Transportation Act,wasnotrestrained under the
MOU.) Bothparties alsoestablished aJointCommission onGrains toexamine theirmarketing and
support systems, including effects oncompetition.
19. Among anumber ofsuggestions, theJoint Commission recommended thatCanada andthe
UnitedStateseliminateexportsubsidiesandexcessivediscretionarypricingpracticesoftheirinstitutions.12
TheCommissionalsocalledforamodificationofdomesticagriculturalpoliciestoremovetradedistorting
effects. Oneoftheapproaches examined inthiscontext wastoexpose theCWB tothepossibility
ofprofits andlosses inthemarket oractinanequivalent manner, without precluding theuseofpooling.
Subsequent tothisreport, theGovernment established inJuly1995theWestern Grain Marketing Panel
todiscuss thefuture operation ofCanada 'sgrain marketing system. Therecommendations made by
theJoint Commission andthePanel arecurrently under consideration.
20. Previous import licensing requirements forwheat, barley andtheirproducts were replaced
byatariff quota system under theWTO Agreement onAgriculture (Table IV.1). Quotas aretobe
allocated onafirst-come first-served basis. Imports ofwheat andwheat products fromtheUnited States
andMexico continue toenter atlower NAFTA ratesoncethetariff quota isfilled. Incontrast, any
additional imports ofU.S.barley andbarley products aresubject tothem.f.n. out-of-quota rate(barley
andbarley products were covered bytherecent NAFTA Panel; section (ii)above.
9OECD (1996).
10WTO document G/STR/W/8, 28February 1996.
11According totheHon. Mr.RoyMacLaren (DFAIT, 1995a), Canada accepted therestrictions "under the
threat ofaunilateral action under Section 22oftheU.S. Agricultural Adjustment Act".
12Canada-United States Joint Commission onGrains.Canada WT/TPR/S/22
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(iv) Beef, vealandpork
21. Mirroring developments inthegrains sector, theexternal market environment formeat has
improved significantly inrecent years. While consumption wasstagnant between 1990 and1996,
production andexports ofbeefandvealexpanded atanannual nominal rateof3and18percent,
respectively.13TheProducer Subsidy Equivalent forbovine andpigmeatdeclined from 20percent
in1989-91 tosome 15percentin1995, withvirtually notransfers fromconsumers. Thedecline reflects
lower domestic prices, currency depreciation and,toacertain extent, thetermination oftheNational
Tripartite Stabilization Program (NTSP) forthebeefandhogsectors. While thereorientation of
Canada 'stransport policy forgrains isexpected topromote redmeatproduction, primarily intheprairie
regions, theauthorities consider theensuing costeffects astoosmall tohaveadiscernible impact on
theNorth American market.
22. Allprovinces except Newfoundland continue, withvariations, torelyonmarketing boards
negotiating sales conditions onbehalf ofhogproducers.14Theboards handle thevastmajority of
transactions ineachprovince. Although notendowed withspecific quotas forsupply management,
they"have suchpower thatitisimplicit intheiroperations touseaquota system toestablish prices".15
Given theboards 'exclusive position, interprovincial differences inprice andsupply conditions atthe
input stage areshielded from offsetting arbitrage operations.
23. The1982Meat Import Act,which provided theauthority torestrict bovine meatimports, was
repealed following theUruguay Round. Canada hasestablished aduty-free tariffquota of76,409 tonnes
ofbovinemeatfornon-NAFTAcountrieswithcountry-specificallocationsforNewZealandandAustralia
(Table IV.1).16Tariff-quota allocation isreserved forretailer-processors anddistributors onthebasis
oftheirprocessing orselling (distributors) ofnon-NAFTA bovine meat inthepreceding year. A
safeguard action onboneless beef,maintained under GATT Article XIXsinceJuly1993, wasterminated
atend-1994.
24. ThenewCattle Options PilotProject (COPP), developed jointly bythecattle industry andthe
Government, isintended toreduce price andexchange raterisksthrough market-based instruments
(option contracts); according totheauthorities, theobjective istopromote afullyprivatized mechanism.
Changes ingrading andinspection systems areintended toincrease theindustry 'scostcontribution;
grading services aredestined forprivatization.
13WTO document, IMA/W/9, 10June 1996.
14Theagencies are:British Columbia HogMarketing Commission; Alberta Pork Producers Development
Corporation; Saskatchewan PorkInternational; Manitoba PorkEst.; Ontario Pork; Fédération desProducteurs
dePorc duQuébec ;New Brunswick HogMarketing Board; Pork Nova Scotia; Prince Edward Island Hog
Commodity Marketing Board.
15Internal Trade Secretariat (1994). Only small processors arenormally allowed topurchase directly from
producers.
16Under supplementary permits, non-NAFTA suppliers mayshipadditional meat (when thetariff quota for
beefhasbeenfilled) provided, interalia,thattheimport price isnolessthantheprice ofsimilar meat entering
theUnited States.WT/TPR/S/22
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(v) Poultry andeggs
25. Allprovinces butNova Scotia andNewfoundland havesigned aNational Allocation andPricing
Agreement fortheperiod December 1995toJanuary 2002. Itimplements anagreement inprinciple,
concluded inAugust 1994 bymostmembers oftheCanadian Chicken Marketing Agency (CCMA),
onanewnational quota allocation andpricing system forthechicken industry. Thenewsystem is
based ona"bottom-up approach" inallprovinces, within which provincial producers andprocessors
simultaneously negotiate eachprocessor 'srequirements atprices acceptable toproducers.17
26. Thesystem iscomplemented byregulatory mechanisms attheprovincial level. InOntario
andQuebec, acommittee comprising chicken producers andprocessors determines priortoeachquota
period thevolume adjustments required inthelightofcurrent andexpected market conditions. While
Quebec andOntario undertook, onabestefforts basis, toco-ordinate prices oflivechicken, other
provinces arecommitted nottoundercut these prices lesstransport costs. Production growth inany
province mustnotexceed acapof8percentinanytwo-month production period onayear-on-year
basis, withtheceiling tobereviewed annually.
27. High levels ofborder protection havealongtradition inthesector. Import quotas were
introduced intheeggandturkey industries in1974, andinthechicken andbroiler hatching industries
in1979 and1989. In1994, imports ofchicken andturkey were limited, respectively, to6.3and
3.6percentofdomestic consumption. Under Canada 'sUruguay Round tariff quota commitments,
39,844 tonnes ofchicken mayenter under tariffs ofslightly over11percent; additional supplies are
dutiable ataround 300percent. Similarly restrictive conditions apply toimports ofturkeys andturkey
products (Table IV.1).
28. Nocountry-specific quota allocations havebeenmade under theimport régime. Since the
inception oftheFTA, however, U.S.suppliers ofchicken andturkey havebeenentitled toexport in
anyyear,respectively, upto7.5and3.5percentofCanada 'sprevious year'sproduction atpreferential
conditions. Thiscompetitive advantage, within anm.f.n. tariff quota, leaves virtually noscope for
additional supplies. In1995, Canada imported 51,761 tonnes ofchicken products, considerably more
thanthecorresponding tariff quota; themain supplier wastheUnited States (Table IV.1).18The
allocation ofin-quota supplies toindividual importers isbeing shifted insteps from arégime based
primarily onhistorical quantities toasystem relying mainly oncurrent market shares. Eventually,
processors anddistributors willhaveaccess toalarger portion thanfurther processors, thefoodservice
sector andhistorical importers.
17Production levels forpoultry meat andeggsaremanaged byfournational agencies: theCanadian Turkey
Marketing Agency, theCanadian Chicken Marketing Agency, theCanadian Broiler Hatching EggMarketing
Agency,andtheCanadianEggMarketingAgency.TheAgenciesaremandatedtosetnationalproductionquantities
andallocate quotas among provincial agencies, buthavenopowers overimports andexports. Typically, producer
prices areestablished provincially, based oncost-of-production calculations and,according totheauthorities,
market factors. Regulatory amendments inMarch 1996 provided foradditional industry representation onthe
boardsofthefouragencies.Thefactthatindustryorganizations,ratherthantheFederalGovernment,nowappoint
directors totheagencies 'boards isexpected toencourage more balanced decision-making. However, consumer
organizations arenotrepresented.
18Supplementaryimportsmaybeallowed,subjecttoconfirmationbytherespectivechickenandturkeymarketing
agencies, toprevent shortages, compete withfurther processed products notsubject toexport controls orfor
re-exports.Canada WT/TPR/S/22
Page 75
29. Despite thecomplex system ofgovernment intervention inproduction andtrade, thePSEfor
poultry declined from 41percentin1989-91 to15percentin1995, owing largely toexchange rate
developments. Incontrast, support fortheeggindustry continues toaccount forabout halfthevalue
ofproduction.
(vi) Dairy
30. Assistanceformilkproducersreliespredominantlyonhighproducerpricesondeliveriessupplied
under production quotas (BoxIV.1). Excess production, mostly ofskimmed milk, isexported. Higher
administeredpricesforindustrialmilkin1995tendedtofurtherweakenmarketorientationinthesector.19
Theprice increase coincided withacommitment, inthe1995 Federal Budget, toreduce theFederal
Dairy Stabilization subsidy by30percentover2years, followed upinthe1996 Budget withan
undertaking tophase outthissubsidy by2001-02.
31. Until July1995, thecostofsurplus disposal -mainly through export -wasfinanced through
alevyonmilkproduction paidbyproducers. Thelevyrégime wasreplaced inAugust 1995byasystem
based onthepooling ofrevenue from special milkclasses (e.g. products facing U.S. competition,
products covered bythefurther Processors Rebate Program andtheButterfat Utilization Program,
cheese exports totheUnited Kingdom andtheUnited States, other exports (evaporated milk, whole
milkpowder), niche markets, andsurplus milkremoval).20Thepriceishighest forspecified quantities
offluidmilkdestined forthedomestic market, andfallssharply inother categories ofmostly industrial
milk. Revenue inallclasses isshared among participating farmers. Food processors andexporters
continue theiractivities, using lower-priced milkcategories, without aproducer-funded rebate from
theCanadian Dairy Commission (CDC). Theauthorities consider theeconomic impact ofthesechanges
tobeminimal intheshort term, astheprice pooling arrangements aregeared tomaintain producers '
income.
32. Dairy exports arecarried outbytheCanadian Dairy Commission andprivate companies; the
subsidies involved arenowlimited byCanada 'sexport subsidy commitments. TheDairy Export
Assistance Programme, which previously served tobridge thegapbetween internal support andworld
market prices, hasbeenabolished. Under NAFTA provisions, subsidized exports totheUnited States
areprohibited, butnottoMexico.
33. Ontheimport side, atotaloftwelve tariff quotas fordairy products havereplaced thepast
system ofquantitative restrictions (Table IV.1). TheCanadian Dairy Commission continues toact
asthesoleimporter ofbutter under thenewquota régime.21Butter imports, amounting to1,964 tonnes
or2percentofdomestic consumption, aresoldtoprocessors andfurther processors.22Thisimplies
19Areduction announced for1996 would bethefirstnominal milk price reduction in15years.
20RevenuefromallclassesofmilkaretobepooledamongproducersfromPrinceEdwardIsland,NovaScotia,
NewBrunswick, Quebec, Ontario andManitoba. Some features ofthepooling system arebeing phased inover
atwo-year period from August 1996, including transportation costpooling andinterprovincial quota exchange
between Ontario, Quebec andNova Scotia. Negotiations areongoing tocomplete apooling arrangement among
western provinces.
21According totheauthorities, theCDC'sdominant position isbased oncustom rather thanlaw.
22Under theoldsystem, import permits were issued bytheDepartment ofForeign Affairs andInternational
Trade when theCDC considered imports necessary torelieve atemporary market shortage.WT/TPR/S/22
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thatforeign exporters arenotfreetoshiptothemarket oftheirchoice, astheyarerestricted tosupplying
onlybutter forprocessing. Anyout-of quota supplies would carry anadvalorem dutyofover
300percent.
BoxIV.1 Main elements oftheinternal support régime formilk
Canadian dairy policy issplitbetween thefluid andindustrial milk markets. Fluid milkisprocessed into
liquid milk andcream products, while industrial milk isused forawide variety ofproducts such as
cheese, butter, skim milk powder, icecream andyogurt. While theprovinces arecompetent forfluid
milk policies (including licensing ofproducers, quality control andpricing), themarketing ofindustrial
milk, which involves exports, imports andinterprovincial trade, isunder jointfederal-provincial control.
Afederal-provincial agreement, theNational Milk Marketing Plan, sets outtheframework for
establishing thenational Milk Marketing Quota anditsallocation totheprovinces. TheCanadian Milk
Supply Management Committee (CMSMC), chaired bytheCanadian Dairy Commission (CDC), oversees
theimplementation ofthePlan. TheCMSMC comprises producers andgovernments ofallprovinces
producing industrial milk. Representatives ofnational consumer, processor andproducer organizations
participate asnon-voting members.
Domestic production continues tobesubject toanational Market Sharing Quota (MSQ) which issetby
theCMSMC. Thequota defines theamount ofmilk thatcanbesoldatthedomestic price; additional
deliveries receive areturn based onsurplus export activities. Thequota isestablished byestimating the
domestic demand fordairy products onabutterfat basis, adding aproduction andexport sleeve and
subtracting theexpected milk equivalent ofimports. Provincial shares ofthenational quota are
determined under theprovisions ofthePlan; inturn, these shares aredistributed toproducers according
totheindividual provinces ’quota policies. The MSQ for1995-96 was estimated at
43.9 million hectolitres, unchanged from theprevious dairy year. Quota decisions, onthebasis of
butterfat demand, result intheproduction ofskim milk powder inexcess ofnational consumption.
34. While Canada 'sin-quota tariffformilkpowder iscurrently setat15percent,contrasting with
out-of-quota duties ranging upto280percent,noquotas haveactually beenopened foreither skimmed
orwhole milkpowder. Inother cases (condensed andconcentrated milk, powdered butter milk), one
historical importer hastheexclusive right toin-quota imports. Forseveral categories, designated
suppliers, including NewZealand, Australia andtheEU,havebeenreserved quota shares.23
35. Expert advice mayhelptoadvance economic change andovercome lobby resistance. In1992,
theCanadian International Trade Tribunal published anenquiry intothequota allocation system,
recommending, interalia,theauctioning ofimport quotas forcheese, icecream, yogurt, buttermilk
andcondensed milk; thesetting ofceilings ontheshares ofindividual importers; andthepossibility
ofquota transfer.24Although thecurrent system hardly reflects these proposals, theauthorities have
stressed thattheCITT report helped todevelop andimplement theadministrative provisions ofCanada 's
tariffquotacommitments,devisemoremarket-orientedproceduresforquotaallocationamongimporters,
andmake provision forquota transfer through rentorsale.
23Following anagreement announced inDecember 1995, Canada adjusted itsreserve forEUcheese from
60to66percentoftheglobal quota toaccommodate EUenlargements since 1979 (accessions ofSpain, Portugal,
Greece, Sweden, Finland andAustria). Inthiscontext, Swiss exporters havecomplained about adisproportionate
reduction inthequantities allocated totheremaining EFTA countries.
24Canadian International Trade Tribunal (1992).Canada WT/TPR/S/22
Page 77
36. While PSElevels formilkcame down by16percentage points since 1989-91, toanestimated
62percentin1995, theyremain thehighest among allsegments ofCanadian agriculture.
(vii) Beverages
37. Compared withdevelopments inother foodsectors, theregulatory framework forbeverages
production haschanged relatively littlesince the1994 Trade Policy Review. Under theImportation
ofIntoxicating Liquors Act,liquor boards continue tocontrol sales, imports andtransport ofalcoholic
beverages within allprovinces except Alberta. Theboards 'monopoly ismaintained forreasons of
public health andmorals.25Canada 'strade balance foralcoholic beverages hascontinued torecord
asurplus, withexports (mostly ofbeer) valued atCan$803 million andimports atCan$740 million
in1994.
38. TwoGATT Panel rulings, banning discriminatory pricing practices byliquor boards, have
helped tocreate competitive conditions ontheCanadian beermarket. Forexample, therearenolonger
anydifferential mark-ups between imported anddomestic beer.26Forwine, allmark-up differentials
between blended andimported products were eliminated on1January 1995; mark-up differentials
between imports and100percentCanadian winearetobephased outby1January 1998.27
39. Imports ofalcoholic beverages aremostly subject tospecific, compound andmixed duties for
which fewadvalorem equivalents areavailable. These wereestimated bytheauthorities torange from
2.4percentforbeer(beer from theUnited States enters dutyfree)and6percentforwine upto
40percentforcider in1995. Imports ofalcoholic beverages areinaddition subject toexcise duties
(beer, certain spirits, liquors, andother spirituous beverages); theratesdonotdiscriminate between
imports anddomestic production. Minimum prices forbeerareineffect inallprovinces except Alberta,
Manitoba, Prince Edward Islands andSaskatchewan.
40. Inorder tobeoffered forsale, products must belisted bytheprovincial liquor boards.
Exceptions include Alberta (allalcoholic beverages) andQuebec (beer), where retailing hasbeen
liberalized. Suppliers mayeither usetheliquor boards 'distribution channels orprivate services in
allprovinces except Ontario andPrince Edward Island.
(viii) Fishing andfishproducts
41. Given itsparticular sensitivity -foreconomic, ecological andregional policy reasons -the
fisheries sector issubject tovarious forms ofgovernment intervention, fromtariffs toproduction and
export licensing, fishing moratoria andfinancial assistance. Mostgrants andothersupport programmes
(e.g.viasoftloans) areoperated atprovincial level.
25WTO document G/STR/N/1/Add.1, 10November 1995. Exports ofalcoholic beverages arenotregulated.
26According totheauthorities, "theretail sales price ofanimported product isafunction ofitslanded cost
(invoice price, dutyandfreight), towhich areadded theapplicable mark-up andfederal andprovincial sales
taxes.(...)Themark-upvariesbyproducttypeandbyprovincialjurisdiction."WTOdocumentG/STR/N/1/Add.1,
10November 1995. ThetwoGATT Panels were Canada -Import, Distribution andSaleofAlcoholic Drinks
byProvincial Marketing Authorities (1988) andCanada -Import, Distribution andSaleofCertain Alcoholic
Drinks byProvincial Marketing Agencies (1992).
27Ontario maintains aminimum grape content requirement fordomestic wine, aswellasprovincial grape
purchase requirements forOntario wineries (Box III.1).WT/TPR/S/22
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42. M.f.n. tariffs inthesector average 2.9percentin199628;allfresh fishenters duty-free. The
tariffs onunprocessed orsemi-processed products (frozen, salted, dried, smoked fish), declined from
anaverage oflessthan2percentin1994to0.3percentin1996, reflecting Canada 'sWTO reduction
commitments. Thecorresponding reductions forfurther prepared fishwerefrom10to7.3percent
andforprepared fishmeals from17to10percent. AttheendoftheUruguay Round implementation
process in1999, m.f.n. tariffs onpreserved sardines, tuna, anchovies andprepared fishmeals will
stillexceed 9percent.
43. Canada hasreviewed itslicensing policy forindustrial andecological reasons. Following
decisions bytheNorthwest Atlantic Fisheries Organization (NAFO), moratoria havebeenintroduced
onthefishing ofcodandother groundfish intheNorth Atlantic. InMay1994, Canada amended the
Coastal Fisheries Protection Actandregulations toenable enforcement action against stateless and
flag-of-convenience vessels fishing ontheGrand Bank ofNewfoundland outside a200-mile zone.
44. Thedispute withtheEuropean Union overallowable catches ofGreenland halibut outside this
zone wasresolved inApril 1995. Animportant element oftheconservation agreement wasthe
deployment ofindependent full-time observers onboard vessels fishing intheNAFO Regulatory Area
untiltheendof1995. AtitsSeptember 1995Annual Meeting, NAFO agreed toextend therequirement
forobserverstoallNAFO-membervessels,effective1January1996.OtherNAFOmeasuresintroduced
atthesame timeinclude enhanced satellite surveillance, increased inspections, quick reporting and
follow-up ofinfractions, anddockside inspections.
45. Despite suchmeasures, Atlantic groundfish landings arenotexpected toincrease inthenear
future.29Total value oflandings continued todecrease in1995(by20percentfromtheprevious year).
Theauthorities statethatthefallinthevalue ofgroundfish landing since 1992wasfullycompensated
byanincrease inshellfish landings, andthegroundfish processing industry maintained itsactivity via
increased imports.30
46. Commercial salmon fishing onthewestern coast, while economically moresuccessful inrecent
years, hasalsocreated tensions. Adispute withtheUnited States hinges onalleged overfishing in
Alaska. Innegotiations since 1994 bothparties areseeking toagree onmeasures thatwould ensure
long-term stock conservation and,atthesame time, revitalize salmon fishing.
47. Toencourage domestic processing, Canada maintains anexport permit requirement for
unprocessed Pacific roeherring.31
28GPTratesaverage 2.2percent, tariffs onU.S.supplies 0.3percentandonMexican supplies 0.6percent.
Alltariffs onfishandfishproducts between theUnited States andCanada aretobeeliminated inJanuary 1999.
29Asdescribed inthe1994 TPRreport, thedepletion ofstocks maybeattributed tobothdomestic over-fishing
byCanadian vessels, encouraged under pastincentive schemes, aswellasover-fishing inareas beyond Canada 's
200mile zone. GATT (1995).
30Shellfish landings, valued atCan$ 1.3billion in1995, accounted forthree quarters oftotalvalue offishery
landings inCanada. Most isexported, making Canada theworld 'sfifthlargest exporter.
31GATT (1995).Canada WT/TPR/S/22
Page 79
(ix) Wood andpaper industries
48. Theforestry sector remains oneofthestrongholds ofCanada 'sexport industry, recently boosted
bycurrency devaluation andaU.S.construction boom. Approximately onethirdofthecountry 'stimber
harvest isuseddirectly fortheproduction ofpulpandpaper32;while theremainder consists mainly
ofprimary wood products forconstruction. Exports oftimber andtimber products totalled
Can$41.4 billion in1995, some 70percentofwhich were destined fortheUnited States.
49. Government involvement inthesector, vialandownership, hasproved acontentious trade
issue. Some 71percentofCanada 'stimber-producing landisowned bytheprovinces, withlogging
permits being subject tostumpage fees.33U.S.producers havelongcomplained about thecomparatively
lowlevelofthese fees,considered tobetantamount toasubsidy. Theissue, asitrelated tosoftwood
lumber, wassettled inApril 1996 intheform ofabilateral arrangement providing foranexport tax
(Chapter III(2)(i)(d)).
50. IntheUruguay Round, Canada agreed withother developed countries toeliminate tariffs on
allpulp, paper andpaper products by2004. Current m.f.n. duties onwood andwood products average
2percent, butinclude peaks ofupto12.9percent(down from 15percentin1994) onfurniture,
and15percentonbasketwork (down from 17.5percentin1994). Imports ofthese products from
theUnited States enter dutyfree,while duties onMexican imports average lessthanhalfthem.f.n.
level. Tariff escalation, resulting from duty-free imports ofmost primary materials, hasdeclined
somewhat inthewake oftheRound.
51. TheGovernment 'sforestry policy isaimed atensuring sustainable development.34Canada
hasendorsedthe"CriteriaandIndicatorsfortheConservationandSustainableManagementofTemperate
andBoreal Forests" (theMontreal Process), andseveral provinces haveadopted newforest management
frameworks strengthening ecological criteria.35Theauthorities favour thedevelopment ofinternational
rules defining sustainable forest management, suchastheInternational Forest Convention currently
under discussion intheUNCommission onSustainable Development. TheCanadian Standards
Association hasdeveloped aseries ofstandards forthecertification ofsustainable forest management;
thefirstcertificates areexpected tobeawarded in1997.
32Over 65percentofthefibreinput inpulpandpaper mills comes fromwood residues generated bysawmills.
33Private operators exploit thepublicly owned forests under various forms ofvolume orarea-based tenure.
Accordingtotheauthorities,mosttenureagreemen tsincludeforestmanagementtasksand,inadditiontopayment
ofstumpage andother fees(e.g. landrents), make theright holder responsible foraccess tothetimber, road
maintenance andreafforestation. Several provinces have made logging permits subject tolocal-residence and
processing requirements. Exports ofrawlogsaretobeapproved bytheDepartment ofForeign Affairs and
International Trade.
34Asnoted inthe1994 TPR report, thegrowing concern forenvironmental protection hasinsome major
consumercountriesledtoinitiatives,inspiredbynon-governmentalgroups,againstclear-cuttingandunsustainable
forest harvesting.
35Examples include British Columbia 'sForest Practices Code, theIntegrated Forest Resource Management
PlaninManitoba, andOntario 'sCrown Forest Sustainability Act.WT/TPR/S/22
Page 80Trade Policy Review
(3) Energy
(i) Overview
52. Benefiting from itsabundant natural resource base -including crude oil,gas, coal,
hydroelectricity anduranium -Canada isamajor producer, consumer andexporter ofenergy.36The
energy sector generates 7.6percentofGDP, about twice theaverage ofOECD countries, withoil
andgasalone contributing some 55percent(Table IV.3). While oilandgasproduction havegrown
rapidly inrecent years, duetobothexplorations andstrong demand fromtheUnited States, theelectricity
industry hasbeenconstrained bysluggish domestic demand.
Table IV.3
Main economic features oftheCanadian energy sector, 1994
(Can$ billion, thousand employees andpercentage)
GDP Investment Exports Imports Employment
(thousands)
Oilandgas 19.3 9.2 16.8 6.6 202
Electricity 13.2 12.0 1.3 0.1 95
Coal 1.0 0.1 1.6 0.4 8
Uranium 1.0 0.3 0.6 0.6 1
Total 34.5 21.6 20.3 7.8 306
(Percentofnational economy) (7.6) (16.8) (9.3) (3.8) (2.9)
Source: WTO Secretariat estimates based oninformation provided byEnergy Canada.
53. Overthepastdecade,mostenergymarketshavegraduallybecomemoreopenandmarket-based.
Thederegulation oftheoilandgasindustries, between themid-andlate-1980s, iscurrently being
followed byacomprehensive review ofelectricity policies innearly allprovinces. While budget cuts
havereducedgovernmentsubsidies,tariffreductionsoreliminations(oncrudeoil,mostrefinedproducts,
andgas)under theNAFTA haveimproved theexternal trading environment.37Foreign ownership
intheenergy sector issubject, however, tolowreview thresholds and,insome instances, restrictions.
54. Under theCanadian Constitution, legislative competence forenergy isshared between federal
andprovincialgovernments.Theprovincesownandcontrolthenaturalresourceswithintheirterritories,
andareempowered toregulate resource development, land-use management, royalties, production,
processing,internaltransmissionanddistribution.TheFederalGovernmentisresponsibleforthenational
policy framework, covering international andinterprovincial tradeandtransport. Bythesame token,
theNational Energy Board (NEB), thefederal regulator, ismandated toregulate tollsandtariffs for
oilandgaspipelines, certify international anddesignated interprovincial powerlines, andissuelicences,
orders andpermits fortheexport ofoil,gasandelectricity.38Despite increasing co-operation between
provincial andfederal authorities, trade inenergy, inparticular electricity, hasremained apolitically
sensitive -andyetunresolved -issue inthecontext oftheAgreement onInternal Trade.
36Canada isrunning anexport surplus inallenergy products buturanium, where trade isbalanced.
37However, m.f.n. tariffs onenergy products were already lowingeneral.
38TheNational Energy Board, endowed withquasi-judicial powers likeallindependent federal regulators,
reports toParliament through theMinister ofNatural Resources.Canada WT/TPR/S/22
Page 81
(ii) Oil
55. Oilproduction hasgrown steadily since thelate1980s, reaching 2.0million barrels perday
(MBD) in1995. Withashare ofabout 3percentinworld production, Canada hasbeenanetexporter
formore thanadecade; in1995, netexports ofcrude oilandrefined products amounted to
850,000barrelsperday.Multinationalcompaniesownmostofthecountry'sproductionanddistribution
facilities.
56. Theincrease inoilproduction inrecent years maybeattributed tobothbuoyant demand,
especially from theUnited States, andsupply-side factors suchasthederegulation ofthecrude oil
sector in1985andadrastic reduction inproduction costs(about 25percentsince1990). Deregulation
hasbeenaccompanied, according totheGovernment, bytheelimination ofvirtually alldirect incentives
forenergy conservation ,fuelswitching andpetroleum exploration.39Public involvement inthesector
remains essentially confined toR&D andparticipation inHibernia, amega-project offthecoast of
Newfoundland, which isledandowned byaconsortium ofCanadian andU.S.companies.40Although
committed totheprivatization ofPetro Canada, pending favourable market conditions, theGovernment
continues toownasignificant share ofthecompany (nonewinitiative hasbeentaken thelastTPR).41
Under thePetro-Canada Public Participation Act,foreign ownership inPetro Canada issubject toa
25percentlimitofvoting shares.
57. Therules governing foreign commercial presence intheindustry haveremained unchanged
sincethe1994TPR.OnlyCanadian-incorporatedcompaniesqualifyforthenecessaryproductionlicence;
andinvestments byNAFTA-based companies continue tobenefit from lower (preferential) review
thresholds.42While oilexports must beauthorized bytheNational Energy Board, allapplications
covering periods oflessthantwoyears are"routinely andexpeditiously" approved, according tothe
Government.43However, under anewactofprocedures foroilexport review, theNational Energy
Board istoassess whether domestic refiners hadanopportunity topurchase theoilonterms comparable
tothose offered toexport customers. Import tariffs areatgenerally lowlevels; under theNAFTA,
crude oilistraded dutyfreebetween Canada andtheUnited States.
(iii) Natural gas
58. Natural gasisCanada 'ssecond most important energy export, withtheUnited States asthe
onlydestination.Bilateralsupplies,amountingto2.8trillioncubicfeetin1995,arehigherthandomestic
39Canadian submission toIEA(1995).
40Since 1994, theFederal Government hasprovided financial assistance totheCan$5.8 billion project in
theform ofloanguarantees (Can$1,074 million), direct contributions (Can$542 million), equity participation
(Can$216 million) andinterest freeloans (Can$66 million). Hibernia isexpected tostartproducing in1997.
41Canadian submission toIEA(1995).
42Investment Canada reviews theacquisition ofcontrol ofaCanadian company byaNAFTA investor only
iftherelevant assets exceed Can$167 million; thethreshold fornon-NAFTA investors isCan$5 million fora
direct acquisition andCan$50 million foranindirect acquisition.
43TheNEB hasnever received applications forlonger-term licences; export contracts areconcluded for
30-60 daysonaverage. Under current legislation, licences exceeding twoyears maybegranted onlyafter a
public hearing.WT/TPR/S/22
Page 82Trade Policy Review
consumption (some 2.7trillion cubic feet). Boosted byimproved access totheU.S.market, thenumber
ofwells drilled annually more thandoubled between 1992and1994, exceeding 5,300. Likeoil,about
85percentofCanada 'snatural gasoriginates intheprovince ofAlberta. Under anagreement between
theFederal Government andthethree gasproducing provinces (Alberta, British Columbia and
Saskatchewan), domestic andexport prices havebeenderegulated since themid-1980s.
59. Thegasindustryconsistsofalargevarietyofcompanies,fromlargeforeign-ownedmultinationals
tosmall Canadian-owned firms andCrown corporation. Thetenlargest companies account for
40percentofdomestic production.44Contrasting withtheoilindustry, there arenofullyintegrated
conglomerates covering exploration, production anddistribution. Gasdistribution ismainly inthe
hands oflocal, privately-owned monopolies, which areunder provincial regulation.
60. Asnoted inthe1994 TPRreport, theNational Energy Board authorizes allexports through
theissuance ofeither short-term export orders (uptotwoyears) andlong-term licences (upto25years).
Unlike short-term export orders, which areissued within 24hours, long-term licences involve public
hearings. These include a"complaints procedure", enabling consumers toappeal totheNEB ifgas
isnotavailable under terms andconditions similar totheproposed exports; an"export impact
procedure", intended todetermine whether theexport islikely to"cause Canadians difficulty inmeeting
theirenergy requirements andneeds"; anda"public interest determination" where anyother relevant
factors mayberaised. Provincial approval isalsorequired prior totheremoval ofnatural gasfrom
theprovince.
(iv) Electricity
61. Whilesufferingfromweakdomesticdemand,mainlyforcyclicalreasons,theelectricityindustry
continues toplayanimportant rôleintheCanadian economy. With aworkforce ofsome 90,000,
electricity generation currently represents nearly 3percentofGDP. Capitalizing onCanada 'snatural
resources, thesector relies heavily, atsome 60percent,onhydro power, followed bynuclear energy
withclose to20percent.
62. Given thepulleffects oftheU.S.market andtheabsence ofsignificant trade impediments,
bilateral electricity exports matched interprovincial trade, bothaccounting forabout 8percentof
domestic production in1994(Chart IV.3).45However, theattraction oftheU.S.market maynotalone,
without theexistence ofinterprovincial barriers, suffice toexplain current supply patterns.46
63. Theprovinceshavelegislativeauthorityoverelectricitygeneration,transmissionanddistribution.
Federal competence isessentially confined toaspects ofinterprovincial andinternational trade, and
nuclear power. Inmostprovinces, production, distribution andtransmission areprovided bypublic
44Amoco Canada, Shell Canada, PanCanadian Petroleum, Mobil OilCanada, Imperial Oil,Petro-Canada,
Talisman Energy, Norcen Energy areamong thetenlargest firms. Canadian ownership onaverage ofthese
tenfirms is45percent.
45Seventy percentofInterprovincial electricity trade consists ofthetransfer from Newfoundland toQuebec
ofenergy produced bytheChurchill Falls power plant. These supplies apart, interprovincial electricity trade
hastended todecline overthepasttwodecades.
46There issome complementarity between theU.S. andCanada 'smarkets, asdemand intheUnited States
generally peaks during thesummer while demand inCanada peaks during thewinter. Canadian suppliers tend
therefore toexport their surplus totheUnited States during thesummer period.Canada WT/TPR/S/22
Page 83
monopolies which account foroverfour-fifths oftotalelectricity generation (Table IV.4)47;therelevant
utilities areregulated byprovincial bodies whose mandate generally includes rateapproval. Reportedly,
some utilities haveinthepastusedtheirexclusive position toprevent interprovincial purchases.48
64. Market segmentation may have encouraged industrial inefficiencies, including through
over-investment,andprovidedscopeforpricediscriminationbetweencustomers.49Ingeneral,electricity
prices haveincreased more rapidly thantheCPIandother energy rates, inparticular since thelate
1980s (Chart IV.4).50Following deregulation intheUnited States, many provinces havelaunched
reviews oftheirelectricity systems covering issues suchasutility structure, wheeling services andtariff
47Self-generation byconsumers ispermitted andfrequently used inCanada.
48GATT (1995), p.145.
49Inareport submitted totheMinister ofNatural Resources in1994, theNational Energy Board estimated
thebenefits tobedrawn from increased interprovincial co-operation atsome Can$23 to32.5billion inyear2000,
i.e.roughly corresponding tothesector 'scurrent annual revenue. National Energy Board (1994).
50Increases inelectricity rates alsoreflect rising marginal costs, duetoenvironmental andsafety-related
investment aswellasexploitation inremote areas.WT/TPR/S/22
Page 84Trade Policy Review
policy, withaview topromoting competition andcost-based pricing.51Alberta enacted legislation
in1995, creating acompetitive market forelectricity generation andopening thewholesale transmission
system intheprovince. InJanuary 1996, British Columbia 'spublic utility opened itstransmission
system toanythird party forwholesale transaction. InJune1996, anexpert committee released a
report tothegovernment ofOntario recommending structural changes intheelectricity sector, including
themobilization ofprivate capital. Quebec isalsoreviewing itsenergy policy.
Table IV.4
Institutional structure ofelectricity production
Province Electric Utility Ownership
Newfoundland Newfoundland andLabrador Hydro
Newfoundland Light &Power Company LimitedProvincial
Private
Prince Edward Island Maritime Electric Company Limited Private
Nova Scotia Nova Scotia Power Incorporated Private
NewBrunswick NewBrunswick Electric Power Commission Provincial
QuebecaHydro-Quebec Provincial
Ontario Ontario Hydro Provincial
Manitoba TheManitoba Hydro-Electric Board
CityofWinnipeg Hydro-Electric SystemProvincial
Municipal
Saskatchewan Saskatchewan Power Corporation Provincial
Alberta Alberta Power limited
Edmonton Power
TransAlta Utilities corporationPrivate
Municipal
Private
British Columbia British Columbia Hydro &Power Authority Provincial
Yukon Yukon Energy Corporation Territorial
Northwest Territories Northwest Territories Power Corporation Territorial
a Inaddition, there aresome municipally aswellasprivately-owned andadministered power plants.
Source: Natural Resources Canada.
65. Although theprovinces seem toacknowledge theneed forenhanced co-operation, some
disagreement persists onitsactual form.52Intheabsence ofacompromise, electricity trade hasnot
beenincluded intheAgreement onInternal Trade, despite theeconomic stakes involved. While an
energy chapter wastobenegotiated by1July1995, discussions arecontinuing.
51Wheelingistheauthorizeduseoftransmissionfacilitiesbytwoentitieswhosefacilitiesarenotinterconnected
inorder tosell,purchase orexchange electricity.
52According theNational Energy Board: "those utilities andprovinces that,byvirtue ofgeographic location,
have direct access toexternal markets intheUnited States, have atendency toprefer thestatus quo. Under
thecontinuation oftheexisting regime, theutilities would enter intovoluntary cooperation activities (...). They
tendtooppose anyform ofmandated solutions todisputes thatarisebetween parties concerning electricity trade,
includingthosethatwouldincludemandatedfederalpowers.(...).Ontheotherhand,thoseutilitiesandprovinces
thatdonothave access toexternal markets tendtosupport such solutions". National Energy Board (1994).Canada WT/TPR/S/22
Page 85
(4) Manufacturing
(i) Overview
66. Owing toasurge inexports, themanufacturing sector made thelargest contribution toCanada 's
economic growth in1994 and1995. Atend-1995, thesector hadanexport ratioof51percent,with
fourfifths ofshipments destined fortheUnited States. Allsegments wereabletocapitalize onincreased
U.S.demand,"traditional"industries(e.g.automobilesandtextiles)aswellasmodern,technology-based
production. Buoyant exports helped tocompensate forsluggish domestic demand, particularly inmature
industries suchastextiles andclothing, where theeffects oflong-term demographic change coincided
withlowgrowth ofdisposable income. Realoutput across allmanufacturing industries grew by
7percentin1994 and4.5percentin1995, asagainst 4.6and2.2percent, respectively, forGDP.
67. Canada 'srecent export drive, inparticular vis-à-vis theUnited States, benefited from the
combination oftheFTA/NAFTA implementation programme withsignificant gains incompetitiveness.
Strong currency depreciation vis-à-vis theU.S.dollar between 1990 and1994 coincided withalmost
identicalwageandproductivitytrendsinbothcountries,possiblyreflectingincreasedmarketintegration.
Theresulting improvements inunitlabour cost(Chart IV.5) helped toattract investors, especially for
assembly operations, from across theborder. Atthesame time, theNAFTA combined anongoing
process ofbilateral tariff liberalization withstrengthened rules andorigin, inparticular fortextiles
andautomobiles.WT/TPR/S/22
Page 86Trade Policy Review
68. Canada 's1996tariffs onmanufacturing imports fromtheUnited States average 1.1percent.53
Bilateral trade insectors suchasautomobiles isdutyfreeor,asinthecaseoftextiles, clothing and
computers, subject toverylowrates. Asdescribed inChapter III(2)(i), therehavealsobeensignificant
reductions inm.f.n. rates, from anaverage of9percentin1994 to6.5percentin1996. However,
hightariffs persists inareas suchastextiles andclothing orshipbuilding (Chart IV.6).
69. U.S.-based multinationals account for90percentofthemotor vehicles and60percentof
thecomputers produced inCanada. Thestrong presence ofthese companies hasreinforced thelink
between trade andforeign direct investment, asabout 70percentoftheirexports areconducted on
anintra-company basis. Overall, intra-company trade accounts forclose to45percentoftotal
Canada-U.S. trade.
53Tariffs onmanufactured goods from Mexico average 2.9percentin1996.Canada WT/TPR/S/22
Page 87
WT/TPR/S/22
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(ii) Adjustments intraditional industries
(a) Motor vehicles
Background
70. Canada 'smotor vehicle industry, thelargest manufacturing sector, specializes inassembly
operations principally ofcars, light trucks andvans, andparts production. In1995, Canada 's
14assembly plants (ofwhich 12arelocated inOntario) produced 2.4million units, ofwhich about
90percentwassoldintheUnited States.54
71. Canada accounts forabout 16percentofNAFTA lightvehicles production (Table IV.5).
Reflecting strong intra-company exchange across theCanada-U.S. border, exports andimports are
strongly correlated.55Theexpansion ofassembly operations, withrelatively shallow domestic supply
links, hasresulted inanincreasing gapbetween theindustry 'scontribution totrade, 23percentof
bothimports andexports, anditsrelatively modest 2.2percentshare inGDP(1995). Important stages
ofR&D, design andengineering tendtobeconducted intheUnited States, Japan andEurope.
Table IV.5
Selected economic indicators fortheNorth American carindustry, 1995
A.Production, employment andcarownership inNAFTA
countriesB.Canadian assemblers oflightvehicles;
production byfirm(thousand units)
Canada United
StatesMexico Canada NAFTA World
Production (units) 2,376,839 11,643,956 931,462 General Motors 908 5,516 8,800
Auto OEMfg. employment 139,000a991,000 197,900 Chrysler 540 2,607 2,674
Vehicles produced perOE
employee17 12 5 Ford 533 3,697 6,476
Vehicles produced per1,000
citizens82 45 10 GM-Suzukia194 194 1,709
Vehicles soldper1,000 citizens 39 58 8 Hondab106 659 1,750
Toyotab90 472 4,694
Volvo 8 8 447
a Does notinclude truck bodies andtrailers.
c Major expansion under-way.
Source: Industry Canada (1996b).
72. Labour productivity (labour hours percarunit)was6percenthigher inCanada thaninthe
United States in1994. With lower wages, Canada 'sproductivity leadhastranslated intoassembly
costsabout one-quarter below theU.S.average (1994).56Inturn,thishashelped toattract investment;
54Inthesame year, parts production (in554plants) wasvalued atCan$21 billion, 63percentofwhich were
exported totheUnited States.
55Inthesame year, parts production (in554plants) wasvalued atCan$21 billion, 63percentofwhich were
exported totheUnited States.
56Industry Canada (1996b).Canada WT/TPR/S/22
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in1995 themotor vehicles assembly andparts industry spent Can$3.4 billion onconstruction and
equipment, more thanthree times the1985 level.
Tariff policy
73. Benefitingfromtariffeliminationunderthe1965"AutoPact"withtheUnitedStates,thenumber
oflightvehicles produced inCanada hasgrown by183percentayearinthelast30years. Under
performance-based dutyremission programmes, introduced intheearly 1980s, other foreign-based
producers wereallowed tooperate under similar tariffconditions asthose available toNorth Americans
under theAuto Pact.57Assembly operations bynon-U.S.-based producers have since expanded
progressively, butstillaccount foralimited share ofoverall Canadian production (Table IV.5).
74. Themainprovisions oftheAutoPactwereincorporated intheFTAandNAFTA. However,
theFTAandsubsequently theNAFTA required theelimination ofallproduction- andexport-based
dutyremission programmes by1January 1996 and1January 1998, respectively. In1994, Canada
alsostarted reducing itsm.f.n. tariffs onautomotive original equipment parts, withfullelimination
achieved on1January 1996. M.f.n. tariffs onassembled lightvehicles remain at8percent,todecline
to6.1percentin1999under theUruguay Round; imports under theAutoPactareeligible forduty-free
treatment. With effect from1January 1996, Canada removed theGPTstatus ofcarsimported from
theRepublic ofKorea. Asanexplanation, theauthorities citedKorea 'sstrong competitive position
inthesector.
75. TheNAFTA introduced stricter rulesoforigin. While under theAutoPactandFTA, duty-free
trade between participants wascontingent ona50percentNorth American content, thethreshold is
toincrease to56percentby1January 1998 and62.5percentbyJanuary 2002 forpassenger cars,
lighttrucks, small buses (transport of15orfewer persons), theirengines andtransmissions. The
corresponding levelforheavy-duty vehicles, largebuses andallother partswillincrease to60percent
by1January 2002.58Inaddition, anewapproach isusedtocalculate regional content, the"netcost
method". While intended toenhance transparency, itmayalsoincrease redtapeforproducers, who
arerequired totrace theorigin ofcomponents backtotheinitial production stages.59
Financial assistance
76. According totheauthorities, sincetheabolition oftheAutomotive Component Initiative, there
arenosubsidy programmes targeted attheindustry atfederal level. (Under theInitiative, support
57The"Auto Pact" provided foraduty-free trade zone between Canada andtheUnited States forfinished
vehicles andcarparts. Eligible producers (the"Big Three") were allowed toimport parts andvehicles duty
free,subject tolocal-content requirements (thelevel ofCanadian/U.S. content under thePactwas50percent).
With theintroduction ofdutyremission programmes, imports from outside theAuto-Pact area, mainly Japan,
could qualify forrebates onexportation. Preferential tariff treatment under theAuto Pactandtheremission
programmes ledtoasharp reduction intariff incidence forforeign-owned carproducers, withdutyaverages
notexceeding 2percentatthetimewhen theFTA andNAFTA entered intoforce. Formore details onthe
operation ofdutydrawback andremission schemes, seeGATT (1995).
58Formore details oflocal-content provisions, seeGATT (1995).
59Rules oforigin have been acontentious issue throughout theNAFTA negotiations. Administration costs
related tothe"netcostmethod" aresaidtoeliminate asignificant portion ofthetariff benefits accruing under
theNAFTA. Cadsby andWoodsie (1993).WT/TPR/S/22
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wasprovided tosmall andmedium-sized producers ofvehicle parts.) R&D activities may, however,
qualify forattractive investment taxcredits. Inaddition, carproducers areeligible forfunding via
Technology Partnerships Canada (section (iii)(a)).
(b) Textiles andclothing
Recent economic developments
77. While accounting foralimited share oftotalGDP, thetextile andclothing industries represent
significant production incertain localareas(Quebec, Montreal, Kingston andKitchener).60Asinmany
other industrialized countries, theindustry hasundergone apainful process ofrestructuring and
adjustment. Between 1990and1995, import penetration increased from36to51percentfortextiles,
andfrom 31to42percentforclothing. Employment fellbyabout onequarter between 1989 and
1995. Therecession of1990 and1991 hitsome subsectors particularly hard, especially men'sand
women 'sclothing. Total output fellby17percentbetween 1989 and1993 andhasnotyetreached
pre-recession levels (Chart IV.7).
78. Despite amodest recovery, theindustry remains subject tostrong competitive pressures from
bothendsofthemarket: Asian products inlow-priced segments and,increasingly, U.S.products in
medium- andhigher-priced categories. Inresponse, Canadian producers haveachieved significant
productivity gainssincethe1990-91 recession, mainly through accelerated introduction oflabour-saving
processes.61Industrial modernization iscurrently more advanced intextiles thaninclothing, with
investment doubling overtheperiod 1991to1995toCan$350 million. Despite important joblosses,
Canada 'sclothing industry, with84,000 permanent employees (100,000 inpart-time employment),
continues toberelatively labour intensive. According toIndustry Canada, "anestimated 50percent
oftheworkforce inclothing areimmigrants whohave often limited French orEnglish language
capabilities,whichlimitstheirflexibilityinseekingalternativeemploymentandexacerbatestheindustry's
adjustment problems".62
60Canada 'smain textiles products areman-made fibre andfilament yarn, wool yarnandwoven wool cloth,
other spunyarnandwoven cloth, knitted fabrics, carpets andhousehold products. With regard toclothing, men's
andboys'wear,andwomen'sweareachaccountedforaboutonethirdofoutput,whilechildren'swearcontributed
some 8percent(1995).
61While between 1980 and1990, labour productivity (realvalue added perperson-hour) grew atannual rates
of2.2percentinthetextiles sector and0.7percentinclothing (1.4percentformanufacturing asawhole),
productivity growth roseto4.9and3.4percent, respectively, between 1990 and1993 (3.9percentfor
manufacturing).
62Industry Canada (1996c).Canada WT/TPR/S/22
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79. Challenged ontheirhome turf,however, boththetextile andclothing industries havebeen
abletodevelop outlets abroad. Owing toquality improvements andgreater specialization in
higher-value-added products, theexport/output ratioincreased between 1990 and1995 from 16to
33percentfortextiles andfrom 5to21percentforclothing. Most ofthegrowth wasachieved in
trade withtheUnited States, inthecontext ofrapid bilateral trade expansion.63TheUnited States,
Canada 'sfourth largest supplier ofclothing in1991, nowranks second, slightly behind China, but
ahead ofHong Kong andtheRepublic ofKorea. Inturn,according togovernment statistics, theshare
ofnon-US suppliers inCanada 'simports oftextiles andclothing declined overtheperiod 1991to1995
(Chart IV.8).64
Access conditions under NAFTA
80. Growing bilateral market integration inpartresulted from theimplementation ofthe
Canada-United States FTAandtheNAFTA. Cyclical andexchange ratefactors mayhavestimulated
Canadian exports, butthese alone would notsuffice toexplain therapid expansion intwo-way trade
during boththerecession andtherecovery. Reflecting theongoing process ofbilateral market
liberalization, Canada 's1996 tariffs onU.S.textiles andclothing products average 3.1percent, as
against 15.5percentform.f.n. supplies. (Under theFTAandtheNAFTA, tariffs arebeing eliminated
intenequal instalments asfrom 1989.) Ontheexport side, Canadian shipments inthesector are
currently facing U.S.tariffs of3.7percentonaverage, about onethirdofthecorresponding m.f.n.
rates. Anoverview ofcurrent tariff treatment isgiven inTables AIV.1 and2.
81. Although access conditions totheNorth American market aretoimprove overtimeforcurrently
restricted suppliers, given theMFA phasing-out process, asignificant tariffgapisbound toremain.65
63Between 1991 and1995, Canada 'sbilateral exports oftextiles andclothing increased by142percentin
value terms (117 involume), anaverage annual increase ofnearly 25percent, while imports from the
United States grew by85percent(78percentinvolume), anannual average ofclose to17percent. Asa
result, theshare oftheUnited States inCanadian totalexports oftextiles rosefrom 72percentin1991 to83per
centin1995, while theU.S. share inimports went upfrom 34to44percent. Inclothing, theUnited States
currently takes some 90percentofCanada 'sexports.
64While in1991 Canada 'stotalimports oftextiles andclothing amounted toCan$5.7 billion (with aU.S.
shareof34.5percent),theyrosetoCan$8.4billionin1995(withaU.S.shareof43percent).Low-costimports,
which increased inabsolute terms (from Can$2.8 billion to3.7billion) declined slightly asashare ofthetotal
(49percentto44percent). Canada 'stextile andclothing industry, statistical data.
65Under theWTO Agreement onTextiles andClothing (ATC), quantitative restrictions vis-à-vis anumber
ofdeveloping countries andcountries intransition, carried over from theformer MFA régime, arebeing
progressively phased outasproducts are"integrated" intotheGATT. Onthedateofentry intoforce ofthe
WTO Agreement (1January 1995), Members which hadretained theright tousethespecial safeguard under
theATC, wererequired tointegrate products accounting fornolessthan16percentoftheir1990 import volume;
afurther minimum 17and18percentaretobeintegrated by1January 1998 and1January 2002, respectively.
Allremaining products willbeautomatically integrated attheendofthetransition on1January 2005. Products
from eachoffourcategories -topsandyarns, fabrics, made-up textiles products andclothing -must beincluded
inthefirstthree phases butthechoice ofthebasket ofgoods tobeintegrated ineachphase islefttotheimporting
Members 'discretion. Atleast12months inadvance ofanimplementation stage, Members arerequired tonotify
theTextiles Monitoring Body oftheirprecise intentions. Unlike theUnited States which submitted anintegration
programme forthefullperiod, Canada (andtheEuropean Union) opted forastage-by-stage approach, sothat,
accordingtotheGovernmentofCanada,anydevelopmentsoccurringduringtheperiodmaybetakenintoaccount.
With integration, anyrestrictions ontheproducts areeliminated.WT/TPR/S/22
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From 1998, bilateral trade intextiles andclothing products willbeduty free, while Canada 's
Uruguay Round finalbound ratesfor2000 average 12.7percent.
82. External suppliers oftextile inputs (andtheirdomestic processors) areconfronted withstricter
rulesoforigin under theNAFTA thanunder theFTA. Forexample, theFTArequirement forfabrics
tooriginate inparticipating countries inorder foranarticle ofclothing toqualify forpreferences, was
extended under theNAFTA totheyarns usedforweaving. AsCanadian producers havetraditionally
relied onthird-country imports ofyarns, the"yarn forward" rulemayhaveasignificant impact on
their sourcing. However, boththeFTA andtheNAFTA allow forspecified quota amounts of
non-originating clothing andtextiles tobeimported fromCanada intotheUnited States. These levels
wereexpanded under NAFTA andhavegenerally (except forwoollen apparel) beensufficient tosustain
theincrease inCanadian exports.
83. Asdescribed inChapter III(2)(i), under WTO andNAFTA provisions, alldutydrawback and
remission programmes conditional onproduction, investment orlocalcontent havebeendiscontinued
oraretobeterminated by31December 1997.66Incompensation, Canada isphasing inautonomous
tariff reductions of26percentonfrequently usedinputs overtheperiod 1993 to1999. Inaddition,
producers mayapply totheCITT fortariff relief inlieuofremission orders incertain circumstances.
TheUruguay Round implementation process
84. Under Articles 2.1and3.1oftheWTO Agreement onTextiles andClothing (ATC), the
Government ofCanada notified totheTextiles Monitoring Body thequantitative restrictions maintained
atthedateofentry intoforce oftheAgreement.67Thenotification includes restraints within bilateral
agreements maintained under Article 4ornotified under Article 7or8oftheMFA, aswellasunilateral
restraints maintained under Articles 7and8andnotcovered byArticle 2(Table IV.6).
85. InOctober 1994, Canada notified thefirstlistofproducts forintegration intotheGATT,
representing 16percentofits1990 imports covered bytheATC (555.8 million square metre
equivalents). Thenotification contained thetermination ofrestraints ononeitemcurrently subject
toquantitative restrictions (work gloves) fromseven sources.68Todate,Canada hasnotinvoked the
transitional safeguard mechanism available toprevent further import surges fromcausing orthreatening
tocause serious damage todomestic industry.
66Theapplication ofdutydrawback schemes vis-à-vis theUnited States wasended on1January 1996 and
istobeabolished vis-à-vis Mexico in2001. Canada alsodecided tooffer apartial dutyrefund procedure for
dutiable goods traded under thetariff preference levels within thefree-trade area. Thedutyrefund system will
bephased outasNAFTA tariff-free access isphased in.Fulldutydrawback remains forgoods traded atfull
m.f.n. rates ofduty.
67WTO document G/TMB/N/62, 19April 1995.
68GATT document G/TMB/W/2, 10October 1994.Canada WT/TPR/S/22
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Table IV.6
Suppliers oftextile andclothing products, July1996
Restraints under theWTO Agreement onTextiles andClothing Restraints withnon-WTO Members
Asean Americas Bulgaria
Indonesia Brazil Cambodia
Malaysia Costa Rica China
Philippines Cuba Chinese Taipei
Singapore Dominican Republic North Korea
Thailand Jamaica Laos
Uruguay Lebanon
Central andSouth Asia Nepal
Bangladesh Africa Oman
India Lesotho Russia
Pakistan Mauritius Syria
SriLanka South Africa VietNam
Swaziland
FarEast
Hong Kong Central andEastern Europe
Macao Czech Republic
Myanmar Hungary
Republic ofKorea Poland
Romania
Middle East Slovak Republic
Qatar
United Arab Emirates Mediterranean
Turkey
Source: WTO Secretariat based onWTO Document G/TMB/N/62, 19April 1995.
(iii) Performance intechnically-advanced industries
(a) Background
86. Canada 's"high-tech" industries areplaying anincreasingly important rôleinemployment,
value-added andexports. Manufacturing activities intheseindustries (information andcommunications
technologies, aeronautics andspace industries, robotics, highprecision instruments, andbiotechnology)
currently represent some 5percent ofGDP, nearly asmuch astheautomobile sector.
Telecommunications equipment andaeronautics arethetwolargest andmost integrated segments in
terms oftheirdomestic supply links. Asinmany other countries, "high tech" industries arelittle
regulated ingeneral, contrary tosome userbranches (e.g. telecom oraviation services), andare
predominantly privately owned. Canada doesnotmaintain anyrestrictions onforeign investment in
these areas, contrasting withsome related services sectors (section (5)(i)).
87. With afewexceptions, including Northern Telecom andBombardier (aeronautics),
advanced-technology activities areconcentrated inCanadian subsidiaries ofmultinational enterprises,
surrounded byanetwork ofsmaller domestic firms. Canadian-owned SME'sareoften"niche players"
inareas suchasflight simulators, remote sensing orruralcommunications network management andWT/TPR/S/22
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computer telephony integration, withastrong focus onexports. While suchcompanies maybeable
tocapitalize onsome ofthebenefits associated with small size, e.g.flexibility andstronger
responsiveness tomarket trends, theytendtosuffer from anarrow financial base, lackofindustrial
andtechnical synergies, andthediseconomies ofrelatively small production runs. Inaddition, given
thesizeofthecountry, thescope forlargeR&D pools andlavish civilanddefence contracts islimited.69
88. R&DspendinginCanadaislowbyOECDstandards,notonlyintechnology-intensiveindustries
butacross virtually allsectors (Chart IV.9). Alternative indicators ofresearch intensity (patents,
scientists, etc.)confirm arelatively weak position which, combined withincreased import penetration
invarious "high tech" products, seems tocorroborate theexistence ofaninnovation ortechnology
gap.70Thequestion remains, however, whether suchagapshould because forpublic concern. It
maybeargued, forexample, thatCanada 'scomparatively small research baseisanatural concomitant
toeconomicallyefficientspecializationandthat,astechnologiesandexpertiseareincorporatedinproducts
andpersons, openmarkets ensure freeaccess toadvanced knowledge developed elsewhere. Onthe
other hand, since mobility isnotjustone-way, itmayalsoresult inabrain drain.
69IndustryCanadafeelsthat"thedependenceonnichemarketsprovidestheindustrywithdisjointedcapabilities,
which havebeendetrimental toitsability tocompete withmore integrated manufacturers from other countries".
Industry Canada (1995).
70TheexistingR&Dsupportschemes havealsobeencriticizedforanimplicitbiasinfavouroflargercompanies;
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Page 97
89. Topromote investment inR&D, provincial andfederal governments havedeveloped generous
incentive systems overtime,implying fiscal costsofsomeCan$1 billion perannum (Chapter III(4)(iv)).
Inrecent years, more emphasis hasbeenplaced ontaxcredits thanondirect payments. Yetthefiscal
drain hasremained largely unchanged, andsohasCanada 'sinternational position inR&D. Increasing
budgetary constraints, combined withdoubts about costeffectiveness, hasthusprompted areview of
various programmes, including themainfederal R&D scheme, theScientific Experimental Development
taxincentive (1994/95 Budget).
90. Technology Partnership Canada (TPC), introduced withthe1996/97 Budget, provides venture
capital toassist companies inlaunching "high tech" products. When fullyoperative in1998/99, TPC
istospend Can$250 million perannum intheform ofrepayable loans (Chapter III(4)(iv)). Unlike
itspredecessor, theDefense Industries Productivity Program (DIPP), which focused ontheaerospace
industry,TPCcoversabroadersectoralspectrumincludingadvancedmaterials,informationandcomputer
technologies, andbiotechnology. Other technology-based programmes, which havesurvived recent
budget cuts, include "Canarie", agovernment-industry consortium focusing onthedevelopment of
advanced communications networks, and"Precarn", aprivate/public consortium supporting
pre-competitive research inthefieldofintelligent systems.
91. TheGovernment haswelcomed theUruguay Round results asproviding Canadian firms with
business opportunities inbothnewandtraditional markets, andhelping them todiversify beyond the
U.S.market.71Under WTO provisions, tariffs on"high tech" products willbesignificantly reduced.
(b) Information andcommunication technologies
92. Informationtechnologiesandtelecommunications(IT&T)spearheadthetechnologicallyadvanced
segment ofCanadian industries, generating about 2percentofGDP. Some 15,000 firms employ over
160,000 persons toproduce telecommunications equipment, computer products andinstrumentation,
computer services andnewmedia, andelectronic components. Trade invirtually allmajor subsectors,
apartfromtelecommunications equipment, isindeficit, adding uptoCan$11 billion (1994). Canada 's
share inthefast-growing IT&T world market isestimated at3percent.72
Telecommunications equipment.
93. Withsome Can$1.5 billion inR&D spending (1995), thetelecommunications equipment sector
isthesingle largest industrial R&D performer inCanada. FourCanadian companies, ledbyNorthern
Telecom, rankamong theworld 's50largest producers intheindustry. Historically, preferential supply
relationships withmonopoly service providers wereanimportant factor inthedevelopment ofNorthern
Telecom (asforsome ofitsmain international competitors). Inturn,thepresence ofamultinational
covering abroad range ofactivities attheintersection ofcommunications, space andother advanced
technologies hasproved afocal point forCanada 'smodern industrial development. Many
telecommunications manufacturers havebegun assuppliers toNorthern Telecom.73Total employment
intheindustry isabout 40,000, down bysome 15percentsince 1988.
71Industry Canada (1995), p.6.
72Team Canada (1996a).
73Industry Canada (1995), p.4.WT/TPR/S/22
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94. Thecompetitive environment fortheindustry ischanging significantly inthedirection of
increasedopennessandinternationalintegration.CanadiantariffsonU.S.telecommunicationsequipment
havebeeneliminated under theCanada-U.S. FreeTrade Agreement (HSlines8517.10 to8517.90).
Under theWTO, allmajor industrial countries arecommitted tosignificant tariffcutsoverthecoming
years. Forinstance, theEuropean Union istophase outtariffs ontelephone setsandsome digital
integratedcircuits,andtoreducetariffsby60percentonothercomponents(switches,systemequipment
andparts). Canada willeliminate tariffs onmany products, fromtelephone setstomodems orfacsimile
machines (Table IV.7).
Table IV.7
Tariffs onselected information technology products before andafter theUruguay Round implementation process
HScode Product descriptionTariff rates
1994 2000
(percent)
Communications andelectronic equipment:
8517.10 Telephone setsandanswering machines 17.5 0.0
8517.30
8517.40Telephone switches, linesystem equipment
andparts0.0-17.6 0.0-8.7
8517.82 Facsimile machines 10.2 0.0
8517.40 Modems andparts 3.9-17.5 0.0
8517.40
8525.20Radio transmitters/transceivers 9.2-9.5 0.0
8805.20 Aircraft flight simulators 0.0 0.0
8534.00 Printed circuits 10.3 0.0
Computers andbusiness machines:
8471.10
8471.20Complete data-processing machines,
analog/digital/hybrid0.0-3.9 0.0
8471.91 Digital processing units 3.9 0.0
8471.92 Input/output units with/without cpu,storage 0.0-3.9 0.0
8471.93 Datastorage units with/without restofsystem 0.0-3.9 0.0
8473.30 Parts/accessories forcomputers 0.0-3.9 0.0
Electronic instruments:
9032.89 Automatic control instruments andparts 0.0-9.2 0.0-6.2
9032.90
9030.39 Measure ortestinstruments orparts 0.0-10.3 0.0-5.1
9030.40 Electrical properties andtelecom use
9026.10 Fluid floworpressure measuring 0.0-10.3 0.0-4.0
9026.20
9026.80
9014.10 Navigating instruments 0.0-10.3 0.0-6.8
9014.20
9014.80
9015.40 Survey, geophysical instruments 0.0-10.3 0.0-6.8
9015.80
9015.90
Source: Industry Canada (1995).Canada WT/TPR/S/22
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Computer hardware andperipherals
95. Canada'scomputerequipmentindustryismarkedbythestrongpresenceofforeignmultinationals
suchasIBM, which accounts for70percentofallcomputers produced inCanada. Multinationals
account fortwothirds ofallexports, predominantly intheformofintra-firm trade. Thelargeplayers
arecomplemented bysome 200mostly Canadian-owned producers ofparts andperipherals which,
duetolackoffunds andmarketing channels, tendtofocus ontheirhome market. TheGovernment
feelsthatthesefirms areatacompetitive disadvantage ifcompared tocompanies, forexample inJapan,
thathaveaccess tolow-cost capital generated within highly integrated conglomerates.74
96. Bilateral trade withtheUnited States andMexico hasbeenfullyliberalized under theFTA
andNAFTA. Canada andtheUnited States aremoving towards acommon m.f.n. tariffoncomputers
andparts, creating trading conditions similar toacustoms union.75
Computer software
97. Based on12,000 establishments with70,000 employees, andachieving double-digit growth
rates, software production isconsidered asoneofCanada 'shigh-tech strongholds.76Theindustry is
composed ofsome20well-established firms (e.g.SHLSystemhouse, DMR Group, Gognos andCorel),
which aremostly Canadian-owned, andamyriad ofsmaller companies. According totheGovernment,
despite theproximity oftheU.S.market, many small companies seemtohavedifficulties inestablishing
apresence abroad, given thelackofadequate financing andtheabsence ofmarketing alliances with
largehardwareproducers.TheWTOAgreementsonTechnicalBarrierstoTrade,Trade-RelatedAspects
ofIntellectual Property Rights, andGovernment Procurement areexpected tohaveamajor positive
impact onthecomputer services andsoftware industry.77
(c) Aeronautics andspace industry
98. Canada 'saeronautics andspace industry isalmost comparable inimportance, interms ofGDP,
totheIT&T sector. Thelarger companies aremostly foreign owned (BellHelicopters, Pratt&Witney),
except forBombardier anditssubsidiaries Canadair anddeHavilland. Anumber ofsmaller firms
areactive inniche markets (flight training devices, flight andairtraffic control simulators, aircraft
management andcontrol systems, space electronics, remote sensing satellites, space robotics systems
etc.). Theindustry hasapproximatively 60,000 employees andisestimated tosupply 4percentof
theworld market. About 70percentofproduction isforexport, twothirds ofwhich goestothe
United States.
99. Contrasting withmany other sectors, Canadian producers ofaeronautics andspace equipment
relymore onforeign thanondomestic procurement markets.78Given theirlimited home base, they
74Industry Canada (1995), p.9.
75Thecurrent m.f.n. tariff oncomputers andparts is3.9percentinbothCanada andtheUnited States.
76Theturnover ofCanada 'stop100software companies grew by38percentin1994.
77Industry Canada (1995), p.16.
78Team Canada (1996a).WT/TPR/S/22
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generally compete with larger, more integrated foreign firms.79Tocompensate forperceived
disadvantages interms offirmsizeandR&D spending, theGovernment promotes technology
development inpriority areas-withsupport forR&D through theDIPP andtheCanadian Space Agency
-andexport marketing.
(5) Services
(i) Recent developments
100. Asinother advanced economies, theproduction ofservices isCanada 'ssingle mostimportant
economic activity, currently accounting forclose totwothirds ofGDP andemployment. "New"
communication andinformation industries haveexpanded rapidly inrecent years. Forexample, value
added inthecomputer services sector grew byanominal 58.9percentbetween 1990 and1995,
corresponding toanaverage annual rateof9.7percent.
101. Therecent expansion ofmodern services isreflected in,andmayhavebenefited from, achange
inpolicy focus. Inareas suchastelecommunications andaviation, Canada hasgradually abandoned
itstraditional reliance ongovernment intervention andcontrol, including through public monopolies,
which hadlongformed anessential component ofregional andindustrial development policies. (Given
Canada 'slargeandscarcely populated territory, infrastructure isconsidered toplayanimportant rôle
foreconomic andsocial cohesion.) Growing concerns about economic andtechnical inefficiencies,
andtheirdrain onthepublic budget, haveencouraged aprocess ofderegulation, privatization and
management reform; regulatory changes intheUnited States haveprovided anadditional impetus.80
102. Inrecent years, Canada hasintroduced competition inlargesegments ofthetelecommunications
sector, including inareas ofvoice telephony andinalladvanced services. Long-standing regulatory
régimesinairandmaritimetransporthavebeenoverhauledandpreviousmonopolyrightsforAirCanada
removed.Portandairportmanagementisincreasinglyprovidedonacommercialbasis.Rulespreventing
financial institutions from intra-sectoral diversification havebeenlifted.
103. AsCanada hasgenerally relied onanevolutive process oflegislative review, thereforms may
havetaken moretime, butpossibly involved lessrisk,thana"big-bang" strategy. Ingeneral, thereform
process hascontributed tocloser integration of(previously) segmented regional services markets. The
large players inthetelecommunications, financial services, airandmaritime transport sectors now
operate under federal rulesandaresubject tofederal regulatory control. Many oftheformer incumbents
havebeenabletoadjust andretain significant market shares (Bell Canada, AirCanada, andthesix
largest banks); theirpractices aremonitored under theCompetition Act.81
79TeamCanada(1996b).Forexample,thespace-relatedrevenueofLockheed-Martin,thelargestU.S.company
inthesector, ismore thanten-times higher thantheCanadian space industry 'stotalturnover.
80Two thirds oftheCanadian population livelessthan100miles from theU.S. border.
81Three prominent competition-policy cases inrecent years involved: Stentor, anassociation formed bythe
main regional telecommunications operators; Gemini, acomputer reservation system jointly operated byAir
Canada andCanadian Airlines International Limited (CAIL); andInterac, anassociation among major banking
institutions providing shared electronic network services. While Stentor wasfound nottooperate asacartel,
theCompetition Tribunal issued aConsent Order in1993 requiring Gemini, which represented 90percentof
themarket, toprovide allother computer reservation systems inCanada withrelevant information. Gemini 's
(continued...)Canada WT/TPR/S/22
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104. Foreign access totheCanadian services markets hasimproved, reflecting thedomestic reform
process andexternal negotiations under theNAFTA andtheWTO. TheNAFTA contains provisions
ontelecommunications, financial, trucking andrailservices. Under theGATS, Canada hasupgraded
itsinitial offers onfinancial, telecommunications andmaritime services withaviewtocontributing
toasignificant outcome ofthenegotiations. Ontheother hand, investment inflows inmany services
areasremain closely monitored toensure continued Canadian influence within anincreasingly integrated
North American andglobal market environment.82Asdescribed inChapter III(4)(iii)(b), thereview
thresholdsforinvestmentsfromWTOMembersarelowerinthefinancialandtransportservicesindustries
thanintherestoftheeconomy, while allinvestments inthecultural sector arereviewable. Specific
ownership restrictions remain intelecommunications, airtransport, cultural and,mainly attheprovincial
level, financial services (Table IV.8).
(ii) Financial services
(a) Background
105. Thefinancial services sector currently accounts forabout 7.5percentofGDP andclose to
4percentoftotalemploymentinCanada.Thebankingindustryisstronglyconcentrated,withsixbanks
representing twothirds ofallassets heldbydeposit-taking institutions. Overall, 50percentofthe
economy 'stotalassets areinthehands ofbanks. However, other financial sector institutions, such
aspension funds andlife-insurance companies, areexpanding rapidly.
106. Deregulationinthefinancialsectorstartedinthemid-1980s,whenCanadaeliminatedregulations
onfinancial sector specialization andseparation. Being allowed since1987tounderwrite anddistribute
securities oftheGovernment andCrown Corporations, banks havebecome important players, mainly
through acquisitions, insecurities markets andthetrustindustry. Atthesame time, theyarebeing
challenged intheirtraditional lending anddeposit businesses byinsurance companies, andtrustand
loancompanies.
107. Stiffening competition hashelped toreduce thecostoffinancial transformation inCanada;
thespread between lending anddeposit ratescompares favourably withother OECD countries IV.10).
81(...continued)
twoparticipants were alsoordered toparticipate inallother computer reservation systems on"reasonable terms".
TheCompetition Tribunal latermodified itsoriginal Consent Order andrequired thedissolution ofGemini at
theendof1993. In1996, theCompetition tribunal accepted aconcerted order designated tofacilitate bothwider
membership onInterac andcompetition between members. (Director ofInvestigations andResearch).
82CanadiancontrolandownershipofservicesprovidersisoftenlinkedtobroaderconceptsofCanadianidentity.
Forexample, theTelecommunications Actof1993 states that"telecommunications performs anessential rôle
inthemaintenance ofCanada 'sidentity andsovereignty" andthattheCanadian telecommunications policy has
asitsobjectives "topromote theownership andcontrol ofCanadian carriers byCanadians" (section iii(c)).WT/TPR/S/22
Page 102Trade Policy Review
Table IV.8
Investment restrictions andcontrols inselected services sectors, 1996
Sector Legal base Limitation
Investment review
General provisions Investment Canada Act Review ofdirect acquisitions byWTO members ofa
business whose assets exceed Can$168 million, toassess the
"netbenefits toCanada".
Review thresholds fornon-WTO members: Can$5 million
fordirect acquisitions; Can$50 million forindirect
acquisitions representing nomore than 50percentofa
transaction.
Sector-specific provisions
Transport servicesaInvestment Canada Act Review thresholds forWTO andnon-WTO members:
Can$5 million fordirect acquisitions; Can$50 million for
indirect acquisitions representing nomore than50percent
ofatransaction.
Cultural industries Investment Canada Act Review ofanyinvestments (acquisition ornewbusiness) in
activities related toCanada 'scultural heritage ornational
identity.
Ownership limitations
Telecommunications Telecommunications Act Foreign ownership ofCanadian common carriers limited to
20percent (33.3 percent inthecase ofholding
companies).
Airtransport National Transportation Act Foreign ownership ofanairline limited to25percent.
Financial services Bank Act Individual ownership limited to10percentofaSchedule I
bank (regardless ofnationality).
Provincial laws Foreign ownership limited to10percentindividually and
25percentcollectively ofprovincially regulated trustand
loancompanies andsecurities firms inseveral provinces.
Broadcasting Broadcasting Act Foreign ownership ofaradio ortelevision station limited to
20percent (33.3 percent inthecase ofaholding
company).
Book publishing anddistribution Investment Canada Act
(Section 20)andsupplementary
policy guidelinesNew businesses must beCanadian-controlled. Foreign
acquisition ofexisting Canadian-controlled businesses is
allowed onlyinextraordinary circumstances.
Filmdistribution Investment Canada Act; policy
guidelines under theActForeign acquisition ofaCanadian-controlled distributor is
notallowed. Investment innewbusinesses permissible only
forimportation ofproprietary products. Direct orindirect
acquisition byforeign-owned companies ispermissible only
iftheinvestor undertakes toreinvest aportion ofits
Canadian earnings "inaccordance withnational andcultural
policies".
a TheBank Actexempts banks from theInvestment Canada Act.
Source: WTO Secretariat, based oninformation provided bytheGovernment ofCanada.Canada WT/TPR/S/22
Page 103
108. Despite(orperhapsbecauseof)alegacyofdomesticregulation,Canadianbankshavetraditionally
beenactive inforeign markets. Theabsence ofexchange controls, combined withamore liberal
framework forcross-border thanfordomestic operations, hasencouraged diversification intothe
United States. Approximately 30percentofthemajor banks 'assets arecurrently heldinforeign
currency. Thefocus onother North American markets hasfurther strengthened inthewake ofthe
NAFTA.83
109. Inturn,foreign access totheCanadian market hasimproved, firstunder theNAFTA andlater
under theGATS. Inparticular, theWTO Agreement Implementation Actremoved long-standing
limitations onnon-Canadian ownership offederally-regulated financial institutions; lifted amarket
share limitation onforeign banks; andextended NAFTA thresholds forinvestment review andcontrol
toallWTO members (Table IV.8). TheBank Act,theCooperative Credit Association Act,theTrust
andLoan Companies ActandtheInvestment Companies Acthavebeenamended accordingly.
110. Asinothersectors,theprovincessharesomeregulatoryandsupervisorypowerswiththeFederal
Government. While banking fallsexclusively under federal jurisdiction, securities companies operate
exclusively under provincial control. (Canada remains theonlymajor industrial country toregulate
capital market operations solely atasubnational level.) Other financial sector institutions -insurance
83TwomajorCanadianbanksrecentlytookcontroloftwoMexicanbanks,and15Canadianinsurancecompanies
arecurrently operating intheUnited States through branches, offices orsubsidiaries. There arenoCanadian
insurance companies operating inMexico.WT/TPR/S/22
Page 104Trade Policy Review
companies, trustandloancompanies, co-operative credit associations, mortgage companies, investment
companies etc.-arefreetoincorporate either under federal orprovincial law.
111. Toavoid regulatory overlap inareasofshared orexclusive provincial competence, co-operation
procedures exist. Regulators forinsurance andsecurities meetregularly toexchange information and
harmonizetheirapproaches.(Forexample,theCanadianSecuritiesAdministrationshavebeenestablished
asabodytoperform suchfunctions.) Since thelargest insurance andtrustandloancompanies operate
nation wide, theyhaveincorporated under federal law.84Regulation ofsecurities firms hasbeenunder
discussion forsome years; while some provinces areexploring theconcept ofauniform regulation
administered byasingle agency, others wanttoretain theirregulatory presence.
(b) Banking
112. Pursuant totheBank Act,theDepartment ofFinance isresponsible forthegeneral policy
framework governing allbanks, including subsidiaries offoreign banks. Regulatory control isvested
intheOffice oftheSuperintendent ofFinancial Institutions (OSFI).85TheOffice reviews incorporations
andacquisitions, andisresponsible forprudential supervision; itreports toParliament through the
Minister ofFinance.
113. TheBank Actprovides fortwoclasses ofbank. Schedule Ibanks arewidely held, with
individual ownership limited to10percentofvoting shares forbothCanadians andforeigners. The
current eightSchedule Ibanks, ofwhich sixoperate anation-wide network withsome 8,000 branches,
holdmore than90percentofallbankassets inCanada; theyareallmajority Canadian-owned. The
second class, Schedule IIbanks, wascreated in1980 toallow foreign banks tooperate inCanada;
theymaybeclosely heldonincorporation andmustestablish assubsidiaries. Most ofthe50foreign
banksubsidiariescurrentlyoperatinginCanadaconfinetheiractivitiestospecializedbusinesses(corporate
banking andinvestment services). TheHongkong Bank ofCanada, thelargest Schedule IIbank, had
assets ofCan$20 billion in1995, while theNational Bank ofCanada, thesmallest ofthe"BigSix",
hadCan$48 billion.
114. Inorder toincorporate aSchedule IIbank, theforeign company should beinthebusiness of
banking andbeknown asabank totheregulator ofitshome country.86While foreign banks may
operate representative offices inCanada, theymustnotsolicit business; direct branching oropening
agencies fromabroad isnotpermitted. Therestriction onbranching, intended tofacilitate prudential
supervision bytheOSFI, hasdrawn complaints from smaller U.S.banks located neartheCanadian
84Thefederally incorporated trustandloanfunds represent 85percentoftheassets inthissector. Many
trustandloancompanies, traditionally concentrated inOntario andQuebec, havedisappeared during therecession
andtherealestate crisis inrecent years. Several provinces, including Ontario, areconsidering reducing their
involvement intheregulation oftrustandloancompanies.
85Thebanks 'rôleisdefined inPartVIIIoftheBank Act. Banks areallowed totakedeposits, andprovide
lending andinvestment services (portfolio management services, counselling services etc.); theymayalsocreate
subsidiaries tooffer other financial services suchasthemanaging andselling ofmutual funds, insurance policies
etc.
86Aletter ofcomfort authorized bythebank'sboard ofdirectors must accompany theapplication forthe
establishment ofasubsidiary.Canada WT/TPR/S/22
Page 105
border.87Theyseetherequirement toestablish acapitalized subsidiary asparticularly onerous, limiting
theirpotential forcommercial expansion.
115. Recent changes havefacilitated market access andconditions ofoperation. Canada iscommitted
nottoenforce reciprocity testsforthelicensing offoreign banksubsidiaries fortheduration ofthe
GATS Agreement onFinancial Services. Once established, asubsidiary isgranted national treatment
andmayperform similar activities asCanadian-based banks without restriction. They mayholdshares
inother financial institutions suchasfederally regulated trustandloancompanies andprovincially
regulated securities firms.88Although Ministerial approval isstillrequired forbanks fromnon-NAFTA
countries toopenmore thanonebranch, permission hasnotbeendenied todate. Previous ceilings
ontheassets offoreign banksubsidiaries, limiting them to16percentoftotaldomestic bankassets,
wereremoved forNAFTA members and,subsequently, onanm.f.n. basisunder theGATS. Capital
requirements arebased ontheBank ofInternational Settlements 'rules oncapital adequacy, anddo
notdiffer between foreign banksubsidiaries anddomestic banks.
116. Foreign ownership restrictions havealsobeeneased. Canada haslongapplied theso-called
10/25 ruleprohibiting foreigners fromholding more than10percentofanyclassofshares individually
or25percentcollectively inaSchedule Ibank. The10percentlimitapplied toallpersons, domestic
orforeign, andwasestablished toavoid therisksnormally associated withexcessive concentration.
The25percentprovision wasaimed atensuring Canadian ownership andcontrol.89Aspartofits
commitments under theGATS, Canada eliminated the25percentcollective limitation.90
(c) Other lending andborrowing activities
117. Arangeofinstitutionsotherthan"banks"providelendingservicesinCanada,includingfederally
orprovincially regulated trustandloancompanies, credit unions andco-operative institutions. Since
1992, these institutions havebeenallowed tocompete onanequal footing withbanks inthepersonal
andcorporate lending market. With thelifting ofthe10/25 percentlimitonfederally incorporated
trustandloancompanies under theGATS, therelevant activities arefullyopentoforeign investment.
118. Securities markets andinstitutions areunder provincial control. Various provinces, including
Ontario, Quebec andBritish Colombia, allow foreigners toacquire fullownership ofprovincially
registered companies. (Ontario hosts Canada 'slargest capital market, inToronto.)
87Journal ofCommerce, 26January 1996. Consultations onthisissue arebeing pursued under theNAFTA.
88Thus, aforeign bank orbank holding company would beabletooperate itsCanadian securities affiliate
aspartofitsforeign securities network, separated from itsCanadian banking activities. Arecent policy paper,
published inpreparation forareview offederal financial institution legislation in1997, proposes allowing foreign
banks withaSchedule IIsubsidiary toholdother financial institutions directly, rather thanthrough thesubsidiary.
89While afterthesecond World Warfewrestrictions prevented foreign banks fromacquiring Canadian banks,
the1967 Bank Actintroduced the10/25 percentrule. Itapplied tovarious segments ofthefinancial services
sector (insurance companies, trustandloancompanies, credit unions, investment firms, securities firms etc.)
atbothfederal andprovincial level. Foreign banks were notallowed toengage inbanking activities asdefined
bytheAct(i.e.thepossibility ofreceiving deposits bycheck), butwere permitted toownnon-bank credit
institutions which were active inmoney-market operations, corporate lending andleasing.
90The25percentcollectiveownershiplimitationwasfirstliftedforU.S.banksundertheCanada-UnitedStates
FTA in1989.WT/TPR/S/22
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(d) Insurance
119. TheCanadianinsurancemarkethastraditionallyhadastrongpresenceofAmericanandEuropean
firms, dating backtothe19thcentury. Atpresent, about halfofCanada 's140health andlifeinsurance
companies areforeign owned, accounting for30percent(some Can$50 billion) ofallassets.91The
property andcasualty insurance industry ismade upof220firms; 60percent(some Can$25 billion)
ofallassets areheldbyforeign-owned companies. While insurance companies canalsoincorporate
under provincial law,threequarters ofCanada 'slifeinsurance companies and55percentoftheproperty
andcasualty insurance companies arefederally registered, representing 90percentoftotalpremium
income.
120. Under theInsurance Companies Act,theOffice oftheSuperintendent forFinancial Institutions
(OSFI) regulates andsupervises thefederally incorporated insurers.92While federal regulation focuses
onprudential supervision (solvency regulation), theprovinces areempowered toregulate products,
terms ofcontracts, market conduct, andlicensing ofallinsurance companies operating intheirterritory,
regardless ofthejurisdiction ofincorporation. Nevertheless, according totheGovernment, products
anddistribution areessentially thesame throughout Canada. Each province hasitsowninsurance
regulator, andallinsurance companies must belicensed intheprovince where theydobusiness.
121. Insurancecompaniesmaysupplytheirserviceseitherdirectly,throughagentsorthroughbrokers.
Lifeinsurance companies arenotingeneral allowed toofferother services (except forhealth, accident
andsickness insurance), butmaybeaffiliated to,anddistribute theproducts of,aproperty andcasualty
insurer. Asinbanking, commercial presence isrequired toofferinsurance, reinsurance andretrocession
services inCanada. However, companies maybranch from abroad oncondition thattheymaintain
trustees assets equivalent totheirliabilities inCanada.
122. Subsequent tothe1987 and1992 reforms, federally incorporated insurance companies were
allowed, likebanks, tooperate inother financial services markets. Forexample, theymayown
deposit-taking institutions, investment dealers, mutual funddealers, andsecurities firms. Inaddition,
insurance companies mayengage directly inlending activities onanequal footing withdeposit-taking
institutions.
123. According totheauthorities, apart from carinsurance, there arenocartels ormonopolies in
theinsurance market. Carinsurance forprivate andcommercial vehicles ismandatory inCanada;
several provinces (Quebec, British Columbia, Manitoba andSaskatchewan) maintain publicly-owned
monopolies, allother provinces haveregulated premiums.93
124. Prior totheGATS, acquisition bynon-NAFTA investors ofafederally incorporated Canadian
insurance company wassubject tothe10/25 rule. While thisrestriction hasbeen lifted, foreign
ownership remains subject tolower investment review thresholds (Chapter III(4)(iii)(b)). Several
provinces continue tosubject foreign investments inexisting, provincially incorporated companies to
authorization (Box IV.2).
91Nofirmexceeds amarket share of10percent.
92TheminimumcapitalrequirementatthefederallevelisCan$10millionforbothforeign-andCanadian-owned
companies inlife,property andcasualty insurance.
93InQuebec, while automobile insurance forcorporal damages ispublic, insurance formaterial damages
isprivate.Canada WT/TPR/S/22
Page 107
BoxIV.2 Overview ofCanada 'sWTO commitments infinancial services sectors
Canada hasbound market access andnational treatment onanm.f.n. basis forfinancial services listed in
theUnderstanding onCommitments inFinancial Services. However, thisissubject tolimitations under
federal andprovincial regulations.
Banking andother non-insurance services
Canada 'scommitments cover thefullspectrum offinancial activities (banking, foreign exchange trading,
money andcapital markets operations, mutual fund management, pension fund management, securities
brokerage, investment advisory services, etc.). While there isnolimitation oncross-border supply and
consumption abroad ofbanking services, anumber oflimitations concern commercial presence:
Market access:
(i)Foreign banks andfinancial institutions must generally incorporate asubsidiary inCanada, under
federal orprovincial law, tooffer banking andrelated services (including mortgage brokering and
securities brokerage). Insome provinces andforsome specified areas (credit unions, asset management,
advisory services), incorporation oranother form oflocal commercial presence iscompulsory.
(ii)Permanent residence isrequired foractivities such asmortgage broking andsecurities trading or
brokering insome provinces (Ontario). Under federal law,nosingle person, either Canadian orforeign,
mayownmore than10percentoftheshares ofaSchedule Ibank. Similar ownership limitations apply
attheprovincial level totrust andloancompanies ormortgage brokers. Inaddition tothe10percent
ceiling, some provinces limit collective share ownership bynon-Canadians to25percent incertain
sectors.
National treatment:
Ministerial approval isrequired fornon-NAFTA foreign bank subsidiaries toopen more thanonebranch.
Aminimum ofonehalfofthedirectors must ordinarily reside inCanada andbeeither Canadian citizens
orpermanent residents.
Insurance
Market access:
Supply ofinsurance andreinsurance services, bothatfederal andprovincial levels, requires acommercial
presence intheform ofacorporation incorporated under thelaws ofCanada orofanother jurisdiction
(i.e.abranch ofaforeign corporation) oranassociation formed ontheso-called Lloyds plan. Some
provinces maintain limitations onthecommercial presence offoreign firms. Forexample, Quebec
subjects foreign investments exceeding 30per cent ofanexisting Canadian-controlled and
Quebec-chartered company toauthorization, andBritish Columbia submits anyindividual acquisition of
acompany 'svoting rights exceeding 10percenttoauthorization. Inother provinces, there arespecific
requirements regarding riskundertakings ortechnical reserves orlimitations ontheprovision ofcertain
auxiliary services (brokering andagency services), including theobligation tosupply such services
through local commercial presence.
National treatment:
Themain limitations concern citizenship orresidence requirements fordirectors (seeabove).
Source: WTO Secretariat based onGATS Document SC/16/Suppl.1/Rev.1, 4October 1995.WT/TPR/S/22
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(iii) Telecommunications
(a) Background
125. TheCanadian telecommunications market hasexpanded rapidly inrecent years. While revenue
growth averaged 4.4percentbetween 1987and1992despite therecession, itreached closeto6percent
in1994and1995. Total income inthesector wasCan$19.4 billion in1995, representing some 5.5per
centoftheNorth American telecommunications market.
126. Reflecting Canada 'sgeographic sizeandtheintensity ofeconomic linkswiththeUnited States,
long-distance telephony contributes some45percentoftelecommunications revenue.94Local telephone
services account foranother 35percent,while theremainder comes fromvariety ofsources, including
overseas telephone services, resale andsharing oflines, radio-telephone services, paging etc.Mobile
cellular telephony, representing arevenue share of10percent,isthefastest growing market segment,
with15percentgrowth in1995.
127. CompetitioninCanada'stelecommunicationservicesmarkethasintensifiedsincetheliberalization
in1992 oflong-distance telephony andenhanced services (data-processing services, paging services
etc.). Newfacilities-based carriers, suchasUnitel andSprint Canada, andcompanies specialized in
reselling leased-line capacity haveentered themarket tocompete withStentor, theassociation ofthe
mainregional carriers, formerly Telecom Canada. Local telephony andmobile satellite services have
beenlegally opened tocompetition. Overseas telephone services maybeprovided freely onaresale
basis, andtherearenorestrictions ontheinterconnection ofdomestic leased circuits andpublic switched
networks.95Call-back companies areallowed tooperate, andprivate networks maybeestablished.
128. Further regulatory initiatives, including improvements inaccess conditions forforeign-based
companies, mayresult fromtheGATS Negotiations onBasic Telecommunications andnewtechnical
developments (e.g.information highways). TheCanadian Radio-Television andTelecommunications
Commission (CRTC), thefederal regulator, iscurrently conducting public hearings onrelated issues
suchastheremoval ofremaining structural barriers tocompetition inlocaltelephony andtherebalancing
ofrates.96
129. Possibly reflecting thespurofincreased competition, performance indicators forCanada 's
telecommunications sector compare relatively wellwithother OECD countries. Costandpricetrends
94Byconvention, Canada-United States telecommunications traffic isdefined aslongdistance rather than
international.
95Conditions ofnetwork access aredefined bytheCanadian Radio-Television andTelecommunications
Commission (CRTC). Section 29oftheTelecommunications Act(1993) stipulates thatagreements between
carriers regarding theinterchange oftelecommunications andtheapportionment ofratesandrevenues aresubject
toprior approval bytheCRTC. Section 40allows theCRTC to"order aCanadian carrier toconnect anyof
thecarrier 'stelecommunications facilities toanyother telecommunications facilities" andrequire thattherelevant
conditions "bejustandexpedient". Under these provisions, theCRTC mayorder carriers togrant other carriers
accesstotheirlocalexchangefacilities,aswasneededfortheintroductionoflong-distancecompetition.According
totheGovernment, major CRTC proceedings arecurrently under waywhich focus onlocal interconnection and
networkcomponentunbundlingwithaviewtoestablishingground-rulesforcompetitioninlocalwire-linetelephony.
96TheCRTC isresponsible fortelecommunications carriers, broadcasters andcable-TV operators, based
ontheTelecommunications Act,theCRTC Act,andtheRadiocommunication Act.Canada WT/TPR/S/22
Page 109
tend toconverge with those intheUnited States, inparticular inthelong-distance segment
(Canada-United States traffic), inwhich companies from bothcountries compete.97
(b) Regulatory framework
130. Thedecision bytheCRTC in1992 toallow competition inpublic long-distance telephony
(Telecom Decision CRTC 92-12) marked animportant stage intheprocess ofsectoral liberalization.98
Itwasfacilitated byacombination oftechnical, economic andlegal developments, including the
proliferation ofnewservices, competitive pressures created byliberalization intheUnited States, and
a1989Decision byCanada 'sSupreme Court confirming federal authority overthemember companies
ofTelecom Canada (now Stentor) andplacing them under CRTC control.99
131. AnewTelecommunications Actfollowed attheendof1993. Itprovides fortheregulation
of"Canadian" or"common" carriers, i.e.telephone companies, thatownoroperate transmission
facilities. They included allmembers butoneofStentor, "independent" telephone companies not
members ofStentor, Telesat andTeleglobe, and"new" entrants suchasUnitel (owned byacable-TV
company) aswellasSprint Canada.100While these companies were submitted toaunified (federal)
régime, theActbydesign excluded resellers from regulation. Thisconcerns allcompanies leasing
andreselling linesfrom facilities-based carriers oroffering "enhanced" or"value-added" services,
suchasdataandother computer-related services.
132. TheCRTC ismandated under theActtopursue thederegulation oftheCanadian market.101
Forreasons ofpublic interest, theCommission mayexempt classes ofcarriers andmarket segments
fromtheapplication oftheAct; itmustforbear fromregulating inareas where effective competition
exists. Forexample, theCRTC announced in1994thatitwould cease toregulate cellular andpublic
97OECD (1995b). Canada tends tocluster around theOECD average interms ofpublic telecommunications
revenue, investment, andtariffs permainline andpercapita. Indicators related tosome fast-growing market
segments, suchasthenumber ofmobile telecommunications subscribers, show Canada wellabove theOECD
average. While interms ofinternational telecom revenue, Canada lagsbehind itsmain competitors, thisisdue
mainly totheexclusion ofCanada-Unites States traffic (seeabove). TheOECD findings arecorroborated by
CRTC estimates comparing costs inCanada andtheUnited States.
98Resale andsharing oflines wasderegulated inearly 1993 (CRTC 93-17).
99Under theprevious régime, 30percentofthetelecommunications market wasunder provincial regulation.
100Stentor comprises Canada 'slargest telephone companies which operate ineach province through
geographically divided concessions andinthelong-distance market asanassociation (seeChart IV.13). Until
1July1997, Teleglobe Canada isthesoleauthorized operator offacilities providing overseas telecommunications
services. (However, according totheGovernment, resale arrangements offeralternative gateways forcompeting
services providers.) Telesat isthesoleauthorized operator, until2002, ofspace segment facilities fordomestic
satellite services. Fixed satellite services between Canada andtheUnited States areprovided byTelesat and
authorized United States 'satellite operators. Earth stations forCanada-U.S. services must beowned byTelesat,
andstations foroverseas services byTeleglobe. Satellite services, asanyother telecommunications services,
mayberesold.
101Thefollowing provisions areinaddition totheCRTC 'straditional powers, confirmed bythe1993 Act,
which range fromrateregulation toquality ofservice monitoring andtheapproval ofinterconnection agreements.
Licences arenotrequired fortheprovision ofatelecommunications service, buttheCRTC istoapprove the
rates charged forcommercial services.WT/TPR/S/22
Page 110Trade Policy Review
cordless phone services thatarenotoffered directly byatelephone company.102However, itwill
continue toregulate terminal equipment supplied onamonopoly basis. Ingeneral, theCRTC must
support thepolicy objectives contained intheAct(Section 47),tohelp"foster reliance onmarket forces
fortheprovision oftelecommunication services".
133. Fewsegments ofthetelecommunication market haveretained aformal monopoly status. In
themain, these areoverseas telecommunications services todestinations other thantheUnited States,
domestic fixed satellite services andlocalpayphone services. (However, Teleglobe hasannounced
thatitwould notseektherenewal ofitsexclusive mandate asCanada 'sfacilities-based overseas carrier,
which istoexpire inApril 1997.103)Inaddition, competition inlocaltelephony isnotpermitted in
theserving territories ofnon-Stentor telephone companies, which currently account for5percentof
thenational market,104andinlong-distance traffic intheterritories ofNorthwesTel, i.e.insome remote
areas inthenorth ofCanada. Chart IV.11 provides anoverview ofthedomestic competitive situation
in1995 asassessed byIndustry Canada.
134. Although notformally defined inlegislation, theavailability ofauniversal service remains
afocal policy objective. The1993 Telecommunications Act(Section 7)requires that"reliable and
affordable telecommunications services ofhighquality beaccessible toCanadians inbothurban and
rural areas inallregions". Thetraditional instrument inthiscontext hasbeenthefixing oflocal
telephone ratesatlowlevels, relying oncross-subsidization from long-distance calls.105However,
pricecompetition inthelong-distance market hasundermined thecarriers 'traditional source ofprofits;
forinstance, BellCanada 'srateofreturn dropped tofrom 13.5percentin1992 to6.5percentin
1995, reflecting a35percentfallinlong-distance rates.106
102Telecom Decision CRTC 94-15. With respect tomobile wireless services provided directly bytelephone
companies, theCRTC isprepared toforgo some ofitsregulatory powers contingent ontheestablishment of
sufficient safeguards. Industry Canada (1994).
103TeleglobePressRelease,8November1995.TelegloberequestedtheGovernmenttofurtheropenthesector,
forexample through increasing pricing flexibility andraising theforeign-ownership ceiling forcarriers to
49percent.
104According totheGovernment, CRTC isexpected soontodecide ontheregulatory framework forsmaller
independent telephone companies operating inOntario andQuebec.
105According totheGovernment, alllong-distance service providers must currently contribute tothesubsidy
flow(someCan$2billion)fromlong-distancetolocalservices.Therégimeisintendedtoseparatethiscontribution
fromthecustomers 'actual choice ofalong-distance company. Thesubsidy requirement isbased onthedifference
between revenues andaverage costs associated withatelephone companies 'local andaccess services.
106EIU(1996).Canada WT/TPR/S/22
Page 111
135. Local telephone markets areinprinciple opentocompetition, butnoentries haveyetoccurred.
TheCRTC acknowledges thatanumber ofsocial, economic andtechnical issues, suchastheexistence
ofnatural monopolies incertain regions andproblems ofinterconnection, continue todeter new
entrants.107Effective market opening, inturnaprecondition fortheoperation ofinformation highways,
isclosely linked tothequestion ofraterebalancing.
136. Tocomplement the1993 Telecommunications Act,theCRTC adopted anewregulatory
framework inSeptember 1994 (Decision 94-19). Itsmain elements aretheremoval ofbarriers to
competition inbasic local telephony, including through opening access toexisting networks; a
programme ofraterebalancing aimed atbringing localandlong-distance charges inlinewithcosts;
thesplitofthemajor company 'sratebaseintocompetitive andutility (monopoly) segments; andthe
adoption ofapricecapregulation fortheutility segment from1January 1998. TheCRTC iscurrently
conducting proceedings withaviewtodevising aprice-cap implementation programme.108
107Inits1995 Report onInformation Highways, theCRTC didnotexpect "that entry willoccur toany
significant degree untiltechnological andother barriers toentry arereduced, anduntiltheterms andconditions
ofentryinlocaltelephonyaresufficientlycleartoallownewentrantstodevelopviablebusinessplans".Hearings
onthetechnical andeconomic issues related totheopening oflocal telephony have been heldbytheCRTC,
anddecisions areawaited inthenearfuture.
108InaPublic Notice, dated 12March 1996, theCRTC confirmed itsintention tointroduce price capsfor
theutility segment. Consultations onthedetails ofthenewpricing system arecontinuing withaviewtoreaching
adecision byend-1996. Inthemeantime, theCRTC hasapproved local rateincreases ofCan$2 permonth for
both1996 and1997.WT/TPR/S/22
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(c) Market developments
137. Thescope ofliberalized telecommunication services hasincreased markedly inrecent years.
Some 340companies (most ofthem resellers withalimited market share) areestimated currently to
provide wire-based long-distance services.109Allmajor carriers areprivately owned, except SaskTel
andManitoba Telephone System which areCrown Corporations.110After fouryears ofintense
competitionsincemid-1992,newfacilities-basedcarrierssuchasUnitelandSprintCanadahavecaptured
closeto15percentoflong-distance revenues, profits haveshrunk andprices havefallen byanaverage
of35percent.111
138. Inarapidly changing environment, theStentor consortium retains astrong position withan
estimated share of73percentintotaltelecommunications revenue in1995.112Some 50"independent"
facilities-based companies account foranadditional 5percent,while another 7percentisaccounted
forbythenewfacilities-based carriers (Unitel, Sprint) and1percentbyabout 200resellers. Despite
itsstrong rôleinCanada, Stentor isarelatively small player byinternational standards, given thelimited
sizeofitsdomestic market (Chart IV.12).
109Financial Times, 2February 1995.
110TheGovernment hassoldits53percentshare inTelesat.
111Industry Canada (1996d).
112Through asubsidiary, TMI, Stentor isalsoactive inthemobile telephone services market.Canada WT/TPR/S/22
Page 113
139. BellCanada Enterprises istheholding company ofbothNorthern Telecom, Canada 'slargest
equipment manufacturer (section (4)(iii)(b)), andBellCanada, thesingle largest carrier which recently
increased itsvoting power inStentor.113Bellcontributes some 60percentofStentor 'srevenue,
equivalent tonearly halfoftotaltelecom income inCanada (Chart IV.13), andowns important shares
inTeleglobe (22percent) andTelesat (25percent).
(d) External aspects
140. Theliberalizationprocesshasgraduallyimprovedforeignmarketaccess;therearenorestrictions
onthecross-border supply ofenhanced services, nornational ownership requirements forresellers
oftelephone capacity. However, pursuant tothe1993 Telecommunications Act,limitations have
remained withaviewtoensuring "ownership andcontrol ofCanadian carriers byCanadians".114Thus,
foreign participation infacilities-based carriers islimited to20percentfordirect holdings and33.3per
centforvoting shares inholding companies (Table IV.8)115;foreign carriers arenotallowed toown
anyvoting shares inTeleglobe Canada; andatleast 80percentoftheboard members ofa
113BellCanada 'sstrong market position istoacertain extent rooted initstraditional basis inOntario and
Quebec.
114Under the1993 Telecommunications ActandtheTelecommunications Common Carrier Ownership and
Control Regulation, compliance withforeign-ownership rulesistobemonitored bytheCRTC which ismandated
toprevent deals thatmight allow foreign shareholders toexercise effective control.
115GTE's51percentholdings inBCTelandQuébec-Tel were grandfathered under current ownership and
control policies.WT/TPR/S/22
Page 114Trade Policy Review
facilities-based carrier mustbeCanadian nationals. Changes mayresult fromasuccessful conclusion
oftheWTO Negotiations onBasic Telecommunications.
141. Under theNAFTA, aseparate Chapter ontelecommunications addresses issues suchasnetwork
access, interconnection, testing andapproval. End-users areentitled touse"public telecom transport
services onreasonable andnon-discriminatory terms andconditions", toattach theirterminal equipment
totelephone networks, andtobuild, interconnect andoperate private leased-line networks.
Telecom-related aspects arealsocovered bytheNAFTA rules oninvestment, intellectual property,
licensing, standards, andtheAgreement 'sgeneral transparency requirements.
(iv) Transport services
(a) Main features
142. Canada 'stransport system isshaped bygeography andsettlement structure, requiring large
coast-to-coast andnorth-south links. (Half ofCanada 's30million population islocated onthe
St.Lawrence Great Lakes axis,aquarter livesonthewestcoast, andtheremainder isspread across
thecountry.) Historically, given theimportance oftheselinks, theGovernment hassought toinfluence
andcontrol thesystem through regulation andsubsidization, infrastructure investment andownership
ofmajor operators. Thelatter included inparticular Canadian National andCanadian Pacific inrail
transport andAirCanada inaviation. Strong public involvement wasfurther motivated bythegenuine
importance oftransport services forCanada 'smainexports; forexample, itisestimated thatbetween
18and45percentoftheexport salesprice ofnatural resource andprimary products isattributable
totransportation.116Overtime,lavish subsidy andcross-subsidy systems haveemerged buthaveproved
unsustainable asthebudgetary situation deteriorated.
143. Foralmost adecade, Canada 'stransport industries haveexperienced areform process similar
tothefinancial services andtelecommunications sectors. Theprocess included acritical review of
theFederal Government 'sinvolvement ininfrastructure management andmaintenance, inparticular
ofthe40main ports and26national airports. Ongoing efforts towards commercialization and
decentralization, combined withsubsidy cutsforuserindustries, areexpected toresult inbudgetary
savings ofuptoCan$2.7 billion bytheendofthecentury. (Including thetermination oftheWestern
Grain Transportation Act,theMaritime Freight RateActandtheAtlantic Region Freight Assistance
Act;seealsosection (2)(ii). Thederegulation process wasfurther encouraged by,andbenefited from,
international negotiations atdifferent levels.117
144. TheFederalGovernmenthasexclusivecompetenceforinter-provincialandinternationaltransport.
Transport Canada istheDepartment responsible forair,surface andmaritime transport policies, while
implementation andenforcement isinthehands oftheCanadian Transportation Agency, thefederal
regulator. TheCanada Transportation Actprovides thelegislative framework foralltransportation
services, complemented byspecialized legislation inindividual areas (Canada Marine Act,Canada
PortCorporation Act,Railways Act).
145. Sector-specific restrictions andcontrols onforeign direct investment havepersisted, including
intheformoflower review thresholds (Table IV.8). Approval bytheCanadian Transportation Agency
isrequired fortheacquisition ofanyfederally regulated transport company withassets orannual gross
116TransportCanada(1996).TheGovernment'straditionallystrongpresenceinthesectormayalsobeattributed
toregional andsocial policy objectives.
117This includes anopen-skies agreement withtheUnited States, NAFTA provisions ontrucking andrail
services, andGATS disciplines forspecified auxiliary airtransport services.Canada WT/TPR/S/22
Page 115
salesinCanada ofoverCan$10 million.118Inorder toqualify fordomestic operations under theCanada
Transportation Act,anairline mustbe75percentCanadian owned andbeunder effective Canadian
control.
(b) Airtransport119
Background
146. Canadian carriers transported anestimated 20to22million passengers in1995, shared mainly
between AirCanada (11million) andCanadian Airlines International (CAIL, 8million). Theeconomic
weight ofthetwocompanies, competing inarelatively small home market, remains below suchlarge
internationalcarriersasDelta(89millionpassengers),AllNipponAirwaysorBritishAirways(30million
each). However, bothAirCanada andCanadian Airlines International havealliances andcommercial
arrangements, including onflight co-ordination andcode-sharing, withmajor foreign carriers. Business
alliances existbetween AirCanada andUnited Airlines, Continental andLufthansa aswellasbetween
CAIL, British Airways andAmerican Airlines.
147. American Airlines owns 33percentofthenon-voting shares ofCAIL. Since theprivatization
ofAirCanada, theGovernment doesnotholdanyshares intheindustry, nordoesitprovide continued
financial assistance. CAIL received loanguarantees in1992 toallow financial restructuring; the
guarantees arescheduled toexpire in1997.
148. Thecurrent structure oftheindustry hasemerged from awave ofmergers andacquisitions,
ushered in,in1987-88, bydomestic deregulation insouthern Canada, theprivatization ofAirCanada
andsubsequent strong competition infares. Twonewairlines, Westjet andGreyhound, haverecently
entered thedomestic scheduled passenger market. Inaddition, there areseven charter companies
operating ondomestic orinternational routes, andseveral smaller companies focusing on
Canada-United States transborder flights. Although these companies tendtochallenge AirCanada
andCAIL 'smarket position, recent government documents continue torefertoaduopolistic industry
structure, however, within tense competition.120
Domestic regulatory framework
149. Thepasttwoyears haveseenthecontinuation ofthereform process inthree directions: the
completion ofdomestic liberalization through thelifting ofremaining regulations innorthern Canada;
theadoption ofanew"International Aviation Policy", laying theground forgreater opening toforeign
companies; andareview oftheGovernment 'sinvolvement ininfrastructure management, possibly
leading tothecommercialization ofmainairports andtheairnavigation system, andthedecentralization
ofresponsibilities forsmaller airports.121
118Exemptarecompaniesoperatedbynon-Canadianresidentsandcompaniesengagedexclusivelyincross-border
transport.
119Airandmaritime transport have been selected hereforasector-presentation, given therecent pace of
regulatory reform inthese twoareas. Aviation isCanada 'sthirdlargest transport sector, representing some 10per
centoftheindustry 'stotalvalue added, behind truck andrailtransport (38percentand26percent, respectively).
120TransportCanada(1996).Theemergenceofaduopolyhasraiseddoubtsamongobservers,whetherCanada's
domestic market could sustain more thantwocontinental scheduled carriers. Button (1993), p.55-73.
121Observers have argued thatrelatively longtransition periods might beusedbytheincumbent scheduled
carriers todevelop newbarriers toentry (Button, 1993).WT/TPR/S/22
Page 116Trade Policy Review
150. The1995 Canada Transportation Actremoved remaining domestic regulations innorth
Canada-relating tolicensing, entry, exitfrom thesector andfares -which hadsurvived from the
deregulatory thrust ofthe1987National Transportation Act. Asaresult, thedomestic market isnow
unified andlargely deregulated, andaccess toallinternal routes isopen tocompetitive bidding for
Canadian airlines. Allfaresaredecontrolled; services canbeintroduced orwithdrawn on60days'
notice; andlicensing ofnewentrants isbased ona"fit,willing, able" criterion.122Some subsidies
areprovided toensure aminimum levelofservice oncertain non-profitable routes.
151. Topreventprivatepracticesfromunderminingthebenefitsofderegulation,the1995Actspecifies
access conditions tocomputer reservation systems, prohibits theselling oftickets prior tolicensing,
andstrengthens minimum financial requirements fornewoperators. Thelatter provisions aretargeted
mainly atinsufficiently capitalized charter companies, which emerged afterthe1987 deregulation of
thesouthern routes. TheCanadian Transportation Agency isresponsible forgranting, suspending and
revoking licences; itreceives anynotices ofexitandensures compliance withownership provisions.
Transport Canada monitors compliance withsafety regulations.
Airport access andairport management
152. According totheauthorities, airport access andslotallocation aregenerally granted ona
first-come, first-served basis. SlotsinToronto, Canada 'smainairport, areallocated during peakperiods
byascheduling committee soastoavoid capacity impasses orsafety problems. Therelevant criteria
include thelength oftheflight concerned oracarrier 'sprevious access. Such "grandfathering" may
benefit inparticular AirCanada andCAIL. AirCanada hasaground-handling monopoly atTerminal 2
inToronto justified bytheauthorities ongrounds oflimited apron capacity.
153. TheFederal Government owns, operates orsubsidizes 140ofatotalof746certified airports
inCanada. Toavoid capacity andreliability problems, efforts areunder waytomodernize aging
infrastructures and,inthiscontext, improve private commercial involvement.123Thelargest 26airports,
which aretoremain federally owned andfederated under theNational Airports System, aretobe
transferred from federal tolocal control; fiveairports have already been leased tolocal airport
authorities.
154. TheGovernment hasalsocommercialized theairnavigation system byproviding foritstransfer
in1996 from Transport Canada toNavCanada, aprivate corporation supplying these services asa
monopoly onanon-profit basis. Itsboard ofdirectors consists ofindustry andunion representatives,
andfederal government appointees. NavCanada willberesponsible forairtraffic services, community
aerodrome radioservices, aeronautical telecommunications, information services andairtraffic control;
itistopaytheFederal Government afeeofCan$1.5 billion forthepurchase oftheairnavigation
system.
Foreign presence andinternational airtransport agreements
155. Canada 's"International AirTransportation Policy", announced inDecember 1994, isintended
tocomplement internal deregulation withexternal reform. Anyroute ofmore than300,000 passengers
willbeopened todualdesignation. Concurrently withthenewpolicy, Canada signed inFebruary 1995
an"open skies" agreement withtheUnited States, covering amarket of13.5million passengers. The
agreement specifies 132citypairroutes. Inresponse, therehasbeena25to30percentcapacity increase
122"Fit" means theability tomeet minimum financial requirements imposed bytheAct,while "able" refers
tothecarriers 'compliance withexisting safety requirements.
123Transport Canada (1995a).Canada WT/TPR/S/22
Page 117
anda15percenttraffic expansion intheCanada-US market. However, theagreement doesnotensure
access todomestic markets, provide forcabotage rights, orexpand upon rights tothirdcountries.
(c) Maritime transport
Background
156. Maritime freight isnotadominant mode oftransport forCanada 'sinternational trade. While
overseas trade-i.e.tradewithnon-U.S. sources anddestinations -isdominated byforeign flagships,
theCanadian flagfleetfocuses ondomestic andCanada-U.S. traffic, where maritime trade isdwarfed
bylandtransport.124TheCanadian fleetisowned bysome 200carriers which achieved Can$2.8 billion
inrevenue andemployed over22,000 persons in1994.125Eastern Canadian transport -predominantly
ofpetroleum products, grains, ironoresandcoal-isconcentrated ontheGreat Lakes, theSt.Lawrence
andtheAtlantic coast waterways, withsome 69million tonnes transported in1995. Domestic west
coasttraffic amounted to31million tonnes in1995, consisting mainly oftimber, wood chips, petroleum,
paper andnewsprint products.
157. Until now, Canada 'smarine infrastructure hasbeenoperated either directly bytheFederal
Government (Transport Canada) oramultitude ofCrown Corporations.126Astudy prepared in1994-95
bytheHouseofCommonsStandingCommitteeonTransport,attherequestoftheMinisterofTransport,
identified avariety ofproblem areas: excessive number ofsector-specific legislation andinefficiencies,
overcapacity andhighcosts intheportsystem. Therecommendations ofthestudy arereflected in
aNewMarine Policy, announced in1995, andunderlie thenewCanada Marine Act(BillC-44) which
wasintroduced inParliament inJune1996. ThenewPolicy isaimed atencouraging faircompetition
betweenports,shiftingthefinancialburdenofportmanagementfromtaxpayerstousers,anddown-sizing
andcommercializing infrastructures where appropriate.127
Regulatory framework forinternational shipping
158. Marine safety regulation liesinthehands ofTransport Canada, although certain environmental
aspects areshared withtheDepartment ofFisheries andOceans. Thetechnical rules andstandards
applicable toforeign-flag vessels arebased exclusively onInternational Maritime Organization
conventions suchasSOLAS andMARPOL. Vessels complying withthese conventions aredeemed
tocomply withCanadian regulations.
159. According totheGovernment, international shipping activities areonlylightly regulated128;
central business parameters forbulktramp andnon-conference lineroperations arenotregulated at
all.Liner conferences aregranted anti-trust immunity fromcompetition law,iftheycomply withthe
124Theimportance ofground transportation reflects thefactthat80percentofCanada 'sinternational trade
originates inorisdirected totheUnited States.
125In1995,theCanadianfleetcomprised779self-propelledand1,651non-self-propelledvesselsover100gross
registered tonnes (GRT); 245and296units, respectively, were over1,000 GRT.
126Over onethird ofallCrown Corporations areinthetransport sector. Crown Corporations involved in
marine transport include Marine Atlantic Inc,St.Lawrence Seaway Authority, Canada Ports Authority, Canada
Ports Corporation, Harbour Commissions, andPilotage Authorities.
127Transport Canada (1995b).
128WTO document S/NGMTS/W/2/Add.5, 24January 1995.WT/TPR/S/22
Page 118Trade Policy Review
terms oftheShipping Conferences Exemption Act(SCEA) of1987.129Under theSCEA, boththe
conference agreements andtherelevant ratesmustbefiledwiththeCanadian Transportation Agency
(CTA), although CTAisnotmandated toenforce compliance withrates. Conference participants must
beallowed todepart fromthepublished conference rates(i.e.bytaking an"Independent RateAction").
Under theSCEA (Section 13),anyperson mayfileacomplaint withtheCTA ifanagreement ora
practice, through reducing competition, islikely toleadtoan"unreasonable" reduction intransport
services oran"unreasonable" increase intransportation costs. Inaddition, Section 59oftheCanada
Transportation Actallows anyperson tocomplain totheCTAabout rates, actsoromissions bycarriers
ifthese areprejudicial tothepublic interest. Canada allows openaswellasclosed linerconferences
(todate, there hasbeenonlycaseinwhich access toaconference wasdenied).
160. Asignificant amount ofCanada 'sinternational linertrade isserved bynon-conference lines.
In1994, nomore than20outof57linesoperating ontheeastcoast, and13outof34linesonthe
westcoast, wereorganized intoconferences. These havebeendeclining inimportance asindependent
lineshavebeenoffering enhanced services atcompetitive rates. Inaddition, anincreasing share of
international traffic isorganizing intomulti-line andmulti-lane consortia andalliances which normally
allowforbetterservice,moreflexibilitythan(relativelyconstraining)conferencecontractsand,possibly,
reduced costs.
Domestic regulation
161. Underfederallegislation,thecoastingtradeisreservedtoduty-paidCanadian-flagships.Foreign
ornon-duty-paid vessels may, however, beusedtemporarily upon payment ofdutyandtaxes, ifno
suitable Canadian shipisavailable foraparticular service.130Inthisevent, a25percenttariff isdue
ontheships (m.f.n. origin), levied atamonthly rateof1/120 of25percentofthefairmarket value.
U.S.builtships arecurrently subject toa5percenttariff.131Following thetemporary importation
ofaforeign shipdestined forcoasting trade, theemployment ofanyforeign personnel issubject to
whether Canadian seafarers areavailable.
162. Toqualify forregistration inCanada, avessel mustbeowned byaCanadian, aBritish subject
(within themeaning oftheBritish Nationality Actof1948) oracompany incorporated under thelaws
ofaCommonwealth country andhaving itsprincipal place ofbusiness inthatcountry.132Thisincludes
certain taxhavens intheCaribbean. However, aCanadian-registered shipmustbeoperated byCanadian
officers andratings holding Canadian certificates; itmustcomply withCanadian coastguard andsafety
standards andbeoperated byaCanadian crew.133
129Exempt from theCompetition Actarepractices such as(a)useofacommon tariff; (b)useofloyalty
contracts; (c)establishment ofterms andconditions respecting theuseofservice contracts; (d)portallocation
among members; (e)regulation ofsailing times; (f)cargo andrevenue sharing; and(g)regulation ofconference
admissionandexpulsion.TheCompetitionActremainsapplicabletopracticesnotcoveredbytheSCEAexemption,
such asconspiracy, abuse ofdominant power andpredatory pricing.
130Thecoverage oftheCoasting Trading Actextends totheouter edgeoftheCanadian continental shelf and
includes certain off-shore activities such asdredging orsalvage related totheexploration andexploitation of
natural resources.
131Under theNAFTA, thetariff onU.S. ships istodecrease to2.5percenton1January 1997 andzero
on1January 1998.
132Through registration, theshipacquires international identity asaCanadian ship.
133AccordingtoCanadianlaw,shipsregisteredinCanadahavetheright,andobligationincertaincircumstances,
toflytheCanadian flag.Canada WT/TPR/S/22
Page 119
163. Asinother transport services, theacquisition ofcontrol ofaCanadian business bya
non-Canadian (including nationals ofWTO Members) issubject toa"netbenefit toCanada" test.
Therelevant review thresholds arelower thanthose generally applied (Table IV.8).
164. According toCanada 'sresponse totheGATS Questionnaire onMaritime Transport Services,
there arenoCanadian restrictions limiting access totheinternational shipping market intheform of
quotasforservicessuppliersortransactionvalues,monopolies,exclusivesupplierpositionsorinstitutional
arrangements forcargo allocation.134Canada allows fortemporary entry ofbusiness visitors,
intra-corporate transfers (executives, managers, specialists), crew members remaining onboard, as
wellasreplacement crews, marine surveyors andportcaptains. Inthetwolatter cases, entry islimited
to90days. Commercial presence isnottiedtoanyspecific legalform, except forlicensed customs
brokers whomustbeincorporated inCanada withamajority ofdirectors being permanent residents
orbeorganized asapartnership composed ofpermanent residents. There areafewspecific exceptions
tonational treatment ofshipping operations. These include, inparticular, thepossibility ofsubsidizing
Canadian companies providing ferry services between Canada andtheUnited States, andreciprocity
provisions concerning double taxation onincome andcapital earned inCanada bynon-residents from
ships operating ininternational traffic. Theconditions ofaccess toanduseofportfacilities donot
discriminate between foreign- andCanadian-owned vessels.135
Thenational portsystem
165. While there are572public ports under theresponsibility ofTransport Canada, 80percent
ofCanada 'smarine traffic passes through only40ports andmany oftheremaining ports arewithout
public facilities. Different régimes -withdiffering mandates, operating rules, financial procedures
andcoststructures -areinplace toregulate thevarious categories ofports (commercial ports,
recreational ports) andportauthorities.136
166. Under theGovernment 'snewMarine Policy, financially independent bodies -Canada Port
Authorities (CPAs) -aretooperate themajor ports considered vitalfordomestic andinternational
trade. TheCPAs willbecomposed ofrepresentatives ofusergroups andvarious levels ofgovernment;
theCanada Ports Corporation, which currently oversees most ofthelarge ports, willbewound up.
Withsupport fromaCan$125 million PortAssistance Fund, localandregional portswillbetransferred
toprovincialorlocalauthorities,privateorotherinterestgroupsoverasix-yearperiod.Themaintenance
ofremote ports willbeensured bytheFederal Government. Inaddition, thenewMarine Actwill
provide foramoreunified regulatory framework forportmanagement byrepealing oramending several
federal laws.137
134WTO document S/NGMTS/W/2/Add.5, 24January 1995.
135WTO document S/NGMTS/W/2/Add.5, 24January 1995.
136Fisheries andOceans Canada oversees 2,000 recreational orfishing harbours, andthere areanumber of
private ports.
137TheCanadaPortsCorporationAct,theHarbourCommissionsActandthePublicHarboursandPortFacilities
Actaretoberescinded.TheSt.LawrenceSeawayAuthorityActwillberepealedifthemanagementoftheSeaway
istransferred toanon-profit corporation. Actsscheduled foramendment include theFinancial Administration
Act,thePilotage ActandCanada Transportation Act.WT/TPR/S/22
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167. Transport Canada willremain responsible formarine transport safety, forcommercial andall
remoteports,pilotageservices,theGreatLakes-St.LawrenceSeawaySystem,andmarineshipinspection
andsecurity.138
International agreements
168. Canada hasparticipated actively intheUruguay Round Negotiations onMaritime Transport
Services. Itmaintained some specific commitments when theextended negotiations weresuspended
in1996.
169. Maritime transport services between Canada andtheUnited States aresubject toageneral
reservation under theNAFTA, while limited commitments weremade between Canada andMexico.
These havetheeffect ofastandstill forsome government measures, including therightofinvestment
inshipping companies andregulatory régimes governing bilateral maritime traffic.
(v) Cultural services
(a) Background
170. Concerned about itscultural identity, Canada hasdeveloped anarray ofpolicies tosupport
sectors andactivities associated with"culture" (visual andperforming arts; publishing; music, film,
video andtelevision production andprogramming; andnewmedia suchasCD-Rom). Significant
assistance isprovided intheform ofdirect subsidies andtaxincentives, local-content requirements
(mainly intheform ofbroadcasting quotas) andforeign-ownership restrictions. Often granted in
combination,thesemeasuresbenefitanindustrywithanestimated670,000employeesandannualrevenue
ofCan$16 billion (1995). Table IV.9gives anoverview ofmain support measures inthesector.
171. Canada 'scultural industry, composed mainly ofrelatively small producers, isperceived to
lacktheeconomic basetocompete successfully withmultinationals.139Thus, notsurprisingly, Canada
isrunning atradedeficit in"cultural products", estimated atabout Can$4 billion for1994.140According
totheGovernment, non-Canadian products currently account forover80percentofthemarket for
English-speaking magazines and75percentofthebookmarket, andrepresent 64percentofair-time
television programming and96percentoftotalscreen-time.
172. Giventhesensitivityofthesector,Canadahassoughttoavoidpolicybindingsunderinternational
agreements. Likeother "sensitive" industries (communications, airandmaritime transport, oil,gas
anduranium), cultural industries have beenexempted inprinciple from theFTA andNAFTA.141
However, ifanaction byCanada discriminates against, orhasanegative impact on,U.S. cultural
138Negotiations areunder way with agroup ofusers tocommercialize theoperation ofthe
Great Lakes-St. Lawrence Seaway, through theestablishment ofanon-profit private corporation tooperate the
Seaway.
139Morethan200soundrecordingcompaniesand740film,videoandtelevisionproducersarecurrentlysharing
inthedomestic market. Team Canada (1996).
140Statistics Canada (1995).
141Therelevant exemption under Article 2005.1 oftheFTA, covers allprovisions oftheAgreement, except
forthose ontariff elimination (Article 401), divestiture ofanindirect acquisition (Article 1607.4), re-transmission
rights (Article 2006), andprint-in-Canada requirements (Article 2007).Canada WT/TPR/S/22
Page 121
industries, theUnited States isentitled totakeretaliatory measures ofequivalent commercial effect.142
Under theGATS, Canada hasnotassumed anycommitments concerning market access andnational
treatment intheaudiovisual sector, buthaslisted support measures forfilm, video andtelevision
programming andproduction asm.f.n. exemptions under Article II.
Table IV.9
Main support measures forindividual cultural industries atfederal level
Sector
(main programmes)Direct financial
assistance (incl.
grants)Taxmeasures Local content requirements Foreign investment
provisions
Allsectors
(Cultural Industries
Development Fund)aCan$2.8b infederal
andCan$3.0b in
sub-federal funds
(1994).Throughout thecultural sector. Investment Canada Act
requires thatany
investment innewor
existing businesses meets
a"netbenefit" test.
Broadcasting Can$1.5b in1994
(federal funding of
CBC radio and
television network).Taxbreaks for
advertisers
purchasing
advertising timeon
Canadian TV.-60percentofCanadian
content forconventional TV;
-20percentCanadian content
forcable-TV
-30percentCanadian content
forradio broadcasts (music) at
federal level;
-65percentFrench content for
radio broadcasts inQuebec.Ownership limitations of
20percentper
individual investor and
33.3percentforholding
companies.
Filmandvideo
(funds administered
byTelefilm Canada
andtheNational Film
Board)Can$240 million in
1994 (federal
funding forTelefilm
Canada andthe
National Film
Board).Canada Filmand
Video Production
TaxCredit.Seeabove. Acquisition ofexisting
Canadian distributors not
permitted; investment in
newdistribution
companies onlyunder
certain conditions.
Sound recording
(Sound Recording
Development
Program)Can$5.5 million in
1994 (federal
funds).Seeabove.
Music productions must fulfil
specified criteria toqualify as
Canadian works.
Publishing ofbooks
andmagazines
(Book Publishing
Industry Development
Program;
Publications
Distribution
Assistance Program)Postal subsidy for
Canadian magazines.Taxbreaks for
advertisements
placed inCanadian
magazines.
Excise taxon
advertisements in
split-run editions.Acquisition ofCanadian
controlled businesses not
permitted.
Newbusinesses must be
intheform ofa
Canadian-controlled joint
venture.
a TheFund grants financial support andprovides advice toCanadian cultural industries.
Source: WTO Secretariat onthebasis ofinformation provided bytheGovernment ofCanada.
(b) Support instruments
173. Thefollowing presentation isstructured bymeasure, rather thansector, asthepolicy effects
generally spread across industries andserve acommon purpose. Forexample, while broadcasting
isthesector withthemostpowerful combination oflocal-content requirements, financial support and
national ownership provisions, theresulting benefits aredestined (mainly) forfilm, music andvideo
142According toArticle 2005.2 oftheFTA: "Notwithstanding anyother provisions ofthisagreement, aparty
maytakemeasures ofequal commercial effect inresponse toactions thatwould havebeeninconsistent withthis
agreement butforparagraph 1(2005.1)". Retaliatory measures arenotlimited tothecultural sector.WT/TPR/S/22
Page 122Trade Policy Review
producers. According toarecent survey, thetelevision market hasbecome themainsource ofrevenue
fortheCanadian filmandvideo industry; in1993-94, conventional andpay-TV represented close
to40percentoffilmandvideo producers 'revenue.143
Canadian-content requirements
174. Allpublic andprivate broadcasters (radio andTV)aresubject tonational-content requirements.
Televisionstationsmustdevoteatleast60percentoftheirentireprogrammetimeandoftheirprime-time
toCanadian programmes. (Theprime-time requirement forprivate stations is50percent.) Moreover,
themainpublic broadcaster, Canadian Broadcasting Corporation (CBC), voluntarily ensures a100per
centCanadian content during prime-time. Radio programmes mustconsist ofatleast30percentof
Canadian music,144withtheCRTC requiring inaddition thatFrench language radio stations respect
a65percentFrancophone content forvocal music (songs).
175. Cable-TV stations andother broadcasters facespecific rules. Forexample, more thanhalf
ofthevideo programme channels must beCanadian; atleastoneCanadian speciality service must
beprovided forevery non-Canadian service (the1:1linkage rule); andatleastoneCanadian pay-TV
service mustbedistributed forevery fivenon-Canadian services (the1:5linkage rule). A"simultaneous
substitution" rulerequires that,when thesame programme isbroadcast onacable system bybotha
localandadistant Canadian station, thecable operator must, onrequest bythelocalstation, substitute
thesignal ofthelocalforthatofthedistant station.
176. TheCanadian Radio-Television andTelecommunications Commission ismandated under the
1991Broadcast Acttoensure compliance withtheabove requirements.145Non- compliance mayresult
innon-renewal orevenwithdrawal ofacompany 'sbroadcasting licence. There hasbeennosuchcase
todate.
Financial support
177. Local-content requirements arecomplemented bysizable financial support forcultural purposes,
withgrants provided byfederal andprovincial governments amounting toCan$5.8 billion, orslightly
lessthan1percentofGDP, infiscal year1993/94. Over halfoftotalfederal spending onculture
isdestined forbroadcasting (Table IV.10), benefiting inparticular the59radioand31television stations
operated bytheCanadian Broadcasting Corporation (CBC).146TheFederal Government alsofunds
143Television production hasdeveloped rapidly inrecent years. While there were 602production companies
in1989-90, withaworkforce of5,000 andaturnover ofCan$583 million, in1993-94 atotalof743companies
had14,600 employees andgenerated Can$1 billion inrevenue. Producers ofTVfilms andvideos record the
highest export receipts among allcultural industries.
144Tobeconsidered Canadian, songs must meet atleasttwoofthefollowing criteria: Canadian music, artist,
performance, and/or lyrics.
145UndertheAct,theCRTCiscommittedtothegeneralobjectiveofencouraging"thedevelopmentofCanadian
expression byproviding awide range ofprogramming thatreflects Canadian attitudes, opinions, ideas, values
andartistic creativity".
146TheCBCismandatedto:(i)"contributetothedevelopmentofasharednationalconsciousnessandidentity;
(ii)reflect thenational andcultural diversity ofCanada, by,among other things, presenting eachregion toitself
andtotherestofthecountry; (iii)contribute tothedevelopment ofCanadian talent andculture; and(iv)reflect
thechanging realities oftheCanadian experience andoftheworld inwhich welive,asseenbyCanadian eyes,
heard byCanadian ears, investigated byCanadian minds andexplored byCanadian imagination" (Canadian
Broadcasting Corporation (1993), p.2).Canada WT/TPR/S/22
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Telefilm Canada andtheNational Film Board, twoState-owned institutions mandated topromote
production anddistribution ofCanadian films.
Table IV.10
Government spending onculture andnational heritage, FY1993-94
(Can$ '000)
Federal Provincial Municipal Total
Librariesa47,452 754,618 1,052,965 1,855,035
Broadcasting 1,509,358 217,179 ... 1,724,537
Heritage institutions 434,612 367,288 49,377 851,277
Other activitiesb94,329 124,069 249,195 467,593
Performing arts 114,586 140,584 61,925 317,095
Filmandvideo 240,438 76,651 ... 317,089
Nature parks 190,016 67,225 ... 257,241
Literary arts 167,533 21,291 ... 188,824
Artseducation 4,402 80,585 ... 84,987
Visual artsandcrafts 13,227 40,629 ... 53,856
Multiculturalismc6,601 39,957 ... 46,018
Sound recording 5,526 3,629 ... 9,155
Total Expenditure 2,827,539d1,933,705 1,413,462 6,174,706e
Note: Figures maynotadduptototals duetorounding.
... Notavailable.
a Includes estimated expenditure ofschool libraries.
b Includes expenditure thatcannot bebroken down byfunction, suchasfinancial support forcultural facilities, centres, festivals,
municipalities, cultural exchange programmes andartsorganizations.
c Includes expenditure related toheritage cultures.
d Includes onlygrants andcontributions byHuman Resources Development Canada related directly totraining andemployment
development inthecultural sector.
e Includes inter-governmental transfers ofabout Can$351 million.
Source: Statistics Canada, Government Expenditures onCulture, 1993-94.
178. Under theIncome TaxAct,companies areallowed todeduct thecostofadvertisements in
Canadian newspapers orperiodicals circulated inCanada147;similar taxbreaks existforadvertisements
onCanadian television channels. Inaddition, Canada recently introduced anexcise taxonsplit-run
editions ofmagazines atarateof80percentonalladvertising revenue. Thetaxisintended to
discourage theintroduction ofeditions inCanada, whose editorial content isconsidered identical to
thatofaforeign publication (Chapter III(2)(ii)).148Under anewtaxcredit scheme, filmproducers
areoffered assistance ofupto12percentofthecostofaneligible production or25percentofeligible
salaries andwages.
179. Government spending onculture istodecline overthecoming years asaresult ofbudgetary
consolidation. Spending bytheDepartment ofCanadian Heritage andrelated agencies istobephased
147ACanadian newspaper orperiodical isdefined asatleast75percentCanadian-owned, with80percent
ofthecontent differing from thatofaperiodical edited orpublished outside Canada.
148On19June1996, aWTO Panel wasestablished attherequest oftheUnited States. TheU.S. complaint
covers theexcise taxonso-called split-run periodicals aswellasanimport prohibition oncertain periodicals
(Tariff Code 9958) andtheapplication offavourable postal rates tocertain Canadian publications.WT/TPR/S/22
Page 124Trade Policy Review
down byCan$676 million overthree years, starting in1995/96. Asthemain beneficiary offederal
government funding, theCBC willbeparticularly affected, withcutsofCan$350 million. However,
Canadian Heritage hadbeenspared from recent subsidy cuts, withanincrease infunding between
1993-94 and1995-96 of2.8percent.149
Foreign investment régime
180. Investmentinculturalindustriesistightlymonitoredandcontrolled.150Contrarytoothersectors,
forwhich specific review thresholds aresetunder theInvestment Canada Act(Table IV.8), investments
incultural industries arereviewable from thefirstdollar toensure thattheyareof"netbenefit to
Canada".151
181. Inaddition, specific foreign ownership restrictions apply. Newbookpublishing anddistribution
companies must beestablished intheform ofaCanadian-controlled joint venture; existing
Canadian-controlled firms canbeacquired onlyinextraordinary circumstances. Acquisition ofa
Canadian-owned and-controlled filmdistributor isnotpermissible, andnewbusinesses canbesetup
onlyforimportation ofproprietary products (covering cases, forexample, where theinvestor owns
theworld rights). Direct andindirect acquisitions offoreign-owned filmdistributers areallowed only
iftheinvestor undertakes toreinvest aportion ofitsCanadian earnings inaccordance withnational
andcultural policies (i.e.inthedistribution ofcertain categories offilms). Theforeign ownership
ceiling forbroadcasting andcable-TV hasrecently beenaligned withtelecommunications, raising it
from20percentto33.3percent. Foreign investment inaprogramming company, i.e.inafirmholding
abroadcasting licence, continues toberestricted to20percent; andtheCRTC remains empowered
toprevent transactions which mayleadtoeffective control. Thelatter provisions arenotbased on
theInvestment Canada Act,butontheBroadcasting Actwhich provides that"theCanadian broadcasting
system shallbeeffectively owned andcontrolled byCanadians".
(c) Newchallenges
182. AlargeportionofCanada'sculturalsectorhastraditionallyreliedongovernmentsupportthrough
avariety ofregulatory restrictions andfinancial schemes. However, pastpolicy patterns arethreatened
byfiscal constraints, asnoted above, ormayberendered redundant bytechnical developments, including
theintroduction ofnewtransmission modes. While attempts havebeenmade recently tocloseresulting
loopholes intheprotective system, e.g.through theintroduction ofanexcise taxonsplit-run periodicals,
suchpossibilities maynotexistinallareas or,ifavailable, could cause trade frictions.
149StatisticsCanada(1995),p.26.Bycontrast,theDepartmentofAgricultureandtheDepartmentofTransport
suffered cutsintheorder of20percentandmore.
150Therelevant definition ofa"cultural business" covers: thepublication, distribution orsaleofbooks,
magazines, periodicals ornewspapers inprint orreadable form, other thanthesoleactivity ofprinting or
typesetting;theproduction,distribution,saleorexhibitionoffilmorvideorecordings;theproduction,distribution,
saleorexhibition ofaudio orvideo music recordings; thepublication, distribution orsaleofmusic inprint or
machine-readable form; andradio communications whose transmission isintended fordirect reception.
151Indetermining whether aninvestment isof"netbenefit", theGovernment istoconsider: (i)theeffect
onthelevel andnature ofeconomic activity inCanada, i.e.onemployment, resource processing, exports etc.;
(ii)thedegree andsignificance ofparticipation byCanadians forexample asmanagers anddirectors; (iii)the
effect onproductivity, industrial efficiency, product innovation, etc.; (iv)theeffect oncompetition within an
industry;(v)thecompatibilitywithnationalandprovincialeconomicandculturalpolicies;and,(vi)thecontribution
toCanada 'sability tocompete inworld markets.Canada WT/TPR/S/22
Page 125
183. Statistics Canada feelsthatCanadian-content regulations forradio programmes "may become
meaningless asnewtechnologies suchasdigital transmission andtheinformation highway continue
togrow. Although thereareconcerns about guaranteeing Canadian content ontheInternet, theglobal
nature ofthetechnology mayforce other approaches tosupporting theCanadian cultural sector."152
Thegradual waning oftraditional barriers, possibly notonlyforbroadcasts, mayspark offaprocess
ofindustrialchangewhoseoutcomeisdifficulttopredict.Somerecentsuccessesinexportmarketing-in
particular ofbooks, butalsoofcertain television productions -seem toindicate apotential forpositive
adjustment thatmaynothavebeenfullymobilized inthepast. Itmayofferastarting point foramore
dynamic, market-based response tothechallenge oftechnical andeconomic globalization.
152Statistics Canada (1995), p.32.Canada WT/TPR/S/22
Page 127
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