WORLD TRADE
ORGANIZATIONWT/DS139/R
WT/DS142/R
11 February 2000
(00-0455)
Original:  English
Canada – Certain Measures Affecting
the Automotive Industry
Report of the Panel
The report of the Panel on " Canada – Certain Measures Affecting the Automotive Industry"  is being
circulated to all Members, pursuant to the DSU.  The report is being circulated as an unrestricted
document from 11 February 2000 pursuant to the Procedures for the Circulation and Derestriction of
WTO Documents (WT/L/160/Rev.1).  Members are reminded that in accordance with the DSU only
parties to the dispute may appeal a panel report, an appeal shall be limited to issues of law covered inthe panel report and legal interpretations developed by the panel, and that there shall be no ex parte
communications with the panel or Appellate Body concerning matters under consideration by the
panel or Appellate Body.
Note by the Secretariat:  This Panel Report shall be adopted by the Dispute Settlement Body (DSB) within 60 days after the date  of its
circulation unless a party to the dispute decides to appeal or the DSB decides by concensus not to adopt the report.  If the Pa nel Report is
appealed to the Appellate Body, it shall not be considered for adoption by the DSB until after the completion of the appeal.  I nformation on
the current status of the panel Report is available from the WTO Secretariat.WT/DS139/R
WT/DS142/R
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TABLE OF CONTENTS
Page
I. PROCEDURAL  HISTORY.......................................................................................................... .............. 1
A. C ONSULTATIONS ............................................................................................................................... .......... 1
B. E STABLISHMENT AND COMPOSITION OF THE PANEL ................................................................................... 1
C. P ANEL PROCEEDINGS ............................................................................................................................... ... 2
II. BACKGROUND .................................................................................................................. ......................... 2
A. T HE AUTO PACT............................................................................................................................... ........... 2
1. Letters from Auto Pact manufacture r beneficiaries to Industry Canada .................................................. 2
2. GATT Working Party examination of the Auto Pact .............................................................................. ... 3
B. T HE CANADA - UNITED STATES FREE TRADE AGREEMENT (CUSFTA)...................................................... 3
C. T HE NORTH AMERICAN FREE TRADE AGREEMENT (NAFTA) .................................................................... 4
D. C ANADA 'S DOMESTIC MEASURES ............................................................................................................... 4
1. The MVTO 1998................................................................................................................ ........................ 5
2. Special Remission Orders ..................................................................................................... .................... 7
III. FINDINGS AND RECOMMENDATIONS RE QUESTED BY TH E PARTIE S................................ 8
A. J APAN 'S REQUEST FOR FINDINGS AND RECOMMENDATIONS ....................................................................... 8
B. T HE EUROPEAN COMMUNITIES ' REQUEST FOR FINDINGS AND RECOMMENDATIONS .................................. 9
C. C ANADA 'S REQUEST FOR FINDINGS AND RECOMMENDATIONS ................................................................. 10
IV. REQUEST FOR PR ELIMINARY RULING....................................................................................... 11
A. J APAN 'S ARGUMENT GIVING RISE TO CANADA 'S REQUEST FOR A PRELIMINARY RULING ......................... 11
B. C ANADA 'S REQUEST FOR A PRELIMINARY RULING ................................................................................... 11
C. T HE PANEL 'S DECISION ............................................................................................................................. 12
V. FACTUAL ARGUMENTS OF THE PARTIES ...................................................................................... 13
A. T HE MEASURES AT ISSUE .......................................................................................................................... 13
1. Terminology and clar ification of claims ...................................................................................... ........... 13
(a) Japan's framing of the measures at issue.................................................................................... ....................... 13
(b) The European Communities' framing of the measures at issue.................................................................. ....... 13
(c) Canada's response to the complainants' framing of the measures at issue ..................................................... ... 14
(d) Japan's follow-up to Canada's response ...................................................................................... ...................... 17
(e) The EC's follow-up to  Canada's response..................................................................................... .................... 17
2. Letters...................................................................................................................... ................................ 18
(a) Japan's arguments concerning the Letters.................................................................................... ..................... 18
(b) The EC's arguments concerning the Letters................................................................................... ................... 19
(c) Canada's response to the complainants' arguments concerning the Letters..................................................... .. 21
(d) Japan's rebuttal to Canada's response....................................................................................... ......................... 22
(e) The EC's rebuttal to Canada's response ...................................................................................... ...................... 23
(f) Response by Canada to the complainants' rebuttals........................................................................... ............... 29
(g) The European Communities' fo llow-up to Canada 's response .................................................................... ...... 32
3. The Auto Pact, the CUSFTA and the NAFTA...................................................................................... .... 33
(a) Japan's arguments regarding the Auto Pact, the CUSFTA and the NAFTA ..................................................... 33
(b) The EC's arguments regarding the Auto Pact, the CUSFTA and the NAFTA.................................................. 40(c) Canada's response to the complainants' arguments regarding the Auto Pact, the CUSFTA and the NAFTA... 45
(d) Japan's rebuttal to Canada's response....................................................................................... ......................... 48
4. Measures relating to administration .......................................................................................... ............. 49
(a) Japan's account of Canada's administ ration of the import duty exemption..................................................... .. 49
(b) The EC's account of Canada's admini stration of the impor t duty exemption.................................................... 55
(c) Canada's response to the complainant's arguments re garding administration of the import duty exemption.... 55
B. S TRUCTURE OF THE AUTOMOTIVE INDUSTRY ........................................................................................... 57
1. Japan's arguments on the structure of the motor vehicles industry......................................................... 57
(a) The integration of the global automobile industry and its implications for the structure of the Canadian
industry....................................................................................................................... ................................................ 58
(b) Implications for the structure of the Canadian industry..................................................................... ............... 58WT/DS139/R
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(c) Production and importation of like motor vehicles........................................................................... ................ 60
(d) Production and importation of like parts, components and materials used in the manufacture of automobiles 65
(e) Supply and consump tion of like services..................................................................................... ..................... 65
(f) The discriminatory effects of the Duty Waiver............................................................................... .................. 66
2. Canada's response to certain arguments regarding the structure of the motor vehicles industry .......... 69
3. Japan's rebuttal to  Canada's response........................................................................................ ............ 70
VI. LEGAL ARGUMENTS OF THE PARTIES ....................................................................................... 74
A. A RTICLE I OF THE GATT .......................................................................................................................... 7 4
1. Arguments of Japan........................................................................................................... ...................... 74
(a) The Duty Waiver relates to a customs duty within the meaning of Article I:1 of the GATT 1994................... 74
(b) The Duty Waiver is an advantage within the meaning of Article I:1 of the GATT 1994 ................................. 74
(c) The products at issue are "like" products................................................................................... ....................... 75
(d) The advantage is not accorded immediately and unconditionally to like products originating in all WTOMembers........................................................................................................................ ............................................. 76
(e) The advantage accorded to the products originating in particular WTO Members has not been accorded to
like products originating in the territories of all WTO Members ................................................................ ............... 77
2. Arguments of the European Communities........................................................................................ ....... 80
(a) The measures confer an "advantage" covered by Article I:1 ................................................................... ......... 80
(b) The automobiles imported by the beneficiaries are "like" the automobiles imported by non-beneficiaries...... 80(c) The Tariff Exemption benefits mainly imports from the United States and Mexico ........................................ 80
3. Canada's re sponse............................................................................................................ ....................... 82
(a) The complainants have failed to meet their burden of proof.................................................................. ........... 82
(b) The MVTO and the SROs prov ide MFN treatment for products.................................................................... .. 82
4. Rebuttal arguments by Japan.................................................................................................. ................ 88
(a) Correct interpretation of Article I:1 of the GATT 1994...................................................................... .............. 89
(b) The fact that imports originating in one or more WTO Members receive the advantage is not indicative ofMFN-consistency ................................................................................................................ ....................................... 90
(c) Receipt of the advantage results from the application of government measures not from private commercial
relationships .................................................................................................................. ............................................. 94
5. Rebuttal arguments by the European Communities ............................................................................... .9 5
(a) Canada’s interpretation of the notion of  de facto  violation is unduly restrictive............................................. 95
(b) The European Communities has shown that de facto  the Tariff Exemption provides an advantage to imports
originating in the United States and Canada.................................................................................... ........................... 95
(c) The advantage accorded to automobiles from the United States and Mexico cannot be exempted by GATT
Article XXIV................................................................................................................... ........................................... 96
6. Response by Canada to th e complainants' rebuttals ............................................................................ ... 98
(a) The Japanese and EC interpretations of Article I:1 are not supported by the facts ........................................... 98
(b) The Japanese and EC interpretations of Article I:1 find no support in the law............................................... 100
7. Japan's follow-up to Canada's response ....................................................................................... ........ 104
8. The European Communities' fo llow-up to Canada' s response.............................................................. 106
(a) The Tariff Exemption provides an advantage to imports from the United States and Mexico ....................... 106
(b) The test of de facto  discrimination................................................................................................................ .. 107
(c) The Tariff Exemption is not exempted by GATT Article XXIV................................................................... . 108
9. Canada's follow- up response .................................................................................................. .............. 109
(a) Both complainants concede that there is no de jure  violation......................................................................... 109
(b) Japan's position on de facto  violation is not supported by the facts and it misinterprets the law.................... 109
(c) The EC's position on de facto  violation is not supported by the facts and it misinterprets the law................. 114
B. A RTICLE III:4  OF THE GATT.................................................................................................................. 115
1. Arguments of Japan........................................................................................................... .................... 115
(a) The CVA requirement ......................................................................................................... ........................... 116
(b) The production-to-sales ratio............................................................................................... ........................... 118
2. Arguments of the European Communities........................................................................................ ..... 119
(a) The CVA requirements........................................................................................................ ........................... 119
(b) The ratio requirements...................................................................................................... .............................. 122
3. Canada's re sponse............................................................................................................ ..................... 123
(a) Article III:4 creates  a two-step test ....................................................................................... .......................... 123
(b) The CVA requirement ......................................................................................................... ........................... 123
(c) The ratio requirement ....................................................................................................... .............................. 126
4. Rebuttal arguments by Japan.................................................................................................. .............. 128
5. Rebuttal arguments by th e European Communities .............................................................................. 1 30
(a) The CVA requirement ......................................................................................................... ........................... 131
(b) The ratio requirements...................................................................................................... .............................. 133WT/DS139/R
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6. Response by Canada to th e complainants' rebuttals ............................................................................ . 133
(a) The CVA requirements........................................................................................................ ........................... 133
(b) The ratio requirements...................................................................................................... .............................. 138
7. The European Communities' fo llow-up to Canada' s response.............................................................. 140
(a) Clarification............................................................................................................... ..................................... 140
(b) The letters contain requirements............................................................................................ ......................... 141
C. T HE TRIM S AGREEMENT ........................................................................................................................ 142
1. Arguments of Japan........................................................................................................... .................... 142
(a) The CVA requirement is a TRIM within the meaning of Article 2.1 of the TRIMs Agreement..................... 143
(b) The CVA requirement is inconsistent with Article III:4 of the GATT 1994 .................................................. 143
2. Arguments of the European Communities........................................................................................ ..... 144
(a) The CVA requirement and the ratio requirement are "investment measures"................................................. 144
(b) The CVA requirement and the ratio requirement are "related to trade in goods" ........................................... 145(c) The CVA requirements and the ratio requirements fall within the Illustrative List of prohibited TRIMs ...... 145
3. Canada's re sponse............................................................................................................ ..................... 145
(a) The MVTO and SROs are not “trade-related investment measures”.............................................................. 1 45
(b) The MVTO and SROs do not violate the TRIMs Agreement........................................................................ . 146
4. Rebuttal arguments by Japan.................................................................................................. .............. 147
(a) Investment measures......................................................................................................... .............................. 147
(b) Trade-related............................................................................................................... .................................... 149
(c) Relevant test ............................................................................................................... .................................... 149
5. Rebuttal arguments by th e European Communities .............................................................................. 1 49
6. Response by Canada to th e complainants' rebuttals ............................................................................ . 150
7. The European Communities' fo llow-up to Canada' s response.............................................................. 150
8. Canada's follow- up response .................................................................................................. .............. 151
D. T HE SCM A GREEMENT ........................................................................................................................... 151
1. Arguments of Japan........................................................................................................... .................... 151
(a) The Duty Waiver is a subsidy unde r Article 1 of the SCM Agreement.......................................................... 1 51
(b) The subsidy is prohibited under Article 3 of the SCM Agreement.............................................................. ... 152
2. Arguments of the European Communities........................................................................................ ..... 153
(a) The Tariff Exemption constitutes a specific subsidy ......................................................................... ............. 153
(b) The  Tariff Exemption is a prohibite d subs idy............................................................................... ................. 154
3. Canada's re sponse............................................................................................................ ..................... 157
(a) The duty-free treatment is not an export subsidy within the meaning of Article 3.1(a) of the SCM Agreement157
(b) The ratio requirements do not make the duty-free treatment contingent upon export performance................ 160
(c) The duty-free treatment is not a subsidy contingent upon the use of domestic cver imported goods ............. 163
4. Rebuttal arguments by Japan.................................................................................................. .............. 165
(a) Article 3.1(a) of the SCM Agreement......................................................................................... .................... 165
(b) Article 3.1(b) of the SCM Agreement ......................................................................................... ................... 167
5. Rebuttal arguments by th e European Communities .............................................................................. 1 67
(a) The ratio requirements...................................................................................................... .............................. 168
(b) The CVA requirements........................................................................................................ ........................... 171
6. Response by Canada to th e complainants' rebuttals ............................................................................ . 174
(a) The measures at issu e do not create a subsidy ............................................................................... ................. 174
(b) The duty-free treatment is not inconsistent with Article 3.1(b) ............................................................. ......... 175
(c) The duty-free treatment is not inconsistent with Article 3.1(a)............................................................. .......... 177
7. Japan's follow-up to Canada's response ....................................................................................... ........ 179
8. The European Communities' fo llow-up to Canada' s response.............................................................. 179
(a) The Tariff Exemption is a subsidy........................................................................................... ....................... 179
(b) The Tariff Exemption is prohibited by Article 3.1 (a) ....................................................................... ............. 180
(c) The Tariff Exemption is prohibited by Article 3.1 (b)....................................................................... ............. 181
9. Canada's follow- up response .................................................................................................. .............. 183
(a) The measures are consistent with Article 3.1(a) ............................................................................. ................ 183
(b) The measures are consistent with Article 3.1(b)............................................................................. ................ 184
E. A PPLICABILITY OF THE GATS TO THE MEASURES .................................................................................. 185
1. Arguments of Japan........................................................................................................... .................... 185
2. Arguments of the EC .......................................................................................................... ................... 187
(a) The Tariff Exemption is a "measure by a Member"............................................................................. ........... 187
(b) The beneficiaries are suppliers of wholes ale trade services covered by the GATS ........................................ 187
(c) The Tariff Exemption "affects" the "supply" of wholesale trade services ..................................................... . 188
(d) The Tariff Exemption "affects" the "trade" in  wholesale distribution services.............................................. 189WT/DS139/R
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3. Canada's Re sponse............................................................................................................ .................... 189
(a) The measures at issue are not covered by the GATS........................................................................... ........... 189
4. Rebuttal arguments by Japan.................................................................................................. .............. 192
5. Rebuttal arguments by th e European Communities .............................................................................. 1 94
6. Canada's Response to the complainants' rebuttals ............................................................................. .. 196
7. Japan's follow-up to Canada's response ....................................................................................... ........ 197
8. The European Communities' fo llow-up to Canada' s response.............................................................. 198
9. Canada's follow- up response .................................................................................................. .............. 200
F. A RTICLE II OF THE GATS ....................................................................................................................... 203
1. Arguments of Japan........................................................................................................... .................... 203
(a) Article II of the GATS requires immediate and unconditional MFN treatment for wholesale trade services and
service suppliers of motor vehicles ............................................................................................ .............................. 203
(b) The Duty Waiver accords more favourable treatment to wholesale trade service  and service s uppliers of the
United States and Sweden in violation of Article II of the GATS................................................................ ............ 204
2. Arguments of the European Communities........................................................................................ ..... 206
(a) The Tariff Exemption is a "measure covered by the GATS"..................................................................... ..... 207
(b) The Tariff Exemption is not covered by the Annex on Artic le II exemptions ................................................ 207
(c) The beneficiaries are "like" other suppliers of wholesale distribution services ............................................. . 207
(d) The Tariff Exemption affords "more favourable treatment" to US service suppliers than to the service
suppliers of other Members..................................................................................................... ................................. 208
3. Canada's re sponse............................................................................................................ ..................... 212
(a) The measures at issue are not covered by the GATS........................................................................... ........... 212
(b) The MVTO and SROs do not accord more favourable treatment to the service suppliers of certain countries212
4. Rebuttal arguments by Japan.................................................................................................. .............. 214
(a) The Duty Waiver is within the scope of the GATS ............................................................................. ........... 215
(b) The Duty Waiver discriminates between like service suppliers................................................................ ...... 215
(c) Competition exists between wholesale trade service suppliers................................................................ ....... 215
(d) Article V of the GATS....................................................................................................... ............................. 215
5. Rebuttal arguments by th e European Communities .............................................................................. 2 16
(a) The Tariff Exemption affects the provision of services within the meaning of Article I:1 of the GATS........ 216
(b) Vertical integration does not exclude competition among providers of wholesale distribution services forautomobiles .................................................................................................................... .......................................... 216
(c) The Tariff Exemption accords more favourable treatment to service s uppliers of the United States.............. 218
(d) The violation of Article II is not exempted by Article V .................................................................... ............ 219
6. Response by Canada to the Complainants' Rebuttals ........................................................................... 2 21
(a) The duty-free treatment does not affect trade in wholesale services......................................................... ...... 221
(b) The measures do not accord more favourable treatment to service s uppliers of certain countries.................. 221
7. The European Communities' fo llow-up to Canada' s response.............................................................. 223
(a) The Tariff Exemption affects trade in wholesale distribution services ....................................................... .... 223
(b) The measure accords more favourable treatment to US suppliers ............................................................... ... 223
(c) Vertical integration does not exclude co mpetition among providers of services ............................................ 224
8. Canada's follow- up response .................................................................................................. .............. 225
(a) The measures do not affect trade in services................................................................................ ................... 225
(b) Duty-Free treatment does not acco rd more favour able tr eatme nt ............................................................... .... 225
9. Further follow-up by the European Communities................................................................................ . 227
G. A RTICLE XVII OF THE GATS.................................................................................................................. 229
1. Arguments of Japan........................................................................................................... .................... 229
(a) The Duty Waiver accords more favourable treatment to Canadian wholesale trade services and service
suppliers in violation of Article XVII of the GATS ............................................................................. .................... 230
(b) The Duty Waiver accords more favourable treatment to Canadian services and service s uppliers related to the
production of motor vehicles................................................................................................... ................................. 232
2. Arguments of the European Communities........................................................................................ ..... 237
(a) The relevant sectors and modes of supply are covered by Canada’s commitments on national treatment ..... 238
(b) The CVA requirement is a  "measure affecting  the supply of services" ....................................................... . 239
(c) Canadian services are "like" the services of other Members provided through modes 1 and 2 ...................... 239(d) Services of other Members supplied through modes 1 and 2 are afforded "less favourable treatment" thanCanadian services.............................................................................................................. ....................................... 240
3. Canada's re sponse............................................................................................................ ..................... 240
(a) Canada has not undertaken a commitment in a relevant sector................................................................. ...... 241
(b) Duty-free treatment under the MVTO and the SROs does not affect the supply of wholesale trade services 242(c) The MVTO and the SROs do not accord less favourable treatment to like services and service s uppliers .... 242
(d) Article XVII of the GATS – CVA requirements ................................................................................. ........... 243
4. Rebuttal arguments by Japan.................................................................................................. .............. 246WT/DS139/R
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(a) Wholesale trade services.................................................................................................... ............................. 246
(b) CVA......................................................................................................................... ....................................... 247
5. Rebuttal arguments by th e European Communities .............................................................................. 2 48
(a) The limitations on Canada’s national treatment commitments do not cover CVA requirements.................... 248
(b) The CVA requirements accord “less favourable treatment” to foreign services and service providers .......... 250
6. Response by Canada to th e complainants' rebuttals ............................................................................ . 251
(a) Article XVII – CVA .......................................................................................................... ............................. 251
(b) Canada has not undertaken a commitment...................................................................................... ................ 251
(c) The measures do not accord  less favourab le treat ment........................................................................ ........... 252
7. Japan's follow-up to Canada's response ....................................................................................... ........ 253
8. The European Communities' fo llow-up to Canada' s response.............................................................. 253
9. Canada's follow- up response .................................................................................................. .............. 254
(a) The measures do not deny national treatment to  wholesale distribution trade service suppliers .................... 254
VII. QUESTIONS AND REPLIES ...................................................................................................... ....... 255
A. F ACTUAL ARGUMENTS OF THE PARTIES .................................................................................................. 255
1. Questions and replies relating to factual arguments on the measures at issue..................................... 255
(a) Question 12 (the ratio requirement)......................................................................................... ....................... 255
(b) Question 36 (the "actual" ratio requirements for MVTO automobile manufacturers) .................................... 255(c) Question 37 (SROs – docu ments and bene ficiaries)............................................................................ ........... 256
(d) Question 38 (Letters – comp rehensiveness of exhibits)....................................................................... ........... 257
(e) Questions 39 (annual declar ations by beneficiaries)......................................................................... .............. 259
(f) Question 40 (annual re ports by beneficiaries)............................................................................... .................. 260
(g) Question 41 (claims – the meas ures and produc ts concerned).................................................................. ...... 261
(h) Question 1 from the EC  (SRO beneficiaries).................................................................................. ................ 262
(i) Question 2 from the EC (Auto Pact and measures at issue).................................................................... ........ 262
(j) Question 3 from the EC (SROs' relation to the Auto Pact).................................................................... ......... 262
(k) Question 5 from the EC (CVA and cost of sales for U.S. Big Three and Volvo) ........................................... 262(l) Question 1 from Japan (Canada's response to factual assertions) ............................................................. ...... 263
(m) Question 2(1) from Japan (purpose of CVA and ratio requirements) ............................................................ . 264
(n) Question 2(2) from Japan (similarity of Letters) ............................................................................ ................ 264
(o) Question 2(3) from Japan (DaimlerCh rysler merger and MVTO status)........................................................ 264
(p) Question 2(4) from Japan (beneficiaries importing vehicles other than automobiles).................................... 265
(q) Question 2(5) from Japan (imports under the NAFTA and the MVTO/SROs) .............................................. 265
(r) Question 8 from the EC (Letters – verification of compliance)............................................................... ....... 265
B. L EGAL ARGUMENTS OF THE PARTIES ...................................................................................................... 266
1. Questions and replies relating to cl aims ander Article I of the GATT .................................................. 266
(a) Question 1 (test for de facto  discrimination)................................................................................................... 266
(b) Question 2 (test for de facto  discrimination)................................................................................................... 268
(c) Question 3 (foreign trade zones, drawback programs and end-use tariff classifications) ............................... 269
(d) Question 4 (private vs. governmental action) ................................................................................ ................. 270
(e) Question 5 (criteria for advantage) ......................................................................................... ........................ 273
(f) Question 6 (eligibility restriction and de facto  discrimination)....................................................................... 274
(g) Question 7 (criteria for SRO status)........................................................................................ ........................ 274
(h) Question 8 (measures at issue and applicability of GATT Article XXIV)...................................................... 2 75
(i) Question 9 (measures at issue and applicability of GATT Article XXIV)...................................................... 2 75
(j) Question 10 (U.S. Big Three vs. foreign producers and other manufacturers in the United States) ............... 276(k) Question 11 (CVA and ratio requirements and Article XXIV:8(b)).............................................................. . 276
(l) Question 42 (Canada's Figure 4  – imports under the MVTO and SROs)....................................................... 277
(m) Question 43 (data on cost of sales) ......................................................................................... ........................ 279
(n) Question 44 (imports and companies' capital relationships).................................................................. ......... 282
(o) Questions 45 (MFN import duty ra tes on motor vehicl es since 1965)........................................................... . 282
(p) Question 2(6) from Japan (foreign trade zones, dr awback programs and end-use tariff classification).......... 283
(q) Question 4 from the EC (Canada's Figure 4  – imports under the MVTO and SROs) .................................... 284
(r) Question 6 from the EC (data on cost of parts and materials and cost of sales).............................................. 284
(s) Question 7 from the EC (1998 automobile imports from the US and Mexico under the MVTO) .................. 286(t) Question 52 (private vs. governmental action) ............................................................................... ................ 286
2. Questions and replies relating to clai ms under Article III:4 of the GATT ............................................ 287
(a) Question 13, in part (the ratio requirements) ............................................................................... ................... 287
(b) Question 14 (the ratio requirements) ........................................................................................ ...................... 288
(c) Question 15 (the ratio requirements) ........................................................................................ ...................... 288
(d) Question 16 (meaning of "require" in Chapeau of TRIMs Illustrative List) ................................................... 2 89WT/DS139/R
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(e) Question 17 (the Letters) ................................................................................................... ............................. 290
(f) Question 18 (the Letters and private vs. governmental action)............................................................... ........ 291
(g) Question 46 (the ratio requirements) ........................................................................................ ...................... 292
(h) Question 47 (the ratio requirements) ........................................................................................ ...................... 292
(i) Question 48 (the ratio requirements) ........................................................................................ ...................... 292
(j) Question 49 (the ratio requirements) ........................................................................................ ...................... 293
(k) Question 50 (the Letters) ................................................................................................... ............................. 293
(l) Question 51 (the Letters and FIRA  and EEC-Regulation on Imports of Parts and Components )................... 295
(m) Question 53 (the Letters) ................................................................................................... ............................. 296
3. Questions and replies relating to cl aims under the TRIMS Agreement................................................. 298
(a) Question 13 (the ratio requirements) ........................................................................................ ...................... 298
(b) Question 16 (meaning of "require" in Chapeau of TRIMs Illustrative List) ................................................... 2 99
(c) Question 46 (the ratio requirements) ........................................................................................ ...................... 300
4. Questions and replies relating to claims under the SCM Agreement.................................................... 301
(a) Question 13, in part (the ratio requirements) ............................................................................... ................... 301
(b) Question 19 ("mere po ssibility" and contingency)............................................................................ .............. 301
(c) Question 20 ("dutie s borne" and inputs) ..................................................................................... .................... 303
(d) Question 21 (the ratio requirements) ........................................................................................ ...................... 303
(e) Question 22 (the measures at i ssue and production- based subsidies) .......................................................... ... 304
(f) Question 23 (subsidies and import facilitation) ............................................................................. ................. 304
(g) Question 24 (the Letters and CVA figures) ................................................................................... ................. 305
(h) Question 25 (the CVA require ments and export performance)................................................................... .... 305
(i) Question 26 (contingency – "in law" and "in fact" vs. "express" and "implicit") ........................................... 30 6
(j) Question 54 (the CVA re quirements and exportation).......................................................................... .......... 306
(k) Question 55 (paragraphs (g), (h), and (i) of the SCM Illustrative List and the measures at issue).................. 307(l) Question 61 (imple mentation time-period).................................................................................... ................. 307
5. Questions and replies relating to clai ms regarding applicability of the GATS..................................... 312
(a) Question 27 (the duty waiver and Article XXVIII) ............................................................................ ............ 312
(b) Question 29 ("critical to the scope and profitability" and "measure affecting trade in services")................... 314(c) Question 58 (inter face of GATT and GAT S) .................................................................................... ............. 315
6. Questions and replies relating to cl aims under Article II of the GATS................................................. 316
(a) Question 33 (the measures at issue and GATS Article V) ...................................................................... ........ 316
(b) Question 34 (owner ship and control)......................................................................................... ..................... 317
(c) Question 35 (vertical integration) .......................................................................................... ......................... 320
(d) Question 56 (the measures at issue and GATS Article V) ...................................................................... ........ 323
(e) Question 57 (the measures at issue and de facto  discrimi nation) .................................................................... 324
(f) Question 59 (origin of wholesale trade service suppliers) ................................................................... ........... 325
(g) Question 60 (origin of wholesale trade service suppliers) ................................................................... ........... 326
7. Questions and replies relating to clai ms under Article XVII of the GATS ............................................ 327
(a) Question 28 (services supplied throug h mode  1).............................................................................. .............. 327
(b) Question 30 ("like" service suppliers) ...................................................................................... ...................... 329
(c) Question 31 (commitments in Canada's GATS Schedule)......................................................................... ..... 330
(d) Question 32 (the CVA requirements and mode 4)............................................................................... ........... 331
(e) Question 34 (ownership and control)......................................................................................... ..................... 331
(f) Question 35 (vertical integration) .......................................................................................... ......................... 331
(g) Question 59 (origin of wholesale trade service suppliers) ................................................................... ........... 334
(h) Question 60 (origin of whol esale trade service suppliers) ................................................................... ........... 335
8. Questions and replies relati ng to third-pa rty arguments ...................................................................... 336
(a) Question 1 from the European Communities to the United States (the measures at issue and GATS Article V)336
(b) Question 2 from the European Comm unities to the United States (the measures at issue and GATS Article V)336
(c) Question 3 from the European Communities to the Un ited States (the measures at issue and GATT Article
XXIV) .......................................................................................................................... ............................................ 337
(d) Question 4 from the European Communities to the Un ited States (the measures at issue and GATT Article
XXIV and GATS Article V)....................................................................................................... .............................. 337
(e) Question 5 from the European Communities to the Unite d States (freezing of SRO list of beneficiaries) ..... 337
VIII. THIRD-PART Y ARGUMENTS ..................................................................................................... .... 338
A. I NDIA 'S ARGUMENTS AS A THIRD PARTY ................................................................................................ 338
B. K OREA 'S ARGUMENTS AS A THIRD PARTY .............................................................................................. 339
1. Introduc tion................................................................................................................. .......................... 339
2. GATT 1994.................................................................................................................... ........................ 339
(a) Article I:1 GATT 1994 ....................................................................................................... ............................ 339
(b) The Tariff Exemption relates to a customs duty within the terms of Article  I:1 of the GATT 1994 ............. 340
(c) The Tariff Exemption is an advantage within  the meaning of Article I:1 of the GATT 1994 ........................ 340WT/DS139/R
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(d) The products are "like" products............................................................................................ ......................... 340
(e) The advantage is not accorded immediately and unconditionally to like products originating in all WTO
Members........................................................................................................................ ........................................... 340
(f) The advantages accorded to products originating in particular WTO Members has not been accorded to likeproducts originating in the territories of all WTO Members ..................................................................... ............... 340
3. TRIMS Agreement .............................................................................................................. ................... 342
(a) The applicability of the TRIMs Agreement to the present dispute ............................................................. .... 342
(b) The CVA requirements and ratio requirements are "investment measures" ................................................... 342
(c) The CVA and ratio requirements are "trade-related".......................................................................... ............ 343
(d) The CVA and ratio requirements fall under the Illustrative List of prohibited TRIMs................................... 343
4. SCM Agreement................................................................................................................ ..................... 344
(a) Applicability of the SCM Agreement to the present dispute ................................................................... ....... 344
(b) The Tariff Exemption constitutes a countervailable subsidy within the meaning of Articles 1 and 2 of the
SCM Agreement.................................................................................................................. ..................................... 344
5. GATS ......................................................................................................................... ............................ 346
(a) Article  II GATS............................................................................................................. ................................. 346
(b) The Tariff Exemption is a measure covered by GATS ........................................................................... ........ 346
(c) The Tariff Exemption accords an advantage to wholesale trade service and service s uppliers of the United
States and Sweden, and, consequently, less favorable treatment to like services and service suppliers in other
countries...................................................................................................................... ............................................. 346
(d) Article XVII GATS ........................................................................................................... ............................. 347
(e) Wholesale trade services of motor vehicles through commercial presence are covered in Canada's Schedule ofSpecific Commitments ........................................................................................................... .................................. 348
(f) The services and service suppliers are "like"............................................................................... ................... 348
(g) The Tariff Exemption modifies the conditions of competition in favor of Canadian services and servicesuppliers ...................................................................................................................... ............................................. 348
(h) The Tariff Exemption accords more favorable treatment to Canadian services and service s uppliers related to
the production of motor vehicles............................................................................................... ............................... 348
(i) The CVA requirements accord less favorable treatment to "like" services and service suppliers................... 349
6. Conclusion................................................................................................................... .......................... 350
C. T HE UNITED STATES ' ARGUMENTS AS A THIRD PARTY ........................................................................... 350
1. Legal Arguments .............................................................................................................. ..................... 350
(a) GATS Article V.............................................................................................................. ................................ 350
(b) GATT Article XXIV ........................................................................................................... ........................... 351
IX. INTERIM REVIEW.............................................................................................................. ............... 352
X. FINDINGS..................................................................................................................... ............................ 353
A. I NTRODUCTION ............................................................................................................................... ......... 353
1. Measures at issue ............................................................................................................ ...................... 353
2. Order of consider ation of claims............................................................................................. .............. 355
3. Rules of treaty interpretation ............................................................................................... ................. 355
B. C LAIMS UNDER THE GATT AND THE TRIM S AGREEMENT .................................................................... 357
1. Claims Under Article I:1 of the GATT ......................................................................................... ......... 357
(a) Introduction ................................................................................................................ .................................... 357
(b) Whether the import duty exemption is awarded "immediately and unconditi onally"..................................... 357
(c) Whether the import duty exemption discriminates in favour of motor vehicles of certain countries.............. 360(d) Applicability of Article XXIV of the GATT ................................................................................... ............... 365
2. Claims Under Article III:4 of th e GATT and the TRIMs Agreement..................................................... 366
(a) CVA requirements............................................................................................................ .............................. 367
(b) Ratio requirements.......................................................................................................... ................................ 382
C. C LAIMS UNDER THE SCM A GREEMENT .................................................................................................. 385
1. Ratio requirements ........................................................................................................... ..................... 385
(a) Order in which issues will be addressed ..................................................................................... .................... 386
(b) Whether the import duty exemption is a s ubsidy within the meaning of Article 1 ......................................... 386
(c) Whether the import duty exemption is "contingent . . . upon export performance"........................................ 390
2. CVA requirements ............................................................................................................. .................... 396
(a) Factual considerations ...................................................................................................... .............................. 396
(b) Arguments of the parties.................................................................................................... ............................. 397
(c) Contingency in Law.......................................................................................................... .............................. 398
(d) Contingency in fact......................................................................................................... ................................ 400WT/DS139/R
WT/DS142/RPage viii
D. C LAIMS UNDER THE GATS..................................................................................................................... 400
1. Introduc tion................................................................................................................. .......................... 400
2. Measures affecting trade in services ......................................................................................... ............ 401
3. Claims Under Article II of the GATS .......................................................................................... .......... 402
(a) Whether the import duty exemption affects wholesale trade services .......................................................... .. 403
(b) Whether service suppliers are "like"........................................................................................ ....................... 405
(c) Whether treatment no le ss favourable is acco rded............................................................................ .............. 405
4. Applicability of Artic le V of the GATS ....................................................................................... ........... 408
5. Claims Under Article XVII of th e GATS  – import duty exemption....................................................... 410
(a) Whether Canada has undertaken commitments on wholesale trade services of motor vehicles ..................... 411
(b) Whether services are "like"................................................................................................. ............................ 412
6. Claims Under Article XVII of the GATS  – CVA requirement............................................................... 413
(a) CVA requirements as affecting services related to the production of motor vehicles..................................... 413
(b) Whether services affected by the CVA requirements are covered by Canada's specific commitments in
services....................................................................................................................... .............................................. 414
(c) Technical feasibility and inherent competitive disadvantage of modes 1 and 2 services................................ 415(d) Whether it is relevant that CVA requirements might be met on the basis of labour costs alone..................... 416(e) Whether treatment no le ss favourable is acco rded............................................................................ .............. 416
XI. CONCLUSIONS A ND RECOMMENDATIONS.............................................................................. 417
A. C ONCLUSIONS ............................................................................................................................... .......... 417
B. R ECOMMENDATIONS ............................................................................................................................... 418WT/DS139/R
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TABLES
Page
JAPAN'S TABLE 1 ................................................................................................................ ............................. 59
JAPAN'S TABLE 2 ................................................................................................................ ............................. 59
JAPAN'S TABLE 3 ................................................................................................................ ............................. 60
JAPAN'S TABLE 4 ................................................................................................................ ............................. 62
JAPAN'S TABLE 5 ................................................................................................................ ............................. 67
JAPAN'S TABLE 6 ................................................................................................................ ............................. 69
JAPAN'S TABLE 7 ................................................................................................................ ............................. 73
JAPAN'S TABLE 8 ................................................................................................................ ............................. 73
JAPAN'S TABLE 9 ................................................................................................................ ............................. 78
JAPAN'S TABLE 10 ............................................................................................................... ............................ 79
EC'S TABLE 1................................................................................................................... .................................. 81
EC'S TABLE 2................................................................................................................... .................................. 81
EC'S TABLE 3................................................................................................................... ................................ 155
EC'S TABLE 4................................................................................................................... ................................ 155
EC'S TABLE 5................................................................................................................... ................................ 210
EC'S TABLE 6................................................................................................................... ................................ 211
EC'S TABLE 7................................................................................................................... ................................ 319WT/DS139/R
WT/DS142/RPage x
FIGURES
Page
CANADA'S FIGU RE 1 .............................................................................................................. ......................... 16
CANADA'S FIGU RE 3 .............................................................................................................. ......................... 47
CANADA'S FIGU RE 2 .............................................................................................................. ......................... 57
CANADA'S FIGU RE 4 .............................................................................................................. ......................... 86
JAPAN'S NEW FIGURE 4........................................................................................................... ...................... 93
CANADA'S FIGU RE 5 .............................................................................................................. ....................... 278
CANADA'S FIGU RE 6 .............................................................................................................. ....................... 280
CANADA'S FIGU RE 7 .............................................................................................................. ....................... 281WT/DS139/R
WT/DS142/R
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I. PROCEDURAL  HISTORY
1.1 This proceeding has been initiated by two complaining parties, Japan and the European
Communities.
A. C ONSULTATIONS
1.2 In a communication dated 3 July 1998 (WT/DS139/1), Japan requested consultations with
Canada in accordance with Article 4 of the Understanding on Rules and Procedures Governing the
Settlement of Disputes (DSU), pursuant to Article XXIII of the General Agreement on Tariffs and
Trade 1994 (GATT), Article 8 of the Agreement on  Trade-Related Investment Measures (TRIMs
Agreement) (to the extent that Article 8 invokes Article XXIII of GATT 1994), Articles 4 and 30 of
the Agreement on Subsidies and Countervailing Measures (SCM Agreement) (to the extent thatArticle 30 refers to Article XXIII of GATT 1994), and Article XXIII:1 of the General Agreement on
Trade and Services (GATS), with respect to certain Canadian measures affecting the automotive
industry.  Japan and Canada held consultations in Geneva on 27 August 1998, but these consultations
did not result in a resolution of the dispute.
1.3 In a communication dated 17 August 1998 (WT/DS142/1), the European Communities
requested consultations with Canada pursuant to Article 4 of the DSU, Article XXIII:1 of GATT
1994, Article 8 of the TRIMs Agreement, Articles 4 and 30 of the SCM Agreement, and Article
XXIII:1 of the GATS, concerning certain measures affecting the automotive sector.  The European
Communities and Canada held consultations on 21 September and 13 November 1998, but these
consultations did not result in a resolution of the dispute.
1.4 On 12 November 1998 Japan (WT/DS139/2) and on 14 January 1999 the European
Communities (WT/DS142/2) each requested the establishment of a panel pursuant to Articles 4.7 and6 of the DSU.
B. E
STABLISHMENT AND COMPOSITION OF THE PANEL
1.5 At its meeting on 1 February 1999, the DSB established a Panel pursuant to the requests by
Japan and the European Communities.  The DSB agreed, pursuant to Article 9.1 of the DSU, that a
single panel should examine both complaints.
1.6 At that meeting, the parties to the dispute agreed that the Panel should have standard terms of
reference provided for in Article 7.1 of the DSU.  The terms of reference of the Panel are the
following:
"To examine, in the light of the relevant provisions of the covered agreements cited
by Japan and the European Communities in documents WT/DS139/2 andWT/DS142/2 respectively, the matter referr ed to the DSB by Japan and the European
Communities in those documents and to make such findings as will assist the DSB in
making the recommendations or in giving the rulings provided for in those
agreements".
1.7 On 15 March 1999, the European Communities and Japan jointly requested the Director-
General, pursuant to Article 8.7 of the DSU, to determine the composition of the Panel.  The Director-
General accordingly determined the compositi on of the Panel (WT/DS139 and 142/3) as follows:
Chairman: Mr. Ronald Saborío Soto
Members: Mr. Timothy Groser
Mr. Rudolf RamsauerWT/DS139/R
WT/DS142/RPage 2
1.8 India, Korea and the United States reserved their third-party rights in the dispute.
C. PANEL PROCEEDINGS
1.9 The Panel met with the parties on 14 and 15 June 1999 and on 13 and 14 July 1999.  The
Panel held a third-party session on 15 June 1999.
II. BACKGROUND
2.1 This dispute concerns Canadian measures which accord to certain motor-vehicle
manufacturers established in Canada the right to im port motor vehicles with an exemption from the
generally applicable customs duty.
2.2 To qualify for the exemption, an eligible manufacturer's local production of motor vehicles
(including in certain cases the production of pa rts) must achieve a minimum amount of Canadian
value added (CVA), and its local production must maintain a minimum ratio ("production-to-sales"
ratio) with respect to its sales of motor vehicles in Canada.
A. THE AUTO PACT
2.3 The measures at issue in this case stem from the Agreement Concerning Automotive Products
Between the Government of Canada and the Governme nt of the United States (the "Auto Pact"), a
treaty between Canada and the United States concluded in January 1965.  Under the Auto Pact,
Canada agreed to accord duty-free treatment to vehicles and original equipment manufacturing parts1
of the United States2, provided the importer met the definition of a motor vehicles "manufacturer"
under the terms of the Auto Pact.  An Auto Pact manufacturer must have produced in Canada, during
the base year (1963-64), motor vehicles of the class it is importing, and (i) must have maintained a
ratio of the sales value of its local production of vehicles of that class to the vehicles of that class soldin Canada of a prescribed minimum, and (ii) must have achieved a minimum amount of CVA in its
local production of motor vehicles (including in certain cases the production of parts therefor).
3  The
Auto Pact also provided that Canada could designate a manufacturer not meeting the base year
criterion to import duty-free motor vehicles and original equipment manufacturing parts.4
1. Letters from Auto Pact manufacturer beneficiaries to Industry Canada
2.4 Prior to the conclusion of the Auto Pact, the Canadian Government requested from the Auto
Pact manufacturers certain Letters specifying how each company viewed its operations in relation to
the Auto Pact.  While the Letters were not released publicly, those of General Motors of Canada,
                                                     
1 Excluding tires and tubes.
2 Article II(a) of the Auto Pact.
3 Para. 2 of Annex A of the Auto Pact defines a manufacturer as one that:
"(i) produced vehicles of that class in Canada in each of the four consecutive three months' periodsin the base year, and
(ii) produced vehicles of that class in Canada in the period of twelve months ending on the 31
st
day of July in which the importation is made,
(A) the ratio of the net sales value of which to the net sales value of all vehicles of that
class sold for consumption in Canada by the manufactur er in that period is equal to or higher than the
ratio of the net sales value of all vehicles of that class produced in Canada by the manufacturer in thebase year to the net sales value of all vehicles of that class sold for consumption in Canada by the
manufacturer in the base year, and is not in any case lower than seventy-five to one hundred;  and
(B) the Canadian value added of which is equal to or greater than the Canadian value
added of all vehicles of that class produced in Canada by the manufacturer in the base year."
4 Para. 3 of Annex A of the Auto Pact.WT/DS139/R
WT/DS142/R
Page 3
Ltd., Ford Motor Company of Canada,  Ltd., Chrysler Canada, Ltd., and American Motors5 were
made public in hearings of the US Congress on the Automotive Products Trade Act, 1965 (the US
implementing legislation for the Auto Pact).
2.5 The Letters address similar issues, and some of them are framed in similar and, in parts,
identical language.  The complainants contend that these Letters contain additional CVA requirementsand constitute binding undertakings.  The respondent contends that the Letters are not binding, that
they contain no such requirements, and that the only evidence on the record indicates that the Letters
are not binding.  The parties' arguments relating to the status of these Letters are found in Section V
(Factual Arguments of the Parties) and in Section VI (Legal Arguments of the Parties).
2. GATT Working Party examination of the Auto Pact
2.6 In March 1965 a GATT Working Party was established to examine the Auto Pact.
6  T h e
Working Party found that the US application of the Auto Pact would violate the GATT:
"It was the general consensus of the Working Party that, if the United States
implemented the Agreement in the manner proposed, United States action
would be clearly inconsistent with Article I and it would be necessary for theUnited States Government to seek a waiver from its GATT obligations."
7
2.7 The United States sought and obtained a waiver under Article XXV:5.8  In November 1996
that waiver was renewed at the request of the United States9, until 1 January 199810, when the duties
on imports of Canadian automotive products were fully eliminated in accordance with the provisions
of the North American Free Trade Agreement (NAFTA).
2.8 When the Working Party went on to examine the relationship between Canada's Auto Pact
obligations and the GATT, members noted that, in his introductory remarks, "the representative ofCanada had stressed that his Government was implementing the Agreement on a most-favoured-
nation basis and was extending to all contracting parties the same tariff benefits, on the same terms, as
it had undertaken to grant the United States under the Agreement."
11  Although some members
questioned whether Canada's application of the Auto Pact was compatible with GATT
Articles I and III12, there was no consensus in the Working Party on whether or not Canada was in
violation of its GATT commitments.
B. THE CANADA - UNITED STATES FREE TRADE AGREEMENT (CUSFTA)
2.9 Trade in automotive products was also affected by the Canada – United States Free Trade
Agreement (CUSFTA)13, which entered into force 1 January 1989.  The CUSFTA provided for the
elimination of duties on automotive products by 1 January 1998, so long as the products qualifiedunder CUSFTA origin rules.
                                                     
5 American Motors was acquired by Chrysler in 1987.
6 Report of the Working Party on Canada – US Agreement on Automotive Products, submitted to the
Council of Representatives 19 November 1965, BISD 13S/112 (hereinafter Report of the Working Party on
Canada – US Agreement on  Automotive Products ).
7 Ibid., para. 17.
8 Ibid., para. 15; Decision of the C ONTRACTING PARTIES  of  20 December 1965 granting the waiver
requested by the United States, BISD 14S/37.
9 G/L/103.
10 Decision adopted by the General Council at is meeting of 7, 8 and 13 November 1996, WT/L/198.
11 Report of the Working Party on Canada – US Agreement on Automotive Products , supra  note 6,
para. 20.
12 Ibid.,  paras. 21 and 22.
13 Exhibits EC-12 and JPN-33.WT/DS139/R
WT/DS142/RPage 4
2.10 The CUSFTA also changed the Auto Pact provisions which had allowed the Canadian
Government to designate additional manufacturers to benefit from the duty exemption.14  It did so by
limiting eligibility for the import duty exemption to firms falling into one of three categories:15  (i)
Auto Pact manufacturers;  (ii)  manufacturers designated by the Canadian Government as
beneficiaries prior to the signing of the CUSFTA;  and (iii) other firms which were expected to bedesignated by the Canadian Government by the 1989 model year.
16  In other words, the CUSFTA had
the effect of closing the list of those entitled to import duty free, after a grace period for certain
potential new entrants, so that the only way a company outside those categories might be authorized
to import duty free pursuant to this programme would be by acquiring control of, or being acquired
by, a beneficiary.17
C. THE NORTH AMERICAN FREE TRADE AGREEMENT (NAFTA)
2.11 The CUSFTA was suspended with the 1 January 1994 entry into force of the NAFTA, an
agreement notified to the GATT as an Article XXIV free-trade area involving Canada, Mexico and
the United States.
2.12 The NAFTA allows Canada to maintain the im port duty exemption subject to the conditions
stipulated in the CUSFTA, including those relating to Auto Pact manufacturer eligibility.
2.13 Under the NAFTA, Mexican trucks now enter Canada duty free, while other vehicles are
currently subject to duties of 1.3 per cent (passenger cars) and 2.4 per cent (heavy trucks and buses),
so long as these products meet the NAFTA origin rules.  All such vehicles imported from Mexico will
enter duty free after 1 January 2003.  Under the NAFTA, all US automotive products meeting
NAFTA origin rules have entered Canada duty free since 1 January 1998.
2.14 The European Communities stipulates that, alth ough not themselves in dispute, the CUSFTA
and the NAFTA are directly relevant for this dispute.18  Japan contends that the agreements amplified
and exacerbated the discriminatory effects of the measures19, but it does not include them in its list of
measures that it is challenging in this proceeding.20
D. CANADA 'S DOMESTIC MEASURES
2.15 The provisions relating to Auto Pact manufacturers were given effect domestically in Canada
through the Motor Vehicles Tariff Order (MVTO) 196521, known as the MVTO, and the Tariff Item
950 Regulations 22, which specified the terms under which duty free entry would be permitted.  These
instruments were replaced by the MVTO 198823 and later the MVTO 199824, which preserved the
essential elements of the earlier legal instruments.  The MVTO 1998 is the measure in effect today.
                                                     
14 Auto Pact, Annex A, para. 3.
15 Annex to Article 1002.1 of the CUSFTA.
16 The last category was added in order to allow CAMI, a joint venture between General Motors and
Suzuki which did not begin production until 1989, to benefit also from the Tariff Exemption.
17 A note in the Annex to Article 1002.1 of the CUSFTA states that the duty exemption shall cease
being granted if, as a result of the acquisition of control over a recipient, "the fundamental nature, scope or size
of the business of the recipient is significantly altered".  This provision has been reproduced in the MVTO 1998,Schedule, Part 1, para. 4.  See footnote 24.
18 See para. 5.5.
19 See paras. 5.139 and 5.144.
20 See para. 5.2.
21 P.C. 1965-99, of 16 January 1965 (Exhibit EC-5 and JPN-25).
22 P.C. 1965-100, of 16 January 1965 (Exhibit EC-5).
23 P.C. 1987-2733, of 31 December 1987 (Exhibits JPN-32), amended in P.C. 1988-2872, of
30 December 1988 (Exhibit EC-4).WT/DS139/R
WT/DS142/R
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2.16 In line with the Auto Pact provisions allowing Canada to designate additional manufacturers
as eligible to import duty free, beginning in 1965 the Government of Canada extended eligibility for
the import duty exemption by granting Special Remission Orders (SROs)25 to individual
manufacturers that had not met the original conditions of the MVTO 1965 and its successors.
2.17 Whereas the Auto Pact calls for Canada to extend to certain manufacturers the right to import
duty-free vehicles and original equipment manufacturing parts from the United States26, the MVTO
1965 accorded the manufacturers the right with respect to "goods imported into Canada on or after 18
January 1965 from any country entitled to the benefit of the British Preferential Tariff or Most-
Favoured Nation Tariff…".27  Similarly, the import duty exemptions provided in the MVTO 1998 and
current SROs apply to imports from any country entitled to Canada's MFN rate.
2.18 The MVTO 1998 and current SROs also provide a tariff exemption for the importation of
certain parts and components for use as original equipment in the manufacture of motor vehicles.
That exemption is not at issue in this dispute.28
1. The MVTO 1998
2.19 The MVTO 1998 provides an import duty exemption for the importation of automobiles29,
specified commercial vehicles30, and buses.31  (Throughout this Report, the terms "automobile",
"specified commercial vehicle" and "bus" are used with the same meaning as in the MVTO 1998, and
the term "motor vehicle" is used to designate collectively "automobiles", "specified commercial
vehicles" and "buses".)
2.20 The beneficiaries of the MVTO 1998 are the same as the beneficiaries of the Auto Pact, i.e.
those manufacturers of a given class of motor vehi cles which produced vehicles of that class during
each of the four consecutive quarters of the base year.
                                                                                                                                                                    
24 Exhibits EC-3 and JPN-4. The MVTO 1998 is an Order-in-Council passed by the Governor General
in Council, on the recommendation of the Minister of Finance. The enabling authority is found in
subsections 14 (2) and 16 (2) of Canada’s Customs Tariff. The MVTO 1998 is administered by the Minister ofNational Revenue.
25 Special Remission Orders are regulations adopted under authority of the Financial Administration
Act, R.S.C. 1985, c. F-11, s. 23 (Exhibit JPN-3).  The MVTO 1965 required companies to have produced motorvehicles in all quarters of the base year, which was defined as the 12-month period from 1 August 1963 to
31 July 1964.  Any manufacturer which had not met this requirement was thus effectively prevented from
qualifying for the import duty exemption.
26 Article II(a) of the Auto Pact.
27 MVTO 1965, para. 1 (Exhibits EC-5 and JPN-25).
28 The tariff rate for imports of all original equipment parts was reduced to zero in 1996, irrespective of
the status of the importer.  See the  Memorandum D10-15-21 (Exhibit EC-10).
29 The MVTO 1998 defines the term "automobile" as "four-wheeled passenger motor vehicle having a
seating capacity for not more than 10 persons, but does not include an ambulance or a hearse." It includesheadings HS 87.02 or 87.03.  Schedule, Part 1, 1(1).
30 The MVTO 1998 defines the term "specified commercial vehicle" as "a truck, an ambulance or a
hearse, or a chassis therefor, but does not include any of the following vehicles or chassis therefor, namely, a
bus, an electric trackless trolley bus, a fire truck, an am phibious vehicle, a tracked or a half-tracked vehicle, a
golf or invalid cart, a straddle carrier or motor vehicle designed primarily for off-highway use, or any machine
or other article to be mounted on or attached to a truc k, an ambulance or a hearse or a chassis therefor for
purposes other than for loading or unloading the vehicle." It includes headings HS 87.01, 87.03 or 87.05 andchassis therefor of heading HS 87.06.  Schedule, Part 1, 1(1).
31 The MVTO 1998 defines the term "bus" as "a passenger motor vehicle having a seating capacity for
more than 10 persons or a chassis therefor, but does not include any of the following vehicles or their chassis,
namely, an electric trackless trolley bus, an amphibious ve hicle, a tracked or half-tracked vehicle or a motor
vehicle designed primarily for off-highway use." It includes heading HS 87.02 and chassis therefor of headingHS 87.06.  Schedule, Part 1, 1(1).WT/DS139/R
WT/DS142/RPage 6
2.21 A list of beneficiaries of the MVTO 1998 is contained in the Appendix to Memorandum
D-10-16-3, issued by the Ministry of National Revenue on 10 April 1995.32  That Appendix lists a
total of 33 firms, of which 4 are identified as manufacturers of automobiles, 7 as manufacturers of
buses and 27 as manufacturers of specified commercial vehicles.
2.22 The four manufacturers of automobiles listed in Memorandum D-10-16-3 are Chrysler
Canada Ltd.33, Ford Motor Company of Canada Ltd., General Motors of Canada Ltd., and Volvo
(Canada) Ltd.34
2.23 The granting of the import duty exemption provided for in the MVTO 1998 is subject to the
same type of CVA and ratio requirements as those stipulated in the Auto Pact.  Specifically, the
schedule to the MVTO 1998 defines a manufacturer as "a manufacturer of a class of vehicles" who:
"(a) produced vehicles of that class in Canada in each of the four consecutive quarters
of the base year;  and
(b) produced vehicles of a class in Canada in the 12-month period ending on July 31
in which the importation is made where
(i)  the ratio of the net sales value of the vehicles produced to the net sales
value of all vehicles of that class sold for consumption in Canada by the
manufacturer in that period is equal to or higher than the ratio of the net sales
value of all vehicles of that class produced in Canada by the manufacturer in
the base year to the net sales value of all vehicles of that class sold for
consumption in Canada by the manufacturer in the base year, and is not in anycase lower than 75 to 100, and
(ii)  the Canadian value added is equal to or greater than the Canadian value
added in respect of all vehicles of that class produced in Canada by the
manufacturer in the base year."
2.24 The requirements are different for each MVTO 1998 beneficiary, depending on its level of
CVA, production and sales during the base year.
2.25 A document published by Industry Canada, a department of the Federal Government of
Canada,
35 indicates that the ratio requirements applicab le to the MVTO 1998 beneficiaries are, "as a
general rule", 95 to 100 for automobiles36, at least 75 to 100 for specified commercial vehicles, and at
least 75 to 100 for buses.  That same document states that the CVA requirements have been rendered
"insignificant" by inflation.
                                                     
32 Exhibits JPN-7 and EC-9.
33 In May 1998, Daimler-Benz and Chrysler agreed to merge their businesses.  DaimlerChrysler
Canada Inc. (formerly Chrysler Canada, Ltd.) is now a wholly-owned subsidiary of Daimler Chrysler Corp.
(formerly Chrysler Corporation), which in turn is a wholly owned subsidiary of Daimler Chrysler AG, a holding
company incorporated in Germany whic h also controls Daimler-Benz AG.  Chrysler Canada Ltd. now imports
motor vehicles of the Mercedes brand under the MVTO 1998.
34 Volvo (Canada) Ltd. ceased the assembly of automobiles in Canada as of December 1998.
Accordingly, it has apparently lost the right to import automobiles duty free under the Auto Pact as from 1August 1999, the next model year.  However, Ford Motor Corporation is purchasing the automotive division of
Volvo AB and, therefore, can continue to im port Volvo automobiles under the Duty Waiver.
35 "Canada-US Automotive Products Agreement (Auto Pact Background)", Industry Canada, 10 June
1998 (Exhibit EC-20).
36 Reflecting base-year CVA levels.WT/DS139/R
WT/DS142/R
Page 7
2.26 The MVTO 1998 lays down detailed rules for the calculation of the CVA.37  In accordance
with those rules, the cost items  to be counted as CVA are, broadly speaking, the following:
- the cost of parts produced in Canada and of materials of Canadian origin that are
incorporated in the motor vehicles;
- direct labour costs incurred in Canada;
- manufacturing overheads incurred in Canada;
- general and administrative expenses incurred in Canada that are attributable to the
production of motor vehicles;
- depreciation in respect of machinery and permanent plant equipment located in
Canada that is attributable to the production of motor vehicles; and
- a capital cost allowance for land and buildings in Canada that are used in the
production of motor vehicles.
2.27 The same rules are applicable for calculating the CVA contained in original equipment parts
for motor vehicles.38
2.28 The MVTO 1998 requires the beneficiaries to submit, each model year prior to their first
importation, a declaration to the Minister of National Revenue, in which they declare that they will
comply with the CVA and ratio requirements that model year.39  The beneficiaries are also to submit
to that Minister and to the Minister of Industry "reports that may reasonably be required by those
Ministers respecting the production and sale of vehicles by the manufacturer".40
2.29 A manufacturer beneficiary not meeting the CVA or ratio requirements stipulated in the
MVTO 1998 in any model year as to a class of motor vehicles is liable for the payment of the
applicable customs duties on all imports of motor vehicles of that class made during that year.However, only duty-free imports are included in the ra tio calculation.  Therefore, an importer that is at
risk of not meeting its production-to-sales ratio is entitled to start paying duty on any additional
imports to be made without having to pay duties on what has already been imported.  A manufacturer
beneficiary which fails to meet the requirements in any given year does not lose the status of
manufacturer beneficiary and may still qualify for the duty exemption in successive model years.
2.30 (For further discussion on administration and enforcement, see Factual Arguments of the
Parties, Section V.)
2. Special Remission Orders
2.31 An administrative memorandum of Revenue Canada lists 63 firms as SRO beneficiaries
41 of
which 2 are identified as manufacturers of automobiles, 5 as manufacturers of buses and 59 as
                                                     
37 MVTO 1998, Schedule, Part 1, 1(1), definition of "Canadian Value Added" , letter (a).
38 Ibid.,  letter (b).
39 MVTO 1998, Schedule, Part 1, 2 (a).  The form of the declaration is set out in MVTO 1998,
Schedule, Part 2.
40 MVTO 1998, Schedule, Part 1, 2 (b). Samples of the reporting documents are provided as
Exhibit EC-14.
41 Memorandum D-10-16-2 lists the SROs for every company still manufacturing, but it does not
include companies that are still in existence but no longer manufacturing.  The orders for those companiesremain in force, but they are not in use.  (Canada's response to Question 37 from the Panel). See Exhibits EC-8
and JPN-8. Copies of all the SROs listed in the Appendix to the Memorandum appear in Exhibits EC-6 andWT/DS139/R
WT/DS142/RPage 8
manufacturers of specified commercial vehicles.  The two manufacturers of automobiles are CAMI
Automotive Inc. (a joint venture between Suzuki Motors Corp., of Japan, and General Motors Corp.,
of the United States) and Intermeccanica International Inc., an artisanal manufacturer of hand-built
replicas of famous cars.42
2.32 All SROs contain a CVA requirement and a manufacturing requirement (i.e . production-to-
sales ratio requirement).  The definitions of both requirements under the SROs are the same as the
definitions under the MVTO 1998, though the specific levels of CVA and the ratios required vary.
Because the SROs were granted after the conclusion of the Canada  – US Auto Pact, different base
years, or initial periods, were assigned to each SRO beneficiary.
2.33 Regarding CVA requirements, typically the SROs issued before 1984 stipulate that, during an
initial period of one to two years, the CVA of the motor vehicles produced in Canada by the
beneficiaries should be at least 40 per cent of their cost of production.  Thereafter, the CVA should be
at least the same (in dollar terms) as in the last 12 months of the initial period. Nevertheless, those
SROs provide that if in any subsequent year the cost of production falls below the level of the initial
period, the CVA (in dollar terms) could also be less, but in no case less than 40 per cent of the cost ofproduction in that year.  In contrast, the SROs is sued from 1984 onwards provide, as a general rule,
that the CVA of the motor vehicles produced in Canada by the beneficiaries (and in some cases, of the
original equipment parts and components) shall be no less than 40 per cent of the cost of sales of the
vehicles sold in Canada, with no reference to the values of an initial period.  By way of exception, the
SRO granted to CAMI
43 prescribes that the CVA of the motor vehicles and original equipment parts
produced in Canada by CAMI must represent at least 60 per cent of the cost of sales of the vehicles
sold in Canada by CAMI.
2.34 Regarding the production-to-sales ratio requirement, the SROs issued before 1977 set the
minimum ratio at 75 to 100.  Since then, almost all SROs have a ratio set at 100 to 100.  In other
words, the sales value of the vehicles produced in Canada by the SRO beneficiaries must be at least
equal to the sales value of all the vehicles sold by them in Canada.
2.35 In terms of administration, the SROs lay dow n reporting obligations similar to those
stipulated in the MVTO 1998 (described above), with similar consequences for a company failing to
meet the requirements.  As with the MVTO 1998, SRO beneficiaries at risk of not meeting their ratio
requirements are entitled to start paying duty on any additional imports without having to pay duty on
what has already been imported.  (See also Factual Arguments of the Parties, Section V.)
III. FINDINGS AND RECOMMENDATIONS REQUESTED BY THE PARTIES
A. JAPAN 'S REQUEST FOR FINDINGS AND RECOMMENDATIONS
3.1 Japan  requests that the Panel make the following findings and recommendations:
(i) the Duty Waiver44 is inconsistent with Article I:1 of the GATT 1994 and Articles II
and XVII of the GATS;
                                                                                                                                                                    
JPN-6.  A table summarising the content of the SROs appears in Exhibit EC-7, and a summary of SRO
conditions and evolution over time is contained in Exhibit JPN-28.
42 See Exhibit EC-21.
43 P.C. 1988-2910, of  30 December 1988 (Exhibit JPN-6).
44 Japan uses the term "Duty Waiver" collectively to refer to the MVTO 1998, the SROs, related
statutory and administrative instruments, and the Letters.  See also Section V.A.1.WT/DS139/R
WT/DS142/R
Page 9
(ii) the Duty Waiver, by virtue of the domestic content requirement, is inconsistent with
Article III:4 of the GATT 1994, Article 2.1 of the TRIMs Agreement, Articles 3.1(b)
and 3.2 of the SCM Agreement, and Article XVII of the GATS; and
(iii) the Duty Waiver, by virtue of the manufacturing requirement, is inconsistent with
Articles 3.1(a) and 3.2 of the SCM Agreement.45
3.2 Finally, Japan requests that the Panel recommend that the Government of Canada bring itself
into conformity with its obligations under the GATT 1994, the TRIMs Agreement and the GATS.
With respect to the inconsistencies with Articles  3.1 and 3.2 of the SCM Agreement, the Government
of Japan respectfully requests that the Panel recommend that the Government of Canada withdraw the
prohibited subsidy "without delay" in accordance with Article 4.7 of the SCM Agreement.
B. THE EUROPEAN COMMUNITIES ' REQUEST FOR FINDINGS AND RECOMMENDATIONS
3.3 The European Communities  requests that the Panel make the following findings and
recommendations:
- the CVA requirements are inconsistent with GATT Article III:4 in that they
afford less favourable treatment to imported parts and materials for the
manufacture of motor vehicles and parts therefor than to domestic like goods;
- the Ratio requirements are inconsistent with GATT Article III:4 in that they
afford less favourable treatment to imported motor vehicles than to domestic
like products with respect to their internal sale in Canada;
- the Tariff Exemption46 is inconsistent with GATT Article I:1 because it
provides an advantage to imports of automobiles originating in the United
States and Mexico vis-à-vis  imports of like products originating in other
Members;
- the CVA requirements and the ratio requirements are TRIMs prohibited by
Article 2.1 of the Agreement on TRIMs;
- the Tariff Exemption is a subsidy contingent upon export performance as well
as upon the use of domestic over imported goods, which is therefore
prohibited by Article 3 of the SCM Agreement;
- the CVA requirements are inconsistent with GATS Article XVII because they
afford more favourable treatment to Canadian services used in themanufacture of motor vehicles and parts therefor than to like services of other
Members; and
                                                     
45 The manufacturing requirement would also be inconsistent with Article III:4 of the GATT 1994 and
Article 2.1 of the TRIMs Agreement.
46 The European Communities uses the term "Tariff Exemption" collectively to refer to (i) the tariff
exemption for the importation of motor vehicles, as well as the CVA requirements and production-to-sale
"ratio" requirements attached thereto, contained in the Auto Pact, as supplemented by the Letters, and in the
MVTO 1998; and (ii) the tariff exemptions for the importation of motor vehicles, and the CVA requirementsand "ratio" requirements attached thereto, prov ided for in the SROs.  See also Section V.A.1.WT/DS139/R
WT/DS142/RPage 10
- the Tariff Exemption is inconsistent with GATS Article II because it accords
more favourable treatment to US suppliers of wholesale trade services for
automobiles than to like service suppliers of other Members.
3.4 The European Communities further requests the Panel to find that, by committing the above
violations, Canada has nullified and impaired benefits accruing to the European Communities underthe cited Agreements.
3.5 The European Communities also requests the Panel to recommend that Canada bring the
measures into conformity with its obligations  under the GATT, the TRIMs Agreement and the GATS.
3.6 Finally, the European Communities requests the Panel to recommend, pursuant to Article 4.7
of the SCM Agreement, that Canada withdraw the subsidy without delay and to specify in itsrecommendation the time period within which the subsidy must be withdrawn.
C. C
ANADA 'S REQUEST FOR FINDINGS AND RECOMMENDATIONS
3.7 Canada  requests that the Panel make the following findings and recommendations:
3.8 Neither Japan nor the European Communities has demonstrated that the measures at issue
violate Canada’s WTO obligations.  More particularly:
• They have failed to show that the measures violate Article I of the GATT 1994: there 
is no discrimination against products based on national origin;
• They have failed to show that the measures violate Article III of the GATT: they do 
not have any effect on the competitive position of  imported parts and vehicles in the 
Canadian market;
• They have failed to show that the measures violate the TRIMS Agreement: the 
measures are not investment measures, they are not trade-related, they do not violate 
Article III of the GATT 1994 and in any event they are not included on the 
Illustrative List;
• They have failed to show that the measures violate the SCM Agreement: they are not 
a subsidy contingent upon export performance or upon the use of domestic over 
foreign goods;
• They have failed to show that insofar as the measures accord duty-free treatment they
violate the GATS: the measures do not affect services and in any event there is no 
discrimination against foreign wholesale serv ice suppliers or in favour of service 
suppliers of certain countries, nor is there any evidence that the companies identified 
by the claimants compete with each other, or in the case of Article XVII, that Canada 
has made a relevant commitment; and
• They have failed to show that insofar as the measures contain a CVA requirement 
they violate Canada's commitments under the GATS:  the measures do not 
discriminate against foreign service suppliers.
3.9 In the light of the foregoing, Canada requests that the claims of Japan and the European
Communities be dismissed.WT/DS139/R
WT/DS142/R
Page 11
IV. REQUEST FOR PRELIMINARY RULING
A. JAPAN 'S ARGUMENT GIVING RISE TO CANADA 'S REQUEST FOR A PRELIMINARY RULING
4.1 Japan  argues as follows:
4.2 Despite the fact that the Government of Japan does not discuss in detail the inconsistency of
the manufacturing requirement with Article III:4 of the GATT 1994 or Article 2.1 of the TRIMs
Agreement in its arguments to the same extent as was discussed in its Request for the Establishment
of a Panel (WT/DS139/2), the Government of Japan reserves its right to elaborate during the course of
the panel deliberation on these claims already contained in the said request.
4.3 In discussing how an eligible manufacturer can meet the conditions for the import duty
exemption, Japan notes the following:
"…this manufacturing requirement (the production-to-sales ratio) would be
inconsistent with Article III:4 of the GATT 1994, because the manufacturing
requirement requires the Auto Pact Manufacturers to increase production of motor
vehicles in Canada and this in turn would lead to increased sales of such domestic
motor vehicles in the Canadian market beyond the level of sales that would haveoccurred in the absence of this requirement, thereby upsetting the balance of
conditions of competition for sales of like imported motor vehicles.  In this regard,
the manufacturing requirement would 'affect' the internal sale, purchase or use of
products within the meaning of Article III:4 of the GATT 1994."
47
B. CANADA 'S REQUEST FOR A PRELIMINARY RULING
4.4 Canada  responds as follows:
4.5 Japan purports to reserve the “right to elaborate during the course of the panel deliberation”
on its claims regarding the alleged inconsistency of  “the manufacturing requirement with Article III:4
of the GATT 1994 or Article 2.1 of the TRIMS Agreement.” Canada objects to this reservation and
requests this Panel to rule as a preliminary matter that it is not open for Japan or the European
Communities to proceed as Japan has proposed to do.  As this Panel is well aware, the fundamental
tenet of due process requires that the responding party must know the case it is to meet.  To permitJapan to develop its claims only when it chooses  to do so would necessarily prejudice Canada’s
ability to defend itself in this action, and would risk offending the basic principle of fairness enshrined
in the maxim audi alteram partem .
48  WTO panels and the Appellate Body have made it abundantly
clear that procedural fairness requires that the complaining party set out its case at the commencement
of proceedings and it is not open to it to eke out its claims incrementally during the various stages ofthe case.
49
4.6 Prior to its first substantive meeting with the parties, the Panel invited Japan and the European
Communities to file a response to Canada's request.  Japan responded by reiterating its right to
elaborate its claims at a later time; the European Communities did not file a response.
                                                     
47 See footnote 397.
48 Let the other side be heard.
49 Appellate Body Report on European Communities – Regime for the Importation, Sale and
Distribution of Bananas , adopted on 25 September 1997, WT/DS27/AB/R (hereinafter Appellate Body Report
on EC –  Bananas III ), paras. 127-128, 143.WT/DS139/R
WT/DS142/RPage 12
C. THE PANEL 'S DECISION
4.7 On 14 June 1999 at the first substantive meeting with the parties, the Chairman read out the
following decision by the Panel :
4.8 The Panel recalls that Japan has stated the following:
"Despite the fact that the Government of Japan does not discuss in detail the
inconsistency of the manufacturing requirement with Article III:4 of the GATT 1994
or Article 2.1 of the TRIMS Agreement in its arguments to the same extent as was
discussed in its Request for the Establishment of a Panel (WT/DS139/2), the
Government of Japan reserves its right to elaborate during the course of the panel
deliberation on these claims already contained in the said request".
4.9 The Panel further recalls Canada’s objection to this reservation by Japan and Canada’s
request to the Panel "to rule as a preliminary matter that it is not open for Japan or the European
Communities to proceed as Japan has proposed to do".
4.10 Having carefully considered this matter, including the arguments of each of the parties to the
dispute, the Panel has come to the following conclusions:
4.11 First, the Panel does not consider that this is a situation where, as argued by Canada, the
complaining party is permitted "to eke out its claims incrementally during the various stages of the
case".  In making this argument, Canada refers to the Appellate Body decision in European
Communities – Regime for the Importat ion, Sale and Distribution of Bananas  (EC  – Bananas III) .
However, the situation here is unlike that in EC – Bananas III , where the Appellate Body stated that
"Article 6.2 of the DSU requires that the claims , but not the arguments , must all be specified
sufficiently in the request for the establishment of  a panel in order to allow the defending party and
any third parties to know the legal basis of the complaint" (WT/DS27/AB/R, para. 143).  In the case
before us there is no Article 6.2 issue of specificity of the measures identified in the panel request.
Japan in this dispute has not attempted to reserve a right to present a new claim at a later stage of the
proceedings;  rather, it appears that Japan has simply indicated that it may wish to further elaborate its
arguments as to claims already set out in the panel request and in its initial arguments.  As such, thePanel does not consider, at this stage, that Canada is likely to be prejudiced in its ability to defend
itself in this action.
50
4.12 Second, to the extent any issue of procedural fairne ss should arise, for example, as to the right
of rebuttal by Canada should Japan wait until a later stage of these proceedings to develop its
arguments as to its GATT Article III:4 and TRIMS Article 2.1 claims with respect to the"manufacturing requirement" (production-to-sales ratio requirement), the Panel will ensure such
procedural fairness by providing Canada with adequate opportunity to respond to any such further
elaboration by Japan of its arguments under these claims.
4.13 Third, in addition to ensuring procedural fairness, it is of course necessary to set a cut-off date
beyond which no new argumentation as to the claims in issue may be accepted, except  upon ashowing of good cause.  In the instant case, the Panel considers that no new argumentation should be
introduced beyond the second panel meeting with th e parties, except in response to any questions
posed by the Panel or otherwise upon a showing of good cause.
                                                     
50 See the Appellate Body Report on EC –  Bananas III , supra  note 49, para. 141, where the Appellate
Body states that, in its view, "there is a significant difference between the claims  identified in the request for the
establishment of a panel, which establish the panel’s terms of reference under Article 7 of the DSU, and thearguments  supporting those claims, which are set out and progressively clarified in the first written submissions,
the rebuttal submissions and the first and second panel meetings with the parties".WT/DS139/R
WT/DS142/R
Page 13
V. FACTUAL ARGUMENTS OF THE PARTIES
A. THE MEASURES AT ISSUE
1. Terminology and clarification of claims
(a) Japan's framing of the measures at issue
5.1 In setting out the measures at issue, Japan  indicates the following:
5.2 Canada implements and applies the Duty Waiver through domestic legislation, regulations,
statutory instruments, departmental memoranda and administrative practices.  More specifically,
Canada implements the Duty Waiver pursuant to:  (i) section 115 of the Customs Tariff and section 23of the Financial Administration Act
51;  (ii) the Motor Vehicles Tariff Order, 1998 (MVTO 1998)52;
(iii) letters of undertaking signed by individual manufacturers upon the demand of the Government of
Canada53;  (iv) Special Remission Orders (SROs) providing for the remission of customs duties on
motor vehicles imported by specified manufacturers54;  (v) departmental memoranda relating to the
MVTO 1998 and the SROs55;  and (vi) implementing measures taken thereunder.  The Government of
Canada also exercises administrative discretion regarding certain aspects of the Duty Waiver.56  I n
Japan's arguments, the term "Auto Pact Manufacturers" means those companies that are qualified to
import motor vehicles duty free under the Duty Waiver MVTO 1998 or its predecessors, or SROs.
The term "Non-Auto Pact Manufacturers" mean those companies that are not Auto Pact
Manufacturers.
(b) The European Communities' framing of the measures at issue
5.3 In setting out the measures at issue, the European Communities  indicates the following:
5.4 The measures in dispute are contained in:
- the Agreement Concerning Automotive Products between the Government of Canada
and the Government of the United Stat es of America, done at Johnson City on
16 January 1965 (the "Auto  Pact")57;
- the so-called Letters of Undertakin g submitted by certain manufacturers of motor
vehicles to the Government of Canada in connection with the Auto Pact (the "Letters
of Undertaking")58:
- the Motor Vehicles Tariff Order , 1998  (the "MVTO 1998")59;
                                                     
51 Exhibit JPN-3.
52 Exhibit JPN-4.
53 Exhibit JPN-5.
54 Exhibit JPN-6.
55 Exhibits JPN-7 and JPN-8.  Departmental Memoranda (D-Memoranda) set out the administrative
procedures followed by Revenue Canada in the administration of various statutes and regulations.
56 For example, on 3 December 1998, the Government of Canada exercised administrative discretion to
grant the remission of MFN duties on imports made by PACCAR Inc. notwithstanding the fact that this eligible
importer did not meet the applicable Auto Pact conditions (Exhibit JPN-9).
57 Exhibit EC-1.
58 Exhibit EC-2.
59 Exhibit EC-3.WT/DS139/R
WT/DS142/RPage 14
- the Special Remission Orders  providing for a remission of customs duties on imports
of motor vehicles issued to certain manufacturers of motor vehicles not covered by
the Auto Pact and the MVTO 1998 (the SROs)60;  and
- the D-Memoranda issued by the Minister of National Revenue for the administration
of the above measures, and other implementing measure.61
5.5 In addition, although not themselves in dispute, the following are directly relevant for this
case:
- the Canada-United States Free Trade Agreement, signed on 2 January 1988 (the
CUFSTA)62;  and
- the North American Free Trade Agreement, signed on 17 December 1992 by the
Governments of Canada, Mexico and the United States (the NAFTA).63
5.6 The measures complained of by the European Communities are the following:
- the Tariff Exemption for the importation of motor vehicles, as well as the CVA
requirements and production-to-sale "ratio" requirements attached thereto, contained
in the Auto Pact, as supplemented by the Letters of Undertaking, and in the MVTO1998;  and
- the Tariff Exemptions for the importation of motor vehicles, and the CVA
requirements and "ratio" requirements attached thereto, provided for in the SROs.
5.7 Hereinafter, both types of exemptions will be referred to collectively as the "Tariff
Exemption".  In turn, the various CVA requirements and ratio requirements attached to the Tariff
Exemption will be designated as the "CVA requirements" and the "ratio requirements", respectively.
Finally, those manufacturers of motor vehicles which qualify for the Tariff Exemption will be referredto as the "beneficiaries".
(c) Canada's response to the complainants' framing of the measures at issue
5.8 With respect to the way the complainan ts set out the measures at issue, Canada  responds as
follows:
5.9 Both Japan and the European Communities have adopted in their arguments the use of a
single term to refer to the measures at issue.  Japan refers throughout its arguments to "the Duty
Waiver", while the European Communities uses the term "the Tariff Exemption".  The Panel is asked
to rule that "the Duty Waiver" or "the Tariff Exemption" violates Canada’s obligations under the
WTO.  The complainants’ strategy appears to be to combine all manner of items together (be they
current measures, repealed provisions, private letters, international agreements, or administrativememoranda) in the hope that this mixture will be enough to constitute a WTO violation.  In other
words, the complainants recognise that they cannot make out a violation for each of the measures they
seek to challenge.  So they created a "single" meas ure, a combination of elements, to try to meet their
burden.
                                                     
60 Exhibit EC-6.  A Table summarising the requirements of the SROs is provided as Exhibit EC-7.
61 Exhibits EC-8, EC-9 and EC-10.
62 Copies of the relevant provisions are supplied as Exhibit EC-12.
63 Copies of the relevant provisions are supplied as Exhibit EC-13.WT/DS139/R
WT/DS142/R
Page 15
5.10 This strategy is misleading and cannot succeed.  For there are a number of measures that have
been challenged64, and to succeed in their claims, Japan and the European Communities must prove
that each of them is inconsistent with Canada’s WTO obligations.
5.11 A ruling on "the Duty Waiver" or "the Tariff Exemption" would have no meaning in law, as
neither is a measure subject to challenge under the WTO.  In fact, the measures at issue are as follows:
• the Motor Vehicles Tariff Order, 1998 (MVTO 1998)65;  and
• each of the current Special Remission Orders (SROs).66
5.12 The complainants have also raised other matters, but they cannot properly be described as
measures.  They include the Auto Pact, Revenue Canada memoranda, letters written in 1965 by
certain vehicle manufacturers to the then Canadian Minister of Industry, as well as certain provisions
of  the CUSFTA and of the NAFTA.
                                                     
64 See Request for the Establishment of a Panel by Japan , WT/DS/139/2, 13 November 1998; Request
for the Establishment of a Panel by the European Communities , WT/DS142/2, 14 January 1999.
65 SOR/98-43 (Exhibits EC-3 and JPN-4).
66 See Exhibits EC-6 and JPN-6.WT/DS139/R
WT/DS142/RPage 16
Canada's Figure 1
Figure 1 - Qualifying for Auto Pact Membership in Canada
Membership was limited to importers that qualified as a
“manufacturer” of the class of vehicles to be imported.
3 Vehicle Classes
Automobiles Buses Specified Commercial
Allowable
Import Class:
•AutomobilesA. Base Year Production in Four Quarters 
Aug Sep Oct Nov
Dec Jun Feb Mar
Ju l Apr May JunYear of ImportationB. Production in Year of Import
Allowable
Import Class:
•Automobiles
C. Maintenance of Production to Sales Ratio
:Canadian
ProductionNet Sales in 
Canada of 
All Vehicles
75 : 100
D. Canadian Value Added Requirement
Base Year Value Added Import Year Value Added
= or >
Duty Free Imports of automobiles
from any Country when qualified
as a manufacturer of the class of
vehicle being imported.Aug Sep Oct
Nov Dec Jan
Feb Mar Apr
May Jun JulBase Year 1963/64
Production
“Manufacturer” was defined in the Agreement on the basis
of the following criteria*:
Manufacturer
* The same illustration would apply to specified commercial vehicles and buses.  A single manufacturer may qualify for all thre e vehicle classes.
WT/DS139/R
WT/DS142/R
Page 17
(d) Japan's follow-up to Canada's response
5.13 Following up on Canada's response to the complainants' framing of the measures at issue,
Japan  adds:
5.14 The Duty Waiver is comprised of a "benefit" in the form of a duty exemption that is
contingent on three conditions:  (i) an eligibility requirement implemented in the form of an eligibility
restriction;  (ii) a domestic content requirement implemented in the form of a Canadian value-added
(CVA) requirement;  and (iii) a manufacturing requirement implemented in the form of a production-
to-sales ratio.
5.15 The term "Duty Waiver" is used to simplify the Government of Japan's arguments regarding
this series of complex measures.
5.16 It is the position of the Government of Japan that the three classes of instruments (i.e.
measures) that implement the Duty Waiver — the MVTO 1998, the letters of undertaking and the
SROs—are inconsistent with the obligations of the Government of Canada under the above-noted
WTO Agreements.  The Government of Japan recognizes that it has the burden to present a prima
facie  case of WTO-inconsistency with respect to the MVTO 1998, the letters of undertaking and the
SROs.  Given that the characteristics that give rise to the WTO-inconsistencies are identical or very
similar in these three classes of instruments, the arguments that apply to the instruments are identical
or very similar.  To the extent that the arguments differ, the differences have been expressly addressed
in the Government of Japan's arguments and are further elaborated upon below.
(e) The EC's follow-up to Canada's response
5.17 Following up on Canada's response to the complain ants' framing of the measures at issue, the
European Communities  adds:
5.18 At several points Canada has referred to CAMI as being the only "relevant" SRO beneficiary.
In response to a request from the European Communities to clarify those statements, Canada has
answered the following:
" … the EC raised specific allegations only with respect to the Canadian Big Three
and Volvo as MVTO beneficiaries and the two SRO automobile manufacturers,
namely CAMI Automotive Inc. and Intermeccanica … Canada, as the defending
party, is not required to rebut the contents of the EC’s Panel request, but only the
evidence presented to the Panel …".67
5.19 The above assertions are incorrect.  The EC’s claims under GATT Article I and GATS
Article II are limited in scope to imports of automobiles and to the provision of wholesale distribution
services for automobiles, respectively.  The only  SROs concerned by those two claims are the SROs
issued to CAMI and Intermeccanica, which are the only two SROs beneficiaries authorised to import
automobiles duty free.
5.20 In contrast, the claims submitted by the European Communities under GATT Article III:4 and
GATS Article XVII, as well as the EC’s claims under the TRIMs Agreement and the SCM
Agreement, cover not only the category of "automob iles", but also the other two categories of "motor
vehicles", i.e. "buses" and "specified commercial vehicles".  Those claims concern all the SROs
                                                     
67 Canada's response to Question 1 from the EC.WT/DS139/R
WT/DS142/RPage 18
currently in force (a total of 63, according to the list appended to Memorandum D-10-16-2)68, and not
just the SROs issued to CAMI and to Intermeccanica.
5.21 The scope of the EC’s claims is stated clearly in the EC’s Panel request and in its
argumentation.  Contrary to Canada’s assertions, the European Communities has provided evidence
with respect to all the SROs.  The European Communities attached a copy of Memorandum D-10-16-2, which contains a complete list of the SROs in force.
69  Furthermore, the European
Communities has supplied to the Panel copies of all those SROs70, as well as a table summarising
their contents.71
5.22 In response to a question from Japan, Canada has disclosed the name of seven vehicle
manufacturers currently utilising SROs to import vehicles other than automobiles.72  To avoid any
possible misunderstanding, the European Communities would like to recall that its claims in this
dispute are not limited to those SROs that are curren tly being "utilised" by their beneficiaries.  They
cover all SROs in force, whether or not they have been "utilised" recently.
5.23 If an SRO beneficiary which is not currently "utilising" its SRO decided to do so as from the
next model year, the Canadian Government would be legally obliged to accord to that beneficiaryduty-free treatment, provided that it meets the cond itions stipulated in its SRO.  Thus, the SROs
constitute "mandatory legislation" which, in accordance with settled case law, may be subject to
dispute settlement even in those cases where they are not currently being "utilised".
73
2. Letters
(a) Japan's arguments concerning the Letters
5.24 With respect to the Letters (noted above in paras. 2.4 and 2.5), Japan  argues as follows (with
arguments also appearing in Section VI, Legal Arguments of the Parties):
5.25 At the time the Auto Pact was being negotiated, the Government of Canada obtained from a
number of Auto Pact Manufacturers additional commitments to meet higher domestic content
requirements than specified under the Canada-US Auto Pact.  These commitments were set out in
company-specific letters of undertaking.  Upon th e demand of the Government of Canada, General
Motors, Ford, Chrysler and American Motors undertook commitments that exceeded those in theMVTO 1965.  A report of the United States Senate noted that the terms of the letters of undertaking
provided for a continuing commitment to increase CVA by a minimum percentage in every year.
74
The report also noted that the manufacturers consider ed the letters to be binding and even continued
to report their compliance every year to the Government of Canada.75  The language of the letters
indicates they are actually binding.76
                                                     
68 Exhibit EC-8.
69 Exhibit EC-8.
70 Exhibit EC-6.
71 Exhibit EC-7.
72 Canada’s response to Question 4 from Japan.  It is unclear whether, in addition to the seven
beneficiaries identified by Canada, there are other be neficiaries which have not given permission to the
Canadian Government to disclose their names.
73 See, e.g., the Panel Report on United States – Taxes on Petroleum and Certain Imported Substances ,
adopted on 17 June 1987, BISD 34S/136 (hereinafter Panel Report on US – Petroleum ), paras. 5.2.1-5.2.2.
74 Exhibit JPN-27, p. 27.
75 Ibid.
76 Exhibit JPN-5 presents Letters of Undertaking from General Motors Canada (GM), Ford Canada
(Ford), Chrysler Canada (Chrysler) and American Motors Canada (AMC):WT/DS139/R
WT/DS142/R
Page 19
5.26 Based on a review of such letters that became publicly available in the United States in 1965,
the producers in question have made a commitment beyond the requirements of the MVTO to
increase the Canadian value added in the production of vehicles and parts by 60 per cent of the
increase in their Canadian sales of automobiles and by 50 per cent of the increase in their Canadian
sales of commercial vehicles.  Furthermore, the major manufacturers undertook to increase CVA inthe production of vehicles and original equipment parts by CDN$260 million from 1964 to the end of
the 1968 model year.
77
5.27 These commitments were undertaken at the request of the Government of Canada as a
prerequisite for qualifying under the Duty Waiver.  Under the terms of the letters, the commitment to
increase CVA by a minimum percentage each year does not expire.
5.28 These undertakings have not been published in any official instrument of the Government of
Canada.  The number of letters of undertaking that have been signed and whether those letters have
been amended over time is not publicly known.
(b) The EC's arguments concerning the Letters
5.29 With respect to the Letters, the European Communities  argues as follows (with arguments
also appearing in Section VI, Legal Arguments of the Parties):
5.30 Prior to the conclusion of the Auto Pact, and as a condition for signing it, the Canadian
Government requested and obtained from the beneficiaries certain additional commitments regarding
their CVA, over and above the requirements imposed by the Auto Pact.
5.31 Those additional commitments are contained in so-called "Letters of Undertaking", which
were submitted by each beneficiary to the Canadian Minister of Industry a few days before the
signature of the Auto Pact.
5.32 The contents of the Letters of Undertaking were kept secret by both Governments at the time
of the conclusion of the Auto Pact.  Nevertheless, the Letters of Undertaking sent by the Canadian
subsidiaries of the US "Big Four" (i.e. GM, Ford, Chrysler and American Motors)78 were eventually
made public in the course of the debate by the US Congress of the Automotive Products Trade Act,
1965.  While it is generally believed that other beneficiaries of the Auto Pact (e.g., Volvo) were also
                                                                                                                                                                    
GM – GM's letter indicates that the right to import motor vehicles duty-free is conditional on
the fulfilment of two requirements not mentioned in the MVTO:(i) an increase of the CVA by an amount equal to 60 per cent of market growth (para. 3);
and
(ii) an increase in the annual CVA by the end of the model year 1968 (see para. 4, which
states that, for GM, the increase is CDN $121 million.  See also p. 35, where GM'spresident reports to the Minister:  "You have requested that we should increase CVA…").
In the last part of the letter, GM's president mentions the difficulties that will be encounteredby GM in attaining  the objectives on time, but undertakes that the company will reorganize its
production facilities in Canada in order to meet the requirement and undertakes studies in that
connection.Ford  – After stating that Ford undertakes to reach  such an amount of CVA in order to "meet
the objectives of the Agreement," Ford's president mentions that the company will report tothe Minister its plans to fulfill its obligations under the letter.Chrysler and AMC  – These two letters incorporate language similar to that noted above in the
Ford letter.
77 United States Senate, Committee on Finance, Data Relating to H.R. 9042 Automotive Products
Trade Act of 1965 (US Government Printing Office: 1965), 59 (Exhibit JPN-39).
78 American Motors was acquired by Chrysler in 1987.WT/DS139/R
WT/DS142/RPage 20
requested to submit Letters of Undertaking by the Canadian Government, those letters have never
been disclosed to the public.
5.33 The terms of the Letters of Undertaking were negotiated by the Big Four with the Canadian
Ministry of Industry.  Their wording is very similar, and in some cases identical.79  In essence, they
impose upon each beneficiary two additional commitments:
(A) to increase in each model year the dollar value of CVA in the production of
motor vehicles of a class, and of original equipment parts therefor, by a
certain percentage of the annual "growth in the market" for the motor vehicles
of that class. For automobiles, that percentage is 60 per cent, and for specified
commercial vehicles and buses 50 per cent;  and
(B) to increase the dollar value of CVA in the production of motor vehicles, and
original equipment therefor, by a certain stated amount, over and above the
amount achieved in the base year, and that achieved pursuant to commitment
(A), during the model year.80
5.34 For purposes of the first commitment, "growth in the market" is defined as the difference
between the cost to each beneficiary of the vehicles of the class concerned during the preceding model
year and the cost to the beneficiary of the vehicles of the same class sold during the current model
year.
5.35 The second commitment, like the requirement to maintain the CVA of the base year laid
down in the Auto Pact, has been eroded over the years by inflation.  As a result, the required CVA
now approaches 60 per cent (in the case of automobiles) or 50 per cent (in the case of specified
commercial vehicles and buses) of the beneficiary’s cost of sales.
5.36 For purposes of both commitments, the calculation of CVA includes, in addition to the CVA
of vehicles produced and sold in Canada, the CV A of vehicles and original equipment parts produced
in Canada and exported from Canada by the beneficiary or purchased by foreign affiliates of the
beneficiary from independent Canadian vendors.81
5.37 The Letters of Undertaking also contain some reporting and auditing provisions82 intended to
allow the Canadian authorities to verify that the beneficiaries meet the additional CVA commitments.
5.38 The CVA requirements of the Letters of Undertaking differ from those contained in the
MVTO 1998 and the SROs in that failure to comply with them in a given model year does not result
in the obligation for the beneficiary to pay customs duties on the imports made during that year.
                                                     
79 Compare, for example, the Letters of Undertaking submitted by Chrysler Canada, Ltd. and American
Motors, Ltd.  This strongly suggests that all Letters of  Undertaking were drafted after a model provided by the
Canadian Government.
80 For the "Big Four", the required increase in CVA totalled C$239 million.  The individual
requirements were C$121 million for General Motors, C $74.2 million for Ford, C$33 million for Chrysler and
C$11.2 million for American Motors.
81 See e.g., the Letter of Undertaking submitted by Ford Motor Co. of Canada, Ltd, p. 2, subpara. (ii).
82 For example, the letter sent by Ford Mo tor Co. of Canada, Ltd. reads as follows:
"The Ford Motor Co. of Canada Ltd., also agrees to report to the Minister of Industry every three
months beginning April 1 1965, such information as the Ministry of Industry requires pertaining to progress
achieved by our company as well as plans to fulfil our obligations under this letter.  In addition, Ford Motor Co.of Canada Ltd. understands that the Government will conduct an audit each year with respect to the mattersdescribed in this letter".WT/DS139/R
WT/DS142/R
Page 21
5.39 This does not, however, mean that the commitments contained in the Letters of Undertaking
are merely "voluntary".  It is obvious that those commitments do not, as such, advance the
commercial interests of the beneficiaries.83  They were exacted by Canada from the beneficiaries as a
condition for signing the Auto Pact.  The beneficiaries, therefore, have assumed that, were they to
infringe the commitments, the Canadian Government would respond by withdrawing the tariffbenefits.
84  In practice, that implicit sanction appears to have been sufficient and instances of non-
compliance have remained exceptional.85
(c) Canada's response to the complainants' arguments concerning the Letters
5.40 In response to the complainants' arguments regarding the Letters, Canada  responds as
follows (with arguments also appearing in Section VI, Legal Arguments of the Parties):
5.41 Japan and the European Communities both have mischaracterized letters sent to the Canadian
Minister of Industry contemporaneously with the ne gotiation and signature of the Auto Pact, and have
included them in their respective "single measures" they have invented solely for the purpose of these
proceedings.86  The complainants in this case would have the Panel regard the letters as legally
binding and enforceable, presumably so that they can be considered measures subject to WTOdisciplines.  However, the letters have not been implemented through any Canadian law or regulation,
and they are not legally binding.
5.42 Both Japan and the European Communities have characterized certain letters as
“requirements”.  The European Communities in particular has claimed the letters were required of the
manufacturers as a condition of Canada’s signing the Auto Pact, and that the beneficiaries have
assumed that a failure to meet them would result  in Canada withdrawing the “Tariff Exemption”.
These arguments have no basis in fact.
5.43 These letters are not legally binding under Canadian law.  They are not contracts, because
they do not meet the Canadian legal requirements of contract formation. They are not statutory
instruments, because they were not passed by the legislature, or by the executive under the authority
of the legislature.  Had the Canadian Government intended to make the letters binding, it could
certainly have done so.  It did not.  Consequently, the letters have no legal status and no legal effect.
5.44 Moreover, those arguments have no basis in law.  Because the letters have no legal status they
are not covered by meaning of “laws, regulations  and requirements” as used in Article III:4.
5.45 The question of duty-free eligibility in any given year is determined exclusively by the
requirements in the MVTO 1998.
87  By law, these are the only grounds under which duty remission
can be denied.  The European Communities has provided no legal basis under which Canada could
                                                     
83 The Letters of Undertaking submitted by General Motors of Canada, Ltd and Ford Motor Co. of
Canada, Ltd. discuss at length the problems encountered by those companies in order to achieve the goals set bythe Canadian Government.
84 Note that the Auto Pact would not be an effectiv e obstacle to such withdrawal of benefits.  Indeed,
the Auto Pact gives to each party the right to terminate the agreement, subject only to giving one year notice
(Auto Pact, Article VII).
85 According to Canada’s Ministry of Industry, the Letters of Undertaking "while not being binding,
typically have been meet".  See Canada – US Automotive Products Agreement  (Auto Pact Background)
Industry Canada, 10 June 1998 (Exhibit EC-20).
86 Japan claimed the letters were provided at the "demand" of the Canadian Government, but it offered
no proof of its claim.  The Europeans have alleged that signature of the letters was a condition precedent to
signing the Auto Pact, although it has filed nothing in support of this contention and relies instead onspeculation:  "it is generally believed" that other Auto Pact beneficiaries submitted letters.
87 MVTO 1998, s. 2.WT/DS139/R
WT/DS142/RPage 22
withdraw benefits for a failure to meet commitments under the letters.88  This is because there is none.
Should a manufacturer fail to meet the voluntary undertakings in its letter, the Canadian Government
would lack the legal authority to deny duty-free eligibility.  Indeed, the D-Memorandum submitted by
the European Communities and Japan demonstrates clearly that Revenue Canada does not review
whether MVTO companies have met their commitments under the letters.89
(d) Japan's rebuttal to Canada's response
5.46 As a rebuttal to Canada's response regarding the Letters, Japan argues the following:
5.47 The Government of Canada takes the position that the letters of undertaking are not
"measures" that can be subject to WTO discipline on the basis that the letters are not binding on the
signatory manufacturers and are not "requirements" within the meaning of Article III of the GATT
1994.90  Clearly, this is not the case.  The signatories of the letters viewed them as binding, the letters
contain audit and reporting requirements, and there is no expiry date on the letters.  It is irrelevant that
the letters have not been expressly implemented in Canadian law or regulation and that the MVTO
1998 and SROs do not provide for sanctions in the event that the commitments in the letters are not
complied with.  The MVTO 1998 and the SROs are "Orders in Council" which are statutoryinstruments that can be revoked or amended by the Government of Canada should it be inclined to do
so.  Accordingly, the letters of undertaking are clearly enforceable as the Government of Canada can
revoke the relevant instruments if their conditions are not met.  There is no doubt that they are
measures to which the disciplines of the WTO apply.
5.48 The Government of Canada's position that the letters of undertaking are not binding on their
signatories is contradicted by statements of the Chief Executive Officers of two of the signatories.
5.49 On 17 November 1997, Mr. G.Y. Landry, then Chairman, President and CEO of Chrysler
Canada Ltd., made the following statement to the Rotary Club of Windsor:
"In exchange for exemption from Canadian customs duties, each Auto Pact member must
ensure that it meets a one to one production to sales ratio (one vehicle produced in Canada
for each one sold in Canada."
"In addition, each member must meet a 60 per cent Canadian value added commitment. The
60 per cent of the value of automobiles sold in Canada by the "Auto Pact" members, has
resulted in a significant purchase of vehicle parts produced in Canada."
91
5.50 On 16 October 1997, Ms. Bobbie Gaunt, then President and CEO of the Ford Motor
Company, made the following statement to the Empire Club of Canada:
"Ford, Chrysler and GM signed commitments that we would produce at least one vehicle in
Canada for each vehicle sold here, and that we would achieve a Canadian Value Added
content of at least 60 per cent.  We have exceeded those obligations by a country mile.92"
                                                     
88 The European Communities did suggest that Canada could simply withdraw from the Auto Pact, but
the suggestion is without merit.  Such an action would be so inimical to Canada’s interests that it would never
be contemplated, as the MVTO beneficiaries are well aware.
89 See Exhibits EC-9 and JPN-7 (Memorandum D-10-16-3).  The remaining memoranda are filed as
Exhibit CDA-7.  In no case do the memoranda state that Revenue Canada will verify anything other thanwhether MVTO requirements have been met.
90 See Canada's responses to Questions 4 and 16 from the Panel.
91Remarks of G. Yves Landry to the 71st International Day, Rotary Club of Windsor,
17 November 1997, Caboto Club, Windsor Ontario (Exhibit JPN-46).
92 Remarks by Bobbie Gaunt, President and Chief Executive Officer, Ford Motor Company of Canada,
Limited, to the Empire Club of Canada, 16 October 1997, Toronto (Exhibit JPN-47).WT/DS139/R
WT/DS142/R
Page 23
5.51 These statements, made independently by the highest officials of two of the MVTO 1998
recipients, are prima facie evidence that the CVA that is applicable to Ford, Chrysler and GM is
60 per cent.  This, in turn, is prima facie evidence that the letters of undertaking are binding and
operative.
5.52 Accordingly, the Government of Japan maintains its position that the Letters of Undertaking
are requirements within the meaning of Article III of the GATT 1994.  It also takes the position that
the Letters of Undertaking constitute "measures" that are clearly subject to the WTO disciplines
identified in its challenge.
(e) The EC's rebuttal to Canada's response
5.53 As a rebuttal to Canada's response regarding the Letters, the European Communities argues
the following:
5.54 As a preliminary matter it is necessary to address a threshold issue raised by Canada which
concerns several of the claims made by the European Communities:  whether the CVA requirements
contained in the Letters of Undertaking submitted by certain manufacturers in connection with theAuto Pact are "measures" subject to dispute settlement.
5.55 Canada’s argument with respect to this issue is not entirely clear.  On the one hand, Canada
contends that the European Communities and Japan have not proven their allegations that the Letters
of Undertaking were submitted at the request of the Canadian Government.  This would suggest that
Canada’s position is that the Letters of Undertaking are "private acts" not attributable to the Canadian
Government.  On the other hand, Canada argues that the Letters of Undertaking are not "legally
binding".  This in turn would seem to imply an admission that the Letters of Undertaking are acts ofthe Canadian Government, but nevertheless lack the necessary attributes to qualify as "measures"
subject to dispute settlement.
(i) The Letters of Undertaking are attributable to the Canadian Government
5.56 As recalled by the Panel Report on Japan – Measures affecting Consumer Photographic Film
and Paper
93, past GATT practice confirms that formally "private" acts may nevertheless be deemed
Governmental action subject to dispute settlement, prov ided that there is sufficient involvement of the
Government.
5.57 The involvement of the Canadian Government in the Letters of Undertaking is indisputable
and makes Canada’s contention that the Letters of Undertaking are "private" acts of the Auto Pact
beneficiaries untenable.
5.58 First, the Letters themselves state expressly that they are submitted in response to a previous
request from the Canadian Government.  The Letter submitted by General Motors is particularly
candid in this regard.  It contains statements such as the following:
"… this letter is in response to your re quest for a statement with respect to the
proposed agreement …".94
and
                                                     
93 Panel Report on Japan – Measures Affecting Consumer Photographic Film and Paper , adopted on
22 April 1998, WT/DS44/R (hereinafter Panel Report on Japan – Film ), para. 10.56.
94 Letters of Undertaking of General Motors of Canada Ltd., para. 1 (Exhibit EC-2).WT/DS139/R
WT/DS142/RPage 24
"…you have requested that we should increase Canadian value added in our products
by $121 million between 1964 and the end of the model year 1968, as outlined under
condition (4).  Also you have requested that the amount should be further increased to
the extent required under condition (3) stated above…".95
5.59 Second, the commitments included in the Letters  of Undertaking do not, as such, advance the
commercial interests of the beneficiaries.  Why would the beneficiaries have submitted the Letters of
Undertaking, unless they had been pressed to do so by the Canadian Government?  In fact, some of
the Letters discuss at length the difficulties encountered by the beneficiaries in order to meet the
objectives assigned by the Canadian Government.96
5.60 Third, all the beneficiaries gave the same commitments.  Furthermore, the wording of the
Letters of Undertaking is very similar, and in some cases identical.97  This "coincidence" suggests that
all the Letters of Undertaking were drafted after a common  model provided by Canada’s Ministry of
Industry.
5.61 Lastly, when the Automotive Products Trade Act of 196598 was debated by the US Congress,
chief executives of the US Big Four and Government officials testified that the Letters of Undertakinghad been negotiated with the Canadian Ministry of  Industry and that their submission was regarded by
Canada as a condition sine qua non  for signing the Auto Pact.
5.62 For example, according to the Executive Vice-President of General Motors:
"The Canadian Government asked us to write them a letter stating our understanding
of the provisions of the agreement as it was finally determined and to ask for our
endorsement of the principles to the extent that we did understand them and assigned
to us an objective whereby, over the 4 years that are involved in this agreement, we
would undertake to increase our Canadian production or our Canadian value."
99
5.63 Equally explicit was the Vice-President of Chrysler with respect to the link between the
Letters and the Auto Pact established by the Canadian Government:
"The agreement was entered into by Canada only after Canada received assurances
from the Canadian vehicle manufacturers which were designed to protect andstimulate Canada’s much smaller and less developed manufacturing industry."
100
5.64 The accounts of the industry were corroborated by officials of the US Government.  Thus, the
Assistant Secretary of State for Economic Affairs testified that:
"… It ought to be a matter of record that there have been such conversations between
the Canadian Government and each of the Canadian automobile manufacturers, andthat the results of those conversations – that is, the letters of assurance, or statements
                                                     
95 Ibid., para. 10.
96 See, e.g., the Letters of Undertaking of General Motors of Canada Ltd., where that company
complains that the CVA objectives assigned by the Canadian Government are "extremely ambitious"(Exhibit EC-2, para. 10 ff.).
97 Compare, for example, the Letters of Undertaking submitted by Chrysler Canada, Ltd., and
American Motors (Canada) Ltd. (both in Exhibit EC-2).
98 Exhibit EC-11.
99 US Congress, Hearings before the Committee on Ways and Means, House of Representatives,
89th Congress, First Session, H.R. 6960, p. 148 (Exhibit EC-22).
100 Ibid., p. 157.WT/DS139/R
WT/DS142/R
Page 25
of intentions, are an important part of this agreement as a whole from the Canadian
standpoint."101
5.65 Further details are provided by the testimony of the Deputy Assistant Secretary for Trade
Policy:
"… We knew during the course of the negotiations that went on for many, many
months that the Minister of Industry of Canada was holding conversations with the
automobile manufacturing companies in Cana da in respect of their intentions as to
production under the differing conditions of the prospective agreement …
"… It took the Canadian Government some time to formulate what was in the letters
but I would say [that we became aware of the terms of the letters] in the wintercertainly of 1964.
"… I imagine that during the separate conversations that the companies had with the
Minister of Industry, that the discussion was perhaps a common one, and perhaps the
Minister of Industry drafted a proposed letter that he discussed with each of them that
had identical language in it, and that these letters were taken by the Canadiancompanies and modified to suit their particular circumstances and returned to the
Ministry with a  lot of common language remaining.
102"
5.66 As already explained by the European Communities, the US Government and the Big Four
tried unsuccessfully to keep secret the Letters of Undertakings.  Their concern proved to be justified.
When the Letters were eventually disclosed to the US Congress, they were heavily criticised by many
congressmen who feared that the additional CVA requirements would cause a serious prejudice to the
US parts industry.103  That led to the insertion in the Automotive Products Trade Act of 1965 of a
special provision requiring the President to repo rt to Congress any subsequent undertakings.  The
wording of that provision evidences that the US Congress entertained no doubts with respect to the
true nature of the Letters of Undertaking.  It reads as follows:
"Whenever the President finds that any manufacturer has entered into  any
undertaking , by reason of governmental action , to increase the Canadian value added
… he shall report such finding … .  The President shall also report whether such
undertaking is additional to undertakings  agreed  to in letters of undertaking
submitted by such manufacturer before the date of enactment of this Act."104
(emphasis added )
5.67 The Letters of Undertaking envisaged that the Canadian Government and the beneficiaries
would enter into new "discussions" before the end of model year 1968.105  The Big Four testified to
the US Congress that those discussions did in fact take place in due course and that the Canadian
                                                     
101 US Congress Hearing before a subcommittee of the Committee of Foreign Relations, US Senate,
89th Congress, 1st Session., 10 February 1965, p. 23 (Exhibit EC-22).
102 US Congress, Hearing before the Committee on Finance, US Senate, 89th Congress, 1st Session,
H.R. 9042, pp. 151-152 (Exhibit EC-22).
103 See e.g., the Statement by Hon. John Brademas, Representative of Indiana, in US Congress,
Hearings before the Committee on Ways and Means, House of Representatives, 89th Congress, First Session,
H.R. 6960, p. 196 ff (Exhibit EC-22).
104 Section 205(a) (Exhibit EC-11).
105 All the four Letters of Undertaking conclude with the following paragraph:  "I understand that
before the end of model year 1968 we will need to discuss together the prospects for the Canadian automotiveindustry and our company's program."WT/DS139/R
WT/DS142/RPage 26
Government requested them to sign new undertakings.106  All of them declared to have refused
Canada’s request.  By way of example, Chrysler testified the following:
"Chrysler Canada Ltd. has informed us of their discussions with representatives of the
Canadian Government.  The Department of  Industry, Trade and Commerce of Canada
has a long standing practice of regular meetings with representatives of the CanadianMotor Vehicles Manufacturers’ Association, including Chrysler Canada Ltd.  For
approximately a year these meetings have centred around a review of the progress in
achieving the commitments made in 1965 and the Canadian’s Government strong
desire for additional undertakings for the years after 1968 … The Canadian
Government requested that Chrysler Canada  Ltd., sign a new undertaking to achieve
Canadian value added of 75 per cent by model year 1971 and 80 per cent by model
year 1974.  Chrysler Canada Ltd. supplied Chrysler Corp. with a draft copy of that
letter and has informed us of a number of telephone conversations and meetings
between various ranking Canadian Government officials and top executives of
Chrysler Canada, Ltd. … Chrysler Canada Ltd., has informed us that they have notagreed to any additional undertakings with the Government of Canada, either by letter
or verbally…".
107
5.68 Although Chrysler did not agree to sign a new undertaking, the above account serves to
illustrate the extent of the Canadian Government ’s involvement in the submission of the Letters of
Undertaking in 1965.
5.69 In its reply to a question from the Panel, Canada has eventually admitted that the Letters of
Undertaking were submitted at the request from the Canadian Government.  Further, Canada evenconcedes now that the Canadian Government itself drafted the model for the Letters of Undertakings.
Nevertheless, Canada pretends that the Canadian Government was not seeking any additional
commitments from the beneficiaries:
"At the conclusion of the Auto Pact the Canadian Government sought assurance from
the affected companies that they understood the new system.  It provided them with a
draft letter outlining what the requirements would be under the pact, and what it
hoped would be achieved as a result.  The companies were free to modify the letter in
any way they chose – for example the letter from General Motors of Canada Ltd. is
different in both form and substance from the others, and in no way affected that
company’s MVTO status".
108
5.70 It is simply not true that the Canadian Government was merely seeking the assurance from the
Auto Pact beneficiaries that they "understood the new system".  The above transcribed passage of the
Letter of Undertaking submitted by General Motors proves that the Canadian Government requested
something more substantial from the beneficiaries:
"… You have requested that we should increase Canadian value added in our
products by $121 million between 1964 and the end of the model year 1968, as
outlined under condition (4).  Also you have requested that the amount should be
further increased to the extent required under condition (3) stated above …".109
5.71 So does the testimony by the Executive Vice-President of General Motors:
                                                     
106 US Congress, Hearing before the Committee on Finance, US Senate, 19th Congress, 2nd Session,
pp. 82 ff (Exhibit EC-22).
107 Ibid., pp. 87 ff.
108 Canada's response to Question 17 from the Panel.
109 Exhibit EC-2.WT/DS139/R
WT/DS142/R
Page 27
"The Canadian Government asked us to write them a letter stating our understanding
of the provisions of the agreement … and assigned to us an objective whereby, over
the 4 years that are involved in this agreement, we would undertake to increase our
Canadian production or our Canadian value ".110 (emphasis added )
5.72 Moreover, it is disingenuous to pretend that the companies "were free to modify the letter in
any way they chose".  The testimony given by US Government officials to the US Congress refers to
lengthy negotiations between the Canadian Government and the beneficiaries.111  Also, if the
beneficiaries had been truly "free to modify the letters", why did all of them eventually give identical
commitments?  Further, why did the beneficiaries give any CVA commitments at all, since it is
obvious that those commitments go against their own interest?
(ii) The Letters of Undertaking are binding
5.73 As to the argument that the Letters of Undertaking are not "legally binding", it must be
recalled at the outset that by now it is well established that "non-binding" acts, such as Government
recommendations or guidance, may constitute "measures" subject to dispute settlement.112
5.74 This issue, however, does not even arise in the case at hand. Contrary to Canada’s assertions,
the Letters of Undertaking are not mere "statements of what was hoped to be achieved under Canada’s
implementation of the Auto Pact system".113
5.75 The Letters state in unequivocal fashion that the beneficiaries " undertake " to meet the CVA
requirements.114  According to a standard dictionary definition115, "to undertake "  means  " to agree to
do", "to give a promise or pledge" , "to guarantee" , "to contract" , "to make oneself responsible for" …
5.76 Furthermore, at several points the Letters refer to the additional CVA commitments as
"obligations under this letter"116 and as " conditions" .117  Thus, the wording of the Letters of
Undertaking leaves no doubt as to the fact that they purport to impose binding obligations upon the
beneficiaries, rather than stating simple "hopes".
(iii) The Letters of Undertaking are enforceable
5.77 The mere fact that there is no sanction explicitly attached to the violation of the Letters does
not mean that they are not "enforceable".  As te stified by executives of the Big Four before the US
                                                     
110 US Congress, Hearings before the Committee on Ways and Means, House of Representatives, 89th
Congress, First Session, H.R. 6960, p.148 (Exhibit EC-22).
111 See above para. 5.63.
112 See e.g., the Panel Report on Japan – Film , supra  note 93, para 10.49:  "… moreover, we also
consider it conceivable … that even non-binding, hortat ory wording in a government statement of policy could
have a similar effect on private actors to a legally binding measure …".  See also the Panel Report on Japan –
Trade in Semiconductors , adopted on 4 May 1988, BISD 35S/116 (hereinafter Panel Report on Japan –
Semiconductors ), para 117:  "The Panel considered that the complex of measures exhibited the rationale as well
as the essential elements of a formal system of export co ntrol. The only distinction in this case was the absence
of formal legal legally binding obligations … However, the Panel concluded that this amounted to a differencein form rather than substance because the measures were operated in a manner equivalent to mandatoryrequirements …".
113 Canada's response to Question 17 from the Panel.
114 See e.g., the Letter of Undertaking of Ford Mo tor Co. of Canada, Ltd., para. 6 (Exhibit EC-2).
115 Webster's New World Dictionary, Third College Edition.
116 See e.g., the Letter of Undertaking of Ford Mo tor Co. of Canada Ltd., para. 9 (Exhibit EC-2)
117 See eg., the Letter of Undertaking of General Motors of Canada Ltd., para. 4 (Exhibit EC-2).WT/DS139/R
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Congress, the Canadian Government made it clear to them that the submission of the Letters was a
necessary condition for the conclusion of the Auto Pact.118
5.78 The existence of a link between the submission of the Letters and the conclusion of the Auto
Pact is acknowledged in the Letters themselves.  By way of example, a letter submitted by Ford
together with its Letter of Undertaking states unambiguously that:
“Our undertakings are, of course, conditional upon the execution of that agreement,
upon the adoption of an order in council, and regulations substantially in the form of
drafts that you have already delivered to us, and upon an acceptable response in
respect of the enclosed supplementary letter."119
5.79 Given that link, the beneficiaries have assumed that, were they to disregard the commitments
contained in the Letters, the Canadian Government would withdraw the Tariff Exemption.  The
Canadian Government could do so simply by repealing or amending the MVTO 1998.  There is
nothing, either in the MVTO 1998, or in any other pr ovision of Canadian law, that could prevent the
Canadian Government from taking that action.
5.80 In particular, the Auto Pact would not constitute an obstacle for withdrawing the Tariff
Exemption, because it can be denounced by either party subject only to one year notice.120
5.81 Canada has asserted that withdrawing from the Auto Pact "would be so inimical to Canada’s
interests that it would never be contemplated, as the MVTO beneficiaries are well aware".
5.82 That statement, however, is hardly credible.  The Auto Pact no longer provides any benefit to
Canadian exports of motor vehicles to the United States. Indeed, the United States is no longer
enforcing the Auto Pact provisions. Moreover, according to Canada, the only "real" benefit enjoyed
by the Auto Pact manufacturers consists of the possibility to import duty-free motor vehicles fromthird countries other than the United States.  Yet that benefit does not flow from the Auto Pact, which
only requires Canada to grant duty-free treatment to imports from the United States. It is a benefit
provided by Canada on a purely unilateral basis under the MVTO 1998 and the SROs.
(iv) The Canadian Government monitors compliance with the Letters of Undertaking
5.83 The existence of elaborate reporting and auditing procedures constitutes an additional
indication that the Letters of Undertaking are treated as binding by both parties.
5.84 Those procedures were expressly foreseen in the Letters of Undertaking.  For example, the
Letter of Undertaking submitted by Ford contains the following provision:
"Ford Motor Co. of Canada Ltd. also agrees to report to the Minister of Industry
every 3 months beginning April 1 1965, such information as the Minister of Industryrequires pertaining to progress achieved by our company as well as plans to fulfil our
obligations under this letter.  In addition Ford Motor Co. of Canada Ltd. understands
                                                     
118 See above para. 5.62.
119 Letter of Ford Motor Co. of Canada, Ltd., dated 4 January 1965, para. 4 (Exhibit EC-2).
120 See Article VII of the auto Pact (Exhibit EC-1).   Moreover, according to Canada, the Auto Pact is
not self-executing, which presumably means that the beneficiaries would have no remedy under Canadian law incase that the Canadian Government decided to withdraw the Tariff Exemption (see Canada's response toQuestion 2 from the EC).WT/DS139/R
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that the Government will conduct an audit each year with respect to the matters
described in this letter".121
5.85 Canada has argued that the D-Memoranda demonstrate that Revenue Canada does not review
whether MVTO companies have met their commitments under the Letters of Undertaking, but only
whether they have complied with their MVTO commitments.
5.86 This argument is disingenuous.  The specimens of reporting documents included in
Exhibit EC-14 evidence that the type of information collected by Revenue Canada from the
beneficiaries of the MVTO 1998 makes it possible for the Canadian authorities to ascertain
compliance also with the requirements contained in the Letters of Undertaking.
5.87 In fact, given that according to Canada the CVA requirements contained in the MVTO "have
long been insignificant"122, it may be suspected that the only reason why those requirements continue
to be enforced is precisely in order to obta in the necessary information to enforce the CVA
requirements contained in the Letters of Undertaking.
(v) The  CVA requirements in the Letters of Undertaking are complied with in practice
5.88 In a document entitled "Auto Pact Background" found on Canada Industry’s website it is
stated that the Letters of Undertaking "while not being binding typically have been met".123
5.89 This confirms that compliance with the Letters of Undertaking is actually ascertained by the
Canadian Government.  It confirms also that, desp ite Canada’s protestations, the Letters continue to
have "current practical significance"124 and are treated as binding by both the Government and the
beneficiaries.
(f) Response by Canada to the complainants' rebuttals
5.90 Canada  responds as follows (with arguments also a ppearing in sections relating to specific
claims):
5.91 The complainants have argued that the letters also violate Article III:4.  That Article states
that it applies to all “laws, regulations and requirements”.  Japan and the European Communities have
not attempted to argue that the letters are laws or regulations because clearly they are not.  They are
not found in any legal instrument.  The only question is whether the letters are requirements.125
5.92 The European Communities and Japan bear the bu rden of proving that the additional letters
are requirements, a burden they cannot meet.  The test for whether the CVA amounts in the letters are
“requirements” is found in the Panel Reports in Canada - Administration of the Foreign Investment
                                                     
121 Letter of Undertaking of Ford Motor Co. of Ca nada, Ltd., para. 8  (Exhibit EC-2).  Identical
statements are contained in the Letters of Undertaking of Chrysler Canada Ltd., para. 6, and of American
Motors (Canada) Ltd., para. 6 (both in Exhibit EC-2).
122 See para. 6.271, below.
123 Exhibit EC-2.
124 Canada's response to Question 17 from the Panel.
125 Canada, in its answer to Question 4 from the Panel, has already set out its views on the
interpretation of the terms “measures” and “laws, regulations and requirements”.  In Canada’s view, the terms
do not have the same meaning, with measure being the broader term.  It is thus only necessary to determine
whether the letters are “requirements”.  If so, they are necessarily measures.  Conversely, a finding that theletters are “measures” would not be determinative.  It would still be necessary to determine whether the lettersare “requirements”, or to find that the two terms have identical meanings.WT/DS139/R
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Review Act126 and EEC – Regulation on Imports of Parts and Components .127  The Canada - FIRA
panel found that voluntarily submitted undertakings could be “requirements” within the meaning of
Article III:4.  However, the panel explicitly noted that the undertakings at issue in Canada - FIRA
were not complied with voluntarily.  Once they were submitted, the undertakings formed part of the
legally enforceable regime applying to the investme nt.  There was, in short, a sanction for failing to
comply with the requirements.  This fact was central to the panel’s reasoning.128
5.93 The Panel on EEC - Parts and Components  distinguished between “requirements” that a
company is legally bound to carry out (the Canada - FIRA  situation) and “requirements” that a
company voluntarily accepts in order to obtain an advantage.  It nevertheless found that both were
“requirements” within the meaning of Article III:4, but only to the extent that the requirements wereconditions precedent to obtaining a benefit.
129
5.94 The letters are not requirements under these tests.  They are not part of the legally enforceable
regime applying to the MVTO.  Should a beneficiary fail to meet the CVA amounts in its letter, it
would still qualify for its duty-free privileges.  Japan’ s own evidence has made it clear that this is the
case.130  Indeed, should a beneficiary refuse to provide the information that would be necessary to
determine whether it had met the amounts, it would still qualify.  Moreover, just as there is no
sanction for failing to meet the amounts in the letters, there is no reward for doing so.  No additional
benefits accrue to companies that honour the letters.  Companies are not bound to carry out their
terms, nor do they do so voluntarily in order to obtain a benefit.  The letters are thus not requirements.
They are completely unrelated to a company’s ability to import duty free under the MVTO.
5.95 Canada has made public its position that the letters are not requirements.  Indeed, Japan has
filed as evidence a public statement from Industry Canada that explicitly describes the letters as non-binding.
131  Canada has made the same statement repeatedly in the proceedings before this Panel; it
should be noted that Canada makes all of its WTO submissions public upon request.  These very
submissions are thus also public statements that the letters are not binding and cannot be enforced.
5.96 The European Communities has made much of the wording of the letters, which it claims is
mandatory.  In fact, the wording varies and is at most ambiguous – the word “undertake” can mean tocommit oneself formally, but it can also mean to take on a task.
132  Where there is no sanction and no
reward, even the most strongly worded private undertaking cannot be considered a requirement under
Article III:4.
5.97 To date, the complainants’ other evidence has focused on the questions of whether the
Canadian government was involved in the preparation of the letters, whether the manufacturers wererequired to submit letters as a sine qua non  of Canada’s signing the Auto Pact, and whether the
beneficiaries believed themselves bound by the letters.  The evidence provided is at best ambiguous,
and does not demonstrate that the letters were ever requirements.
133
                                                     
126 Panel Report on Canada – Administration of the Foreign Investment Review Act , adopted on 7
February 1984, BISD 30S/140 (hereinafter Panel Report on Canada – FIRA ).
127 Panel Report on EEC – Regulation of Imports of Parts and Components , adopted on 16 May 1990,
BISD 37S/132 (hereinafter Panel Report on EEC – Parts and Components ).
128Panel Report on Canada – FIRA , supra  note 126, para. 5.4.
129 Panel Report on EEC – Parts and Components , supra  note 127, para. 5.21.
130 Exhibit JPN-27, p. 63.
131 Exhibit JPN-38, p. 38-1.
132 See, e.g., The New Shorter Oxford English Dictionary on Historical Principles, definition 4(a) (vol.
2 [Oxford: Clarendon Press, 1993], p. 3476, Exhibit CDA-13), and Merriam-Webster’s Collegiate Dictionary,
definition 1 (10th ed. [Markham: Thomas Allen, 1993], p. 1289 (Exhibit CDA-14).
133 For example, Exhibit EC-22, p. 11 contains the following statement from an official of General
Motors Corp. of the United States:  "I can speak for General Motors and I can say that there have been no secretWT/DS139/R
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5.98 The European Communities has also claimed that the letters are enforceable on the theory that
nothing in Canadian law prevents Canada from repe aling or amending the MVTO. This argument is a
fundamental misstatement of WTO law.  The WTO agreements do not apply to actions that Members
could  take.  They apply to actions that Members have taken .  The letters are not requirements because
they are not enforceable and offer no rewards; whether the Canadian government has theconstitutional authority to convert them into requirements is irrelevant.
5.99 That the letters are not requirements is clear from what would happen in the event that
Canada had to implement a finding that they viol ate Article III:4.  The Canadian government would
not have to take any action in order to comply with the finding.  It would not have to repeal the letters
because it never passed them in the first place – there is nothing to repeal.  It would not have torepudiate them, because it has already been made clear that neither the government nor the companies
affected regard themselves as bound by them.  It would not have to stop enforcing them, because it
does not do so.
5.100  Virtually all of the evidence the complaining pa rties have supplied relates to the time when
the letters were written, thirty-five years ago.  All of this evidence is irrelevant.  Regardless of the paststatus of the letters, they are not requirements today, and will not become requirements in the future.
Even prior to the complaining parties bringing this case, Canada had publicly stated that the letters
were not binding.
134  The complainants themselves have cited the statement, and have never rebutted
it.  Canada has also stopped making any effort to verify whether companies achieved the amounts
contained in the letters.  Canada has now repeatedly made it clear that it does not regard the letters as
binding.  If the executives of the beneficiary companies were ever in any doubt on this point, they no
longer are.
5.101  Regardless of whether the letters have ever been thought binding, they have never been
enforceable.  Japan has now joined the European Communities in claiming that the letters could be
enforced by repealing or amending the MVTO, and even withdrawing from the Auto Pact if
necessary.  This argument is a fundamental misstatement of WTO law.  The WTO agreements do not
apply to measures that Members could take.  They apply to measures that Members have taken.
5.102  In any event, Canada would never – indeed, could never – have withdrawn from the Auto
Pact.  First, it would punish every MVTO a nd SRO company, not just the non-compliant one.
Second, from 1965 until 1998, when NAFTA duty phase-outs for the United States reached zero,
duty-free access to the American market depended on the Auto Pact.  There was never any possibility
that Canada would withdraw from it under those circumstances.
5.103  For these reasons, Canada submits that the letters of undertaking do not create requirements
within the meaning of GATT Article III:4.  They therefore cannot give rise to a violation of that
Article.
                                                                                                                                                                    
agreements, there have been no negotiations .  The Canadian Government asked us to write them a letter stating
our understanding of the provisions of the agreement as it was finally determined and to ask for ourendorsement of the principles to the extent that we did understand them and assigned to us an objective
whereby, over the 4 years that are involved in this agreement, we would undertake to increase our Canadianproduction or our Canadian value."  (e mphasis added )  United States-Canada Automotive Products Agreement:
Hearings before the House Comm. on Ways and Means on H.R. 6960 “The Automotive Products Trade Act of
1965", 89
th Cong., 1st Sess. (1965), p. 148 (testimony of James M. Roche, Executive Vice President, General
Motors Corp.).  This statement agrees exactly with Canada’s explanation of the facts provided in response toQuestion 17 from the Panel.
134 Exhibit JPN-38 and Exhibit EC-20.WT/DS139/R
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(g) The European Communities' follow-up to Canada's response
5.104  As a follow-up to Canada's response, the European Communities  argues as follows (with
arguments also appearing in sections relating to specific claims):
5.105  Canada appears to have recognised that the position that the Letters of Undertaking are not
"measures" is untenable.  Thus, in its response to the complainant's rebuttals, Canada limits itself to
argue that the Letters of Undertaking are not "laws, regulations and requirements".  By way of
justification, Canada explains in a footnote that si nce the term "measure" is "broader" than the term
"requirement", it is only necessary for the Panel to determine whether the Letters are requirements.
5.106  The European Communities disagrees. Even assuming that the term "measure" was indeed
"broader", the European Communities has submitted cl aims with respect to the CVA requirements not
only under GATT Article III:4 and Article 2.1 of  the TRIMs Agreement, but also under GATS
Article XVII and Article 3.1(b) of the SCM Agreemen t.  Neither of those two provisions refers to
"requirements".  Therefore, a finding that the Lett ers are not "requirements", would not dispense the
Panel from ascertaining whether they are "measures".
5.107  Canada's defence relies on an extremely narrow interpretation of the term "requirement".  In
essence, Canada argues that the Letters are not "requirements" because they are not "legally
enforceable", either through sanctions or through rewards explicitly attached to them.
5.108  That interpretation, however, is not compelled by the ordinary meaning of the term
"requirement".  "Required" and "legally enforceable" are not synonyms.  The existence of a explicit
legal sanction furnishes the proof that something is a "requirement", but is not an inherent element.
5.109  The Letters of Undertaking contain "requirements" because they are drafted in mandatory
terms and are regarded as binding by the Canadian Government and by the beneficiaries, as evidencedby the fact that compliance is regularly verified and that in practice the beneficiaries do comply with
the terms of the Letters.
5.110  The statement found in Industry Canada's website to the effect that the Letters "while non-
binding, typically have been met"
135 cannot be taken as evidence that the Canadian Government does
not regard  the Letters as "binding".  That statemen t is not addressed to the beneficiaries, but to the
general public.  The Canadian Government does not need to post statements in the internet in order to
convey to the beneficiaries its views on the nature of the Letters.  In any event, Canada Industry uses
the term "binding" in the narrow sense of "legally enforceable".  In the same paragraph, Canada
Industry also refers to the terms of the Letters as something the beneficiaries "undertook" and as
"conditions".
5.111  For similar reasons, the statements made by the Canadian Government in these proceedings
cannot be taken as evidence that it does not regard the Letters as binding or that it has repudiated
them.  The Big Three understand perfectly well that Canada is forced to make those arguments in
order to preserve the Tariff Exemption for their benefit.
5.112  Canada claims that its interpretation of the term "requirement" is derived from Canada –
FIRA136 and EEC – Parts and Components137 Those reports, however, in no way suggest that the
panels purported to formulate, or that they were applying a set of generally applicable criteria.
                                                     
135 Exhibit EC-20.
136 Panel Report on Canada – FIRA , supra  note 126.
137 Panel Report on EEC – Parts and Components , supra  note 127.WT/DS139/R
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5.113  In any event, the Letters of Undertaking fit within the same pattern as the measures at issue in
EEC – Parts and Components .  As explained  by Canada, in that case the Panel found that the
undertakings to increase local content given by the subsidiaries of certain Japanese companies were
"requirements" because they were a "condition precedent to obtaining a benefit".  The same is true of
the Letters of Undertaking.  The Canadian Government would not have concluded the Auto Pact if theBig Three had not submitted the Letters of Undertaking.
5.114  The only difference between the two cases is th at the EC antidumping regulations envisaged
that, if the undertakings were breached or withdr awn, the EC Commission could (but was not obliged
to) re-institute proceedings and eventually impose anti-circumvention duties.
138  The MVTO does not
envisage expressly the possibility to impose sanctions. That does not mean, however, that the Lettersare unenforceable.  Given the linkage between the conclusion of the Auto Pact and the submission of
the Letters established by the Canadian Government, there has always been a tacit understanding
between the parties that if the beneficiaries fa iled to comply with the Letters, the Canadian
Government would withdraw the tariff benefits.
5.115  In one of the supplemental questions put by the Panel, the Panel has asked Canada whether
any of the manufacturers operating under the MVTO have indicated in their annual reports that they
have gone above the CVA requirements of the MVTO.
139
5.116  The answer is that there is no need for the beneficiaries to do so.  The samples of reporting
forms included in Exhibit EC–14 show that the MV TO beneficiaries are required to report, among
other things, the total CVA amount in the relevant period, as well as the net sales value of the vehicles
sold in Canada during the same period.  Those two amounts allow the Canadian Government to
verify, by making a very simple calculation, whether the Big Three comply with the CVArequirements in the Letters.  The Big Three know that. And the Canadian Government knows that the
Big Three know.
3. The Auto Pact, the CUSFTA and the NAFTA
(a) Japan's arguments regarding the Auto Pact, the CUSFTA and the NAFTA
5.117  Regarding the Auto Pact, the CUSFTA and the NAFTA, Japan  argues as follows (with
additional arguments contained in sections relating to specific claims):
(i) From the outset, the Canada-US Auto Pact was designed to be discriminatory in nature
5.118  In the early 1960s, the Government of Canada was concerned that its automotive policies
were insufficient to stimulate growth in the Cana dian automotive industry.  To address its concern, a
new duty rebate program was initiated in 1963 for automotive parts.  Exports of automotive parts tothe United States soared and an US radiator producer responded by initiating a countervailing duty
action.  The Governments of Canada and the United States then began negotiations to resolve the
matter.  The result of these negotiations was the Canada-US Auto Pact.
5.119  On 16 January 1965, the Governments of Canada a nd the United States signed the Canada-US
Auto Pact, a sectoral agreement applicable to trade in automotive goods.
140  The parties agreed that if
certain conditions were met, automobiles and original equipment parts would be traded between the
two countries on a duty-free basis.141  In other words, the Canada-US Auto Pact originally was
                                                     
138 Panel Report on EEC – Parts and Components , supra  note 127, para  5.20.
139 Question 40 from the Panel.
140 The Canada-US Auto Pact provisionally entered into force on 16 January 1965.
141 Article II of the Canada-US Auto Pact reflects the agreement on duty-free trade, and Annexes A and
B thereto describe the covered products (Exhibit JPN-1).WT/DS139/R
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designed to accord benefits and competitive advantages only to North American automobile
manufacturers, their distributors and their products, given the fact that no manufacturer (other than
American Motors, Chrysler, Ford, General Motors, Studebaker and Volvo)142 had made substantial
investments in Canada at that time.
5.120  The Governments of Canada and the United States used different criteria to determine
eligibility for such duty-free treatment.  In the case of the United States, automotive products from
Canada would qualify if they were "products of Canada" meeting certain rules of origin".143
5.121  On the Canadian side, in order for the products to qualify for duty-free treatment they had to
be imported by motor vehicle manufacturers that met certain conditions, inter alia, specified domestic
content and manufacturing requirements.144  Also, Canada reserved the right to designate
manufacturers not meeting the specified conditions as entitled to the benefit of duty-free treatment.145  
The Government of Canada's approach was motivated by the Government's objective that a certain
share of the North American industry would re main in Canada as motor vehicle manufacturers
restructured their operations.146
5.122  In March 1965, a GATT 1947 Working Party initiated a review of the terms of the Canada-
US Auto Pact.147  Since the United States' implementation of the Canada-US Auto Pact would confer
duty-free status only on parts and motor vehicles originating in Canada, it was considered to be a clear
violation of Article I of the GATT 1947.  Thus, the Un ited States requested and eventually obtained a
GATT 1947 waiver.148
5.123  While the United States recognized that its commitments under the Canada-US Auto Pact
constituted a clear violation of Article I of the GA TT 1947 and thus sought and obtained a waiver, the
Government of Canada did not request a waiver.  According to the Canadian representative appearingbefore the Working Party, the Canada-US Auto Pact would be implemented on a most-favoured-
nation basis, and the benefits of the Agreement would be extended on the same terms to all
contracting parties.  According to the Canadian representative, Paragraph 3 of Annex A of the
Canada-US Auto Pact, which contained the Government of Canada's obligations, provided that
automobile producers who met the same conditions as the intended Auto Pact Manufacturers wouldqualify for t he same treatment.
149  According to the Canadian representative, this position illustrated
the open-ended character of the Canada-US Auto Pact.150  However, as discussed below, the open-
ended nature of the Canada-US Auto Pact was fundamentally changed in 1989 when the list of
                                                     
142 Volvo was the only original Member of the Cana da-US Auto Pact that was not a North American-
owned manufacturer.
143 Annex B of the Canada-US Auto Pact (Exhibit JPN-1).
144 Annex A of the Canada-US Auto Pact.  A vehicle manufacturer was defined as a manufacturer of
automobiles, buses or certain commercial vehicles, that produced such vehicles in Canada in the 1963-1964 baseyear.  In addition, such manufacturers had to maintain, in each subsequent year:  (i) an equal or higher ratio ofthe net sales value of the vehicles they produced to the net sales value of all vehicles they sold in Canada(production-to-sales ratio) than the ratio that they maintained in the base year, or seventy-five to one hundred,whichever was greater;  and (ii) the same or greater Canadian value added (CVA) to the vehicles they produced
in Canada in the base year (Exhibit JPN-1).
145 Annex A of the Canada-US  Auto Pact, para. 3 (Exhibit JPN-l).
146 J.R. Johnson, "The Effect of the Canada-US Free Trade Agreement on the Auto Pact" in
M.A. Molot, ed., Driving Continentally:  National Policies and the North American Auto Industry (Ottawa:Carleton University Press, 1993) 256 (Exhibit JPN-23).
147 Report of the Working Party on  Canada – US Agreement on Automotive Products , adopted on 25
March 1965, BISD 13S/112.
148 The waiver, which had been extended under the WTO, expired on 1 January 1998 (Exhibit JPN-24).
149 Exhibit JPN-1.
150 Report of the  Working Party on the Auto Pact, supra  note 147, 114, para 10.WT/DS139/R
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eligible importers was frozen.  This action crystallized the discriminatory nature of the Canadian
regime.
5.124  At the time of the 1965 GATT Working Party, several contracting parties challenged the
Government of Canada's view.  In particular, they noted that the Agreement introduced de facto
differentiation between those third country producers which had production facilities in Canada andthose which did not.
151  Moreover, one Member of the Working Party referred to the possibility of
"like products imported by different classes of importers being charged different rates of duty and
inquired whether this would not result in discrimination between sources of supply" contrary to
Article I of the GATT 1947.152  Members of the Working Party inquired as to the criteria that would
be applied to new producers wishing to qualify as manufacturers.  The representative of Canadareplied that "it was not the intention of his Government to discriminate either against or in favour of
new producers of any nationality".
153  The Working Party did not reach a conclusion with regard to
the GATT-consistency of the Government of Canada's implementation measures of the Canada-US
Auto Pact.
(ii) From 1965 to 1969, Canada implemented a discri minatory scheme through the Canada-US
Auto Pact
5.125  The Government of Canada initially implemented its obligations under the Canada-US Auto
Pact through the Motor Vehicles Tariff Order 1965  (MVTO 1965) and the Tariff Item 950
Regulations (950 Regulations) which set out the declarative and reporting requirements for eligible
importers.154   The Government of Canada established conditions in the MVTO 1965 that, if met,
would entitle a manufacturer to import automotive goods duty free from any country benefiting from
MFN or British Preferential Tariff Treatment.155  With respect to the eligibility condition, the MVTO
1965 applied only to those producers who operated in the 1963-1964 base year.156  Given the
definition of "base year", the MVTO 1965 applie d only to six automobile producers (American
Motors, Chrysler, Ford, General Motors, Studebaker and Volvo) and a number of specified
commercial vehicle and bus producers.  Thus, the benefits of the Duty Waiver were limited to those
eligible importers, foreign manufacturers that had relationships with those importers, products of suchforeign manufacturers, eligible importers' wholesale trade services, and, indirectly, to suppliers of
certain domestic products and services to those eligible importers.
5.126  Because manufacturers that had not operated during the 1963-1964 base year were not
eligible to receive the Duty Waiver's benefits under the MVTO 1965, the Government of Canada
issued company-specific SROs for other manufacturers requesting equivalent status where certainconditions were met.
157  The criteria for determining initial el igibility for SRO status were unclear and
appear arbitrary as the Government of Canada reserved the right under the Canada-US Auto Pact to
designate manufacturers as entitled to the Duty Waiver and as there is no mentioning of the criteria
that might be applied for such designations.158  According to a United States Senate report, the
Government of Canada required the establishment of production facilities and the fulfilment of
                                                     
151 Ibid., 119, para. 27.
152 Ibid., 117, para 21, and 119, para. 27.
153 Ibid., 114, para. 10.
154 Exhibit JPN-25.
155 Section 2 of  the Schedule to the MVTO 1965 (Exhibit JPN-25).
156 Ibid. , at subsection 2(1).
157 A list of SROs that were still in force in 1998 is set out in Exhibit JPN-26.
158 Canada-US Auto Pact, Annex A, Section 3 (Exhibit JPN -1).WT/DS139/R
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conditions similar to the production-to-sales ratio and the Canadian value added (CVA) requirement
before an SRO would be issued.159
5.127  The express conditions for duty-free importation of automotive products under the SROs
were similar to those under the MVTO 1965 and the 950 Regulations.  All SROs provided for a
manufacturing requirement and the CVA requirement, although the level that had to be reached coulddiffer from those applying to manufacturers that qualified under the MVTO 1965.
160  Manufacturers
that qualified under an SRO were granted a benefit equivalent to those companies that qualified under
the MVTO 1965.161
(iii) The Canadian motor vehicle industry benefite d substantially from the Canada-US Auto Pact
preferences
5.128  The adoption of the Canada-US Auto Pact favoured the development of the Canadian motor
vehicle industry.  Before 1965, the Canadian moto r vehicle industry, as with most other national
automotive industries, was organized on a national basis.  The market was supplied by locally based,
foreign-owned producers and import penetration was minimal as high tariff barriers insulated the
market.162  Following the conclusion of the Canada-US Auto Pact, the Canadian automotive industry
rapidly transformed from an industry geared toward s the supply of a small domestic market to the
sixth-leading producer in the world.163  The industry expanded primarily due to the conditions for
obtaining duty-free treatment under the Canada-US Auto Pact, which emphasize Canadian production
of finished motor vehicles.
5.129  By providing for the liberalisation of imports in motor vehicles and automotive parts between
Canada and the United States, the Canada-US Auto Pact encouraged the mainly foreign-owned
producers located in Canada to rationalise their production.  The main automotive producersconcentrated the production of specific models in specific plants to take advantage of cost savings
through economies of scale and to ship finished products from each plant, wherever located, to all
regional markets in Canada and the United States.
5.130  The implication of Canada's automotive sector was that a number of plants would produce a
narrower range of models but these would be destined for both the domestic and American markets.Other models would be imported into Canada from United States or other plants to complete the
product lines available to consumers.
164  Auto Pact Manufacturers were allowed under the
Government of Canada's tariff regime to decide which models were to be imported into Canada with
the benefit of the Duty Waiver, and the country of origin of those models.  However, as discussed in
arguments appearing in paragraphs 5.238 - 5.240 and 5.264 - 5.269, due to the global integration ofthe motor vehicle manufacturing industry, most imports have been from overseas manufacturers that
are affiliates or related companies of the eligible importers.  Thus, as expected by one Member of the
                                                     
159 United States Senate, Committee on Finance, United States International Trade Commission Report
on the United States-Canada Automotive Agreement:  Its History, Terms and Impact (Washington:  USGovernment Printing Office, 1976), at p. 25 (Exhibit JPN-27).
160 Exhibit JPN-28 summarizes the SRO cond itions and their evolution over time.
161 Memorandum D10-16-2 , Revenue Canada, 22 May 1998, s. 1 (Exhibit JPN-8).
162 J. Holmes, "From Three Industries to One; To wards an Integrated North American Automobile
Industry", in M.A. Molot, ed., Driving Continentally; National Policies and the North American Auto Industry(Ottawa:  Carleton University Press, 1993) at 25 (Exhibit JPN-23).
163 Industry Canada's web site shows that the US, Japan, Germany, France and South Korea preceded
Canada in 1997, "Motor Vehicle Production by Major Producing Country (Thousands of Units)":
http://strategis.ic.gc.ca/SSG/am01178e.html , document published 23 November 1998, date accessed:
1 February 1999.
164 This concept is sometimes referred to as the "decoupling" of domestic sales from national
production.WT/DS139/R
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GATT 1947 Working Party that reviewed the terms of the Canada-US Auto Pact, the Duty Waiver
indeed resulted in "discrimination between sources of supply".
(iv) The Government of Canada's administration of the Canada-US Auto Pact  from the 1970s to
the 1990s crystallized the discriminatory aspects of the Duty Waiver
5.131  The manner in which the Government of Canada regulated automotive trade during the 1970s
through the 1990s served to exacerbate and crystallize the discriminatory aspects of the Duty Waiver.
More specifically, restrictions introduced as a result of the (CUSFTA) and the NAFTA ensured that
the motor vehicles, parts and components thereof, wholesale trade services and other services of
Japanese manufacturers and suppliers would be denied the benefits of the Duty Waiver.
- Recognizing the discriminatory effects of the Duty Waiver, the Government of Canada
initially offset the effects by providing certain compensatory programmes
5.132  Acknowledging the adverse discriminatory effects of the Duty Waiver and seeking to attract
further foreign investment, the Government of Canada introduced compensatory programmes that, in
part, offset those effects.  However, these compensatory programmes did not remove the
discriminatory aspects of the Duty Waiver.  Moreover, they were arguably, in themselves,inconsistent with the Government of Canada's international trade obligations.
5.133  Introduced in the 1970s and 1980s, these compensatory programmes permitted Non-Auto
Pact Manufacturers to import motor vehicle products duty free.  However, companies that did not
manufacture automobiles in Canada could not benefit from these programmes, restricting the
compensatory effect of the programmes to a narrow class of importers.  Moreover, the compensatory
benefits were subject to certain conditions.
5.134  The compensatory nature of these programmes and the fact that they were intended to permit
Non-Auto Pact Manufacturers to compete with Au to Pact Manufacturers is confirmed by a former
Canadian Ambassador for Trade Negotiations and the Deputy Chief Negotiator for the CUSFTA.  In
his recent book, Mr. Gordon Ritchie states that the programmes in question were negotiated to enable
Japanese and Korean manufacturers "to compete with American companies until they could qualify
under the Auto Pact".
165
5.135  Over this period, the Government of Canada issued duty remission orders to Non-Auto Pact
Manufacturers.  The first type of remission orders applied to export of parts (export-based remission
orders).166  The second type of remission orders were based on production (production-based
remission orders).167
5.136  The production-based remission orders resembled the MVTO 1965 and its successors and the
Special Remission Orders in that they contained similar performance requirements.  Given the
relatively high MFN rates on automobiles at the time, the production-based remission orders were
significant for the participating companies.
                                                     
165 Ritchie, Gordon, Wrestling with the Elephant, the Inside Story of the Canada-US Trade Wars
(Toronto; MacFarlane, Walter & Ross; 1997) at p. 112 (Exhibit JPN-29).
166 Individual remission orders were revoked in 1975 and were replaced by the Automobile
Components Remission Order  (SI/75-58).  In 1985, the Automobile Components Remission Order was revoked
(SI/85-48).  Then, throughout the 1980s, Canada issued a series of company-specific remission orders (Exhibit
JPN-30).
167 The companies that qualified for production-based remission orders were Honda, Toyota, and
Hyundai (Honda Remission Order, 1988, SI/89-15;  Toyota Remission Order , 1988 , SI/89-14;  Hyundai
Remission Order , 1988-2 , SI/89-16) (Exhibit JPN-31).WT/DS139/R
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5.137  In addition to the export and production-based remission orders, the general Inward
Processing Remission Programme provided companies with certain relief from the payment of
customs duties on parts they used in their Canadian production of automobiles.  The Government of
Canada exempted payment of customs duties on imported parts used in Canadian production and
exported to third countries (in practice, the most important third country was the United States).
5.138  In 1988, Canada amended the Customs Tariff   - the federal statute that provided legislative
authority for the MVTO 1965.168  As a result, Canada revoked the MVTO 1965 and issued a new
order, the Motor Vehicles Tariff Order , 1988 (MVTO 1988), to reflect the legislative changes.169  The
MVTO 1988 replaced and consolidated both the MVTO 1965 and Tariff Item 95000  (Entry of Motor
Vehicles) Regulations .170  It preserved the essential elements of the MVTO 1965 and the Tariff Item
95000 (Entry of Motor Vehicles) Regulations.
- The discriminatory effects of the Duty Waiver were amplified by the CUSFTA through the
introduction of an eligibility restriction and the elimination of the compensatory programmes
5.139  On 1 January 1989, the CUSFTA entered into force.  The Agreement amplified the
discriminatory effects of the Duty Waiver.  New restrictions imposed as a result of the CUSFTA had aprofound adverse effect on the compensating benefits that the Japanese and other Non-Auto Pact
Manufacturers in Canada had been receiving under the duty remission programmes described above.
According to Gordon Ritchie, the Government of Canada's Deputy Chief Negotiator for the CUSFTA,
these restrictions were imposed at the insistence of the United States:
"The Americans made it abundantly clear that they were not prepared under any
circumstances to have these companies enjoy the Auto Pact benefits, even if it meant
terminating the pact itself."
171
5.140  Accordingly, the Governments of the United States and Canada agreed in CUSFTA
Article 1002 that waivers of customs duties could not be extended to any recipient other than  those
listed in Part One of Annex 1002.1 to the CUSFTA.172  That Annex listed all existing companies with
"Auto Pact Manufacturer status" in Canada.  The effect of  CUSFTA Article 1002, therefore, was to
prohibit new applicants from qualifying for Auto Pact Manufacturer status.  In short, the list of AutoPact Manufacturers was frozen.  As a result, contrary to statements made by the Government of
Canada's representative before the GATT 1947 Working Party, eligibility for the Duty Waiver could
no longer be extended to new manufacturers.  Since 1 January 1989, new manufacturers, including
Japanese manufacturers, have been barred forever from enjoying the benefit of the Duty Waiver.
5.141  The eligibility restriction was implemented in the Canadian automotive regulatory framework
by virtue of an amendment to the MVTO 1988.
173  Specifically, a definition of eligible "recipients",
which refers to the manufacturers listed in Part  I of Annex 1002.1 to Chapter 10 of the CUSFTA (the
"Tier I" companies, as discussed below) was added.  The amendment also stipulated that no customs
                                                     
168 Customs Tarif f, R.S.C. 1985, c.41 (3rd Supp.).  The Regulatory Impact Analysis Statement for the
MVTO 1988 states that the Government of Canada's adoption of the Harmonized Commodity Description and
Coding System (HS) required the passage of new Customs Tariff legislation.  As a result of this legislative
change, certain orders made pursuant to the Customs Tariff (e.g., MVTO 1965) had to be amended to reflect thenew tariff classification system (SOR/88-71, Canada Gazette Part II, Vol. 122, No. 2, 615 at 623)(Exhibit JPN-32).
169 Exhibit JPN-32.
170 The original Tariff Item 950 Regulations were renamed Tariff Item 95000 (Entry of Motor
Vehicles) Regulations upon the 1978 consolidation of Canadian regulations, C.R.C. 1978, c.480.
171 Exhibit JPN-29, at 112.
172 CUSFTA, Annex 1002.1 (Exhibit JPN-33).
173 Motor Vehicles Tariff Order, 1988, Amendment, SOR/89-48 (Exhibit JPN -35).WT/DS139/R
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duties would be removed in the case of a manufacturer who did not qualify prior to 1 January 1988, as
a manufacturer of a class of vehicles under the MVTO 1965, as that Order read on
31 December 1987.174  Thus, one of the major conditions for the enjoyment of the Duty Waiver is that
the relevant manufacturers are included on this list.
5.142  Consequently, in addition to eliminating preferential duty programmes previously available to
Non-Auto Pact Manufacturers, the CUSFTA created two classes of motor vehicle manufacturers.  The
first class, known as "Tier I" companies, consis ts of General Motors, Ford, Chrysler, Volvo, CAMI,
Intermeccanica and the companies that are eligible for Auto Pact Manufacturer status under MVTO
1998 and SROs.175  These companies have full Auto Pact Manufacturer status, which permits them to
import automobiles and parts duty free so long as they meet the specified performance requirements.
5.143  The second class, known as "Tier II" companies, consists of Toyota, Honda and others.  As a
result of the restrictions introduced by the CUSFTA (and, as discussed below, the NAFTA), these
companies can never attain Tier I status.176  Of course, other manufacturers in the world having no
manufacturing facilities in Canada have no possibility to enjoy such Tier I status and the associated
benefits.
The NAFTA reaffirmed the discriminatory aspects of the CUSFTA
5.144  On 1 January 1994, the NAFTA entered into force.177  Like the CUSFTA, it contained
extensive provisions dealing with trade and investment in the automotive sector.178  In addition to the
general restriction on duty waiver programmes179, it stated that both the Governments of Canada and
the United States could maintain the Canada-US Auto Pact as modified by the CUSFTA.180
Preferential trade and MFN trade
5.145  For the purposes of this dispute, one must distinguish between preferential trade under the
CUSFTA and NAFTA and MFN trade that takes place outside the scope of the preferential trade
under those Agreements.181  As discussed below, bilateral  duty-free trade in motor vehicles between
Canada and the United States now takes place exclusively under the terms of the NAFTA since the
Canada-US Auto Pact is no longer operative in the United States.182
                                                     
174 In the case of CAMI Automotive Inc. (CAMI), an extension was granted so that it could qualify for
the 1989 model year.  It later qualified and its SRO is still in effect.  Sections 1 and 3 of the Schedule to theMVTO 1998 set out the same restrictions.
175 See D-Memoranda D10-16-3 and D10-16-2 for a list of companies that qualify (Exhibits JPN-7 and
8).
176 Section 1 of Article 1002 of the CUSFTA provides that neither Party to the Agreement shall extend
a duty waiver to anyone but those recipients listed in Annex 1002.1.  Part One of Annex 1002.1 lists thosecompanies that qualified for Auto Pact Manufacturer status;  no Japanese companies are included on this list.Sections 2 and 3 of Article 1002 provide specific termination dates for the previously enjoyed export-based and
production-based waivers of customs duties.
177 In Canada, the date on which the legislation implementing the NAFTA became effective was fixed
by regulation at 1 January 1994 (Order Fixing January 1, 1994, as the Date of the Coming into Force of the Act,except Section 177, SI/94-1, Canada Gazette Part II, Vol. 128, No. 1, 604.)
178 Annex 300-A, Article 403, and Annex 401 of the NAFTA (Exhibit JPN-36).
179 Sections 1 and 2 of Article 304 of the NAFTA (Exhibit JPN-36).
180 Sections 1-3, Appendix 300-A.1, NAFTA, (Exhibit JPN-36).
181 The scope of preferential trade under the Agreements is defined by their respective rules of origin.
182 Until 31 December 1997, the motor vehicle trade und er the Duty Waiver prevailed over the trade
under the terms of the NAFTA, since a 0.9 per cent duty had been imposed on NAFTA imports.WT/DS139/R
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5.146  In some cases where the NAFTA rules of origin are not met, the Duty Waiver is available
with respect to Canada-US trade.  However, this appl ies only to imports into Canada.  Imports into the
United States do not benefit from similar treatment.
5.147  Accordingly, the Duty Waiver applies mostly to MFN trade between Canada and other
countries.  Thus, to the extent that the two regi onal trade agreements amplified and maintained the
Duty Waiver's discrimination, the rights and obligations of WTO Members have been adversely
affected.
The MVTO 1998 is directed solely at protecting Canada's domestic industry
5.148  On 1 January 1998, the United States' GATT 1947 waiver (that had been continued under the
WTO Agreement) expired.183  After that date, Canadian motor vehicle products entered the
United States duty free solely under the terms of the NAFTA.  In other words, the Canada-US Auto
Pact became inoperative with respect to imports into the United States.184
5.149  Also in December 1997, the federal Customs Tariff was once again amended and a new Order
in Council, the MVTO 1998, was enacted and entered into force on 1 January 1998.185  The MVTO
1998 contains the technical changes required to ensu re consistency with the terminology and structure
of the amended Customs Tariff, consolidates the MVTO 1988 and includes amendments thereto.  The
conditions required in order to benefit from the Duty Waiver remain the same.
5.150  On 10 June 1998, the Government of Canada released a report on the Canadian automotive
industry.186  In that report, it determined that the discriminatory duty treatment would be maintained
and "decided against any unilateral changes to the MFN vehicle duty at this time".187
5.151  Thus, after 1 January 1998, the Duty Waiver was no longer related to the implementation of
the Canada-US Auto Pact.  Rather, it was aimed solely at protecting Canada's domestic motor vehicleindustry; Canada's parts, components and materials industries; and certain suppliers of wholesale
trade and other services.
(b) The EC's arguments regarding the Auto Pact, the CUSFTA and the NAFTA
5.152  Regarding the Auto Pact, the CUSFTA and the NAFTA, the European Communities  argues
as follows (with additional arguments contained in Section VI, Legal Arguments of the Parties):
                                                     
183 Exhibit JPN-24.
184 Also in 1994, as apparent concessions to Non-Auto Pact Manufacturers, the Government of Canada
reduced the MFN duty rates on original equipment parts for manufacturers of automobiles to zero for certaingoods and 2.5 per cent for others (Customs Duties Reduction or Removal Order, 1988, amendment, SOR/94-18).  As of 1 January 1996, the Government of Canada eliminated the MFN duties on "[p]arts, accessories and
articles, excluding tires and tubes, for use in the manufacture of original equipment parts for passenger
automobiles, trucks or buses, or for use as original equipment in the manufacture of such vehicles or chassisthereof."  (Customs Duties Reduction or Removal Order, 1988, amendment, SOR/96-4.  This statutoryinstrument expired on 31 December 1997.)  However, the elimination of the MFN duties was made part of thenew Customs Tariff, S.C. 1997, c. 36, under tariff code 9958.
185 Customs Tariff, S.C. 1997, c. 36.  Section 213 repealed the previous version of the Customs Tariff
(R.S.C. 1985, c.41 (3rd Supp.)).
186 Industry Canada, The Automotive Competitiveness Review:  A Report on the Canadian Automotive
Industry (Ottawa:  Industry Canada, 1998) (Exhibit JPN-2).
187 Ibid., p. 29.WT/DS139/R
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(i) The Auto Pact
- Antecedents
5.153  The measures in dispute stem from the Auto Pact concluded in January 1965 by the
Governments of the United States and of Canada. The Auto Pact purported to resolve the trade
frictions caused by Canada’s persistent efforts to build and maintain a local automotive industry.
5.154  Prior to 1965, Canada sought to achieve that objective through the application of high import
duties on motor vehicles188 and parts therefor189, together with a system of tariff exemptions, whereby
the manufacturers of motor vehicles established in Canada could import duty free original equipment
parts190, provided that they met a minimum "Commonwealth"191 content requirement192.
5.155  While those measures permitted the development of a local automotive industry (albeit one
dominated by US firms193), they led to costly inefficiencies194.  In fact, those measures encouraged
foreign manufacturers to assemble locally a very large range of models.  Since the size of the
Canadian market was relatively small, each model had to be produced in short runs, with the ensuing
loss of economies of scale.  As a result, unit production costs, and hence prices to Canadian
consumers, were higher than in the United States and other producing countries.
5.156  Concern about that situation, as well as about Canada’s growing deficit in trade in automotive
products with the United States, prompted the adoption in 1963 of a so-called "full-duty remission
plan" designed to stimulate exports of automotive products.195  Under that plan, qualified
manufacturers196 of motor vehicles could earn a remission of duties on imports of motor vehicles and
original equipment parts to the extent that they increased the Canadian content of its exports of
automotive products over that achieved in a base period.
5.157  The full-duty remission scheme gave rise to protests by the US parts industry and, eventually,
to the filing of a petition requesting the imposition of countervailing duties.  However, fears of
retaliation, together with the desire to avoid a confrontation with a major ally, led the US authorities
to opt for a negotiated solution.  The result of those negotiations was the Auto Pact.
5.158  The Auto Pact is an asymmetrical agreement that imposes different obligations on each of the
two signatories.
                                                     
188 The applicable duty on imports of complete cars was 17.5 per cent.
189 The applicable import duty was up to 25 per cent.
190 This incentive applied only with respect to parts and components of a kind not manufactured in
Canada.
191 In practice, imports of inputs from other members of the British Commonwealth were negligible, so
that this requirement amounted effectively to a Canadian content requirement.
192 From 40 per cent to 60 per cent of the ex-factory cost of the motor vehicles assembled in Canada,
depending on the size of the manufacturer.
193 Over 90 per cent of the automobiles sold in Canada were assembled by firms owned in part or in
whole by US companies.
194 The Canadian industry prior to 1965 has been described as a "high-cost duplication in miniature of
the United States’ automotive industry".  Carl. E. Beige, The Canada-US Automotive Agreement:  anevaluation, The Canadian-American Committee, 1970, p. 11.
195 P.C. 1963-1/1544, of 22 October 1963. The Plan was based on the recommendations of a one-man
Royal Commission appointed by the Canadian Government in 1960,  the "Bladen Commission", and waspreceded by the introduction of  a so-called "pilot  plan" on 31 October 1962  (P.C. 1962-1/1536). Under the
pilot plan, the duties paid by qualified manufacturers on imports of automatic transmissions and stripped
engines were remitted to the extent that the Canadian content of automobile parts exported by the manufacturerexceeded that of the base period.
196 Qualified manufacturers were  those producing in Canada at least 40 per cent of their sales.WT/DS139/R
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- Obligations of the United States
5.159  The United States agreed under the Auto Pact to provide duty-free treatment for imports of
certain classes of motor vehicles, as well as of original equipment parts therefore.197
5.160  That exemption applies to imports of Canadian products exclusively.198  Furthermore, the
Auto Pact required that any materials from third countries incorporated into those products should notexceed 50 per cent of their appraised customs value when imported into the United States.
199
Subsequently, that requirement was replaced by the origin rules laid down first in the CUSFTA, andthen in the NAFTA.
5.161  As from 1 January 1998, all Canadian automotive products can be imported duty free into the
United States under the NAFTA, provided that they sati sfy the relevant origin rules of that agreement.
Since, as explained below, imports under the Auto Pact into the United States also have to comply
with the NAFTA origin rules, the US side of the Auto Pact has become redundant.  Indeed, the
European Communities understands that the United States effectively discontinued the administration
of the Auto Pact as of 1 January 1998.
- Obligations of Canada5.162  For its part, Canada agreed to provide duty-free treatment to imports of certain classes of
motors vehicles (namely, "automobiles", "specified commercial vehicles" and "buses"
200), as well as
of original equipment parts therefor, but only when those imports were made by certain designated
manufacturers of motor vehicles established in Canada.201
5.163  Specifically, the Auto Pact reserves the right to import duty free a given class of motor
vehicles to those manufacturers which produced motor vehicles of that class in Canada during the
so-called "base year", which is defined as the period commencing on 1 August 1963 and ending on31 July 1964.
202
5.164  In addition, those manufacturers must comply, on an annual basis and for each "class" of
vehicles concerned,  with the following CVA and Ratio conditions.203
(A) the ratio of the net sales value of the motor vehicles produced in Canada to the net
sales value of all vehicles sold for consumption in Canada must be equal to or higherthan the corresponding ratio in the base year, and in no case lower than 75 to 100;
and
(B) the total CVA (in dollar terms) of the motor vehicles produced in Canada during that
period must be at least equal to the CVA of the base year.
5.165  Canada reserved expressly the right in the Auto  Pact to accord similar duty-free treatment to
other manufacturers which did not meet the above conditions.
204  Prior to 1989, Canada exercised that
                                                     
197 Auto Pact, Article II (b). Note that the US Government did not agree to provide duty-free treatment
but rather to "seek enactment" by the US Congress of the necessary legislation. That legislation is contained in
the Automotive Products Trade Act , 1965, Public Law 89-23, of 21 October 1965 (Exhibit EC-11).
198 Auto Pact, Article II (b).
199 Auto Pact, Annex B, para. 3.
200 These categories are defined in the Auto Pact, Annex B, paras. 2(1), 2(3) and 2(7).  Those
definitions have been refined in the MVTO 1998.
201 Auto Pact, Article II (a).
202 Auto Pact, Annex 2(2).
203 Auto Pact,  Annex A, para. 2(5).
204 Auto Pact, Annex A, para. 3.WT/DS139/R
WT/DS142/R
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right in order to extend, by means of SROs, similar tariff benefits to other manufacturers which
established themselves in Canada after the base year.  However, as discussed below, Canada
renounced that right in the CUFSTA, which contains a provision freezing definitively the list of
beneficiaries of the Tariff Exemption as of 1 July.
5.166  By its own terms, the Auto Pact applies only to imports of US products.205  But, as will be
explained below, Canada has extended unilaterally the same treatment to imports originating in all
other countries entitled to MFN treatment.
5.167  As from 1 January 1998, all US automotive products which meet the NAFTA origin rules can
be imported duty free into Canada under the NAFTA.206 By contrast, duties on imports of automotive
products from Mexico will not be fully eliminated under the NAFTA until 1 January 2003.  This doesnot, however, mean that the Auto Pact benefits have become redundant also with respect to US
imports into Canada.  In the first place, unlike imports of Canadian products into the United States,
US imports into Canada do not have to comply with the NAFTA origin rules in order to qualify for
the Auto Pact benefits.
207  Moreover, even in those cases where US products have sufficient "North
American content" to meet the relevant NAFTA origin rules, the Auto Pact beneficiaries can avoid thecomplex paperwork required for proving that orig in by importing the products under the Auto Pact
instead of under the NAFTA.
- Status of the Auto Pact in the GATT/WTO
5.168  The Auto Pact was examined by a GATT Working Party established in March 1965.
208
During the discussions, the United States were le d to admit that its obligations under the Auto Pact
were inconsistent with GATT Article I:1.209  Subsequently, the United States requested a waiver under
Article XXV:5, which was granted.210  In November 1996 that waiver was renewed, at the request of
the United States211, until 1 January 1998212, the date on which the duties on imports of Canadian
automotive products were fully eliminated in accordance with the provisions of the NAFTA.
5.169  In contrast, Canada took the position that its obligations under the Auto Pact were fully
consistent with the GATT, even though some members of the Working Party questioned their
compatibility with Articles I and III of GATT.213  As a result, unlike the United States, Canada did not
request a waiver.  In an attempt to allay the concerns expressed within the Working Party, Canada
gave assurances that the benefits provided in the Auto Pact would be extended to imports of all
sources on the same terms.214  Canada also gave assurances that the Auto Pact would not lead to
                                                     
205 Auto Pact, Article II (a).
206 By contrast, duties on imports of automotive products from Mexico will not be fully eliminated
under the NAFTA until 1 January 2003.
207 Under the CUSFTA, motor vehicles and most automotive parts had to contain at least 50 per cent
Canadian/US value.  The required percentage of "North American" value under the NAFTA is currently
56.5 per cent. It will be increased to 62.5 per cent as from 1 January 2002.
208 Report of the Working Party on Canada – US Agreement on Automotive Products, supra  note 6.
209 Ibid ., para. 15.
210 See ibid. and the Decision of the CONTRACTING PARTIES of 20 December 1965 granting the
waiver requested by the United States, BISD 13S/37.
211 G/L/103.
212 Decision adopted by the General Council at is meeting of 7, 8 and 13 November 1996, WT/L/198.
213 Report of the Working Party on Canada – US Agreement on Automotive Products, supra  note 6, paras.
21 and 22.
214 Ibid., para. 20.WT/DS139/R
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discrimination against new entrants.215 216  Yet, as explained below, the provisions of the CUSFTA
forced Canada to break those assurances.
(ii) The CUSFTA
5.170  The CUSFTA provides for the elimination of all import duties on trade in automotive
products between the United States and Canada by  1 January 1998.  Nevertheless, the abolition of
import duties applies only with respect to imports of  "originating" products, i.e. of products which
meet the preferential origin rules contained in the CUFSTA.
5.171  The CUSFTA made two important changes to the operation of the Auto Pact.
5.172  First, whereas the Auto Pact had permitted Canada to grant similar tariff benefits to other
manufacturers which did not qualify for the Auto Pact benefits, the CUFSTA includes a provision
excluding expressly that possibility.
5.173  Specifically, Article 1002.1 of the CUFSTA provides that Canada shall not grant any waiver
from import duties on automotive products which is contingent upon the fulfilment by the recipient of
performance requirements to any firm which is not included in the Annex to that provision.217
5.174  The Annex to Article 1002.1 then lists three categories of firms:  (1) the beneficiaries of the
Auto Pact;  (2) the beneficiaries of SROs issued before the signature of the CUFTSA which accord
benefits similar to those of the Auto Pact; and 3) other firms which "may be reasonably expected" to
qualify for one such SRO by the 1989 model year.218  The last category was added in order to allow
CAMI, a joint venture between General Motors and Suzuki which did not begin production until
1989, to benefit also from the Tariff Exemption.
5.175  Article 1002.1 of the CUFSTA had thus the effect of freezing the list of recipients of the
Tariff Exemption as of 31 July 1989.  The only possible way in which a company not listed in the
Annex to Article 1002.1 may benefit from the Tariff Exemption is by acquiring the control of a listed
recipient.  Nevertheless, even that possibility is restricted by a note in that Annex, which states that
the Tariff Exemption shall cease being granted if, as a result of the acquisition of control over a
recipient, "the fundamental nature, scope or size of the business of the recipient is significantlyaltered".
219
5.176  Article 1002.1 was included in the CUFSTA at the request of the United States, and has the
clear purpose of reserving the Tariff Exemption for the subsidiaries of US companies.  More
                                                     
215 According to the Report of the Working Party on Canada – US Agreement on Automotive Products,
supra  note 6, para. 10:  "The representative of Canada emphasised that the Agreement placed no  impediment in
the way of companies wishing to start production in Canada.  It was not the intention of his Government todiscriminate either against or in favour of new producers of any nationality.  The criteria which would beapplied in the case of a new producer wishing to particip ate in the programme could not be identical with the
criteria for existing producers (because there would be no production during the base period) but the terms of
admission would have to be consistent with these criteria".
216 Both types of assurances were confirmed by Canada during the subsequent discussion by another
Working Party of the request for a waiver made by the United States.  See the Report of the Working Party on
Canada – US Agreement on Automotive Products, supra  note 6, para. 15.
217 Exhibit EC-12.
218 Ibid.
219 This provision has been reproduced in the MVTO 1998, Schedule, Part 1, para. 3.  The obvious
purpose of this clause was to prevent that a major EC or Japanese manufacturer could gain Auto Pact benefitsthrough the acquisition of control of Volvo (Canada) Inc.WT/DS139/R
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particularly, Article 1002.1 was directed against the Japanese companies Honda and Toyota, which
had built up manufacturing plants in Canada shortly before the conclusion of the CUFSTA and, but
for Article 1002.1, could have qualified for an SRO granting the Tariff Exemption within a few
years.220
5.177  The second change introduced by the CUFSTA concerns the origin rules applicable to
imports of Canadian products into the United States under the Auto Pact.  Pursuant to the CUFSTA221,
those imports must comply with the relevant CUFSTA  origin rules, instead of the requirements laid
down in Annex B of the Auto Pact.  By contrast, the CUFSTA origin rules do not apply to imports of
US products into Canada under the Auto Pact.222
(iii) The NAFTA
5.178  Effective 1 January 1994, the CUFSTA was replaced by the NAFTA.  The NAFTA
authorises expressly Canada to maintain the Tariff  Exemption subject to the conditions stipulated in
the CUFSTA, including in particular Article 1002.1 and the Annex to that provision.223
5.179  The only change introduced by NAFTA with regard to the operation of the Auto Pact
concerns the origin rules applicable to imports in to the United States.  Pursuant to the NAFTA, those
imports became subject to the relevant NAFTA origin rules, in place of the CUFSTA origin rules.224
(c) Canada's response to the complainants' arguments regarding the Auto Pact, the
CUSFTA and the NAFTA
5.180  Regarding the complainants' arguments on the Auto Pact, the CUSFTA and the NAFTA,
Canada  responds as follows (with additional arguments contained in Section VI, Legal Arguments of
the Parties):
5.181  Japan and the European Communities both have referred in their arguments to the
CUSFTA225 and the NAFTA.226  The European Communities stated in its arguments that the
CUSFTA and the NAFTA are "not themselves in dispute" but that they are "directly relevant for this
case", complaining that the United States and Mexico fare better than other WTO Members do in
motor vehicle trade with Canada.  Japan claimed that the CUSFTA "amplified the discriminatory
effects of the Duty Waiver" and that the NAFTA "reaffirmed the discriminatory aspects of theCUSFTA."
5.182  In fact, these free-trade agreements are of no relevance to this dispute.  The CUSFTA created
a free-trade area composed of Canada and the United States and in doing so provided for duty-free
automotive trade between Canada and the United Stat es, provided that certain requirements were met.
The CUSFTA was suspended when the NAFTA came into force, and as such has no relevance for anycountry, much less the complainants.  The NAFTA continued this regime, and expanded the free-trade
area to include Mexico with the result that Mexican trucks now enter Canada duty free, and other
vehicles are currently subject to nominal duties of 1.3 per cent (passenger cars) and 2.4 per cent
                                                     
220 Honda’s plant in Allison, Ontario, with a capacity of 120.000 units, was opened in 1986, whereas
Toyota’s Plant in Cambridge, Ontario, with a capacity of 85.000 units, was opened in 1988.
221 CUFSTA, Article 1005.1 (a). (Exhibit EC-12).
222 CUFSTA, Article 1005.1 (b) (Exhibit EC-12).
223 NAFTA, Annex 300-A;  and Appendix 300-A.1., paras. 1 and 2 (Exhibit EC-13).
224 Ibid.
225 Free Trade Agreement between the Government of Canada and the Government of the United States
of America  , CTS 1989/3.  See relevant sections at Exhibits EC-12 and JPN-33.
226 See relevant sections at Exhibits EC-13 and JPN-36.WT/DS139/R
WT/DS142/RPage 46
(heavy trucks and buses).  All NAFTA originating ve hicles imported from Mexico will enter duty free
after 1 January 2003.
5.183  The NAFTA provides for a free-trade area in accordance with Article XXIV of the GATT
1994.  Canada is at liberty to accord to the United States and Mexico treatment more favourable than
it does to other WTO Members.  Indeed, it may even treat its NAFTA partners better than thatAgreement requires it to do.  By virtue of Article XXIV, such favourable treatment can have no
bearing on the treatment Canada accords to other WTO Members, and the complaints of
discrimination levied by Japan and the European Communities in this dispute have no basis in law.
(i) Application of the Auto Pact in the United States
5.184  As outlined in the arguments of Japan and the European Communities, the application of the
Auto Pact in the United States stood in sharp contrast to its application in Canada.  Essentially, goods
could enter the United States duty free only if they contained sufficient Canadian content.  In other
words, the United States implemented the Auto Pa ct on a discriminatory basis, rather than on a
non-discriminatory basis.  Figure 3 illustrates the contrast between the Canadian and US application
of the Auto Pact: imports into Canada are origin-neutral while imports into the United States arebased on Canadian origin.WT/DS139/R
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Canada's Figure 3
Figure 3 - Canada Applies the Auto Pact on a Most Favoured
Nation Basis While the United States Does Not
Duty Free Imports of automobiles
from any Country  for a qualified 
manufacturer.Duty Free Imports of automobiles from any CountryCanadian Application of the Auto Pact
Further restrictions apply to Canadian 
motor vehicles and parts manufactured 
with materials imported from countries 
outside of North America.U.S. Application of the Auto Pact
Duty Free Imports of automobiles from Canada only
WT/DS139/R
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(ii) The United States required a GATT waiver for the Auto Pact; Canada did not
5.185  In 1965, prior to the implementation of the Auto Pact, a GATT Working Party was
established to determine its consistency with the GATT.227  The Working Party found that the US
application of the Auto Pact violated the GATT:
"It was the general consensus of the Working Party that, if the United States
implemented the Agreement in the manner proposed, United States action would be
clearly inconsistent with Article I and it would be necessary for the United States
Government to seek a waiver from its GATT obligations".228
5.186  Consequently, the United States sought and received a waiver.229  This is significant because,
while the United States failed to pass GATT scrutiny, Canada’s implementation of the Auto Pact was
not similarly faulted and therefore Canada was not required to obtain a waiver.230  The complainants
in this case make much of the fact that Canada did not receive a waiver.  But Canada was not required
to do so.  Canada would have done so had the Working Party required it.  The fact is, it did not.
5.187  Canada does not contest that the measures favour certain manufacturers in Canada over
others.  Eligible manufacturers may import vehi cles from outside the NAFTA Area duty free.
Manufacturers that had not qualified as manufacturers as of 27 October 1989, when the list of eligible
manufacturers was closed, may not import vehicles from outside the NAFTA area duty free.  The
WTO does not forbid such differentiation between manufacturers.  The complainants have tried to
suggest that it does by stretching existing rules and quoting selectively from panel opinions.  But there
is no such prohibition, and Canada’s measures are perfectly consistent with WTO rules.
(d) Japan's rebuttal to Canada's response
5.188  As a rebuttal to Canada's response to  factual argument s regarding NAFTA, Japan  argues as
follows:
5.189  The Government of Japan would like to bring to the Panel’s attention the fact that the Duty
Waiver affects two categories of non-preferential (i.e. MFN) trade.  First, the Duty Waiver is applied
to imports of motor vehicles that originate in the territories of certain WTO Members that are notParties to the NAFTA.  Second, the Duty Waiver is applied to imports of certain motor vehicles that
originate in the territories of WTO Members that are also Parties to the NAFTA (i.e. the United States
and Mexico).
                                                     
227 Report of the Working Party on Canada – US Agreement on Automotive Products, supra  note 6,
para. 31.
228 Ibid., para. 17.
229 The waiver expired on 1 January 1998.  This expiry has not affected the duty-free entry of Canadian
origin automotive products, which now enter the United States under the NAFTA.
230 See also Report of the Working Party on Canada – US Agreement on Automotive Products, supra
note 6, para. 13, indicating that a group of Members stated that Canada had already extended Auto Pact
advantages immediately and conditionally as required by Article I of the GATT:  Members of the WorkingParty noted that Article V of the Agreement which lays down that "access to the Canadian and United Statesmarkets provided for in this Agreement may by agreemen t be accorded on similar terms to other countries" does
not require that similar access "be accorded immediately and unconditionally to like products originating in or
destined for the territories of all other contracting parties" in the terms of Article I of the GATT. They however
observed that , as the Government of Canada had unilaterally extended duty-free treatment for the products
described in Annex A to all contracting parties,  Article V would, in practice, have significance only with respect
to the extension of access to the United States. ( emphasis added )WT/DS139/R
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5.190  In this second category of MFN trade, the Duty Waiver is applied to those motor vehicles that
do not meet the strict NAFTA rules of origin which qualify goods for preferential duty treatment
under that Agreement.  The Duty Waiver is also applied in instances where the applicable NAFTA
rule of origin is met but the applicable NAFTA duty has not yet been reduced to zero.
5.191  In recent years, imports from the United States and Mexico have benefited to a great extent
from the Duty Waiver.  As noted earlier, automobile s originating from these two countries can still be
imported into Canada by Auto Pact Manufacturers duty free under the Auto Pact which is not a free-
trade agreement.  As shown in Exhibit JPN-37-3, the Government of Canada exempted automobiles
imported from the United States from the customs duty of 0.9 per cent in 1997 that otherwise would
have had to be paid, even if such automobiles complied with the NAFTA origin rules.  The total
exempted amount of customs duty was over CD$88 mill ion.  Further, the Government of Canada also
exempted automobiles imported from Mexico from the 2.0 per cent customs duty in 1997 that would
otherwise be applicable even if the automobiles complied with the NAFTA origin rules.  The total
exempted amount of customs duty was CD$21 million.  As a result, importers of Japanese
automobiles paid over CD$142 million customs dut ies, while importers of US automobiles and
Mexican automobiles paid only about CD$637,000 and CD$12,000 respectively.  This comparison
demonstrates the magnitude of the customs duties paid and is a clear indication of their potential
effect on competitive conditions between goods im ported from Japan and those from other countries.
4. Measures relating to administration
(a) Japan's account of Canada's administration of the import duty exemption
5.192  Concerning measures relating to the administration of the Duty Waiver, Japan contends the
following:
(i) MVTO 1998 and the Letters of Undertaking
- Eligibility for the Duty Waiver is restricted to certain manufacturers
5.193  The eligibility requirement for the Duty Waiver is contained in the definition of
"manufacturer" provided in subsection 1(1) of the Schedule to the MVTO 1998.  Paragraph (a) of this
definition provides that a manufacturer first must have produced in Canada vehicles of the class forwhich it seeks the Duty Waiver in each of the four consecutive quarters of the base year.
231  The base
year is defined as the 12-month period from 1 August 1963 to 31 July 1964.232
5.194  Therefore, to meet this requirement, a manufacturer of motor vehicles must have had
production facilities in Canada before 1965, when the Canada-US Auto Pact came into force.  The list
of manufacturers that continue to qualify for the Duty Waiver under the MVTO 1998 appears in theAnnex to Revenue Canada's Memorandum D10-16-3.
233  According to this list, the only importers
considered to be manufacturers of automobiles under the MVTO 1998 are subsidiaries of General
Motors, Ford, Chrysler and Volvo as these companies had production facilities in Canada during the
base year.
5.195  Although eligibility for importers under the MVTO 1998 has been frozen, there is a narrow
exception under which an importer who also is a "manufacturer" may achieve Auto Pact Manufacturer
status.  Under subsection 1(5) of the Schedule to the MVTO 1998, a manufacturer may designate
another person as a person associated with the manufacturer for the production of motor vehicles in
Canada.  For the purposes of the Duty Waiver, Revenue Canada will consider this associated person
                                                     
231 MVTO 1998 (Exhibit JPN-4).
232 Definition of "base year", subsection 1(1) of the Schedule to the MVTO 1998 (Exhibit JPN-4).
233 Exhibit JPN-7.WT/DS139/R
WT/DS142/RPage 50
to be the same person.234  Thus, this exception was introduced for the convenience of existing Auto
Pact Manufacturers and not for newcomers.  It is meaningless to Non-Auto Pact Manufacturers
including Japanese automobile manufacturers.
5.196  Nevertheless, the products of a Non-Auto Pact Manufacturer may obtain the benefit of the
Duty Waiver where the manufacturer acquires a recipient, that is, a manufacturer listed in Part One ofAnnex 1002.1 of the CUSFTA.
235  However, the manufacturer must meet the requirements of
section 4 of the Schedule to the MVTO 1998.
5.197  Section 4 of the Schedule to the MVTO 1998 provides as follows:
"4. A recipient is not entitled to a reduced rate of customs duty in respect of
vehicles referred to in section 2 if
(a) effective control of the conduct and operation of the recipient's business or
substantial ownership of its assets is acquired, directly or indirectly, by a person who
manufactures vehicles and is not a recipient;  and
(b) after that person's acquisition of effective control or substantial ownership of
the assets of the recipient's business, the fundamental nature, scope or size of thebusiness is significantly altered from the business as it had been carried on by the
recipient immediately before the acquisition."
5.198  Thus, two conditions must be met to enable the acquired company to maintain its Auto Pact
Manufacturer status.  With respect to the first condition, the transaction must be such that effective
control of the company or substantial ownership of it s assets is transferred to a manufacturer that does
not qualify under the Duty Waiver programme.  The second condition relates to whether thefundamental nature, scope and size of the business of the recipient have been significantly altered.
The MVTO 1998 does not define the term "recipient's business" although section 4 requires that the
change of ownership must significantly alter the business "as it had been carried on by the recipient
immediately before the acquisition".
5.199  Consequently, pursuant to section 4 of the Schedule to the MVTO 1998, the imports of a
Non-Auto Pact Manufacturer may become eligible for the Duty Waiver only when the manufacturer
acquires a recipient without altering significantly "the fundamental nature, scope and size" of the
recipient's business.  In the event of a take-over or acquisition of assets, the new owner effectively
must continue the recipient's business as it existed before the acquisition.
5.200  This means that, except through the substantial acquisition of Canadian subsidiaries of
General Motors, Ford or Chrysler, Japanese automobile manufacturers cannot become eligible for the
Duty Waiver.  Accordingly, the acquisition method does not provide a meaningful opportunity to gain
access to the Duty Waiver.
- Manufacturing and CVA requirements
5.201  An Auto Pact Manufacturer may benefit from the Duty Waiver if it fulfils two performance
requirements:  (i) a manufacturing requirement;  and (ii) a CVA requirement.
                                                     
234 The list of these associated persons is in the Annex to Revenue Canada's Memorandum D10-16-3
(Exhibit JPN-7).
235 The manufacturers contained in that list have qualified for Auto Pact Manufacturer status under the
MVTO 1998 or under an SRO before 1 January 1988 (Exhibit JPN-33).WT/DS139/R
WT/DS142/R
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- Manufacturing requirement
5.202  The manufacturing requirement is contained in the definition of "manufacturer" found at
subsection 1(1) of the Schedule to the MVTO 1998.  In simple terms, the value of motor vehicles
produced by an Auto Pact Manufacturer in Canada must be in proportion to the value of motor
vehicles it sells in a given year.  The ratio of production-to-sales for each year must be equal to orhigher than that manufacturer's ratio achieved in the base year, without being lower than 75 to 100.
This ratio consists of the net sales value of vehicles of a given class produced in Canada in a given
year over the net sales value of all vehicles of that class sold for consumption in Canada in that year.
5.203  While the actual production-to-sales ratios are not publicly available, according to Industry
Canada, the production-to-sales ratio for cars must be at least 95 to 100.
236
5.204  The operation of the manufacturing requirement is best illustrated in an example.  Assuming
that the production-to-sales ratio is 80 to 100 and an Auto Pact Manufacturer produces in Canada and
sells in Canada motor vehicles for a value of $1,000,000, it can import into Canada motor vehicles
valued up to $250,000.  The ratio of 80 to 100 is maintained in that situation as it has produced
$1,000,000 worth of vehicles and has sold a total value of $1,250,000 ($1,000,000 + $250,000).237
5.205  In practice, the application of the manufacturing requirement means that a certain value of
motor vehicles must be exported by Auto Pact Manufacturers.
5.206  In the case of Auto Pact Manufacturers qualifying under the MVTO 1998, the production-to-
sales ratio provides that an Auto Pact Manufacturer must maintain in a given year a ratio of the "net
sales value of the vehicles produced by the company" to the "net sales value of all vehicles of that
class sold for consumption in Canada" that is equal to or higher than the ratio obtained in the base
year and in no case less than 75 to 100.238  For most of the Auto Pact Manufacturers qualifying under
an SRO, the specified ratio is 100 to 100.239
5.207  With respect to the situation where the production-to-sales ratio is 100 to 100, the pressure to
export, which arises from the application of the production-to-sales ratio, can be illustrated as follows:
(i) Where an Auto Pact Manufacturer imports motor vehicles and sells them in Canada,
it increases the net sales value of the vehicles "sold for consumption in Canada"240;
                                                     
236 Exhibit JPN-38.  The Government of Canada is aware of the ratio for each Auto Pact Manufacturer
since it receives declarations and reports from each Auto Pact Manufacturer.  Schedule to the MVTO 1998,Sections 2.(a), (b).  Exhibit JPN-4.
237 The simplest case is where the production to sales ratio is 100 to 100.  In that case, for every
imported motor vehicle sold in Canada, an Auto Pact Manufacturer must produce a motor vehicle or vehicles of
equal net sales value in Canada, which eventually must be exported.
238 Mathematically, this ratio can be represented as follows:  Px/Sx ≥ P1/S1 where Px = value of cars
produced in year X1; S x = value of cars sold in year X1; P1 = value of cars produced in year 1 (i.e. the base
year);  and S1= value of cars sold in year 1 (i.e. the base year).
239 For a number of Auto Pact Manufacturers, the production-to-sales ratio is based on the production
and sales figures achieved in the base year.  For SROs issued since 1977, the production-to-sales ratio is set at
100 to 100.  See Exhibit JPN-28 for a summary of the SROs' condition and their evolution.
240 Vehicles sold for consumption in Canada includes imported vehicles sold for consumption in
Canada where the customs duty on those vehicles has been removed:  Subsection 1(4) of the Schedule to theMVTO 1998 only excludes from the calculation of vehicles sold for consumption in Canada those imports forwhich the customs duty is not removed.  A contrario , where the duty is removed such import sales are included
in the calculation.  (Exhibit JPN-4).WT/DS139/R
WT/DS142/RPage 52
(ii) The Auto Pact Manufacturer must increase the net sales value of the vehicles it
produces in Canada in order to comply with the ratio;
(iii) But if the vehicles so produced by the Auto Pact Manufacturer are sold for
consumption in Canada, those sales would only increase the net sales value of thevehicles for the Manufacturer, thereby widening the disparity between the net sales
value and the net production value;  and
(iv) Thus, the only way for the Auto Pact Manufacturer to maintain its compliance with
its production-to-sales ratio is to export the vehicles it produces.
241
5.208  Where the production-to-sales ratio is less than 100 to 100, the requirement to export also
arises.  An example can be illustrated for a case where an Auto Pact Manufacturer has been operating
under a production-to-sales ratio of 75 to 100 (the lowest possible ratio) as follows:
(i) Where an Auto Pact Manufacturer imports motor vehicles and sells them in Canada,
it increases the net sales value of the vehicles "sold for consumption in Canada";
(ii) The Auto Pact Manufacturer must increase the net sales value of the vehicles it
produces in Canada in order to comply with the ratio;
(iii) As is the case in the example shown in para. 5.207, if the vehicles so produced by the
Auto Pact Manufacturer are sold for consumption in Canada, those sales would onlyincrease the net sales value of the vehicles for the Manufacturer, thereby widening the
disparity between the net sales value and the net production value;
(iv) Thus, the only way for the Auto Pact Manufacturer to maintain its compliance with
its production-to-sales ratio is to export the vehicles it produces, but a lesser degree ofproduction-to-sales requirement imposes a lesser degree of pressure in comparison
with the case exemplified in para 109.
242
- CVA requirement
5.209  The MVTO 1998 describes this domestic content requirement as follows:
"the Canadian value added is equal to or greater than the Canadian value added in
respect of all vehicles of that class produced in Canada by the manufacturer in the
base year."243
5.210  In other words, the Canadian value added (CVA) for vehicles of a specified class must be
equal to or greater than the CVA for the base year.
                                                     
241 In other words, any increase in production that is sold in Canada will affect to the same extent both
elements of the ratio.  The value of sales of motor vehi cles (S) consists of products manufactured in Canada that
are sold in Canada (D) and products manufactured abroad  that are sold in Canada (I).  The value of motor
vehicles produced consists of those vehicles that are sold in Canada (D) and those that are exported (E).Mathematically, these relationships can be shown as:  Sx = Dx + Ix and Px = Dx + Ex.  To solve:
Px/Sx = (Dx + Ex) / (Dx  + Ix).  If Px/Sx ≥ 1, then Px ≥ Sx.  Replacing these values in the equation we obtain
Dx + Ex ≥ Dx + Ix.  Therefore, Ex ≥ Ix.
242 For example, applying the formula set out in footnote 241 in a case where the ratio is 75 to 100,
instead of E x ≥ Ix , the formula will be E x ≥ Ix – 1/3P x.
243 See para. (b)(ii) of the definition of "manufacturer " in Subsection 1(1) of the Schedule to the
MVTO 1998 (Exhibit JPN-4).WT/DS139/R
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5.211  The MVTO 1998 lists a broad range of expenses that are included in the calculation of
CVA.244
5.212  With respect to trade in goods, the definition of CVA identifies a number of categories of
expenses that are particularly relevant to this dispute.  (See Section II, Background.)
5.213  As discussed in Exhibits JPN-15 through 19, the full range of motor vehicle parts,
components and materials are available both within Canada and outside of Canada.  The CVA
requirement clearly favours domestic parts, components and materials over imported competing
products.
5.214  With respect to trade in services, the elements included in the definition of CVA are costs that
are reasonably attributable to the production of the vehicles such as the cost of maintenance and repairwork executed in Canada on machinery and equipment used for the production process, the cost of
engineering services, experimental work and product development work executed in Canada, and
administrative and general expenses incurred in Canada.
245
5.215  These services are available both within Canada and outside of Canada.  The domestic
content requirement in the CVA clearly favours such services supplied in Canada over competingservices supplied outside Canada.
5.216  The domestic content targets that must be met by each manufacturer in order to qualify for the
Duty Waiver depend on the figures that were attained in the base year.  These figures are not publicly
available, although the Government of Canada would be aware of these figures from declarations and
reports from Auto Pact Manufacturers.
246
(ii) Special Remission Orders (SROs)
5.217  Beginning in 1965, the Government of Canada extended eligibility for the Duty Waiver by
granting SROs to individual manufacturers that ha d not met the original conditions of the MVTO
1965 and its successors.247  At present, 83 manufacturers continue to qualify for the Duty Waiver
under a company-specific SRO granted prior to 1 January 1989.  Among the 83 manufacturers, only
two are producers of automobiles (i.e. CAMI and Intermeccanica).  A list of the SROs that are
currently in force and the manufacturers that are benefiting from them is set out in Exhibit JPN-26.
                                                     
244 Ibid., definition of "Canadian value added".
245 Ibid.
246 Auto Pact Manufacturers must report periodically to the Government of Canada, Section 2(a) and
(b) of the Schedule to the MVTO1998.
247 Special Remission Orders are regulations adopted under authority of the Financial Administration
Act, R.S.C. 1985, c. F-11. s. 23 (Exhibit JPN-3).  The MVTO 1965 required companies to have produced motor
vehicles in all quarters of the base year, which was defined as the 12-month period from 1 August 1963 to31 July 1964.  Any manufacturer which had not met this requirement was thus effectively prevented fromqualifying for the Duty Waiver.WT/DS139/R
WT/DS142/RPage 54
- Eligibility requirement to obtain an SRO
5.218  A manufacturer may no longer obtain a new SRO if it did not meet the qualifying
requirements before 1 January 1988.  As a result of the above noted restrictions introduced in the
CUSFTA, the Government of Canada cannot grant the Duty Waiver to any company other than those
already listed in Annex 1002.1 of the CUSFTA.
- Manufacturing and CVA requirements
5.219  Although the conditions may vary according to the time period in which the SROs were
granted, all SROs contain the CVA requirement and a manufacturing requirement (i.e. production-to-
sales ratio).  The definitions of both requirements under the SROs are the same as the definitions
under the MVTO 1998.  Because the SROs were granted after the adoption of the Canada-US AutoPact, different base years had to be applied to each manufacturer in order to establish the amounts on
which the domestic content and manufacturing requirements would be based.
5.220  The SROs that were granted through 1976 set the minimum production-to-sales ratio at 75 to
100.  Since 1977, almost all SROs set the production-to-sales ratio at one to one.  Until 1984, the
CVA requirement was the amount of CVA achieved in the specified base year.  The only limitationwas that the base year level of CVA had to be at least 40 per cent of the cost of sales.  Since 1984, the
CVA requirement for a given year has been expressed as a percentage of the cost of sales achieved in
the year for which the Duty Waiver is claimed.  There is no reference to the values for the base year.
Hence, over the years, the manufacturing and CVA requirements attached to the SROs have become
more onerous.
248
(iii) Declarations and reports
5.221  To maintain the Duty Waiver, each Auto Pact Manufacturer is required under the MVTO
1998 to send to the Minister of Revenue Canada a declaration before importing the first vehicles
during a given period.  This declaration must be sent before any 12-month period ending on
31 July.249  Failure to submit the declaration would result in the loss of the Duty Waiver status for
imports during the affected year.
5.222  In addition, the MVTO 1998 provides that every Auto Pact Manufacturer who imports
vehicles under the Duty Waiver must submit any reports that may be reasonably required by the
Minister of Revenue Canada and the Minister of Industry regarding the production and sale of
vehicles by the Auto Pact Manufacturer.250  Auto Pact Manufacturers that qualified for the Duty
Waiver under a company-specific SRO also are requir ed under the SRO to submit reports to show that
they have complied with the conditions of their order for each period.251
5.223  Further filing requirements are provided in Revenue Canada's Memorandum D10-16-3 to
show compliance with the MVTO 1998.252  A series of reports must be submitted to the Minister of
Revenue Canada and to the Minister of Industry by 1 November of each year.
5.224  Based on the reports supplied by the Auto Pact Manufacturer, officials of Revenue Canada
determine if the Auto Pact Manufacturer has complied with the conditions of the MVTO 1998 or
                                                     
248 Exhibit JPN-28 provides a comparative table of  the conditions included in the various SROs
according to the time period in which they were granted.
249 Section 2, para. (a), of the Schedule to the MVTO 1998 (Exhibit JPN-4).
250 Ibid.,  para. (b).
251 Memorandum D-10-16-2, Revenue Canada, section 8 (Exhibit JPN-8).  This requirement also
appears in a number of SROs, starting with the Truck Equipment Remission Order, SI/72-38 (Exhibit JPN-6).
252 See Memorandum D-10-16-3 (Exhibit JPN-7).WT/DS139/R
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company-specific SRO.  If the Auto Pact Manufacturer has complied with all the conditions, no duties
are assessed on motor vehicle imports for the preceding year.  If the Auto Pact Manufacturer does not
comply with the conditions, duties are assessed on the previous year's imports.  There are no
provisions in the MVTO 1998 or the D-Memoranda providing for a Auto Pact Manufacturer to lose
its Auto Pact Manufacturer status following the failure to meet the performance requirements for agiven year.  If the Auto Pact Manufacturer meets the criteria in the following year, it appears that the
MFN duty is waived on that year's imports.
5.225  Discretion plays a role in the administration of the measure.  There is evidence that some
Auto Pact Manufacturers are entitled to the remission of import duties even though they failed to meet
the performance requirements.  One notable example is Paccar Inc.
253
(b) The EC's account of Canada's administration of the import duty exemption
5.226  Concerning measures relating to the administration of the Tariff Exemption, the European
Communities  contends the following:
5.227  Each model year the beneficiaries must submit, before they make the first importation, a
signed declaration to the Minister of National Revenue, in which they undertake to comply with theCVA and ratio requirements stipulated in the MVTO 1998 during that model year.
254
5.228  In addition, the beneficiaries must submit periodical reports containing information regarding
production costs, output and sales.255  That information allows the Canadian authorities to ascertain
compliance not only with the requirements of the MVTO 1998 but also with the additional
commitments contained in the Letters of Undertaking.  The reports are audited after the close of each
model year by Revenue Canada.
5.229  Any manufacturer that fails to meet the CVA or ratio requirements stipulated in the MVTO
1998 in any model year as to a class of motor vehicles is liable for the payment of the applicable
customs duties on all imports of motor vehicles of that class made during that year.  Nevertheless, the
manufacturer concerned does not lose the status of Auto Pact beneficiary and may still qualify for the
Tariff Exemption in successive model years.
5.230  The SROs lay down reporting obligations sim ilar to those stipulated in the MVTO 1998.
5.231  The consequences in case that a beneficiary fails to meet the CVA and ratio requirements
prescribed in its SRO are the same as in the case of violation of the requirements imposed by the
MVTO 1998.
(c) Canada's response to the complainant's arguments regarding administration of the
import duty exemption
5.232  With respect to the complainants' arguments on measures relating to the administration of the
Duty Waiver, Canada  responds as follows:
                                                     
253 PACCAR Inc. Remission Order, 1998, SOR/98- 585, 2 December 1998, Canada Gazette Part II,
Vol. 132, No 26, 3174 (Exhibit JPN-9).  In addition, Vo lvo did not satisfy the production-to-sales ratio in 1997
(Exhibit JPN-40).  However, Volvo could import vehicles duty-free (Exhibit 37-1).  This is another example ofabusive use of its discretion on the part of the Government of Canada.
254 MVTO 1998, Schedule, Part 1, 2 (a).  The form of the declaration is set out in MVTO 1998,
Schedule, Part 2.
255 MVTO 1998, Schedule, Part 1, 2 (b). Samples of the reporting documents are provided as
Exhibit EC-14.WT/DS139/R
WT/DS142/RPage 56
5.233  Japan and the European Communities refer to the D-Memoranda.256  These documents
explain the conditions under which vehicle manufacturers may qualify for the duty remission, and
note that vehicle producers are required to submit reports demonstrating compliance with the
conditions set out in the MVTO.
5.234  Japan has furnished evidence that the Big Three plus Volvo (Canada) Ltd. have consistently
exceeded their 1964 ratio requirements (based on aggregate performance of all four manufacturers).257
Indeed they generally operate far in excess of their individual ratios.  It should be noted, however, thatno additional benefits accrue to manufacturers that operate above their required ratio.
5.235  Both Japan and the European Communities have acknowledged that the CVA requirement
imposed by the MVTO is of no consequence today.
258  This is aptly illustrated in Figure 2 .259
                                                     
256 See examples filed by the EC and Japan in Exhibits EC-8/JPN-8, EC-9/JPN-7 and EC-10.
257Exhibit JPN-27, p. 27-40.
258 Exhibit EC-18 p. 54;  see also United States International Trade Commission Report on the United
States – Canadian Automotive Agreement: Its History, Terms, and Impact in the Ninth Annual Report of thePresident to the Congress on the Operation of the Automobile Products Trade Act of 1965, US SenateCommittee on Finance, January 1976.  That report, filed by Japan as Exhibit JPN-27, indicates at page 27-40
that the CVA "is of minor importance today" … "due to effects of inflation and the growth in the Canadian
market."  (See also pp. 27-35, 27-59).  The CVA is even less significant today, some 23 years after thepreparation of that Report.
259 For supporting evidence, see Exhibit CDA-2.WT/DS139/R
WT/DS142/R
Page 57
Canada's Figure 2
0.01.02.03.04.05.06.07.0
Canadian Value Added -
Required  Canadian Value Added -
Total Reported  Canadian Value Added -
Labour Reported  63
/
6464
/
6565
/
6666
/
6767
/
6868
/
6969
/
7070
/
7171
/
7272
/
7373
/
7474
/
7575
/
7676
/
7777
/
7878
/
7979
/
8080
/
8181
/
8282
/
8383
/
8484
/
8585
/
8686
/
8787
/
8888
/
8989
/
9090
/
9191
/
9292
/
9393
/
9494
/
9595
/
9696
/
97Base
YearTotal CVA Reported
in Excess o f
Requirement
for 1996-97
$0.612 Billion
9%$6.177 Billion
91%
Required
CVAFigure 2 - The Total Required CVA for MVTO Automobile
Manufacturers is so Insignificant as to be Irrelevant
(Billions of $)
Source: ndustry Canada Database. Complete data for 1997/98 is not available.
5.236  Figure 2  illustrates that the total required Canadian value added was fixed for the Big Three
automobile manufacturers plus Volvo (Canada) at roughly $612 million in the base year (1963-64).  It
remains the same today, some thirty-five years later.  In model year 1996-97, the last year for which
complete data is available, the reported aggregate CVA for the Big Three plus Volvo (Canada) was
about $7 billion260, or more than 11 times greater that the required level.  As illustrated in Figure 2 ,
labour costs alone have enabled the Big Three plus Volvo (Canada) to meet or exceed their aggregate
CVA requirement consistently since 1988.
B. STRUCTURE OF THE AUTOMOTIVE INDUSTRY
1. Japan's arguments on the structure of the motor vehicles industry
5.237  Regarding the structure of the motor vehicles industry, Japan  argues as follows:
                                                     
260Note that the reported amount is significantly less than the actual amount.  This is because none of
the Big Three companies goes to the trouble of calculating every dollar of Canadian value added, given that theyexceed the requirements by such a wide margin.WT/DS139/R
WT/DS142/RPage 58
(a) The integration of the global automobile industry and its implications for the structure
of the Canadian industry
5.238  The global automobile industry is dominated by a limited number of transnational automobile
manufacturers.  These manufacturers include:  (i) Japanese companies such as Honda Motor Co. Ltd.
(Honda) and Toyota Motor Corporation (Toyota);  (ii) North American companies such as FordMotor Company (Ford) and General Motors Corporati on (General Motors);  (iii) European companies
such as Bayerische Motor Werke AG (BMW);  Volkswagen AG (Volkswagen);  and Volvo AB
(Volvo);  and (iv) a new transcontinental company, DaimlerChrysler AG (DaimlerChrysler), formed
by the merger of Chrysler Corporation and Daimler Benz AG.
5.239  These transnational companies have integrated their production and distribution operations
over several different countries to increase their efficiency and rationalize their production.  In
particular, they control subsidiaries that have been mandated to manufacture specific models at
specific plants located in various countries.  The models produced at these plants can be shipped to
domestic and export markets.  As a result, motor vehicles produced at each plant are destined for
many different markets.  This permits the manufacturers to offer a broad range of models toconsumers located in many different markets while maintaining economies of scale.  The complex
corporate relationships and the resulting patterns of sourcing in the Canadian market are documented
in Exhibits JPN-10 and JPN-11.
5.240  To complete their product lines, some manufacturers also have contracted with
non-subsidiaries or have acquired equity interests in other manufacturers for the purpose of selling
specific models.  For example, as documented in Exhibit JPN-10, General Motors has a 50 per cent
equity stake in Saab (Sweden), a 37.5 per cent stake in Isuzu (Japan), a 50 per cent stake in CAMI(the other 50 per cent is owned by Suzuki) and wholly  owns Opel (Germany).  Until recently Ford had
a 10 per cent equity stake in Kia (South Korea), and wholly owns Jaguar.  Commercial relationships
such as these allow the leading manufacturers to distribute more models and occupy new market
segments without having to build new production facilities.
(b) Implications for the structure of the Canadian industry
5.241  This process of global integration has influenced the structure of the motor vehicle industry in
Canada.  Specifically, a number of these transnational manufacturers own Canadian subsidiaries that
produce, distribute and sell their full range of products.
5.242  The Canadian light vehicle sector, which includes passenger cars and light-duty trucks, is
dominated by a few foreign-owned subsidiaries that are fully integrated in the global operations oftheir parent corporations.  The only Canadian-owned manufacturer of automobiles which is eligible
for the Duty Waiver is Intermeccanica Internationa l Inc. (Intermeccanica), a small manufacturer of
specialty automobiles.
261
5.243  There are two general categories of Canadian subsidiaries of transnational automobile
manufacturers - those that manufacture and distribute motor vehicles in Canada and those that onlydistribute imported automobiles in Canada.
5.244  The following table lists the companies included in the first category:
                                                     
261 Exhibit JPN-12.WT/DS139/R
WT/DS142/R
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Japan's Table 1
Canadian Subsidiary Parent Company and Ownership
Chrysler Canada Ltd.  (Chrysler Canada) 100 per cent owned by Chrysler Corporation
(a United States-owned corporation)262
Ford Motor Company of Canada Ltd. (FordCanada)100 per cent owned by Ford Motor Company
 (a United States-owned company)
General Motors of Canada Ltd.(GM Canada) 100 per cent owned by General Motors Corp.
(a United States-owned corporation)
Volvo Canada Limited (Volvo Canada) 100 per cent owned by Volvo Canada Holdings,
which is owned by Volvo AB.263
(a Swedish-owned corporation)
CAMI Automotive Inc.  (CAMI) 50 per cent owned by General Motors Corporation
(a United States-owned corporation) and50 per cent owned by Suzuki Motor Corporation
(a Japanese-owned corporation)
Toyota Motor Manufacturing Canada Inc.
(Toyota Manufacturing Canada)100 per cent owned by Toyota Motor Corporation
(a Japanese-owned corporation)
Honda Canada Inc. (Honda Canada) 50.14 pe r cent owned by Honda Motor Company
(a Japanese-owned company) and 49.86 per cent
owned by American Honda Motor Company (a
United States company that is 100 per cent owned
by Honda Motor Company)
5.245  These subsidiaries produce particular models determined by their respective parent
corporation(s).  Such subsidiaries then distribu te these automobiles in the Canadian domestic and
export markets.  With the exception of Toyota Manufacturing Canada, such subsidiaries also
distribute imported models in Canada.
5.246  The following table lists certain companies included in the second category of subsidiaries –
i.e. those companies that only distribute imported automobiles in Canada with the exception of Toyota
Canada Inc. which distribute imported as well as domestic automobiles manufactured by Toyota
Manufacturing Canada:
Japan's Table 2
Canadian Subsidiary Parent Company and Ownership
Toyota Canada Inc. (Toyota Canada) 50 per cent owned by Toyota Motor Corporation
and 50 per cent owned by Mitsui & Company Ltd.
(a Japanese-owned corporation)
Nissan Canada Inc. (Nissan Canada) 38.3 per cent owned by Nissan Motor Co., Ltd.
(a Japanese-owned company) and 61.7 per centowned by Nissan North America Inc.
(a United States company that is 100 per cent
                                                     
262 The effect of the creation of DaimlerChrysler on the legal ownership of Chrysler Canada is unclear.
263 Ford Motor Corporation has announced that it is purchasing the automotive division of Volvo AB.WT/DS139/R
WT/DS142/RPage 60
Canadian Subsidiary Parent Company and Ownership
owned by Nissan Motor Co.)
Mazda Canada Inc. (Mazda Canada) 60 per cent owned by Mazda Motor Corporation
(a Japanese-owned corporation) and 40 per centowned by Itochu Corporation (also a Japanese-
owned company)
Suzuki Canada Inc. (Suzuki Canada) 100 per cent owned by Suzuki Motor Corporation
of Japan
Subaru Canada Inc. (Subaru Canada) 100 per cent owned by Fuji Heavy Industries, Ltd.
of Japan
BMW Canada Inc. BMW AG
Volkswagen Canada Inc. Volkswagen AG
(c) Production and importation of like motor vehicles
(i) Canadian production of automobiles
5.247  The companies that manufacture automobiles in Canada are identified above in Japan's Table
1.  Exhibit JPN-13 identifies the Canadian manufacturing facilities of these companies and the
automobile models produced at each facility.
5.248  Competition in the Canadian automobile market takes place within specific market segments
which are comprised of competing models of automobiles.  Exhibit JPN-11 outlines the market
segments relevant to the Canadian market.
5.249  Based on the information in Exhibit JPN-11, the following table classifies the automobiles
produced in Canada in 1996 by applicable Canadian market segment264:
Japan's Table 3
Market Segment Company, Model (1996)
Subcompact GM Firefly/Metro
Suzuki Swift
Honda Civic HB
Compact Toyota Corolla
Honda Acura EL
Honda Civic Sedan/Coupe
Small Sporty GM Firebird
GM Camaro
Intermediate GM Regal W
GM Monte Carlo
Chrysler Intrepid
                                                     
264 The market segmentation used in the following charts is generally accepted in the Canadian market
by consumers.  This is confirmed in Exhibit JPN-14 which consists of copies of the magazine Wheel sold in theCanadian market.WT/DS139/R
WT/DS142/R
Page 61
Market Segment Company, Model (1996)
Chrysler Eagle Vision
Chrysler Concorde
Full-size GM Bonneville H
Ford Grand Marquis
Ford Crown Victoria
Chrysler New Yorker LH
Luxury Volvo 850
Compact Sport Utility GM Tracker/Sun Runner
Suzuki Sidekick
Compact Van Chrysler Town & Country
Chrysler Voyager/Caravan
Ford Windstar
Full Size Pickup Ford F150 Light Duty
GM C/K 1500 Light Duty
Full Size Van Chrysler B150 Ram Van/Wagon
(ii) Importation of automobiles
5.250  Broad ranges of models of automobiles are imported into Canada by
manufacturer/distributors and distributors.  Exhibit JPN-11 lists the automobiles imported into Canada
and identifies these automobiles by importer.  The following table classifies the imported automobiles
from outside North America by importer in 1996 a nd by applicable Canadian market segment:WT/DS139/R
WT/DS142/RPage 62
Japan's Table 4
Market Segment Company,  Model (1996)
Subcompact Chrysler
Eagle Summit (Japan)
Colt 100/200 (Japan)
Ford
Aspire (Korea)
Hyundai
Accent (Korea)
Excel (Korea)
Lada
Lada (Russia)
Subaru
Justy (Japan)
Toyota
Tercel (Japan)
Mazda
323 HB (Japan)
Compact Subaru
Impreza (Japan)
Suzuki
Esteem (Japan)
Mazda
323 Protégé (Japan)
Hyundai
Elantra (Korea)
Honda
Civic (Japan)
Toyota
Corolla (Japan)
Small Sporty Chrysler
Stealth (Japan)
Volkswagen
Corrado (Germany)
Audi Coupe/Quattro (Germany)
Toyota
Paseo (Japan)
Celica (Japan)
Nissan
240SX (Japan)
Mazda
MX-5/Miata (Japan)
MX-3/Precidia (Japan)
Hyundai
Scoupe (Korea)
Tiburon (Korea)
Honda
Acura Integra (Japan)
Prelude (Japan)
Del Sol (Japan)WT/DS139/R
WT/DS142/R
Page 63
Market Segment Company,  Model (1996)
Intermediate Volkswagen
Passat (Germany)
Nissan
Maxima (Germany)
Hyundai
Sonata (Korea)
Toyota
Camry (Japan)
Small Luxury GM
Cadillac Catera (Germany)
Saab 900 (Sweden)
Honda
Acura TL (Japan)
Mazda
Millenia (Japan)
929 (Japan)
Nissan
Infiniti G20 (Japan)
Infiniti I30 (Japan)
Toyota
Lexus ES250/300 (Japan)
Mercedes
190GAS/C-Class (Germany)
Volkswagen
Audi 90 (Germany)
Luxury GM
Saab 9000 (Sweden)
Ford
Jaguar Sedans (UK)
BMW
5-Series (Germany)
7-Series (Germany)
Honda
Acura Legend/RL (Japan)
Nissan
Infiniti J30 (Japan)
Infiniti Q45 (Japan)
Toyota
Lexus GS300 (Japan)
Lexus LS400 (Japan)
Volkswagen
Audi 100/200 (Germany)
Audi A8 (Germany)
Volvo
960's (Belgium or Sweden)
940's (Belgium or Sweden)
Mercedes
S Class (Germany)
300E/400E/Eclass (Germany)WT/DS139/R
WT/DS142/RPage 64
Market Segment Company,  Model (1996)
Luxury Sport Ford
Jaguar Sports Coupe (UK)
Volkswagen
Porsche (Germany)
Toyota
Lexus SC400 (Japan)
Supra(Japan)
Subaru
SVX (Japan)
Nissan
300ZX (Japan)
Mazda
RX7 (Japan)
Honda
Acura NSX (Japan)
BMW
6/8 Series (Germany)
Compact Pickup Toyota
T100 4x2 (Japan)
T100 4x4 (Japan)
Compact Sport Utility GM
Isuzu Trooper II (Japan)
Lada
Niva (Russia)
Land Rover
Discovery (UK)
Defender 90 (UK)
Nissan
Pathfinder (Japan)
Infiniti QX4 (Japan)
Toyota
RAV4 (Japan)
4 Runner (Japan)
Compact Van Chrysler
Summit Wagon (Japan)
Mazda
MPV (Japan)
Nissan
Axcess (Japan)
Honda
Odyssey (Japan)
Volkswagen
Bus/Transporter (Germany)
Camper (Germany)
Eurovan (Germany)WT/DS139/R
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Page 65
Market Segment Company,  Model (1996)
Full Size Sport Utility Land Rover
Range Rover (UK)
Toyota
Lexus LX450 (Japan)
Land Cruiser (Japan)
5.251  Reading Japan's Table 4 in conjunction with Japan's Table 3, it is clear that imported
automobiles compete in every market segment in which there is domestic automobile production in
Canada.
5.252  It is also clear from Japan's Table 4 that there are competitions among imported automobiles
within each market segment.
(d) Production and importation of like parts, components and materials used in the
manufacture of automobiles
(i) Canadian production of parts, components and materials
5.253  Canada has a substantial automotive parts and components industry that produces a full range
of parts and components.  These products include body parts, stampings, trim, instrument panels,controls, engine components and drive train compone nts.  Exhibit JPN-15 provides a comprehensive
description of the Canadian automotive parts and components industry.
5.254  Canada also produces a full range of materials used in automobile production, such as steel,
plastics, glass, rubber and lubricants.  Exhibits JPN-16 and JPN-17 document the producers of some
of these materials.
(ii) Like imported parts, components and materials
5.255  Most developed economies with automotive manufacturing industry have significant
automotive parts, components and materials industries.  Exhibit JPN-18 lists major companies in
Japan that manufacture automotive parts and components.  Exhibit JPN-19 lists some of Japan's
industries that produce materials that can be used in the production of automobiles.
5.256  It is clear from a comparison of Exhibits JPN-15 through 19 that comparable and competitive
automotive parts, components and materials are available from outside of Canada.
(e) Supply and consumption of like services
(i) Wholesale trade services
5.257  As noted above, the transnational automobile manufacturers distribute imported automobiles
in Canada through distribution streams established by their Canadian subsidiaries.  Typically, the
Canadian subsidiary is responsible for importing the automobile, complying with customs formalities
including the payment of customs duties where applicable and distributing the automobiles to
dealerships.
5.258  Each of the major global automobile manuf acturers has its own distribution network in
Canada.  The respective numbers of dealers of such manufacturers are shown in the table in
Exhibit JPN-20.WT/DS139/R
WT/DS142/RPage 66
5.259  No substantial differences can be found in their business activities, irrespective of the
nationality of the manufacturer.
5.260  Further, as documented in Exhibits JPN-10 and 11, each of the automobile distributors in
Canada imports automobiles from foreign manufacturers with which it has an equity relationship or
with which its parent company is in a contractual relationship such as a joint venture agreement.
(ii) Services related to the production of automobiles
5.261  Broad ranges of services are used by motor vehicle manufacturers in the production of motor
vehicles.  These services include the following:
Repair and Maintenance Services
- Technical advice and other related services regarding the manner or method of the
repair and maintenance of machinery and equipment used in the production of motor
vehicles.
Engineering Services- Technical advice and other related services for the facilitation of the manufacturing
process in motor vehicle factories.
General Services- Accounting and data processing services through telecommunication networks.- Software implementation services.- Services for optimal administration of inventories.
- Management consulting services.
5.262  These services are available from service suppliers located in Canada and around the world.
(iii) The bus and commercial motor vehicle industry in Canada
5.263  Most of the importers who qualify for the Duty Waiver are also manufacturers of buses or
specified commercial vehicles.  The Canadian production of buses and specified commercial motor
vehicles is documented in Exhibits JPN-21 and 22.
(f) The discriminatory effects of the Duty Waiver
5.264  As a result of the regulation of automotive trade in Canada, some imports enter Canada under
the Duty Waiver while competing imports do not qualify for the Duty Waiver.  Japan's Table 5presents data on imports of these two categories of automobiles:  (i) imports that enter Canada under
the Duty Waiver;  and (ii) competing imports that enter Canada but do not qualify for the Duty
Waiver.WT/DS139/R
WT/DS142/R
Page 67
Japan's Table 5
Imported Models That Are Imported Duty Free
under the Duty WaiverCompeting Imported Models That Are Not
Eligible for the Duty Waiver
Segment
Importer
Model (Country of origin)Unit sales of
imported motorvehicles (1996)Segment
Importer
Model (Country of origin)Unit sales of
importedmotor
vehicles
(1996)
Subcompact
Ford
Aspire (Korea)
Chrysler
Eagle Summit (Japan)
Colt 100/200 (Japan)2,309
290
891Hyundai
Accent (Korea)
Excel (Korea)
Lada
Lada (Russia)
Subaru
Justy (Japan)
Toyota
Tercel (Japan)
Mazda
33 HB (Japan)2
10,540
981
88
11,502
124
Small Luxury
GM
Cadillac Catera (Germany)
Saab 900 (Sweden)96
1,031Honda
Acura TL (Japan)
Mazda
Millenia (Japan)
929 (Japan)
Mercedes
190GAS/C-Class
Nissan
Infiniti G20 (Japan)
Infiniti I30 (Japan)
Toyota
Lexus ES250/300 (Japan)
Volkswagen
Audi 90 (Germany)1,569
403
8
1,929
164
742
1,2081,347
Luxury
GM
Saab 9000 (Sweden)
Ford
Jaguar Sedans (UK)
Volvo
960's (Belgium or Sweden)
940's (Belgium or Sweden)275
859539
46BMW
5-Series (Germany)
7-Series (Germany)
Honda
Acura Legend/RL (Japan)
Mercedes
S Class (Germany)
300E/400E/E Class (Germany)
Nissan
Infiniti J30 (Japan)
Infiniti Q45 (Japan)
Toyota
Lexus GS300 (Japan)996
449
938761
2,013
96
138
38WT/DS139/R
WT/DS142/RPage 68
Imported Models That Are Imported Duty Free
under the Duty WaiverCompeting Imported Models That Are Not
Eligible for the Duty Waiver
Segment
Importer
Model (Country of origin)Unit sales of
imported motor
vehicles (1996)Segment
Importer
Model (Country of origin)Unit sales of
imported
motor
vehicles
(1996)
Lexus LS400 (Japan)
Volkswagen
Audi 100/200 (Germany)
Audi A8 (Germany)464
359
31
Luxury Sport
Ford
Jaguar Sports Coupe (UK) 192Volkswagen
Porsche (Germany)
Toyota
Lexus SC400 (Japan)
Supra (Japan)
Subaru
SVX (Japan)
Nissan
300ZX
Mazda
RX7
Honda
Acura NSX
BMW
6/8 Series373
100
7
6345
328
1616
Source: The Canadian Association of Japanese Automobile Dealers (Exhibit JPN-11)
5.265  This table shows that the Duty Waiver discriminates between imported automobiles that are
imported duty free under the Duty Waiver and their competing imported automobiles.  This is mostapparent in the case of Swedish, Belgian and Japanese imported automobiles.  Almost all imported
Swedish automobiles (i.e. Saab and Volvo) and Belg ian automobiles (i.e. Volvo) benefited from the
Duty Waiver while none of the competing imported Japanese automobiles ( Acura , Infiniti  and Lexus )
were eligible for the Duty Waiver.
5.266  Moreover, as a result of the global integration described above, imports of each manufacturer
or distributor into Canada always will originate from a single, specific source and not from a variety
of sources.  This characteristic, which is documented in Exhibit JPN-11, has important implications
for the effect of the Duty Waiver.  First, the countries from which motor vehicles can be imported
under the Duty Waiver are restricted:  they are limited to countries where Auto Pact Manufacturers
have affiliates or related companies.  Second, the competitive balance is tilted in favour of motor
vehicles originating in this restricted class of  countries compared to competing motor vehicles
originating in other countries.
5.267  Canadian import statistics on the percentage of motor vehicles that benefit from the Duty
Waiver for each country of origin clearly illustrate the discrimination that is inherent in the Duty
Waiver.  Depending on the country of origin, the volume of imports that benefit from the Duty
Waiver ranges from close to 100 per cent to zero per cent, as is illustrated in the following table:WT/DS139/R
WT/DS142/R
Page 69
Japan's Table 6
Country of Origin Duty Free Import
Sales Quantity (1997)Imports Quantity
(1997)Duty Free Percentage
Sweden 1,776 1,851 95.95%
Belgium 4,746 5,047 94.04%
United Kingdom 1,020 2,275 44.84%
Germany 1,560 21,256 7.34%
(EC total) 9,102 30,629 29.72%
South Korea 972 19,956 4.87%
Japan 4,502 153,349 2.94%
Other countries 0 826 0%
Note: The figures in the above table do not include imports from the United States and
Mexico.
Source: Ward's Automotive Year Book 1998, Statistics Canada (Exhibit JPN-37).
5.268  The competitive advantage that accrues from the Duty Waiver is clearly significant.  It can
affect all aspects of an importer's and wholesale trade services supplier's operations including pricing,
marketing, earnings and the establishment of distribution networks.
5.269  The discriminatory effects of the Duty Waiver on trade in goods (motor vehicles, parts and
components, materials) and services (wholesale trade services and other services related to the
production of motor vehicles) are discussed in detail in the arguments presented.
2. Canada's response to certain arguments regarding the structure of the motor vehicles
industry
5.270  With respect to information presented in Japan's Table 5, Canada  responds as follows (with
additional arguments contained in sections relating to specific claims):
5.271  Japan's Table 5, according to Japan, is intended to demonstrate "that the Duty Waiver
discriminates between imported automobiles that are imported duty free under the Duty Waiver [i.e.
those from Sweden and Belgium] and their comp eting imported automobiles that are not imported
duty free [i.e. those from Japan]".  The Panel should note that Table 5 uses only 1996 data, and
features a number of models that are either no longer produced or no longer available in Canada.265  In
addition, some models listed in the source document cited by Japan (Exhibit JPN-11) are not included
in Table 5, presumably because if they had been, Japan would have had to acknowledge several
competing Japanese-origin automobiles that enter duty free. 266
5.272  As the facts before this Panel demonstrate, Canada’s measures do not restrict benefits to any
particular vehicle, and beneficiary manufacturers may import from anywhere in the world.  Which
                                                     
265 See Exhibit CDA-5 for the models listed in Table 5 that are no longer in production or sold in
Canada.
266For 1996 there are: Suzuki Esteem (1291 vehicles), Chrysler Stealth (20 vehicles), Honda/Acura CL
series (1226 vehicles), Toyota Avalon (2163 vehicles), General Motors Isuzu Trooper II (261 vehicles),Chrysler Summit Wagon (98 vehicles).  But see footnote 267.WT/DS139/R
WT/DS142/RPage 70
Member’s products benefit at any given time depends entirely on the commercial decisions made by
the manufacturers.  The tariff regime, however, is completely neutral as to nationality.
3. Japan's rebuttal to Canada's response
5.273  As a rebuttal to Canada's comments in response to Japan's Table 5, Japan  argues as follows
(with additional arguments contained in sections relating to specific claims):
5.274  With respect to Japan's Table 5, the Government of Canada argues that the Table includes
models of automobiles that are no longer manufactured and, therefore, no longer imported into
Canada.  However, it is industry practice for automobile manufacturers to regularly renew their line of
car models and change model names in certain market segments.  In the case of Japanese cars, models
are renewed approximately every four years.  As examples of such practices, the names of the Audi90 and Hyundai Excel were changed to Audi A4 and Hyundai Accent, respectively, when recent
model changes occurred.  Both automobiles continue to be imported into Canada under their new
names.
5.275  Notwithstanding the above-noted qualification to Table 5, the Table provides concrete
examples of imports and sales in Canada in the 1996 model year, and can be relied on to illustrate thediscrimination that is inherent in the Duty Waiver.  The Table documents the "less favourable"
treatment that was accorded to certain automobiles imported from certain countries as a result of the
application of the Duty Waiver in the past.  Irrespective of the fact that certain models listed in the
Table might no longer be imported and sold in Canada, the inherent discrimination still exists.
5.276  At the present time, automobiles originating in the territories of certain WTO Members are
imported into Canada duty free while like autom obiles originating in the territories of other WTO
Members, including Japan, do not benefit from this advantage when imported into the Canadianmarketplace.  These discriminatory effects are also confirmed by the evidence submitted by the
Government of Canada.  Exhibit CDA-6 demonstrates that, in 1998, the following automobiles listed
under the small luxury and luxury car market segment were imported duty free under the Duty Waiver
and sold in Canada:
Model Origin
Saab 9-3 Sweden
Saab 9-6 Sweden
Saab 900 Sweden
Saab 9000 Sweden
Volvo 90 SwedenVolvo S70 V70 Sweden
Jaguar XJ6 United Kingdom
Jaguar XJ5 United Kingdom
Catera Germany
5.277  All like automobiles imported from Japan and sold in Canada in 1998 were subject to the
applicable MFN duty.  According to Exhibit JPN-37, these are:WT/DS139/R
WT/DS142/R
Page 71
Model Origin
Acura TL, Legend Japan (Honda)
Lexus ES300, LS400, GS300/400 Japan (Toyota)
Infiniti G20, I30, Q45, J30 Japan (Nissan)
5.278  Thus, imports of automobiles from Japan and from other countries continue and will continue
to be subject to the 6.1 per cent MFN duty while like automobiles originating in the territories of other
WTO Members continue and will continue to be imported duty free.  This is due to the fact that, as
Canada admitted, Auto Pact Manufacturers only import and distribute automobiles from certain
specific sources.
5.279  In fact, the evidence on the record demonstrates that capital relationships between Auto Pact
Manufacturers and other entities are decisive in the determination of the country of origin of duty-free
imports.  For example, automobiles listed in Exhibit CDA-6 that have been imported by Chrysler
Canada and GM Canada were manufactured  by the following foreign manufacturers:
Importers Models Manufacturers
Chrysler Colt (Dodge)
Stealth
RAM 50Mitsubishi
GM Metro, Storm/Spectrum, Asuna,
SunfireSuzuki
GM Tiltmaster Isuzu
GM Lemans Daewoo
5.280  It is a well-known fact that Chrysler held a 24 per cent (maximum) stake in Mitsubishi
Motors from 1971 to July 1993.  Further, GM is a stakeholder of both Suzuki and Isuzu.  GM alsoowned a 50 per cent equity intere st in Daewoo until October 1992.
5.281  As appears from Exhibit CDA-6, Chrysler continued to import and sell Mitsubishi
automobiles until mid-1996 and GM ceased to import and sell Daewoo automobiles in 1992.  The
phasing-out of imports by Chrysler after the termination of the capital relationship and the immediate
close of imports of Daewoo automobiles after the termination of the capital relationships indicate thatsuch relationships determine the Auto Pact Manu facturers' source of imports.  Although Chrysler
continued to sell imported Mitsubishi cars, the number of which had been decreasing during such a
phase-out period, this period should be considered as the transition period which Chrysler needs to
gradually change its line of products by maintaining its dealers networks.
5.282  Hence, contrary to the allegations of the Government of Canada, the evidence before this
Panel makes it clear that, at any given time, the benefits of the Duty Waiver are restricted to particular
imported automobiles originating from particular countries.  Such benefits are not granted to all like
automobiles originating in the territories of all WTO Members.
5.283  The Government of Canada also argues that some models listed in the source document cited
by Japan are not included in Japan's Table 5.  However, the Government of Japan wants to point outWT/DS139/R
WT/DS142/RPage 72
to the Panel that the CAJAD report (Exhibit JPN-11) that was used to construct Table 5 is not
completely accurate.267
5.284  In the light of the above, Canada's statement that an "examination of the complete data leads
to a result that stands in marked contrast to the theory espoused by the Japanese" is not supported by
the facts.  Automobiles of Japanese origin are cl early denied an advantage that is granted to like
automobiles originating in the territories of other WTO Members.
5.285  The Government of Canada stated that over 82 per cent of imports subject to the minimum
6.1 per cent MFN duty came from Japan.  This consideration is irrelevant.  What is relevant is the fact
that more than 97 per cent of imports of Japanese cars to Canada have been subject to the MFN duty
and are being forced to compete with cars imported duty free from a few other WTO Members.  The181,000 motor vehicles referred to by the Government of Canada are motor vehicles imported from
countries located outside of North America.  However, 540,000 additional motor vehicles a year have
been imported duty free from the US and Mexico under the Duty Waiver regime.  As admitted by
Canada, imports from Mexico are subject to certai n reduced duties under the NAFTA but those duties
have been fully exempted, as a consequence of the Duty Waiver.  The argument of the Government ofCanada in this respect in no way justifies the inconsistency of the Duty Waiver with the WTO
Agreements.  (Exhibit JPN-37.)
5.286  Further, Canada's Figure 4  does not contain data regarding duty-free imports from Mexico
and the United States.  If the Government of Canada refers to the aggregate volume of duty-free
imports under the MVTO 1998 and the SROs, it should also refer to the imports from Mexico and the
United States thereunder and Figure 4  should be revised accordingly.  Of course, since 1998, the
majority of imports of automobiles from the US are no longer subject to any customs duty underNAFTA; thus, they should be deleted from Figure 4  beginning with the 1998 year only when they
meet strict NAFTA origin rules and importers declares the satisfaction with such rules at the customs
office by submitting certifications.  The figure, revised to include the data of the duty-free imports
from the United States and Mexico, is as follows:
                                                     
267 The data contained in the Ward's Automotive Yearbook (Exhibit JPN-37-4) indicates that two
models listed in footnote 266 were manufactured in the United States by affiliates of Toyota and Honda.  These
are the Toyota Avalon and the Acura CL.  Thus, such models were not imported from Japan as suggested by
Canada.  As for the other automobiles listed by Canada, they do not fall under the same market segments asthose automobile models listed in Table 5 that are not eligible for the Duty Waiver.  Accordingly, they were notincluded in the Table.WT/DS139/R
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Japan's Table 7
Duty-free Imports of Automobiles to Canada(Including Imports from the US and Mexico) (Numbers)
Origin US Mexico Japan Sweden/Belgium UK Others (Germany
and Korea)Total
1998 277,188 19,375 5,878 5,538 1,293 1,853 311,125
1997 308,140 52,319 4,566 2,837 1,020 2,532 371,414
1996 255,403 6,420 4,856 4,263 1,051 2,405 274,398
1995 244,800 4,403 8,036 8,368 948 4,646 271,201
1994 326,107 32,156 23,537 7,812 713 3,647 393,972
1993 261,596 42,497 50,064 5,814 630 5,765 366,366
1992 283,086 50,348 52,953 4,059 581 12,788 403,815
1991 368,209 47,073 41,180 4,499 727 6,930 468,618
Source: Imports from Mexico to Canada;  AMIA Statistic
Others;  Ward's Autoinfo Bank
1.  Imports from the United States and Mexico only includes the automobiles imported by Big 3.
2.  Imports from Mexico in 1991-1993 includes the commercial vehicles.
Japan's Table 8
Duty-free Imports of Automobiles to Canada(Including Imports from the US and Mexico (Percentage)
Origin US Mexico Japan Sweden/Belgium UK Others (Germany
and Korea)Total
1998 89.1 6.2 1.9 1.8 0.4 0.6 100
1997 83 14.1 1.2 0.8 0.3 0.7 100.1
1996 93.1 2.3 1.8 1.6 0.4 0.9 100.1
1995 90.3 1.6 3 3.1 0.3 1.7 100
1994 82.8 8.2 6 2 0.2 0.9 100.1
1993 71.4 11.6 13.7 1.6 0.2 1.6 100.1
1992 70.1 12.5 13.1 1 0.1 3.2 100
1991 78.6 10 8.8 1 0.2 1.5 100.1
5.287  (Additional arguments relating to the structure of the industry are found in Section VI, Legal
Arguments of the Parties .)WT/DS139/R
WT/DS142/RPage 74
VI. LEGAL ARGUMENTS OF THE PARTIES
A. ARTICLE I OF THE GATT
1. Arguments of Japan
6.1 Japan  argues as follows:
6.2 The Duty Waiver is inconsistent with Canada's MFN obligation under Article I:1 of the
GATT 1994 because the advantage, i.e. removal of customs duty, is not accorded immediately and
unconditionally to like products originating in the territories of all other Members.
6.3 Article I:1 of the GATT 1994 provides that:
"With respect to customs duties and charges of any kind imposed on or in connection
with importation or exportation or imposed on the international transfer of paymentsfor imports or exports, and with respect to the method of levying such duties and
charges, and with respect to all rules and formalities in connection with importation
and exportation, and with respect to all matters referred to in paragraphs 2 and 4 of
Article III,  any advantage, favour, privilege or immunity granted by any [Member] to
any product originating in or destined for any other country shall be accordedimmediately and unconditionally to the like product originating in or destined for the
territories of all other [Members]."
6.4 To assess whether there is any inconsistency with Article I:1 of the GATT 1994, one must
answer the following questions:
(i) Does the Duty Waiver relate to a customs duty within the meaning of Article I:1 of
the GATT 1994?
(ii) Is the Duty Waiver an advantage within the meaning of Article I:1 of the GATT
1994?
(iii) Are the products at issue "like" products?
(iv) Has the advantage accorded to the products originating in particular WTO Members
been accorded "immediately and unconditionally" to all like products originating in
the territories of all other WTO Members?
(a) The Duty Waiver relates to a customs duty within the meaning of Article I:1 of the
GATT 1994
6.5 The Duty Waiver relates to the 6.1 per cent MFN duty and is, therefore, within the scope of
Article I:1 of the GATT 1994.
(b) The Duty Waiver is an advantage within the meaning of Article I:1 of the GATT 1994
6.6 Article I:1 applies to " any advantage" granted to products originating in any country.  The
plain meaning of "advantage" is "a beneficial feature; a favourable circumstance", or, in simple terms,WT/DS139/R
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a "benefit".268  The term "advantage" has been interpreted broadly both under the GATT 1947 and the
GATT 1994.269
6.7 The Duty Waiver grants a benefit to certain imported motor vehicles because such motor
vehicles are exempt from an otherwise applicable customs duty.270  Accordingly, it is an "advantage"
within the meaning of Article I:1 of the GATT 1994.
(c) The products at issue are "like" products
6.8 The determination of whether products are "like" must be assessed on a case-by-case basis in
the light of all relevant facts and circumstances.  Relevant factors include physical characteristics,
end-uses, consumer tastes and habits, and price.271
6.9 In this case, the Duty Waiver covers the full range of motor vehicles imported into Canada.272
It does not distinguish between motor vehicles based on physical characteristics, end-uses, consumer
tastes and habits or price.  With the Duty Waiver in place, Canada applies a higher import duty to
Non-Auto Pact Manufacturers' imports than it does to identical Auto Pact Manufacturers' imports.
Accordingly, the motor vehicles to which the Duty Waiver applies and those to which it does not
apply are per se  "like" products.273  This reasoning applies to all types of motor vehicles (i.e .
automobiles, buses and specified commercial vehicles).
                                                     
268 The Concise Oxford Dictionary of Current English, 8th Edition (Clarendon Press:  Oxford, 1990)
(Exhibit JPN-41).
269 The Appellate Body made this observation in its report on EC – Bananas III , supra  note 49,
para. 206, when referring to the interpretation of the term by the Panel Report on United States – Denial of Most-
Favoured-Nation Treatment as to Non-Rubber Footwear from Brazil , adopted on 12 June 1992, BISD 39S/128
(hereinafter Panel Report on US – Non-Rubber Footwear ), para. 6.9.  See  also Panel Reports on European
Communities – Regime for the Importation, Sale and Distribution of Bananas , adopted as modified by the
Appellate Body on 25 September 1997, Complaint by Ecuador - WT/DS27/R/ECU, Complaint by Guatemala -WT/DS27/R/GTM, Complaint by Honduras - WT/DS27/R/HND, Complaint by Mexico - WT/DS27/R/MEX,
Complaint by the United States - WT/DS27/R/USA, 22 May 1997 (hereinafter Panel Reports on EC – Bananas
III (ECU/GTM/HND/MEX/USA ) [The reports of each of the complaining parties in the dispute have identical
paragraph and footnote numbering.  In the Findings section of each report, however, certain paragraph and footnotenumbers are not used.], (USA) para. 7.221.
270 In its Report on Indonesia – Certain Measures Affecting the Automobile Industry , adopted on 23 July
1998, WT/DS54/R, WT/DS55/R, WT/DS59/R & WT/DS64/R (hereinafter Panel Report on Indonesia – Autos ),
para. 14.139, the Panel found that customs duty benefits (i.e. duty reductions) were "advantages" underArticle I:1 of the GATT 1994.
271 Appellate Body Report on Japan – Taxes on Alcoholic Beverages , adopted on 1 November 1996,
WT/DS8/AB/R, WT/DS10/AB/R & WT/DS11/AB/R (hereinafter Appellate Body Report on Japan – Alcoholic
Beverages ), p. 19.  These criteria, which were addressed by the Appellate Body in the context of Article III  of
the GATT 1994, were applied to the like products analysis under Article I of the GATT 1994 by the Panel in
Indonesia  –  Autos , supra  note 270, para. 14.141.
272 There are limited exclusions from the scope of cove rage that are not relevant to these proceedings.
For example, subsection 1(1) of the Schedule to the MVTO 1998 defines "automobile" to exclude "anambulance or a hearse", "bus" to exclude "electric trackle ss trolley bus, an amphibious vehicle, a tracked or half
tracked vehicle or a motor vehicle defined primarily fo r off-highway use", and "specified commercial vehicle"
to exclude "a bus, an electric trackless trolley bus, a fire  truck, an amphibious vehicl e, a tracked or half-tracked
vehicle, a golf or invalid cart, a straddle carrier or motor vehicle designed primarily for off-highway use".
273 Panel Report on Indonesia – Autos, supra  note 270, para. 14.141; Panel Report on US – Non-Rubber
Footwear , supra  note 269, para. 6.12.WT/DS139/R
WT/DS142/RPage 76
6.10 Exhibit JPN-11 and Japan's Tables 3, 4, and 5 categorise automobiles imported into Canada
into applicable market segments.274  They demonstrate that both Auto Pact Manufacturers and Non-
Auto Pact Manufacturers import "like" automobiles.275
(d) The advantage is not accorded immediat ely and unconditionally to like products
originating in all WTO Members
6.11 The advantage must be accorded "immediately and unconditionally" to the like products
originating in the territories of all WTO Members under Article I:1 of the GATT 1994.  The plain
meaning of "unconditional" is "not subject to conditions".276
6.12 In this case, the Government of Canada accords the advantages of the Duty Waiver only to
the motor vehicles imported by the Auto Pact Manufacturers in accordance with the many conditions
or requirements described in Japan's factual argumentation.  The advantage that accrues from the Duty
Waiver is conditional upon the several criteria not related to the imported products themselves.  Such
criteria include, among others, (i) whether motor vehicles were imported by the Auto PactManufacturers and (ii) whether the Auto Pact Manufacturers have satisfied the CVA and
manufacturing requirements.
6.13 The panel on Indonesia - Autos  made clear that under Article I:1 of the GATT 1994, any
advantage "cannot be made conditional on any criteria not related to the imported product itself".
277
6.14 This interpretation is further confirmed by the Belgian Family Allowances  Panel Canada
quoted, which states that "the Belgian legislation would have to be amended insofar as it ... made the
granting of the exemption dependent on certain conditions."
6.15 The reference by the Indonesia – Autos  Panel to "the imported product itself" in articulating
this interpretation is rational.  To the extent that such conditions or criteria are related to the physical
product in question, they could permit a distinction between products on the basis that they are not
“like”.  Where products are not “like”, discrimination in the sense of GATT Article I cannot arise.
6.16 Thus, Canada has failed to accord the advantage "immediately and unconditionally" to the
like products originating in the territories of all WTO Members and the Duty Waiver is inconsistent
with Canada's MFN obligation under Article I:1 of the GATT 1994.
                                                     
274 In the context of automobiles, the Panel in Indonesia – Autos  included market segment classification
as part of its like products analysis.  Panel Report on Indonesia – Autos, supra  note 270, paras. 14.110 and
14.111.
275 Japan has indicated that the CAJAD report used in constructing Table 5 (Exhibit JPN-11) is not
completely accurate. See supra para. 5.283 and notes 266 and 267.
276 The Concise Oxford Dictionary , 238 (Exhibit JPN-41).  In Indonesia  – Autos , the Panel found that
this requirement means that an advantage cannot be made conditional on any criteria that are not related to theimported product itself, see supra  note 270, para. 14.143.  See also Panel Report on Belgian Family Allowances ,
adopted on 7 November 1952, BISD 1S/59 (hereinafter Panel Report on Belgian Family Allowances ) and Report
of the Working Party on the Accession of Hungary , adopted on 30 July 1973, BISD 20S/34 (hereinafter Report of
the Working Party on the Accession of Hungary ).
277 Panel Report on Indonesia – Autos, supra  note 270, para. 14.143.  Further, the Panel in Indonesia  –
Autos stated as follows:  "For the reasons discussed above, we consider that the June 1996 car programme which
introduced discrimination between imports in the allocation of tax and customs duty benefits based on various
conditions and other criteria not related to the imports themselves and the February 1996 car programme which
also introduce discrimination between imports in the allocation of customs duty benefits based on variousconditions and other criteria not related to the imports themselves, are inconsistent with the provisions of ArticleI of GATT." (para.14.147)WT/DS139/R
WT/DS142/R
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(e) The advantage accorded to the products or iginating in particular WTO Members has
not been accorded to like products origin ating in the territories of all WTO Members
6.17 By virtue of its eligibility restriction, the Duty Waiver discriminates in practice by according
an advantage to motor vehicles from certain countries while effectively denying the same advantage
to like motor vehicles originating in the territories of other WTO Members.
6.18 Although, ostensibly, the Auto Pact Manufacturers are permitted to import motor vehicles of
any national origin, in practice they have chosen and will continue to choose to import the products of
particular companies from particular countries, in consideration of their previous history of
transactions, the capital relationships as shown in Exhibit JPN-10, and the nationality of companies
investing in the Auto Pact Manufacturers.  For example, the MFN duty would be imposed upon motorvehicles imported from Japan by such companies as Toyota Canada and Honda Canada, while the
majority of motor vehicles entitled to duty waiver are of particular national origin, and are produced
by the Big Three, Volvo or those manufacturers that have capital relationships with the Big Three
(such as Saab, Opel and Jaguar).
6.19 This means that the eligibility restriction and other conditions attached to the Duty Waiver
effectively limit access to the advantage to certain Members having the companies with which Auto
Pact Manufacturers have certain commercial relationships.
6.20 Furthermore, the discriminatory nature of the Duty Waiver was strengthened due to the fact
that the list of eligible importers (i.e. Auto Pact Manufacturers) has been frozen since 1 January 1989.
This regime explicitly narrows the origins from which motor vehicles can be imported under the Duty
Waiver.
6.21 This discrimination is evidenced in the general import statistics discussed in Japan's Table 6.
These statistics demonstrate that while approximately 100 per cent of imports from certain countries
qualify for the Duty Waiver, this is not the case for imports from other countries.
6.22 Japan's Tables 9 and 10 document two examples wherein imported automobiles originating in
the territory of a WTO Member benefit from the Duty Waiver while imports of "like" automobiles
originating in the territory of another WTO Member do not benefit.
6.23 General Motors imports from Sweden the Saab  900 and Saab 9000 , luxury automobiles
manufactured by Saab.
278  These automobiles are imported into Canada duty free under the Duty
Waiver and sold in the Canadian market.
6.24 Japanese manufacturers produce like automobiles that are imported into Canada for sale in the
Canadian market.  These are shown in the right-hand column of the following table.
                                                     
278 According to publicly available information from Saab's web site, General Motors owns 50 per cent
of Saab's shares (stock).WT/DS139/R
WT/DS142/RPage 78
Japan's Table 9
Models Imported Under the Duty Waiver Like Automobiles Produced by Japanese
Manufacturers That Are Imported into Canada
Without the Duty Waiver
Small Luxury
GM
Saab 900 (Sweden)Honda
Acura TL (Japan)
Mazda
Millennia (Japan)
929 (Japan)
Nissan
Infiniti G20 (Japan)
Infiniti I30 (Japan)
Toyota
Lexus ES250/300 (Japan)
Luxury
GM
Saab 9000 (Sweden)Honda
Acura Legend/RL (Japan)
Nissan
Infiniti J30 (Japan)
Infiniti Q45 (Japan)
Toyota
Lexus GS300 (Japan)
Lexus LS400 (Japan)
Infiniti Q45 (Japan)
Toyota
Lexus GS300 (Japan)
Lexus LS400 (Japan)
6.25 None of these automobiles, which comprise all of the "like" automobiles produced in Japan
and exported to Canada, have been imported into Canada under the Duty Waiver.  Consequently, theMFN duty has been applied to date.
6.26 Volvo Canada (soon to be part of Ford) imports from Belgium or Sweden Volvo 960's  and
940's model  automobiles.  These automobiles are imported into Canada duty free under the Duty
Waiver and sold in the Canadian market.
6.27 Japanese manufacturers produce like automobiles that are imported into Canada for sale in the
Canadian market.  These are shown in the right-hand column of the following table.WT/DS139/R
WT/DS142/R
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Japan's Table 10
Models Imported Under the Duty Waiver Like Automobiles Produced by Japanese
Manufacturers That Are Imported into Canada
Without the Duty Waiver
Luxury
Volvo
960's (Belgium or Sweden)
940's (Belgium or Sweden)Honda
Acura Legend/RL (Japan)
Nissan
Infiniti J30 (Japan)
Infiniti Q45(Japan)
Toyota
Lexus GS300 (Japan)
Lexus LS400 (Japan)
6.28 None of these automobiles, which comprise all of the "like" automobiles produced in Japan
and exported to Canada, have been imported into Canada under the Duty Waiver.  Consequently, the
MFN duty has been applied to date.
6.29 The effect of this discrimination is clearly reflected in Canada's import statistics.  During
1997, nearly 100 per cent of the imports of almost all  automobiles from Sweden or Belgium entered
Canada duty free under the Duty Waiver.279  This compares to zero per cent of imports of the above-
noted like and thus competing automobiles imported from Japan.  Based on the foregoing, it is clear
that the advantage that accrues from the Duty Wai ver has in practice not been accorded to like
products originating in all WTO Members.
6.30 The foregoing reasoning applies equally to impor ts of all motor vehicles (i.e. automobiles,
buses and specified commercial vehicles) whenever like motor vehicles are imported under the Duty
Waiver, even where there have never been explicit examples as shown above due to the absence of
such import to date in those market segments.280
6.31 In this manner, the fact that the Duty Waiver is available only to the Auto Pact Manufacturers
has brought about the effect of denying duty-free access to the Canadian market to exports from anyorigin other than from a limited group of WTO Members.  As a corollary to the argument laid down
in the Appellate Body in EC – Bananas III
281, the Duty Waiver is inconsistent with the MFN principle
in Article I:1 of the GATT 1994.
                                                     
279 See Table 6.
280 See Panel Report on United States – Section 337 of the Tariff Act of 1930 , adopted on 7 November
1989, BISD 36S/345 (hereinafter Panel Report on US – Section 337 ), para. 5.13, and Appellate Body Report on
Korea – Taxes on Alcoholic Beverages , adopted on 17 February 1999,  WT/DS/75/AB/R & WT/DS84/AB/R
(hereinafter Appellate Body Report on Korea – Alcoholic Beverages ), pp. 32-37.  See also Panel Report on
Canada – Certain Measures Concerning Periodicals , adopted on 30 July 1997, WT/DS31/R (hereinafter  Panel
Report on Canada – Periodicals ), para. 5.23, as confirmed by the Appellate Body Report, adopted on 30 July
1997, WT/DS31/AB/R (hereinafter Appellate Body Report on Canada – Periodicals ), p. 23.
281 Appellate Body Report on EC  – Bananas III, supra note 49, para. 232.WT/DS139/R
WT/DS142/RPage 80
2. Arguments of the European Communities
6.32 The European Communities argues as follows:
6.33 GATT Article I:1 provides in pertinent part that:
"With respect to customs duties and charges of any kind imposed on or in connection
with importation … any advantage, favour, privilege or immunity granted by anycontracting party to any product originating in … any other country shall be accorded
immediately and unconditionally to the like product originating in … the territories of
all other contracting parties."
6.34 As shown below, the Tariff Exemption is inconsistent with GATT Article I:1 in that de facto
it provides an advantage to imports of automobiles originating in the United States and Mexico vis-à-
vis imports of like products originating in other Members.
(a) The measures confer an "advantage" covered by Article I:1
6.35 GATT Article I:1 applies, inter alia , to any advantage granted by a Member "with respect to
customs duties…".  The Tariff Exemption is, therefore, an "advantage" covered by GATT Article I:1.
(b) The automobiles imported by the beneficiar ies are "like" the automobiles imported by
non-beneficiaries
6.36 The Tariff Exemption is not based on the characteristics of the automobiles imported by the
beneficiaries. Imports by non-beneficiaries would not qualify for the tariff exemption even if the
automobiles imported by them were identical in all respects to those imported by the beneficiaries.
(c) The Tariff Exemption benefits mainly imports from the United States and Mexico
6.37 Article I:1 of GATT does not prohibit only measures that discriminate formally, or de jure ,
according to the country of origin of the importe d goods. As recalled by the  Appellate Body in EC –
Bananas III , Article I:1 of the GATT has also been applied, in past practice, to measures involving de
facto  discrimination
282.
6.38 On its face, the Tariff Exemption is non-discriminatory, as it applies equally with respect to
all imports of automobiles by the beneficiaries, irrespective of their country of origin. In reality,
however, since the main beneficiaries of the Tariff Exemption are subsidiaries of US companies withlarge manufacturing facilities in the United States and in Mexico, the Tariff Exemption benefits
almost exclusively to imports of automobiles originating in those two Members.
6.39 As shown in the EC's Table 1, in 1997 imports of automobiles originating in the United States
and Mexico accounted for 97 per cent of imports under the Tariff Exemption. That share is not the
result of commercial factors, as evidenced by the fact that, in contrast, imports from the United Statesand Mexico accounted for under 80 per cent of all imports of automobiles into Canada.
                                                     
282 Appellate Body Report on EC –  Bananas III , supra  note 49, paras. 231-232. As examples of that
practice, the Appellate Body referred to the Panel Reports on Spain – Tariff Treatment of Unroasted Coffee ,
adopted on 11 June 1981, BISD 28S/102 (hereinafter Panel Report on Spain – Unroasted Coffee ); Panel Report on
European Economic Communities – Imports of Beef from Canada , adopted on 10 March 1981, BISD 28S/92
(hereinafter Panel Report on EEC – Beef from Canada );  and Panel Report on Japan – Tariff on Imports of Spruce-
Pine-Fir (SPF) Dimension Lumber , adopted on 19 July 1989, BISD 36S/167 (hereinafter Panel Report on Japan –
SPF Lumber ).WT/DS139/R
WT/DS142/R
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6.40 Moreover, as set out in the EC's Table 2,  whereas in 1997 the vast majority of imports from
Mexico and the United States benefited from the Tariff Exemption, most imports from other sources
were subject to customs duties.
EC's Table 1
Imports of automobiles by country of export – 1997
(million C$)
All imports Share of All
importsAuto Pact*
importsShare of Auto
Pact* imports
USA 12,526 70.68% 10,498 88.23%
Mexico 1,459 8.23% 1,071 9 .00%
USA + Mexico 13,985 78.91% 11,569 97.23%
Japan 2,492 14.06% 0.2 0.02%
Europe 898 5.07% 164 1.38%
Other countries 363 2.04% 162 1.36%
* Includes imports under the MVTO 1998 and the SROs
Source: 1997 Automotive Trade Report, Industry Canada, Tables 2 and 3  (Exhibit  EC-15).
EC's Table 2
Ratio of Auto-Pact imports to All imports of automobiles - 1997
All imports
(million C$)
(A)Auto Pact* imports
(million C$)
(B)Ratio of Auto Pact
imports* (B) to All
imports  (A)
USA 12,526 10,498 83.81%
Mexico 1,459 1,071 73.41%
USA + Mexico 13,985 11,596 82.91%
Japan 2,492 0.2 0.01%
Europe 898  164 18.26%
Japan + Europe 3,390 164.2 4.84%
Total 17,720 11,898 67.14%
* Includes imports under the MVTO 1998 and the SROs
Source: 1997 Automotive Trade Report, Industry Canada, Tables 2 and 3  (Exhibit EC-15).WT/DS139/R
WT/DS142/RPage 82
3. Canada's response
6.41 Canada  responds as follows:
(a) The complainants have failed to meet their burden of proof
6.42 The complainants appear to believe that this Panel could find for them on the basis of mere
assertions that Canada is in breach of its WTO obligations.  This is wishful thinking; there can be nodoubt that the complaining parties bear the burden of proving their claims against Canada.  This is
well established in WTO law, notably by the Appellate Body in the leading case on this issue, United
States – Measure Affecting Imports of Wo ven Wool Shirts and Blouses from India:
283
… we find it difficult, indeed, to see how any sy stem of judicial settlement could work if it
incorporated the proposition that the mere assertion of a claim might amount to proof. … [I]tis a generally-accepted canon of evidence … that the burden of proof rests upon the party,
whether complaining or defending, who asserts the affirmative of a particular claim or
defence.
284
6.43 The Appellate Body has further explained that the complaining party must:
… put forward evidence and legal arguments  sufficient to demonstrate that action by [the
defending party] is inconsistent with the obligations assumed [under the WTO]. … Then,
…the onus shifts to the defending party] to bring forward evidence and arguments to disprove
the claim.285 (emphasis added )
6.44 The complainants’ submissions fall well short of this legal and evidentiary obligation.  As
Canada will show, neither of the complainants has been able to demonstrate a prima facie case withrespect to any of their claims, which is not surprising because those claims are not sustainable.  What
is surprising and disturbing, however, is that in many instances, no attempt is even made to do so.
The Appellate Body has stated clearly that it is no t sufficient for a complainant to shift the burden
simply by referring to a measure and asserting that it contravenes a WTO rule.
286  To say something is
so does not make it so.  Moreover, filing copies of excerpts from a directory of Canadian automotiveparts manufacturers, a handbook listing Japanese automotive parts and components manufacturers,
web sites of companies that manufacture goods used in the production of automobiles, and lists of
vehicle models, while perhaps of interest to automobile manufacturers, does not by any measure
constitute proof of any allegations made by the Japanese who have filed them,
287 or indeed of
anything at all relevant to this dispute.
(b) The MVTO and the SROs provide MFN treatment for products
6.45 The complainants each allege, albeit for different reasons, that Canada’s implementation of its
Auto Pact obligations is inconsistent with its MFN obligations with respect to trade in goods under
Article I:1 of the GATT 1994.  Their respective conten tions misinterpret and misapply Article I.  As a
                                                     
283Appellate Body Report on United States – Measure Affecting Imports of Woven Wool Shirts and
Blouses , adopted on 23 May 1997, WT/DS33/AB/R (hereinafter Appellate Body Report on US – Wool Shirts ), p.
12 et seq .
284Ibid., p. 14.
285Appellate Body Report on India – Patent Protection for Pharmaceutical and Agricultural Chemical
Products , adopted on 19 December 1997, WT/DS50/AB/R (hereinafter Appellate Body Report on India –
Pharmaceuticals ), paras. 73-74.  See also Panel Report on Argentina – Measures Affecting Imports of Footwear,
Textiles, Apparel and Other Items , adopted on 25 November 1997, WT/DS56/R (hereinafter Panel Report on
Argentina – Footwear ), paras. 6.34-6.40.
286 Appellate Body Report on US – Wool Shirts , supra  note 283, p. 14.
287 Exhibits JPN-13 through JPN-19.WT/DS139/R
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matter of fact and of law, Canada’s  tariff regime applicable to automotive products is fully consistent
with the letter and spirit of Article I.  Moreover, if any advantage is accorded to Canada’s NAFTA
partners, this would be perfectly legitimate because the NAFTA creates a free-trade area within the
meaning of Article XXIV of GATT 1994.
6.46 Article I:1 provides:
"With respect to customs duties and charges of any kind imposed on or in connection
with importation or exportation or imposed on the international transfer of payments
for imports or exports, and with respect to the method of levying such duties and
charges, and with respect to all rules and formalities in connection with importation
and exportation, and with respect to all matters referred to in paragraphs 2 and 4 ofArticle III, any advantage, favour, privilege or immunity granted by any contracting
party to any product originating in or destined for any other country shall be accorded
immediately and unconditionally to the like product originating in or destined for the
territories of all other contracting parties."
6.47 Article I by its terms forbids discrimination based on origin  of the product . It refers to an
advantage granted to a product “originating in or destined for any other country” and such advantage
must be accorded to “the like product originatin g in or destined for” any other Member country.
Advantages granted to the products of one Member must be granted to like products of any other
Member.  That the treatment relates to products  is clear from the text of the Article, and it is
confirmed by the negotiating history.
288  Moreover, it has been recognized by a recent WTO Panel.289
A Member may therefore legitimately treat products  differently, so long as the distinction in treatment
is based on criteria other than national origin .   Thus distinctions based on activities of importing
manufacturers do not offend Article I.
6.48 The complaining parties can therefore make their prima facie case only by demonstrating that
like products receive differential treatment because of their national origin.  They have not met this
burden, nor can they, since Canada’s measures do not differentiate in any way on the basis of national
origin.
(i) The complainants concede there is no de jure  violation of Canada’s MFN obligation
6.49 Both Japan and the European Communities concede that the MVTO and SROs provide for
MFN treatment on their face.  Japan states:  "Ostensibly, the Auto Pact manufacturers are permitted to
import motor vehicles of any national origin…"  The European Communities is equally categorical:
"On its face, the Tariff Exemption is non-discrimina tory, as it applies equally with respect to all
imports of automobiles by the beneficiaries, irrespective of their country of origin."  The MVTO 1998
provides explicitly for MFN treatment.  Vehicles ar e entitled to the remission  “on condition that the
goods are imported into Canada on or after January 18, 1965 from any country entitled to the Most-
Favoured-Nation Tariff …”.290  Moreover, none of the SROs limits the sources from which vehicles
may be imported duty free.
                                                     
288 The word “product” was deliberately chosen to limit the scope of Article I to goods and to exclude
intangible questions such as the rights of business people.  See J. Jackson, World Trade and the Law of GATT(Charlottesville:  The Michie Company, 1969), p. 57 (Exhibit CDA-3).  See also UN Document EPCT/C.II/3,
p. 14 (Exhibit CDA-4).
289 Panel Reports on EC – Bananas III , supra  note 269, para. 7.239.  The Appellate Body did not modify
this finding.  See Appellate Body Report on EC –  Bananas III , supra  note 49, para. 207.
290 Schedule to the MVTO 1998, supra  note 10, Part 1, s. 2.WT/DS139/R
WT/DS142/RPage 84
(ii) The complainants’ contention that there is de facto  violation of Canada’s MFN obligation
cannot be sustained
6.50 GATT and WTO cases demonstrate that to prove a de facto  violation of Article I, claimants
must prove that a criterion that is neutral on its face is in fact able to be met only by products of a
particular origin or origins, such that national origin determines the tariff treatment the product
receives.291  The simple fact is that MVTO and SRO duty remissions have been and are still applied to
products from a number of sources, including notably the complaining parties.  There is no incentive
to source from any particular country.
6.51 Japan and the European Communities have attempted to use trade statistics to demonstrate
that the products of some countries receive a disproportionate share of the duty-free benefit.  Theallegation of the European Communities is that an illegal advantage is granted de facto  t o  U S  a n d
Mexican products.  The Japanese claim is that the MVTO and SROs grant a de facto  advantage to
Swedish and Belgian products without extending it to Japanese products.  The fact that the
complainants’ allegations are so markedly different suggests that neither theory has any basis in fact.
6.52 First, the EC’s allegation, even if true, cannot assist the European Communities in this case.
This is because any advantage that may be accorded to the United States or Mexico, Canada’s
NAFTA free-trade partners, would in any event be exempted from Article I disciplines by virtue of
Article XXIV of the GATT 1994.   Indeed, should Canada decide to accord to the United States and
Mexico treatment more favourable than it is required to do under the NAFTA, the European
Communities can have no legitimate complaint.  Canada is free to go beyond its commitments to its
NAFTA partners, just as European Communities member States may extend to each other more
favourable treatment than the Treaty of Rome requires.
6.53 In contrast to the European Communities, Japan recognised that it has no legitimate complaint
under Article I as regards treatment of the United States and Mexico.  Indeed, Japan correctly reached
the conclusion that the real benefits from the MVTO and the SROs flow to products imported from
countries other  than the United States and Mexico. Japan provided data indicating that vehicles from
Sweden, Belgium, the United Kingdom, Germany, South Korea and Japan enjoy duty-free access tothe Canadian market.
6.54 Japan's Tables 5 and 6 purport to show that sales of imported Japanese automobiles are
disadvantaged as compared to Belgian and Swedish automobiles.  Quite apart from the factual errors
in both tables, neither proves the Japanese theory.
6.55 As Japan said, Japan's Table 5 is intended to demonstrate “that the Duty Waiver discriminates
between imported automobiles that are imported duty free under the Duty Waiver [i.e. those from
Sweden and Belgium] and their competing imported automobiles that are not imported duty free [i.e.
those from Japan]”. The Panel should note that Table 5 uses only 1996 data, and features a number of
models that are either no longer produced or no longer available in Canada.
292  In addition, some
models listed in the source document cited by Japan (Exhibit JPN-11) are not included in Table 5,presumably because if they had been, Japan would have had to acknowledge several competing
Japanese-origin automobiles that enter duty free. 
293
                                                     
291 See, e.g., Panel Report on EEC – Beef from Canada , supra  note 282, paras. 4.2-4.3
292 See Exhibit CDA-5 for the models listed in Table 5 that are no longer in production or sold in
Canada.
293For 1996 there are: Suzuki Esteem (1291 vehicles), Chrysler Stealth  (20 vehicles), Honda/Acura CL
series (1226 vehicles), Toyota Avalon (2163 vehicles), General Motors Isuzu Trooper II (261 vehicles),Chrysler Summit Wagon (98 vehicles).WT/DS139/R
WT/DS142/R
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6.56 Japan's Table 6 uses only 1997 data, although data for previous and subsequent years are
available.  An examination of the complete data leads to a result that stands in marked contrast to the
theory espoused by the Japanese.  In fact, the data demonstrate that Japanese-origin MVTO and SRO
import sales in 1995, 1996 and 1998 were about equal to those from Sweden and Belgium.294  In any
event, it is far from clear that statistics like those found in Table 6 bear any relevance to theestablishment of an MFN violation.  Certainly Japan has not explained how they prove de jure  or de
facto  discrimination in favour of or against goods of a particular national origin.  But even if it is
assumed, for the sake of argument, that they do show this, the comparison that Japan undertakes using
these statistics is misguided.  The proper comparison is not to compare the total duty-free import sales
from one country to the total import sales from that  country, and then compare all of the resulting
percentages.  In other words, it is not useful to compare total duty-free import sales from Sweden to
total import sales from Sweden, and then compare the resulting percentage to another country’s
percentage.
6.57 A more instructive comparison would be to contrast the total duty-free import sales from one
country against the total duty-free import sales from other countries.  Take Sweden again as anexample.  Japan’s evidence in Japan's Table 6 indicates that in 1997, there were 1,776 duty-free
import sales of vehicles from Sweden.  In the same year, there were 4,502 from Japan.  In fact, of the
six countries of origin shown, Japan is second only to Belgium, which had 244 more than Japan.
According to Japan’s evidence, of the roughly 15,000 total duty-free import sales in 1997, just under
31 per cent were of Japanese origin.
6.58 In the early 1990s, Japanese-origin vehicles enjoyed a commanding lead over the European
models.  Figure 4  illustrates that Japanese-origin vehicles have had great success in the Canadian
market and have benefited from the duty waiver that they now seek to challenge.
295  It also confirms
the Japanese argument that Sweden and Belgium have fared well under the MVTO and SRO duty
waiver regime.  Finally, it underlines that single year data are not representative and should not be
relied upon to support theories of discrimination, since they tell only part of the story.
                                                     
294 Note that the source cited by Japan erroneously indicates that all Volvos imported into Canada are
of  Swedish origin (Exhibit JPN-37).  However, Japan correctly states in its submission that the Volvos originatein Belgium and Sweden.  Some Volvos from Belgium are shipped to Sweden for onward shipment to Canada.
295 For supporting evidence, see Exhibit CDA-6.WT/DS139/R
WT/DS142/RPage 86
Canada's Figure 4
0102030405060708090100
1991 1992 1993 1994 1995 1996 1997 1998Figure 4 - Beneficiaries Under the Auto Pact
According to the Japanese Submission
(Percentage of MVTO and SRO Vehicle Sales by Origin)
77.2%
75.2%80.4%
70.1%
36.5%38.6%41.7%
40.3%8.4%
5.8%9.3% 19.2%
38.0%
33.9%
25.9%38.0%1.4%
0.8%1.0% 1.8%
4.3%8.4%
9.3%8.9%
Source: Ward’s AutoInfo Bank and Industry CanadaJapan United Kingdom Sweden / BelgiumOther Beneficiaries
not shown
6.59 In any event, the important question is not how many Japanese and European vehicles qualify
for MFN treatment; it is whether they qualify under the same terms as the products of all other WTO
Members.   The short answer is that they do.WT/DS139/R
WT/DS142/R
Page 87
(iii) The complainants’ contentions that the MVTO and SROs do not extend MFN treatment
unconditionally are without merit
6.60 The European Communities argues that Canada’s measures are discriminatory because the
importers are almost exclusively subsidiaries of United States companies with large manufacturing
interests in the United States and Mexico. But the European Communities has no legitimate complaintin this regard because, as mentioned above, Canada has formed a free-trade area with the United
States and Mexico and advantages accorded by Canada to products of these countries are exempt
under Article XXIV of GATT 1994.
6.61 Japan appears to argue that the mere fact that duty-free importers are likely to have preferred
sources of supply is itself enough to mean that duty-free treatment has not been extended on an MFNbasis. Where the identity of duty-free importers is limited, according to Japan, the discrimination is
“strengthened”. And Japan posits that a simple limitation on the identity of importers “explicitly
narrows the origins from which motor vehicles can be imported under the Duty Waiver.” The
“regime” to which Japan refers has no such effect, whether explicitly, implicitly or otherwise, and
Japan has no basis in law or in fact for making this claim.  Indeed, measures such as import-licensingregimes, tariff-rate quotas and end-use requirements that provide advantages all have the effect of
limiting the number of eligible importers and are nonetheless perfectly consistent with WTO
obligations.  There is no basis whatsoever under the GATT 1994 or any other WTO Agreement for a
claim that the private commercial relationships of importers entitled to an advantage can, by
themselves, form the basis for a violation of Article I:1 of GATT 1994.
6.62 Japan has raised the argument that the MVTO  and SROs do not extend “unconditional” MFN
treatment because manufacturers must meet certain conditions in order to qualify for duty-freeimportation.  The argument is based on one passage in a single, unappealed, WTO case:  Indonesia –
Certain Measures Affecting the Automobile Industry .
296  GATT and WTO cases have made it
abundantly clear that Article I prohibits treatment that discriminates between like products on the
basis of nationality.297  Thus, the proper test of whether the imposition of a condition or criterion
infringes Article I is whether that condition or criterion is both (a) insufficient to afford a basis todistinguish the products as not “like”, and (b) of a nature that results in discriminatory import
treatment on the basis of the national origin of the product.  The MVTO and the SROs contain no
such conditions.
(iv) In summary, the Japanese and EC claims under Article I must fail
6.63 Having failed to demonstrate that Canada has granted an illegal advantage to the products of
any country or countries, the Japanese and EC claims under Article I:1 must fail.  The MVTO and the
SROs provide no advantages, de jure  or de facto, to the products of any country or group of countries,
although products of the United States and Mexico may enjoy more favourable treatment as a result of
a free-trade agreement.  The irony is that this challenge has been brought by the Members whose
products are currently the principal beneficiaries of the MVTO and SROs.
6.64 As the facts before this Panel demonstrate, Canada’s measures do not restrict benefits to any
particular vehicle, and beneficiary manufacturers may import from anywhere in the world.  Which
Member’s products benefit at any given time depends entirely on the commercial decisions made by
the manufacturers.  The tariff regime, however, is completely neutral as to nationality.
                                                     
296 Panel Report on Indonesia – Autos, supra  note 270.
297 Panel Report on Belgian Family Allowances, supra  note 276; Panel Report on EEC – Beef from
Canada , supra  note 282 .WT/DS139/R
WT/DS142/RPage 88
4. Rebuttal arguments by Japan
6.65 Japan  rebuts as follows:
6.66 With respect to Article I of the GATT 1994, the Government of Canada incorrectly states that
"[i]n contrast to the EC, Japan recognized that it has no legitimate complaint under Article I as regards
treatment of the United States and Mexico".  The Government of Japan has expressly recognized thepreferential aspects of the Duty Waiver in the context of Canada-US and Canada-Mexico trade and
supports the position of the European Communities on this issue.
298
6.67 As discussed in the above argumentation by the Government of Japan, the Duty Waiver is
inconsistent with Article I:1 of the GATT 1994 because there is an advantage granted to certain motor
vehicles originating in various countries, and that advantage is not granted immediately andunconditionally to "like" motor vehicles originating in the territories of certain WTO Members.
6.68 The Government of Canada does not expressly contest that: the Duty Waiver (made up of its
constituent instruments) is a measure within the scope of Article I:1; there is an advantage that is
granted within the meaning of Article I:1; the products at issue are "like"
299;  and Article I:1 prohibits
measures involving de facto discrimination.
6.69 Instead, Canada relies on an incorrect interpretation and application of Article I:1.  More
specifically, the Government of Canada:
- narrows the scope of the legal obligation in Article I:1;
- incorrectly asserts that where imports originating in one or more WTO
Members receive the advantage, this is somehow indicative of MFN-
consistency;
- erroneously suggests that receipt of the advantage results from private
commercial relationships not from the application of Government measures;
and
- misstates the legal interpretation of unconditional MFN treatment.
6.70 The Government of Canada has suggested that the mere fact that the Government of Japan
and the European Communities have decided to advance different examples of the discriminatory
effect of the Duty Waiver somehow means that th e Government of Japan's position regarding the
violation of Article I:1 is not consistent with the EC's approach. To the contrary, the fact that there are
so many different ways to illustrate the discriminatory effect of the Duty Waiver serves to highlight
the inconsistency with Article I:1.
6.71 Like the European Communities, the Government of Japan is of the view that the de facto
discrimination can also occur with respect to imports of motor vehicles from the United States and
Mexico.  The Duty Waiver is still applied to those motor vehicles that do not meet the strict NAFTA
rules of origin.  In the case of imports from Mexico, since the applicable NAFTA duty has not been
yet reduced to zero, the Duty Waiver is still used ev en in cases where the applicable rule of origin is
met.
                                                     
298 Supra  paras. 5.145- 5.147.  See also supra  paras. 5.189 - 5.191.
299 Although the Government of Canada states that:  "filing … lists of vehicle models ... does not by
any measure constitute proof of any allegations…",  Ca nada has not actually contested "likeness".  Moreover,
the evidence referred to by the Government of Canada in this statement does in fact constitute prima facie
evidence that the automobiles imported by Auto Pact Manufacturers and Non-Auto Pact Manufacturers are
"like".  Canada has not produced any evidence to rebut this prima facie evidence.  The evidence in question is
referred to in Japan's Tables 4, 5 and 7 (as modified  in Japan's rebuttal to Canada's response to certain
arguments regarding the structure of the motor vehicle industry, Section V.B.3).WT/DS139/R
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(a) Correct interpretation of Article I:1 of the GATT 1994
6.72 The Government of Canada consistently misstates the legal obligation in Article I:1.300  This
may be due, in part, to the fact that the Government of Canada does not appear to have followed the
required approach for interpreting the provisions of WTO Agreements.301  The relevant part of
Article I:1 reads as follows:
"Any advantage … granted by any contracting party to any product originating in …
any other county shall be accorded immediately and unconditionally to the like
product originating in … the territories of all other contracting parties."
6.73 Leaving aside for the moment the argument over the words "immediately and
unconditionally", the ordinary meaning of the words of Article I:1 in context is clear.  Products
originating in the territory of a WTO Member must receive any advantage granted by an importing
Member to like products of any other country.  Thus, an advantage such as a duty waiver that is
granted to products imported from one or more countries must be granted to like products originating
from all WTO Members.302  If that advantage is not granted, either expressly on the face of a measure
or in effect as a result of the implementation and application of a measure, to the like products of each
and every WTO Member303, the MFN obligation is violated.
6.74 Therefore, Article I:1 prohibits Canada from granting the advantage (i.e. the waiving of the
6.1 per cent tariff) to products (e.g., Volvo and Saab automobiles) imported from certain countries
(e.g., Sweden) while at the same time denying that  advantage to "like" products (e.g., Honda Acura,
Nissan Infiniti and Toyota Lexus automobiles) originating in the territory of all other WTO Members
(e.g., Japan).304
6.75 The ordinary meaning of the words in context do not support Canada's assertion that WTO
Members can discriminate between imported products of different origins as long as the "distinction"
in treatment is based on criteria other than national origin or unless "like" products receive
"differential" treatment because of their national origin. Canada has offered no textual or contextual
justification for its interpretation.  Nor does Canada identify any GATT 1947/WTO Panel or WTOAppellate Body Reports that stand for such a proposition.
                                                     
300 From the outset of its defense under Article I:1, where it states that "Article I by its terms forbids
discrimination based on  origin of the product" (emphasis added, emphasis in original deleted), the Government
of Canada misstates the obligation therein. Article I:1 does not expressly nor implicitly refer to discriminationbased on  origin of the product.
301 In accordance with Article 3:2 of the DSU, as interpreted and affirmed many times by the Appellate
Body (e.g., Appellate Body Report on United States – Import Prohibition of Certain Shrimp and Shrimp Products ,
adopted on 6 November 1998, WT/DS58/AB/R (hereinafter Appellate Body Report on United States – Shrimp )),
Article I:1 must be interpreted by applying the "customary rules of interpretation of public international law".This requires an interpretation based on the ordinary meaning of the words in Article I:1, read in their contextand the light of the object and purpose of the GATT 1994. As stated by the Appellate Body, the interpretativeanalysis:   "... must begin with, and focus upon, the text of the particular provision to be interpreted.  It is in the
words constituting that provision, read in their context, that the object and purpose of the states parties to the
treaty must first be sought."
302 As noted above, Canada does not contest that the waiver of the 6.1 per cent tariff is an advantage
granted to products imported from one or more countries.  As well, Canada does not contest that the products atissue are "like", and that some like products receive the advantage and others do not.
303 "All other contracting parties" means each and every WTO Member.  The Concise Oxford
Dictionary of Current English defines "all" to mean "the entire number of " (Oxford: Clarendon Press, 1995,
33).
304 It should be noted that, in previous years, certain Volvo products were also imported under the Duty
Waiver from Belgium (see Japan's Table 5).WT/DS139/R
WT/DS142/RPage 90
6.76 If the purpose of Article I:1 is to further one  of the fundamental objectives of the GATT 1994
(i.e. to eliminate "discriminatory treatment in international commerce"305), surely Article I:1 must
apply to situations where a distinction in treatment has the effect of "like" products originating in the
territory of a WTO Member not receiving the advantage at issue.306
6.77 As is clear from the WTO Panel's analysis in EC – Bananas III , if a measure "affects the
competitive relationship" between products that or iginate in any country to the detriment of like
products from a WTO Member, that measure violates Article I:1.307  In short, a WTO Member may
legitimately treat products differently only if the distinction in treatment does not adversely affect the
competitive relationship of imported products or iginating in a WTO Member in relation to like
imported products from other countries.
(b) The fact that imports originating in one or more WTO Members receive the advantage
is not indicative of MFN-consistency
6.78 The Government of Canada appears to argue that the Duty Waiver is consistent with the MFN
obligation because it is available to motor vehicles imported from the territories of several WTO
Members.
6.79 As is tacitly recognized, although not followed by the Government of Canada, the proper
interpretation of Article I:1 mandates a focus on the products originating in the territories of Members
that are not granted the same advantage.  Thus, contrary to the Government of Canada's position,
whether imports originating in the territory of one or more WTO Members receive the advantage is
not determinative of whether that advantage is granted on a MFN basis.308
6.80 To the contrary, Article I:1 should be interpreted to ensure that where the products of any
country receive an advantage, the like products of all WTO Members (not just those of some
Members, even if it is a majority of Members) receive that advantage.  To the extent that a measure
operates so as to exclude certain products of even one WTO Member from receiving such an
advantage, there is a violation of Article I:1 of the GATT 1994.
6.81 As demonstrated in the Government of Japa n's arguments and confirmed by Canada's own
evidence, there is such exclusion in the present case.309  When imports into Canada of "like"
automobiles are examined, certain models from certain countries (e.g., Volvo and Saab automobiles
                                                     
305 Preamble to the GATT 1994, third para.
306 The treatment as between imported products should be assured on the objective basis of their
"likeness" as products.  Otherwise, imported products could be exposed to a highly subjective and variabletreatment according to extraneous factors, which could create instability and uncertainty in the conditions of
competition as between like imported products.  Although this substantive concern was originally raised in
respect of GATT Article III:4 (by the Panel in its Report on United States – Standards for Reformulated and
Conventional Gasoline , adopted as modified by the Appellate Body on 20 May 1996 , WT/DS2/R & WT/DS4/R
(hereinafter Panel Report on US – Gasoline )) and elaborated by the Appellate Body  Report  on Japan – Alcoholic
Beverages,  supra note 271, it seems equally applicable to the complementary non-discrimination provision set
out in Article I:1.
307 Panel Reports on EC – Bananas III , supra  note 269, para. 7.239.  The Appellate Body did not modify
this finding.  See the Appellate Body Report on EC –  Bananas III , supra  note 49, para. 207, where the Appellate
Body tacitly affirms the relevance of conditions of competition by noting that a "competitive advantage" give tocertain suppliers over other suppliers (of  WTO Member s) constitutes an advantage not given to WTO Members
contrary to Article I:1.
308 Even under Canada's erroneous interpretation of Article I:1, there is still a clear breach of
Article I:1.  Restricting the advantage of the Duty Waiv er to automobiles originating in particular countries
means that there is a distinction in treatment based on national origin.  Whether Canada actually "intended" such
a distinction to arise is irrelevant.  The relevant cons ideration is the practical ef fect of the Duty Waiver.
309 Exhibit CDA-6.WT/DS139/R
WT/DS142/R
Page 91
from Sweden) benefit from the Duty Waiver while this preferential treatment is not granted to like
automobiles from Japan (e.g., Honda Acura, Nissan Infiniti and Toyota Lexus automobiles).
6.82  The Government of Canada further contends that because some  automobiles originating in
Japan have benefited from the Duty Waiver, the measures are consistent with the MFN obligation.
This argument is wholly without merit.  As affirmed by the WTO Panel in EC – Bananas III , Article
I:1 does not permit balancing more favourable treatment in one instance against less favourable in
another. Therefore, the fact that certain Japanese automobiles may receive the advantage under the
Duty Waiver is irrelevant for the purpose of determining if Article I:1 has been violated.
6.83 Moreover, as Canada has conceded, Auto Pact Manufacturers only import and distribute
automobiles from certain specific sources.  The evidence makes it clear that the advantage of the DutyWaiver is restricted to particular imported automobi les originating from particular countries, and that
the advantage is not granted to like automobiles originating in the territories of all WTO Members.
6.84 Therefore, in the light of the proper interpretation of Article I:1 (i.e. that products originating
in a WTO Member must receive any advantage that is granted by an importing Member to like
products of any other country), there is an obvious breach of Article I:1 on the facts of this case.
6.85 Based on the fact that not all motor vehicles from Japan are denied the advantage of the Duty
Waiver, Canada claims that the de facto  discrimination is not present, while insisting that Article I
violation is established only when discrimination is based solely on the country of origin.  As the
Government of Japan stated in its reply to the Questions of the Panel, the Government of Japan is
unaware of any Report recognizing such a narrow interpretation of Article I as is described by
Canada, using the language "GATT and WTO cases demonstrate that to prove a de facto  violation of
Article I, claimants must prove that a criterion that is neutral on its face is in fact able to be met onlyby products of a particular origin or origins, such that national origin determines the tariff treatment
the product receives." ( emphasis added )
6.86 The Government of Japan is of the view that such a test has never been established in any
panel or Appellate Body report, despite the Government of Canada's assertion. Indeed, the relevant
authority directly contradicts Canada's position.  In EEC – Beef from Canada , the Panel found an EC
levy-free tariff rate quota for high-quality grain-fed beef to be inconsistent with Article I:1 of the
GATT 1994 because only the US Department of Agriculture was able to issue the requisite certificate
of authenticity.  On its face, there was no discrimination based on origin.
6.87 However, there, as here, the effect was discriminatory and hence there was a violation of
Article I:1.  More broadly, accepting Canada's  argument would limit the MFN obligation to de jure
discrimination, for no distinction in treatment could be found to be based on the criterion of national
origin unless that criterion was spelled out in the measure at issue.  Such a result would be
inconsistent with WTO and GATT authority, most recently the declaration by the Appellate Body in
EC – Bananas III  that Article I:1 applies to de facto , as well as de jure  discrimination.
310
6.88 To judge de facto  discrimination, the Panel needs only to apply a test that has already been
established by the EEC – Beef from Canada  referred to above.  With this test, the MVTO 1998 and
SROs are on their face origin neutral as to motor vehicles imported duty free by Auto Pact
Manufacturers.  However, as demonstrated above by Japan and confirmed by Exhibit CDA-6, the
Duty Waiver has "in effect" been granted largely to  products originating in Sweden and Belgium and
not granted to "like" products originating in the territory of Japan.  As Canada admitted, Auto PactManufacturers have a strong tendency to import automobiles from certain specific sources in certain
countries.  Such tendency is based on the corporate relationship of Auto Pact Manufacturers with their
affiliated Manufacturers.
                                                     
310 Appellate Body Report on EC – Bananas III, supra note 49, para . 232.WT/DS139/R
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6.89 The example shown for the Mitsubishi-Chrysler affiliation is a case in point.  During the
years 1971-1993 the affiliation was in place, Chrysler imported motor vehicles from Mitsubishi.
When the relationship ended, so did the imports.  Importation of automobiles from parent or affiliated
companies makes commercial sense.  Given such pattern of trade among manufacturers, the eligibility
restriction of the Duty Waiver has the effect of restricting the manufacturers from which the AutoPact Manufacturers import motor vehicles.  As each manufacturer has its own country of
establishment, restricting the exporting manufacturers would invariably restrict the countries from
which the products originates.  Thus, the MVTO 1 998 and SROs have the effect of preventing duty-
free access of like products from origins other than the particular countries.  Therefore, they violate
Article I of the GATT 1994.  With regard to the data the Government of Japan presented for de facto
discrimination, Canada claims that Japan's Table 6 is simply unreliable.  The Government of Japan in
fact has already submitted multi-year data to the same effect in Exhibit JPN-37 which enables the
Government of Canada  to verify the factual basis of this argument.
6.90 The Government of Canada uses Figure 4  to paint a misleading picture of the Duty Waiver,
disguising the fact that the majority of motor vehicles imported from Japan are not accorded theadvantage of Duty Waiver.  Canada attempts to emphasize the sheer volume of duty-free imports
from Japan while ignoring the far greater volume of imports from US and Mexico.  In order to rectify
such a distortion, the Government of Japan created the new Figure 4  presented below, on the same
basis as that was used for the original but with the addition of volume of imports from the United
States and Mexico.WT/DS139/R
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Japan's New Figure 4
78.6108.810.2
70.112.513.110.1
71.411.613.71.60.2
82.88.2620.2
90.31.633.10.3
93.12.31.81.60.4
8314.110.80.3
89.16.21.91.80.4
0%10%20%30%40%50%60%70%80%90%100%
1991 1992 1993 1994 1995 1996 1997 1998Correct Figure 4 - Beneficiaries Under the Duty Waiver
US Mexico Japan Sweden United KingdomCorrection of Figure 4 in the First Submission of the Government of Canada 
Other Beneficiaries not 
shown
Source: Ward's Automotive Yearbook, Ward's Communications, Ward's Autoinfo Bank, Industry Canada, AMIA(Percentage of MVTO 1998 and SROs Automobiles by Origin)WT/DS139/R
WT/DS142/RPage 94
6.91 Although the Government of Canada states that it prepared Figure 4  based on information
provided with Japan's initial argumentation, the data used by the Government of Canada are not the
same as those included in Japan's Table 6 or Exhibit JPN-37.  The Government of Japan uses the data
in Exhibit CDA-6 for the purpose of comparison.
6.92 While the Government of Japan showed in its initial argumentation the duty-free percentage
among the total import quantity by each origin, and thus has not needed to include the data on the
imports from the United States and Mexico, the Government of Canada used Figure 4  to show the
percentage of duty-free imports by origin among the total imports of Canada.  Nevertheless, if the
Government of Canada intended to show the percentage by each origin among its total duty-freeimports, it should have included figures regarding the imports from the United States and Mexico,
because significant amounts of automobiles have been imported from those countries duty free under
the MVTO 1998 and SROs and not under the NAFTA.
6.93 Thus, the Government of Canada uses Japan's Table 6 in an incorrect manner.
6.94 Finally, it should be noted that the figure for imports from Mexico in 1991-1993 includes the
imports of commercial vehicles (since it is not possible to differentiate them based on the available
statistics).  Motor vehicles made in Mexico may not be imported duty free into Canada even if they
satisfy the NAFTA origin rules because the applicab le NAFTA duty has not yet been reduced to zero.
Although the automobiles made in the United St ates and satisfying NAFTA origin rules may be
imported duty free since 1998, the figure has been included, because the MVTO 1998 and SROs are
measures totally unrelated to the NAFTA.
(c) Receipt of the advantage results from the application of government measures not from
private commercial relationships
6.95 The Government of Canada also seems to suggest that there is no de facto  discrimination
because whether products receive the advantage under the Duty Waiver depends on private
commercial relationships of importers. Such a suggestion seriously misconstrues the Government of
Japan's position and arguments in this dispute.  The Government of Canada even goes on to assert that"Which Member's products benefit at any given time depends entirely on the commercial decisions
made by the manufacturers".  In fact the converse  is true — which Member's products are granted
relief from the 6.1 per cent import tariff actually depends on the regime that the Government of
Canada has created, implemented and applied.
6.96 As noted in the Government of Japan's response to Question 4 from the Panel in this dispute,
the measures at issue (e.g., the MVTO 1998, the SROs, related statutory and administrative
instruments, and the letters of undertaking) are clearly and indisputably governmental measures.  It is
these measures, collectively referred to as the "Duty Waiver", that are at the core of the Government
of Japan's various claims of  WTO Agreement violations.
6.97 To the extent that actions taken by private parties play any role in ensuring the discriminatory
effects of the Duty Waiver, this is precisely the sort of activity that must be viewed as having
"sufficient government involvemen t" to be deemed governmental.
311  What the Government of
Canada has done in implementing the Duty Waiver, however, is to ensure that, given the economic
realities of the global automotive industry, discrimination will occur.312  That is, given the global
                                                     
311 Panel Report on Japan – Film , supra  note 93, para. 10.56.
312 At a minimum, as Canada acknowledges, the regime permits automobile manufacturers that are
direct competitors of Japanese and other national-origin manufacturers to ensure that certain automobiles fromcertain countries will obtain duty free access into Canada.WT/DS139/R
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integration of the automotive industry, each qualified manufacturer imports motor vehicles from a
limited number of sources.
6.98 This is confirmed by the undisputed evidence presented by the Government of Japan.  Each
qualified manufacturer in fact imports motor vehicles only from countries where its parent company,
or a company with which it has a capital relationshi p, has production facilities.  "Like" motor vehicles
manufactured around the world by their competitors have been prevented from enjoying any
possibility of ever qualifying for the Duty Waiver, and will always be excluded from receiving that
advantage.
5. Rebuttal arguments by the European Communities
(a) Canada’s interpretation of the notion of  de facto  violation is unduly restrictive
6.99 The European Communities  rebuts as follows:
6.100  Canada concedes that GATT Article I:1 may be applied also to de facto  violations.
Nevertheless, it puts forward an extremely narrow test:
“GATT and WTO cases demonstrate that to prove a de facto  violation of Article I,
claimants must prove that a criterion that is neutral on its face is in fact able to be metonly by products of a particular origin or origins, such that national origin determines
the tariff treatment the product receives.”
6.101  The test advanced by Canada is unduly restrictive and would make it virtually impossible to
prove the existence of de facto discrimination. In order to establish a de facto  violation of GATT
Article I:1 it is not necessary to show that “only” imports of a certain origin may benefit from the
advantage concerned. Instead, it may be sufficient to show that imports of a certain origin benefit
disproportionately  from that advantage.
6.102  Previous GATT and WTO cases do not support Canada’s very narrow interpretation of the
notion of  de facto  discrimination. On this point, the European Communities refers the Panel to its
response to Question 1 from the Panel.
(b) The European Communities has shown that de facto  the Tariff Exemption provides an
advantage to imports originating in the United States and Canada
6.103  The European Communities has shown that the ma in beneficiaries of the Tariff Exemption
are the Canadian subsidiaries of the US Big Three, all of which have large manufacturing facilities in
the United States and Mexico. As a result, the Tariff Exemption provides an advantage to imports
from those two countries over imports from those countries where the non-beneficiaries  of the Tariff
Exemption have their main manufacturing facilities.
6.104  The above is demonstrated by the statistics summarised in the EC's Tables 1 and 2 above,
which show that the share of US and Mexican imports under the Tariff Exemption (97  per cent in
1997) is larger than their share of total imports (80  per cent in the same year).
6.105  Canada has failed to refute that evidence. Indeed, Canada has not even addressed it in its
arguments
313. During the first meeting with the Panel, the European Communities asked Canada to
                                                     
313 Canada has limited itself to making an unsupported assertion to the effect that the European
Communities has not proved its claim of de facto violation of GATT Article I. Ironically, in the same statement,Canada acknowledges the relevance of the type of statistical data supplied by the European Communities.WT/DS139/R
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complete the import data shown in Canada's Figure 4  with data for imports under the Tariff
Exemption from the United States and Mexico. Canada has ignored that request314. It is submitted that
the Panel should draw appropriate inferences from Canada’s unjustified lack of response.
(c) The advantage accorded to automobiles from the United States and Mexico cannot be
exempted by GATT Article XXIV
6.106  Canada contends that any advantages granted to Mexico and the United States are
“exempted” from Article I by virtue of Article XXIV of GATT.
6.107  That claim, however, is refuted by the very wording of Article XXIV:5, which reads in
relevant part as follows:
“Accordingly, the provisions of this Agreement shall not prevent, the formation of …
a free-trade area … or the adoption of an interim agreement necessary for the
formation of … a free-trade area”
6.108  There is currently no “free-trade area” between Mexico and Canada. Trade between those two
countries, including trade in automotive products, is still subject to customs duties.  In the absence of
a “free-trade area”, the exception in Article XXIV may apply only with respect to the “adoption of aninterim agreement necessary for the formation of a free-trade area”.
6.109  Even assuming that NAFTA qualified as such an agreement (something which the Panel does
not need to decide), the Tariff Exemption is neither part of, nor required by NAFTA
315. NAFTA
permits, but does not oblige Canada to maintain th e Tariff Exemption, which constitutes a derogation
from generally applicable NAFTA rules. The decision to maintain the Tariff Exemption is a unilateral
decision of Canada, except to the extent that the Tariff Exemption implements the provisions of the
Auto Pact316. The Auto Pact, however, lacks the trade coverage required by Article XXIV:8(b).
6.110  In response to a question from the Panel, Canada argues that the Tariff Exemption does not
constitute a “derogation” from NAFTA317. The truth, however, is that but for the provisions contained
in paragraphs 1 and 2 of Appendix 300-A.1 of NAFTA318, which expressly authorise (but do not
require) Canada to “maintain” the Tariff Exemption, the continued application by Canada of that
measure would be a flagrant violation of NAFTA319.
6.111  Canada further argues that the parties to an interim free-trade agreement often proceed to the
elimination of import duties faster than required by the agreement320. That analogy, however, is
clearly inapt. In accordance with GATT Article XXIV, the parties to an interim free-trade agreements
are “required” to eliminate customs duties at the end of a transitional period. In contrast, NAFTA does
                                                     
314 Canada's response to Question 4 from the EC.
315 Canada admits implicitly in its First Submission that the Auto Pact is neither part, nor required by
NAFTA when it argues that NAFTA is “of no relevance to this dispute” and that it may “treat its NAFTApartners better than the Agreement requires it to do”.
316 The Auto Pact only requires Canada to grant duty free treatment to imports from the United States.
317 Canada's response to Question 8 from the Panel.
318 Exhibit EC-13.
319 Annex 300-A, para. 1 of NAFTA (Exhibit EC-13) makes it clear that paras. 1 and 2 of Appendix
300-A.1 are exceptions to the generally applicable NAFTA rules contained in that Annex .  It reads as follows:“Each Party shall accord to all existing producers of vehicles  in its territory treatment no less favourable than it
accords to any new producers of vehicles in its territory under the measures referred to in this Annex, except
that this obligation shall not be construed to apply to any differences in treatment specifically provided for in theAppendices in this Annex”.
320 Canada's response to Question 8 from the Panel.WT/DS139/R
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not “require” Canada to continue to apply the Tariff Exemption either now or at any time in the
future.
6.112  Most transitional periods provided for in NAFTA with respect to trade between Canada and
the United States seem to have already expired. It may thus be arguable that a “free-trade area” has
been “formed” between Canada and the Unites States. Once again, however, the Panel does not needto reach that issue. Even assuming that a “free-trade area” in accordance with Article XXIV existed
between the United States and Canada, the measures  in dispute would not be exempted by the terms
of that provision.
6.113  Article XXIV:5 does not provide a legal basis for adopting all sorts of measures otherwise
incompatible with Article I. Article XXIV:5 merely authorises the “formation of a free-trade area”, anotion which is defined in Article XXIV:8 (b). Cons equently, only those measures that are inherent in
that objective can be exempted by Article XXIV.
6.114  The Tariff Exemption does not fall within that category of measures. It is not necessary  for
the “formation of a free-trade area”. NAFTA already provides for the elimination of duties on imports
into Canada of motor vehicles originating in Mexico and the United States, as required byArticle XXIV:8 (b).
6.115  Furthermore, the Tariff Exemption does not contribute to achieving a greater degree of trade
liberalisation, but rather the opposite. The only purpose of the Tariff Exemption is to provide an
advantage to the US Big Three, not only vis-à-vis  foreign manufacturers of motor vehicles, but also
vis-à-vis  the other manufacturers established in the United States
321. It distorts competition between
those manufacturers and, as a result, trade between Canada and the United States, thereby preventing
NAFTA from displaying all its potential trade-creating effects.
6.116  Moreover, as noted in one of the Panel’s questions322, the CVA and ratio requirements
attached to the Tariff Exemption are “restrictive regulations of commerce” in the meaning of GATT
Article XXIV:8 (b). In fact, those requirements afford “less favourable treatment” not only to goods
imported from non-members of  NAFTA, but also to goods imported from the United States and
Mexico.
6.117  For example, the CVA requirements create an incentive to use Canadian parts and materials
for the assembly of motor vehicles in Canada instead of like products imported from the United States
and Mexico. Those restrictions have not become “moot"323 simply because the beneficiaries can now
import motor vehicles duty free from the United States under NAFTA324. For the beneficiaries, it is
more advantageous to import motor vehicles under the Tariff Exemption than under NAFTA. As aresult, the Tariff Exemption continues to afford less favourable treatment to parts and materials for the
assembly of motor vehicles imported from the United States and Mexico.
                                                     
321 In response to a question from the Panel, Canada claims that the Tariff Exemption does not
discriminate against other US manufacturers because the vehicles produced in the United States by those
manufacturers may also qualify for duty free treatment under NAFTA (Canada’s response to Question 10 from
the Panel). However, as discussed in the EC's argumentation above, for the Big Three it is more advantageous toimport motor vehicles into Canada under the Tariff Exemption than under NAFTA because they can avoid theapplication of the NAFTA origin rules. Canada also suggests that the Big Three may import under the TariffExemption vehicles produced by other manufacturers in the United States. But, as argued by Canada itself in thecontext of Article II of GATS, in practice the Big Three are unlikely to import and distribute in Canada motor
vehicles produced by other US manufacturers that have their own distribution network in Canada.
322 Question 11 from the Panel.
323 Canada's response to Question 11 from the Panel.
324 As mentioned above, imports from Mexico under NAFTA are still subject to customs duties.WT/DS139/R
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6.118  Thus, in sum, far from “going beyond NAFTA” (as Canada has asserted), the measures in
dispute represent an obstacle to the full achieveme nt of the objectives of NAFTA and, consequently,
to the formation of a free-trade area as defined in Article XXIV:8 (b).
6.119  To conclude, it is worth noting that until recently the United States did not share Canada’s
view that the Auto Pact benefits are exempted by Article XXIV. In fact, as late as 1996 the UnitedStates deemed necessary to request a renewal of the 1965 waiver for the Auto Pact, notwithstanding
the conclusion in the meantime of CUSFTA and NAFTA
325.
6. Response by Canada to the complainants' rebuttals
6.120  Canada  responds as follows:
6.121  The Japanese and EC claims regarding a violation of Article I:1 must fail because they find
no support in the facts before the Panel and they do not accord with previous panel and Appellate
Body interpretations of the provision.
6.122  Canada maintains that the measures at issue do not violate Article I:1.  They are not
discriminatory, either de jure , which both complainants concede, or  de facto , because the facts and the
law confirm otherwise.  The Canadian measures, the MVTO 1998 and the various SROs, permitcertain automotive producers to import vehicles duty free from any WTO Member country, provided
that the producers meet eligibility criteria to qualify as a Canadian manufacturer.  The measures
distinguish between manufacturers of vehicles, but make no distinctions among that favour vehicles
of any country over those of any other country.  There is no advantage that has been granted to the
products originating in one country that is not accorded immediately and unconditionally to the like
products originating in any other WTO Member country. Hence the measures do not violate
Article I:1 of the GATT 1994.
6.123  If it is true, as suggested by Japan, that global integration of the automobile industry is
responsible for automotive trade patterns, this does not render the Canadian measures a violation of
Article I:1 where no governmental measures limit co mmercial choices as to origin of goods.  No
GATT/WTO cases support the proposition that a GATT Article I:1 violation can be based solely on
private commercial relationships.  If it is true, as suggested by the European Communities, that themajority of vehicles entering Canada duty free are manufactured in the United States or Mexico, this
is not ipso facto  proof of discrimination.  Nor would it constitute a violation of Article I:1 of the
GATT because Article XXIV of the GATT provid es for an exception to MFN obligations for
members of free-trade areas, such as the North American Free Trade Area.
(a) The Japanese and EC interpretations of Article I:1 are not supported by the facts
6.124  Both complaining parties concede that there is no de jure  violation of Article I:1 of the
GATT.  Therefore, the Panel’s inquiry regarding Article I relates only to alleged de facto  violations.
The complaining parties’ positions differ markedly as to the nature of the de facto  violation.
6.125  Japan argues that the Canadian measures have the effect of discriminating against Japanese
automobiles in favour of automobiles from Belgium and Sweden.
326  Japan also suggests that the
Canadian measures are discriminatory and a violation of GATT Article I:1 because they have the
                                                     
325 The evasive answer given by the United States to a question raised by the European Communities in
this connection reveals the US embarrassment before this glaring inconsistency. See US response to Question 3from the EC, and Section VIII – Third-Party Arguments.
326 Japan’s response to Question 1 from the Panel.WT/DS139/R
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effect of limiting imports to the WTO Members that are favoured by certain commercial relationships
formed as a result of the global integration of the automotive industry.327
6.126  Canada demonstrated above in its response to the claims that the facts do not support Japan’s
contentions regarding favoured treatment for vehicles of Belgium and Sweden.  Canada's Figure 4
demonstrates that the single year data cited by Japan328 are of limited value and that when data for the
last several years are examined, the evidence is that Japanese-origin vehicles have benefited from the
duty-free treatment provided for in Canada’s measures to a much greater extent than have vehicles of
Belgium, Sweden and several other WTO Member countries.  In fact, products from Japan have
accounted for a larger share of duty-free import sales in the Canadian market than have products from
Sweden and Belgium every year since 1990 except 1995, when Japanese duty-free imports accountedfor 1.5 per cent less sales than those of Belgium and Sweden combined.
329
6.127  Japan’s theory of discrimination based on the global integration of the automotive industry is
difficult to reconcile with its complaint regardin g favouritism toward Belgium and Sweden.  But in
any event, the argument cannot be sustained.  If manufacturers determine the source of vehicle
imports on the basis of where they have business affiliations, this would be due entirely to the privatebusiness decisions of manufacturers.  The Canadian measures have no bearing on these decisions.
Discrimination is plainly absent.  And in any event, the number of countries implicated in these
commercial relationships is quite significant.  DaimlerChrysler AG has affiliations in Austria, China,
Egypt, India, Japan, Thailand, and the United States.  Ford Motor Company has affiliations in
Belarus, China, India, Japan, Malaysia, Portug al, Taiwan, South Africa, Sweden, Vietnam and the
United Kingdom.  And General Motors Corporation has affiliations in Argentina, Australia, China,
Ecuador, France, Germany, India, Indonesia, Japa n, Kenya, Nigeria, Russia, South Africa, Sweden
and the United Kingdom.  These relationships involve 24 separate countries.
330
6.128  It is telling that Japan and the European Communities do not agree on the alleged
discriminatory aspects of the Canadian measures.  While Japan claims that the measures favour EC
countries, the European Communities claims that they favour the United States and Mexico. This
suggests that there is no discrimination at all, and like the Japanese claim, the EC’s claim of ArticleI:1 violation must also fail.
6.129  The EC’s position has evolved since the commencement of these proceedings.  Its most recent
elaboration of its position, contained in the response to Question 2 posed by the Panel, indicates that
the European Communities:
"is not arguing that the Tariff Exemption discriminates de facto  in favour of US and
Mexican imports simply because those imports account currently for the majority of
imports into Canada … The EC’s complaint is that reserving the Tariff Exemption to
the Big US Three has the consequence that the share of US and Mexican imports into
Canada is even larger than it would be if the Tariff Exemption was [sic] available to
all importers … [T]his is demonstrated by the fact that the share of the US andMexican imports under the Tariff Exemption (97% in 1997) is larger than their share
of total imports (80% in the same year).
331
                                                     
327 Japan’s argumentation and Japan’s response to Question 1 from the Panel.
328 Japan’s Table 6.
329 See also Exhibit CDA-6.
330See “Global Joint Ventures and Affiliations for 1999,” Automotive Industries  (AI) website
http://www.ai-online.com/stats/globalventure.htm (Exhibit CDA-12).  Note that Belarus, China, Russia, Taiwan
[Chinese Taipei] and Vietnam are in  the process of acceding to the WTO.
331 EC’s response to Question 2 from the Panel.WT/DS139/R
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6.130  How this is evidence of discrimination by  Canada is not explained.  The European
Communities advances this proposition with such assurance as if to suggest that it is a statement of
the obvious.  But the European Communities offers no analysis for its conclusion.  The EC’s position
may be rejected on this basis alone.
6.131  Had the European Communities provided an objective analysis, it would have demonstrated
that in the absence of the measures at issue, all NAFTA-qualifying vehicles would still enter Canada
duty free332 and all non-NAFTA vehicles would enter subject to Canada’s MFN duty.  The absence of
the measures would make no difference to the NAFTA-qualifying vehicles, but it would adversely
affect imports from the complaining parties.  Indeed, it is likely that in the absence of the measures,
the percentage of imports from the United States and Mexico would be even greater than it is with themeasures in effect.
6.132  In any event, even if the European Communities were able to substantiate its allegation of
discrimination based on a preponderance of automotive trade with the United States and Mexico, this
could not result in a finding of a violation of Arti cle I:1.  Canada, the United States and Mexico have
formed a free-trade area and, therefore, any advantage that may be accorded by Canada to its free-trade partners is exempt from Article I:1 oblig ations by virtue of Article XXIV of the GATT.
6.133  The European Communities raised several argu ments regarding Article XXIV.  First, it
argues that there is no free-trade area between Mexico and Canada because Canada-Mexico trade is
still subject to customs duties and that Article XXIV is unavailable to Canada. The European
Communities also suggests that it is “arguable” that a free-trade area has been formed between
Canada and the United States, but that Article XXIV would still provide no assistance, though no
explanation is offered for this conclusion. The Panel need waste no time on these allegations becausethey have no basis in law.  Article XXIV status is not premised on the total elimination of all duties
between the parties to a free-trade agreement.  And in any event, the European Communities itself
said the Panel does not need to make a determination on the status of the NAFTA.
6.134  Finally, the European Communities was in erro r when it suggested that the measures in
dispute are not part of the NAFTA, but rather derogation therefrom. The NAFTA specificallyprovides for the measures to continue.  Paragraph 1 of NAFTA Appendix 300-A.1 incorporates
Article 1001, as well as Articles 1002(1) and (4) of  the Canada-United States Free Trade Agreement
(CUSFTA) “as they refer to Annex 1002.1, Part One.”  CUSFTA Annex 1002.1, Part One is the list of
recipients exempted from the restrictions imposed by CUSFTA Articles 1002(1) and (4).  The specific
reference in NAFTA Appendix 300-A.1 to Annex 1002.1 , Part One has the effect of bringing the
measures within the NAFTA.
333
(b) The Japanese and EC interpretations of Article I:1 find no support in the law
6.135  The complainants concede there is no de jure  violation with regard to Article I:1.  Their
claims relate only to de facto  violations.
6.136  Japan said that “the eligibility restriction de facto  excludes certain motor vehicles from certain
countries from benefiting from the Duty Waiver.” It also explains its de facto claim in its response to
Question 1 of the Panel:
“the Duty Waiver has been ‘in effect’ granted largely to products originating in
Sweden and Belgium and not so granted to ‘like’ products originating in the territory
of Japan … MVTO and SROs have the effect of preventing duty-free access of like
                                                     
332 With the exception of passenger cars and heavy trucks and buses from Mexico, which are subject to
nominal duties; see Canada’s argumentation above.
333 These provisions are found in Exhibits EC-12 and EC-13.WT/DS139/R
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products from other origins than the particular countries [where Auto Pact
manufacturers have business relationships] and thus they constitute a violation of
Article I of GATT 1994.”334
6.137  The European Communities did not elaborate on its de facto  claim, except in response to
Question 1 from the Panel. The European Communities suggests that the test of de facto
discrimination under Article I:1 of the GATT is “whether the disputed measure results in an allocation
of imports among supplying Members which is different from that that would have prevailed in the
absence of that measure.”335
6.138  A survey of the panel and Appellate Body reports that deal with Article I:1 will demonstrate
that the theories espoused by Japan and the European Communities regarding the interpretation to begiven to Article I:1 find no support in the jurisprudence.  It will also demonstrate that the cases
support Canada’s position regarding the test for de facto  discrimination, i.e. that the measures in
question must result in like products of certain countr ies being favoured over like products of others.
6.139  In Belgian Family Allowances ,
336 Norway and Denmark complained about the application by
Belgium of its levy of a 7.5 per cent charge on foreign goods purchased by public bodies.  Norwayand Denmark alleged that Belgium granted an exemption from the levy when these goods originated
in a country whose system of family allowances met specific requirements.  The Panel found that the
Belgian legislation “introduced a discrimination between countries having a given system of family
allowances and those which had a different system or no system at all, and made the granting of the
exemption dependent on certain conditions.”
337  The Panel concluded that “the exemption would have
to be granted unconditionally to all other contracting parties”338 and that “[t]he consistency or
otherwise of the system of family allowances in fo rce in the territory of a given contracting party with
the requirements of the Belgian law would be irrelevant in this respect.”339
6.140  There is no similarity between the measures contested in that case and those challenged
before this Panel.  Unlike the Belgian measures that granted exemptions depending upon where the
goods originated and what system of family allowances was in place in the country of origin, the
Canadian measures impose no conditions that limit the country of origin.  Duty-free treatment isaccorded based on the activities of the manufacturer, not on the origin of the products being imported,
or on any internal systems or measures that may exist in the country of origin.  Thus, Belgian Family
Allowances  supports Canada’s position regarding what constitutes de facto  discrimination.
6.141  European Economic Community – Imports of Beef from Canada
340 is often cited as the
leading case on de facto  discrimination under Article I:1 of the GATT.  Canada cited this case above
in support of its test for de facto  discrimination, namely that it is necessary to “prove that a criterion
that is neutral on its face is in fact able to be met only by products of a particular origin, such that
national origin determines the tariff treatment the product receives.” In that case, the Panel found de
facto  discrimination contrary to Article I:1 because importation of beef was possible only upon
certification, and certification was possible only from a US agency that was mandated to certify only
US products.  The practical result, or de facto  effect, was that only products from the United States
could enter the EEC duty free; products from every other Member were necessarily dutiable.  The
discrimination is plain: the products of one country were favoured over like products of other
                                                     
334 Japan’s response to Question 1 from the Panel.
335 Ibid., para. 1.
336 Panel Report on Belgian Family Allowances, supra  note 276.
337 Ibid., para. 3.
338 Ibid.
339 Ibid.  It is interesting to note that the Belgian measures in question limited the tax exemption to
purchases only by Belgian public bodies, a condition that was not found inconsistent with Article I:1.
340 Panel Report on EEC – Beef from Canada , supra  note 282.WT/DS139/R
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countries.  The Canadian measures at issue stand in marked contrast to those contested in EEC – Beef
from Canada .  In the case before this Panel, importation is based on commercial decisions made by
manufacturers.  Products need not be certified to enter duty free.  They do not have to meet any tests
whatsoever.  All vehicles may enter Canada duty free from anywhere in the world, without
distinction, provided that they are imported by eligible manufacturers.  Indeed, the facts before thisPanel demonstrate that vehicles entering Canada duty free come from a large number of countries.
341
6.142  Spain – Tariff Treatment of Unroasted Coffee342 deals primarily with the issue of “like
products”, but it is also instructive rega rding the interpretation to be give to de facto  discrimination
under Article I:1.  In that case Brazil complained of de facto  discrimination because Spain, which had
been applying a single tariff rate to all unroasted coffee, created a new tariff regime in which certaintypes of coffee were subject to much higher duties than other types.  Brazil exported almost
exclusively types subject to the higher duties while other Latin American countries exported almost
exclusively types subject to lower duties.  Spain said  it instituted the new tariffs without regard for
which countries produced mild coffee and which produced other types.  The Panel found, however,
that the different types of coffee under consideration were like products and that the different rates ofduty resulted in de facto  discrimination against products of Brazil.  As in the case of Belgian Family
Allowances , the condition or criterion at issue (in this case the type of coffee) did not make the
products unlike but did cause discrimination by national origin.
343
6.143  Both Japan and the European Communities rely on  EC – Bananas III ,344 although for different
reasons, but neither can legitimately claim support for their position from that case either.  Japan
relies on EC –  Bananas III  as it refers to EEC – Beef from Canada  discussed earlier.345  Canada has
demonstrated that EEC – Beef from Canada  supports Canada’s position regarding de facto
discrimination, not the complainants’.  The EC’s Article I analysis as set out in its response to the
Panel’s Question 1 relies on paragraphs 7.332-334 and 7.350-351 of EC – Bananas III .346  But its
reliance on those findings is inapt.  Those paragraphs consider whether certain EC measures are
inconsistent with the GATS.  The European Communities had introduced a licensing allocation
system that favoured operators of predominantly EC (or ACP) nationality, while disfavouring others.
The question the EC –  Bananas III  panel (and subsequently the Appellate Body) examined was
whether “formally identical” treatment of service suppliers nevertheless resulted in less favourable
conditions of competition for like service suppliers of other countries.  That test for de facto  violation
of the MFN obligation under the GATS is not found in GATT Article I.  GATS Article XVII is
framed in terms of “no less favourable treatment,” which leads to a comparison of the competitiveopportunities open to service suppliers of various nationalities.  Article I:1 of the GATT 1994 refers to
granting an “advantage, favour, privilege or immunity” immediately and unconditionally to the like
products of all WTO Members.  The latter has nothing to do with “competitive opportunities,” which
                                                     
341 See Canada's Figure 4  and Exhibit CDA-6.
342 Panel Report on Spain – Unroasted Coffee, supra  note 282.
343 Panel Report on Japan – SPF Lumber, supra  note 282, paras. 5.7, 5.14 and 6.1, followed a similar
analysis, but came to a different result than the Panel Report on Spain – Unroasted Coffee, supra  note 282.  In the
Japan – SPF Lumber  case, Canada complained that Japan’s tariff on certain lumber cut to specified dimensions
(“dimension lumber”) violated Article I:1 because Cana dian exports of SPF dimension lumber to Japan were
subject to a customs duty of eight per cent, whereas other comparable types of dimension lumber enjoyed the
advantage of a zero tariff duty.  Canada claimed it had been subject to de facto  discrimination because Japan had
arranged its tariff classification in such a way that a co nsiderable part of Canadian exports of SPF dimension
lumber was subject to the eight per cent duty, whereas comparable types of dimension lumber from the United
States were imported duty free.  The Panel concluded that reliance by Canada on the concept of dimensionlumber was not an appropriate basis for establishing likeness of products under Article I:1, and therefore thatthere was no Article I:1 violation.
344 Panel Reports on EC – Bananas III , supra  note 269, and Appellate Body Report on EC –  Bananas
III, supra  note 49.
345 Japan’s response to Question 1 from the Panel.
346 EC’s response to Question 1 from the Panel.WT/DS139/R
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entails a more far-reaching enquiry.  Under the Auto Pact, Canada agreed to permit qualifying
manufacturers to import vehicles and other automotive products duty free from the United States.
Canada fulfilled its obligations under GATT Article I:1 by extending this “advantage” to products
originating from all WTO Members.
6.144  Although the European Communities relies on EC – Bananas III  to support its Article I:1 de
facto  discrimination theory, it does not refer to the section of that Report that deals specifically with
Article I:1.  Presumably, this is because the Appellate Body analysis in that section supports the
Canadian approach to de facto  discrimination regarding differentiation among like products
originating from different Members.  It provides no support for the theory advanced by the European
Communities.347
6.145  Moreover, even if the language and meaning of Article I of the GATT were substantially
identical to that of Article II of the GATS, the legal analysis of the EC – Bananas III  panel would not
support the EC position in this dispute.  In EC – Bananas III , the European Communities had in effect
taken licences that were essential to conduct a services business away from one group of service
suppliers predominantly owned or controlled by nationals of certain WTO Members.  The EuropeanCommunities re-allocated them by criteria that favoured another group of suppliers that were
predominantly nationals of the European Communities or certain other countries.  There was evidence
that the European Communities intended to achieve this re-allocation among service suppliers.  No
comparable situation is present here, since, as previously noted, the Canadian measures do not
discriminate by origin of vehicles, nor do they es tablish conditions that would constrain or favour
particular origins.  Even the commercial choices of Canadian importers demonstrate no preference for
products of particular countries outside of the North American free-trade area.
6.146  The Panel on Indonesia – Autos
348 also considered Article I:1.  The panel quite properly found
that Indonesia’s measures were de facto  violations of Article I:1.  Korean products were in fact
capable of meeting the conditions imposed by Indonesia.  All three Indonesian conditions were
nominally neutral on their face, but they were inconsistent with Article I:1 because in practice they
determined the national origin of the products that could be imported duty free.  The panel concludedthat the measures, in their application, amounted to differential treatment on the basis of national
origin.  The difference between the case before this Panel and Indonesia – Autos  is manifest.  In the
latter, conditions imposed by the government m eant that only Korean cars qualified for special
treatment.  None of the Canadian measures challe nged impose conditions that in law or in practice
determine the national origin of imported products.  This is evident in the import statisticsdemonstrating that imports are sourced based on commercial decisions of manufacturers and not
based on the national origin of the products.
6.147  The Indonesia – Autos  case is also of interest for its finding on the relevance of commercial
relationships as they impact on the application of ostensibly neutral measures.  In Indonesia – Autos ,
the panel considered whether a particular company “had made a deal with [the] exporting company to
produce [the] National Car.”
349  The existence of the commercial relationship was relevant to the rate
of duty applied.  However, the “deal” was enshrined in a legal instrument which, by law, defined a
particular Korean vehicle as the only vehicle entitled to the duty benefits.350  In the case before this
Panel, commercial relationships may govern the choices companies make to source imports from
particular companies.  But these relationships are not enshrined in any Canadian law.
                                                     
347 Appellate Body Report on EC –  Bananas III , supra  note 49, paras. 205-207.
348  Panel Report on Indonesia – Autos, supra  note 270.
349 Ibid ., para. 14.145.
350 Ibid.WT/DS139/R
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6.148  Finally, it is worth examining Japan – Film351 because the European Communities seeks to
use that case to support its test of de facto  discrimination.   The Japan – Film  panel considered a
complaint by the United States of non-violation nullification or impairment under Article XXIII:1(b),
and specifically whether measures had had a disparate impact on imported products in their
application, thereby upsetting competitive conditions of market access for imported film and paper.
6.149  As it did with the EC – Bananas III  case, the European Communities seeks to import into
Article I a test used for another provision – in this circumstance it is borrowing jurisprudence relating
to Article XXIII:1(b).  The legal merit of making  this analogy is questionable.  A claim of non-
violation nullification or impairment is necessa rily based on non-violation.  It is inappropriate,
therefore, to use the rationale of Japan – Film  in support of a theory on violation of Article I:1.
6.150   Japan has raised one further argument under Article I of the GATT.  Japan has claimed that
the limitation on which manufacturers may qualify to import duty free, together with the CVA and
ratio requirements, should be considered to violate the “immediately and unconditionally” clause of
Article I.  The European Communities has not joined in this claim, but rather has articulated a
diametrically opposite view.  The European Communities states in its response to Question 3 of thePanel that “the European Communities is not argu ing that any condition unrelated to the imported
goods is as such contrary to the obligation to  provide most favoured national (sic) treatment
‘unconditionally’ laid down in GATT Article I:1.”
352  In any event, Canada has explained in its
response to Question 5 of the Panel and in previous  arguments that Japan’s allegations are based on a
misinterpretation of the “immediately and unconditionally” clause.353
6.151  Contrary to the Japanese claim and to the dicta  in the Indonesia – Autos  Panel Report on
which Japan appears to base its claim, there is no prohibition in Article I of origin-neutral terms andconditions on importation that apply to importers as opposed to the products being imported.  Were it
otherwise, end-use tariff provisions or programme s such as foreign trade zones or duty drawbacks
would be inconsistent with Article I because like products attract different rates of duty, even though
there is no discrimination based on origin of the product.
6.152  In summary, this review of the relevant pane l and Appellate Body reports demonstrates that
the jurisprudence, like the evidence, does not support either the Japanese or EC allegations under
Article I:1 of the GATT 1994.  The complainants cannot meet their burden of proof because the
Canadian measures at issue do not discriminate either de jure  or de facto  contrary to Article I:1.
7. Japan's follow-up to Canada's response
6.153  As a follow-up to Canada's response, Japan  argues as follows:
6.154  Canada asserts in its response to the complainants' rebuttals that "there is no prohibition in
Article I of origin-neutral terms and conditions on importation that apply to importers as opposed to
the products being imported."  This assertion, however, oversimplifies and incorrectly narrows the
scope of obligation under Article I of the GATT 1994.
6.155  As is clear in the EC – Bananas III  Panel Report (paragraph 7.239), Article I covers terms and
conditions on importation that apply to the importers.  In essence, the Panel declared that Article I
concerned both treatment of foreign products originating from different foreign sources and treatment
of the suppliers of these products on the basis that the transfer of tariff quota rents actually occurred
when bananas originating in certain Members were  exported to the European Communities.  The
                                                     
351 Panel Report on Japan – Film , supra  note 93.
352 EC’s response to Question  3 from the Panel.
353 Canada’s response to Question 5 from the Panel.WT/DS139/R
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measure had the effect of giving certain suppliers a competitive advantage over other suppliers which,
in turn, had a discriminatory effect on products originating in different WTO Members.
6.156  Article I of the GATT 1994 covers terms and conditions that are, on their face, origin neutral.
This point has been made in past GATT 1947 Panel Reports, including  Spain-Tariff  Treatment of
Unroasted Coffee.   Moreover, Canada itself acknowledges this in the context of Indonesia – Autos ,
stating at paragraph 6 of its answer to the Question 5 of the Panel, that "all three Indonesian
conditions, in spite of their apparent neutrality, were inconsistent with the requirement of Article I:1."
6.157  Following the above assertion, Canada goes on to contend that Article I does not prohibit
origin-neutral terms and conditions on imports because there are various measures of this sort
consistent with Article I, such as import licensing schemes, tariff quotas, end-use classification, free-trade zones and duty drawbacks.  It is wrong, however, to argue that these measures are in themselves
consistent with Article I.  As is the case with any measure permitted under the WTO, these measures
would violate Article I if they either de jure or de facto fail to abide by the MFN provisions contained
in Article I.  Thus, this oversimplified contention of Canada has no merit in this case.
6.158  Japan would re-emphasize that the core cause of the inconsistency arises from the fact that the
eligibility of the privileged importers has been limite d by the governmental measure referred to in its
arguments as eligibility restriction, though removal of  this restriction alone would not completely cure
the WTO inconsistency of the Duty Waiver.
6.159  Canada's statement in its response to the co mplainants' rebuttals that the scheme permits
certain producers to import vehicles duty free from any WTO Member country, "provided that the
producers meet eligibility criteria to qualify as a Canadian manufacturer" does not tell the whole
story.  They not only must be a Canadian manufacturer but also must qualify as an Auto Pactmanufacturer satisfying various other conditions such as the CVA requirement.
6.160  The Government of Canada tries to misguide the Panel by taking the position that which
Member's products benefit at any given time from the Duty Waiver depends entirely on the
commercial decisions made by the manufacturers.  However, there is severe limitation by the
governmental action on the eligibility of the privileged importers.
6.161  Given the fact admitted by Canada that Auto Pact Manufacturers have strong tendency to
import motor vehicles from certain specific sour ces, the governmental action, i.e. limiting the
eligibility of the Auto Pact Manufacturers, inevit ably affects the countries of origin of duty free
imports.  In other words, whether or not the advantage granted by Canada to the motor vehicles from
certain Members is accorded to the like products originating in the territories of all other Members,totally depends on the choice made by the Auto Pact Manufacturers.  The sources of duty-free imports
would be different if the Duty Waiver were available to any potential importer.
6.162  The Government of Canada attempts to portray incorrectly the reality of the Duty Waiver to
its advantage with Figure 4 by way of turning a blind eye to the fact that majority of motor vehicles
imported from Japan are not accorded the advantag e of the Duty Waiver. Canada attempts to
emphasize the sheer volume of duty-free imports from Japan while ignoring the far greater volume of
imports from the United States and Mexico.
6.163  The Duty Waiver is still available to imports from the United States and Mexico.  The Duty
Waiver is the only measure through which the duty-free treatment is provided to the imports from
Mexico.
6.164  Prior to 1 January 1998 (when the NAFTA duty with  regard to imports from the United States
to Canada was reduced to zero), the Duty Waiver was the only measure whereby the duty-free
treatment was provided to the imports from the United States.  After 1 January 1998, the Duty WaiverWT/DS139/R
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is available to imports of motor vehicles produced in the United States, whether or not they meet the
strict NAFTA rules of origin.
6.165  Canada's Figure 4  as corrected by Japan demonstrates that the vast majority of duty-free
imports come from the United States, Mexico and other countries which host the parent manufacturers
of or manufacturers in partnership with the Auto Pact manufacturers.
6.166  The Spain - Unroasted Coffee case demonstrated that it is sufficient that Brazil exported to
Spain "mainly" the varieties subject to the higher duty rate, in order to establish a violation of
Article I.  The  EEC - Beef from Canada case found that the EC's measure had the effect of preventing
access of like products from other origin than the United States, and for that reason found the measure
to be inconsistent with Article I.
6.167  The statistics referred to above easily meet these criteria, and demonstrate that the advantage
of the Duty Waiver is accorded "mainly" to the countries which host the parent manufacturers of or
manufacturers in partnership with the Auto Pact manufacturers, and that the Duty Waiver has the
effect of preventing access of like products from other countries.  In other words, in the given context
of the strong tendency of Auto Pact Manufacturers, Canada fails to observe its unconditional MFNobligation under Article I by maintaining a scheme which sets the condition that the duty-free
importation of automobiles can only be made by the group whose membership has been limited by the
governmental measure.
8. The European Communities' follow-up to Canada's response
(a) The Tariff Exemption provides an advantage to imports from the United States and
Mexico
6.168  As a follow-up to Canada's response, the European Communities  argues as follows:
6.169  Canada has argued that "it is likely" that in the absence of the Tariff Exemption, "the
percentage of imports from the United States and Mexico would be even greater than it is with the
measures in effect".
6.170  Even if true ( quod non ), that would not dispose of the EC's complaint, which is that reserving
the Tariff Exemption to the US Big Three has the consequence that the share of US and Mexicanimports is greater than it would be if the Tariff Exemption was equally available to all importers.
354
6.171  Implicit in Canada's argument is the suggestion that the Tariff Exemption affords no real
advantage to imports from the United States and Mexico by the Big Three, because those imports
could in any event enter duty free under NAFTA.
6.172  That suggestion is misleading.  In the first place, imports from Mexico will remain subject to
import duties until 2003.  Second, the only imports from the United States which may enter duty free
under NAFTA are those meeting NAFTA's origin rules.  This means that, for example, a car
manufactured by GM in the United States with 55 per cent "North American" content would not
qualify for duty-free treatment under NAFTA.  Yet that car would still be a US car under Canada's
non-preferential origin rules.
6.173  The best proof that the Tariff Exemption constitutes a genuine advantage is that the Big Three
continue to import cars from the United States under  the Tariff Exemption, rather than under NAFTA,
in spite of the fact that since 1 January 1998 import duties on vehicles originating in the United States
have been eliminated under NAFTA.
                                                     
354 See also EC's response to Question 2 from the Panel.WT/DS139/R
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(b) The test of de facto  discrimination
6.174  In response to a question from the Panel, the European Communities has explained that in
order to establish a de facto  violation of GATT Article I:1 it is not necessary to show, as claimed by
Canada, that "only" imports of a certain origin may benefit from the advantage concerned. Instead, it
is sufficient to show that imports of a certain origin benefit disproportionately from that advantage.355
6.175  The European Communities cited a number of Panel Reports supporting that test. In its
response to the complainants' rebuttals, Canada strives to demonstrate that those reports are irrelevant
or say something different from what their ordinary meaning would suggest.
6.176  According to Canada, in Spain - Unroasted Coffee356, the Panel found a violation of Article
I:1 because "Brazil exported almost exclusively types subject to the higher duties while other LatinAmerican countries exported almost exclusively type s subject to lower duties".  That is not, however,
what the Panel said. The Panel noted that Brazil exported "mainly" the types subject to the higher
duties
357 and said nothing about exports from other Latin American countries.  In any event, the test
read by Canada into Spain – Unroasted Coffee  is inconsistent with the test advanced by Canada and
would lead to a finding of de facto  violation also in this case.
6.177  Canada goes on to argue that the test of de facto  discrimination applied in EC – Bananas III
when addressing the claims under GATS Article II is irrelevant here because GATT Article I:1 has
"nothing to do with competitive opportunities, which entails a more far-reaching analysis".
6.178  Yet, in the very same case the Appellate Body affirmed the Panel's finding that certain export
certificate requirements enforced by the European Communities were inconsistent with GATT Article
I:1 precisely because they accorded to banana suppliers of BFA countries a "competitive advantage"
over other Latin American suppliers.358
6.179  Furthermore, also in EC – Bananas III , the Appellate Body relied upon past practice under
GATT Article I:1 in order to conclude that GATS Article II applies also to de facto  discrimination.359
Surely, the analogy drawn by the Appellate Body would have been inappropriate if, as claimed by
Canada, de facto  discrimination under GATT Article I:1 "had nothing to do" with de facto
discrimination under GATS Article II.
6.180  Canada argues that the European Communities is ignoring the section of the Appellate Body
report on EC – Bananas III  dealing with Article I:1 of GATT because, it claims, "the Appellate Body
analysis in that section supports the Canadian approach to de facto  discrimination".  Yet Canada does
not explain how the Appellate Body report supports its approach.  That is not surprising, given that
the claims addressed by the Appellate Body in that section are claims of de jure  discrimination and
not of de facto  discrimination.360  The EC's defence was not that the measures applied equally to all
imports, but rather that the differences in treatment among Members did not provide an
"advantage".361
6.181  Canada also misreads the Panel Report on Indonesia – Autos .362  According to Canada, the
Panel "quite properly found that Indonesia's measures were de facto  violations of Article I:1".  The
                                                     
355 Question 1 from the Panel.
356 Panel Report on Spain – Unroasted Coffee, supra  note 282.
357 Ibid., para. 4.10.
358 Appellate Body Report on EC – Bananas III , supra  note 49, para. 207.
359 Ibid., paras. 231-232.
360 Ibid., paras. 205-207.
361 Ibid., paras. 37-39.
362 Panel Report on Indonesia – Autos, supra  note 270.WT/DS139/R
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Panel did not say that in the report. Instead, as argued by Japan in this dispute, the Panel wrote in its
report that the measures were inconsistent with Article I:1 of GATT because they discriminated
among like product based on conditions not related to the imports themselves.363
6.182  Canada concludes its review of case law by asserting that Japan - Film364 is not relevant
because in that case the Panel considered a non-violation complaint under GATT Article XX III:1(b).
Japan - Film  is a very long report.  The Panel considered a non-violation complaint, but it addressed
also a violation complaint under GATT Article III:4.365  As made clear by the European Communities,
its argument alluded to the test applied by  the Panel in connection with the claim under
Article III:4.366
(c) The Tariff Exemption is not exempted by GATT Article XXIV
6.183  Canada continues to argue that, even if the Tariff Exemption were inconsistent prima facie
with Article I:1 of GATT, it would nevertheless be exempted by GATT Article XXIV.  According to
Canada:
"Canada, the United States and Mexico have formed a free-trade area and, therefore,
any advantage that may be accorded by Canada to its free-trade partners is exemptfrom Article I:1 obligations by virtue of Article XXIV of the GATT."
6.184  That statement reflects a gross misunderstanding of the scope and function of Article XXIV.
Article XXIV does not say that if two Members form a free-trade area, then trade between them is no
longer subject to GATT rules.  Rather, Article XXIV  stipulates that other GATT provisions shall not
prevent two or more Members from forming a free -trade area or from adopting an interim agreement
necessary for the formation of a free-trade area.
367
6.185  Accordingly, the issue before the Panel is wh ether the Tariff Exemption is necessary for the
formation of a free-trade area, as defined in Article XXIV:8 (in the case of US imports) or is part of
an interim agreement necessary for the formation of a free-trade area (in the case of imports from
Mexico).  Although the burden of proof lies with Canada, the European Communities has shown that
the Tariff Exemption is neither.
6.186  The Tariff Exemption is not part of, nor required by NAFTA. Canada's assertion to the effect
that "NAFTA specifically provides for the measures to continue" is misleading.  NAFTA does not
require Canada to continue to apply the Tariff Exem ption.  It merely authorises Canada to "maintain"
the Tariff Exemption.368  The Tariff Exemption is a unilateral measure of Canada, except to the extent
that it implements the Auto Pact.  The Auto Pact, nevertheless, is a purely sectoral agreement which
does not meet the requirements of Article XXIV:8.
6.187  It is also misleading to say that Appendix 300.A.1 "has the effect of bringing the measures
within NAFTA".  The reason why that provision auth orises Canada to maintain the Tariff Exemption
is precisely because, otherwise, the Tariff Exemption would have been in violation of NAFTA's
generally applicable rules concerning inter alia  the elimination of customs duties, origin rules, the
national treatment of goods369, the abolition of performance requirements370, and the national
                                                     
363 Ibid., para. 14.145 in fine and 14.147.
364 Panel Report on Japan – Film , supra  note 93.
365 See the Panel Report on Japan – Film , supra  note 93, paras. 10.368-10.382.
366 EC's response to Question 1 from the Panel.
367 C.f. GATT Article XXIV:5.
368 Appendix 300-A.1, paras. 1 and 2 (Exhibit EC-13).
369 C.f. Article 301 of NAFTA.
370 C.f. Articles 304  and 1106 of NAFTA.WT/DS139/R
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treatment371 and most-favoured-nation treatment372 of investors.  Thus, contrary to Canada's claims, it
is not an error to describe the Tariff Exemption as a "derogation" from NAFTA.
6.188  In addition to not being part of NAFTA, the Tariff Exemption is not necessary for the
formation of a free-trade area as defined in Article XXIV:8, something which is already achieved by
NAFTA.  Furthermore, the Tariff Exemption detracts from the objectives of NAFTA.  It discriminatesbetween the Big Three and the other car manufacturers established in Mexico and the United States
and, as a result, distorts trade between Canada and its NAFTA partners.
9. Canada's follow-up response
6.189  Canada  responds as follows:
(a) Both complainants concede that there is no de jure  violation
6.190  Canada has stated and Japan and the European Communities both concede that there is no de
jure violation of  Canada's obligations under Article I:1 of the GATT 1994. There is no doubt about
this aspect of the dispute.  The MVTO 1998 states on its face that vehicles are entitled to the duty
remission "on condition that the goods are imported into Canada on or after January 18, 1965 from
any country entitled to the Most-Favoured-Nation Tariff…".
373  Moreover, none of the SROs limits
the sources from which vehicles may be imported duty free.
6.191  Both complainants allege de facto  violation of Article I:1, although their claims differ
markedly on this issue.  Neither claim can succeed.  First, neither complainant has supported its
allegations with evidence proving de facto  discrimination.  Indeed, the facts Canada has presented in
rebuttal confirm there is no discrimination.  Second, neither complainant finds support for its
allegations in the law.  Canada's review of the law in its Second Written Submission confirms that the
cases support the Canadian interpretation of Article I:1 and debunk the legal theories presented by thecomplainants.
6.192  Finally, neither complainant succeeds in its attempt to undermine Canada's position regarding
the meaning of Article I:1.  They have both misstated Canada's position and then proceeded to attack
a theory they claim is espoused by Canada.  This is because neither complainant can successfully
make a valid rebuttal of Canada's true position.
6.193  Canada's position is clear: to prove a de facto  violation of Article I:1, the claimants must
prove that a criterion that is neutral on its face is in fact able to be met only by products of a particular
origin or origins, such that national origin determ ines the tariff treatment the product receives.  The
GATT and WTO cases that Canada reviewed in its Second Written Submission fully support this
position.
(b) Japan 's position on de facto  violation is not supported by the facts and it misinterprets
the law
6.194  Japan has two main arguments regarding de facto  violation of Article I:1.  First, Japan says
that Sweden and Belgium are favoured by the tariff measures because virtually all automobile imports
from those countries enter Canada duty free.  Japan claims that most Japanese imports, by contrast, donot enter duty free.  Second, Japan argues that commercial relationships dictate from where vehicles
are sourced and therefore, by limiting the number of importers, the effect of Canada's measures is to
limit the WTO Members from which vehicles will be imported into Canada.
                                                     
371 C.f. Article 1102 of NAFTA.
372 C.f. Article 1103 of NAFTA.
373 SOR/98-43 (Exhibits EC-3 and JPN-4).WT/DS139/R
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6.195  Japan's theory of discrimination is flawed for a number of reasons, the major ones being:
• first, Japan seeks to find discrimination among luxury models but the measures at issue make no
distinction among model segments, or indeed any distinctions of any kind;
• second, Japan's theory of what constitutes de facto  violation of Article I:1 is at odds with all of the
relevant panel and Appellate Body reports, each of which Canada reviewed in its response to thecomplainants' rebuttals; and
• third, Japan has not provided reliable evidence to support its assertions; the data upon which
Japan relies are wrong, as Japan itself now admits.
(i) Japan's like products argument is inapt becaus e the Canadian measures do not distinguish on
the basis of  model segment or on any other basis
6.196  The first major flaw in the Japanese argument regarding Article I:1 is that Japan seeks to
prove discrimination by comparing imports of certain "luxury" models from Japan to those of certain
"luxury" models from Europe.  Specifically, Japan decries the fact that Saabs, Volvos, Jaguars andCateras from Sweden, the United Kingdom and Germany enter Canada duty free, while "like
automobiles" from Japan (such as the Acura, the Infiniti and the Legend) do not.  It then dismisses as
irrelevant the fact that a large number of other vehicles from Japan receive duty-free treatment  Japan
is essentially attempting to make a "like products" analysis by distinguishing what it considers to be
certain luxury models from all other vehicles, and then comparing imports within that particular groupof automobiles.
6.197  The Japanese analysis is inapt.  The Canadian measures at issue make no distinction among
model segments.  The MVTOs and the SROs treat all automobiles identically, regardless of model
segment, size, price, origin, or any other distinction.  This was not the case in Indonesia – Autos
374,
where the regulations in issue contained the specifications for the Kia Sephia model.  The likeproducts analysis in that case proceeded on the basis of whether the products of other countries were
"like" that particular vehicle.
6.198  This case is different.  The Saab 900 may be "like" a Honda Acura, and the Suzuki may or
may not be "like" the Saab or the Honda. But the MVTO and the SROs make no distinction of any
kind among different models of cars on the basis of origin.  The Honda will be subjected to the MFN
duty if it is not imported by a qualified manufacturer, unless of course it is imported from Honda's US
production facilities.  The Saab imported from Sweden will be exempt from duty if imported by aqualified manufacturer.  But the difference in duty is exclusively the result of the importing
company's choice, and not due to the Canadian measures.
6.199  This is not so extraordinary as the complainants contend.  Article I:1 does not mean that,
unless there is some specific GATT exception, all like products must always bear the same rate of
duty.  That is clear from the plain language of Ar ticle I:1, and it is clear from long-standing GATT
practice.  The only obligation under Article I:1 is that an advantage accorded to the products of one
Member must be accorded to like products of all Members.  Tariff rate quotas, end-use requirements,
duty drawbacks and foreign trade zones all result in different duties on imported like products.  These
practices are perfectly acceptable.  They are all consistent with Article I, so long as those using such
programs to import at lower rates of duty are free to make such imports from any origin.  This is trueeven if the importers' choices result in greater importation from some origins than others.
6.200  Canada recalls the GATT Working Party that examined the Auto Pact.  It understood very
well – and made no objection to – the fact that the Canadian system would allow only imports by
                                                     
374 Panel Report on Indonesia – Autos, supra  note 270.WT/DS139/R
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qualified manufacturers to enjoy duty-free treatment, while imports of like products by others would
be subject to the MFN duty.  By contrast, the Working Party recommended to the United States that it
seek a waiver from Article I for its intended preferences – preferences that applied exclusively to
products from Canada. As well, in the Belgian Family Allowances case375, the panel found
inconsistent with Article I only the condition that limited the origin of products that could qualify fortax-free treatment.  The panel had no problem with the other condition that only certain Belgian
government entities could enjoy the exemption, while the like imported product would be subject to
tax if purchased by any other person or entity in Belgium.
6.201  The lesson from this is clear: the fact that some vehicles enter Canada duty free and that some
other vehicles are subject to an MFN duty is not a per se  violation of Article I:1.  As long as there is
no distinction or condition in the measures themselves that discriminates based on the origin of the
vehicles, differential duty treatment for like products is perfectly consistent with Article I:1.  The
Canadian measures at issue in this case make no such distinction and are therefore perfectly consistent
with Article I:1.
(ii) Japan's de facto arguments are not supported by panel and Appellate Body reports
6.202  The second fundamental problem with Japan's de facto  discrimination theory is that it is out
of step with previous panel and A ppellate Body reports dealing with de facto  violation of Article I:1.
Japan contends that Canada's measures fall afoul of Article I:1 because automotive companies tend to
import only from their affiliates around the world.  Since only certain companies qualify for the duty
waiver,  and those companies have not chosen to source automobiles from all WTO Members, in
Japan's view there is "in effect" a violation of Article I:1. Japan further contends, in its response to
Question 2 of the Panel, that even if every manufacturer in Canada qualified for the duty waiver, therewould still be an Article I violation because those manufacturers who do not operate in Canada could
not import automobiles duty free.
6.203  The GATT and WTO jurisprudence does not support this position.  The purely commercial
decisions of private automobile manufacturing companies cannot result in a violation by Canada of its
international trade obligations when there is no involvement of the government in these decisions.
6.204  Japan suggests that the companies' decisions ha ve "sufficient government involvement" so as
to be "deemed governmental", but it offers no explana tion for this point of view. It states only that the
Government of Canada has "ensured discrimination" because it has implemented the duty waiver
"given the economic realities of the global automotive industry" and given that "each qualified
manufacturer imports vehicles from a limited number of sources".  The truth is that the measuresadopted by the Government of Canada have nothing to say about with the commercial decisions of the
importers regarding from where they source their vehicles.
6.205  The MVTO and the SROs set no conditions that limit the origin of products that may be
imported duty free.  Commercial choices have never been the basis of a finding of de facto  violation
when there was nothing in the government measures that limited those choices.  The only case inwhich commercial choice was argued was Indonesia – Autos ,
 but there the regulations had the effect
of limiting the choice to one company in one countr y.  Moreover, the contractual obligation in that
case was "covered by the authorization of June 1996 with specifications that correspond to those of
the Kia car produced only in Korea".376  Unlike Indonesia – Autos , in the case before this Panel the
commercial decisions are not carried forward into the government measures.
6.206  There have been few complaints in the past regarding de facto  violation of Article I:1.  The
notion of a de facto  violation of the MFN obligation does not derive from the text of Article I:1 itself,
                                                     
375 Panel Report on Belgian Family Allowances, supra  note 276.
376 Panel Report on Indonesia – Autos, supra  note 270, para. 14.145.WT/DS139/R
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which may explain why panels have not accorded this concept the broad meaning and effect now
sought by Japan.  As Canada has shown, the cases do not support Japan's reading.  But they do
confirm Canada's position.  De facto  violations of Article I:1 were found when the measures in
dispute had the inherent effect of discriminating by origin of the product.
6.207  Japan cites EEC – Beef from Canada377 in support of its interpretation.  But it appears to have
misunderstood the Panel Report, which actually supports the Canadian position – not Japan's.  In the
EEC – Beef from Canada  case, the measure itself permitted duty-free access provided that the product
was certified by one particular agency.  That agency was a US government agency, and it was
mandated to certify only US beef.  The effect of the measure was that there was no possibility for
Canadian-origin beef, or any beef other than US-origin beef, to achieve certification and therebyqualify for preferential duty treatment.  Only US-origin beef could enter duty free.  Thus Canada's
criteria for making out a de facto  case are met: a criterion that is neutral on its face is in fact able to be
met only by a product of a particular origin or origins, such that national origin in effect determines
the tariff treatment the product receives.  In the case before this Panel, there is no similar government
condition or criteria that limits the origin of products that may benefit.  And there is no de facto
violation.  Automobiles from any WTO Member can gain duty-free access to the Canadian market.
And automobiles are in fact imported duty free from around the globe.
378
6.208  Indonesia – Autos also deals with de facto  violation of Article I:1.  The condition established
by the regulation had the effect that products of only one country – Korea – could possibly benefit
from the duty exemption.  In Spain – Unroasted Coffee379,Spain had introduced a distinction between
types of coffee that disfavoured types exported by Brazil, but not by most other Latin American
countries.  These cases, too, support Canada's interpretation.
6.209  EC – Bananas III380 is offered by Japan as support for its theory of Article I de facto  violation,
but Japan has misunderstood the panel's findings.  Japan cited the case as authority for the proposition
that "a Member may legitimately treat products differently only if the distinction in treatment does not
adversely affect the competitive relationship of imported products originating in a WTO Member."
What Japan has failed to mention is that the measures in question discriminated explicitly,  de jure , by
origin.  To import bananas of certain specified origins (namely BFA countries), an importer had to
ensure that an export licence accompanied the bananas.  Japan cites paragraph 7.239 of the EC –
Bananas III  Panel Report.  But, it neglects to mention the next paragraph of the report, which states:
"Since the EC accords this advantage to pr oducts originating in Colombia, Costa Rica
and Nicaragua ‘while denying the same advantage to a like product originating in theterritories of other [Members], i.e. the Complainants' countries, the requirement to
match licences with BFA export certificates as provided for in Article 3 of Regulation
478/95 is inconsistent with Article I:1."
381
6.210  Clearly the violation of Article I:1 was expressly based on the origin of products.  Japan
similarly misconstrues the reference to the EC – Bananas III  Appellate Body Report.  Paragraph 207
of the Report, which is cited by Japan, simply upholds what the panel found.  It reads in relevant part
as follows:
"The EC export certificate requirement accords BFA banana suppliers, which are
initial holders of export certificates, preferential bargaining leverage to extract a share
of the quota rents for their fruit exported  to the European Communities, and gives
                                                     
377 Supra  note 282.
378 See Exhibit CDA-6.
379 Panel Report on Spain – Unroasted Coffee, supra  note 282.
380 Panel Reports on EC – Bananas III , supra  note 269.
381 Ibid., para. 7.240.WT/DS139/R
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them a competitive advantage over other Latin American suppliers.  The EC export
certificate requirement thus provides an advantage to some members (i.e. the BFA
countries) that is not given to other Members.  Therefore, we agree with the Panel
that the export certificate requirement is inconsistent with Article I:1 of the GATT
1994."382
6.211  Thus the EC – Bananas III  case does not support Japan's argument.  In fact, none of the cases
supports Japan's theory of de facto  violation of Article I:1.  They all support Canada's interpretation.
They confirm that the Canadian measures cannot be found to breach Article I:1 without extending the
MFN obligation beyond anything panels have subscribed to in the past.
6.212  One final point regarding the Japanese interpre tation of Article I:1.  It would appear that
Japan has abandoned its position regarding the meaning of "immediately and unconditionally" as used
in Article I:1 since it does not endorse this argument in its rebuttal argumentation, nor in its follow-up
points.  Canada refuted this argument noting that "unconditionally" means without conditions that
limit origin, such as a conditional MFN requirement based on reciprocity, which was present in early
commercial treaties.  Canada notes that the European Communities has taken a position in itsresponses to the Panel's Question 3 that is diametrically opposed to the one advanced by Japan on this
issue.
(iii) The data upon which Japan's de facto arguments rest are wrong
6.213  Having looked at the deficiencies in the Japanese legal arguments, Canada turns to the errors
in Japan's data and the consequences thereof for the case Japan seeks to make.  Canada pointed out
earlier that the data Japan offered in support of its claim are incorrect.  Japan admitted its errors in its
rebuttal argumentation.  Japan acknowledged that Canada was correct when it pointed out that Japan'sTable 5 included vehicle models no longer produced or available in Canada.
6.214  Canada also pointed out that Japan omitted from Japan's Table 5 certain information found in
Exhibit JPN-11.  That exhibit was filed by Japan to support Table 5.  The information that was
omitted included vehicle models that originate in Japan and that enter Canada duty free.  Canada
assumes the data were omitted because they would have undermined the discrimination theoryespoused by Japan.  In seeking to rebut Canada's arguments about the omission and the inference to
be drawn therefrom, Japan stated that "the Government of Japan wants to point out to the Panel that
the CAJAD report (Exhibit JPN-11) that was used to construct Table 5 is not completely accurate".  In
other words, Japan contests Canada's argument by pointing out that the evidence Canada relied upon,
which was provided by Japan, is wrong.  The extent of the inaccuracy is not revealed.  Japanacknowledges that some model segments were left out, but it does not explain why.
6.215  Canada cannot agree with Japan that despite these errors reliance may still be placed on
Japan's Table 5 to support Japan's claim of disc rimination, because the very foundation of Japan's
discrimination analysis is inaccurate and has crumbled away.
6.216  In any event, even if the data could be relied upon, they do not illustrate the assertions made
by Japan.  How a list of 1996 vehicles sales (even if accurate) separated into model segments and by
dutiable status illustrates discrimination is never explained – neither in the initial argumentation where
it first appears, nor in subsequent documents filed by Japan.  What the statistics do show is that in
1996, total Japanese-origin imports into Canada far exceeded those of any other country listed
(Germany, Korea, Russia and United Kingdom).  They also show that total Japanese duty-free importsexceeded those of Germany and the United Kingdom.
                                                     
382 Appellate Body Report on EC –  Bananas III , supra  note 49.WT/DS139/R
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6.217  Canada recalls Figure 4  of its initial response illustrating that Japan is far and away the
leading duty-free source of automobiles into Canada, excluding the United States and Mexico.
6.218  Japan seeks to dilute its prominence among the Auto Pact beneficiaries by comparing the
volume of its duty-free imports to those of the United States and Mexico.  It does this in seeking to
rebut Canada's Figure 4.   But any advantage that may be accorded to the United States and Mexico
would be irrelevant because of the North American free-trade area and Article XXIV of the GATT.
Canada will return to this matter later in this stat ement.  It is worth noting that Japan appears to have
adjusted the factual and legal basis for its claim of de facto  violation of Article I:1.  Japan did not
argue that imports from the United States and Mexico were the basis of a de facto  violation of
ArticleI:1.  Instead, Japan focussed on imports fr om Belgium and Sweden.  Now, Japan appears to
endorse the position espoused by the European Communities that imports from the United States and
Mexico receive favourable treatment.  It is not clear whether the European Communities shares
Japan's objections to alleged favourable treatment of products from Belgium and Sweden.
(c) The EC 's position on de facto  violation is not supported by the facts and it misinterprets
the law
6.219  Like Japan, the European Communities has offered nothing in its rebuttal to counter Canada's
defense.  The European Communities has repeated its assertions that because most vehicles imported
duty free are of US or Mexican origin, this constitutes a de facto  violation of Article I:1.  The
European Communities contends that this duty-free treatment does not fall within Article XXIV
because it is not required by the terms of the North American Free Trade Agreement, the most
important accord forming the free-trade area.
6.220  Regarding the interpretation the European Comm unities ascribes to Article I:1, Canada notes
that the European Communities does not provide a definitive interpretation of de facto  violation of
Article I:1.  The European Communities states that "it may be sufficient to show that imports of a
certain origin benefit disproportionately  from that advantage".  In its follow-up points, the European
Communities said it "is sufficient" to show this.  The cases reviewed by Canada in its response to the
complainants' rebuttals and in this Statement do not support this interpretation.  Nor can thisinterpretation reasonably be inferred from the ordinary meaning of the words in their context and in
the light of their object and purpose.  Canada submits therefore that the EC's interpretation of
Article I:1 be rejected.
6.221  Regarding the factual arguments the European Communities has alleged with a view to
demonstrating that de facto  the Canadian measures provide an advantage to imports originating in the
United States and Mexico, Canada pointed out in its response to the rebuttals that the evidence put
forward by the European Communities to prove the alleged advantage was unconvincing.  The
European Communities offered that in 1997 the share of US and Mexican duty-free automobile
imports was larger than their total share of imports – the spread it cited was 97 per cent to 80 per cent.
It offered no statistical analysis or other data.  More fundamentally, it did not explain how thispercentage spread was evidence of discrimination.
6.222  The European Communities has repeated its erroneous description of the NAFTA.  Canada
will not repeat its refutation of the EC description, because it has already set out the correct
information in its Responses to the Questions of the Panel.
383 Suffice it to say here that the measures
do not constitute a derogation from the NAFTA.  Rather, they are an integral part of it.  This isconfirmed in the Canadian Statement on Implementation , published in the Canada Gazette  upon the
coming into force of the NAFTA, where it is stated that:
                                                     
383 See Canada's response to Question 8 from the Panel.WT/DS139/R
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"The rights and obligations in respect of the Autopact agreed between Canada and the
United States under the terms of the FTA are incorporated into the NAFTA ."384
(emphasis added )
6.223  The European Communities seeks to raise some doubts about the status of the NAFTA.  But
there is no doubt.  Canada, the United States and Mexico have formed a free-trade area.  The fact thata few duties remain to be phased out between Canada and Mexico does not change the nature of the
agreement.  The European Communities conceded in its follow-up points that there is a free-trade area
between Canada and the United States, and at leas t an interim agreement necessary for the formation
of such a free-trade area between Canada and Mexico.
6.224  In any event, these distinctions between free-trade areas or customs unions and interim
agreements are not significant for purposes of this dispute.  Duty-free treatment on the widest and
earliest possible basis is arguably the most fundamental objective of a free-trade area or an interim
agreement.  Nothing in Article XXIV limits the exemption from Article I to the duty reductions and
schedules stipulated in the treaty forming the free- trade area, such as the North American Free Trade
Agreement, or a customs union, such as the Treaty of Rome.
6.225  The European Communities provides no explanation for what it means by its unsupported
assertion that "only those measures that are inherent" in the objective of forming a free-trade area or
required by an agreement forming the free-trade agreement can be exempted by Article XXIV.  The
EC's interpretation of Article XXIV of the GATT 1994 is manifestly wrong.
6.226  One final word on the EC's interpretation of Article XXIV.  The European Communities
states that "as noted in one of the Panel's questions, the CVA and ratio requirements attached to the
Tariff Exemption are ‘restrictive regulations of commerce' in the meaning of Article XXIV:8(b)".The Panel will be aware that the European Communities is misrepresenting the Panel's position.  The
Panel did not note that the CVA and ratio requirements were "restrictive regulations of commerce".
Instead, the Panel asked Canada in Question 11 to clarify how it regards the CVA and ratio
requirements given that Article XXIV:8(b) provides that "A free-trade area shall be understood to
mean a group of two or more customs territories in which the duties and other restrictive regulationsof commerce … are eliminated…".  Canada's response to the Panel's question made it clear that the
CVA and the ratio requirements are not restrictive regulations of commerce within the meaning of
Article XXIV:8(b).  They are qualifications cont ained in the MVTO and SROs regarding qualifying
as a "manufacturer".  They do not in any way restrict commerce between Canada, the United States or
Mexico.  The Panel may wish to note in this regard that the panel in the recent Turkey – Textiles
385
case indicated that "there is no agreed definition between Members as to the scope of this concept of
‘other regulations of commerce'".386
6.227  In sum, should the Panel find that there is an advantage afforded products of the United States
and Mexico, this would not result in a violation of Article I:1 of the GATT 1994 because any such
violation would be exempted by  Article XXIV of the GATT 1994.
B. ARTICLE III:4  OF THE GATT
1. Arguments of Japan
6.228  Japan  argues as follows:
                                                     
384 Canada Gazette, Part I, 1 January 1994, p. 92.  (Exhibit CDA-23).
385 Panel Report on Turkey – Restrictions on Imports of Textile and Clothing Products , circulated 31 May
1999, WT/DS34/R [on appeal at time of argumentation] (hereinafter Panel Report on Turkey – Textiles ).
386 Ibid ., para. 9.120.WT/DS139/R
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(a) The CVA requirement
6.229  By virtue of its CVA requirement, the Duty Waiver is inconsistent with Canada's national
treatment obligation under Article III:4 of the GATT 1994.  The CVA requirement accords a
competitive advantage to domestic motor vehicle parts, components and materials that is not accorded
to like imported motor vehicle parts, components and materials.
6.230  The relevant part of Article III:4 of the GATT 1994 provides that:
"The products of the territory of any [Member] imported into the territory of any
other [Member] shall be accorded treatment no less favourable than that accorded to
like products of national origin in respect of all laws, regulations and requirements
affecting their internal sale, offering for sale, purchase, transportation, distribution oruse."
6.231  To demonstrate an inconsistency with Article III:4 of the GATT 1994, a three-part analysis is
required:
(i) Is the CVA requirement laws, regulations or requirements affecting the internal sale,
offering for sale, purchase or distribution of products?
(ii) Are the affected imported and domestic products "like"?(iii) By virtue of the CVA requirement, does the Duty Waiver accord less favourable
treatment to imported products than to the like domestic products?
6.232  The answer to all three questions is "yes".  Ac cordingly, the Duty Waiver is inconsistent with
Article III:4 of the GATT 1994.
(i) The CVA requirement is a law, regulation or re quirement affecting the internal sale, purchase
or use of products
(a) Article III:4 of the GATT 1994 applies to all laws, regulations and requirements
affecting a product's internal sale, offering for sale, purchase, transportation,distribution or use.  Moreover, it applies both to mandatory laws, regulations and
requirements and to requirements that an enterprise voluntarily accepts in order to
obtain an advantage.
387
(b) The CVA requirement is an express condition in the MVTO 1998, the Special
Remission Orders, and the letters of undertaking signed by Auto PactManufacturers.
388  The MVTO 1998 and the SROs are considered in Canadian law to
                                                     
387 Panel Report on EEC – Parts and Components , supra  note 127, para. 5.21; Panel Report on Canada
– FIRA , supra  note 126, para. 5.4.
388 Section 2 of the Schedule to the MVTO 1998 specifies that the reduced rate of customs duties is
subject to, inter alia, the filing of a declaration by every manufacturer  who intends to import vehicles and the
submission of a report by every  manufacturer  who imports vehicles in respect of which customs duties are
removed.  The term "manufacturer " is defined in subsection 1(1) of the Schedule to the MVTO 1998 as a
"manufacturer of a class of vehicles " who, inter alia , "produced vehicles ... where ... the [production-to-sales
ratio is complied with] and the Canadian value added is equal to or greater than the Canadian value added in
respect of all vehicles of that class produced in Canada by the manufacturer in the base year ". Similar language
is incorporated in the SROs.  The letters of undertaki ng expressly incorporate the domestic content requirement
and provide additional commitments in excess of these requirements.  As discussed in the para. 56 of thesubmission, the manufacturers consider these commitments to be binding and continue to report theircompliance to the Government of Canada.WT/DS139/R
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be statutory instruments.389  As such, they constitute "regulations" within the meaning
of Article III:4 of the GATT 1994.  The letters of undertaking were accepted by the
Auto Pact Manufacturers in order to obtain the advantage of the Duty Waiver. As
such, they constitute "requirements" within  the meaning of Article III:4 of the GATT
1994.
(c) These regulations and requirements clearly affect the "internal sale ... purchase ... or
us" of products.  In this context, the word "affect" has been broadly interpreted so as
to cover regulations and requirements that directly govern the conditions of sale and
those that might adversely modify the conditions of competition between domestic
and imported products on the internal market.390
(d) As a condition of the Duty Waiver, the CVA requirement in practice requires Auto
Pact Manufacturers to purchase and use domestic rather than like imported motor
vehicle parts, components and materials or to maintain their purchases and uses of
such products at certain levels.  In this way, the requirement adversely affects the
conditions of competition between such products.  Accordingly, the CVArequirement "affects" the internal sale, purchase or use of products within the
meaning of Article III:4 of the GATT 1994.
(ii) The affected imported and domestic products are "like"
(a) The determination of whether products are "like" must be assessed on a case-by-case
basis in the light of all relevant facts and circumstances.  Relevant factors include
physical characteristics, end-uses, consumer tastes and habits, or price.
391
(b) The CVA requirement covers the full range of motor vehicle parts, components and
materials and distinguishes between such products solely on the basis of whether they
are of domestic or foreign origin.  Accordingly, the affected imported and domestic
parts, components and materials are per se  " like".392
(c) Exhibits JPN-15 through to 17 document the parts, components, and materials
manufactured in Canada and used in the production of motor vehicles.  Exhibits JPN-18 and 19 document the availability of like products manufactured outside of Canada.
                                                     
389 Statutory Instruments Act, R.S.C. 1985, c. S-22, s. 2 (Exhibit JPN-42).
390 Panel Report on Italian Discrimination Against Imported Agricultural Machinery , adopted on
23 October 1958, BISD 7S/60 (hereinafter Panel Report on Italian Agricultural Machinery ), para. 12. Conditions
of competition are adversely affected, for example, where a purchasing requirement "excludes the possibility of
purchasing available imported products ": Panel Report on Canada – FIRA , supra  note 126, para. 5.8.
391 Panel Report on Indonesia – Autos, supra  note 270, paras. 14.110, 14. 111 and 14.141.
392 Ibid., para. 14.141.  In the case of automobile parts, in Indonesia – Autos , the Panel concluded that
parts imported for use in a particular car were like parts imported from the complainants ' companies.  See also
Panel Report on US – Non-Rubber Footwear , supra  note 269, para. 6.12.WT/DS139/R
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(iii) The Duty Waiver, by virtue of the CVA requirement, accords less favourable treatment on like
imported products
6.233  Article III:4 of the GATT 1994 provides that imported products must receive treatment no
less favourable than that accorded to like domestic products.  "Treatment no less favourable" means
that imported products must be granted competitive opportunities no less favourable than thoseaccorded to domestic products.
393  In this light, Article III of the GATT 1994 protects expectations of
"the equal competitive relationship between imported and domestic products".394
6.234  By effectively requiring the Auto Pact Manufacturers to purchase and use domestic motor
vehicle parts, components and materials, the CVA requirement accords less favourable competitive
opportunities to like imported motor vehicle parts, components and materials than those accorded to
domestic products.  Accordingly, the Duty Waiver, by virtue of the CVA requirement, is inconsistent
with the national treatment obligation in Article III:4 of the GATT 1994.395
(b) The production-to-sales ratio
6.235  In order to import motor vehicles duty free under the Duty Waiver, the Auto Pact
Manufacturers must comply with another requirement under which the sales value of vehiclesproduced by a manufacturer in Canada must be equal to or exceed a specified proportion of the sales
value of vehicles sold by the manufacturer for consumption in Canada.
6.236  If an Auto Pact Manufacturer wants to increase the value of its motor vehicle imports subject
to the Duty Waiver, because of the manufacturing requirement (i.e. production-to-sales ratio) it must
increase the value of its production in Canada and either:  (i) increase its exports of motor vehicles
produced in Canada;  (ii) increase its domestic sales of motor vehicles produced in Canada;  or (iii) do
both, in order to meet the specific production-to-sales ratio specified by the Government of Canada.If the manufacturer chooses to sell in Canada additional motor vehicles produced in Canada (i.e.
under case (ii) or case (iii)) in meeting this requirement, this would increase the competition for sales
of like imported motor vehicles.
396  In this case, this requirement creates a situation in which imported
motor vehicles are accorded treatment less favourab le than that accorded to motor vehicles produced
in Canada.397
6.237  It is possible, depending on how the Auto Pact Manufacturers organise their production, for
the production-to-sales ratio to also violate GATT Article III.  For example, in meeting the ratio, the
                                                     
393 Panel Report on US – Section 337, supra  note 280.
394 Appellate Body  Report  on Japan – Alcoholic Beverages,  supra note 271, p. 17.
395 In the Panel Report on Canada – FIRA , supra  note 126, paras. 5.7-5.11 and 6.3, the Panel found that
various undertakings to purchase goods of Canadian origin and undertakings to use Canadian sources of
suppliers (irrespective of the origin of the goods) violated Article III:4 of the GATT 1994.  In its conclusions,the Panel noted that "the purchase requirements under examination ... tend to tip the [competitive] balance infavour of Canadian products, thus coming into conflict with Article III:4".
396 The increased domestic production that results from the manufacturing requirement also multiplies
the discriminatory effect of the CVA requirement.  Since the manufacturing requirement results in more motor
vehicles being produced that meet the CVA requirement,  it increases the market for Canadian motor vehicle
parts, components and materials.
397 Also under the cases (ii) and (iii) in para. 6.236 of this submission, this manufacturing requirement
(the production-to-sales ratio) would be inconsistent with Article III:4 of the GATT 1994, because themanufacturing requirement requires the Auto Pact Manu facturers to increase production of motor vehicles in
Canada and this in turn would lead to increased sales of such domestic motor vehicles in the Canadian market
beyond the level of sales that would have occurred in the absence of this requirement, thereby upsetting the
balance of conditions of competition for sales of like imported motor vehicles.  In this regard, the manufacturingrequirement would "affect" the internal sale, purchase or use of products within the meaning of Article III:4 ofthe GATT 1994.WT/DS139/R
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Auto Pact Manufacturers could organise their pr oduction and inventory practices so that certain
models of automobiles would be exported while others would be primarily directed at the Canadian
market.   If the additional production resulting from the manufacturers’ attempts to observe the ratio
(or that production resulting from the minimum production level maintained by the ratio) is not
exported, it has to be sold in the Canadian market.  Then, such production could harm competitiveopportunities to like imported products.  Accordingly, a violation of the national treatment obligation
in Article III:4 could occur.
2. Arguments of the European Communities
6.238  The European Communities  argues as follows:
6.239  The CVA Requirements are inconsistent with GATT Article III:4 because they afford less
favourable treatment to imported parts and material s for use in the manufacture of motor vehicles, or
of parts therefor, than to like domestic goods.
6.240  In turn, the ratio requirements are inconsiste nt with GATT Article III: 4 because they provide
less favourable treatment to imported motor vehi cles than to like motor vehicles manufactured in
Canada with respect to their sale in the Canadian market.
6.241  Article III:4 of  GATT reads as follows in relevant part:
"The products of the territory of any cont racting party imported into the territory of
any other contracting party shall be accorded treatment no less favourable than that
accorded to like products of national origin in respect of laws, regulations and
requirements affecting their internal sale, offering for sale, purchase, transportation,
distribution or use […]."
6.242  Accordingly, in order to rule on the European Communities claims under GATT Article III:4,
the Panel is required to make the following determinations:
- whether the measures at issue are "laws, regulations or requirements";
- whether the measures "affect" the internal sale, offer for sale, purchase,
transportation, distribution or use of the products concerned;
- whether domestic products are "like"  imported products; and
- whether the measures afford "less favourable treatment" to imported products
than to domestic products.
6.243  The above issues will be examined here below separately in connection with each of the two
claims raised by the European Communities under GATT Article III:4.
(a) The CVA requirements
(i) The measures at issue are "laws, regulations or requirements"
- The CVA requirements contained in the MVTO 1998 and the SROs
6.244  Both the MVTO 1998 and the SROs are so-called "Orders-in-Council" issued by the
Governor General of Canada. Therefore, they are clearly "laws, regulations or requirements" within
the meaning of GATT Article III:4.WT/DS139/R
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6.245  The CVA requirements contained in the MVTO 1998 and the SROs are not "compulsory", in
the sense that they do not impose upon the beneficiaries an obligation to achieve the relevant CVA
level. Failure to do so only entails the obligation to pay the generally applicable customs duties.
6.246  By now, however, it is well-established that GATT Article III:4 applies not only to
"compulsory" measures, but also to measures compliance with which is necessary to obtain anadvantage. As noted by the Panel on  EEC – Regulation on Imports of Parts and Components ,
"The comprehensive coverage of ‘all laws, regulations or requirements affecting the
internal sale, etc.’ of imported products suggests that not only requirements which an
enterprise is legally bound to carry out … but also those which an enterprise
voluntarily accepts in order to obtain an advantage from the government constitute‘requirements’ within the meaning of that provision."
398
6.247  Further confirmation is provided by the chapeau of Item 1 of the Illustrative List of prohibited
TRIMs annexed to the TRIMS Agreement399, which states that:
"TRIMs that are inconsistent with the obligation of national treatment provided for in
paragraph 4 of Article III of GATT 1994 include those which are mandatory orenforceable under domestic law or under administrative rulings, or compliance with
which is necessary to obtain an advantage …"
6.248  The "advantage" in question may consist of a benefit in respect of a border measure, such as a
tariff exemption. Thus, in EC –Bananas III , the Panel found that a requirement to purchase domestic
bananas in order to obtain the right to import bananas at a lower duty rate under a tariff quota was a
requirement "affecting" the internal purchase of a product within the meaning of GATT
Article III:4
400.
6.249  More recently, in Indonesia – Autos , the Panel concluded that the granting of a tariff
exemption conditional upon compliance with a local content requirement was inconsistent with
GATT Article III:4 and violated Article 2 of the TRIMs Agreement401.
- The CVA commitments contained in the Letters of Undertaking
                                                     
398 Panel Report on EEC – Parts and Components , supra  note 127, para. 5.21. The same interpretation
underlies the Panel Report on Italian Agricultural Machinery,  supra  note 390, para. 12, where the Panel
concluded that an Italian law providing especial cred it terms to farmers for the purchase of agricultural
machinery conditional upon the purchase by the farmers of Italian machinery was contrary to Article III:4 ofGATT.
399 In its Report on Indonesia – Autos, supra  note 270, the Panel found that the granting by Indonesia of
tax and tariff benefits conditional upon certain local content requirements was  inconsistent with GATT
Article III:4 and violated Article 2 of the TRIMs Agreemen t. In reaching that conclusion, the Panel rejected an
argument by Indonesia to the effect that the local content requirements were not mandatory. According to thePanel, para. 14.90:  "The wording of the Illustrative List of the TRIMs Agreement makes it clear that a simpleadvantage conditional on the use of domestic goods is co nsidered to be a violation of Article 2 of the TRIMs
Agreement even if the local content requirement is not binding as such."
400 See e.g., Panel Reports on EC – Bananas III , supra  note 269, paras. 7.179 and 7.180. On appeal, this
finding was upheld in the Appellate Body Report on EC –  Bananas III , supra  note 49, paras. 208-211.
401 In reaching this conclusion, the Panel rejected Indonesia’s attempted defence that the measure was a
"border" measure not covered by GATT Article III:4:  "We do not consider that the matter before us inconnection with Indonesia’s obligations under the TRIMs Agreement is the customs duty relief as such butrather the internal regulations, i.e. the provisions on purchase and use of domestic products, compliance with
which is necessary in order to obtain an advantage, which advantage here is the customs duty relief. The lower
duty rates are clearly ‘advantages’ in the meaning of the chapeau of the Illustrative List to the TRIMsAgreement and as such, we find that the Indonesian measures fall within the scope of the Item 1 of theIllustrative List of the TRIMs." Panel Report on Indonesia – Autos, supra  note 270.WT/DS139/R
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6.250  On their face, the Letters of Undertaking are "private" acts of the beneficiaries, and not acts of
the Canadian Government. It must be recalled, nevertheless, that the submission of the Letters of
Undertaking was required by the Canadian Govern ment as a condition for signing the Auto Pact.
Further, the terms of the Letters of Undertaking were negotiated by each beneficiary with Canada’s
Ministry of Industry. Thus, there can be no question that the Letters of Undertaking constitute actsattributable to the Canadian Government
402.
6.251  Furthermore, as already explained in the fact ual part, the CVA commitments contained in the
Letters of Undertaking are not "voluntary", even if  no specific sanction has been formally attached to
their violation. Those commitments were a condition for the conclusion by Canada of the Auto Pact.
For that reason, the beneficiaries have assumed that, were they to disregard them, Canada wouldrespond by withdrawing the Tariff Exemption.
6.252  The existence of elaborate reporting and a uditing procedures that allow the Canadian
authorities to monitor regularly if the beneficiaries comply with the Letters of Undertaking,  as well as
the fact that in practice non-compliance has rema ined exceptional constitute additional indications
that neither the Canadian Government nor the beneficiaries regard the commitments as "voluntary".
(ii) Domestic goods are "like" the imported goods
6.253  The product distinctions made by the CVA requirements are based exclusively on the country
of origin of the products: on the one hand, Canadian made parts and materials, as well as certain non-
permanent equipment are always counted as CVA
403; on the other hand, imported parts, materials and
non-permanent equipment are never counted as CVA404.
6.254  More specifically, the CVA calculation rules provide in relevant part that the following items
shall be counted as CVA405:
"(i) the cost of parts produced in Canada , and the cost of materials to the extent that
they are of Canadian origin , that are incorporated in vehicles in the factory of the
manufacturer in Canada …
(iv) the part of the following costs that is  reasonably attributable to the production of
the vehicles, namely, …
(J) the cost of tools, dies, jigs, fixtures and other similar equipment of a non 
permanent nature that have been manufactured in Canada "
(emphasis added )
6.255  Clearly, however, the mere fact of having "Canad ian origin", or of having been "produced" or
"manufactured in Canada", is not, as such, apt to confer upon parts, materials and non-permanent
                                                     
402 As recalled by the Panel Report on Japan – Film , supra  note 93, para. 10.56:  "Past GATT cases
demonstrate that the fact that an action is taken by private parties does not rule out the possibility that it may bedeemed to be governmental if there is sufficient government involvement with it."  The Panel based thatconclusion on the Panel Report on Japan – Semiconductors , supra  note 112, and the Panel Report on EEC –
Restrictions on Imports of Dessert Apples, adopted on 22 June 1989, BISD 36S/93.
403 With the only exception of parts and materials previously exported from Canada. MVTO 1998,
Schedule, Part 1, Para. 1(1) definition of "Canadian Added Value", item (a) (i) in fine.
404 With the only exception, subject to certain limitations, of the cost of iron, steel or aluminium parts
produced outside Canada from iron, steel or aluminium poured in Canada. Ibid., Item (a)(i) (iii).
405 Ibid., items (a)(i) and (iv)(J).WT/DS139/R
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equipment any characteristic, property or quality which makes them, by definition, "unlike" any
imported goods406.
(iii) The measures "affect" the  internal "use" of the products concerned
6.256  The term "affect" has a broad scope of application. According to the Panel Report on Italian
Agricultural Machinery :
The selection of the word ‘affecting’ would imply … that the drafters of the Article
intended to cover in [Article III:4] not only the laws and regulations which directly
governed the conditions of sale and purchase but also any laws or regulations which
might adversely modify the conditions of competition between the domestic and
imported products on the internal market.407
6.257  The CVA requirements "affect" the "internal use" of parts, materials and non-permanent
equipment for the manufacture of motor vehicles be cause they provide a financial incentive for the
manufacturers of motor vehicles, and parts therefor, to use domestic parts, materials and non-
permanent equipment instead of like imported goods, thereby modifying the conditions of competition
between imported and domestic goods.
(iv) Imported goods are afforded "less favourable treatment"
6.258  Using domestic parts, materials and non-permanent equipment makes it easier for the
beneficiaries to reach the prescribed level of CVA, and hence to qualify for the Tariff Exemption
attached thereto, than using like imported goods.
6.259  Consequently, the beneficiaries will always give preference, all other conditions being equal ,
to Canadian goods over like imported goods. Thus, the CVA requirements afford "less favourable
treatment" to imported goods than to domestic goods.
(b) The ratio requirements
(i) The measures are "laws, regulations or requirements"
6.260  The test of Article III:4 conformity as articulated above with respect to CVA requirements is
equally applicable with respect to the ratio requirements.
(ii) The measures "affect" the internal  sale of  motor vehicles
6.261  The ratio requirements "affect" the internal sale of motor vehicles because they provide an
incentive to limit the sales of imported motor vehicles, thereby modifying the conditions of
competition between those vehicles and domestic motor vehicles, the internal sale of which is not
subject to any similar restriction.
(iii) Domestic and imported motor vehicles are "like" products
6.262  The product distinctions drawn by the ratio requirements are based exclusively on the origin
of the motor vehicles. Again, however, the mere fact that a motor vehicle is manufactured in Canada
                                                     
406 In its Report on Indonesia – Autos, supra  note 270, the Panel noted, para. 14.113, that an "… origin-
based distinction  in respect of internal taxes suffices in itself to violate Article III:2, without the need to
demonstrate the existence of actually traded like products".
407 Panel Report on Italian Agricultural Machinery,  supra  note 390, para. 12.  The Appellate Body
confirmed this interpretation of the term "affect" in its Report on EC –  Bananas III , supra  note 49, para. 220.WT/DS139/R
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is not, of itself, apt to confer upon that motor vehicle any characteristic, property or quality which
makes it, by definition, "unlike" any imported motor vehicle.
(iv) Imported motor vehicles are afforded "less favourable treatment"
6.263  The ratio requirements prescribe that the total value of all the motor vehicles of each relevant
category sold in Canada by a beneficiary must keep a certain proportion with the total sales value ofthe motor vehicles of the same class manufactured in Canada by that beneficiary.
6.264  Although the ratio requirements place a maximum limit on the total sales value of all motor
vehicles, irrespective of their origin, in practice that limit operates so as to restrict exclusively the
sales of imported motor vehicles, given that:
- by definition, any increase in the sales value of  motor vehicles produced in
Canada by the beneficiary will give rise automatically to an identical increase
in the value of permitted domestic sales; and
- by contrast, an increase in imports of motor vehicles does not entail any
increase in the value of permitted domestic sales.
6.265  Thus, the ratio requirements have the consequence that the beneficiaries cannot, without
losing the entitlement to the Tariff Exemption, sell  in Canada any imported motor vehicles in excess
of a certain amount that is directly related to the sales value of their domestic production of motor
vehicles.
6.266  No similar limit is placed upon the internal sales of domestic motor vehicles. The
beneficiaries may sell in Canada as many Canadian made motor vehicles as they wish, without
forfeiting the Tariff Exemption or any other equivalent advantage. Therefore, the ratio requirements
afford "less favourable treatment" to imported motor vehicles than to Canadian motor vehicles withrespect to their internal sale in Canada.
3. Canada's response
6.267  Canada  replies as follows:
(a) Article III:4 creates a two-step test
6.268  A measure violates Article III:4 only if it fails the two-step test set out in United States –
Standards for Reformulated and Conventional Gasoline .
408  The measure must be a law, regulation or
requirement affecting the internal sale, offering for sale, purchase, transportation, distribution or use
of an imported product.  And it must provide the imported product treatment that is less favourable
than that accorded to the like domestic product.  The burden is on the complainants to demonstrate
that the MVTO and SROs fail each step of this te st.  The complainants have failed to make even a
prima facie case for a violation of Article III.  The reason for this is simple:  Canada’s measures do
not provide any competitive advantage to its domestic products.
(b) The CVA requirement
(i) The MVTO and SROs do not affect the sale or use of products
6.269  The MVTO and the SROs are laws, regulations or requirements within the meaning of
Article III:4.  However, they do not affect the “internal sale, offering for sale, purchase,
                                                     
408 Panel Report on US – Gasoline, supra  note 306, para. 6.5.WT/DS139/R
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transportation, distribution or use” of products.  Neither the production-to-sales ratio nor the
Canadian-value-added requirement has any effect on the internal market.  Neither influences the
parts-sourcing decisions of automobile manufacturers in Canada.  Neither affects in any way the sale
of imported vehicles in the Canadian market.  They exist only to ensure that importers claiming a duty
exemption are really manufacturers.
(ii) The CVA provides no advantage to Canadian parts
6.270  The complainants’ arguments concerning the CVA suffer from similar factual
misunderstandings.  They have argued that the CVA is a local-content requirement, affecting the use
of products.  This argument ignores the ordinary meaning of the CVA’s terms, transforming it from a
broadly-based value-added requirement to a local-products-content requirement.  The key element ofCVA in the MVTO and the SROs is labour, not local products, and the labour costs of a Canadian
manufacturer will necessarily be Canadian.  In fact, Canadian-produced products play no role in
determining whether an automobile manufacturer meets its CVA levels.
6.271  The MVTO requires companies to incorporate into each class of vehicle produced in Canada
a fixed amount of Canadian value added.  Those amounts were set in 1964 and have not been adjustedfor inflation or for the growth of the Canadian industr y; they have  long been insignificant.  The SRO
amounts are generally expressed as a percentage.  Nevertheless, they too can still be met without
including Canadian parts.
6.272  Revenue Canada’s reviews of the CVA numbers confirm that every automobile manufacturer
using the MVTO easily meets the CVA levels required of it, and does so on the basis of labour costs
alone.
409  So does CAMI Automotive, Inc., the only SRO automobile manufacturer of significance to
this case.410  Indeed, the manufacturers meet their CVA requirements so easily that it has become
standard practice for them not to tally their actual amounts and for Revenue Canada to review only the
amounts reported.  The CVA is therefore not a consid eration in parts-sourcing decisions.  Indeed, the
MVTO’s inclusion of labour – a necessarily Canadian cost – clearly makes parts-sourcing decisions
irrelevant.  The CVA can thus have no effect on the competitive opportunities of imported as opposed
to domestic parts.
6.273  Under the circumstances, it cannot be argued that  the MVTO and SROs affect the sale or use
of products.  The production-to-sales ratio has no effect on the conditions of competition in the
Canadian automobile market.  The CVA has no effect on product sourcing.  Manufacturers make their
parts-sourcing decisions on a fully competitive basis; they need not and do not consider their CVA
requirements.  Rather, these decisions are made in the light of more practical considerations such asthe efficiency and price advantage of various sources, and the need to meet NAFTA rules of origin.
6.274  The facts do not support Japan’s claim.  There is no effective requirement to use Canadian
parts in the manufacture of vehicles in Canada.  Canada would draw the Panel’s attention to Figure 2
of its written submission, which is attached to this submission.  Canada demonstrated with this figure
that MVTO manufacturers can meet their CVA requirements on the basis of their labour costs alone.Canada has also stated that CAMI, the only SRO manufacturer relevant to this case, can and does
meet its CVA requirement on its labour costs alone.  All of these companies could source all of their
parts abroad and still qualify for all of their benefits.
6.275  Japan is also mistaken when it claims that the production-to sales ratios exacerbate the effect
of the CVA requirements.  Japan argues that the ratios increase production, and the increasedproduction results in there being more vehicles produced that meet the CVA requirements.  According
                                                     
409 See Figure 2 , comparing CVA amounts required with CVA amounts reported each year.  Note that
reported amounts are well below actual amounts, since MVTO companies routinely under-report their CVA.
410 Information provided by Revenue Canada and released with the consent of CAMI Automotive, Inc.WT/DS139/R
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to Japan, this increases the market for Canadian original equipment parts.  Canada has already
demonstrated that the ratios do not increase production.  For purely commercial reasons,
manufacturers are already operating well above their ratios.  However, even if the ratios did increase
production, that would still not increase the effect of the CVA.  On the contrary, increased production
dilutes  the already marginal significance of the CVA requirements.  CVA levels set a minimum
amount of Canadian value-added in a class of vehicles, not in each vehicle.  Thus, the more vehicles
are produced, the more readily CVA levels are achieved on labour costs alone, without using any
Canadian parts at all.  Japan’s allegation therefore has no factual basis.
6.276  The failings of the EC’s arguments are legal ra ther than factual.  The European Communities
has presented an argument that is based on a novel but erroneous interpretation of Article III:4,although it has tried to present it as a matter of well-established law.  The European Communities
claims that the mere inclusion of domestic parts in the definition of “domestic value-added” is enough
to create a violation of Article III:4.  There is no WTO authority for this argument.
6.277  A number of cases have found local-content requirements to be a violation of GATT
Article III:4.
411  In each of these cases, the measures required  the use of domestic products in order to
receive an advantage.  These measures accorded treatment more favourable to domestic products than
to imported ones.  However, the Canadian measures in dispute are not like the measures at issue in
previous cases.  They are not domestic product requirements – they are value-added requirements.  As
a matter of both fact and law, MVTO and SRO beneficiaries are not required to use Canadian parts in
order to qualify for duty-free importation.  They can and do meet CVA requirements without using
Canadian parts.
6.278  The European Communities is therefore asking for a broad and unwarranted extension of
Article III:4.  It argues that a violation is created by the mere inclusion of domestic parts in the
concept of domestic value-added.  Such an interpretation would free complaining parties from
demonstrating that impugned measures have any effects on the conditions of competition between
imported and domestic products.  This reverses the burden of proof, and is contrary to the well-
established principle that complaining parties must demonstrate the truth of their assertions.
(iii) The letters are not laws, regulations or requirements
6.279  Both Japan and the European Communities have characterized certain letters as
“requirements”.  The European Communities in particular has claimed the letters were required of the
manufacturers as a condition of Canada’s signing the Auto Pact, and that the beneficiaries have
assumed that a failure to meet them would result in Canada withdrawing the “Tariff Exemption”.These arguments have no basis in fact.
6.280  These letters are not legally binding under Canadian law.  They are not contracts, because
they do not meet the Canadian legal requirements of contract formation. They are not statutory
instruments, because they were not passed by the legislature, or by the executive under the authority
of the legislature.  Had the Canadian Government intended to make the letters binding, it couldcertainly have done so.  It did not.  Consequently, the letters have no legal status and no legal effect.
6.281  Moreover, those arguments have no basis in law.  Because the letters have no legal status they
are not covered by meaning of “laws, regulations  and requirements” as used in Article III:4.
6.282  The question of duty-free eligibility in any given year is determined exclusively by the
requirements in the MVTO 1998.
412  By law, these are the only grounds under which duty remission
                                                     
411 See, e.g., Panel Report on Italian Agricultural Machinery,  supra  note 390;  Panel Report on  Canada
– FIRA , supra  note 126, 30/140; Panel Report on Indonesia – Autos, supra  note 270.
412 MVTO 1998.WT/DS139/R
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can be denied.  The European Communities has provided no legal basis under which Canada could
withdraw benefits for a failure to meet commitments under the letters.413  This is because there is
none.  Should a manufacturer fail to meet the voluntary undertakings in its letter, the Canadian
Government would lack the legal authority to deny duty-free eligibility.  Indeed, the D-Memorandum
submitted by the European Communities and Japan demonstrates clearly that Revenue Canada doesnot review whether MVTO companies have met their commitments under the letters.
414
(c) The ratio requirement
6.283  Article III mandates the effective equality of  competitive opportunity once products have
entered the domestic market.415  The production-to-sales requirement has no effect on the competitive
position of vehicles imported into the Canadian market and therefore does not fall within the scope ofArticle III:4.
6.284  Japan and the European Communities argue that the ratio requirement affects the sale of
imported vehicles.  Japan’s argument is so abbreviated that it does not even approach the threshold of
a prima facie case. Japan argues that a qualified manufacturer must increase its imports in order to
increase the value of its MVTO or SRO bene fits.  According to Japan, however, the ratio
requirements prevent such an increase unless it is accompanied by additional domestic production.
Japan concludes that if some of this extra production is sold on the domestic market, it must
necessarily increase the competition for sales of imported vehicles, thereb y violating Article III:4.
This argument cannot succeed, since Japan has offered no evidence for its factual assertions, and no
authority for its legal interpretations.
6.285  Indeed, Japan is only correct in the first step of its reasoning.  A manufacturer must increase
its imports  in order to increase its benefits.  Of course, this contradicts the claim that the measures
disadvantage imported products.  By Japan’s own admission, the effect of the measures is to increase
importation.  Having made this admission, Japan must somehow convert an incentive to import into a
disadvantage for the products so imported.  It does this by claiming that the measures also require an
increase in domestic production, and that any such increase necessarily disadvantages imported
vehicles.
6.286  The European Communities claims that the ratio imposes a limit on the number of imported
vehicles a manufacturer may sell without losing its duty-free entitlements, and therefore creates a
disincentive to selling imported vehicles that does not exist for domestic ones.
6.287  Both arguments are based on serious factual misunderstandings.  Neither has any basis in law.
The Japanese argument, insofar as it has been made at all, appears to rely on the assumption that all
MVTO and SRO beneficiaries operate at exactly the required ratio.  This is not so.  The ratio is simply
a minimum production requirement for the receipt of duty-free benefits; it is well below real levels of
production.  All the automobile manufacturers operate far in excess of the required ratios, and can
therefore significantly increase their imports sales without increasing production, while still
maintaining their ratios.  Indeed, they could even decrease production.  The requirement thereforedoes not affect conditions of competition between domestic and imported products.
                                                     
413 The European Communities did suggest that Canada could simply withdraw from the Auto Pact, but
the suggestion is without merit.  Such an action would be so inimical to Canada’s interests that it would neverbe contemplated, as the MVTO beneficiaries are well aware.
414 See Exhibits EC-9 and JPN-7 (Memorandum D10-16-3).  The remaining memoranda are filed as
Exhibit CDA-7.  In no case do the memoranda state that Revenue Canada will verify anything other than
whether MVTO requirements have been met.
415 Panel Report on Italian Agricultural Machinery,  supra  note 390, para. 12; Panel Report on US –
Section 337, supra  note 280, para. 5.11.WT/DS139/R
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6.288  Furthermore, it cannot be argued that production levels have reached their current heights by
the operation of the MVTO and the SROs.  The ratio requirements in these measures set only the
minimum ratio of production to sales.  The meas ures provide no benefit whatsoever for production
beyond the required ratio.  If a manufacturer were only interested in increasing its duty-free
importation, it would source abroad as many vehicles as possible, and keep its Canadian productionjust high enough to meet its ratio.
6.289  The MVTO and SRO manufacturers do not do this.  Their Canadian production levels greatly
exceed their ratios.  This is because production is determined not by ratios but by market
considerations such as labour costs and plant efficiency.  The level of competition faced by imported
vehicles is completely unrelated to the ratio requirements.
6.290  Japan’s argument would fail even if it were assumed that future production levels might drop
dramatically, such that importation would have to be offset with a new increase in production.  Setting
aside the great unlikelihood of such an occurrence, the argument remains wrong in law.  Neither the
GATT nor any other WTO Agreement prohibits measures that increase production levels; there is no
authority anywhere for the proposition that a mere increase in domestic production negatively affectsthe conditions of competition for like imported products.
6.291  Japan cannot simply claim that greater production of domestic vehicles must mean fewer
sales of imported ones.  WTO law recognizes no such claim.  Japan must demonstrate that the
impugned measures adversely affect the conditions of competition for imported vehicles.  It has failed
to do this.
6.292  Even if Japan’s assumptions were correct, its argument would still fail, since it is plainly
wrong in law.  The production-to-sales ratio simply sets the minimum production value required toreceive a given level of benefits.  This is similar to a production-based subsidy, which requires a
certain level of production to receive a certain level of benefits.
416  It is obvious that under such
subsidies manufacturers must increase production to increase their benefits.  It is equally obvious that
the increased production must be either exported, sold in the domestic market, or both.  Japan claims
the production-to-sales ratio violates Article III because it has precisely these effects. Yet production-based subsidies are not violations of GATT Article III.  If Japan’s argument were correct, it would
render null the entire Section III of the Subsidies and Countervailing Measures Agreement , which
makes such subsidies actionable rather than prohibited.
6.293  The EC’s argument too is based on a misconstruction of the facts.  Like the Japanese
argument, it assumes that manufacturers operate at exactly the required minimum levels.  Moreimportant, it assumes that manufacturers are faced with an all-or-nothing proposition – they can pay
duty either on all imports or on no imports. This is a serious misunderstanding of the Canadian
measures.  In fact, manufacturers can always ensure that they remain within their MVTO or SRO
ratios, regardless of the number of imported vehicles they sell, simply by paying duty on some
vehicles.  Under the measures, they can deduct from the sales side of their ratio calculation the valueof vehicles on which they paid duty.
417  Thus the ratio never creates an incentive to stop selling
imported vehicles.  If at any point in the model year a manufacturer believes it might exceed its ratio,
it can simply begin paying duty.   The sales of  these duty-paid vehicles would not enter the ratio
calculation, and therefore would not affect the duty-free status of previously imported and sold
vehicles.
                                                     
416 Note the ratio does not link benefits to production, in the sense that production beyond the ratio does
not increase benefits.   MVTO and SRO companies are therefore operating at their current levels for purelycommercial reasons.
417See, for example, MVTO 1998, Schedule, s. 1(4).WT/DS139/R
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6.294  The European Communities contends that manufacturers would refrain from selling imported
vehicles in order to maintain their production-to-s ales ratio.  However, the ratio requirement applies
only to vehicles imported by an MVTO or SRO be neficiary.   It cannot under any circumstances
affect vehicles imported by another company.  The European Communities therefore appears to be
arguing that vehicles imported under the MVTO or SRO are at a disadvantage in the Canadiandomestic market.  It is difficult to understand how this argument can be reconciled with the European
Communities’ Article 1 argument that these vehicles receive an advantage denied to other imports.
6.295  Indeed, it is difficult to understand the argument.  The European Communities is suggesting
that a manufacturer would import a vehicle in order to receive the benefit of not paying duty on it, and
then refuse to sell it to preserve that benefit.  Th is is an argument at odds with  commercial reality.
No manufacturer would import vehicles only to withhold them from the market:  vehicles are
expensive to warehouse, and their market value drops immediately upon the introduction of the next
model year. When a manufacturer imports a vehicle, it is quite obviously with the intention of selling
it.  Indeed, manufacturers typically import only on the basis of projected or confirmed demand.  The
ratio has no effect on this.  A manufacturer can always remain within its ratio by paying the duty onsome of its imports, thereby removing that value from the ratio calculation.
6.296  This fact ensures that the production-to-sales ratios cannot limit sales of imported vehicles.
They simply set a minimum level of production for any given level of duty-free importation.
Importation beyond that level requires the payment of the normally applicable MFN duty.  The
European argument therefore suffers from the same basic legal flaw as the Japanese one.  That is,
there is nothing in the GATT or any other WTO Agreement that prohibits Canada from capping duty-
free benefits in this way.  The European Communities, like Japan, must demonstrate that Canada’smeasures provide conditions of competition that are less favourable to imported vehicles than to
domestic ones.  Like Japan, the European Communities has failed to do this.
6.297  In Canada’s view the EC’s argument is a disguised attempt to argue that the production-to-
sales ratio acts as a limit on importation .  As such, the argument would be properly made under
Article XI of the GATT 1994, and not under Article III:4.  The complaining parties have not done thisbecause the Canadian market is so clearly open to imports.  There are no restrictions whatsoever on
importation, as the share of imports on the Canadian market – particularly the complainants’ imports
– demonstrates.
418
4. Rebuttal arguments by Japan
6.298  Japan  rebuts as follows:
6.299  The Government of Canada argues that th e CVA requirement is not inconsistent with
Article III:4 of the GATT 1994 because it has no relevance to the sourcing of parts within Canada
and, therefore, has no impact on the competitive opportunities relating to parts sold in the Canadian
market.  The Government of Canada also argues that the CVA is comprised of a number of cost
elements and that, under current circumstances, the CVA requirement can be met by the MVTO 1998recipients solely on the basis of labour costs.
419
6.300  Before responding to the Government of Canada's arguments, the Government of Japan
wishes to address an evidentiary issue raised by the Government of Canada when it stated:
                                                     
418 The evidence filed by the European Communities and Japan shows that almost $2.5 billion worth of
Japanese vehicles entered Canada in 1997, together with almost $1 billion worth of vehicles from the European
Communities.  See p. 8 of Industry Canada, Automotive Trade 1997, filed as Exhibit EC-15 and Exhibit JPN-37-10 (pp. 37-166 in Japan’s pagination).  See also Figure 4 .
419 Ibid., paras. 30-31, 65, 74, and 77.WT/DS139/R
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"Filing copies of excerpts from a directory of Canadian automotive parts
manufacturers, a handbook listing Japanese automotive parts and components
manufacturers, web sites of companies that manufacture goods used in the production
of automobiles … does not by any measure constitute proof of any allegations … "
6.301  The evidence referred to by the Government of Canada in this statement is prima facie
evidence that the full range of parts, components and materials used in the manufacture of
automobiles are available from Canadian and non-Canadian sources and, therefore, "like" products are
affected.420  It is also prima facie evidence that domestic and imported automobiles are "like".421  Such
evidence is relevant to the "like" products compar ison under Article III:4 with respect to the CVA.
Most importantly, Canada has not produced any evidence to rebut this prima facie evidence.
6.302  The Government of Canada's arguments fundamentally misconstrue the nature of the
discrimination against imported motor vehicles parts, components and materials that is inherent in the
CVA requirement.
6.303  It is undisputed that the CVA is, in law, a mandatory condition for obtaining the favourable
treatment under the Duty Waiver.  It is also cl ear from the regulatory requirements governing the
CVA that the cost of imported parts, components and materials can never qualify for inclusion in the
CVA.  This means that, in law, the cost of impor ted parts, components and materials is excluded from
ever being taken into account in the CVA calculation.  Accordingly, since the mandatory CVA
stipulates an express legal exclusion of the cost (a nd therefore the use) of imported, parts, components
and materials, it discriminates between domestic and like imported products.
6.304  The foregoing reasoning applies to the CVA irrespective of whether it is incorporated in the
MVTO 1998, the letters of undertaking or in the in dividual SROs.  Accordingly, with respect to all
three classes of instruments, the CVA requirement discriminates between domestic and imported
parts, components and materials, and is, therefore, inconsistent with Article III:4 of the GATT 1994.
6.305  The fact that, under current circumstances, imported, parts, components and materials may
not be affected by the CVA requirement is irrelevant to the violation of Article III:4.  The AppellateBody has stated that:
"The broad and fundamental purpose of Article III  is to avoid  protectionism in the
application of internal tax and regulatory measures. … Toward this end, Article III
obliges Members of the WTO to provide equality of competitive conditions for
imported products in relation to domestic products. … Moreover, it is irrelevant thatthe "trade effects" of the tax differential between imported and domestic products, as
reflected in the volumes of imports, are insignificant or even non-existent; Article III
protects expectations not of any particular trade volume but rather of the equal
competitive relationship between imported and domestic products."
422
6.306  Thus, Article III:4 protects expectations as to the competitive relationship between domestic
and imported products for both current trade and to create predictability for future trade.423  I n
applying Article III:4, the practice is to determine whether discrimination exists by examining the
distinctions made by the laws, regulations and requirements themselves and on their potential impact
                                                     
420 See Exhibits JPN-15, 16, 17, 18 and 19, paras. 33-36.
421 Domestic automobiles are identified in Japan's Table 3 and like imported automobiles in Japan's
Table 4.
422 Appellate Body Report on Korea – Alcoholic Beverages , supra  note 280, para. 21 (citing the
Appellate Body  Report  on Japan – Alcoholic Beverages,  supra note 271, p. 16, with references to earlier Panel
Reports).
423 Panel Report on US – Petroleum, supra  note 73, para. 5.2.2.WT/DS139/R
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rather than on the actual consequences for specific imported products.424  In short, Article III:4 covers
laws, regulations and requirements that do or could adversely modify the conditions of competition
between domestic and imported products in a given internal market.425
6.307  The foregoing principles have a direct bearing on the Government of Canada's defense that, in
the case of the MVTO 1998 recipients, the CVA can be met solely on the basis of labour costs.  Thefact that, under current circumstances, the CVA requirement may have little or no effect is irrelevant.
What is relevant is that the discrimination in the CVA requirement has the potential to modify the
conditions of competition between domestic and like imported products.  As the current MVTO 1998
recipients consolidate their Canadian manufacturing operations in the future, one or more of the
recipients could be placed in a position where it would be forced to use domestic rather than likeimported parts, components and materials in order to comply with the CVA requirement.  In the view
of the Government of Japan, this "potential" adverse effect in the future is why the discrimination in
the CVA requirement must be disciplined today.
426
6.308  The fact that only a small volume of imported parts, components and materials could be
affected is also irrelevant to the violation of Article III:4.  As reflected in the Appellate Bodystatement quoted above, Article III:4 protects competitive conditions between domestic and like
imported products, it does not protect expectations as to volume.
427
6.309  Accordingly, the arguments presented by Canada are not persuasive and should be rejected.
Clearly, the CVA requirement, whether implemented in the MVTO 1998, the letters of undertaking or
the SRO, discriminates against imported parts, components and materials.
5. Rebuttal arguments by the European Communities
6.310  The European Communities  rebuts as follows:
                                                     
424 Panel Report on US – Section 337, supra  note 280, para. 5.13.
425 Panel Report on Italian Agricultural Machinery,  supra  note 390, paras. 11-13.
426 Just prior to the initiation of the Canada-US negotiations that resulted in the CUSFTA, there was
substantial discussion regarding the automotive industry in Canada.  The following comment illustrates thepotential of adverse effects caused by the CVA:  (as noted in Exhibit CDA-2, in 1986 the Big 3 and Volvo
labour component of their CVA also exceeded the CVA requirement as it did at the time of this statement).  "So
called domestic auto manufacturers, those that operate under the rules of the Autopact, have invested heavily inCanada  – $12 billion in the last six years.  They now assemble two vehicles in Canada for every one they sell in
Canada, double the ratio required under the Autopact, Canadian value added is now at 90 per cent minimum.  (Itmust be recognized, however, that these rules apply by company and therefore remain very important incentivesfor certain firms; and market changes can rapidly reduce current levels)"  Windsor Star, "Strong leaders needed
to save our auto trade from slow death", Monday, 20 October 1996 (Exhibit JPN-48).
427 Panel Report on United States – Measures Affecting Alcoholic and Malt Beverages , adopted on
19 June 1992, BISD 39S/206 (hereinafter Panel Report on US – Malt Beverages ), para. 5.6 and Panel Report on
US – Petroleum, supra  note 73, para. 5.1.9.WT/DS139/R
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(a) The CVA requirement
(i) The actual effects of the CVA requirements are not relevant
6.311  Canada argues that the CVA requirements do not violate GATT Article III:4 because the
beneficiaries can easily meet those requirements on the basis of labour costs alone,  so that the CVA
requirements have “no effect on product sourcing".
6.312  This argument is thoroughly misguided. As established by a long series of Panel Reports and
confirmed by the Appellate Body, GATT Article III protects competitive opportunities and not trade
flows428. Hence, in order to establish a violation of Article III:4 it is not necessary to show that the
measure concerned has had any actual effects. The mere possibility that a measure may result in some
circumstances in less favourable treatment being afforded to imported products is already sufficient toestablish a violation of Article III:4
429.
6.313  The CVA requirements violate GATT Article III:4 because, all other conditions being equal,
they provide an incentive for using local parts and materials instead of imported like goods. How
effective that incentive turns out to be in practice is not a relevant consideration for the purposes of
GATT Article III:4.
(ii) In any event, Canada has not shown that the beneficiaries can meet the CVA requirements
without using domestic parts and materials
6.314  In any event, Canada has not proved its assertion that the beneficiaries can meet the CVA
requirements on the basis of labour costs alone.
6.315  The table contained in Exhibit CDA-2430 only shows that currently  the aggregate labour CVA
of the US Big Three and Volvo is sufficient to meet the CVA requirements contained in the Auto Pact
and in the MVTO 1998. This does not necessarily mean, however, that it will always be so. The USBig Three may decide to move some production back to the United States or to a lower cost country
such as Mexico
431. In that case, the US Big Three could be forced to use Canadian parts and materials
in order to meet the CVA requirements contained in the Auto Pact and the MVTO 1998.
6.316  Furthermore, Exhibit CDA-2 does not prove that  the labour CVA of the US Big Three and
Volvo is sufficient to meet the more onerous CVA requirements contained in their Letters ofUndertaking.
6.317  In the exchange of written questions and replies, the European Communities asked Canada to
complete the data shown in Exhibit 2 with the aggregate cost of sales of the producers concerned
432.
The requested data would have enabled the Panel to verify whether the labour CVA of those
producers is sufficient to meet the CVA requirements in the Letters of Undertaking. Unfortunately,
                                                     
428 See, e.g., the Appellate Body  Report  on Japan – Alcoholic Beverages,  supra note 271, p.16 and the
Panel Reports cited therein.
429 See, e.g., the Panel Report on EEC – Payments and Subsidies Paid to Processors and Producers of
Oilseeds and Related Animal-Feed Proteins , adopted on 25 January 1990, BISD 37S/86 (hereinafter Panel Report
on EEC – Oilseeds ), where the Panel noted, para. 141:  “ … the Panel examined whether a purchase regulation
which does not necessarily discriminate against imported products but is capable of doing so is consistent withArticle III:4. The Panel noted that the exposure of a pa rticular imported product to a risk of discrimination
constitutes, by itself, a form of discrimination. The Panel therefore concluded that purchase regulations creatingsuch a risk must be considered to be according less fa vourable treatment within the meaning of Article III:4.”
430 Canada's Figure 2  is based on that Exhibit.
431 Volvo has already done so.  As explained in the EC's arguments, it ceased production of motor
vehicles in Canada as of December 1998.
432 Question 5 from the EC.WT/DS139/R
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Canada has refused to provide the information requested on the spurious ground that it is not
“relevant” to this dispute433. Once again, the Panel should draw appropriate inferences from Canada’s
lack of a response.
6.318  Nonetheless, the evidence already made available by Canada is sufficient to confirm
indirectly that the Big Three cannot meet the CVA requirements in the Letters of  Undertaking on thebasis of labour CVA alone. Exhibit CDA-2 shows that in model year 1996/97 labour CVA accounted
for approximately 29 per cent of the total CVA  reported by the Big Three and Volvo. In turn,
according to the official statistics supplied by Canada during the consultations
434, the total CVA of the
major MVTO and SRO beneficiaries accounted in 1996 for 70 per cent of their cost of sales in
Canada. Thus, it may be estimated that the labour CVA of the Big Three represents just 20 per cent oftheir cost of sales in Canada (29 per cent of 70 per cent), i.e. much less than the 50 per cent to 60 per
cent required by the Letters of Undertaking.
6.319  Canada has not provided any evidence whatsoever regarding the CVA requirements imposed
upon the SRO beneficiaries. Canada limits itself to assert that according to Canada Revenue, CAMI’s
labour CVA is sufficient to meet its CVA requirem ents, but provides no supporting evidence. Clearly,
that assertion is not sufficient to meet Canada’s burden of proof
435.
6.320  In any event, CAMI is not the only SRO be neficiary. According to Canada, eight other
beneficiaries are currently utilising their SROs. In response to a question from the Panel, Canada has
admitted that four of those eight SRO beneficiaries have not, in recent years, meet their CVA
requirements on the basis of labour CVA alone436.
(iii) The CVA commitments in the Letters of Undertaking are “laws, regulations or requirements”
in the meaning of Article III:4
6.321  Canada has argued that the CVA commitments in the Letters of Undertaking are not “laws,
regulation or requirements” in the meaning of Article III:4.
6.322  The European Communities considers that those terms are intended to have the same broad
coverage as the term “measure” in, for example, GATT Article XI. The national treatment obligation
contained in Article III:4 complements the prohibition on import restrictions contained inArticle XI
437. It would be absurd if non-binding border m easures that restrict imports were prohibited
by Article XI,  but then non-binding internal measures that discriminate against imported products
were permitted by Article III:4.
6.323  Nevertheless, even if the term “requirement” had to be construed more narrowly than the term
“measure”,  the European Communities submits that, for the reasons explained above, the CVArequirements would still qualify as “requirements”.
                                                     
433 Canada's response to Question 5 from the EC.
434 Statistical Review of the Canadian Automotive Industry, 1997 Edition, Industry Canada, Table 4.7
(Exhibit EC-18).
435 As noted by the Panel Report on Indonesia – Autos, supra  note 270, para. 14.235, the parties to a
dispute may not invoke the confidentiality of business information as a justification for failing to provide the
positive evidence required to prove their assertions.
436 Canada's response to Question 32 from the Panel.
437 As noted by the Panel Report on Italian Agricultural Machinery,  supra  note 390, para. 11:  “… the
intention of the drafters of the Agreement was clearly to treat the imported products in the same way as the likedomestic products once they had been cleared through cust oms. Otherwise indirect protection could be given”.
Similarly, the Panel Report on US – Petroleum, supra  note 73, noted, para. 5.2.2:  “… The general
prohibition of quantitative restrictions under Article XI … and the national treatment obligation of Article III…
have essentially the same rationale, namely to protect expectations of the contracting parties as to thecompetitive relationship between their products and those of the other contracting parties …”WT/DS139/R
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(b) The ratio requirements
6.324  Canada argues that the ratio requirements do no limit sales of imported vehicles by other
importers, nor sales of vehicles imported by the beneficiaries outside the Tariff Exemption.
6.325  It is a well established principle, however, that the “no less favourable” treatment requirement
of GATT Article III:4 is applicable to each individual case of imported products438. Accordingly, the
mere fact that sales of vehicles imported outside the Tariff Exemption benefit from the same treatment
as sales of domestic products cannot offset the fact that internal sales of vehicles imported within the
Tariff Exemption receive less favourable treatment.
6.326  Canada also makes the argument that the ratio requirements are an import measure and should
be examined under GATT Article XI, rather than under GATT Article III.
6.327  Yet the distinction between import and internal measures is a formal one and not one based
on the effects of the measure. The ratio requirements are internal measures subject to Article III, and
not to Article XI, because they do not affect the right to import motor vehicles, but the right to sell
them in Canada439.
6. Response by Canada to the complainants' rebuttals
6.328  Canada  responds as follows:
(a) The CVA requirements
(i) The CVA amounts in the MVTO and SROs do not  affect the sale of original equipment
manufacturing parts
6.329  Japan and the European Communities have both argued that the CVA amounts in the MVTO
and SROs are per se  violations of Article III:4.440  As Canada has already stated, the arguments of the
European Communities and Japan rest on a characterization of the CVA as a domestic-contentrequirement.  The CVA is not a domestic-content requirement, it is a value-added requirement.
Previous GATT and WTO cases have found violations in measures that required the purchase or use
of domestic products in order to receive an advantage.
441  However, there is no GATT or WTO
authority to support the proposition that the mere inclusion of local products in a broadly-based value-
added requirement is a violation of GATT Article III:4.
6.330  This interpretation of Article III:4 finds support in the text of paragraph 1 to the Illustrative
List in the TRIMs Agreement.  Paragraph 1 provides examples of TRIMs that are inconsistent with
Article III:4 and refers to measures that require  the use of domestic products.
6.331  Canada demonstrated in its initial response th at all the companies for which the complainants
raised arguments easily meet their CVA amounts by labour alone. In response, Japan argues that the
                                                     
438 See e.g., the Panel Report on US – Section 337, supra  note 280, para. 5.14; and the Panel Report on
US – Gasoline, supra  note 306, para. 6.14.
439 The Panel Report on Canada – FIRA , supra  note 126, noted, para. 5.14, that:  “The Panel shares the
view of Canada that the general Agreement distinguishes between measures affecting the ‘importation’ ofproducts, which are regulated in Article XI:I, and those affecting ‘imported products’ which are dealt with inArticle III. If Article XI:I were interpreted broadly to cover also internal requirements, Article III would bepartly superfluous.”
440 Japan had initially argued that the CVA requirements are a de facto requirement to use domestic
parts, but appears to have abandoned this line of reasoning.
441 See, e.g., Panel Report on Italian Agricultural Machinery,  supra  note 390;  Panel Report on Canada –
FIRA , supra  note 126; Panel Report on Indonesia – Autos, supra  note 270.WT/DS139/R
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actual effects of the measure are irrelevant, because the test is whether the measure “might adversely
modify the conditions of competition between domestic and imported products on the internal
market”. As authority, Japan cites two cases:  Italian Discrimination Agai nst Imported Agricultural
Machinery442 and United States – Taxes on Petroleum and Certain Imported Substances .443
6.332  The phrase quoted above comes from paragraph 12 of Italian Agricultural Machinery .  The
panel was dealing with Italy’s argument that Article III:4 did not apply to its measure, because it did
not directly govern the conditions of sale of products.  The panel rejected this argument, finding that
Article III:4 applies to all measures that “might  adversely modify the conditions of competition
between the domestic and imported products on the internal market.”  In other words, this test
determines whether Article III:4 applies at all, not whether the measure is a violation.  The Italianmeasure in question provided a benefit only to purchasers of Italian farm equipment.  There was thus
a real and immediate incentive to favour those products, not a mere potential for it in the future.  That
is where the panel found the violation of Article III:4.
6.333  The paragraph from Taxes on Petroleum  cited by Japan says nothing about measures that
“might” adversely modify conditions of competition.  It stands for the proposition that one cannotjustify a higher tax on imported products than like domestic ones (an indisputable violation of
Article III:2) on the basis that the measure has a negligible effect on the volume of imports.  This
finding is irrelevant to this case.
(ii) The CVA requirements do not affect condi tions of competition between domestic and
imported products
6.334  Japan and the European Communities have claimed that the CVA requirements violate GATT
Article III:4.  Japan initially argued that the CVA is a de facto  requirement to use Canadian parts. It
has joined the European Communities in arguing that the CVA is a de jure  violation of Article III:4
because it might, someday, under some potential future circumstances, create the possibility of less
favourable treatment for imported products.  If this is  indeed the correct test for a violation of Article
III:4, it seems unlikely that any measure could ever pass it.  It is not surprising then, that none of the
cases cited by the complaining parties has made such a finding.
6.335  Both complaining parties have cited a line of cases holding that Article III protects equality of
competitive opportunity, not trade flows.  This, they  argue, frees them from having to demonstrate
that the Canadian measures actually have any of the effects they allege. They claim that these and
other cases
444 support a test based on the possibility of a future change in circumstances creating the
potential for discrimination.
6.336  No Panel Report – and certainly not a single one cited by the complaining parties – has ever
found a violation of Article III:4 based on discrimination that might exist after a change in
circumstances that could occur at some unspecified time in the future.  Japan and the European
Communities, as the complaining parties, cannot simp ly assert that there may be the possibility of
discrimination under some potential future circumstances.  In every case cited by the complainingparties, the potential for discrimination actually existed under the circumstances present at the time
the case was brought.  Not a single case contains a finding that the complaining party need only
demonstrate the potential for future discrimination given the right change in circumstances.  Thus, to
succeed, the complaining parties have to demonstrate the current potential for discrimination under
                                                     
442 Panel Report on Italian Agricultural Machinery,  supra  note 390, paras. 11-13.
443 Panel Report on US – Petroleum, supra  note 73, para. 5.1.9.
444 EEC – Oilseeds , supra  note 429, para. 141; Appellate Body Report on Korea – Alcoholic Beverages ,
supra  note 280, para. 21; Panel Report on US – Petroleum, supra  note 73, para. 5.1.9; Panel Report on US –
Section 337, supra  note 280, para. 5.13; Panel Report on Italian Agricultural Machinery,  supra  note 390, para. 12.WT/DS139/R
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present circumstances.  They have only tried to demonstrate the future potential under hypothetical
circumstances.
6.337  Their evidence is insufficient even for that purpose.  Japan's production of a single newspaper
article, in which the author speculates that market conditions could one day result in lower production
levels, does not constitute evidence.445  The European Communities suggests that the Big Three might
shift production to the United States, or to some other country, just as Volvo (Canada) did. This
proves nothing, since companies that cease production in Canada will no longer be eligible for duty-
free treatment under the MVTO or SROs, at least until  they resume production.  Their ability to meet
CVA requirements in these circumstances is meaningless.
6.338  The CVA calculations require companies importing vehicles under the MVTO and SROs to
achieve a total amount of Canadian value in each class of vehicle they produce.  The three classes are
automobiles, buses and specified commercial vehicles.  Because the requirement operates for a "class"
of vehicles, there is no requirement for individual vehicles to contain any Canadian products.
Furthermore, "Canadian value" includes labour, factory overhead such as heating and lighting, and
depreciation on buildings and equipment.  Because of these additional inclusions, it is possible tomeet CVA requirements without using Canadian produc ts, even within an entire class of vehicles.
Every company importing any class of vehicle under the MVTO meets its CVA requirement on the
basis of labour alone.  Except for four companies
446, the same is true of companies importing vehicles
under the SROs, including CAMI.
6.339  Therefore, the CVA amounts do not affect the conditions of competition between domestic
and imported products, because the CVA does not require the purchase or use of domestic products.
The CVA requirements, particularly those under the MVTO and the CAMI order, do not and cannotaffect competitive opportunities for imported parts or other products, because companies can purchase
all inputs and equipment from any country they choose, and still meet their respective CVA
requirements.
6.340  The GATT and WTO cases support Canada's position that the use of domestic products must
be required in order for a content or value-added requirement to be inconsistent with Article III:4.The content requirement in Indonesia – Autos could not be met without the use of Indonesian parts.
In FIRA
447, the undertakings to purchase local products, while voluntarily made, were not voluntarily
complied with.  In Italian Discrimination Against Imported Agricultural Machinery448 and in Parts
and Components449, the only means to acquire a government-offered benefit was by purchasing
domestic products.
6.341  Canada's position respecting the application of Article III:4 to content requirements is
confirmed by the Illustrative List in the TRIMs Agreement.  Both the chapeau to paragraph 1 and sub-
paragraph 1(a) make it clear that a measure must require the purchase or use of domestic products to
be inconsistent with GATT Article III:4.
6.342  Inflation and growth in the industry have made the fixed CVA requirements for those
companies importing vehicles under the MVTO so insignificant that they cannot be seen as a
requirement to do anything, much less purchase, or even favour, domestic products.  They are based
on historical levels of production that were so low they cannot be expected to be seen again.  Canada's
Figure 2  and Exhibit CDA-2 demonstrate that, for automobile manufacturers, reported CVA on
                                                     
445 Japan's argumentation referring to Exhibit JPN-48.
446 The four companies are Capital Disposal Equipmen t, Les Entreprises Michel Corbeil, Navistar and
NovaBUS.
447 Panel Report on Canada – FIRA , supra  note 126, para. 5.4.
448 Panel Report on Italian Agricultural Machinery,  supra  note 390.
449 Panel Report on EEC – Parts and Components , supra  note 127, para. 5.21.WT/DS139/R
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labour alone in 1996-97 was more than three times the total required amount.450  Total CVA reported
that year was more than 11 times that required.451
6.343  In conclusion, the complainants have misinterpreted the findings on which they rely.  Both
complaining parties have argued that they have to demonstrate only that the CVA might, in some
potential future circumstances, affect the conditions of competition between domestic and importedoriginal equipment parts.  None of the cases cited by the complainants has endorsed this proposition.
Canada therefore submits that the CVA requirements cannot violate Article III:4.
(iii) The Letters are not “laws, regulations or requirements”
6.344  The complainants have argued that the letters also violate Article III:4.  That Article states
that it applies to all “laws, regulations and requirements”.  Japan and the European Communities havenot attempted to argue that the letters are laws or regulations because clearly they are not.  They are
not found in any legal instrument.  The only question is whether the letters are requirements.
452
6.345  The European Communities and Japan bear the bu rden of proving that the additional letters
are requirements, a burden they cannot meet.  The test for whether the CVA amounts in the letters are
“requirements” is found in the Panel Reports in FIRA  and EEC – Regulation on Imports of Parts and
Components .453  T h e  FIRA  panel found that voluntarily submitted undertakings could be
“requirements” within the meaning of Article III:4.  However, the panel explicitly noted that the
undertakings at issue in FIRA  were not complied with voluntarily.  Once they were submitted, the
undertakings formed part of the legally enforceable regime applying to the investment.  There was, in
short, a sanction for failing to comply with the requirements.  This fact was central to the panel’s
reasoning.454
6.346  The Panel on EEC - Parts and Components  distinguished between “requirements” that a
company is legally bound to carry out (the FIRA  situation) and “requirements” that a company
voluntarily accepts in order to obtain an advantage.  It nevertheless found that both were
“requirements” within the meaning of Article III:4, but only to the extent that the requirements were
conditions precedent to obtaining a benefit.455
6.347  The letters are not requirements under these tests.  They are not part of the legally enforceable
regime applying to the MVTO.  Should a beneficiary fail to meet the CVA amounts in its letter, it
would still qualify for its duty-free privileges.  Japan’ s own evidence has made it clear that this is the
case.456  Indeed, should a beneficiary refuse to provide the information that would be necessary to
determine whether it had met the amounts, it would still qualify.  Moreover, just as there is no
sanction for failing to meet the amounts in the letters, there is no reward for doing so.  No additionalbenefits accrue to companies that honour the letters.  Companies are not bound to carry out their
terms, nor do they do so voluntarily in order to obtain a benefit.  The letters are thus not requirements.
They are completely unrelated to a company’s ability to import duty free under the MVTO.
                                                     
450 Labour CVA was $1.9 billion, while the total required was $611 million.
451 Total reported CVA was almost $6.8 billion.
452 Canada, in its response to Question 4 from the Panel, has already set out its views on the
interpretation of the terms “measures” and “laws, regulations and requirements”.  In Canada’s view, the termsdo not have the same meaning, with measure being the broader term.  It is thus only necessary to determinewhether the letters are “requirements”.  If so, they are necessarily measures.  Conversely, a finding that theletters are “measures” would not be determinative.  It would still be necessary to determine whether the lettersare “requirements”, or to find that the two terms have identical meanings.
453 Panel Report on EEC – Parts and Components , supra  note 127.
454 Panel Report on Canada – FIRA , supra  note 126, para. 5.4.
455 Panel Report on EEC – Parts and Components , supra  note 127, para. 5.21.
456 Exhibit JPN-27, p. 63.WT/DS139/R
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6.348  Canada has made public its position that the letters are not requirements.  Indeed, Japan has
filed as evidence a public statement from Industry Canada that explicitly describes the letters as non-
binding.457  Canada has made the same statement repeatedly in the proceedings before this Panel; it
should be noted that Canada makes all of its WTO submissions public upon request.  These very
submissions are thus also public statements that the letters are not binding and cannot be enforced.
6.349  The European Communities has made much of the wording of the letters, which it claims is
mandatory.  In fact, the wording varies and is at most ambiguous – the word “undertake” can mean to
commit oneself formally, but it can also mean to take on a task.458  Where there is no sanction and no
reward, even the most strongly worded private undertaking cannot be considered a requirement under
Article III:4.
6.350  To date, the complainants’ other evidence has focused on the questions of whether the
Canadian government was involved in the preparation of the letters, whether the manufacturers were
required to submit letters as a sine qua non  of Canada’s signing the Auto Pact, and whether the
beneficiaries believed themselves bound by the letters.  The evidence provided is at best ambiguous,
and does not demonstrate that the letters were ever requirements.459
6.351  The European Communities has also claimed that the letters are enforceable on the theory that
nothing in Canadian law prevents Canada from repe aling or amending the MVTO. This argument is a
fundamental misstatement of WTO law.  The WTO agreements do not apply to actions that Members
could  take.  They apply to actions that Members have taken .  The letters are not requirements because
they are not enforceable and offer no rewards; whether the Canadian government has the
constitutional authority to convert them into requirements is irrelevant.
6.352  That the letters are not requirements is clear from what would happen in the event that
Canada had to implement a finding that they viol ate Article III:4.  The Canadian government would
not have to take any action in order to comply with the finding.  It would not have to repeal the letters
because it never passed them in the first place – there is nothing to repeal.  It would not have to
repudiate them, because it has already been made clear that neither the government nor the companies
affected regard themselves as bound by them.  It would not have to stop enforcing them, because itdoes not do so.
6.353  Virtually all of the evidence the complaining pa rties have supplied relates to the time when
the letters were written, thirty-five years ago.  All of this evidence is irrelevant.  Regardless of the past
status of the letters, they are not requirements today, and will not become requirements in the future.
Even prior to the complaining parties bringing this case, Canada had publicly stated that the letterswere not binding.
460  The complainants themselves have cited the statement, and have never rebutted
                                                     
457 Exhibit JPN-38, p. 38-1.
458 See, e.g., The New Shorter Oxford English Dictionary on Historical Principles, definition 4(a) (vol.
2 [Oxford: Clarendon Press, 1993], p. 3476, Exhibit CDA-13), and Merriam-Webster’s Collegiate Dictionary,definition 1 (10
th ed. [Markham: Thomas Allen, 1993], p. 1289 (Exhibit CDA-14).
459 For example, Exhibit EC-22, p. 11 contains the following statement from an official of General
Motors Corp. of the United States:  I can speak for General Motors and I can say that there have been no secret
agreements, there have been no negotiations .  The Canadian Government asked us to write them a letter stating
our understanding of the provisions of the agreement as it was finally determined and to ask for ourendorsement of the principles to the extent that we did understand them and assigned to us an objective
whereby, over the 4 years that are involved in this agreement, we would undertake to increase our Canadianproduction or our Canadian value.  (emphasis added)  United States-Canada Automotive Products Agreement:Hearings before the House Comm. on Ways and Means on H.R. 6960 “The Automotive Products Trade Act of
1965", 89
th Cong., 1st Sess. (1965), p. 148 (testimony of James M. Roche, Executive Vice President, General
Motors Corp.).  This statement agrees exactly with Canada’s explanation of the facts provided in response toQuestion 17 from the Panel.
460 Exhibit JPN-38 and Exhibit EC-20.WT/DS139/R
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it.  Canada has also stopped making any effort to verify whether companies achieved the amounts
contained in the letters.  Canada has now repeatedly made it clear that it does not regard the letters as
binding.  If the executives of the beneficiary companies were ever in any doubt on this point, they no
longer are.
6.354  Regardless of whether the letters have ever been thought binding, they have never been
enforceable.  Japan has now joined the European Communities in claiming that the letters could be
enforced by repealing or amending the MVTO, and even withdrawing from the Auto Pact if
necessary.  This argument is a fundamental misstatement of WTO law.  The WTO agreements do not
apply to measures that Members could take.  They apply to measures that Members have taken.
6.355  In any event, Canada would never – indeed, could never – have withdrawn from the Auto
Pact.  First, it would punish every MVTO a nd SRO company, not just the non-compliant one.
Second, from 1965 until 1998, when NAFTA duty phase-outs for the United States reached zero,
duty-free access to the American market depended on the Auto Pact.  There was never any possibility
that Canada would withdraw from it under those circumstances.
6.356  For these reasons, Canada submits that the letters of undertaking do not create requirements
within the meaning of GATT Article III:4.  They therefore cannot give rise to a violation of that
Article.
(b) The ratio requirements
(i) The ratio requirements do not provide less favourable treatment to domestic vehicles
6.357  The European Communities says Canada argued  that less favourable treatment for some
products can be balanced with more favourable treatment for others.  Canada has made no such
argument.
6.358  The European Communities, in its responses to qu estions, made it clear that its claim in this
area is only with respect to vehicles imported under the MVTO and SROs – in other words, the very
same vehicles it claims have an advantage under Article I.  Such vehicles, the European Communities
argues, are at a competitive disadvantage because the ratio requirements impose a quantitative limit
on their sale, based on the value of domestic production.
6.359  According to the European Communities, MVTO and SRO beneficiaries will import vehicles
in order to obtain duty-free benefits, and will then decline to sell the vehicles in order to preserve
those benefits.  This argument seems to have been made without any regard to the measures in
question.  The ratios do not limit sales; they provide that imports beyond a certain value of sales will
be subject to Canada’s MFN duty.  Manufacturers are free to sell vehicles outside their ratios – theonly consequence is that they will pay duty on the value of those vehicles.
6.360  Because the ratios have no effect on total sales, whether domestic or imported, the European
Communities appears to be arguing that a limit on duty-free benefits is itself a violation of Article III.
Canada disagrees.  The EC’s argument would convert a measure setting out the terms under which
importation takes place – which is manifestly a border measure – into a limitation on internal salesunder Article III:4.  Such a claim has no basis in the GATT.  It would make every tariff rate quota or
limitation on tariff preferences a violation of Article III.WT/DS139/R
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(ii) The ratio requirements do not affect the internal sale of vehicles
6.361  Japan’s complaint rests entirely on the hypothesis that if Canadian production were structured
so that some models were produced for export, and others were directed primarily at the Canadian
market, this might lead to an increase in pr oduction which could somehow disadvantage imported
vehicles.
6.362  Japan’s argument divides production in two:  production for export and production for the
domestic market.  Japan theorises that if some models are directed primarily at the domestic market,
an increase in the production of those models could lead to a reduction in competitive opportunities
for imported vehicles.  Japan has not produced any evidence to demonstrate that Canadian production
is structured in this way.  Nor can it, because such an inefficient structure could not be maintained in arationalized market.  Thus, it cannot substantiate its claim that domestic production “could”
negatively affect the conditions of competition for imported vehicles, and Japan cannot establish a
prima facie case.
6.363  In any event, the argument is difficult to reconcile with the effect of the programme, which is
to remove duties from imports.  It is also difficult to reconcile with market reality:  beneficiaries havean incentive to reduce  production and increase  importation, given that their production levels far
exceed what is required under the ratios.
6.364  Japan claimed that the ratio requirements could create a violation of Article III that is in some
way related to an alleged production increase.  However, Japan has provided no evidence and scarcely
any explanation of its claim, and chose not to address it at all in its responses to the Panel's questions,
in its arguments.  Japan has failed to make a prima facie case, and its claim must be dismissed.
6.365  The argument of the European Communities has apparently changed through these
proceedings.  In presenting its claims, the European Communities seemed to argue that the ratio
requirements impose a quantitative limit on all import sales of the beneficiary companies, a claim
without foundation.  The European Communities now seems to be limiting its argument to vehicles
imported duty free under the MVTO and SROs.  It concedes that sales of imported vehicles on which
duty is paid receive the same treatment as sales of domestic vehicles.  However, it suggests that salesof duty-free vehicles receive less favourable treatment than like domestic or duty-paid vehicles.  The
EC theory seems to be that a beneficiary company might reduce its production to such an extent that it
would have to reduce its volume of duty-free imports for Canadian sale.
6.366  Canada rebutted the first version of the EC argument by demonstrating that it was based on a
misunderstanding of how the ratios and Article III ope rate.  The second version, however, also seems
to misunderstand the operation of both Article III and the ratio requirements.  It is therefore
appropriate to briefly explain again exactly how the ratios work.
6.367  The MVTO and the SROs provide that each company importing vehicles under those
measures must maintain a set ratio of the value of its Canadian production to the value of its Canadian
sales.  The sales figure includes only domestic vehicles and vehicles imported duty free.  In the caseof companies operating under the MVTO, the required ratio is the ratio actually achieved in the base
year of 1963-64.  In the case of companies opera ting under an SRO, each SRO specifies the workings
of the required ratio.  There are no other ratio amounts specified anywhere, whether in the additional
letters or in the annual declarations required under the MVTO.
6.368  An example will provide the easiest means of understanding the ratio requirements.  Let us
assume that a company operating under the MVTO has a ratio of 95 to 100.  If that company sells
$100 worth of automobiles in Canada, whether imported duty free or domestic, it must also produce at
least $95 worth of automobiles in Canada in that same model year.  There are no requirements
regarding where or how to sell that production.  Ther e are no requirements as to how much to importWT/DS139/R
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duty free or how much to import duty-paid.  There are no requirements of any kind as to origin.  The
company is free to structure its imports, and its sales, as it chooses.
6.369  Furthermore, the company can always ensure that it will meet its ratio requirement, because
only vehicles imported duty free are counted in the sales side, or denominator, of the ratio.  In the
unlikely event that the company were operating at or near its ratio, it could start paying the otherwiseapplicable duty on its imports.  This is the same duty that would otherwise have been payable on all of
its imports.  In this situation, vehicles already imported into Canada would remain duty free; only
vehicles to be imported could be affected, and the only effect is that they would become subject to
duty.  It is only in this situation that the ratio serves to cap the total value of vehicles that a company
may import duty free.  This cap does not limit or otherwise affect the value or volume that can beimported under the MFN duty.  Manufacturers can thus import and sell as many vehicles as they
choose.
6.370  As regards internal sale, all vehicles are subject to the same rules.  Vehicles imported duty
free under the MVTO and SROs are in precisely the same competitive position regarding their
internal sale as vehicles imported duty-paid – and the European Communities has conceded that duty-paid vehicles are not discriminated against under Ar ticle III.  Indeed, all ve hicles, whether imported
duty free or duty-paid, or whether produced domestically, are subject to precisely the same rules in
respect of their internal sale.
6.371  All companies importing vehicles under either the MVTO or the SROs are currently
exceeding their respective ratios by wide margins.  The ratios have thus ceased to have any effect
other than to qualify beneficiaries as manufacturers.  There is no regulatory incentive for exceeding
the required ratio.  Production levels in Canada are therefore entirely the result of commercial factorssuch as cost and product demand.
6.372  It is possible that Canada has misunderstood the EC argument.  The European Communities
could be arguing that the very existence of a potential cap on the value of products that can be
imported duty free itself disadvantages the internal sale of duty-free products.  If this is indeed the EC
argument, it fails to make the distinction between measures affecting importation of products, andmeasures affecting imported products.  Article III:4 applies to measures affecting the competition
between like domestic and imported products, after the imported products have cleared the border and
any applicable duty has been paid.  Article III therefore offers no basis for claiming that otherwise
like imported products receive less-favourable trea tment under Articl e III becau se they were subject
to different tariffs.  Otherwise, tariff-rate quota s and any other variable tariff rates would be a
violation of Article III:4.
7. The European Communities' follow-up to Canada's response
6.373  As a follow-up to Canada's response, the European Communities  argues as follows:
(a) Clarification
6.374  The European Communities would like to make a clarification regarding the scope of its
claims with respect to the CVA requirements.  Ca nada attributes to the European Communities the
claim that "the CVA requirements favour the use of domestic equipment manufacturing (OEM) parts
in the production of vehicles in Canada".
6.375  That is not correct.  The EC's claim is not limit ed to OEM parts.  It extends to all goods used
or consumed in the manufacture of motor vehicles which are counted as CVA when produced ormanufactured in Canada, but not when imported.  As stated in the EC's initial argumentation, in
accordance with the rules contained in the MVTO 1998, that includes not only parts, but also
materials, as well as certain equipment of non-permanent nature.WT/DS139/R
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(b) The letters contain requirements
6.376  Canada appears to have recognised that the position that the Letters of Undertaking are not
"measures" is untenable.  Thus, in its response to the complainant's rebuttals, Canada limits itself to
argue that the Letters of Undertaking are not "laws, regulations and requirements".  By way of
justification, Canada explains in a footnote that since the term "measure" is "broader" than the term"requirement", it is only necessary for the Panel to determine whether the Letters are requirements.
6.377  The European Communities disagrees. Even assuming that the term "measure" was indeed
"broader", the European Communities has submitted cl aims with respect to the CVA requirements not
only under GATT Article III:4 and Article 2.1 of th e TRIMs Agreement, but also under GATS Article
XVII and Article 3.1 (b) of the SCM Agreement.  Neither of those two provisions refers to"requirements".  Therefore, a finding that the Lett ers are not "requirements", would not dispense the
Panel from ascertaining whether they are "measures".
6.378  Canada's defence relies on an extremely narrow interpretation of the term "requirement".  In
essence, Canada argues that the Letters are not "requirements" because they are not "legally
enforceable", either through sanctions or through rewards explicitly attached to them.
6.379  That interpretation, however, is not compelled by the ordinary meaning of the term
"requirement".  "Required" and "legally enforceable" are not synonyms.  The existence of a explicit
legal sanction furnishes the proof that something is a "requirement", but is not an inherent element.
6.380  The Letters of Undertaking contain "requirements" because they are drafted in mandatory
terms and are regarded as binding by the Canadian Government and by the beneficiaries, as evidenced
by the fact that compliance is regularly verified and that in practice the beneficiaries do comply with
the terms of the Letters.
6.381  The statement found in Industry Canada's website to the effect that the Letters "while non-
binding, typically have been met"
461 cannot be taken as evidence that the Canadian Government does
not regard  the Letters as "binding".  That statemen t is not addressed to the beneficiaries, but to the
general public.  The Canadian Government does not need to post statements in the internet in order to
convey to the beneficiaries its views on the nature of the Letters.  In any event, Canada Industry usesthe term "binding" in the narrow sense of "legally enforceable".  In the same paragraph, Canada
Industry also refers to the terms of the Letters as something the beneficiaries "undertook" and as
"conditions".
6.382  For similar reasons, the statements made by the Canadian Government in these proceedings
cannot be taken as evidence that it does not regard the Letters as binding or that it has repudiatedthem.  The Big Three understand perfectly well that Canada is forced to make those arguments in
order to preserve the Tariff Exemption for their benefit.
6.383  Canada claims that its interpretation of the term "requirement" is derived from Canada –
FIRA
462 and EC – Parts and Components463 Those reports, however, in no way suggest that the panels
purported to formulate, or that they were applying a set of generally applicable criteria.
6.384  In any event, the Letters of Undertaking fit within the same pattern as the measures at issue in
EC – Parts and Components .  As explained  by Canada, in that case the Panel found that the
undertakings to increase local content given by the subsidiaries of certain Japanese companies were
"requirements" because they were a "condition precedent to obtaining a benefit".  The same is true of
                                                     
461 Exhibit EC – 20.
462 Panel Report on Canada – FIRA , supra  note 126.
463 Panel Report on EEC – Parts and Components , supra  note 127.WT/DS139/R
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the Letters of Undertaking.  The Canadian Government would not have concluded the Auto Pact if the
Big Three had not submitted the Letters of Undertaking.
6.385  The only difference between the two cases is th at the EC antidumping regulations envisaged
that, if the undertakings were breached or withdr awn, the EC Commission could (but was not obliged
to) re-institute proceedings and eventually impose anti-circumvention duties.464  The MVTO does not
envisage expressly the possibility to impose sanctions. That does not mean, however, that the Letters
are unenforceable.  Given the linkage between the conclusion of the Auto Pact and the submission of
the Letters established by the Canadian Government, there has always been a tacit understanding
between the parties that if the beneficiaries fa iled to comply with the Letters, the Canadian
Government would withdraw the tariff benefits.
6.386  In one of the supplemental questions put by the Panel, the Panel has asked Canada whether
any of the manufacturers operating under the MVTO have indicated in their annual reports that they
have gone above the CVA requirements of the MVTO.465
6.387  The answer is that there is no need for the beneficiaries to do so.  The samples of reporting
forms included in Exhibit EC–14 show that the MV TO beneficiaries are required to report, among
other things, the total CVA amount in the relevant period, as well as the net sales value of the vehicles
sold in Canada during the same period.  Those two amounts allow the Canadian Government to
verify, by making a very simple calculation, whether the Big Three comply with the CVA
requirements in the Letters.  The Big Three know that. And the Canadian Government knows that the
Big Three know.
C. THE TRIM S AGREEMENT
1. Arguments of Japan
6.388  Japan  argues as follows:
6.389  By virtue of its CVA requirement, the Duty Waiver is inconsistent with Canada's obligations
under Article 2.1 of the TRIMs Agreement.
6.390  Article 2 of the TRIMs Agreement reads as follows:
"Article 2 National Treatment and Quantitative Restrictions
1. Without prejudice to other rights and obligations under GATT 1994, no Member shall
apply any TRIM that is inconsistent with the provisions of Article III or Article XI of GATT
1994.
2. An illustrative list of TRIMs that are inconsistent with the obligation of national
treatment provided for in paragraph 4 of Article III of GATT 1994 and the obligation of
general elimination of quantitative restrictions provided for in paragraph 1 of Article XI of
GATT 1994 is contained in the Annex to this Agreement."
6.391  To demonstrate an inconsistency with Article 2.1 of the TRIMs Agreement, it must be
demonstrated that the measure in question is a TRIM and that it is inconsistent with Article III or
Article XI of the GATT 1994.  Both requirements are met in this case.
                                                     
464 Ibid., para. 5.20.
465 Question 40 from the Panel.WT/DS139/R
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(a) The CVA requirement is a TRIM within the meaning of Article 2.1 of the TRIMs
Agreement
6.392  The CVA requirement is an "investment measure".  The requirement is a condition that is
incorporated in the MVTO 1998, the SROs and in the letters of undertaking which are pertinent to the
Canada-US Auto Pact specifically aiming at investment.466  The publicly available letters of
undertaking (Exhibit JPN-5) specifically refer to investment objectives.467  The measures today are
directed at maintaining investment in Canada by the existing Auto Pact Manufacturers.
6.393  The CVA requirement is "trade-related".  Such a domestic content requirement is necessarily
trade-related because it favours the use of domestic products over imported products and, therefore,
affects trade.468
6.394  Accordingly, the CVA requirement is a TRIM  within the meaning of Article 2.1 of the
TRIMs Agreement.
(b) The CVA requirement is inconsistent with Article III:4 of the GATT 1994
6.395  As discussed with respect to GATT Article III (Section VI.B), the CVA requirement is
inconsistent with Article III:4 of the GATT 1994.
6.396  In the context of the TRIMs Agreement, this inconsistency is confirmed in the Agreement's
Illustrative List.  The relevant part of Paragraph 1 of the Illustrative List reads as follows:
"1. TRIMs that are inconsistent with the obli gation of national treatment provided for in
paragraph 4 of Article III of GATT 1994 include those which are mandatory or enforceable
under domestic law or under administrative rulings, or compliance with which is necessary to
obtain an advantage, and which require:
(a) the purchase or use by an enterprise of products of domestic origin or from
any domestic source, whether specified in terms of particular products, in terms of
volume or value of products, or in terms of a proportion of volume or value of its
local production;"
6.397  The Duty Waiver grants an advantage (i.e. exemption of customs duty) conditional on, inter
alia, meeting the CVA requirement.  Accordingly, the Duty Waiver is a measure for which
"compliance ... is necessary to obtain an advantage"  within the meaning of the chapeau of paragraph 1
of the Illustrative List.
6.398  The CVA requirement falls squarely within the example in paragraph 1(a) of the Illustrative
List which states "the purchase or use by an enterprise of products of domestic origin or from any
                                                     
466 The preamble to the Canada-US Auto Pact includes the following statement:  "Recognizing the
important place that the automotive industry occupies in the industrial economy of the two countries and theinterests of industry, labour and consumers in sustaining high levels of efficient production and continued
growth in the automotive industry. "
Article I of the Canada-US Auto Pact includes the following statement:  "The Governments of the
United States and Canada, pursuant to the above principles, shall seek the early achievement of the following
objectives... (c) the development of conditions in which ma rket forces may operate effectively to attain the most
economic pattern of investment, production and trade. "
467 The letters signed by General Motors, Ford, Chrysler and AMC include the following
understanding:  "It is our understanding that the important objectives of the intergovernmental agreement are...the development of conditions in which market forces may operate effectively to attain the most economic
pattern of investment, production  and trade. " (emphasis added)
468 Panel Report on Indonesia – Autos, supra  note 270, para. 14.82.WT/DS139/R
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domestic source".  Accordingly, the CVA requirement is a TRIM that is inconsistent with the
provisions of Article III of the GATT 1994 within the meaning of Article 2.1 of the TRIMs
Agreement.
2. Arguments of the European Communities
6.399  The European Communities argues as follows:
6.400  Article 2.1 of the TRIMs Agreement provides that:
"Without prejudice to other rights and obligations under GATT 1994, no Member
shall apply any TRIM that is inconsistent with the provisions of Articles III or XI of
GATT."
6.401  The TRIMs Agreement does not define the notion of TRIMs. Nevertheless, the Annex to that
Agreement contains what Article 2.2 describes as:
"An illustrative list of TRIMs that are inconsistent with the obligation of national
treatment provided for in paragraph 4 of Article III of GATT…"
6.402  The CVA requirements and the ratio requirements are both "investment measures" and
"related to trade in goods" and, consequently, constitute TRIMs within the meaning of Article 1 of theTRIMs Agreement. Since those requirements ar e inconsistent with GATT Article III:4 (see  Section
VI.B for argumentation), it follows that they infr inge as well Article 2.1 of the TRIMs Agreement.
6.403  Moreover, the CVA requirements and the ratio requirements fall within Item 1 of the
Illustrative List of prohibited TRIMs.
(a) The CVA requirement and the ratio requirement are "investment measures"
6.404  The term "investment measure" is not defined in the TRIMs Agreement but has been
interpreted authoritatively in Indonesia – Autos . In that case, the Panel found that the granting by the
Indonesian Government of tariff and tax incentives conditional upon compliance by the beneficiaries
with certain local content requirements was an "investment measure".
6.405  The Panel reasoned as follows:
"[T]hose measures are aimed at encouraging the development of a local
manufacturing capability for finished motor vehicles and parts and components inIndonesia. Inherent to this objective is that these measures necessarily have a
significant impact on investment in these sectors. For this reason, we consider that
these measures fall within any reasonable interpretation of the term ‘investment
measures"
469
6.406  The structure of the measures in dispute is similar to that of the measures applied by
Indonesia. Further, the two sets of measures pursue the same objective, with the only difference that
Canada’s measures, having already succeeded in "developing a local manufacturing capability", now
operate mainly as an encouragement for the US Bi g Three to maintain their investments in Canada.
As such, Canada’s measures, like Indonesia’s measures, have a "significant impact on investment"
and, therefore, must be deemed to constitute "investment measures" for purposes of the TRIMsAgreement.
                                                     
469 Ibid., para. 14.80.WT/DS139/R
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(b) The CVA requirement and the ratio requirement are "related to trade in goods"
6.407  The CVA requirements are "related to trade in goods" because they favour the use of
domestic parts and materials for the assembly of motor vehicles over imported parts and materials470
and/or the export of motor vehicles (and/or parts therefor).  (See discussion below in Section VI.D,SCM Agreement).
6.408  In turn, the ratio requirements are "related to trade in goods" because they provide an
incentive for limiting the sales of imported motor vehicles (discussed above in Section VI.B,
Article III:4 of the GATT), as well as for exporting domestically produced motor vehicles (discussed
below in Section VI.D, the SCM Agreement).
(c) The CVA requirements and the ratio requirements fall within the Illustrative List of
prohibited TRIMs
6.409  Item 1 of the Illustrative List of prohibited TRIMs states the following in relevant part:
"1. TRIMs that are inconsistent with the obligation of national treatment
provided for in paragraph 4 of Article III of GATT include those … compliance with
which is necessary to obtain an advantage, and which require:
(a)  the … use by an enterprise of products of domestic origin or from
any domestic source … specified in terms of a proportion of … value of its
local production;
(b) that an enterprise’s purchase or use of imported products be limited
to an amount related to the … value of local products that it exports."
6.410  The CVA requirements provide an incentive to use domestic goods instead of imported goods
in the manufacture of motor vehicles. Further, as discussed below, some of the CVA requirementshave been set at a level such that they cannot be met unless that the beneficiaries use a significant
proportion of domestic goods in the manufacture of motor vehicles (and/or parts therefor) or, as the
sole alternative, that they export part of its production of motor vehicles (and/or parts therefor).
Therefore, the CVA requirements fall within Items 1(a) and/or 1(b).
6.411  In turn, as described below in arguments relating to the SCM Agreement (Section VI.D),
under the ratio requirements the amount of imported motor vehicles that a beneficiary may sell in
Canada (and, therefore, that it may be interested in "purchasing") varies according to the value of the
motor vehicles which it exports. Therefore, the ratio requirements fall within Item 1(b) of the
Illustrative List.
3. Canada's response
6.412  Canada  responds as follows:
(a) The MVTO and SROs are not “trade-related investment measures”
6.413  Just as Japan and the European Communities cannot show a violation of Article III, they
cannot show that the TRIMs Agreement has any relevance.  The TRIMs Agreement, by the terms of
Article 1, applies to trade-related investment measures.  The term “investment measures” is not
                                                     
470According to the Panel Report on Indonesia – Autos, supra  note 270, para. 14.82, "[local content
requirements are] necessarily ‘trade-related, because such requirements, by definition, always favour the use ofdomestic products over imported products, and therefore, affect trade".WT/DS139/R
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defined in the text.   The only interpretation of the term was provided by the Panel in Indonesia -
Autos  which found the Indonesian measures to be TRIMs.  The Panel wrote:
"On the basis of our reading of these measures applied by Indonesia under the 1993
and the 1996 car programmes, which have investment objectives and investment
features and which refer to investment programmes, we find that these measures areaimed at encouraging the development of a local manufacturing capability for finished
motor vehicles and parts and components in Indonesia.  Inherent to this objective is
that these measures necessarily have a significant impact on investment in these
sectors.  For this reason, we consider that these measures fall within any reasonable
interpretation of the term “investment measures”."
471
6.414  The Panel conceded that it was not providing a complete definition of the term, and stated that
other measures may relate to investment in a different manner.  Nevertheless, it seems clear that an
investment measure must affect investment.  This is consistent with the ordinary meaning of the
words.472  The complainants have not demonstrated that Canada’s measures have any current
investment effects, and have therefore not shown th at they are TRIMs. Changes in investment levels
can have no effect on benefits under the measures.  Furthermore, current production levels are far
beyond those required, and are therefore based purely on commercial considerations such as labour
costs, proximity to markets and the quality of the labour force.
6.415  The complaining parties have also failed to demonstrate that the CVA and ratio requirements
are trade-related.  Japan claims the CVA requirements of the MVTO and SROs and the CVA
commitments of the additional letters are trade- related because they are a domestic content
requirement.  This is not true of the MVTO and SRO amounts, since Canada has already
demonstrated that they do not require the use of domestic parts; indeed, they have no effect
whatsoever on parts-sourcing decisions. The amounts in  the additional letters are irrelevant, since they
are not requirements at all.
6.416  The European Communities makes the same claims with respect to the CVA, and is wrong
for the same reasons.  It also claims the ratio requirements are trade-related because they create an
incentive for limiting the sales of imported vehicles and for exporting domestic vehicles. Given that
manufacturers are operating well above the required levels, the ratio requirements are incapable of
affecting trade in goods.  Manufacturers can and do increase or decrease production, imports or
exports without affecting their MVTO or SRO eligibility.
(b) The MVTO and SROs do not violate the TRIMs Agreement
(i) The measures do not violate Article III or XI of GATT 1994
6.417  Assuming the TRIMs Agreement applies at all, which Canada denies, Canada’s measures still
do not violate Article 2.  That article provides that no Member shall apply any TRIM that is
inconsistent with Articles III or XI of the GATT 1994.  The complainants have not raised Article XI,and they cannot demonstrate the existence of any violation of Article III. Canada has already
demonstrated that the measures at issue do not violate Article III.  They thus could not violate the
TRIMs Agreement, even if it did apply to the case.
                                                     
471 Panel Report on Indonesia – Autos, supra  note 270, para. 14.80.
472 See the interpretive provisions of the Vienna Convention on the Law of Treaties (May 23, 1969,
CTS 1980/37, 1155 UNTS 331, (1969) 8 ILM 679), especially Article 31.WT/DS139/R
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(ii) The CVA is not covered by the Illustrative List
6.418  It is clear from the terms of the Illustrative List that Canada is not in violation of the TRIMs
Agreement.  The text is explicit in stating that a prohibited TRIM must “require” the purchase or use
of domestic products.  The CVA requirements in the MVTO and SROs do not require the purchase or
use of domestic products, notwithstanding the complainants’ claims to the contrary.
6.419  The CVA is a value-added calculation that ensures a minimal level of manufacturing activity.
MVTO and SRO manufacturers are free to achieve their CVA levels in the manner of their choosing.
They are not required  by law to use Canadian products:  they can and do meet their CVA levels on
the basis of their labour costs, which are costs necessarily incurred domestically.  They could choose
to import all of their parts and components, and they would still qualify for benefits under the MVTOand the SROs.  The CVA is therefore not covered by the Illustrative List.
(iii) The ratio requirements are not covered by the Illustrative List
6.420  The European Communities argues that under the ratio requirement the number of imported
vehicles that a manufacturer may sell varies according to the value of the vehicles it exports.  It
therefore claims that the ratio requirements are covered by Item 1(b) of the Illustrative List.
473
6.421  The Illustrative List covers mandatory measures that require “that an enterprise’s purchases or
use of imported products be limited  to an amount related to the … value of local products that it
exports”.  The ratio requirements do not in any way limit the purchase or use of imported products, let
alone do so on the basis of the value of local products exported.  Manufacturers can purchase, import,
and use an unlimited quantity of imported vehicles.  It could happen in some cases that a
manufacturer may have to pay duty on some of  those vehicles.  This, however, is not a limit on the
purchase or use of imported products.  It simply returns the products to the situation they would havefaced in the absence of the measures. The ratio re quirement simply sets the maximum amount of duty-
free importation available for any given level of production.  The ratio requirements are therefore not
covered by the Illustrative List, and are not TRIMs.
4. Rebuttal arguments by Japan
6.422  Japan  rebuts as follows:
6.423  The Government of Canada argues that the measures at issue have no current investment
effect and, as such, they are not investment meas ures within the meaning of the TRIMs Agreement.
Canada also claims that, even if they were such measures, they would not be inconsistent with
Article 2.1 of the TRIMs Agreement because, according to Canada, they do not violate Article III:4 of
the GATT 1994.
6.424  Canada's arguments are not supported by the fact s and misinterpret the relevant provisions of
the TRIMs Agreement.
(a) Investment measures
6.425  Canada incorrectly interprets the Panel's reasoning in Indonesia – Autos
474 to support its
contention that an investment measure must have actual investment effects.  Indeed, a proper readingof the Panel's ruling in that instance can only lead to the rejection of Canada's narrow interpretation of
the meaning of the term "investment measure".
                                                     
473 This argument, too, appears to be premised on the EC’s incorrect assumption that a ratio failure
results in a complete loss of duty remission.
474 Panel Report on Indonesia – Autos, supra  note 270.WT/DS139/R
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6.426  In Indonesia - Autos , the panel made it clear that numerous measures may relate to investment
in a different manner and that more than one factor can be taken into account in interpreting the term
"investment measure".  Far from limiting its analysis to the current investment effects of a given
measure, the Panel specifically considered the objective of the Indonesian measures at issue in that
case and found that such measures were aimed at encouraging the development of a localmanufacturing capability for finished motor vehicles and parts and components.  Then, it examined
whether the measures had an impact on investment on the sectors (e.g., whether the stated objectives
have been met).
6.427  In this present dispute, the measures are clearly aimed at sustaining investment in the
automotive sector.
6.428  First, as discussed, the MVTO 1998, the SROs and the letters of undertaking implement the
Auto Pact, a trade agreement that was explicitly aimed at investment.
6.429  Second, the fact that the only eligible recipients for the Duty Waiver are manufacturers is
prima facie evidence that the Duty Waiver is an investment measure.
6.430  Third, the view that the Duty Waiver is an investment measure is supported by statements of
Canadian and industry officials.
6.431  On 23 February 1999, Minister John Manley (the Minister of Industry Canada) made the
following statement:
"In the context of our consultations for this review, the industry told us that the
most important decision that the government could make to assist production in
Canada  was to maintain the Auto Pact and vehicle tariff at its current level.  We did
just that.  We are defending the interests of GM, Ford and Daimler-Chrysler before
the WTO."475 (emphasis added )
6.432  This is clear evidence that the Duty Waiver "assists production" in Canada.  Whether
production is "maintained" or "increased", it is clearly linked to investment.
6.433  This linkage to investment is supported by the 17 November 1997 statement by the then
Chairman, President and CEO of Chrysler Canada  (Exhibit JPN-46) wherein he acknowledged that
the CVA "has resulted in significant purchases of vehicle parts produced in Canada" and has "resulted
in the dramatic rise of the Canadian vehicle parts industry" between 1964 and 1996.
6.434  With regard to the position of the Government of Canada that the CVA is not an investment
measure, Japan would like to bring the Panel's attention to the 1997 statements by the then Chairman,President and CEO of Chrysler Canada, contained in our Exhibit JPN-46.
"In the last decade alone, over $20 billion out of the $23 billion invested in total from
the whole industry, came from the Auto Pact players (the domestic industry) as a
result of the 1965 Auto Pact" (Exhibit JPN-46, at p.2).
"Automobiles manufactured in North America by the Auto Pact members, the "Big
Three", contain on average over $1,500 worth of Canadian-made parts.  Automobiles
manufactured by non-auto pact members, such as Honda and Toyota, contain only
$360 worth of Canadian-made parts.  So, you can see by these figures the potential
economic ramifications of any initiatives which undermine our domestic Industry."(Ibid.)
                                                     
475 Visit to Boisbriand on 23 February 1999 by Minister Manley (Exhibit JPN-49).WT/DS139/R
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6.435  It is also supported by 16 October 1997 statements made by the then President and CEO of
Ford Canada:
So what is so special about the Auto Pact that makes it worth fighting for?
It has been acclaimed as Canada's most successful trade policy in the last 30 years
because it spawned the development of a world class automotive parts and
manufacturing industry in Canada.
(b) Trade-related
6.436  The Government of Canada argues that the Duty Waiver is not trade-related.  On this issue,
the above discussion with respect to the inconsistency of the CVA requirement with Article III:4 of
the GATT 1994 demonstrates that the Duty Waiver is trade-related and is thus governed by the
TRIMs Agreement.
(c) Relevant test
6.437  The Government of Canada argues that the CV A does not fall within the Illustrative List.
This argument has no merit.  First, the Illustrative List is not exhaustive.  Second, the relevant legal
issues are:  (i) is the measure an "investment measure";  (ii) is the measure "trade related";  and (iii) in
the context of this dispute, is the measure inconsistent with the Article III:4 of the GATT 1994.  As
set out above, all three questions can be answered in the affirmative.  The fact that the measure is not
included on the Illustrative List is not determinative.
6.438  In its response to Question 16 of the Panel, the Government of Canada takes the position that
the use of the word "require" is a mandatory criteri on for a TRIM that is inconsistent with Article III:4
of the GATT 1994.
6.439  Clearly, this is not the case.  The qualifying word "include" applies to the remainder of
paragraph 1 of the Illustrative List, including the word "require".  Thus, "require" is not a mandatory
criterion.  It is merely illustrative.
6.440  It is necessary only to demonstrate that the TRIM in question violates Article III:4 of the
GATT 1994.  Thus, it is necessary only to show that the measure has the potential to change the
conditions of competition between imported and like domestic products.
5. Rebuttal arguments by the European Communities
6.441  The European Communities  rebuts as follows:
6.442  Canada’s main argument under the TRIMs Agreement is that the measures in dispute are not
“investment measures”, because they have not been shown by the complainants to have “any current
investment effects476. "
6.443  The existence of an “investment measure” does not depend on its current effects on
investment. The examples of prohibited TRIMs contained in the Illustrative List do not incorporate
any such  “current effects” test.
                                                     
476 Canada also asserts that:  “Automotive production levels in Canada are based on purely commercial
considerations such as labour costs, proximity to market s and the quality of the labour force”.  Aside from the
fact that the actual effects of the measure are not relevant, Canada provides no supporting evidence for thatstatement. Volvo’s decision to close its assembly plant in Canada casts doubts on Canada’s self-confidentassertions and suggests that investment incentives may still play a role even in Canada.WT/DS139/R
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6.444  The Panel Report on Indonesia – Autos , which on this point is quoted with approval by
Canada, did not look at the actual effects of the measure, but rather at the structure and the aim of the
measures477.
6.445  If the characterisation of a measure as an “investment measure” was made dependant on its
actual effects on investments at a given moment, one and the same type of measure could be aprohibited TRIM when applied by a Member,  but not when applied by another Member.
6.446  Indeed, that would be precisely the perverse outcome of Canada’s position in this case. In
Indonesia – Autos , the granting of a tariff exemption contingent upon compliance with a local content
requirement was found to be a prohibited TRIM when applied by a developing country
478. Yet
Canada’s position is, in essence, that the very same measure should be condoned by this Panel, simplybecause Canada is a developed country which has already succeeded in building its own local
automotive industry, so that the measure has no “current” effects.
6.447  Canada introduces the additional argument that “changes in investment levels can have no
effects on benefits under the measures."  That asse rtion is manifestly wrong. If the Big Three decided
to close their production facilities in Canada and import all the motor vehicles which they sell inCanada from the United States and Mexico, they would cease to qualify for the Tariff Exemption. On
the other hand, if the Big Three made new investments, so as to increase their local production, they
would be entitled to sell even more vehicles imported under the Tariff Exemption than now
479.
6.448  Canada also argues that the measures are not “trade-related"; and that they do not fall within
the Illustrative List.  The arguments raised by Canada are essentially the same as those raised by
Canada in its unsuccessful attempt to refute that the measures are inconsistent with GATT
Article III:4 and with Article 3.1(a) of the SCM Agreement. Those arguments are disposed ofelsewhere in the EC's argumentation.
6. Response by Canada to the complainants' rebuttals
6.449  Canada  responds as follows:
6.450  Canada maintains its argument that the measures are not TRIMs because they have no
investment effects.  Manufacturers are operating well above the production levels required by theMVTO and SROs.  There is no incentive to increase investment, and no need even to maintain
existing levels.  The measures are thus incapable of affecting investment.
6.451  The European Communities has argued that the measures are TRIMs because of their
“structure and aim”. Canada notes that the panel in Indonesia – Autos  stated explicitly that the
measures at issue would “necessarily” have a “significant” effect on investment.
480  It is thus incorrect
to state that the previous panel “did not look at the actual effects of the measure”, as the European
Communities has suggested.
7. The European Communities' follow-up to Canada's response
6.452  As a follow-up to Canada's response, the European Communities  argues as follows:
                                                     
477 Panel Report on Indonesia – Autos, supra  note 270, para. 14.80.
478 Ibid., para. 14.91.
479 Significantly, Annex 300.A of NAFTA, which authorises Canada to continue to apply the Tariff
Exemption, is entitled “Trade and Investment in the Automotive Sector” (Exhibit EC –13).
480 Panel Report on Indonesia – Autos, supra  note 270, para. 14.80.WT/DS139/R
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6.453  As mentioned with respect to Article III claims, the European Communities would like to
make a clarification regarding the scope of its claims with respect to the CVA requirements.  Canada
attributes to the European Communities the claim that "the CVA requirements favour the use of
domestic equipment manufacturing (OEM) parts in the production of vehicles in Canada".
6.454  That is not correct.  The EC's claim is not limit ed to OEM parts.  It extends to all goods used
or consumed in the manufacture of motor vehicles which are counted as CVA when produced or
manufactured in Canada, but not when imported.  In accordance with the rules contained in the
MVTO 1998, that includes not only parts, but also materials, as well as certain equipment of non
permanent nature.
8. Canada's follow-up response
6.455  Canada  responds as follows:
6.456  (See Canada's response to the complainants' rebuttals in Section VI.B.6.)
D. THE SCM A GREEMENT
1. Arguments of Japan
6.457  Japan  argues as follows:
6.458  The Duty Waiver is inconsistent with the SCM Ag reement.  It is a subsidy that is contingent
upon export performance and upon the use of domestic over imported goods.  Accordingly, it is
prohibited under Article 3 of the SCM Agreement.
(a) The Duty Waiver is a subsidy under Article 1 of the SCM Agreement
6.459  Article 1 of the SCM Agreement defines a subsidy as follows:
"1.1 For the purposes of this Agreement, a subsidy shall be deemed to exist if:
(a)(1) there is a financial contribution by a government or any public body within
the territory of a Member (referred to in this Agreement as "government"),
i.e. where:
… (ii) government revenue that is otherwise due is foregone or not collected
(e.g., fiscal incentives such as tax credits);
and(b) a benefit is thereby conferred."
6.460  Thus, in order to determine if a subsidy exists, two elements must be demonstrated.  The
alleged subsidy must be (i) a financial contribution by a government (ii) that confers a benefit.
6.461  With respect to the first element, a financial contribution under paragraph 1.1(a)(1)(ii) of the
SCM Agreement exists when government revenue that is otherwise due is foregone or not collected.In the ordinary sense, "government revenue" is raised through internal taxes and other charges
including customs duties.  Since government revenue is foregone when a customs duty is waived, the
Duty Waiver amounts to a financial contribution.WT/DS139/R
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6.462  With respect to the second element, the exemption of customs duty on motor vehicles is
clearly a benefit under Article 1.1(b) of the SCM Agreement.
6.463  Accordingly, the Duty Waiver is a subsidy within the meaning of Article 1 of the SCM
Agreement.  This is consistent with the finding of the Panel in Indonesia – Autos  that preferential duty
treatment analogous to the Duty Waiver was a subsidy within the meaning of Article 1 of the SCMAgreement.
481
(b) The subsidy is prohibited under Article 3 of the SCM Agreement
6.464  Article 3 of the SCM Agreement prohibits certain subsidies.  It reads as follows:
"3.1 Except as provided in the Agreement on Agriculture, the following subsidies, within
the meaning of Article 1, shall be prohibited:
(a) subsidies contingent, in law or in fact, whether solely or as one of several
other conditions, upon export performance, including those illustrated in
Annex I.
(b) subsidies contingent, whether solely or as one of several other conditions,
upon the use of domestic over imported goods.
3.2 A Member shall neither grant nor maintain subsidies referred to in paragraph 1."
6.465  The Duty Waiver is a prohibited subsidy for two independent reasons:  (i) it is contingent on
the use of domestic over imported goods and (ii) it is contingent on export performance.
(i) The Duty Waiver is contingent on the use of domestic over imported goods
6.466  Article 3.1(b) of the SCM Agreement prohibits subsidies that are contingent, whether solely
or as one of several other conditions, upon the use of domestic over imported goods.
6.467  The Duty Waiver is conditional on compliance with the CVA requirement which requires the
use of domestic over imported goods.  Accordingly, the Duty Waiver is a prohibited subsidy underArticle 3.1(b) of the SCM Agreement and is inconsistent with Article 3.2 of the SCM Agreement.
(ii) The Duty Waiver is contingent upon export performance
6.468  Article 3.1(a) of the SCM Agreement prohibits subsidies that are contingent, in law or in fact,
whether solely or as one of several other conditions, upon export performance.
6.469  The Duty Waiver is, in fact, contingent on export performance.  Eligibility for the Duty
Waiver is conditional on compliance with the manufacturing requirement (i.e. the production-to-sales
ratio).  As discussed in argumentation relating to Article III, the application of the manufacturing
requirement means that a certain value of motor vehicles is to be exported by the Auto Pact
Manufacturers.
6.470  In this case, by virtue of the manufacturing requirement, the Duty Waiver is conditional on an
Auto Pact Manufacturer exporting a certain amount of its production.  The benefit of the Duty
Waiver, therefore, is contingent upon export performance.
                                                     
481 Panel Report on Indonesia – Autos, supra  note 270, para. 14.155.  The measures included a variety of
tariff reductions and tariff exemptions on motor vehicles and parts.WT/DS139/R
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6.471  Thus, the Duty Waiver is a prohibited export subsidy under Article 3.1(a) of the SCM
Agreement and is inconsistent with Article 3.2 of the SCM Agreement.
2. Arguments of the European Communities
6.472  The European Communities  argues as follows:
6.473  The Tariff Exemption is a "specific subsidy"  within the meaning of Articles 1 and 2 of the
SCM Agreement. Furthermore, the granting of the Tariff Exemption is contingent upon export
performance, as well as upon the use of domestic over imported goods. As such, it is prohibited by
both Article 3.1(a) and Article 3.1(b) juncto  Article 3.2 of the SCM Agreement.
(a) The Tariff Exemption constitutes a specific subsidy
(i) The Tariff Exemption is a "subsidy"
6.474  The notion of "subsidy" for the purposes of the SCM Agreement is defined in its Article 1.1.
That provision reads in relevant part as follows:
"1.1 For the purpose of this Agreement, a subsidy shall be deemed to exist if:
(a)(1) there is a financial contribution by a government …, i.e. where:
…(ii) government revenue that is otherwise due is foregone or not collected
(e.g., fiscal incentives such as tax credits);
…
and
(b)  a benefit is thereby conferred."
6.475  Customs duties are imposed, collected and appropriated by the Canadian Government.
Accordingly, they constitute "Government revenue".
6.476  Pursuant to Canada’s Customs Tariff, the importation of motor vehicles is, in principle,
subject to the payment of customs duties. Thus, by exempting from customs duties the importation of
motor vehicles by the beneficiaries, the Canadian  Government is "foregoing" revenue that would
otherwise be "due".
6.477  Finally, the Tariff Exemption provides a "benefit" to the beneficiaries because it lowers their
import costs, compared to the costs that they woul d incur if, like any other importer of motor vehicles,
they were required to pay the full amount of customs duties stipulated in Canada’s Customs Tariff.
(ii) The subsidy is "specific"
6.478  Article 1.2 of the SCM Agreement provides that:
"A subsidy as defined in paragraph 1 shall be subject to the provisions of Part II …
only if such a subsidy is specific in accordance with the provisions of Article 2."
6.479  According to Article 2.3 of the SCM Agreement:WT/DS139/R
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"Any subsidy falling under the provisions of Article 3 shall be deemed to be
specific."
6.480  As shown below, the Tariff Exemption falls within the provisions of both Articles 3.1(a) and
3.1(b) of the SCM Agreement. Therefore, it constitutes a "specific" subsidy for purposes of
Article 1.2.
(b) The  Tariff Exemption is a prohibited subsidy
6.481  Article 3 of the SCM Agreement reads as follows in pertinent part:
"3.1 [T]he following subsidies, within the meaning of Article 1, shall be prohibited:
a) subsides contingent, in law or in fact, whether solely or as one of several
conditions, upon export performance ….
 b)subsides contingent, whether solely or as one of several conditions, upon the
use of domestic over imported goods.
3.2 A Member shall neither grant nor maintain subsidies referred to in paragraph 1."
(footnotes omitted)
6.482   As will be demonstrated below, the ratio requirements constitute an export performance
condition of the type prohibited by Article 3.1 (a).
6.483   In turn, the CVA requirements make the Tariff Exemption contingent upon: (1) the use of
domestic over imported goods, contrary to Article 3.1(b); and/or (2) the exportation of  motor vehicles
and/or original equipment parts therefor, contrary to Article 3.1(a).
(i) The ratio requirements
6.484  As explained in the factual part, the production-to-sales ratio applicable to the MVTO 1998
beneficiaries is, as a general rule, at least 95 to 100 in the case of automobiles and at least 75 to 100 inthe case of specified commercial vehicles and buses. In turn, the production-to-sales ratio applicable
to the SRO beneficiaries is, also as a general rule, 100 to 100, irrespective of the class of motor
vehicles.
6.485   In those instances where the required ratio is 100 to 100 or more, a beneficiary cannot sell in
Canada any amount of motor vehicles imported under the Tariff Exemption unless it exports anequivalent amount of domestically manufactured motor vehicles.
6.486  This is illustrated by the example set out in the EC's Table 3 below.  Beneficiary A sells all its
production in Canada, with the consequence that it cannot sell any motor vehicles imported under the
Tariff Exemption. Indeed, if Beneficiary A sold any such motor vehicles, in addition to those which it
manufactures in Canada, the resulting ratio of  production-to-sales would be less than 100 to 100. Incontrast, Beneficiary B, which produces and sells in Canada the same amount of motor vehicles as
Beneficiary A, is nevertheless entitled to sell motor vehicles imported under the Tariff Exemption up
to an amount of 50$ because it exports motor vehicles for the same amount.WT/DS139/R
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EC's  Table 3
Ratio domestic production/domestic sales: 100 to 100
Local production Exports Imports Total sales in
Canada
Beneficiary A 100$ 0$ 0$ 100$
Beneficiary B 100$ 50$ 50$ 100$
6.487  Thus, in those cases where the ratio is 100 to 100 or more, the possibility to sell motor
vehicles imported under the Tariff Exemption, and consequently to benefit from the subsidy, is legally
"contingent" upon export performance within the meaning of Article 3.1 a) of the SCM Agreement
6.488  In those instances where the prescribed ratio is less than 100 to 100, the beneficiaries are
entitled to sell in Canada some motor vehicles imported under the Tariff Exemption, whether or not
they export any domestically produced motor vehicles. For instance, if the required ratio is 95 to 100,the beneficiaries may sell imported motor vehicles for an amount equal to 5 per cent of  their total
sales in Canada, even if they do not export any motor vehicles.
6.489  Nonetheless, as shown by the example in the EC's Table 4, if a beneficiary exports some
motor vehicles instead of selling them in Canada, the value of imported motor vehicles which it may
sell in Canada increases by an amount equal to the value of the exported vehicles.
EC's Table 4
Ratio local production/local sales: 95 to 100
Local production Exports Imports Total sales in
Canada
Beneficiary A 95$ 0$ 5$ 100$
Beneficiary B 95$ 50$  55$ 100$
6.490  In the above example Beneficiary A does not export any motor vehicles. As a consequence, it
may sell in Canada only a small amount of motor vehicles imported under the Tariff Exemption (5$).
Beneficiary B produces the same amount as Bene ficiary A but, unlike Beneficiary A, exports a
substantial part thereof. As a result, Beneficiary B is entitled to sell in Canada the same amountimported under the Tariff Exemption as Beneficiary A (5$) plus an additional amount equal to the
value of its exports (50$).
6.491  Thus, by exporting part of their domestic production, the beneficiaries qualify for a larger
subsidy than if they sold all their domestic production in Canada. That additional subsidy is therefore
"contingent" in law upon export performance within the meaning of Article 3.1 (a).WT/DS139/R
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(ii) The CVA requirements
6.492  The CVA requirements do not impose explicitly the obligation to "use domestic over
imported goods", but rather the obligation to reach a certain amount of Canadian Value Added.
Nevertheless, parts and materials used in the manufacture of motor vehicles are one of the items,
indeed the main one, included in the calculation of the CVA482.
6.493  The Tariff Exemption is "contingent upon the use of domestic over imported goods" within
the meaning of Article 3.1 (b) because using domestic parts and materials may be sufficient, or at least
contribute, to meet the CVA requirements, wherea s using imported parts and materials may not. As a
result, the granting of the subsidy will depend, at least in some cases, on whether the beneficiaries use
domestic or imported goods.
6.494  During the consultations, Canada appeared to take the position that the Tariff Exemption is
not "contingent upon the use of domestic over imported goods" because in practice the beneficiaries
can meet the CVA requirements without using any domestic parts and materials at all.
6.495  In order to establish a violation of Article 3.1(b),  however, it is not necessary to show that the
subsidy has any actual effects. The mere possibility that in some cases a beneficiary may be requiredto use domestic goods instead of imported goods in order to qualify for the subsidy is sufficient to
trigger the application of Article 3.1(b).
6.496  At any rate, assuming arguendo  that the actual use of domestic goods had to be a necessary
condition for granting the subsidy, in the case at hand some of the CVA requirements have been set at
a level such that the beneficiaries cannot possibly meet them without using some domestic parts and
materials.
6.497  As set out in the factual part, the CVA requirements contained in the Letters of Undertaking
have the consequence that the total CVA of the motor vehicles of a given class, and of the original
equipment parts therefor, produced  in Canada must approach 60 per cent (in the case of automobiles)
or 50 per cent (in the case of specified commercial vehicles and buses) of the cost to the beneficiary of
the vehicles of that class sold in Canada.
6.498  In turn, the SROs issued from 1984 onwards
483 provide, as a general rule, that the CVA of the
motor vehicles produced  in Canada by the beneficiaries (and in some cases, of the original equipment
parts) shall be no less than 40 per cent484 of the cost of sales of the vehicles sold in Canada.
6.499  In practice, however, parts and materials may account on average for as much as 80 per cent
of the cost of sales of the motor vehicles assembled in Canada485. Consequently, the CVA contained
in the motor vehicles sold in Canada by a beneficiary cannot be sufficient on its own to meet theabove mentioned CVA requirements, unless those motor vehicles incorporate a substantial proportion
of domestic parts and materials.
                                                     
482See Section VI.B on GATT Article III.
483 See supra para. 5.35.
484 60 per cent in the case of CAMI.
485 Based on the data shown in tables 2.10 ("Value of Shipments in Canadian Automotive Industries")
and 2.16 ("Cost of Materials in the Canadian Automotive Industry) contained in the Statistical Review of theCanadian Automotive Industry: 1997 Edition, published by Industry Canada (hereinafter, "Statistical Review
1997") (Exhibit EC-18). For example, in 1995, the last year for which data are available, the total cost of
materials of Canada’s motor vehicles industry was C$40,680 million, whereas the value of the shipments ofmotor vehicles by the Canadian industry totalled C$50,473 million. Thus, the cost of materials represented, onaverage, 80.5 per cent of the shipment value.WT/DS139/R
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6.500  It must be recalled, nevertheless, that the relevant CVA amount includes not only the CVA
contained in the motor vehicles sold domestically but also the CVA of any exported motor vehicles
(and in some cases of exported original equipment parts).Therefore, in theory it is conceivable that a
beneficiary might be able to satisfy the CVA requirements without using any domestic parts and
materials at all, by exporting such a large part of its production that the "non-parts CVA" of  thoseexports, added to the "non-parts CVA" at of the motor vehicles sold domestically, reaches on its own
the required percentage of CVA to the cost of sales of the vehicles sold domestically
486.  But in that
case the CVA requirements would be operating as an export performance condition.
6.501  Thus, in definitive the CVA requirements make the Tariff Exemption "contingent" either
upon the use of domestic over imported goods, contrary to the prohibition of Article 3.1 (b); and/or, asthe sole alternative, upon export performance, in violation of the prohibition contained in
Article 3.1(a).
3. Canada's response
6.502  Canada responds as follows:
6.503  Japan and the European Communities contend that duty-free treatment pursuant to the MVTO
and the SROs is a subsidy that is contingent upon export performance, contrary to Article 3.1(a) of the
SCM Agreement and contingent upon the use of domestic over imported goods, contrary to Article
3.1(b) of the SCM Agreement.  Both of these allegations rest on fundamental misunderstandings of
the nature and effect of the measures at issue.
(a) The duty-free treatment is not an export subs idy within the meaning of Article 3.1(a) of
the SCM Agreement
(i) The duty-free treatment facilitates imports:  it does not distort export trade
6.504  Article 3.2 of the DSU requires that the SCM Agreement must be interpreted in good faith in
accordance with the principles of treaty interpretation in customary international law as set out, in
part, in Article 31 of the Vienna Convention on the Law of Treaties.
487   The starting point for
interpreting the SCM Agreement is therefore the ordi nary meaning of its terms, in their context and in
the light of the object and purpose of the SCM Agreement.
6.505  The overriding purpose of the SCM Agreement is to discipline subsidies that distort trade.
The hierarchy of disciplines the SCM Agreement imposes on its three categories of subsidies reflects
this purpose: non-actionable subsidies;488 actionable subsidies489; and prohibited subsidies.  Only two
types of subsidies are prohibited: those that are co ntingent upon export performance and those that are
contingent upon the use of domestic over imported goods.  Such subsidies are taken to be, or are seenas intended to be, by definition trade distorting.   Thus, in Brazil – Export Financing Programme for
Aircraft , the Panel stated:
"In our view, the object and purpose of the SCM Agreement is to impose multilateral
disciplines on subsidies which distort international trade.  It is for this reason that the
SCM Agreement prohibits two categories of subsidies – subsidies contingent upon
                                                     
486 In practice, the "non-parts CVA" accounts for barely one third of the total CVA achieved by the
beneficiaries.  See Statistical  Review 1997, Table 4.8 (Exhibit EC-18).
487 Appellate Body Report on United States – Standards for Reformulated and Conventional Gasoline ,
adopted on 20 May 1996 , WT/DS2/AB/R & WT/DS4/AB/R (hereinafter Appellate Body Report on US –
Gasoline ), p. 17.
488 See Articles 1.2 and 8.
489 See Article 5.WT/DS139/R
WT/DS142/RPage 158
exportation and upon the use of domestic over imported goods – that are specifically
designed to affect trade ."490 (emphasis added )
6.506  Japan and the European Communities assert that the duty-free treatment of imported  vehicles
constitutes a prohibited export  subsidy under the SCM Agreement.  The Canadian measures at issue
implement Canada’s obligations under the Auto Pact that was designed to facilitate the rationalization
of automotive production by removing barriers to automotive trade between Canada and the United
States.  Canada’s contribution to this rationalization was to remove the tariff on motor vehicle imports
into Canada.  It did this through the measures at issue.491
6.507  Canada’s import duty waiver therefore encouraged imports into Canada.  Because NAFTA-
origin vehicles are not subject to duty,492 the principal beneficiaries of the duty waiver are vehicles
from Japan and the European Communities, as illustrated by Canada’s Figure 4  and Japan's Table 6.
6.508  Export subsidies are prohibited because they are trade distorting: they divert production from
domestic markets to export markets.  Canada’s duty-free treatment for imports does not do this.  If
manufacturers were really exporting to receive duty-free treatment for imports, they would beexporting only up to their levels of imports and they would be exporting everywhere they could.
Instead, the value of Canadian motor vehicle production is more than double that required by the
production-to-sales ratios and Canadian production is directed almost exclusively to the United States.
6.509  This is exactly what one expects to see in a rationalized industry where the US market is
much larger – ten times larger – than the Canadian market, and where Canadian exports to the United
States have attracted no duty since the Auto Pact came in to force, first under the US GATT waiver,
now under the NAFTA.  In fact, this production and export pattern is followed by all Canadian motorvehicle manufacturers, and not just those qualifying for duty-free treatment for imports.
6.510  The United States contribution under the Auto Pact to the rationalization of the
Canada/United States automotive industry was the elimination of its duty on imports from Canada of
qualifying vehicles and other automotive goods.
493
6.511  It is the US waiver of duty on vehicles importe d from Canada that has affected the export of
vehicles from Canada.  This is borne out by the fact that the overwhelming preponderance of exports
of Canadian vehicles is to the United States.494
6.512  The only real effect  on trade of the Canadian duty-free treatment is to increase the volume of
duty-free imports into Canada of vehicles that would not qualify for such treatment under the
NAFTA, such as those from Japan or the European Communities.  This is the antithesis of the effectthat underlies the prohibition of subsidies contingent upon export performance: the unfair distortion of
trade in favour of exports from the subsidizing Member.
                                                     
490 Panel Report on Brazil – Export Financing Programme for Aircraft , adopted as modified by the
Appellate Body on 20 August 1999,  WT/DS46/R (hereinafter Panel Report on Brazil – Aircraft ), para. 7.26.
491 Pursuant to Article II(a) and Annex A of the Auto Pact.
492 All motor vehicles from the United States and light trucks from Mexico enter Canada duty-free
under the NAFTA.  Other motor vehicles from Mexico are subject to a 1.3 or 2.4 per cent tariff, that will beeliminated by 2003.
493 Pursuant to Article II(b) and Annex B of the Auto Pact. This elimination of duty by the United
States, on Canadian vehicles only, was originally found by the Working Party to be inconsistent with Article I of
the GATT.  The United States therefore obtained a waiver from its GATT obligations. The US measure was
subsequently subsumed into the CUSFTA and the NAFTA.
494 See Tables 23-32 in Automotive Trade 1997, pp. 30-39 (Exhibit EC-15).  The same report notes that
in 1997, 97 per cent of Canada's automotive exports were to the United States, p.4.WT/DS139/R
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6.513  What Canada’s duty-free treatment really does is to facilitate the importation of vehicles from
Japan, Europe and elsewhere by permitting vehicles of any origin to enter Canada duty free.  Provided
that this treatment is granted on an MFN basis – and it is – this is exactly the sort of treatment that the
GATT permits, and indeed encourages.
6.514  It would be contrary to the objective of trade liberalization – the very foundation of the GATT
– to characterize a measure that facilitates imports  as an improper trade distortion.  It is therefore
hardly surprising that nowhere does the 1965 GATT Working Party Report suggest that any members
considered Canada’s duty-free treatment an export subsidy, even though export subsidies were
prohibited by Article XVI:4 of the GATT at the time  of the Working Party.  The Working Party, by
necessary implication, found no export subsidy in Canada’s measures.
(ii) The duty-free treatment is unlike any of the practices on the Illustrative List of Export
Subsidies
6.515  The Illustrative List of Export Subsidies in Annex I to the SCM Agreement, (the “Illustrative
List”), while not exhaustive, is an important gu ide to identifying the practices that constitute
prohibited export subsidies. It is particularly significant that in each of the practices identified on theIllustrative List there is a clear and direct nexus between the subsidy and the exported product, and the
amount of the subsidy increases with the volume of exports.
6.516  Neither Japan nor the European Communities ha s identified any subsidy on the Illustrative
List that is remotely analogous to the duty-free treatment for imports under the MVTO and SROs. The
duty-free treatment is, in fact, unlike any of the measures listed as prohibited export subsidies on the
Illustrative List.
6.517  It is contextually significant that duty or tax exemption or remission programs, such as those
described in paragraphs (g) , (h) and (i) of the Illustrative List, are deemed not to constitute export
subsidies when they are not excessive.  By operation of footnote 5 to Article 3.1(a), these non-
excessive tax or duty exemption or remission programs are explicitly not prohibited subsidies under
the SCM Agreement.  Footnote 5 to Article 3.1(a) provides that:
"Measures referred to in Annex I as not constituting export subsidies shall not be
prohibited under this or any other provision of this Agreement."
6.518  Moreover, under the SCM Agreement, certain ex emption or remission programs are not only
considered not to be prohibited export subsidies, they are considered not even to be subsidies.
Footnote 1 to Article 1.1(a)(1)(ii) of the SCM Agreement provides:
"In accordance with the provisions of Article XVI of GATT 1994 (Note to Article
XVI) and the provisions of Annexes I through III of this Agreement, the exemption of
an exported product from duties or taxes borne by the like product when destined for
domestic consumption, or the remission of such duties or taxes in amounts not in
excess of those which have accrued, shall not be deemed to be a subsidy."
6.519  Footnotes 1 and 5, together with paragraphs (g), (h) and (i) of the Illustrative List make clear
that in the case of non-excessive duty or tax exemp tion or remission programs, there is no prohibited
export subsidy – nor even a subsidy – even though government revenue that is otherwise due is
foregone and a benefit is thereby conferred directly to exports.
6.520  Under the MVTO and the SROs, duty-free treatment can never result in excess remissions.
Moreover, the benefit is conferred on imports.  The direct correlation with exports found even in the
permitted programs is entirely absent.  If non-excessive exemption or remission programs do not
constitute prohibited export subsidies, it would be inconsistent with the principles underlying thoseWT/DS139/R
WT/DS142/RPage 160
exemptions for MVTO and SRO duty-free treatment to be found to constitute prohibited export
subsidies.  To find the duty-free treatment to be an  export subsidy within the meaning of Article 3.1(a)
of the SCM Agreement would require an interpretation of Article 3.1(a) that is contrary to the
ordinary meaning of its terms in their context and in the light of the object and purpose of the SCM
Agreement.
(b) The ratio requirements do not make the duty-free treatment contingent upon export
performance
6.521  Article 3.1(a) reaches only subsidies that are contingent upon export performance, “in law or
in fact, whether solely or as one of several other conditions …”.  According to the European
Communities, the production-to-sales ratio requirements make the duty-free treatment contingent in
law on export performance. By contrast, Japan appears to concede that the measures do not make the
duty-free treatment legally  contingent upon export performance, but it does contend that the “subsidy”
is de facto  contingent upon export performance.
6.522  The arguments of both complainants demonstrate the absence of de jure  contingency.  They
rely on hypothetical scenarios because there is nothing on the face of the measures themselves thatsuggests contingency.  In other words, there is no contingency in law.
6.523  Indeed, the approach of both complainants underscores that there is no de facto  contingency
either:  they are forced to imagine scenarios ra ther than present facts.  In the SCM Agreement,
footnote 4 to Article 3.1(a) provides that the standard of “contingency in fact upon export
performance” is met only when the facts demonstrate that the granting of a subsidy is in fact tied to
actual or anticipated export earnings. The plain language of Footnote 4 demands that contingency
upon exportation be demonstrated by the facts.
(i) The ratio requirement does not make the import duty relief a subsidy contingent in law upon
export performance
6.524  A subsidy is contingent in law upon export performance where the underlying legal
instruments of that subsidy expressly provide that  the subsidy is available to enterprises only on
condition of export performance.  Even if the duty-free treatment could be considered a “subsidy”within the meaning of Article 1 of the SCM Agreem ent, nothing in either the MVTO or any of the
SROs indicates that it is available only on the condition that the subject manufacturers achieve any
particular export performance.  The relevant legal condition expressed in the MVTO and each SRO is
achievement of a production-to-sales ratio.  Neither production nor sales, nor a ratio of the one to the
other, is synonymous with exportation.
6.525  Despite the EC’s claim, the entirety of its supporting argument consists of two examples that
purport to show, by way of certain arithmetical hypotheses, that the ratio requirements force
manufacturers to export even though neither the MVTO  nor any of the SROs states that they must.
The EC’s argument fails even to establish a prima facie case that such an express condition exists.
Indeed, no such condition does exist.
(ii) The ratio requirements do not make the duty-free treatment a subsidy contingent in fact upon
export performance
6.526  Whether de jure  or de facto , the legal standard in Article 3 is that of “contingent upon export
performance”.  “Contingent upon” means conditioned on or dependent on.
495 “Contingent upon export
                                                     
495 In the Panel Report on Canada – Measures Affecting the Export of Civilian Aircraft , adopted with
Appellate Body Report on 20 August 1999, WT/DS70/R (hereinafter Panel Report on Canada – Aircraft ), the
Panel found that the relevant ordinary meaning of “contingent upon” is “dependent for its existence onWT/DS139/R
WT/DS142/R
Page 161
performance” therefore means “conditioned or dependent upon export performance”.  The ordinary
meaning of this phrase, interpreted in the context of Footnote 4 to Article 3.1(a) and the Illustrative
List, requires more than just a linkage between the subsidy and exportation.  Footnote 4 provides that
the standard of “contingent in fact upon export performance”:
"… is met when the facts demonstrate that the granting of a subsidy, without having
been made legally contingent upon export performance, is in fact tied to actual or
anticipated exportation or export earnings. The mere fact that a subsidy is granted to
enterprises which export shall not for that reason alone be considered to be an export
subsidy within the meaning of this provision. "
6.527  The fact that a subsidy is granted to enterprises that export is not sufficient to create an export
subsidy.  The subsidy must in fact be “tied to” e xportation or export earnings.  This interpretation is
borne out by all of the examples on the Illustrative List, which involve a demonstrable link between
an increase in exports and an increase in the size of the subsidy.  In the case of the duty-free treatment
at issue here, this tie is absent.
6.528  In Canada – Aircraft , the European Communities agreed with Canada that the following
factors are useful in determining whether a subsidy is in fact  contingent upon export performance:
• evidence that the subsidy would not have been  paid but for the exports flowing from it;
• whether there are penalties – in the sense of reductions or withdrawals of payments – if exports do
not take place; or
• whether there are bonuses or additional payments if exports do take place.496
6.529  Neither Japan nor the European Communities has produced evidence that any of these factors
is present in this case.  Instead, they rely on two hypothetical examples in their attempts to
demonstrate export contingency.  However, neither complainant has produced any evidence to
substantiate their claims that the production-to-sales requirement influences qualified manufacturers
to conduct their businesses in the manner suggested in these hypothetical examples.
6.530  Under the complainants’ hypotheses, Canadian manufacturers export so as to receive the
benefit of the duty-free treatment of imports.  However, the European Communities has also
characterized the  ratio requirements as “restrict[ing] exclusively the sales of imported motor
vehicles”. Japan has argued, also with respect to Article III of the GATT, that the ratio requirements
lead to increased domestic production.  Japan claims that this results in increased competition for
sales in Canada’s domestic market – at the expense of imports.  In other words, Japan and the
European Communities are asking this Panel to accept, for the purposes of their SCM allegations, that
the ratio requirements encourage – or even force – manufacturers to export so that they can importvehicles duty free.  But they also ask the Panel to accept, for the purposes of their GATT arguments,
that the same ratio requirements simultaneously restrict the sales of imported vehicles.  By the
complainants’ reasoning, manufacturers export vehicles in order to receive duty-free treatment on
imported vehicles that they then cannot sell.  This illogical proposition runs counter to reality:  the
duty-free treatment facilitates imports; it has no nexus with exports.
6.531  The fact of the matter is that manufacturers export because of market considerations.  The
only “measure” in the entire context of the Auto Pact that provides an incentive for Canadian
manufacturers to export is the US waiver of duty on Canadian vehicles, for which the United States
received a GATT waiver and which is now subsumed into the NAFTA.  Manufacturers import
                                                                                                                                                                    
something else”, “conditional; dependent on, upon.” (para. 9.331).  The Panel relied on The New Shorter
Oxford English Dictionary on Historical Principles, Vol. 1 (Oxford:  Clarendon Press, 1993).
496 Panel Report on Canada – Aircraft, supra note 495, para. 7.5.WT/DS139/R
WT/DS142/RPage 162
vehicles into Canada not to obtain duty-free treatment but because there is a market for them in
Canada.
6.532   There is a simple reason why neither the European Communities nor Japan relies on the
factors that the European Communities proposed in Canada – Aircraft as indicative of de facto  export
contingency:  these factors are entirely absent.  The first of these factors is that the “subsidy” wouldnot have been paid but for the exports flowing fr om it.  As Canada has shown, exports do not flow
from the Canadian duty-free treatment at all; they flow from the US duty waiver on imports of
Canadian vehicles.   As far as the second factor is concerned, there are no penalties if exports do not
take place.  With regard to the third factor,  it is clear that no bonuses are paid or additional payments
made if exports do take place.  This is because the benefits received by a qualifying manufacturerdepend wholly on its imports and not on exports.
6.533  Moreover, the fact that many of the production-to-sales ratios are set at less than 1:1
497 proves
that receipt of duty-free treatment does not require exports at all.  Japan’s own example illustrates
this.
6.534  In that example, a motor vehicle manufacturer with a ratio of 80 to 100 ( i.e. 0.8 to 1) produces
$1,000,000 worth of vehicles.  Without exporting any of its production, and without exceeding its
production-to-sales ratio, the manufacturer may import $250,000 worth of additional vehicles duty
free.  The “subsidy” is therefore available to manufacturers whether they export or not.
6.535  Moreover, the duty-free treatment available under Canada’s waivers is entirely independent
of export volume.  The following example demonstrates this:
A manufacturer is required to maintain a production-to-sales ratio of 1 to 1 but
operates at a production-to-sales ratio of 2 to 1.   It produces automobiles with a netvalue of $600,000 while selling $300,000 worth of domestic and imported
automobiles in Canada.  (In fact, as the EC’s Exhibit–18 shows, qualifying
manufacturers cumulatively achieve ratios of at least 2 to 1 on a regular basis.
498)  Of
the $600,000 worth of automobiles produced in Canada, the manufacturer exports
$500,000 and sells $100,000 domestically.  The other $200,000 in domestic salescomes from imports that receive duty-free treatment.
If it so chose, the same manufacturer could achieve its production-to-sales ratio by
producing just $300,000 worth of automobiles and exporting them, all while importing
and selling an equivalent $300,000 worth of automobiles under the duty waiver.  In sodoing, the manufacturer would increase  the value of its imports, and therefore the  ad
valorem  value of the duty waiver to it, by 50 per cent, while reducing  its exports by 40
per cent and halving its Canadian production.
6.536  As this example shows, there is no direct nexus  between receipt of duty-free treatment and the
exportation of vehicles.  Not only are there no penalties if exports do not take place or bonuses if
additional exports do take place, but the benefit of the duty-free treatment can be increased while
exports are decreased.  The only way to increase the “benefit” of duty-free treatment is to increase
imports, which can be done even while decreasing production and exports. If the opportunity to
import vehicles duty free encouraged or rewarded exportation, manufacturers would export only tothe levels necessary to maximise their imports under their production-to-sales ratios.  Any other
behaviour would dilute the value of the duty-free treatment per imported vehicle.  However,
manufacturers do not do this.  They produce vehicles at values greatly in excess of their ratios and
import vehicles duty free at values far below what their production would allow.  This demonstrates
                                                     
497 See Exhibit EC-18, p. 54.
498 Exhibit EC-18, p. 54.WT/DS139/R
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that the duty-free treatment is not in fact “tied to” exportation.  It is therefore not a subsidy contingent
upon export performance.
(c) The duty-free treatment is not a subsidy contingent upon the use of domestic cver
imported goods
6.537  Both Japan and the European Communities claim that because the duty-free treatment is
conditional upon compliance with the CVA requirement, it is “contingent… upon the use of domestic
over imported goods”, contrary to Article 3.1(b) of the SCM Agreement.
6.538  The complainants are silent as to whether they are alleging that this “contingency” can be
found de jure  or de facto .  Japan, in devoting a mere five lines in its argument to its Article 3.1(b)
claim, has done no more than assert, incorrectly, that “the CVA requirement … requires the use ofdomestic over imported goods”.  The European Communities, by acknowledging at the outset that
“[t]he CVA requirements do not impose explicitly the obligation to ‘use domestic over imported
goods’”, appears to be advancing a claim of de facto  contingency.
(i) Article 3.1(b) of the SCM Agreement extends to de jure  contingency only
6.539  In contrast with Article 3.1(a) of the SCM Agreement, which states explicitly that it applies to
subsidies contingent “in law or in fact”, Article 3.1(b), which immediately follows Article 3.1(a) and
otherwise tracks the language of Article 3.1(a), contains no reference to de facto  contingency.
Whereas a footnote to Article 3.1(a) expands in some detail on the standard that must be met for de
facto  contingency to exist, Article 3.1(b) is again silent.
6.540  The Appellate Body has held in Japan – Taxes on Alcoholic Beverages  that “the words
actually used” in an article “provide the basis for an interpretation that must give meaning and effect
to all its terms”.
499  The Appellate Body made it clear in that case that textual differences in sentences
within an article must be respected, and that an “omission must have some meaning”.500
6.541  The only reasonable meaning that can be given to explicit references to de facto  contingency
in Article 3.1(a) and the omission of any such references in the very next sub-paragraph in Article
3.1(b) is that the prohibition in Article 3.1(b) extends to de jure  contingency only.
6.542  The receipt of duty-free treatment is not contingent in law on the use of domestic over
imported goods.  The EC’s own argument appears to recognize this. The complainants have not made
out even a prima facie case of de jure  contingency.  Their claims in respect of Article 3.1(b) of the
SCM Agreement must therefore fail.
(ii) Receipt of duty-free treatment is not de facto contingent on the use of domestic goods either
6.543  Even supposing that Article 3.1(b) of the SCM Agreement did extend to de facto  contingency
– which it does not – the facts demonstrate that no such contingency exists in the present case.
6.544  If Article 3.1(b) did extend to de facto  contingency, then, for the reasons set out in respect of
Article 3.1(a), in accordance with the customary rules of international law on the interpretation of
treaties, the words “contingent upon” in Article 3.1(b) should be interpreted to apply to subsidies that
are conditional on or tied to  the use of domestic over imported goods.  The receipt of duty-free
treatment is not, as a matter of fact, conditional on or tied to the use of domestic goods over imported
goods.  Duty-free treatment is available to manufacturers whether they use domestic goods or not ,
provided that they meet their CVA requirements.
                                                     
499 Appellate Body  Report  on Japan – Alcoholic Beverages,  supra note 271, p. 17.
500 Ibid., p. 18.WT/DS139/R
WT/DS142/RPage 164
6.545  Japan’s own argument states that, “a broad range of expenses … are included in the
calculation of CVA”. These expenses include goods, services and other expenses, any of which,
individually or in combination, may be sufficient to satisfy a manufacturer’s CVA requirement.  The
EC’s argument also acknowledges that a manufacturer may include in the calculation of CVA not
only goods, but direct labour costs, overhead, general and administrative expenses, depreciation andcapital cost allowance for land and buildings.
6.546  As a result, CVA requirements can be, and are, satisfied without the use of any domestic
goods.  In the case of the Big Three, CAMI and Volv o (Canada) Ltd., for example, labour costs alone
(which are necessarily Canadian) are more than sufficient to achieve their CVA requirements.
501
Domestic goods are not – contrary to the assertion of the European Communities – the “main” item
included by these manufacturers in their CVA calculations
6.547  The facts therefore demonstrate that the duty-free treatment is available even when domestic
goods are not included in the fulfilment of a CVA requirement.  The use of domestic goods plays no
necessary role in determining whether a manufacturer meets its CVA requirement.  While the
inclusion of domestic goods in a manufacturer’s CVA calculation is permitted, it is not required, de
jure or de facto .  Duty-free treatment cannot therefore be “contingent upon” the use of domestic over
imported goods.
6.548  Manufacturers can, and do, source parts purely on the basis of commercial considerations.
Duty-free treatment is not contingent upon the use of domestic over imported goods by any
reasonable standard of “contingency”.
6.549  Faced with the facts, the European Communities states that duty-free treatment is “contingent
upon” the use of domestic over imported goods not because eligibility for a duty-free treatment isconditional upon the use of domestic goods, but because using them “may be sufficient, or at least
contribute, to meet the CVA requirements”. As a result, according to the European Communities, the
receipt of duty relief “will depend, at least in some cases” on the use of domestic goods.  The
European Communities then contends that “[t]he mere possibility” that a manufacturer may be
required to use domestic over imported goods to qualify for the duty waiver is sufficient to triggerArticle 3.1(b).
502  The European Communities offers no authority for this contention.
6.550  The contention is, in fact, diametrically opposed to the position that the European
Communities itself took in Canada – Aircraft , where, in the context of Article 3.1(a) it argued that the
term “contingent” requires conditionality; that is,  that the subsidy can be obtained only if the
condition is fulfilled.503
6.551  If de facto  contingency is prohibited under Article 3.1(b),  “contingent upon” must impose the
same standard of conditionality under Article 3.1(b) that it does under Article 3.1(a).  It can hardly be
that the same term can require that certain circumstances must  exist when applied to one category of
prohibited subsidies, but that “mere possibility” will suffice when applied to the other category.
6.552  If even a “mere possibility” that fulfilling the CVA requirements might  require the use of
domestic goods is sufficient to transform them into a prohibited subsidy, it would establish a standard
that is vastly over-broad.  The EC’s standard would prohibit any content requirement that even
mentioned domestic goods in connection with the receipt of any government benefit such as reduced
                                                     
501 See Figure 2 .
502 The European Communities also argues that the manufacturers’ letters impose additional CVA
requirements.  However, as Canada has shown, the letters are not requirements.  Those manufacturers that have
given letters can and do qualify for duty relief without fulfilling additional CVA requirements.  The letters are,furthermore, unenforceable.
503 Panel Report on Canada – Aircraft, supra note 495, para. 7.3.WT/DS139/R
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tariffs.  By that measure, rules of origin requirements would also constitute prohibited subsidies.  This
is a result that Canada suspects most Members, including those in the European Communities, would
find unacceptable.
4. Rebuttal arguments by Japan
6.553  Japan  rebuts as follows:
6.554  What constitutes a subsidy under SCM Article 1(a) does not depend on whether the measure
has any effect to encourage imports, nor on whether it distorts trade.   Here, a customs duty that is
otherwise due is foregone and a benefit is conferred to Auto Pact Manufacturers, thus the Duty
Waiver constitutes a subsidy under the definition of subsidy, expressly set forth in Article 1.1 of the
SCM Agreement.
6.555  Canada has ignored this definition to contend that this Duty Waiver is a tax remission for
exports.   Moreover, this Duty Waiver falls within paragraph (a) of the Illustrative List of Export
Subsidies in Annex I to the SCM Agreement, that is "the provision by governments of direct subsidies
to a firm ... contingent upon export performance."
6.556  Canada is mistaken in stating that "Japan appears to concede that the measures do not make
the duty-free treatment legally contingent upon export performance, but it does contend that the
"subsidy" is de facto  contingent upon export performance".  Actually, the MVTO and SROs by virtue
of the ratio requirement provide the legal mechanism where the subsidy is contingent upon export
performance.  The fact that this mechanism is best understood if explained in the context of a
mathematical formula does not diminish its legal effect.
(a) Article 3.1(a) of the SCM Agreement
(i) Violation of SCM Agreement in law
6.557  As clarified in its responses to Question 21 from the Panel, it is the position of the
Government of Japan that, by virtue of the production-to-sales ratio, the Duty Waiver is in law export
contingent.
(ii) Production-to-sales ratio for the MVTO 1998 manufacturers
6.558  In its response to Question 12 from the Panel, the Government of Canada acknowledges that
the average of the actual production-to-sales ratio requirements for the four MVTO 1998
manufacturers is 95:100.  In his above-noted 17 November 1997 remarks, the then Chairman,
President and CEO of Chrysler Canada stated that the production-to-sales ratio for each Auto Pact
manufacturer was 1:1.  Presumably, Mr. Landry was referring to Chrysler, Ford and GM when
making this statement.  In her above-noted 16 October 1997 remarks, the then President and CEO ofFord Canada stated that "Ford, Chrysler and GM signed commitments that we would produce at least
one vehicle in Canada for each vehicle sold here".
6.559  Taken together, these acknowledgements and statements are prima facie evidence that the
production-to-sales ratio for Ford Canada, Chrysler Canada and GM Canada are 1:1.  For Volvo
Canada they are less than 1:1.WT/DS139/R
WT/DS142/RPage 166
(iii) Canada's arguments
6.560  The Government of Canada has raised several arguments in response to the Government of
Japan's challenge.
6.561  First, the Government of Canada takes the position that duty-free treatment facilitates trade
and it would be contrary to the objective of the trade liberalization to prohibit such a measure.504  The
Government of Japan is challenging a duty exemption that is legally made conditional on export
performance.
6.562  Second, the Government of Canada argues that there must be a clear and direct nexus
between the subsidy and the exported product, and the amount of the subsidy actually increases with
export volumes.  In this particular case, Canada itself has offered evidence that such a clear nexusdoes exist.  The more exports of motor vehicles that are made by the Auto Pact Manufacturers, the
more motor vehicles that such eligible manufacturers can import duty free.  This conclusion can be
drawn from the example provided by the Government of Canada.  In this example, the Government of
Canada assumes as a required production-to-sales ratio of 1 to 1 (but the attained production-to-sales
ratio of 2 to 1) and the following circumstances:
Net Sales Value of
the Vehicles
ProducedNet Sales Value
Sold for
Consumption in
CanadaDomestic Sales of
Domestic
ProductionDuty-free Import
ValueExport Value of
Domestic
Production
$600,000 $300,000 $100,000 $200,000 $500,000
Under this situation, assuming (1) the amount of the domestic production, the total domestic
sales and the attained production-to-sales ratio are stable and (2) that export values decreased to
$400,000 and $300,000 respectively, the duty-free import value will be decreased as follows:
Net Sales Value of
the Vehicles
ProducedNet Sales Value
Sold for
Consumption in
CanadaDomestic Sales of
Domestic
ProductionDuty-free Import
ValueExport Value of
Domestic
Production
$600,000 $300,000 $200,000 $100,000 $400,000
$600,000 $300,000 $300,000 $0 $300,000
6.563  This clearly shows that the more export value increases, the more the duty-free import amount
increases.  In other words, this establishes that there is a clear and direct nexus between the subsidyand the exported products, and the amount of the subsidy increases with the volume of exports.
Exporting is an integral component of benefiting from the Duty Waiver.
6.564  Further, the Government of Canada argues that Autopact Manufacturers may import certain
motor vehicles duty free without exports.  However, this does not deny the direct nexus between
export performance and subsidies incorporated in the Duty Waiver regime.
6.565  Fourth, the Government of Canada argues that  the Duty Waiver is not an export subsidy
because it does not provide for an "excessive" duty remission.  As authority for this proposition,
Canada relies upon items (g), (h) and (i) of the Illustrative List and footnote 5 to the SCM Agreement.
                                                     
504 Of course, duty-free treatment only facilitates or liberalizes trade for those products that receive
such treatment.  For products that are excluded , trade is actually hampered or restricted.WT/DS139/R
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This argument has no basis in the text of the SCM Agreement.  A review of the cited items in the
Illustrative List and their related annexes (Annex II and III) makes it clear that the types of
programmes to which their provisions apply are entirely different from the Duty Waiver.  Item (g)
applies to the remission of indirect taxes  on exported  products.  Item (h) applies to the remission of
indirect  taxes on goods used in the production of exported products .  Item (i) applies to the remission
or drawback of customs duties on imported inputs that are consumed in the production of the
exported product .  All of these programmes differ fundamentally from the Duty Waiver which is a
conditional waiver of customs duties on imports of a finished good.
(b) Article 3.1(b) of the SCM Agreement
6.566  While Article 3.1(b) of the SCM Agreement prohibits subsidies contingent upon the use of
domestic over imported goods, the subsidy of the Duty Waiver is contingent in law upon the use of
domestic over imported goods.   Canada seemingly tries to argue that the term "in law" requires the
costs for domestic parts be always included in the CVA but Canada shows no basis for the term to
have such meaning.   Rather, ordinary meaning of  "in law" is "inferred by law, existing in law or by
force of law" (Black's Law Dictionary) and does not support Canada's interpretation.   The CVA is alegal requirement and only domestic and not imported parts, components and material costs can be
counted.   Thus, the Duty Waiver, by virtue of the CVA requirement, constitutes a subsidy contingent
in law upon the use of domestic over imported goods.
6.567  With respect to the Government of Canada's argument that Article 3.1(b) of the SCM
Agreement requires that the Government of Japan prove that the Duty Waiver requires the use of
domestic over imported goods, it is the position of the Government of Japan that this argument
ignores the express wording of Article 3.1(b).  Ar ticle 3.1(b) prohibits "subsidies contingent … upon
the use of domestic over imported goods".  This includes subsidies that are contingent on a condition
that requires  the use of domestic over imported goods as well as subsidies contingent on a condition
that favours  the use of domestic over imported goods.  In this dispute, the Duty Waiver is contingent
upon a requirement that favours the use of domestic parts, components and materials over imported
like products.
6.568  In the event that this Panel were to find that the actual use of domestic goods is an
indispensable factor of the SCM, it is still the Government of Japan's position that the Duty Waiver
would be contingent upon the use of domestic over imported goods in the case of the SROs to
automobile manufacturers and the letters of undertaking which impose 60 per cent CVA requirements
(as evidenced in the above-noted 1997 statements by the then highest officials in Ford Canada andChrysler Canada).  The Government of Canada's re sponse to Question 32 of the Panel which refers to
CVA requirements based on a base-year and on 40-50 per cent do not apply to CAMI which is
expressly bound by a 60 per cent CVA according to the terms of its SRO.  Also, contrary to the
Canadian assertion with no exhibits, CAMI may not achieve 60 per cent CVA requirement solely by
labour cost.  Furthermore, even under the MVTO 1998, labour costs might be reduced byrationalization of production facilities so that the CVA could not be satisfied by labour costs alone in
the future.
6.569   The Government of Canada's argument that Article 3.1(b) does not include de facto
contingency is unsustainable.  Absence the language "in law or in fact" means that Article 3.1(b)
applied to both in law and in fact contingency.  Such a result would be absurd and should be avoided.
5. Rebuttal arguments by the European Communities
6.570  The European Communities  rebuts as follows:WT/DS139/R
WT/DS142/RPage 168
(a) The ratio requirements
6.571   Canada advances several arguments in order to  contest that the ratio requirements make the
subsidy contingent upon export performance. They are all mistaken or irrelevant.
(i) The alleged “import facilitating” effects of the Tariff Exemption are irrelevant in determining
whether it is an export subsidy
6.572  Canada alleges that it would be improper to characterise a measure that  “facilitates” imports
as an export subsidy.
6.573  To begin with, however, it is questionable that the Tariff Exemption “facilitates” imports at
all. No doubt, it facilitates imports of motor vehicles by certain manufacturers.  But this does not
mean that imports are overall “facilitated”.
6.574  Moreover, the measure at issue here is not the Tariff Exemption as such. The Tariff
Exemption is a prohibited export subsidy only because of the ratio requirements attached thereto.
Clearly, those requirements are not inherent to the Tariff Exemption and do not, of themselves,
“facilitate” imports in any conceivable manner. Their only purpose is to promote local production and
exports of motor vehicles.
6.575  In  any event, whether or not the Tariff Exemption “facilitates ” imports is irrelevant.  The
SCM Agreement does not provide any exception for export subsidies with “import facilitating”
effects. Article 3.1(b) of the SCM Agreement prohibits all export subsidies, irrespective of their
effects on imports into the subsiding country.
(ii) The contextual arguments drawn by Canada from the Illustrative List are mistaken and, in
any event, irrelevant
6.576  Canada notes that the measures in dispute are unlike any of the practices in the Illustrative
List of Export Subsidies in Annex I to the SCM Agreement.
6.577  This is true but irrelevant. As Canada itself concedes, the Illustrative List in Annex I is simply
that, an “illustrative ” list, and not an “exhaustive” one.  Therefore, it is not possible to draw any  a
contrario   inferences from the List, except in the well defined circumstances specified in Footnote 5.
In any event, Canada’s  “contextual” arguments are clearly wrong.
6.578  According to Canada, it would be “particularly significant that in each of the practices
identified in the Illustrative List there is a clear and direct nexus between the subsidy and the exported
product".
6.579  That is not correct. The List includes practices which do not require that nexus. For example,
Item (a), which reads as follows:
 “The provision by governments of direct subsidies to a firm or industry contingent
upon export performance”.
6.580  At any rate, the ordinary meaning of the terms of Article 3.1(a) is clear and unambiguous and
leaves no scope for the “contextual” re-writing suggested by Canada. All that is required by
Article 3.1(a) is the existence of a subsidy and of an export performance condition attached to thatsubsidy. There is no additional requirement to the effect that the goods that benefit from the subsidy
must be the same as the exported goods.WT/DS139/R
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6.581  In similar vein, Canada argues that the examples in the Illustrative List show that the amount
of the subsidy must increase with the volume of export.
6.582  Once again, that is not correct. Assume, for instance, that the Canadian Government decided
to make a $100,000 grant to any company whose exports exceed $1,000,000. That grant would fall
squarely within  Item (a) of the List. Yet, the amount of the subsidy would  not increase with the
volume of exports.
6.583  According to Canada, it is also “contextually significant” that the duty or tax exemption or
remission programmes described in items (g), (h) and (i) of the Illustrative List are deemed export
subsidies only to the extent that they are “excessive".
6.584  The relevance of this argument is difficult to understand other than as an attempt by Canada
to obfuscate the discussion. The Items mentioned by Canada are not the expression of some sort of
unwritten general principle of WTO law permitting tax or duty remissions or exemptions, provided
that they are not “excessive”. Instead, those Items reflect the rule set out in Footnote 1 to the SCM
Agreement (which in turn reproduces the terms of Interpretative Note  ad GATT Article XVI). That
rule constitutes an exception to the definition of “subsidy” in Article 1 of the SCM Agreement and, assuch, must be construed strictly.
6.585  The measures in dispute fall clearly outside the scope of Footnote 1, which reads in relevant
part as follows:
“In accordance with the provisions of Article XV I of GATT (Note to Article XVI)
and the provisions of Annexes I through III of this agreement, the exemption of an
exported product from duties … borne by the like product when destined for domestic
consumption, or the remission of such duties ... in amounts not in excess of thosewhich have accrued, shall not be deemed a subsidy.”
6.586  At issue in this case is an exemption of duties on imported motor vehicles, and not an
exemption of duties on exported motor vehicles.
6.587  Furthermore, the Tariff Exemption cannot be assimilated to a “remission” of the duties
“borne” by the products exported by the beneficiaries. The exception provided in Footnote 1 withrespect to duty remissions is limited to the two situations described in Item (i) of Annex I, as further
interpreted in Annexes II and III, i.e.: (i) when imported inputs are used in the manufacture of the
exported products; and (ii) when domestic inputs having the same quality and characteristics are
substituted for imported inputs in the production of exported products. In both cases, the inputs must
be “consumed” in the manufacture of the exported goods.
6.588  The Tariff Exemption does not fall within either of those two situations. The products covered
by the Tariff Exemption are not “inputs” used (let alone “consumed”) in the manufacture of the motor
vehicles exported by the beneficiaries, but complete  motor vehicles intended for sale in Canada. For
that reason, assuming that Canada levied duties on the motor vehicles now imported under the Tariff
Exemption, those duties could not be deemed “borne” by the motor vehicles exported by thebeneficiaries.
(iii) Canada confuses contingency “in law” with “express” contingency
6.589  The prohibition on export subsidies contained in Article 3.1(a) of the SCM Agreement applies
to subsidies that are contingent upon export performa nce, either “in law” or “in fact”. The European
Communities claims and has demonstrated that the ratio requirements make the subsidy exportcontingent “in law”.WT/DS139/R
WT/DS142/RPage 170
6.590  Canada alleges that the subsidy is not export contingent “in law” because neither the MVTO
1998 nor the SROs make any express reference to the requirement to export.
6.591  The European Communities disagrees with that interpretation. Article 3.1 (a) draws a
distinction between contingency “in law” and contingency “in fact”, and not between “express” and
“implicit” contingency. A subsidy is export contingent “in law” where the requirement to exportresults from the terms of the law itself, whether such  requirement is stated expressly in the law or is
implicit in other requirements that are so stated in the law. On the other hand, a subsidy is export
contingent “in fact” where the requirement to export does not result from the terms of the law, or at
least from those terms alone, but from factual elements outside the law (including the exercise of
discretion by the granting authority).
6.592  In the case at hand,  the requirement to export is not expressly stated in the MVTO 1998 or in
the SROs. Nevertheless, that requirement is a necessary consequence of the ratio requirements, which
are themselves stated expressly in the law. That makes the Tariff Exemption contingent “in law” upon
export performance, and not simply “in fact”.
(iv) The ratio requirements make the subsidy contingent upon export performance
6.593  Canada argues that the beneficiaries export because of market considerations and not because
of the subsidy. More specifically, according to Canada, “exports do not flow from [the Tariff
Exemption];  they flow from the US duty waiver on imports of Canadian vehicles".
6.594  Even if true, this would be irrelevant. Article 3.1(a) prohibits all export subsidies, whether or
not they have any actual effect on the level of exports. A superfluous export subsidy would still be a
prohibited subsidy. Indeed, Canada’s argument puts Article  3.1(a) on its head. The relevant issue
under that provision is not whether exports are contingent upon subsidisation, but whether subsidiesare contingent upon export.
6.595  The European Communities has demonstrated beyond doubt that the ratio requirements make
the Tariff Exemption contingent upon export performance.
6.596  In those cases where the production-to-sales ratio is 1 to 1 or more, the beneficiaries cannot
sell in Canada any amount of vehicles imported under the Tariff Exemption unless they export anequivalent amount. This is not a mere “arithmetical hypothesis".  It is a self-evident truth
505.
6.597  In those instances where the ratio is less than 1 to 1, the beneficiaries may sell some imported
vehicles even if they do not make any exports. Nevertheless, if they export some vehicles, the value of
imported motor vehicles which they may sell in Canada increases by an amount equal to the value of
those exports. Thus, it is indisputable that in this situation there is an export subsidy because, to useCanada’s own words, “there are bonuses or additional payments if exports do take place".
6.598  Canada's two examples fail to demonstrate that the subsidies are not contingent upon export
performance
506. They show only that the amount of the subsidy may depend not just on the volume of
                                                     
505 Canada itself, perhaps inadvertently,  concedes as much when it states that:  “Moreover, the fact that
many of the production-to-sales requirements are set at  less than 1:1 proves that receipt of duty free treatment
does not require exports at all.”  This statement involves an open admission that, at least in those cases wherethe ratio is 1 to 1 or more, the beneficiaries are “required” to export in order to qualify for the Tariff Exemption
and, therefore, that the subsidy is contingent upon export performance.
506 The two examples assume a ratio production-to-sales 1 to 1. They provide further confirmation, if
need be,  that a beneficiary subject to that ratio cannot sell any imported vehicles unless it exports an equivalentamount.WT/DS139/R
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exports but also on other factors, namely the volume of production, the actual ratio production-to-
sales and the extent to which each beneficiary decides to make use of the Tariff Exemption.
6.599  However, the fact that other factors may also affect the size of the subsidies does not mean
that that they are not contingent upon export performance. Article 3.1(a) does not require that the
subsidies be contingent only and exclusively upon export performance. It prohibits subsidiescontingent  “…whether solely or as one of several conditions, upon export performance”. The Tariff
Exemption is contingent upon export performance because, all other conditions being equal, the size
of the subsidy is larger if motor vehicles are exported than if they are sold in Canada.
(b) The CVA requirements
(i) The CVA requirements make the Tariff Exempti on contingent in law upon the use of domestic
over imported goods
6.600  Contrary to the assumptions drawn by Canada in its argument, the European Communities
claims that the CVA requirements make the Tariff Exemption contingent upon the use of local over
imported goods “in law”,  and  not simply “in fact”.
6.601  Canada contends that the Tariff Exemption is not prohibited by Article 3.1(b) because the
CVA requirements do not “require” the use of a cert ain amount of domestic goods,  but rather the use
of a certain amount of CVA. That argument, however, is based on a mistaken reading of
Article 3.1(b).
6.602  Article 3.1(b) of the SCM Agreement does not prohibit only those conditions that require the
actual use of domestic goods by the beneficiary. It prohibits any condition that gives preference to the
use of domestic over imported goods, whether or not that condition results in all cases in the actual
use of domestic goods by the beneficiaries.
6.603  In other words, Article 3.1(b) prohibits any subsidies that are “contingent” upon a condition
that favours the use of domestic over imported goods, and not merely those subsidies that are
“contingent” upon the actual use of domestic goods.  In the case at hand, the subsidy is “contingent”
in law upon a value added requirement that gives preference to the use of domestic over imported
goods. Accordingly,  the subsidy is  “contingent upon the use of domestic over imported goods” in themeaning of Article 3.1(b).
6.604  That interpretation is consistent with the ordinary meaning of the wording of Article 3.1(b).
That provision does not prohibit subsidies that are contingent “upon the use of domestic goods”.
Rather, it prohibits subsidies that are contingent  “upon the use of domestic over imported goods”.
The terms “over imported goods” (in French, “de preference à des produits importés”; in Spanish,“con preferencia a los importados”) would be totally redundant if the prohibition applied only where
the subsidy is contingent upon the actual use of domestic goods. Those terms only acquire meaning if
Article 3.1(b) is interpreted as prohibiting any condition that gives preference to the “use of domestic
over imported goods”, irrespective of whether in practice domestic goods are actually used by the
beneficiary.
6.605  Further, that interpretation is consistent with the object and purpose of Article 3.1(b), which is
to avoid that subsidies are used to discriminate between domestic and imported goods. Canada’s
interpretation would frustrate that objective. For example, assume that a Member grants a subsidy
upon the condition that local valued added must represent 99 per cent of the beneficiary’s sales value.
If Canada’s interpretation was correct, that subsidy would not be prohibited by Article 3.1(b), eventhough it is unquestionable that such a subsidy ha s both the purpose and the effect of discriminating
against imported goods.WT/DS139/R
WT/DS142/RPage 172
6.606  The context and the drafting history of Article 3.1(b) also supports the EC’s view. Like
Article 2.1 of the TRIMs, Article 3.1(b) of the SCM Agreement purported to clarify and strengthen
the existing GATT disciplines with respect to local content requirements507. In view of that, it would
be anomalous if Article 3.1 b) was interpreted so as to be less encompassing than GATT Article III:4.
6.607  In any event, assuming arguendo  that “contingent upon the use of domestic over imported
goods” meant contingent upon the actual use of domestic goods, Article 3.1(b) does not require that
that condition be a necessary one. In fact, Article 3.1(b) prohibits the granting of subsidies that are
contingent upon the use of domestic over imported goods, “whether solely or as one of several
conditions”.
6.608  This may cover the situation where a subsidy is simultaneously subject to two or more
cumulative conditions. But it may as well apply to the situation where a subsidy is subject two or
more alternative conditions, so that compliance with any of them gives a right to the subsidy. If one of
those conditions is “the use of domestic over imported goods” the subsidy must be deemed prohibited
by Article 3.1(b), even if it is also possible to qua lify for the subsidy by complying with an alternative
non-prohibited condition, such as using a certain amount  of domestic labour or of domestic services.
6.609  Indeed,  if using domestic goods had to be always a necessary condition, it would be very
easy to circumvent the prohibition contained in Article 3.1(b) simply by providing that the
beneficiaries may also qualify for the subsidy by fu lfilling some irrelevant but dissuasive alternative
condition. Further, that interpretation would have the absurd result that a subsidy that was conditional
upon compliance with either a local content rule or an export performance requirement would be
prohibited neither by Article 3.1(a) nor by Article 3.1(b).
6.610  Canada contends that the EC’s interpretation of Article 3.1(b) is “vastly over-broad” and
would have the consequence that “rules of origin requirements would also constitute prohibited
subsidies".
6.611  This argument reflects a serious misunderstanding of the nature of origin rules. To begin with,
it is obvious that origin rules may not constitute as such a subsidy, let alone a prohibited subsidy,
because they involve no financial contribution.
6.612  Therefore, it may be assumed that Canada’s argu ment is that,  by the EC’s standard,  applying
a preferential duty rate only to imports which meet a certain origin requirement would constitute a
prohibited subsidy. That argument  overlooks a fundamental difference between origin rules and the
CVA requirements. Origin rules are used to establish the country of origin of import508, and not
whether products are “domestic” or “imported”, and are generally applied in connection with border
                                                     
507 Ironically, Canada was one of the participants that proposed to insertion in the SCM Agreement of a
prohibition on local content subsid ies (MTN.GNG/NG10/W25). Canada explained the rationale for its proposal
in the following terms (Section 1(b)):  “Subsidies that are contingent, whether solely or as one of several otherconditions, upon the use of domestic over imported goods or upon export performance clearly constitutedistorting subsidies. Experience with existing obligations and precedents suggests that these practices should be
made subject to an explicit  GATT prohibition” (emphasis added).  A Note by the Secretariat of 16 October 1989
summarised as follows the participants’ views with respect to the prohibition of local content subsidies
(MTN.GNG/NG10/13, p.8):  “Some Participants expressed their reservation on the category of other traderelated subsidies. They considered that subsidies proposed for this category were already covered by Article IIIof the General Agreement (subsidies that were contingent upon the use of domestic over imported goods) or byArticle XVI:4 (subsidies contingent upon export performance). Some other participants explained that althoughthese subsidies were already prohibited by other provisions of the General Agreement, their inclusion into the
category of prohibited subsidies would serve the purpose of better clarity and certainty.”
508 C.f. Article 1.2 of the Agreement on Rules of Origin. Note that that provision refers to Most
Favoured Nation treatment, including with respect to ma tters covered by GATT Article III, but not to National
Treatment as matters in respect of which origin rules are used.WT/DS139/R
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measures, such as  tariffs. Thus, by definition, origin rules cannot favour the use of “domestic” over
“imported”  goods. If anything, origin rules would favour the use of goods originating in one
exporting country over goods originating in another exporting country.
(ii) Article 3.1(b) applies to de facto contingency
6.613  Although for the reasons mentioned above, the European Communities considers that the
CVA requirements are contingent “in law” upon the use of domestic over imported goods, the
European Communities also submits in the alternat ive that the CVA requirements make the subsidy
contingent “in fact” upon the use of domestic over imported goods.
6.614  Canada has argued that Article 3.1(b) does not extend to de facto  contingency based upon the
textual differences between that provision and Article 3.1(a).  This argument is not compelling.
6.615  The issue of whether Article 3.1(b) should apply also to de facto  violations was never
discussed during the negotiations of the SCM Agreement. For that reason, it is not possible to draw
any conclusions from the fact that Article 3.1(b) does not distinguish expressly between de jure  and
de facto  contingency.
6.616  The ordinary meaning of Article 3.1(b) does not exclude de facto  contingency.  Previous
panel and Appellate Body reports confirm that a prohibition may be applicable to de facto  violations,
even if the relevant provision does not state so expressly509. Moreover, if Article 3.1(b) did not apply
to de facto  contingency, it would be extremely easy to devise measures to circumvent that prohibition.
(iii) In the alternative, the CVA Requirements make  the subsidy contingent de facto upon the use
of domestic over imported goods or upon export performance
6.617  Canada pretends that even if Article 3.1(b) applied to de facto  contingency, the facts
demonstrate that no such contingency exists in the present case, because the CVA requirements canbe, and are satisfied on the basis of labour costs alone.
6.618  However, as shown above, Canada has not substantiated that claim. The evidence furnished
by Canada only shows that, currently, the labour CVA of the Big Three and Volvo meet the CVA
requirements contained in the MVTO 1998. It doe s not show that the Big Three meet the more
onerous CVA requirements contained in the Letters of Undertaking also on the basis of labour CVA.Furthermore, Canada has conceded that some of the SRO beneficiaries do not meet their CVA
requirements on the basis of CVA labour alone.
6.619  In presenting its claims, the European Communities has demonstrated that parts and materials
account on average for as much as 80  per cent of the cost of sales of the motor vehicles assembled in
Canada.  Canada has not challenged that percentage.  Indeed, it could hardly do so since it is based onofficial statistics of Canada’s Ministry of Industry. In response to a question from the Panel, Canada
merely argues that “the cost of parts and materials as a percentage of cost of sales can vary widely"
510.
                                                     
509 See, e.g., Appellate Body Report on EC –  Bananas III , supra  note 49, para. 233.
510 Canada’s response to Question 24 from the Panel.  In support of that proposition Canada invokes the
percentages of cost of materials to “gross sales valu e” shown in Exhibit JPN-43-3 for Toyota and Honda. The
relevance of those percentages, however, seems questionable. In the first place,  they appear to correspond to theproduction of Honda and Toyota in Japan, where presumably more parts are made in-house, and not in Canada.Second, it is unclear whether the notion of “gross sales value” is comparable to that of “cost of sales/value ofshipments”, as used in Canada’s regulations, which does not include selling expenses. In any event, the
percentages shown in Exhibit JPN-43-3, although somewhat lower than 80 per cent (from 54 per cent to 69 per
cent) confirm that a manufacturer of motor vehicles cannot meet the CVA requirements in the Letters of
Undertaking and the SROs except by using a significant amount of local parts and materials or, as the solealternative, by exporting motor vehicles or parts therefor.WT/DS139/R
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Even if true, however, it would still remain that, at least in the case of some manufacturers, the
percentage must be necessarily  80 per cent or higher.
6.620  The above means that, in practice, the only conceivable way in which the  beneficiaries could
meet the CVA requirements contained in the Letters of Undertaking and in the SROs without using
any domestic goods at all is by exporting a large volume of motor vehicles and parts therefor, so thatthe non-parts CVA of those exports can be added to the non-parts CVA of the vehicles sold in
Canada
511.
6.621  Thus, in definitive, the CVA requirements make the Tariff Exemption contingent de facto
either upon the use of domestic over imported goods, contrary to Article 3.1(b) or upon export
performance, in violation of Article 3.1(a).
6. Response by Canada to the complainants' rebuttals
6.622  Canada  responds as follows:
(a) The measures at issue do not create a subsidy
6.623  In their various arguments, the complainants have sometimes asserted, and at other times
simply assumed, that the duty-free treatment accorded  by the measures at issue constitutes a subsidy
within the meaning of Article 1.1 of the SCM Agreem ent.  When they have asserted this, they have
claimed that there is a subsidy because the duty-free treatment falls under Article 1.1(a)(1)(ii) as a
financial contribution in the form of government revenue that is otherwise due but is foregone or not
collected.  However, the complainants have offered little or no justification for their claims, beyond a
mechanical recitation that an import duty waiver should be considered "revenue foregone" in the
sense of Article 1.
6.624  Japan cited the Indonesia - Autos  case in support of its proposition that duty relief is a
subsidy.  However, the Panel Report in Indonesia - Autos  offers no useful analysis of the issue
because the respondent Indonesia not only agreed, but also insisted, that its measures were export
subsidies.512  This was because Indonesia's defence of its illegal regime depended on persuading the
panel that its duty waiver was an export subsidy and that the eight-year grace period for export
subsidies of LDCs should be considered an eight year exception from other WTO obligations as well.
6.625  The European Communities alleged that Canada “admits” that the duty-free treatment is a
subsidy.  Canada has done no such thing.  On the contrary, Canada has maintained that duty-free
treatment for goods does not necessarily constitute revenue foregone under Article 1.1(a)(1)(ii) of the
SCM Agreement.  If it did, then a subsidy would exist whenever a Member unilaterally applied a rate
of duty lower than its bound rate, as Canada does in applying a zero duty on OEM automotive parts,as many developing country Members with high bound rates do on a wide scale, and as many
Members do in granting generalized preferences or du ty drawbacks.  Developing countries themselves
do it on a wide scale: many of them have very high bound rates, but apply much lower rates.  In all of
these cases a benefit is conferred in accordance with Article 1.1(b) of the SCM Agreement.
Specificity will also exist in many cases, for example, where the low-duty import is a component for adomestic assembly industry.  To define such programmes as “subsidies” would be contrary to the
object and purpose of the WTO Agreement, which explicitly identifies tariff reductions as
contributing to the objectives of the parties.
513
                                                     
511 Note that Canada's response to Question 25 from the Panel does not deny this.
512 Panel Report on Indonesia – Autos, supra  note 270, para. 14.155.
513 See Marrakesh Agreement Establishing the World Trade Organization in Results of the Uruguay
Round of Multilateral Trade Negotiations: The Legal Texts (Geneva: GATT Secretariat, 1994), p. 6.  The thirdWT/DS139/R
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6.626  As Canada has also noted, Footnote 1 to Article 1.1(a)(1)(ii) excludes certain non-excessive
exemptions or remissions such as duty drawbacks from the definition of a “subsidy” notwithstanding
that they confer a benefit directly on exports.514  It is therefore difficult to justify extending the
definition of  “subsidy” to capture non-excessi ve duty exemptions or remissions on imports,
particularly when tariff reductions are a raison d’être  of the WTO.
6.627  If, however, the Panel considers that the duty-free treatment is a subsidy, it would be  an
import subsidy.  Contrary to the complainants’ assertions, duty-free treatment is available only by
importing.  The measures impose no requirement, either in fact or in law, to export in order to receive
duty-free treatment.  The duty-free treatment is available without exporting at all.  The only way to
receive additional benefits is by increasing the value of vehicles imported.
6.628  In the further alternative, the duty-free trea tment would be a subsidy for domestic production
because it is contingent upon achieving a production-to-sales ratio.  The SCM Agreement does not
prohibit domestic subsidies unless they cause adverse effects, none of which have been alleged by the
complainants.
(b) The duty-free treatment is not inconsistent with Article 3.1(b)
6.629  Even if it were a subsidy, duty-free treatment is not a subsidy contingent upon the use of
domestic over imported goods, within the meaning of  Article 3.1(b) of the SCM Agreement.  The
claims of both Japan and the European Communities rest on interpretations of  “contingent upon” that
would make the concept of contingency meaningless.
6.630  The European Communities explains the “mere possibility test” it proposed, by arguing that
Article 3.1(b), “prohibits any condition that gives preference to the use of domestic over imported
goods, whether or not that condition results in all cases in the actual use of domestic goods”.515  Such
an interpretation would replace the test of  “contingency” with that of “affecting”.
6.631  The European Communities further elaborates that  Article 3.1(b) prohibits any subsidy that is
contingent upon a “condition that favours the use of domestic over imported goods, and not merely
those subsidies that are ‘contingent’ upon the actual use of domestic goods”.516  This  would introduce
an entirely new element into Article 3 that finds no support in the wording of the provision or in anyauthority.
6.632  The EC’s test is at odds with the legal standard of Article 3, which is one of conditionality.
517
The plain meaning of a “condition” is “a thing demanded or required as a prerequisite to the granting
or performance of something else; a stipulation”.518  In order to constitute a condition in Article
3.1(b), the prerequisite to the granting of a subsidy must be the requirement that domestic goods beused over imported goods.  Absent such a stipulation, there is no conditionality.
                                                                                                                                                                    
preambular paragraph refers to contributing to the obj ectives of the WTO by “entering into reciprocal and
mutually advantageous arrangements directed to the substantial reduction of tariffs and other barriers to tradeand to the elimination of discriminatory treatment in international trade relations.”
514 Canada states that:  "In accordance with the provisions of Article XVI of GATT 1994 (Note to
Article XVI) and the provisions of Annexes I through III of this Agreement, the exemption of an exportedproduct from duties or taxes borne by the like product when destined for domestic consumption, or theremission of such duties or taxes in amounts not in excess of those which have accrued, shall not be deemed tobe a subsidy."
515 EC’s response to Question 19 from the Panel.
516 Ibid.
517 See Panel Report on Canada – Aircraft, supra note 495, para. 9.376.
518 The New Shorter Oxford English Dictionary on Historical Principles, vol. 1 (Oxford: Clarendon
Press, 1993), p. 472 (Exhibit CDA-15).WT/DS139/R
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6.633  In the present case, there is no such stipulation.  The receipt of duty-free treatment, even if it
were a subsidy, does not depend on the use of domestic over imported goods, but rather, on the
achievement of a CVA requirement, which may be met without the use of domestic goods at all.
6.634  The European Communities argues in the alternat ive that, even if Article 3.1(b) required the
actual use of domestic goods, it “does not require that that condition be a necessary one”.519  B y
definition, an unnecessary “condition” is not a condition.
6.635  The European Communities seeks to explain its argument on the basis that under
Article 3.1(b), a subsidy is prohibited if it is co ntingent upon the use of domestic over imported goods
“whether solely or as one of several conditions”.520  The same clause appears in Article 3.1(a).  The
clause means that the use of domestic goods or export performance does not have to be the onlycondition for the receipt of the subsidy.  There may be additional conditions to fulfil as well, but each
condition must be mandatory.  The clause does not mean, as the European Communities contends,
that a subsidy can be considered contingent if the use of domestic goods or export performance is not
required but is among the ways to qualify for the subsidy.
521  It does not mean, for example, that a
subsidy is contingent upon export performance if receipt of the subsidy depends on either exporting orselling domestically.
6.636  Japan does not address Article 3.1(b) in its responses to the Panel’s Questions.  It argues only
that duty-free treatment, “by virtue of the CVA re quirement” is a subsidy contingent in law upon the
use of domestic over imported goods because the CVA is a legal requirement and “only domestic and
not imported parts, components and material costs can be counted”.
6.637  Japan uses the term contingent correctly, when it states that “[t]he second condition upon
which the Duty Waiver is contingent is the CVA requirement”.  Receipt of the duty waiver isconditional upon the fulfilment of a CVA requirement.  However, the fact that duty-free treatment is
legally “contingent upon” fulfilment of a CVA requirement does not make it “contingent upon” the
use of domestic over imported goods, in law or in fact.
6.638  The European Communities argues in the alternative that the CVA requirements make duty-
free treatment a subsidy contingent “in fact” on the use of domestic over imported goods, even thoughArticle 3.1(b) does not mention de facto  contingency.  The European Communities contends that
because it “was never discussed during the negotiations of the SCM Agreement … it is not possible to
infer any conclusions from the fact that Article 3.1 (b) does not distinguish expressly between de jure
and de facto  contingency”.
6.639  The suggestion that a treaty cannot be given meaning in the absence of a negotiating history
has no basis in treaty interpretation.  It woul d run contrary not only to the Appellate Body’s
observations that an omission “must have some meaning”,
522 but to the Vienna Convention on the Law
of Treaties , which relegates a treaty’s negotiating history to supplementary status behind the general
rule that a treaty shall be interpreted in good faith in accordance with the ordinary meaning to be
given to its terms in their context and in the light of its object and purpose.523
6.640  The context in which sub-paragraph 3.1(b) must be interpreted is the absence of any explicit
reference to contingency in fact in Article 3.1(b), in contrast to sub-paragraph 3.1(a) in the same
paragraph of the same Article.  The European Communities is unable to explain this difference in
                                                     
519 EC’s response to Question 19 from the Panel.
520 Ibid.
521 Ibid.
522Appellate Body  Report  on Japan – Alcoholic Beverages,  supra note 271, p. 18.
523 Vienna Convention on the Law of Treaties, May 23, 1969, Can. T.S. 1980 No. 37, 1155 U.N.T.S.
331, (1969) 8 ILM 679, Articles 32 and 31.WT/DS139/R
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wording within the same paragraph.  The fact that the Appellate Body has interpreted other
provisions, such as Article II of the GATS, to extend to de facto  discrimination is of little relevance; it
did not involve an overt contrast in the expression of obligations in two consecutive provisions within
the same Article.524  The Appellate Body has held that te xtual differences between two sentences in
the same Article must be respected.525  It has held as well that a treaty interpreter is not entitled to
assume that the use of different words in different places in an agreement was merely inadvertent.526
The only way to apply these principles to Article 3.1(b) of the SCM Agreement is to find that the
obligation it creates extends only to de jure  contingency.
6.641  In any event, even if a de facto  test could be inferred in Article 3.1(b), there is no de facto
contingency in this case.  The use of domestic over imported goods is not a condition of achievingCVA.  CAMI, under its SRO, and the Big Three automobile manufacturers would meet their CVA
requirements even if every part they used were imported.
(c) The duty-free treatment is not inconsistent with Article 3.1(a)
6.642  The complainants similarly fail to provide any basis for their respective claims that the duty-
free treatment is inconsistent with Article 3.1(a) of the SCM Agreement.  Article 3.1(a) prohibitssubsidies that are contingent in law or in fact on export performance.  Canada understands that Japan
and the European Communities do not argue that there is any export contingency in fact.  Rather, they
take the view that in some theoretical circumstances there could be an incentive to export as a result
of the production-to-sales ratio.
6.643  In fact, viewed as a means of encouraging exports in law, the production-to-sales ratio in
conjunction with duty-free treatment, is singularly ineffective.  Motor vehicle exports to Japan and the
European Communities by qualifying manufacturers are practically nil.  Instead, the majority of theirproduction is exported to the United States.  This is due not to the Canadian measures but to the US
duty waiver,
527 as confirmed by the fact that production by non-MVTO or SRO manufacturers in
Canada follows exactly the same pattern.528
6.644  Japan nevertheless contends that the duty-free treatment is contingent in law upon export
performance because “[t]he formula expressing such terms of the [production-to-sales] ratio asstipulated in applicable Canadian law (i.e. the MVTO and the SROs) demonstrates clearly that it
makes the Duty Waiver contingent on export performance”.
529  Japan has confused the legal
contingency of receipt of duty-free treatment on fulfilment of the ratio with contingency upon export
performance.  A legal requirement to meet a production-to-sales ratio is manifestly not the same thing
as a legal requirement to export or to undertake to develop exports.  By simply contending that it is,
unsubstantiated by any evidence, Japan has failed to establish even a prima facie case of contingency.
6.645  The European Communities suggests that the fact  that the duty-free treatment facilitates
imports is irrelevant because the “SCM Agreement does not provide any exception for export
subsidies with ‘import facilitating’ effects” and that “[e]xport subsidies are always prohibited,
irrespective of its [sic] effects on imports into the subsidising country”.  As Canada explained in itsresponse to the Panel’s Question 23, Canada has not claimed that there is an exception for export
                                                     
524 Appellate Body Report on EC –  Bananas III , supra  note 49, paras. 233-234.
525 Appellate Body  Report  on Japan – Alcoholic Beverages,  supra note 271, p. 18.
526 Appellate Body Report on European Communities –  Measures Affecting Meat and Meat Products
(Hormones), adopted on 13 February 1998, WT/DS26/AB/R & WT/DS48/AB/R, para. 164; Appellate Body
Report on United States – Restrictions on Imports of Cotton and Man-Made Fibre Underwear , adopted on 25
February 1997, WT/DS24/AB/R, p. 17.
527 Initially granted under the Auto Pact and now under the NAFTA.
528 Japan’s response to Question 1 from Canada.
529 Japan’s response to Question 21 from the Panel.WT/DS139/R
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subsidies with import facilitating effects.  Rather, Canada has pointed out that the duty-free treatment,
if it is a subsidy at all, is a subsidy first of imports and second of production.  Production subsidies are
not prohibited under the SCM Agreement, and the mere fact that a subsidy is granted to an enterprise
that exports, explicitly does not make the subsidy an export subsidy.530
6.646  The only way to receive the duty-free treatment is by importing.  The European Communities
cannot reconcile the standard of “contingent upon” export performance with the fact that qualifying
manufacturers may receive the duty-free treatment even if they do not export at all.  As Canada has
already noted in the context of Article 3.1(b), contingency requires “conditionality”.  Exportation is
not a stipulation upon which the receipt of duty-free treatment depends. That which need not be
achieved is, by definition, not a condition.
6.647  According to the New Shorter Oxford English Dictionary , the ordinary meaning of
"condition" is "a thing demanded or required as a prerequisite to the granting or performance of
something else; a stipulation."  In order to meet th e standard of conditionality under Article 3.1(a), the
prerequisite to the granting of a subsidy must be export performance.  If export performance is not a
prerequisite, or stipulation, for the granting of the subsidy, there is no conditionality.
6.648  Nor are there “bonuses or additional payments” if exports take place, a test of export
contingency cited and endorsed by the European Communities.  The only way to receive additional
benefits is by increasing the value of vehicles imported.  Moreover, the benefits are not payments at
all.531
6.649  The European Communities further errs by dismissing as “‘contextual’ re-writing” Canada’s
argument that Article 3.1(a) must be interpreted in its context.  The European Communities claims
that “the ordinary meaning of the terms of Article 3.1 (a) is clear and unambiguous and leaves noscope” for consideration of such context.  However, the Appellate Body has consistently held that it is
the context of a treaty’s provisions, as well as its object and purpose, that establishes the ordinary
meaning to be given to the terms of a treaty.
532  As Article 31.1 of the Vienna Convention  provides,
“A treaty shall be interpreted in good faith in accorda nce with the ordinary meaning to be given to the
terms of the treaty in their context and in the light of its object and purpose.”  Contrary to the EC’s
contentions, context is an essential element of treaty interpretation and not merely a secondary tool to
resolve ambiguity.
6.650  In the present case, context is crucial to determining what is – and is not – a subsidy
contingent upon export performance.  A key aspect of this context is the Illustrative List in Annex I to
the SCM Agreement.  As Canada noted in its answer to the Panel’s Question 23, by dismissing as“irrelevant” the complete dissimilarity between the measures at issue and those on the Illustrative List,
the European Communities has disregarded the guidance of the Appellate Body.
533
6.651  In the context of the Illustrative List, it is an unjustifiable interpretative leap to contend, as the
complainants do, that a non-excessive remission of import charges is not only a subsidy, but an
“export subsidy”.  The European Communities claims that the limitation of  Items (g) through (i) ofthe Illustrative List to excessive tax or duty exemptions or remissions are not the expression of a
general principle that such remissions are permitted when non-excessive.  However, the only non-
excessive tax exemption or remission programs identified on the Illustrative List as an export subsidy
do not involve import charges but rather, direct taxes or social welfare charges (Item (e)).  Even these
remissions are only deemed export subsidies when they are “specifically related to exports”.  The onlyremissions of import charges identified on the Illustrative List are those that are both excessive and
                                                     
530 See Footnote 4 to Article 3.1(a).
531 Panel Report on US – Malt Beverages, supra  note 427, para. 5.8.
532 See, e.g., Appellate Body Report on US – Gasoline , supra  note 487, p. 17.
533 Appellate Body  Report on Canada – Periodicals , supra  note 280, pp. 33-34.WT/DS139/R
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linked directly to an exported product.534  When interpreted in its context, it is clear that Article 3.1(a)
does not extend to the measures at issue.
7. Japan's follow-up to Canada's response
6.652  As a follow-up to Canada's response, Japan argues as follows:
6.653  The measures certainly constitute a subsidy in the meaning of Article 1.1(a)(1)(ii) of SCM
Agreement if, for example, Canada applies 6.1 per cent customs duty on a product from certain
countries while applying zero-duty on the same product from other countries.  Whether or not the duty
applied is lower than the bound rate does not matter in the determination of a subsidy.  And such
disparity in the rates of duty applied is not usually called "tariff reduction".  Whether this subsidy is
prohibited or not depends on the conditions attached to the subsidy.  Duty-drawbacks and even GSPwould be a prohibited subsidy if these schemes have conditions falling in Article 3.1 of SCM
Agreement.
8. The European Communities' follow-up to Canada's response
6.654  As a follow-up to Canada's response, the European Communities  argues as follows:
(a) The Tariff Exemption is a subsidy
6.655  Canada argued in its initial response that the Tariff Exemption was not a subsidy contingent
upon export performance or upon the use of domestic over imported goods.  Canada has since gone
one step further and claims that the Tariff Exemption is not a subsidy at all.
6.656  Canada alleges that if the Tariff Exemption were a subsidy, "then a subsidy would exist
whenever a Member unilaterally applied a rate of duty lower than its bound rate".
6.657  That argument misses an essential point.  The definition of subsidy in Article 1.1 of the SCM
Agreement requires that the revenue that is "foregone" or not "collected" by the Government must be"otherwise due".  In other words, there must be a legal obligation to pay the duty or tax which is
exempted or remitted by the Government.
6.658  Bound duty rates are not "due" by importers.  When a Member gives a tariff binding it
assumes simply the obligation not to apply tariffs above the level of the bound rate.  Since tariff
bindings do not require Governments to apply the bound rates, it follows that the mere existence of a
tariff binding may not, as such, impose upon the importers the obligation to pay those rates.
6.659  In its response to the complainants' rebuttals, Canada reiterates the argument that it is possible
to derive from Footnote 1 and Items (g) through (i) of the Illustrative List the general principle that a
duty exemption is not a subsidy unless it is "excessive".
6.660  By definition, however, an import exemption may never be "excessive".  Indeed, "excessive"
compared to what?  The necessary consequence of Canada's argument is, purely and simply, that a
duty exemption could never be a subsidy.
6.661  But, if so, there would be no reason to limit the circumstances in which the remission of
import duties is not deemed a subsidy.  For example, if the exemption of import duties on the
machinery used for the assembly of motor vehicles is not a subsidy, why should the payment andsubsequent remission of those duties constitute an export subsidy?
                                                     
534 Item (i).WT/DS139/R
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6.662  Yet Footnote 1 stipulates that duty remissions sh all not be deemed to be a subsidy only where
the import duties are "borne" by the exported goods, which in accordance with Annexes I through III
means that the duties must have been levied on inputs "consumed" in the production of the exported
goods.
6.663  Far from finding support in Footnote 1 and the Illustrative List, the principle asserted by
Canada would render redundant Item (i) of that List as well as large portions of Annexes II and III.
(b) The Tariff Exemption is prohibited by Article 3.1 (a)
6.664  Canada claims that, even if the Tariff Exemption were a subsidy, it would be an "import
subsidy" and not an "export subsidy" because "d uty-free treatment is available only by importing".
6.665  Canada's argument is based on the wrong assumption that simply because a subsidy is
"contingent" upon importation, it cannot be "contingent" also upon export performance.
6.666  While it is true that "duty-free treatment is available only by importing", merely importing
motor vehicles is not a sufficient condition to benefit from the subsidy.  A beneficiary may not import
and sell in Canada as many motor vehicles as it wishes.  It may import and sell in Canada only a
limited amount of motor vehicles.  As demonstrated, that amount depends upon the amount of motorvehicles exported by each beneficiary.  That makes the subsidy contingent upon export performance
in the meaning of Article 3.1(a).
6.667  Canada also argues that, in the alternative, the duty-free treatment would not be an export
subsidy but rather "… a subsidy for domestic production because it is contingent upon a production-to
sales ratio".
6.668  Canada makes again the same mistake. "Production" subsidies and "export subsidies" are not
mutually exclusive categories.  Canada appears to overlook that "exported" goods must be "produced"first.  For that reason, any "export" subsidy will normally operate also as "production" subsidy.
6.669  In the case at hand, the subsidy is contingent upon production, in the sense that the
beneficiaries cannot qualify for the Tariff Exemption unless they produce some motor vehicles in
Canada.  But, in addition, the subsidy is also contingent upon export performance because, all other
conditions being equal, the amount of the benefit is larger if motor vehicles are exported than if theyare sold in Canada.
6.670  Canada also argues that the Tariff Exemption is "singularly ineffective", because the
beneficiaries export "the majority of their production" to the United States, rather than to the
European Communities or Japan.
6.671  As already explained by the European Communities, whether or not the Tariff Exemption has
any actual effects is totally irrelevant, because the SCM Agreement prohibits all export subsidies,
irrespective of their effects.  In any event, th e fact that there are few exports to the European
Community or Japan does not mean necessarily that the subsidy causes no prejudice to those
Members.  The European Communities would recall that, for example, the displacement of exports
from a third country market is considered as an actionable "adverse effect" under Part III of the SCMAgreement.WT/DS139/R
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(c) The Tariff Exemption is prohibited by Article 3.1 (b)
(i) Article 3.1 (b) prohibits all the subsidies that are contingent upon any condition that gives
preference to the use of domestic over imported goods
6.672  The EC's position has been that Article 3.1(b) prohibits all the subsidies that are contingent
upon any condition that gives preference to the use of domestic over imported goods, and not only
those subsidies that require the actual use of domestic goods.
6.673  The European Communities has argued that its interpretation is consistent with the ordinary
meaning of the wording of Article 3.1(b), and is supported by the context of that provision, as well as
by its object and purpose and by the drafting history of the SCM Agreement.
6.674  Canada has not addressed any of those arguments. Instead, in response to the complainants'
rebuttals, Canada keeps on arguing that the EC's position is inconsistent with the notion of
"contingency".  That argument, however, misses the point.  The issue in dispute is not the meaning of
the term "contingent".  The European Communities has no quarrel with Canada's tautological
proposition that "contingency" means "conditionality".  The issue in dispute is the meaning of the
terms "use of domestic over imported goods".  In other words, the issues is not whether the subsidymust be "conditional", but rather what is the relevant "condition".
(ii) Article 3.1(b) does not require that the use of domestic over imported goods be a necessary
condition
6.675  The European Communities has also argued that, even if "contingent upon the use of
domestic over imported goods" meant "contingent upon the actual use of domestic goods",
Article 3.1(b) does not require that that condition be a necessary one.
6.676  In fact, Article 3.1(b) prohibits the granting of subsidies that are contingent upon the use of
domestic over imported goods "whether solely or as one of several conditions".  That may cover the
situation where a subsidy is subject to two or more alternative conditions, so that compliance with any
of them gives a right to the subsidy.
6.677  Canada responds that, by definition, an alternative condition would not be a condition.  The
European Communities disagree.  Assume, for example, that a Member grants a subsidy to thosecompanies which export € 1,000,000 worth or create 1,000 jobs.  Clearly, that subsidy would be
"contingent" even though neither exporting nor creating jobs is a "necessary" condition to obtain the
subsidy.
6.678  A subsidy subject to two or more "alternative" only ceases to be "contingent" if the admitted
alternatives exhaust all possible options.  For example, a subsidy granted upon exporting goods orupon selling them domestically would not be truly "contingent" upon either because the beneficiary
has no other option left.
(iii) Article 3.1(b) applies also to de facto contingency
6.679  As mentioned, the European Communities considers that the CVA requirements make the
Tariff Exemption contingent "in law" upon the use of domestic over imported goods.  Nevertheless,the European Communities has also submitted in the alternative that the CVA requirements make the
Tariff Exemption contingent "in fact" upon the use of domestic over imported goods.
6.680  Canada asserts that Article 3.1(b) does not extend to de facto  contingency.  Yet the only
argument submitted by Canada is that, unlike Article 3.1(a), Article 3.1(b) does not refer expressly to
contingency "in fact".WT/DS139/R
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6.681  Article 3.1(a) is part of the context of Article 3.1(b) and, as such, may be a relevant element
of interpretation.  But it is not the only one.
6.682  As recalled by the Appellate Body in US - Shrimps , the interpretative analysis "must begin
with, and focus upon, the text of the particular provision to be interpreted".535  The ordinary meaning
of the text of Article 3.1(a) does not exclude de facto  contingency.  A contextual interpretation based
exclusively on Article 3.1(a) should not be allo wed to prevail over the ordinary meaning of
Article 3.1(b).
6.683  The differences in wording between Article 3.1(a) and Article 3.1(b) may be explained by
their different drafting history.  The explicit reference to de facto  contingency found in Article 3.1(a)
was proposed by the European Communities.536  The EC proposal started from the premise that "the
present discipline also applies to subsidies de facto  contingent upon export".537  Thus, the purpose of
the EC proposal was not to extend the prohibition on export subsidies to de facto  export subsidies, but
rather to "provide for clearer guidance in identifying de facto  subsidies, in order to avoid undue
extensions of the category of export subsidies".538
6.684  The other participants agreed with the premise that de facto  export contingency was already
prohibited by existing disciplines and the negotiations focused on the text of the footnote to
Article 3.1(a), which specifies the standard for the interpretation of de facto  export contingency, rather
than on the inclusion of an express reference to de facto  export contingency in Article 3.1(a).
6.685  The mere fact that Article 3.1(b) does not refer expressly to de facto  contingency should not
be taken to mean that the drafters aimed to restrict the scope of that provision to de jure  contingent
subsidies.  Rather, it reflects the fact that the drafters did not consider it necessary to define a standard
for identifying de facto  local content subsidies, simply because that notion is more easily
apprehensible.  By the same token, the drafters did not consider it necessary either to supplement
Article 3.1(b) with an Illustrative List of prohibited local content subsidies.
6.686  In any event, Article 3.1(b) is not the only relevant contextual element.  As already explained
by the European Communities, Article 3.1(b) was in serted in the SCM Agreement with the purpose to
clarify and reinforce the existing GATT disciplines with respect to local content requirements.  In
view of that, it would be anomalous if Article 3.1(b) was interpreted so as to have a narrower scope
than GATT Article III:4.
6.687  Furthermore, the provisions of a treaty must be interpreted not only "in their context" but also
"in light of their object and purpose".  The object a nd purpose of Article 3.1 is to avoid that subsidies
be used to discriminate between domestic and imported goods used in the manufacture of other goods.If Canada's views were upheld, it would be extremely easy for Members to devise measures to
circumvent Article 3.1(b).  As already explained by the European Communities, Canada's position
would have the absurd result that, for example, a subsidy contingent upon a 99 per cent domestic
added value requirement would not be prohibited by Article 3.1(b), even though it is unquestionable
that such a subsidy would discriminate against imported goods.
                                                     
535 Appellate Body Report on United States – Shrimp, supra  note 301, para. 114.
536 Doc. MTN.GNG/NG10/W/31, 27 November 1989, Section 1a.
537 Ibid.
538 Ibid.WT/DS139/R
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(iv) In the alternative, the CVA requirements make the subsidy contingent de facto upon the use of
domestic over imported goods or upon export performance
6.688  In its response to the complainants' rebuttals, Canada reiterates its position that, even if
Article 3.1(b) applied to de facto  contingency, there is no de facto  contingency in this case because
the Big Three and CAMI meet their CVA requirements on the basis of labour CVA alone.
6.689  Canada has not substantiated those assertions.  The evidence provided by Canada only shows
that, currently, the Big Three meet the CVA requirements in the MVTO 1998 on the basis of labour
CVA alone.  But it does not show that they can meet also the CVA requirements in the Letters of
Undertaking without using domestic parts and materials.
6.690  Canada has provided no evidence whatsoever concerning CAMI.  The European
Communities has shown that, on average, the cost of materials accounts for 80 per cent of the total
cost of sales of the motor vehicles assembled in Canada.  Canada has not disputed that figure.  Even
allowing for the "wide" variations in costs among manufacturers alleged by Canada539, it is simply
impossible that labour costs alone may account for as much as 60 per cent of the cost of sales of any
passenger car assembled by CAMI.  The only possible way in which CAMI could meet the 60 percent CVA requirement in its SRO without using any domestic parts and materials at all is by
exporting a substantial amount of vehicles and parts, which would make the subsidy contingent upon
export performance.
9. Canada's follow-up response
6.691  Canada  responds as follows:
(a) The measures are consistent with Article 3.1(a)
6.692  Japan has asserted, on the basis of a new hypothetical example in its rebuttal, that contingency
exists because duty-free treatment necessarily increa ses with export volumes.  There is a technical
error in Japan's argument in that production-to-sales ratios are based on value, not volume as Japan
asserts.  More significantly, the Japanese argument has two major substantive failings.
6.693  First, Japan's example shows only that an increase in the value of exportation could permit a
company to import more vehicles duty-free, but not that it necessarily will.  As Canada demonstratedin its initial response, the value of duty-free imports may also increase substantially while export
value is decreased substantially.  Nor does a manufacturer receive the alleged subsidy except by
actually importing.  Paradoxically, the duty-free treatment is an incentive to increase imports and
reduce exports if a company wants to maximize the ad valorem  benefit of the duty saving.
6.694  Second, even if the value of the alleged subsidy did increase with the value of exportation,
that would not be sufficient to establish contingency.  The same increase would also be true of any
per-unit production subsidy.  Such a subsidy would still not be an export subsidy because, as in the
present case, exportation is not a condition for receipt of the benefit.  In the absence of this
conditionality a subsidy is not contingent upon export performance.
6.695  Japan also argues that the ratios of the MVTO automobile manufacturers are at 1 to 1 or
higher, based on two statements by some company officials.  Canada assumes that the officials in
question were rounding off these ratios for the sake of simplicity.  As Canada stated in its response to
the Panel's Question 36, the ratios for these companies vary from the low 80s to 100 to the high 90s to
100.  None of them are at or over 1 to 1.
                                                     
539 Canada's response to Question 24 from the Panel.WT/DS139/R
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6.696  The European Communities, which has elaborated its claim more than Japan, argues that even
at ratios below 1 to 1, the production-to-sales ratio should be considered an export subsidy because at
some point it will only be possible to increase duty-free imports by exporting more.  This is as true of
a ratio of 0.5 to 1 as it is of a ratio of .99 to 1.  Of course, by the same theory of the European
Communities, any subsidy paid in direct proportion to production is an illegal export subsidy because,at some point, domestic markets will be saturated, leaving export markets as the only alternative.
6.697  The SCM Agreement does not prohibit subsidies contingent upon production, even though a
subsidy per unit of production is much more of an incentive to export than the duty-free treatment in
this case.  This is because a subsidy per unit of production increases with every unit of export.  By
contrast, as Canada has shown, the value of the duty-free treatment does not increase with increasedexports but only with imports.
6.698  The complainants have also done little to challenge Canada's position that a finding that the
measures are inconsistent with Article 3.1(a) would require the panel to ignore the context of the SCM
Agreement.  The context of the SCM Agreement, including the Illustrative List, offers no support for
the complainants' contention that a non-excessive remission of import charges is not only a subsidybut an export subsidy.
6.699  In its rebuttal, the European Communities merely reiterates its arguments that the context of
the SCM Agreement should be ignored, despite the Appellate Body's consistent findings that context
is an essential element of treaty interpretation.  As Canada noted in its response to the rebuttals, the
only non-excessive tax exemption programs listed on the Illustrative List as export subsidies do not
involve import duties and even these programs are only export subsidies to the extent that they are
"specifically related to exports".  Remissions of import duties are listed on the Illustrative List as anexport subsidy only to the extent that they are both excessive and linked directly to an exported
product.  There is nothing on the Illustrative List that would justify extending Article 3.1(a) to the
present measures, which are non-excessive and have no linkage, direct or otherwise, to an exported
product.
(b) The measures are consistent with Article 3.1(b)
6.700  Both complainants also claim that the CVA requirement makes the duty-free treatment a
subsidy contingent in law upon the use of domestic over imported goods under Article 3.1(b) of the
SCM Agreement.  Canada has already explained in its various arguments to this Panel why the EC's
interpretation of "contingent upon" as "mere possibility" is completely unsubstantiated by the plain
wording of Article 3.1(b) and is contrary to the legal standard of Article 3, which is that ofconditionality.
6.701  For its part, Japan accuses Canada of ignoring the "express wording" of Article 3.1(b).  It
appears from Japan's arguments that Japan endorses the EC's interpretation of Article 3.1(b).  Japan
states that "contingent upon … the use of domestic over imported goods" includes contingency on a
condition that requires or favours the use of domestic over imported goods.  This suggests stronglythat Japan misunderstands the meaning of "express wording".
6.702  The express wording of Article 3.1(b) is "contingent upon the use of …".  "Contingent upon"
does not mean favouring.  The prerequisite to the granting of a subsidy must be the use of domestic
over imported goods.  In the present case, even if duty-free treatment were a subsidy, the relevant
prerequisite for the receipt of duty-free treatment is the achievement of a certain CVA.  Because amanufacturer may achieve its CVA with or without the use of domestic goods, the use of domestic
over imported goods is not a prerequisite for receipt of duty-free treatment.  The measures therefore
lack the conditionality required for a prohibited subsidy.WT/DS139/R
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6.703  The complainants' arguments would turn Article 3.1(b) into a prohibition of any measure that
granted lower duty treatment to imported products on the basis that the imported products contained
or used domestic products of the importing country.  By the complainants' theory, if such measures
were not subsidies contrary to Article 3.1(b), they would have to be considered to violate
Article 3.1(a).
6.704  Both complainants insist in the alternative, that despite the wording of Article 3.1(b), the
subsidy allegedly accorded by the measures is contingent in fact upon the use of domestic over
imported goods.  Neither complainant has offered any explanation for why the scope of Article 3.1(b)
should be interpreted to extend to de facto contingency, absent the express language "in law or in fact"
found in sub-paragraph (a) of the same Article.  The European Communities made no new assertionson this point in its rebuttal.  In today's argument it referred to its own position during the negotiation
of Article 3.1(a) that: "the present discipline also applies to subsidies de facto  contingent upon
export".  This hardly explains Article 3.1(b).
6.705  Japan simply asserts that in the absence of this language, sub-paragraph 3.1(b) should be
taken to apply to both contingency in law and in fact.  This contention fails to explain both thesignificance of the specific reference to "in law or in fact" in sub-paragraph 3.1(a) and the relevant
findings of the Appellate Body on this issue, which Canada has discussed in its arguments.
6.706  Moreover, even if the scope of sub-paragraph 3.1(b) did extend to contingency in fact, the
complainants still fail to show that the measures satisfy the legal standard of conditionality upon the
use of domestic over imported goods.  Nor can they, given that duty-free treatment is available even
when domestic goods are not included in the fulfilment of a CVA requirement, for example, in the
case of the qualifying manufacturers that fulfil their CVA requirements on labour costs alone.
E. A
PPLICABILITY OF THE GATS TO THE MEASURES
1. Arguments of Japan
6.707  Japan  argues as follows:
6.708  The Duty Waiver and its associated conditions fall within the scope of the GATS which
applies to "measures by Members affecting trade in services".540
6.709  The Duty Waiver and its associated conditions constitute a measure taken by a central
government (i.e . the Government of Canada) in the form of a law, regulation or administrative action
(i.e. the MVTO 1998, the SROs, the letters of undertaking and administrative action), within the
meaning of Articles I:3 and XXVIII of the GATS.541  Accordingly, the Duty Waiver is a "measure by
a Member" under Article I:1 of the GATS.
6.710  Also, the Duty Waiver is a measure "affecting trade in services", within the meaning of
Articles I and XXVIII(c) of the GATS, because it affects:  (i) conditions of competition in the supply
of services between wholesale trade service suppliers;  and (ii) conditions of competition in the supply
of services between service suppliers relating to the production of motor vehicles.542  The panel in EC
                                                     
540 Article I:1 of the GATS states "[t]his Agreement applies to measures by Members affecting trade in
services".
541 Article I:3 of the GATS defines "measures by Members" to include measures taken by … central,
regional or local governments and authorities.  GATS Article XXVIII defines the term "measures" to mean any
measure by a Member, whether in the form of a law, regu lation, rule, procedure, decision, administrative action,
or any other form.
542 Article XXVIII(c) of the GATS provides:
(c) "measures by Members affecting trade in services" include measures in respect ofWT/DS139/R
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- Bananas III found that no measures are excluded a priori from the scope of the GATS.  Rather, that
panel confirmed that "sub-paragraphs (i)-(iii) [of Article XXVIII(c) of the GATS] do not contain a
definition of 'measures by Members affecting trade in services' as such, but rather are an illustrative
list of matters in respect of which such measures could be taken".543  The EC - Bananas III  panel also
determined that the expression "affecting" in Article I:1 of the GATS had to be given a broadinterpretation.  It noted that Article I:1 of the GATS refers to measures in terms of their effect, which
means "they could be of any type or relate to any domain of regulation".
544  On this issue, the Panel
concluded that:
"… the drafters consciously adopted the terms 'affecting' and 'supply of a service' to
ensure that the disciplines of the GATS would cover any measure bearing uponconditions of competition in supply of a service, regardless of whether the measure
directly governs or indirectly affects the supply of the service."
545
6.711  The Duty Waiver and its associated conditions have two effects on the conditions of
competition in the supply of services.  First, the di scriminatory provision of duty-exempt status that is
limited to the Auto Pact Manufacturers (who are also wholesale trade service suppliers of motorvehicles) necessarily affects the conditions of competition in the supply of services between wholesale
trade service suppliers.  The Duty Waiver necessarily reduces the cost for the supply of wholesale
trade services for the Auto Pact Manufacturers and places them at a competitive advantage in offering
their wholesale trade services in the Canadian market.  The effect of the Duty Waiver on the
conditions of competition in this instance is indirect in that it directly affects the cost of the good
being distributed and indirectly affects the cost and/or profitability of the related wholesale trade
services.
546  However, the panel in EC – Bananas III  explicitly addressed this situation and found
irrelevant "whether the measure directly governs or indirectly affects the supply of the service".547
The supply of wholesale trade services by Non-Auto Pact Manufacturers is quite clearly lessprofitable than would be the case if the prices charged for those automobiles did not have to recoup
the cost of the discriminatory MFN duty.  A ccordingly, the Duty Waiver has "a bearing upon
conditions of competition in supply of services" and is a measure affecting trade in services within themeaning of Articles I and XXVIII(c) of the GATS.
6.712  Second, following the reasoning of the Panel of EC - Bananas III , by virtue of the domestic
content requirement (i.e. the CVA), the Duty Waiver has an effect on the purchase, payment or use of
services related to the production of motor vehicles.  Items listed in the definition of the CVA include
payments made by the Auto Pact Manufacturers in respect of the use of services in the followingservice sectors:
(i) repair and maintenance services;
(ii) engineering services;  and
(iii) administrative and general services (e.g., accounting, management and consulting
services).
                                                                                                                                                                    
(i) the purchase, payment or use of a service;
(ii) the access to and use of, in connection with the supply of a service, services which
are required by those Members to be offered to the public generally;
(iii) the presence, including commercial presence, of persons of a Member for the supply
of a service in the territory of another Member.
543 Panel Reports on EC – Bananas III , supra  note 269, para. 7.280.  The substance of the Panel's
statement was supported by the Appellate Body in its Report on EC –  Bananas III , supra  note 49, para. 220.
544 Ibid.
545 Ibid., para. 7.281.  At para. 220 of its Report, supra , note 49, the conclusions of the Appellate Body
support the Panel's reasoning on this point.
546 As discussed below, the Government of Canada has scheduled its relevant GATS commitments.
547 Panel Reports on EC – Bananas III , supra  note 269, para. 7.281.WT/DS139/R
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6.713  The domestic content requirement in practice requires the Auto Pact Manufacturers to
purchase and use certain specified services supplied by service suppliers in Canada to the detriment of
like services supplied by service suppliers outside Canada.  In this way, it has an effect on the
conditions of competition in the supply of services.  It is, therefore, a measure affecting trade inservices within the meaning of Articles I and XXVIII(c) of the GATS.
2. Arguments of the EC
6.714  The European Communities  argues as follows:
6.715  GATS Article I:1 provides that: "[t]his Agreement applies only to measures by Members
affecting trade in services". Thus, a "measure cove red by the GATS" is a measure "affecting trade in
services
548.
6.716  The Tariff Exemption is a "measure covered by GATS"  because:
- it is a "measure by a Member";
- the beneficiaries are suppliers of  "services" covered by the GATS, namely of
wholesale trade services for automobiles;
- the Tariff Exemption "affects" the "supply" of  those services; and
- in so doing, the Tariff Exemption "affects" the "trade" in wholesale trade
services for automobiles.
(a) The Tariff Exemption is a "measure by a Member"
6.717  The Tariff Exemption is contained in "Orders-at-Council" issued by the Governor General of
Canada. Therefore, it is clearly a " measure by a Member" in the meaning of GATS Articles I:3 (a)
and  XXVIII (a).
(b) The beneficiaries are suppliers of wholesale trade services covered by the GATS
6.718  In addition to manufacturing automobiles in Canada, the beneficiaries also are engaged in the
wholesale distribution in Canada of automobiles imported by them from other Members. Typically,
the beneficiaries purchase the automobiles to fore ign manufacturers, import them into Canada and sell
them to local dealers which, as a general rule, re-sell them to the final users.
6.719  In connection with that activity, the beneficiaries also perform a series of related activities
such as maintaining a stock, delivering the autom obiles to the dealers, commissioning and/or funding
promotional activities, providing after-sales maintenance and repair services, etc.
6.720  GATS Article I.3(b) stipulates that the term "services"  includes "any service in any sector
except services supplied in the exercise of governmental authority". Thus, the sectoral coverage ofGATS is, in principle, universal
549.
6.721  The distribution of goods, both at wholesale and at retail level,  is a "service" within the
meaning of the GATS. That activity is listed in the Services Sectoral Classification List550.  Moreover,
                                                     
548 See, e.g., Panel Report on EC – Bananas III (USA) , supra  note 269, para. 7.298.
549 Ibid., para. 7.288.WT/DS139/R
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many Members (including Canada551) have given market access and/or national treatment
commitments with respect to wholesale distribution services.  Further confirmation is provided by EC
– Bananas III , where the provision of wholesale trade services with respect to bananas was found to
be an activity covered by the GATS552.
6.722  The CPC describes "wholesale trade services" as a sub-set of "distributive services",  which is
defined in a headnote to Section 6 of the CPC as consisting of:
"selling merchandise to retailers, to industrial, commercial, institutional, or other
professional business users, or to other wholesalers, or acting as agent or broker
(wholesaling services)  or selling merchandise for personal or household consumption
including services incidental to the sale of goods (retailing services). The principal
services rendered by wholesalers and retailers may be characterised as reselling
merchandise, accompanied by a variety of related, subordinated services such as:
maintaining inventories of goods ; physically assembling, sorting and grading goods
in large lots, breaking bulk and redistribution in smaller lots; delivery services ;
refrigeration services; sales promotion services rendered by wholesalers ; and services
associated with retailer’ business, e.g., processing subordinated to selling,
warehousing and garage services." ( emphasis added )
6.723  Under Section 6, the CPC contains  a sub-division entitled "Wholesale trade services of motor
vehicles"  (CPC 61111), which includes, inter alia , the "wholesaling of passenger motor cars".
6.724  Thus, the activities performed by the beneficiaries with respect to the automobiles that they
import from other Members fall squarely within the definition of the CPC category of "wholesale
trade services".
(c) The Tariff Exemption "affects" the "supply" of wholesale trade services
6.725  The considerations made below with respect to  the meaning of the term "affecting the supply
of services" in the context of GATS Article XVII are equally applicable with respect to GATS
Article II.
6.726  The granting of a tariff exemption for importing automobiles modifies the conditions of
competition between the beneficiaries and other wholesale distributors of imported automobiles which
do not benefit from a similar exemption for importing the automobiles that they re-sell in Canada.
Hence, the tariff exemption "affects" the "supply" of wholesale distribution services.
6.727  This analysis is confirmed by EC – Bananas III .  In that case, the Panel found that, by
favouring certain categories of wholesalers of bananas with respect to the allocation of a tariff quotafor bananas, the measures "affected" the supply of wholesale trade services for bananas within the
European Communities.
                                                                                                                                                                    
550 In the Uruguay Round negotiations, participants agreed to follow a set of guidelines for the
scheduling of specific commitments under the GATS.  Thos e guidelines encouraged participants to use the so-
called Services Sectoral Classification List (Document MTN.GNS/W/120, dated 10 July 1991), which is largelybased on the United Nations’ Central Product Classification (the "CPC"). Although the use of the Services
Sectoral Classification List is not mandatory, most Members, including Canada, have adopted it as a basis for
scheduling their commitments.
551 Exhibit EC-19.
552 Ibid.WT/DS139/R
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6.728  On appeal, that conclusion was affirmed by the Appellate Body. In response to an argument
to the effect that "when buying or importing [bananas], a wholesale trade services supplier is a buyer
or importer and not covered by the GATS", the Appellate Body noted that:
"It is difficult to conceive how a wholesaler could engage in the ‘principal service’ of
reselling a product if it could not also purchase or, in some cases, import the product.Obviously, a wholesaler must obtain the goods by some means in order to resell them
….
553
(d) The Tariff Exemption "affects" the "trade" in  wholesale distribution services
6.729  Article I:2 of GATS defines  "trade in services" as the "supply of a service" through any of
the four modes listed therein,  i.e. cross-border supply, consumption abroad, commercial presence and
presence of natural persons. Thus, a measure "affects trade in services" if it affects the "supply of
services" through any of those four modes.
6.730  In the present case, the Tariff Exemption affects the "trade in services" because it affects the
"supply" of wholesale distribution services thro ugh commercial presence (Mode 3) by persons of
other Members.
3. Canada's Response
6.731  Canada responds as follows:
(a) The measures at issue are not covered by the GATS
6.732  Measures covered by the GATS are set out in Article I.  Article I:1 provides that: “This
Agreement applies to measures by Members affecting trade in services”.
6.733  Article I:2 defines “trade in services” as the supply of a service according to any of four so-
called “modes”.554  Thus, measures covered by the GATS are measures affecting the supply of a
service according to these modes.
6.734  According to the arguments of both complainants, the services allegedly affected by the
measures at issue are wholesale distribution services for automobiles.  Japan’s argument does not
specify the mode of wholesale distribution service su pply that is allegedly affected by the measures at
issue.  The EC’s argument contends that the affected mode is the supply of wholesale distributionservices through the commercial presence of persons of other Members (mode 3).
6.735  Japan and the European Communities rely on EC – Bananas III for the proposition that the
scope of the GATS is broad enough to extend to the measures at issue.  However, the fact that the
scope of the GATS is broad does not mean that it is unlimited.  Virtually all goods must be distributed
in order to be marketed and the distribution of goods is a service.  If the term “affecting” is interpretedtoo broadly, all measures affecting trade in g oods would be found to affect, at a minimum, the
distribution services for those goods.  Thus, all measures affecting trade in goods would also affect
trade in services.  To avoid this result, the Appellate Body has held that a measure must affect a
                                                     
553 Appellate Body Report on EC –  Bananas III , supra  note 49, para. 226.
554 The modes are, respectively, the supply of a service:  from the territory of one Member into the
territory of any other Member; in the territory of one Member to the service consumer of any other Member; by
a service supplier of one Member, through commercial presence in the territory of any other Member; and by aservice supplier of one Member, through presence of natural persons of a Member in the territory of any otherMember.WT/DS139/R
WT/DS142/RPage 190
service supplier in its supply of a service  to fall within the GATS.  It is not enough for the measure to
affect the service supplier in a capacity unrelated to the supply of a service.
6.736  The Appellate Body has made this critical  distinction in two separate findings in EC –
Bananas III.   In considering the extent to which the GATS applies to vertically-integrated companies,
the Appellate Body stated that:
"…to the extent that it is also engaged in providing “wholesale trade services” and is
therefore affected in that capacity  by a particular measure of a Member  in its supply
of those “wholesale trade services” , that company is a service supplier within the
scope of the GATS."555 (emphasis added )
6.737  Implicit in this finding is the requir ement that “affecting” means affecting in the capacity of  a
service provider  and in its supply of services .
6.738  The Appellate Body’s distinction is borne out by the definitions in Article XXVIII(b) and (c)
of the GATS.  “Supply of a service”, as the phrase is used in Article I, is defined in Article XXVIII(b)
to include the “production, distribution, marketing, sale and delivery of a service”.  Withoutexception, these examples relate to the activity of carrying on a service business.
6.739  Similarly, Article XXVIII(c) defines “measures by Members affecting trade in services” to
include measures respecting such things as the purch ase of a service, the payment for a service, the
use of a service, access to services and the presence of persons to supply a service.  Again, without
exception, these examples relate to the activity of carrying on a service business.  None of the
examples in either of the foregoing definitions relates to access to or taxation of goods provided by a
service supplier.
6.740  The Appellate Body’s distinction upholds the unambiguous statement in the Addendum to the
Explanatory Note on the Scheduling of Initial Commitments in Trade in Services issued by the Group
of Negotiations on Services.
556  The Addendum takes the form of questions and answers.  In response
to Question 6, “Is it necessary to reserve the right to impose customs duties and regulations on the
movement of goods in relation to the supply of a service?”, the Addendum answers:
"There is no requirement in the GATS to schedule a limitation to the effect that the
cross-border movement of goods associated with the provision of a service may be
subject to customs duties or other administrative charges .  Such measures are subject
to the disciplines of the GATT. ”557  (emphasis added )
6.741  In considering the relationship between the GATT 1994 and the GATS, the Appellate Body
also found that there are three categories of measures: those affecting the supply of services as
services; those involving a service related to or supplied in conjunction with a good; and those
affecting only trade in goods as goods.558
6.742  At the core of the Japanese and EC argument is  the proposition that every measure that affects
the cost of or access to goods also affects the trade in the services supplied by the distributors of such
goods.  This proposition runs contrary to the finding of the Appellate Body in EC – Bananas III ; it
would read out of existence the category of measures that affect only trade in goods as goods.
                                                     
555 Appellate Body Report on EC –  Bananas III , supra  note 49, para. 227.
556 Addendum to the Explanatory Note on the Scheduling of Initial Commitments in Trade in Services,
MTN.GNS/W/164/Add.1, 30 November 1993 (Exhibit CDA-8).
557 Ibid., p. 2.
558 Appellate Body Report on EC –  Bananas III , supra  note 49, para. 221.WT/DS139/R
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6.743  As noted, the activity  of distributing goods is undoubtedly a service.  A measure affecting the
activity of supplying the service of distributing goods is a measure affecting the supply of a service
within the scope of the GATS.  However, a measure affecting goods themselves but not the supply of
distribution services related to those goods is not a measure affecting trade in services because it does
not affect supply of a service.  It therefore does not fall within the scope of the GATS.
6.744  Duties or tariffs are measures affecting trade in goods as goods.  So too are measures
providing for relief from duties or tariffs.  The MVTO and SROs are pure tariff measures.  Tariff
measures fall within the disciplines of the GATT, as its very title indicates.  Such measures affect
trade in goods as goods.  The extension or non-ex tension of MVTO and SRO duty-free treatment may
affect the cost of automobiles, but it does not, either directly or indirectly, affect in any way trade inwholesale distribution services for those automobiles.  It does not affect the suppliers of wholesale
distribution services in their  capacity a s providers of wholesale distribution services.
6.745  The complainants’ claim in respect of Article  II of the GATS relates to the duty-free
treatment afforded to certain goods.  These measures fall into the first category of measures identified
by the Appellate Body:  measures affecting only trade in goods as goods.  The extension of duty-freetreatment to automobiles may affect the cost of the automobiles but it does not affect wholesale
distribution services in those automobiles.
6.746  Accepting the arguments of the European Communities and Japan would have absurd and far-
reaching consequences.  If the mere fact that a measure affects goods means that it also affects the
suppliers of distribution trade services for such goods in their capacity as service suppliers, the GATS
could be used to impugn and override measures that are permitted under the GATT and other WTO
Agreements.  Thus for example, Article XXIV of the GATT permits Members to form customsunions and free-trade areas that by definition entail discrimination in the rates of duty imposed on the
goods of parties and the like goods of non-parties.
6.747  If the complainants’ arguments on this issue were accepted, any differential treatment of
goods authorized by Article XXIV of the GATT could be used to found a claim of inconsistency with
the GATS, on the basis that such measures “affect” the suppliers of distribution services in thosegoods.  This very concern was raised by the European Communities itself in EC – Bananas III  when it
argued that even the prohibitive  tariffs under its banana import licensing regime were outside the
scope of the GATS.
559  Similarly, the legitimate imposition of an anti-dumping or countervailing duty
on imported goods, while consistent with Article VI of the GATT, would almost certainly affect the
foreign suppliers of distribution services for those goods, and could therefore, according to thecomplainants’ reasoning, be inconsistent with the GATS.
6.748  Japan and the European Communities seek to escape the implications of their argument by
claiming that the measures at issue do in fact affect service suppliers as service suppliers.  Japan, for
example, insists that “[t]he Duty Waiver [sic] necessarily reduces the cost for the supply of wholesale
trade services for the Auto Pact manufacturers”, and that “[t]he supply of wholesale trade services byNon-Auto Pact manufacturers is quite clearly less profitable than would be the case if the prices
charged for those automobiles did not have to recoup the cost of the discriminatory MFN duty”.
6.749  However, Japan offers no substantiation whatsoever for these claims.  It offers no explanation
why wholesale trade service providers are “affected” by the measures at issue any more than the
providers of distribution services for any goods are affected by the duties imposed on those goods.The EC’s claim is equally deficient.  Neither complainant has made out even a prima facie case that
the measures at issue “affect” the supply of wholesale distribution services.  They have failed to show
that the MVTO and SROs are measures covered by the GATS.
                                                     
559 Ibid., para. 43.WT/DS139/R
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6.750  The absence of any substantiated effect of the measures on the supply of wholesale motor
vehicle distribution services stands in stark contrast to the facts of EC – Bananas III , where the
European Communities maintained an import licensing regime.  Under the EC’s tariff quota system,
over-quota imports of bananas faced a prohibitive tariff, while the right to import bananas at
preferential rates within the EC’s quota was allocated by a system of import licenses.  Effectively,those wholesalers that received in-quota import licences could purchase or import bananas.  Those
that did not receive licences effectively could not.  Thus, the allocation of import  licences necessarily
affected the ability of distribution service providers to provide their services: it affected their ability to
purchase or import goods.  As the Appellate Body noted:
"It is difficult to conceive how a wholesaler could engage in the ‘principal service’ of
reselling a product if it could not also purchase or, in some cases, import the product.
Obviously, a wholesaler must obtain the goods by some means in order to resell them
…”
560
6.751  The MVTO and SROs have no effect whatsoever on the ability of the identified entities to
obtain automobiles, to import automobiles, or to otherwise engage in the provision of automobile
distribution services.  Thus, in 1997, according to Japan’s own figures, over 181,000 motor vehicles
were imported into Canada without benefit of a MV TO or SRO duty waiver or the NAFTA.  Over 82
per cent of these imports came from Japan.561
6.752  Moreover, because in EC – Bananas III , licences to import bananas from certain countries or
were far more valuable than licences to import bananas from other countries, the allocation of the
more valuable licenses necessarily affected both th e service suppliers that received them and those
that did not.  The benefits of receiving the more valuable licences affected the service suppliers intheir capacity as service suppliers.
6.753  There are no comparable circumstances in the present case.  There is no licencing mechanism
for any wholesale service supplier engaged in the di stribution of motor vehicles in Canada, nor any
instrument akin to a licence which permits – or the absence of which limits – the supply of such
distribution services.  The only possible point of comparison is that the EC’s bananas regime applieddifferential duties to the products handled by different wholesale operators.  Significantly, this was
not even raised as a GATS issue in EC – Bananas III .
6.754  In sum, the import quota and licencing system in EC – Bananas III  was critical to the scope
and profitability of the provision of services by the independent banana distributors and to the ability
of even the integrated distributors to import at all.  The mere existence of differential duties was not.The “effect” of the EC’s banana importer licencing regime was therefore fundamentally different
from the measures at issue.
6.755  In the absence of even a prima facie case that the MVTO and SROs affect the supply of
services, the claims by Japan and the European Communities under Articles II of the GATS must fail.
4. Rebuttal arguments by Japan
6.756  Japan  rebuts as follows:
6.757  The Government of Canada argues that the MVTO 1998 and SROs are "pure tariff measures"
that do not affect the supply of wholesale trade services and thus are not covered by the GATS.  It
then argues that duties and tariff measures affect only trade in goods as goods and, as such, are
disciplined only by the GATT 1994.  The Government of Canada cited as authority for this position
                                                     
560 Appellate Body Report on EC – Bananas III , supra  note 49, para. 226.
561 Japan's Table 6.WT/DS139/R
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the Appellate Body Report for EC – Bananas III , claiming that "affecting" within the meaning of
Article I means "affecting in the capacity of a service provider and its supply of services".  The
Government of Canada also referred, in order to support its position, to the 1993 GATS Addendum
that states there is no requirement in the GATS to schedule a limitation to the effect that the cross-
border movement of goods associated with the provision of a service may be subject to "customsduties or other charges".  The argument simply fails to defend that the Duty Waiver is outside of the
scope of the GATS.
6.758  First, the Government of Canada's above citation of the relevant part in the Appellate Body
for EC – Bananas III  does not address the definition of "affecting" within the meaning of GATS
Article I.  Rather, it only recognizes that, even if it is vertically integrated, a company is a wholesaleservice supplier, to the extent that it is engaged in providing wholesale trade services and is therefore
affected in that capacity by a particular measure of a Member.  It does in no way determine the
interpretation of "affecting" within the meaning of Article I of the GATS.
6.759  The Government of Canada's argument on the Addendum is also unconvincing.  The
Addendum simply states that Members are not required to schedule general customs duties or othercharges as limitation in the Schedule of Specific Commitments on trade in services.  It neither permits
Canada to take tariff measures that are in violation of GATS Article II, nor exempts Canada from the
requirement to list such discriminatory custom duties or other charges as an MFN exemption.
Canada's emphasis on the phrase in the Addendum that "such measures are subject to the disciplines
of the GATT" does little help its position:  the Appellate Body for EC – Bananas III  confirms the fact
that measures that are covered by the GATT are not a priori  excluded from the coverage by the
GATS.
6.760  The Government of Canada's narrow interpretation of the word "affecting" in Article I:1 of
the GATS is contrary to its ordinary meaning in the light of the object and purpose of the GATS.  In
EC – Bananas III , the Panel stated that the word "affecting" was chosen by the drafters of the GATS
to ensure that any measures bearing upon the conditions of competition in the supply of a service be
covered by the GATS.  It determined that the word "affecting" had to be given a broad interpretationand that a measure affecting trade in services "could be of any type and relate to any domain of
regulation".
562  It follows from this interpretation that contrary to what Canada is suggesting, no
measures are per se  excluded from a review under the GATS.
6.761  As the Government of Canada admits itself, the Appellate Body Report in EC – Bananas III
divides measures into three categories and recognizes that "measures that involve a service relating toa particular good or a service supplied in conjunction with a particular good" fall within the scope of
both the GATT 1994 and the GATS.  The Appellate Body then supports the Panel's finding that the
EC-banana import licensing procedures are subject to both the GATT 1994 and GATS.
6.762  As the Appellate Body Report in EC – Bananas III  confirms, and as the Government of
Canada also admits, measures affecting trade in goods can have an effect on the supply of servicesand be also governed by the GATS.  The Government of Japan submits that such an effect can also be
indirect and still give rise to a violation of the GATS, as was the case of the measures at issue in EC –
Bananas III , tariff quotas, which were restrictions of trade in goods.  In fact, tariff quotas are simply
two-tier "customs duties".  The fact that they had an  indirect effect on trade in services was sufficient
for them to fall within the scope of the GATS.  In EC – Bananas III , it was determined that, by
favouring certain categories of wholesalers of bananas with respect to the allocation of tariff quotas
for bananas, the measures affected the supply of wholesale services.
                                                     
562 Panel Reports on EC – Bananas III , supra  note 269, para. 7.280.  The Appellate Body supported the
substance of this statement, Appellate Body Report on EC –  Bananas III , supra  note 49, para. 220.WT/DS139/R
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6.763  As the Government of Canada admits in its initial response, the Duty Waiver affects the cost
of automobiles procured and then distributed by wholesale trade service suppliers, as the EC tariff
quota system affected the cost of bananas procured and then distributed by operators.  Thus, in a
manner almost identical to the measures at issue in EC – Bananas III , the Duty Waiver, which
involves a service relating to or supplied in conjunction with automobiles and by creating two-tier"custom duties," affects trade in wholesale trade services of motor vehicles.  The only difference
between the Duty Waiver in this case and the tariff quota system in EC – Bananas III  is the magnitude
of the duty.
6.764  The Government of Canada also attempted to stand out differences between this case and EC
– Bananas III by claiming that "the import quota and licensing system in EC – Bananas III was
critical to the scope and profitability of the provision of services by the independent banana
distributors and to the ability of even the integrated distributors to import at all" because those who
did not receive licenses faced a prohibitive tariff.  However, as the Government of Canada admits
itself, "critical" is not a test to determine whether a measure affects trade in services, and it is
irrelevant whether the higher tariff is "prohibitive" or not, as long as measures affect the ability ofwholesale trade service suppliers and do not accord no less favourable treatment to service and service
suppliers of all WTO Members.  The Duty Waiver also affects the ability of Auto Pact Manufacturers
(who are also wholesale service suppliers) to import and distribute motor vehicles by reducing their
procurement cost.  Again, the difference is just a magnitude of the discrimination of the customs duty
in question, not its nature.
6.765  The effects of the Duty Waiver on wholesale trade services have already been discussed
extensively in the Government of Japan's response to Question 35 of the Panel.
6.766  Also unconvincing in this context is the Government of Canada's argument that the
acceptance of Japan's interpretation on the scope of GATS would have far-reaching and absurd
consequences.
563  The Government of Canada argues that such interpretation would make differential
treatment of goods authorized by the GATT 1994 such as an anti-dumping and countervailing duty
inconsistent with the GATS.  However, the Duty  Waiver is not an anti-dumping or countervailing
duty.  It is a discriminatory tariff measure entirely different in nature from differential treatment of
goods categorically authorized by the GATT and other WTO Agreements.  Therefore, Japan views
that the Panel is not required to decide on the consistency between these GATT-consistent measures
and the GATS, which is irrelevant to this isolated case of discriminatory tariff measures not at all
authorized by the GATT 1994.
5. Rebuttal arguments by the European Communities
6.767  The European Communities rebuts as follows:
6.768  Canada argues that the EC’s claim implies that “every measure which affects the cost of or
access to goods also affects the trade in the services supplied by the distributors of such goods"
Before addressing more specifically the different aspects of Canada’s argument, it should be recalledthat the fact that a measure affects trade in services in itself is not sufficient to establish a violation of
GATS Article II, for it is still necessary to show, as the European Communities has done, that like
services or service suppliers of some WTO Members are accorded less favourable treatment.  Thus,
the EC’s interpretation of the term “affect” would not have the “absurd and far-reaching"
consequences claimed by Canada
564.
                                                     
563 Ibid., paras. 153-154.
564 For example, although anti-dumping measures or countervailing duties, or a preferential duty rate
applied under a free-trade area agreement, may conceivabl y affect the supply of distribution services, it does not
follow necessarily that those measures are contrary per se  to GATS Article II. A complainant would still have toWT/DS139/R
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6.769  Canada submits that “duties and tariffs are measures affecting trade in goods as goods" .  This
is certainly true, but does not rule out that they may also affect trade in services. The Appellate Body
in EC – Bananas III has recognised that one and the same measure, because of its specific content,
may affect both the provision of goods and the provision of services and therefore may be reviewed
under both GATT and GATS565.
6.770  The measures reviewed in EC – Bananas III  were quite similar to the ones at issue in this
dispute, and indeed measures like tariff quotas are measures par excellence  affecting trade in goods.
However, this did not prevent the Appellate Body to  conclude that EC measures were subject to both
the GATT and the GATS566.
6.771  The similarity is clear if one has regard to the EC – Bananas III  Panel Report. First, the Panel
recognised that operators (the banana importers) providing wholesale services in respect of the
products that they have imported are wholesale service suppliers567. Likewise, the Tariff Exemption
beneficiaries providing wholesale services in respect of the automobiles which they have imported are
wholesale service suppliers.
6.772  Second, wholesale services as defined in the headnote to Section 6 of the CPC classification
consist in “resale to retailers”. There can be no question that this equally applies to this case.
6.773  Third, certain operators (the initial licence holders) were found to be able to retain the “tariff
quota rent” (i.e. the advantage of importing in-quota goods at preferential rates)568. Likewise, the
beneficiaries of the Tariff Exemption are able to retain the benefit of importing duty free.
6.774  In a nutshell, in EC – Bananas III  the Panel recognised that a tariff advantage allowing to
import under more favourable conditions allows to resell under more favourable conditions too.  Its
finding was affirmed by the Appellate Body.  Ther efore, the same principle should be recognised as
applying in this case.
6.775  Canada’s attempts to distinguish the Tariff Exemption from the measures reviewed in EC –
Bananas III are unsuccessful.
6.776  Canada suggests that the standard upheld in EC – Bananas III is that a measure would only
fall under GATS provisions if “prohibitive”, that is, if it prevented importation.
6.777  The Panel EC – Bananas III  in did not rule on the assumption that importation outside the
tariff quotas were prohibitive. In fact the Panel took into account the fact that licences were freely
tradeable. Thus, contrary to what Canada says, those distributors who had not been allocated licences
by the European Communities could still import bana nas provided that they bought licences. Indeed,
large numbers of licenses were actually traded on the market569.
6.778  Nevertheless, the Panel considered that in that case the buyers of the licences would not reap
the tariff quota rent which would still remain with the seller. Thus, the Panel found that the effect of
                                                                                                                                                                    
show that in their application those measures provide an  advantage to the service suppliers of one Member over
the suppliers of other Members. In this connection, it is also worth recalling that, contrary to what is implied by
Canada  at several points (see e.g., Canada’s response to Question 33 from the Panel), the EC does not claimthat the free-trade area for goods established by NAFTA leads to a de facto violation of GATS Article II. TheEC’s claim is that the violation of Article II results from the privileges accorded under the Tariff Exemption to
the US Big Three, in derogation of NAFTA ’s generally applicable rules.
565 Appellate Body Report on EC – Bananas III , supra  note 49, para. 221.
566 Ibid., para. 222.
567 Panel Reports on EC – Bananas III , supra  note 269, para.7.320.
568 Ibid., para. 7.336.
569 Panel Reports on EC – Bananas III , supra  note 269, para. 7.336.WT/DS139/R
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the measures was to confer on certain operators (initial licence holders) an economic advantage (the
tariff quota rent) which enabled them to compete on the market under better conditions570.
6.779  This means, on the one hand, that the tariff quota system was taken into account by the Panel
to review whether certain operators were afforded  more “favourable conditions” within the meaning
of GATS, and thus to establish a violation thereof.  On the other hand, it shows that the Panel did not
base its finding on the condition that the measures totally prevented importation by other operators.
This point was not modified by the Appellate Body.  Thus, any attempt to distinguish measures on the
basis of the intensity of their restrictive effect on importation has no basis in EC – Bananas III .
6. Canada's Response to the complainants' rebuttals
6.780  Canada responds as follows:
6.781  Japan, in its response to the Panel’s Question 27,571 simply repeats its position that the duty-
free treatment “necessarily affects the profitability in supplying wholesale trade services”.  It offers no
evidence or explanation for its conclusion.  The burden is on Japan to show that the duty reduces the
profitability of wholesale distribution.  Having failed to do this, it has failed to make out a prima facie
case.
6.782  Japan goes so far as to contend that differences in retail prices caused by the duty-free
treatment will “necessarily” affect sales volumes and by extension profitability in the supply of
wholesale trade services.  The implication of this argument is that any difference in retail prices
between domestic and imported goods due to a measure will necessarily affect the relative
profitability of wholesale service suppliers in those goods.  By Japan’s reasoning, every tariff
becomes a potential violation of national treatment for distribution services in any product sector
where manufacturers tend to do their own distribution.  According to Japan, the tariff will “affect theprofitability” of the foreign manufacturers/distributors of imported products while domestic
distributors of domestic products face no tariff.  For example, where a Member has made
commitments for distribution services, it would violate Article XVII of the GATS that those who
manufacture and distribute automobiles in the Member can sell them without paying duty, while
imported cars are subject to a tariff.
6.783  The European Communities seeks to justify its assertion that the present measures fall within
the scope of the GATS on the basis that they are similar to the measures found to affect services in EC
– Bananas III .  However, none of the EC’s points of comparison is valid.
6.784  In the first place, the EC’s contention that the measures in EC – Bananas III  are “quite
similar” to those at issue in this case is absurd.  The measures at issue in both cases affect trade ingoods, as the European Communities states.  However, that is where the similarity ends.  From a
GATS perspective, the effect of the EC’s scheme on trade in services was readily evident.  The
scheme involved (i) the creation of a tariff quota syst em with an over-quota tariff rate that made over-
quota imports prohibitive; and (ii) the creation of a licensing system to allocate in-quota licences.
Thus, the lack of a licence meant that an importer effectively could not import.  Access to the quotawas essential to the ability of distributors to carry on their business, particularly when the only source
of the product being distributed was from imports.  By taking quotas away from operators in category
A and allocating them to Category B operators, the EC’s system fundamentally limited or disrupted
the distribution businesses of Category A operators.  The allocations put the Category A operators in
the competitively disadvantageous position of having to pay quota rents to their Category Bcompetitors in order to acquire licences to enable th em to remain in business or maintain their market
share.
                                                     
570 Ibid.
571 Japan’s response to Question 27 from the Panel.WT/DS139/R
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6.785  The duty-free treatment in the present case is not even remotely equivalent to the quota
scheme in EC – Bananas III .  Indeed, it should be noted that in the EC – Bananas III   case there was
also a tariff preference for certain bananas that was not even alleged as a GATS measure,
notwithstanding that it reduced the cost of only certain bananas.
6.786  The European Communities also contends that the ability of the operators receiving the initial
licences in EC – Bananas III  to extract tariff quota rent from the Category A operators is analogous to
the receipt of duty-free benefits by qualifying manufacturers in the present case.  This ignores both
that the EC banana licences were tradeable and that they were essential for the ability of banana
distributors to sell in the EC market.  The receipt of a licence to import bananas in-quota affected both
the distribution service suppliers that received them and those that did not and had to purchase them.The licence allocations effectively determined which suppliers could engage in the business of
distributing bananas in the EC market and which ones would have to pay large rents for the ability to
do so.  Licence allocations in these circumstances, and the necessity to pay quota rents, are central to
the equality of competitive opportunities that GATS Article II is intended to preserve.
6.787  The EC’s assertion that the EC – Bananas III panel “did not rule on the assumption that
importation outside the tariff quotas were prohibitive” because licences were tradeable is a
misrepresentation.  In the face of prohibitive over-quota tariffs, tradability of licences gave a further
competitive advantage to the licence recipients by enabling them to extract quota rents from those
distributors who needed licences.  No such elements are present in this case.  All distributors can
import and sell as many automobiles as the market will bear.
6.788  The European Communities further argues that, because most of the operators not receiving
bananas licences were foreign operators, the panel found that they were subject to less favourableconditions of competition than their EC counterparts.  Because the qualifying manufacturers of
automobiles are mostly of US origin, the European Communities argues that other wholesale service
suppliers are subject to less favourable conditions of competition.
6.789  Even if it were true that most of the automobile manufacturers are service suppliers of the
United States, the EC’s reasoning is conclusory.  It has skipped the critical step of demonstrating aneffect of the measures on wholesale service suppliers in their capacity as such.  The EC measures
were found to violate Article II of the GATS because, for the reasons just described, they
fundamentally altered competition in distribution services by introducing a system where licences
were essential to conduct a distribution business, and by allocating those licences in a new and
discriminatory way. No similar effect arises from the duty-free treatment at issue in this case.
6.790  Nor, contrary to the EC’s assertion, did ei ther the panel or the Appellate Body in EC –
Bananas III  recognize “that a (tariff) advantage allowing to import [sic] under more favourable
conditions allows to resell under more favourable conditions too”.  The “advantage” recognized in EC
– Bananas III  was not the difference in tariff rates but the allocation, to certain operators, of licences
the absence of which rendered importation effectively impossible or forced the payment of quotarents.  As previously noted, the mere difference in tariff rates in EC – Bananas III  was not even
argued as an issue of discrimination against competing service suppliers under the GATS.
7. Japan's follow-up to Canada's response
6.791  Following up on Canada's response to the complainants' rebuttals, Japan  argues as follows:
6.792  With respect to the Government of Japan's claim that the Duty Waiver by virtue of the
eligibility restriction is inconsistent with Article II of the GATS, contrary to the assertions of the
Government of Canada, the Government of Japan has presented a prima facie case with respect to the
fact that the Duty Waiver "affects" wholesale trade services.WT/DS139/R
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6.793  As discussed in Japan's rebuttal, the difference between the Duty Waiver and the measure at
issue in EC – Bananas III  is the magnitude of the customs duties.  In both instances, the regimes are
analogous to a tariff quota whereby higher and lower tier duties are applied.  In the case of the Duty
Waiver, although the higher tier duty may not be prohibitive, it is still significant (6.1 per cent).
While its effect may not be as great as that encountered in EC – Bananas III , there is still an effect.
Whether or not it is "prohibitive" is irrelevant to  determine whether a measure "affects" the supply of
services.  The payment of the 6.1 per cent MFN duty by a wholesale trade service supplier per se
increases its procurement costs and, therefore, per se,  decreases the profitability of that service
supplier in comparison with service suppliers who are exempted from payment of the duty by the
Duty Waiver, thus affecting the conditions of competition in favour of the latter to attract dealers (seeresponse of the Government of Japan to Panel Question 35 and Japan's rebuttal.  The Government of
Japan has also demonstrated in these documents that competition exists between wholesale trade
service suppliers in attracting the retail service suppliers, regardless of their integration with
manufacturers in their resale to retail service suppliers.  In this way, the supply of wholesale trade
services is "affected" by the Duty Waiver.
6.794  The Government of Canada's concern that this argument could bring every tariff into the
potential violation of the GATS is unfounded.  Cana da distorted Japan's argument by stating that it
implies "any difference in retail prices between domestic and imported goods due to a measure will
necessarily affect the relative profitability", and thus "every tariff becomes a potential violation of
national treatment for distribution services".  The Government of Japan simply argues that certain
measures affecting trade in goods also affects trade in services and thus can also be governed by the
GATS.  Just because a measure is covered by the GATS does not mean at all that it is in violation ofthe GATS.  Violation occurs when such a measure is inconsistent with one or more of the GATS
obligations, which is clearly the case with the Duty Waiver.  To the extent that tariffs are also covered
by the GATS, it simply means that those tariffs must be imposed in a manner consistent not only with
the GATT 1994 but also with the GATS.  In this instance, as the Government of Japan has already
demonstrated, discriminatory imposition of the duty-free treatment through the Duty Waiver isinconsistent  with GATS as well.
8. The European Communities' follow-up to Canada's response
6.795  Following up on Canada's response to the complainants' rebuttals, the European
Communities  argues as follows:
6.796  In its response to the rebuttals, Canada restates its GATS Article II test, based on which in
order for a violation to be established Canada's Tariff Exemption should affect wholesale trade
services in some specific way "that would not make every import duty, and most other goods
measures, into measures covered by the GATS".
6.797  That requirement, however, is nowhere stated in the GATS.  In accordance with Article I:1 of
the GATS, all that is required in order to establish that a measure is "covered" by the GATS is toshow that the measure in question "affects the supp ly of services".  This does not, however, mean that
every  import duty is covered by Article II of the GATS.
6.798  Rather, the scope of Article II is limited by another requirement in addition to the one that a
measure affect the provision of services.  In fact, to establish a violation of Article II it is further
necessary to show that the measure at issue modi fies the conditions of competition in favour of
providers of a certain WTO Member compared to providers of other Members.  The European
Communities had already refuted this argument of Canada's and set out the proper Article II test.  Yet
even if one wanted to follow Canada's test, it is clear that the Tariff Exemption does affect trade in
wholesale services in a way different from other import duties, in the sense that while not all tariff
measures discriminate in favour of some importers only, Canada's measure does.WT/DS139/R
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6.799  This conclusion can be illustrated by referring to Canada's example of the supposedly absurd
consequences of the Complainants' position.  Canada argues that if the Complainants' reasoning is
followed, then "where a member has made commitments for distribution services, it would violate
Article XVII of the GATS that those who manufacture and distribute automobiles in the member can
sell them without paying duty, while imported cars are subject to a tariff".
6.800  That example, however, is clearly different from the measures in dispute.  The application of
the same import duty on all imports of cars by all importers would not modify the conditions of
competition in favour of domestic distributors:  all distributors would have the opportunity to import
automobiles under the same conditions and/or to manufacture them domestically.
6.801  Canada's reconstruction of the EC – Bananas III  Appellate Body Report in its response to the
rebuttals is striking.  Canada appears to argue that the regime reviewed EC – Bananas III  was
different from Canada's Tariff Exemption because (a) its effect on trade in services was readily
evident, and (b) the decisive element to find the EC's bananas regime in breach of Article II was that
"the lack of a licence [for in-quota imports] meant that an importer effectively could not import".
6.802  Indeed, considering that "the lack of licence meant that an importer effectively could not
import" simply begs the question, as this is an inherent feature in any licensing system.  It sounds
somehow like saying that the lack of fuel in a car prevents one from driving.  However, the real issue
is obviously whether fuel can be procured, and under which conditions.
6.803  In this connection, the European Communities has already recalled that the decisive element
in the EC – Bananas III  case was not merely the imposition of a licensing system, as the licences were
freely tradable and were actually traded.  It was rather that the original licence holders could retain
their "tariff quota rent" (that is, the benefit of a preferential tariff scheme) even if they sold theirlicences.
572
6.804  Canada also makes much of the fact that in EC – Bananas III  the measures at issue were not
differences in tariff rates, but rules for the allocation of import licenses under a tariff quota.  That
difference, however, is superficial.
6.805  The import licenses at issue in EC – Bananas III  conferred to certain distributors the right to
import a certain amount of bananas at a preferential duty rate.  The amount was based on certain
performance criteria, including in particular the amount of EC and ACP bananas previously marketed
by those distributors.
6.806  Likewise, the MVTO 1998 and the SROs confer  to certain designated importers (the
beneficiaries) the right to import a certain amount of motor vehicles at a preferential duty rate.  Thatamount is based on certain performance criteria, namely their local production-to-sales ratio.
6.807  In any event, if anything, the measures at issue are more  discriminatory than the measures in
dispute in  EC – Bananas III .  In the first place, in EC – Bananas III  any distributor was entitled to
apply by licenses. Chiquita and the other US distributors did get licenses from the EC authorities.  By
contrast, the list of beneficiaries of the Tariff Exemption has been closed since 1989.
6.808  Second, as already recalled, in  EC – Bananas III , licenses were freely transferable.  Again, in
contrast, the only possible way in which a non-beneficiary could qualify for the Tariff Exemption is
by taking over one of the beneficiaries.  Compared with the price of buying GM, the quota rents paid
by Chiquita are negligible.
                                                     
572 Panel Report on EC – Bananas III (USA) , supra  note 269, para. 7.336.WT/DS139/R
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6.809  In conclusion, in its structure and effects the EC's bananas import scheme is much more
similar to the preferential tariff scheme constituted by the Tariff Exemption than Canada pretends.
The difference comes down to one of degree, i.e. to a difference between the alleged "large rents" paid
to buy banana import licences and the preference margin afforded by Canada's Tariff Exemption.  As
the European Communities has said elsewhere, there is no place for a de minimis  threshold under
Article II of the GATS.
6.810  In its response to the rebuttals, Canada again submits that in order to establish an Article II
violation "an effect of the measures on wholesale trade services suppliers in their capacity as such"
must be demonstrated.  Contrary to what Canada argues, this was not "critical" to the Appellate
Body's ruling in  EC – Bananas III .  It was not considered as a separate element to show to establish a
violation.  There is no support for this additional requirement in the EC – Bananas III  Appellate Body
Report.  In fact on the one hand, when evalua ting whether GATT and GATS may overlap, the
Appellate Body found that the "Under GATS, the focu s is on how the measure affects the supply of a
service or the services suppliers involved".573
6.811  On the other hand, when specifically dealing with integrated companies, the Appellate Body
found that "to the extent that [an integrated compan y] is also engaged in providing ‘wholesale trade
services' and is therefore  affected in that capacity by a particular measure of a Member in its supply
of those ‘wholesale trade services', that company is a service supplier within the scope of the
GATS".574  It clearly results from this passage that the effect on service providers "in their capacity as
such" is not a separate element from the fact that a company must provide services.
9. Canada's follow-up response
6.812  Canada  responds as follows:
6.813  Both Japan and the European Communities insist that the duty-free treatment under the
measures affects trade in services, but their explanations for how this is so remain vague.  In
particular, the complainants are unable to explain how the duty-free treatment affects trade in
wholesale services in any way that would no t make every import duty, and most other goods
measures, measures subject to the GATS.  The difficulty the complainants face is that the duty-freetreatment affects trade in goods, and may affect the price of goods, but it does not affect trade in
distribution services in any way independent of its effect on the price of goods.
6.814  Japan and the European Communities seek to evade this fundamental flaw in their argument.
They assert baldly that the present case is just like EC – Bananas III  and that if the measures in that
case were found to affect trade in services, then the same must be true of the duty-free treatment.Japan goes so far as to suggest that the only difference between the measures in EC-Bananas III  and
those in the present case is the magnitude of a tariff.
6.815  There are two basic flaws with these contentions.  The first is that because the complainants
are claiming effects that arise in fact, not in law, a ll of the facts, including the magnitude of the tariff,
are relevant.  The other flaw is that the measures at issue in the present case are fundamentallydifferent from those in EC – Bananas III .
6.816  Despite the complainants' repeated attempts to suggest otherwise, the offending GATS
measure in EC – Bananas III  was not the tariff quota itself but the import license allocation system.
That system took licenses away from Category A operators.  It fundamentally limited or disrupted
their distribution businesses and put them in the competitively disadvantageous position of having to
                                                     
573 Appellate Body Report on EC –  Bananas III , supra  note 49, para. 221.
574 Ibid., para. 227.WT/DS139/R
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pay quota rents to their Category B competitors in or der to reacquire their licenses to enable them to
remain in business or maintain market share.
6.817  The situation was particularly egregious in EC – Bananas III  because for the most part, the
product could be sourced only by importing.  It was impossible to carry on a banana distribution
business without an import licence.  The measures in question went to the very heart of the ability ofdistribution service suppliers to deliver distribution services and properly fell within the scope of the
GATS.
6.818  A fact that Canada has previously noted, and the complainants have studiously ignored, is that
in EC – Bananas III , in addition to the ordinary tariff quota and the licence distribution system, there
was a tariff preference for certain (ACP) bananas over Latin American bananas.  That tariffdifferential was not even argued to be a GATS measure by any of the many parties to that dispute, nor
by the panel or the Appellate Body.  It may be surmis ed that it was simply inconceivable to the parties
that such a measure would be considered to affect trade in services.
6.819  It was also inconceivable to the drafters of the GATS, as evidenced by the Addendum to the
Explanatory Note cited by Canada.  Despite Japan's attempts to explain it away, and the EC's decision
to ignore it, the Addendum assured Members that there was no requirement to schedule a GATS
limitation for the effect that customs duties might have on the cross-border movement of goods
associated with the provision of a service.
6.820  Neither Japan nor the European Communities have claimed any effect of the measures except
the potential effect on the price of goods.  This, they contend, is sufficient to constitute an effect on
the distributors of those goods.  The implications of accepting this contention, which Canada has
considered in more detail, include that it could make otherwise legal differential treatment of goods,such as anti-dumping and countervailing duties and end-use requirements, inconsistent with the
GATS.
6.821  The European Communities responds that while this is conceivable, it does not necessarily
follow that such measures are contrary per se  to GATS Article II because a complainant would still
have to show that the measures accord an advantage to the service suppliers of one or more Membersover those of other Members.  This offers little comfort.  Measures such as anti-dumping duties
specifically disadvantage the goods of certain Members.  Due to vertical integration in manufacturing
and distribution, these disadvantages would, by the complainants' reasoning, affect the service
suppliers of those goods and those Members, in some cases under Article II, in others under
Article XVII.
6.822  Japan responds that the Panel should ignore this problem because these other measures are
"categorically authorized by the GATT and other WTO Agreements".   However, a measure is not
immune from one WTO obligation merely because it may be consistent with another.
575  It is precisely
because an overly broad interpretation of "measures affecting trade in services" would have the
bizarre and unwarranted consequence of making illegal all kinds of legal tariff measures that the Panelmust exercise caution.
6.823  The complainants might want to do the same.  As Canada just noted, there are cases
throughout the world where, due to the vertically-integrated distribution of goods, foreign distribution
service suppliers pay tariffs on the goods they import while domestic distribution service suppliers
distribute goods that are not subject to duty.  The mechanical application of the complainants'erroneous interpretation would render all such import duties a violation of a GATS commitment on
distribution services.  A tariff measure affects the cost of the goods purchased.  The likely foreign-
owned distributor of the import would pay a duty while the domestic distributor of a domestic good
                                                     
575 Appellate Body Report on EC –  Bananas III , supra  note 49, para. 221.WT/DS139/R
WT/DS142/RPage 202
would not.  Therefore, by the complainants' reasoning, a host of legal import duties would become
violations of the GATS.
6.824  Moreover, if the duty-free treatment is offensive because it favours the distribution service
suppliers of certain countries, then free-trade areas must be offensive too.  Under the NAFTA for
example, distribution service supp liers of North American-manufactured vehicles are able to import
vehicles into Canada, the United States and Mexico duty-free.  Honda and Toyota are significant
beneficiaries of this treatment but Korean manufacturers and distributors are not.  There is no
provision of the GATS that exempts free-trade areas that create differentials in duty treatment,
doubtless because the drafters of the GATS never imagined that it would be necessary to have one for
a tariff measure of the kind at issue here.
6.825  In fact, in their rebuttals, the complainants make much of Article V of the GATS.  As Canada
noted in its response to Question 33 from the Panel, if the Panel finds that measures at issue do fall
within the scope of the GATS in respect of the du ty-free treatment of goods, the measures at issue
would be subject to the MFN exception conferred by Article V:1 of the GATS.  Neither complainant
has made a persuasive case to the contrary.
6.826  However, as Canada also noted in its response to Question 33, the principal relevance of
Article V is that it demonstrates that the scope of the GATS was never intended to extend to measures
according duty-free treatment to goods.  If it was,  the exemption in Article V:1 would have been
extended to agreements liberalizing trade in goods and not just agreements liberalizing trade in
services.
6.827  In presenting its claims, Japan attempted to incorporate into Article II the "affecting
conditions of competition test" from Article XVII of the GATS.  Part of Canada's response was to
note that there is no competition among wholesale distribution trade service suppliers to affect due to
the close relationships between manufacturers and their distribution service providers.
6.828  The complainants have since offered two responses.  The first, by the European Communities,
is that such competition does exist, as demonstrated by the Big Three's distribution arrangements,
such as with Chrysler and Mitsubishi.  The European Communities describes Mitsubishi as unrelatedto Chrysler.  Despite the EC's statement that it was Canada's position that these imports always
required an ownership link, what Canada actually said in its response to the complainants' rebuttals
was that Mitsubishi and Chrysler had an equity relationship or a manufacturing relationship, or both
throughout the duration of their distribution arrangement.  The Mitsubishi example merely
demonstrates the absence of independent competition in wholesale distribution services.
6.829  In its latest argument, the European Communities offers two more examples, Ford's
distribution of Kias and GM's dist ribution of Isuzus, but these suffer from the same flaw.  In neither
case were the distributors independent of the manufacturers whose vehicles they distributed.  In both
cases the distribution was a function of other relationships, including substantial equity interests in the
manufacturer.  The GM/Isuzu relationship is ongoing , but Ford's distribution of Kias ended in 1994.
6.830  The complainants' second response was that manufacturers compete to sell automobiles to
retail dealers.  Even if this is true, and the EC's own regulations, submitted as Exhibit CDA-16, seem
to say the contrary, it is merely another way of arguing that the measures affect distribution service
suppliers by affecting the price of the goods distributed by them.  This is evident for example, in
Japan's contention that by reducing the procurement cost of automobiles, the duty-free treatmentconfers an advantage on qualifying manufacturers to supply their services to dealers.  The European
Communities makes similar claims.
6.831  Canada has already addressed the far-reaching implications of these assertions.  Canada has
also noted that these assertions would nullify the three distinct categories of measures the AppellateWT/DS139/R
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Body identified in EC – Bananas III .  Neither complainant has suggested otherwise, or has offered a
theory of what falls into the Appellate Body's category of measures affecting goods only.
6.832  Even if retailers were not bound by exclusive agreements with manufacturers, what they are
choosing to purchase, in the complainants' own scenario, is not distribution services as such, but
automobiles.  Even if the dealers had a choice among the suppliers of the automobiles they wish topurchase – which they do not – the duty-free treatment would not affect their choice of supplier.  It
would merely affect their choice of automobile.  In  other words, to use the language of the Appellate
Body, the duty-free treatment does not affect wholesale trade service suppliers in the supply of their
wholesale trade services.
F. A
RTICLE II OF THE GATS
1. Arguments of Japan
6.833  Japan  argues as follows:
(a) Article II of the GATS requires immediate and unconditional MFN treatment for
wholesale trade services and service suppliers of motor vehicles
6.834  Restricting eligibility to the Duty Waiver to  the Auto Pact Manufacturers under the MVTO
1998 and the SROs who are wholesale trade service suppliers is inconsistent with Article II of the
GATS, which requires the "immediate and unconditi onal" extension of general most-favoured-nation
treatment to like services and service suppliers of any other WTO Member.
6.835  In accordance with the definition stipulated in Article XXVIII of the GATS, particularly
subparagraphs (m) and (n) of the Article, the Government of Japan found in Japan's Tables 1 and 2
that the Auto Pact Manufacturers include US and Swedish service suppliers (e.g., Ford Canada, GM
Canada and Volvo Canada) and do not include Japanese service suppliers (e.g., Honda Canada andToyota Canada).
576
6.836  The first paragraph of Article II of the GATS provides:
"With respect to any measure covered by this Agreement, each Member shall accord
immediately and unconditionally to services and service suppliers of any other
Member treatment no less favourable than that it accords to like services and servicesuppliers of any other country."
6.837  The second paragraph of the same Article provides:
"A Member may maintain a measure inconsistent with paragraph 1 provided that such
a measure is listed in, and meets the conditions of, the Annex on Article IIExemptions."
                                                     
576 CAMI, which is 50 per cent owned by General Motors Corp. (a US corporation) and 50 per cent
owned by Suzuki Motor Corporation (a Japanese corporation) is not a Japanese service supplier since it isneither owned nor controlled by natural persons or judicial persons of Japan within the meaning of subparagraph
(m) of Article XXVIII of the GATS.  This is because i) more than 50 per cent of the equity interest in CAMI is
not beneficially owned by Japanese persons within the meaning of subparagraph (n)(i) of the Article;  and
ii) Japanese persons do not  have the power to name a majority of its directors or otherwise to legally direct its
actions within the meaning of subparagraph (n)(ii) of the same Article.WT/DS139/R
WT/DS142/RPage 204
Canada, however, has not listed any measures relating to "wholesale trade services" in the Annex.
Therefore, Canada is fully bound by its obligations under Article II:1 of the GATS in relation to
"wholesale trade services".
6.838  In EC – Bananas III , the WTO panel articulated the following two-part test to determine
whether the contested measure violates Article II of the GATS:
"We note that two elements need to be demonstrated in order to establish a violation
of the GATS MFN clause:  (i) the EC has adopted or applied a measure covered by
GATS;  (ii) the EC's measure accords to services or service suppliers of Complainants'
origin treatment less favourable than that it accords to the like services suppliers ofany other country."
577
6.839  The first element of the two-part test set out by the panel in EC - Bananas III is met in this
case.  The Government of Japan has shown that the Duty Waiver constitutes a measure affecting trade
in services.  As the Panel in EC – Bananas III  clarified, "any measure bearing upon conditions of
competition in supply of a service" constitutes a measure "affecting the supply of services".  By
exempting the imports of the Auto Pact Manufacturers from otherwise applicable MFN customs duty,
the Duty Waiver reduces the cost that must be borne by the Auto Pact Manufacturers in supplying
wholesale trade services.  Therefore, the Duty Waiver constitutes a measure bearing upon condition of
competition and thus is covered by the GATS.
6.840  As to the second element, according to the panel in  EC – Bananas III , if the answers to both
of the following questions are "yes", then the Duty Waiver is inconsistent with Article II of theGATS:
(i) Does the Duty Waiver confer an advantage?
(ii) If it does, is such an advantage conferred on services or service suppliers from certain
members but not on like services or service suppliers from other WTO Members
including Japan?
Further, the Appellate Body in EC – Bananas III  concluded that, in determining whether a measure
meets the MFN obligation of Article II:1 of the GATS, "treatment no less favourable" should be
interpreted to include both de facto  and de jure  discrimination.
578  Finally, Article II of the GATS
requires that MFN Treatment be accord ed "immediately and unconditionally".
(b) The Duty Waiver accords more favourable tr eatment to wholesale trade service  and
service suppliers of the United States and Sweden in violation of Article II of the GATS
(i) The services and service suppliers at issue are like
6.841  As discussed above, importers who are eligible for the Duty Waiver (i.e. the Auto Pact
Manufacturers) offer wholesale trade services to distribute domestically produced and imported motor
vehicles.  Similarly, importers who are not eligible for the Duty Waiver (i.e. Non-Auto Pact
Manufacturers) offer like wholesale trade services to distribute domestically produced and/or
imported motor vehicles.
6.842  In EC – Bananas III , the panel found:
"In our view, the nature and the characteristics of wholesale transactions as such, as
well as of each of the different subordinated services mentioned in the headnote to
                                                     
577 Panel Reports on EC – Bananas III , supra  note 269, para. 7.344.
578 Appellate Body Report on EC – Bananas III, supra  note 49, para. 234.WT/DS139/R
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Page 205
Section 6 of the CPC, are "like" when supplied in connection with wholesale services,
irrespective of whether these services are supplied with respect to bananas of EC and
traditional ACP origin, on the one hand, or with respect to bananas of third-country or
non-traditional ACP origin, on the other.  Indeed, it seems that each of the different
service activities taken individually is virtually the same and can only be distinguishedby referring to the origin of the bananas in respect of which the service activity is
being performed.  Similarly, in our view, to the extent that entities provide these like
services, they are like service suppliers."
579
6.843  This finding applies with equal force to the in stant case.  As discussed above, the Auto Pact
Manufacturers (e.g., Chrysler Canada, Ford Canada, General Motors Canada and Volvo Canada) and
Non-Auto Pact Manufacturers (e.g . Honda Canada, Mazda Canada, Nissan Canada and Toyota
Canada) are rendering "like" services "in connection with wholesale trade services", "irrespective of
whether these services are supplied with respect  to automobiles imported by the Auto Pact
Manufacturers or their related companies on the one hand or with respect to automobiles imported bythe Non-Auto Pact Manufacturers on the other hand".  Further, to the extent that the Auto Pact
Manufacturers and the Non-Auto Pact Manufacturers "provide these like services, they are like
service suppliers"
580, regardless of whether or not they have production facilities in Canada.
(ii) The Duty Waiver confers an advantage on wholesale trade services and service suppliers who
are eligible for the Duty Waiver (i.e. the Auto Pact Manufacturers)
6.844  The Appellate Body concluded in EC-Bananas III :
"treatment no less favourable" in Article II:1 of the GATS should be interpreted to
include de facto , as well as de jure , discrimination.  We should make it clear that we
do not limit our conclusion to this case.581
6.845  As discussed above, the Auto Pact Manufacturers are limited to United States or Canadian
automobile manufacturers (i.e. service suppliers) with one exception.  This is a reflection of the fact
that the Canada-US Auto Pact was originally intended to address trade in automobiles and originalequipment parts on a duty-free basis between Canada and the United States.  Since the NAFTA
entered into force, with respect to automobile manufacturers, only Canadian subsidiaries of three
major United States automobile manufacturers and a Swedish manufacturer and two manufacturers
that are allowed remission of duties under SROs (i.e. CAMI and Intermeccanica), all of which are also
wholesale trade service suppliers, have been allowed to import  motor vehicles duty-free forwholesale trade in Canada.
6.846  No Japanese wholesale trade service suppliers may enjoy the advantages of importing
automobiles duty-free, since they are prevented from doing so by the eligibility restriction.  Moreover,
the restriction freezes the status quo, i.e. the situation where only importers that are United States or
Swedish wholesale trade service suppliers may import automobiles duty-free from third countries.This constitutes de facto  discrimination against Japanese wholesale trade services and service
suppliers, and is therefore inconsistent with Canada's obligations under Article II of the GATS.
6.847  As noted by the Appellate Body, any other interpretation would allow a Member to "devise
discriminatory measures aimed at circumventing the basic purpose of" Article II:1 of the GATS.
582
                                                     
579 See Panel Reports on EC – Bananas III , supra  note 269, para. 7.322 (see also para. 7.346).
580 Ibid., para. 7.346.
581 Appellate Body Report on EC – Bananas III , supra  note 49, para. 234.
582 Ibid., para. 233.WT/DS139/R
WT/DS142/RPage 206
6.848  As also clarified by the panel in EC – Bananas III  (para. 7.349), "the obligations contained in
Article II:1 of the GATS to extend 'treatment no less favourable' should be interpreted to require
providing 'no less favourable conditions of competitions'".  Although the Panel in EC – Bananas III
based its holding on prior interpretations of Article III of the GATT 1994, the Appellate Body
affirmed the substance of its holding.  Also, a number of panels have found that the MFN obligationof Article I of the GATT 1994 extends to de facto discrimination of the type the Government of
Canada has engaged in here.
583
6.849  The Duty Waiver necessarily affects the conditions of competition because the Auto Pact
Manufacturers need not pass on import duties in the sales price of automobiles nor incur any financial
carrying costs associated with the import duties, while Non-Auto Pact Manufacturers are required todo so.  Thus, wholesale trade service suppliers who pay the MFN duty (or that distribute motor
vehicles for which the MFN duty is paid) are put at a competitive disadvantage (i.e. accorded less
favourable treatment) in offering their services as compared to like service suppliers who do not pay
the duty (or that distribute motor vehicles for which the MFN duty is waived).
6.850  Thus, Japanese service suppliers are subject to less favourable treatment than United States or
Swedish service suppliers.
584  This discrimination is the result of the provision of duty-free status to a
very limited number of importers in conjunction with the eligibility restriction.
(iii) The favourable treatment is not accorded "i mmediately and unconditionally" to like services
and service suppliers
6.851  Article II:1 of the GATS obliges the Government of Canada to accord no less favourable
treatment "immediately and unconditionally" to like services and service suppliers of WTO Members.
6.852  Although no case in the context of the GATS has referred to lack of conditionality, as
discussed above in the context of Article I:1 of the GATT 1994, the Panel on Indonesia – Autos
discussed this requirement in detail.  The findings of the Indonesia – Autos  Panel regarding the
"immediate and unconditional" provision of benefits apply equally to the equivalent MFN obligation
in the GATS.
6.853  Under the Duty Waiver, in order for an importer/wholesale trade service supplier to benefit
from the duty-exempt treatment, it must meet certain pre-requisites, including eligibility, domestic
content and manufacturing requirements.  Accordingly, the Duty Waiver creates "conditional most-
favoured- nation" treatment and, therefore, violates Article II:1 of the GATS.
2. Arguments of the European Communities
6.854  The European Communities  argues as follows:
6.855  The Tariff Exemption is inconsistent with Canada’s obligations under GATS Article II in that
de facto  it provides more favourable treatment to US suppliers of wholesale distribution services for
automobiles than to like service suppliers of other Members.
6.856  Article II of GATS states as follows in relevant part:
                                                     
583 See, e.g., Panel Report on Japan – SPF Lumber, supra  note 282, paras. 6.9, 5.10, 5.13 and 5.14:
Panel Report on EEC – Beef from Canada , supra  note 282, paras. 4.2(a) and (b), and 4.3.  See also Panel Report
on Spain – Unroasted Coffee, supra  note 282.
584 As discussed in footnote 591, CAMI is not of Japanese-origin pursuant to Article XXVIII of the
GATS.WT/DS139/R
WT/DS142/R
Page 207
"1. With respect to any measure covered by this agreement, each Member shall
accord immediately and unconditionally to services and service suppliers of any other
Member treatment no less favourable than that it accords to like services and service
suppliers of any other country.
2. A Member may maintain a measure inconsistent with paragraph 1 provided that
such a measure is listed in, and meets the conditions of, the Annex on Article II
exemptions."
6.857  Therefore, the Panel is required to address the following issues in order to decide on the EC’s
claim under GATS Article II:
- whether the Tariff Exemption is a "measure covered by the GATS";
- whether the Tariff Exemption is covered by the Annex on Article II
exemptions;
- whether the beneficiaries are "like" the service suppliers of other Members;
and
- whether the Tariff Exemption affords more "favourable treatment" to US
service suppliers than to like service suppliers of other Members.
(a) The Tariff Exemption is a "measure covered by the GATS"
6.858  (See Section VI.E, Applicability of the GATS to the Measures.)
(b) The Tariff Exemption is not covered by the Annex on Article II exemptions
6.859  Canada has not listed in the Annex on Article II exemptions any measures relating to the
supply of "wholesale trade services". Therefore, Canada is fully bound by its obligations under
Article II:1 in relation to those services.
(c) The beneficiaries are "like" other suppl iers of wholesale distribution services
6.860  The beneficiaries supply the same type of distribution services as the other firms established
in Canada which are engaged in the purchase, importation and re-sale of automobiles to local dealers.
6.861  In fact, the distinction between the beneficiaries and the other wholesale distributors is based
exclusively on the fact that the beneficiaries:  (1) were engaged in the manufacture of automobilesprior to 1989;  and (2) have undertaken to comply with certain CVA and ratio requirements. Clearly,
however, neither of those two factors may have, as such, any bearing on the nature and the
characteristics of the distribution services supplied by the beneficiaries with respect to imported
automobiles.
6.862  To the extent that they provide "like" services, the beneficiaries and the other wholesale
distributors  are  "like" service suppliers
585.
                                                     
585 See, e.g., Panel Reports on EC – Bananas III , supra  note 269, paras. 7.322,  7.346, 7.359.WT/DS139/R
WT/DS142/RPage 208
(d) The Tariff Exemption affords "more favourable treatment" to US service suppliers than
to the service suppliers of other Members
6.863  In EC – Bananas III , the Appellate Body clarified that Article II of GATS applies not only to
formal, or de jure  discrimination, but also to de facto  discrimination between services or service
suppliers. According to the Appellate Body:
"The obligation imposed by Article II is unqualified. The ordinary meaning of this
provision does not exclude de facto  discrimination. Moreover, if Article II was not
applicable to de facto  discrimination, it would not be difficult – and, indeed, it would
be a good deal easier in the case of trade in services, than in the case of trade of goods
– to devise discriminatory measures aimed at circumventing the basic purpose of thatArticle.
586
6.864  On  that premise, the Appellate Body affirmed the Panel’s finding that, although the so-called
"operator category rules" for the allocation of a tariff quota did not distinguish formally among
service suppliers on the basis of their country of origin, they were nonetheless inconsistent with
GATS Article II because de facto  "most" of the service suppliers of Complainants’ origin were
classified within the less favoured category of operators, whereas "most" of the suppliers of ACP fell
within the more favoured category587.
6.865  The present dispute concerns a similar situation. The Tariff Exemption does not distinguish
formally among suppliers of wholesale distribution services for automobiles according to their
country of origin. Nonetheless, de facto  it affords more favourable treatment to US suppliers than to
the suppliers of other Members.
6.866  As explained in the factual part, the category of firms authorised to import automobiles under
the Auto Pact duty-free is a closed one, consisting of just five beneficiaries588.
6.867  As set out in the EC's Table 5 below, three of those beneficiaries (namely, the subsidiaries of
the US Big Three) are wholly owned by juridical persons constituted under the law of the United
States and with substantial business operations in the territory of the United States. Therefore, those
beneficiaries can be considered as service suppliers of the United States in application of the rulescontained in GATS Article XXVIII (m)
589 and (n)590.
                                                     
586 Appellate Body Report on EC – Bananas III , supra  note 49, para. 233.
587 Ibid., paras. 242-244. The Appellate Body followed the same reasoning with respect to the
allocation of the so-called "hurricane licenses" (para. 248) .
588 Intermeccanica, an artisanal producer of replicas of  racing cars, may be disregarded for the purposes
of this analysis.
589 GATS Article XXVIII (m) reads as follows:
"(m) ‘juridical person of another Member’ means a juridical person which is either:
(i) constituted or otherwise organised under the law of that other Member, and is
engaged in substantive business operations in the territory of that Member or any
other Member; or
(ii) in the case of the supply of a service through commercial presence, owned or
controlled by:
natural persons of that Member; orjuridical persons of that other Member identified under subparagraph (i)."
590 GATS Article XXVIII (n) provides that:
"(n)  a juridical person is:
(i) ‘owned’ by persons of a Member if more than 50 per cent of the equity interest in it
is beneficially owned by persons of that Member;WT/DS139/R
WT/DS142/R
Page 209
6.868  Another beneficiary, CAMI Automotive Inc., is a joint venture between General Motors
Corp., a US company, and Suzuki Motor Corp., a Japanese company, of which General Motors Corp.
is the largest shareholder591. CAMI is devoted exclusively to manufacturing and does not distribute in
Canada the automobiles that it is entitled to import duty-free under the Auto Pact. Instead, those
automobiles, like the automobiles manufactured in  Canada by CAMI, are distributed by the two
parent companies under their respective nameplates592.
6.869  Thus, there is currently only one beneficiary without any ownership links with US firms:
Volvo (Canada) Ltd., which is a wholly owned s ubsidiary of Volvo AB, a Swedish company. This
situation, nevertheless, will change soon, following the announcement made on 29 January 1999 of
the sale of Volvo AB’s passenger car business to Ford Motor Co.593
6.870  As shown in the EC's Table 6,  in contrast with the subsidiaries of the US Big Three, both
Suzuki Canada Inc. and Volvo (Canada) Ltd. are minor players in the Canadian market for
automobiles and account for a very small share of imports under the Auto Pact.
6.871  Moreover, as mentioned above, Volvo (Canada) Ltd. ceased the production of automobiles as
of December 1998, with the consequence that it will lose the right to import automobiles duty-freeunder the Auto Pact at the end of the current model year.
6.872  The fact that the Tariff Exemption benefits mainly US service suppliers is by no means
fortuitous. As already explained in the factual part, until 1989 Canada was committed to extend the
Tariff Exemption to any manufacturer which met CV A and ratio requirements equivalent to those
imposed upon the original Auto Pact beneficiaries in 1965. Canada was forced to repudiate that
commitment as a result of the conclusion of the CUFSTA, which contains a express provision
prohibiting Canada from granting the Tariff Exemption to any other manufacturers. That prohibitionwas inserted in the CUFSTA at the demand of the United States and has the clear purpose of reserving
the Tariff Exemption for the subsidiaries of the US Big Three.
                                                                                                                                                                    
(ii) ‘controlled’ by persons of a Member if such persons have the power to name a
majority of its directors or otherwise to legally direct its actions;
(iii) ‘affiliated’ with another person when it controls, or is controlled by, that other
person; or when it and the other person are both controlled by the same person."
591 In September 1998, General Motors Corp increased its shareholding in Suzuki Motors Corp. from
3.3 per cent to 10 per cent.
592 In practice, most of CAMI’s production is for General Motors.
593 The sale has been approved by the shareholders of Volvo AB at an extraordinary General Meeting
held on 8 March 1999 and cleared by the EC anti-trust authorities on 26 March 1999.WT/DS139/R
WT/DS142/RPage 210
EC's Table 5
Country of origin of the beneficiaries
Service supplier Parent % of shares owned by
parentCountry of
incorporation of the
parent
Ford Motor Co. of
Canada Ltd.Ford Motor Co. 100 USA
General Motors of
Canada Ltd.General Motors Corp. 100 USA
.
Chrysler Canada Ltd Daimler Chrysler
Corp.594100 USA
CAMI Automotive Inc. General Motors Corp 50 USA
Suzuki Motor Corp. 50 Japan
Volvo (Canada) Ltd. Volvo AB 100 EC (Sweden)
Source:  Based on the documents attached  (Exhibit EC-21).
                                                     
594 In May 1998, Daimler-Benz and Chrysler agreed to merge their businesses.  Daimler Chrysler Corp.
(formerly Chrysler Corp.) is a wholly owned subsidiary of Daimler Chrysler AG, a holding companyincorporated in Germany which also controls Daimler-Benz AG.  It is believed that Chrysler Canada Ltd. nowimports motor vehicles of the marque Mercedes under the Auto Pact.WT/DS139/R
WT/DS142/R
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EC's Table 6
Sales of automobiles by distributor in 1997
Distributor Produced in Ca nada Imported Market share
(units) (units) (A + B)
(A) (B)
Ford Motor Co. of
Canada Ltd.595107,676* 1,992** 14.84%
General Motors of
Canada Ltd.596242,014 3,873** 33.27%
Chrysler Canada Ltd. 87,292* ---** 11.81%
Volvo (Canada) Ltd. 9,224 1,796 1.49%
Volkswagen Canada Inc. --- 26,541 3.59%BMW Canada Inc. --- 7,117 0.96%
Mercedes-Benz Canada
Inc.--- 5,703 0.77%
Porsche Canada Ltd. --- 1,796 0.24%
Toyota Motor Mfg.
Canada Inc.34,119 46,009 10.84%
Honda Canada Inc. 43,151 47,152 12.20%
Nissan Canada Inc. --- 20,570 2.78%
Subaru Canada Inc. --- 7,944 1.08%Mazda Canada Inc. --- 22,195 3.00%
Suzuki Canada Inc. 2,572 2,311 0.66%
Lada Canada Inc. --- 646 0.09%Hyundai Canada Inc. --- 19,285 2.61%
*Including sales of automobiles produced in the United States and Mexico.
**Excluding sales of automobiles imported from the United States and Mexico.
Source: Quarterly Automotive Circular, January-December 1997, Industry Canada, Table 1.7
(Exhibit EC-16).
                                                     
595 Ford Motor Co. of Canada, Ltd. also imports and distributes in Canada the marques Jaguar and Kia.
596 General Motors of Canada Ltd. also imports and distributes the marques Saab and Isuzu.WT/DS139/R
WT/DS142/RPage 212
3. Canada's response
6.873  Canada  responds as follows:
6.874  Article II of the GATS imposes an MF N obligation.  Article II:1 provides:
"With respect to any measure covered by this Agreement, each Member shall accord
immediately and unconditionally to services and service suppliers of any otherMember treatment no less favourable than that it accords to like services and service
suppliers of any other country."
6.875  Article II:2 of the GATS allows Members to exempt certain measures from the scope of
Article II by listing them in an Annex.  No such exemptions are at issue in this case.
6.876  In order to succeed in their claims, Japan and the European Communities must establish:
i) that the measures at issue are covered by the GATS;
ii) that the services and service suppliers at issue are “like”; and
iii) that the measures at issue accord more favourable treatment to the service suppliers of
certain countries than it does to the service suppliers of other Members.
6.877  The claims of Japan and the European Communities cannot satisfy this test.  The measures at
issue are neither measures covered by the GATS, nor do they accord more favourable treatment to the
service suppliers of some countries than to those of other Members.
(a) The measures at issue are not covered by the GATS
6.878  (See Section VI.E, Applicability of the GATS to the Measures.)
(b) The MVTO and SROs do not accord more f avourable treatment to the service suppliers
of certain countries
(i) The Complainants' evidence does not demonstrate de facto discrimination
6.879  The complainants’ arguments on the third element of the test under Article II of the GATS –
in particular that of the European Communities – come down to a numbers game.  Japan and the
European Communities acknowledge that the measures do not distinguish de jure  among the suppliers
of wholesale distribution services for automobiles, but claim that they do so on a de facto  basis.
6.880  The complainants attempt to identify the number of manufacturers that are eligible to import
automobiles pursuant to the MVTO or the SROs.  The totals they arrive at, six in the case of Japan,
five in the case of the European Communities, differ in that Japan includes Intermeccanica, a
Canadian speciality automobile manufacturer, while the European Communities does not.  The
totality of their argument is that, on the basis of the “nationality” of certain of these five or sixmanufacturers, the measures de facto  accord more favourable treatment to certain Members than to
others.  Japan argues that manufacturers of the Un ited States and Sweden (a member of the European
Communities) receive more favourable treatm ent.  The European Communities claims that
manufacturers of the United States alone do.  It is a testament to their insufficient evidence that the
complainants cannot agree on this fundamental point.WT/DS139/R
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6.881  In fact, when the nationality of service suppliers is ascertained in accordance with the GATS
rules, no particular Member is favoured or disadvantaged.  Changes in ownership of MVTO
beneficiaries over the period that the measures have been in effect demonstrate that the measures are
indifferent to the nationality of the beneficiaries’ ownership.
6.882  According to the rules in GATS Article XXVII I(m) and (n) for determining which company
is a juridical person of which Member, Chrysler Canada is a juridical person of the European
Communities, in that it is wholly owned by DaimlerChrysler of the United States which is in turn 100
per cent owned by DaimlerChrysler AG of the Federal Republic of Germany.  Volvo (Canada) Ltd. is,
as the European Communities notes, a wholly owned subsidiary of Volvo AB of Sweden.  However,
its passenger car business is now or will soon become American by virtue of its sale to the Ford MotorCompany.  On the other hand, the European Communities notes that Volvo (Canada) Ltd. is about to
lose its qualifying status under the MVTO because it is ceasing production in Canada.  In addition,
CAMI, a 50/50 joint venture of General Motors of Canada Limited and Suzuki Motor Company is
probably, under the GATS, a juridical person of both the United States and Japan.
6.883  Thus, of the automobile manufacturers alleged to be foreign service suppliers benefiting from
the MVTO and SROs among the possible conclusions are that two-and-a-half are US companies, two
are EC companies and half is a Japanese company; or three-and-a-half are US companies, one is an
EC company and half is a Japanese company; or two-and-a-half are US companies, one is an EC
company and half is a Japanese company.
6.884  Other permutations are also possible.  What is clear is that the nationality of the wholesales
service suppliers at issue reveals that the MVTO and SROs do not de facto  afford more favourable
treatment to the service suppliers of certain countries than to those of other Members.
(ii) The MVTO and the SROs do not modify conditions of competition
6.885  According to the Panel Report in EC – Bananas III , the obligation in Article II of the GATS
to accord “treatment no less favourable” requires Members to provide “no less favourable conditions
of competition” to the service suppliers of another Member than they accord to the like service
suppliers of any other country.
597
6.886  Only Japan relies on this interpretation of Article II, which was subsequently cast into some
doubt by the Appellate Body Report.598  Even if Japan’s interpretation of Article II is correct, its
application of that interpretation to the facts of this case is not.
6.887  Japan asserts that duty-free treatment under the MVTO and SROs  “necessarily” affects the
conditions of competition “because the Auto Pact Manufacturers need not pass on import duties in thesales price of automobiles nor incur any financial carrying costs associated with the import duties,
while Non-Auto Pact Manufacturers are required to do so.”  However, the cost of duties is borne by
the sales price of the goods on which the duties are imposed.  Duties affect the cost of the goods as
goods and not the conditions of competition in the supply of distribution services.
6.888  If it were otherwise so, as Canada has noted above, any duty measure would also be a
measure affecting the supply of distribution services for the dutiable good. Duty-free treatment
reduces the cost of goods, not services.  The fact that automobiles imported by Honda Canada are
subject to duty while automobiles imported by Chrysler Canada are not does not mean that conditions
of competition between Chrysler Canada and Honda Canada in the provision of wholesale distribution
services are affected.
                                                     
597 Panel Reports on EC – Bananas III , supra  note 269, para. 7.349.
598 Appellate Body Report on EC – Bananas III , supra  note 49, para. 231.WT/DS139/R
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6.889  Moreover, the commercial presences engaged in the supply of wholesale distribution services
for automobiles are integrally related to the manufacturers of the motor vehicles they distribute.
Unlike the distributors in EC – Bananas III , they do not engage in genuine competition in buying and
reselling.  They are mere conduits for the vehicles produced by the manufacturers to which they are
related.  The MVTO and SROs do not therefore affect the conditions of competition among thesuppliers of wholesale distribution trade services.
6.890  In the supply of wholesale distribution services for automobiles, there is no competition to
affect.  The structure of the motor vehicle industry allows for considerable competition among
manufacturers in the sale of automobiles ( i.e. goods as goods).  However, because wholesale service
suppliers are subordinated to those manufacturers, competition among them in the supply ofwholesale distribution services is precluded.
6.891  All of the commercial presences identified by the complainants as providing wholesale
distribution services are closely related to the manufacturers of the automobiles they distribute.  They
do not compete independently of these relationships to provide distribution trade services for the
automobiles produced by other manufacturers. Thus, for example, the Ford Motor Company ofCanada does not and cannot compete with Honda Canada to provide wholesale distribution services
for Honda automobiles manufactured by the Honda Motor Company of Japan.  Those services, such
as they are, are the exclusive domain of Honda Canada by virtue of its relationship with its parent
manufacturer.  Nor does Honda Canada compete wi th the Ford of Canada for the distribution of
Fords.  That non-NAFTA vehicles imported by H onda are subject to a duty whereas those imported
by Ford of Canada are not has absolutely no bearing on these distribution relationships.  It does not
affect the conditions of competition between the pr oviders of wholesale distribution services because
no such competition exists.
6.892  Once again, the situation in the automobile industry is starkly different from that in EC –
Bananas III , where not all of the relevant services were supplied by vertically-integrated companies
and even those that were had “the capability and opportunity to enter the wholesale service market”
rather than transferring bananas within their integrated company.
599  Such opportunities in practice
simply are not available to any of the suppliers of wholesale distribution services for automobiles.
6.893  Lastly, Japan has offered no evidence that the effect of the measures on conditions of
competition is attributable to the nationality of the service suppliers.  As Canada has shown, service
suppliers from Japan and the European Communities as well as the United States benefit from duty-
free treatment under the measures.
(iii) The treatment of wholesale service suppliers is  not made “conditional” by the MVTO and
SROs
6.894  Japan transplants to Article II of the GATS its argument under Article I of the GATT that
because manufacturers must meet certain conditions to qualify for duty-free importation under the
MVTO or the SROs, the treatment accorded to whol esale trade service suppliers is “conditional”.  As
Japan admits, “no case in the context of the GATS has referred to lack of conditionality”.  To the
extent that any requirement of unconditionality can be transplanted from the GATT to the GATS,
Canada’s arguments in respect of Article I of the GATT that Japan has misconstrued this requirement
apply equally to Article II of the GATS.
4. Rebuttal arguments by Japan
6.895  Japan  rebuts as follows:
                                                     
599 Panel Reports on EC – Bananas III , supra  note 269, para. 7.320.WT/DS139/R
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6.896  As discussed in the Government of Japan's presentation of its clams, the Duty Waiver is
inconsistent with Canada's obligations under GATS Article II.  It accords more favourable treatment
to wholesale trade services and service suppliers of motor vehicles of the United States and Sweden
than to like services and service suppliers of other WTO Members including Japan.
(a) The Duty Waiver is within the scope of the GATS
6.897  (See Section VI.E, Applicability of the GATS to the Measures.)
(b) The Duty Waiver discriminates between like service suppliers
6.898  The Government of Canada has also claimed that the measures are indifferent to the
nationality of the beneficiaries' ownership, which is also far from convincing to us.  The Government
of Japan would not repeat its effective response to the claim which has already been provided.  Itsimply suffice to refer that at the core of Japan's argument for the discriminatory nature of the Duty
Waiver is that Japanese service suppliers are excluded from ever qualifying for the Duty Waiver while
US and Swedish service suppliers are not.
(c) Competition exists between wholesale trade service suppliers
6.899  Also unconvincing is Canada’s reasoning that wholesale trade service suppliers of motor
vehicles are “integrally related to the manufacturers of the motor vehicles they distribute” and thus
“they do not engage in genuine competition.” When wholesale trade service suppliers are
subordinated to those manufacturers, as Canada emphasizes, those vertically integrated companies are
wholesale trade service suppliers, to the extent that they are engaged in providing wholesale trade
services, as confirmed in paragraph 227 of the Appellate Body Report for EC – Bananas III .  And
those wholesale service suppliers compete against each other in their resale to retail service suppliers,
even when they are integrated with respective manufacturers.  More detail on this has been providedin the Government of Japan's response to Question 35 from the Panel.
6.900  From the Government of Japan's point of vi ew, the Government of Canada's response to
Question 35 of the Panel ignores transactions between the wholesale service suppliers and their
dealers (i.e. the transactions between the wholesale service suppliers and the consumers of those
services) in determining whether there is competition between integrated wholesale trade servicesuppliers of a automobiles.  There is no question that the wholesale trade service suppliers must attract
dealers who consume their services and further distribute automobiles at the retail level, and therefore
there is competition amongst wholesale trade service suppliers to attract dealers.  To the extent that
the Duty Waiver reduces the procurement cost of automobiles for the Auto Pact Manufacturers (who
are also wholesale trade service suppliers) and, thereby, confers an advantage to supply their servicesto dealers, competition between them exists and its conditions are modified within the meaning of the
GATS.
(d) Article V of the GATS
6.901  In its argumentation as a third party (see Section VIII), the United States Government raises
Article V as a provision that, in its view, may be of relevance to the facts of this case.  Further, theGovernment of Canada supports this argument in its reply to the Question of the Panel.
6.902  However, Article V has no application to the facts of this dispute.  By its express wording,
Article V of the GATS applies to parties "entering into an agreement liberalizing trade in services
between or among the parties to such an agreement".  There is no such agreement relevant to this
instance.  The Auto Pact is no longer in force as it is not being implemented by the United States, andeven if it were (which is not), it would not qualify as an agreement of the type mentioned in
Article V:1 of GATS, as the US admits in its response to Question 1(a) of European Communities.WT/DS139/R
WT/DS142/RPage 216
6.903  Moreover, the Duty Waiver is in no way part of the NAFTA.  Rather, it is inconsistent with
the NAFTA as evidenced by the express exceptions in NAFTA Annex 300-A.1 (which excludes the
Duty Waiver from the prohibition on Duty Waivers in NAFTA Article 304) and NAFTA Annex I-
Canada (which excludes the Duty Waiver from the prohibition against performance requirements in
NAFTA Article 1106).  Without these exceptions, the Duty Waiver could not have been permitted tocontinue under the NAFTA.
6.904  Therefore, as the Government of Japan has demonstrated, the Duty Waiver is solely a
domestic measure implemented under Canadian domestic laws.
5. Rebuttal arguments by the European Communities
6.905  The European Communities  rebuts as follows:
(a) The Tariff Exemption affects the provision of services within the meaning of Article I:1
of the GATS
6.906  (See Section VI.E, Applicability of the GATS to the Measures.)
(b) Vertical integration does not exclude competition among providers of wholesale
distribution services for automobiles
6.907  Canada has argued that “because service suppliers are subordinated to … manufacturers,
competition among them in the supply of wholesale services is precluded".
6.908  A similar argument was rejected in EC – Bananas III .  According to that Panel Report, the
mere fact that the wholesale distributors of bananas were vertically integrated did not exclude per se  a
violation of GATS Article II, because those wholesalers had the “capability and opportunity to enter
the wholesale service market"
600.
6.909  The Appellate Body affirmed the Panel’s view and further added:
"… even if a company is vertically-integrated, and even if it performs other functions
related to the production, importation, distribution and processing of a product, to the
extent that it is also engaged in providing ‘wholesale trade services’ and is therefore
affected in that capacity by a particular measure of a Member in its supply of those
‘wholesale trade services’, that company is a service supplier within the scope of the
GATS."601
6.910  Although the major wholesale distributors of automobiles present in the Canadian market are
vertically integrated with manufacturers602, they have the “capability and opportunity” to compete
amongst them with respect to the purchase of motor vehicles from manufacturers for wholesale resale.
6.911  While it may be true that Honda Canada and Ford Canada would not compete for the
distribution in Canada of vehicles manufactured by Ford in the United States, they may compete, not
only with other integrated distributors but also w ith independent distributors, for the distribution of
vehicles produced by a foreign manufacturer without a distribution network in Canada.
                                                     
600 Panel Reports on EC – Bananas III , supra  note 269, para. 223.
601 Appellate Body Report on EC – Bananas III , supra  note 49, para. 227.
602 The affiliation of some distributors, such as Lada Canada Inc., is nevertheless unclear, as shown in
the EC's response to Question 34 from the Panel, Table 7.WT/DS139/R
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6.912  By way of example, in the past Chrysler has imported and distributed in Canada motor
vehicles manufactured by Mitsubishi, an unrelated Japanese producer603. Similarly, Ford imports and
distributes in Canada motor vehicles manufactured by Kia and Mazda, while General Motors does the
same with Isuzu’s motor vehicles, even though th ey do not have a controlling interest in those
manufacturers604.
6.913  The Tariff Exemption confers upon the beneficiaries a competitive advantage in respect of the
purchase of vehicles for resale because it lowers their import costs and, therefore, gives them the
possibility to offer better purchasing terms to the foreign manufacturer.
6.914  In any event, Canada’s argument is built on the erroneous assumption that wholesale
distribution services are provided exclusively to manufacturers. Yet the relationship betweenwholesalers and retailers is at least equally relevant. Wholesale distributors of automobiles act as an
intermediary between manufacturers and retail distributors. Thus, they also provide a service to retail
distributors. In fact, except in the rare cases where wholesale distributors of automobiles act as mere
agents for the manufacturers,  the “buyer” of the service, i.e. the person who actually “pays” for the
distribution service, is the retailer and not the manufacturer.
6.915  Vertical integration between manufacturers and wholesale distributors of automobiles, even if
it were complete, would not exclude per se competition among wholesale distributors with respect to
sales to retailers and final consumers.  Vertical integration has the only consequence that Honda
Canada and Ford Canada, for example,  cannot compete to resell the same  automobiles to retailers.
But it does not prevent them from competing in or der to resell to dealers automobiles manufactured
by their respective parents which are directly competitive and substitutable with each other. In other
words, the absence of intra-brand competition among wholesalers does not exclude inter-brandcompetition.
6.916  In response to a question by the Panel, Canada argues that wholesalers cannot  compete for
sales to retailers due to the existence of exclusive distribution arrangements between manufacturers
and wholesalers. For example, according to Canada, GM Canada could not supply Honda cars to an
Honda dealer because Honda Canada has the exclusive right to distribute those cars
605. That example,
however, misses the point raised by the Panel. GM Canada and Honda Canada compete for sales to
retailers because, as admitted by Canada itself in the same response606, a dealer selling Honda cars
may decide to switch to GM cars, if GM Canada offers betters terms than Honda Canada. The Tariff
Exemption affects competition between Honda Canada and GM Canada in respect of their sales to
retailers because, by lowering the imports cost of GM Canada, it allows GM Canada to offer betterterms to dealers.
6.917  In the same response, Canada raises the curious argument that the Complainants have not
proven that  the service suppliers “ purchase” the automobiles from the manufacturers and, therefore,
that they “re-sell” them in the meaning of the headnote to Section 6 of the CPC
607. The ordinary
meaning of “re-selling”, however, does not exclude the sale of products previously purchased from arelated seller. A sale between two related, but legally distinct juridical persons,  is still a “sale”.
                                                     
603 See Exhibit EC-16, Table 1.7.
604 See Exhibit JPN-10.
605 Canada's response to Question 35 from the Panel.
606 Ibid.
607 Ibid.WT/DS139/R
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(c) The Tariff Exemption accords more favourable treatment to service suppliers of the
United States
6.918  Canada argues that the Tariff Exemption does not afford more favourable treatment to US
service suppliers because not all the beneficiaries are service suppliers of the United States. More
specifically, Canada contends that Chrysler Canada Ltd., CAMI Automotive Inc., and Volvo CanadaLtd. are, at least in part, service suppliers of other Members.
6.919  In the case of Chrysler Canada Ltd., Canada alleges that it is not a service supplier of the
United States but of Germany, because its parent company, DaimlerChrysler Corp., a US juridical
person, is fully owned by DaimlerChrysler AG, a juridical person constituted under the law of
Germany.
6.920  That argument is based on a mistaken reading of Article XXVIII(m). In accordance with the
plain meaning of that provision, if a service suppli er established in Member A is owned or controlled
by a juridical person of Member B, then that service supplier can be considered as a service supplier
of Member A, irrespective of who owns or controls the juridical person in Member B
608.
6.921  The above is confirmed by EC – Bananas III609, where the Panel held that the EU subsidiaries
of  Del Monte, a company constituted under Mexican law, were service suppliers of Mexico, even
though Del Monte was controlled by a Jordanian national610.
6.922  As regards CAMI Automotive Inc., the evidence available suggests that, although it is owned
50/50 by Suzuki Motor Co. of Japan, and General Motors Corp, of the United States, actual control is
exercised by the latter611. Canada takes the view, nevertheless, that CAMI is “a juridical person of
both the United States and Japan612. That position is clearly mistaken. If neither General Motors nor
Suzuki “owns” or “controls” CAMI in accordance with the criteria of Article XXVIII (n), the
inescapable conclusion is that CAMI is not a “service supplier of another Member”, but service
supplier of Canada. That would have the consequence that, in addition to being contrary to GATS
Article II, the Tariff Exemption would also violate GATS Article XVII.
6.923  Volvo Canada Ltd., was controlled by Volvo AB, of Sweden, until January 1999, when Volvo
AB agreed to sell its passenger car business to Fo rd Motor Co., of the United States. At any rate,
Volvo Canada Ltd closed its Canadian assembly plant in December 1998, with the consequence that it
will loose the right to import motor vehicles under the Tariff Exemption as of July 1999.
6.924  In any event, more relevant that the number of suppliers of each Member that benefit from the
Tariff Exemption, is their share of imports under the Tariff Exemption613. The evidence made
available by the European Communities shows that the US Big Three account for the vast majority ofthose imports.
                                                     
608 A different matter is whether in case that the juri dical person of Member B was in turn controlled by
a person of Member C, Member C could also assert rights under the GATS in respect of the service supplier in
Member A.
609 Panel Reports on EC – Bananas III , supra  note 269, footnote 493.
610 Furthermore, by Canada’s own logic, before reaching the conclusion that DaimlerChrysler AG is a
service supplier of Germany, it would be necessary to establish that it is “owned” or “controlled” by Germanpersons rather than by US persons.
611 General Motors Corp., is the largest single shareholder of Suzuki Motor Co.  Furthermore, Japanese
nationals seem to constitute a minority within the Board of Directors of CAMI Automotive Inc. (See CAMI’s
page in the Corporations Directorate of Industry Canada (Exhibit EC –21).)
612 Canada’s response to Question 34 from the Panel. In contrast, Canada stated that CAMI “is
probably, under the GATS, a juridical person of both the United States and Japan”.
613 See Panel Reports on EC – Bananas III , supra  note 269, paras. 7.333 and 7.334.WT/DS139/R
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6.925  The EC's Table 1 provides data on imports of automobiles under the Tariff Exemption.
Together, imports originating in the United States and Mexico accounted in 1997 for 97.23 per cent of
all imports under the Tariff Exemption. To the EC’s best knowledge, neither Volvo nor Suzuki is
engaging in imports of automobiles from the United States and/or Mexico. Accordingly, the 97.23 per
cent import figure from US and Mexico actually means imports by the Big Three.
6.926  As regards the residual 2.77 per cent of auto mobile imports under the Tariff Exemption,
which are those originating in “MFN countries” within the meaning of the MVTO of 1998,
information provided in the EC's Table 6 shows that in 1997 the Big Three’s total imports amounted
to 5.865 units.  In turn, imports by Volvo and Suzuki amounted to 4.107 units. Thus, the Big Three’s
imports from “MFN countries” under the Tariff Exemption represented 58.81 per cent of all suchimports. Therefore, it may be estimated that overall the Big Three accounted in 1997 for about 99 per
cent of total imports of automobiles made into Canada under the Tariff Exemption.
6.927  While the main beneficiaries of the Tariff Exemption are US service suppliers, all major
wholesale distributors of automobiles which do not benefit from the Tariff Exemption are, with only
one exception (Nissan Canada Inc.), service suppliers of Members other than the United States
614.
(d) The violation of Article II is not exempted by Article V
6.928  In reply to a question from the Panel, Canada has indicated that even if the Tariff Exemption
was found to be inconsistent with GATS Article II, it would nevertheless be “subject to the MFN
exception conferred by Article V:1 of the GATS”615.
6.929  The European Communities recalls that Article V:1 of GATS is an affirmative defence.
Therefore, in accordance with well settled case law616, it is for Canada to prove that the Tariff
Exemption is covered by GATS Article V:1, and not for the Complainants to prove the opposite.Clearly, the laconic answer given by Canada to the Panel’s question  cannot be considered sufficient
to meet its burden of proof.
6.930  Without prejudice to the above, the European Communities submits that for the reasons set
forth below the Tariff Exemption fails to meet the requirements of GATS Article V:1.
6.931  In the first place, Article V:1 provides an exception only with respect to “agreements”
between Members, and not with respect to unilateral measures by Members.  The wording of
Article V:1 is clear and unambiguous in that respect:
“This agreement shall not prevent any of its Members from being a party to or
entering into an agreement liberalising trade in services between or among the parties
to such an agreement…”
6.932  The Tariff Exemption is not an “agreement”. As already explained, the Tariff Exemption is
neither part of, nor required by NAFTA. NAFTA permits, but does not oblige Canada to maintain the
Tariff Exemption, which constitutes a derogation from generally applicable NAFTA rules. The
decision to maintain the Tariff Exemption is a unilateral decision of Canada, except to the extent that
the Tariff Exemption implements the provisions of the Auto Pact
617. The Auto Pact, however, lacks
the “substantial sectoral coverage” required by letter (a) of  Article V:1.
                                                     
614 See Table 7 in EC's response to Question 33 from the Panel.
615 Canada's response to Question 33 from the Panel.
616 See the Appellate Body Report on US – Wool Shirts , supra  note 283, pp.15-16, and the panel reports
cited therein.
617 The Auto Pact only requires Canada to grant duty free treatment to imports from the United States.WT/DS139/R
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6.933  Second, GATS Article V:1 requires that the agreement must “liberalise” trade in services. The
meaning of that term is further specified in letter (b ) of that Article, which provides that the agreement
must:
“… provide for the absence or elimination of substantially all discrimination, in the
sense of Article XVII, between or among the parties, …. through:
(i) elimination of existing discriminatory measures, and/or
(ii) prohibition of new or more discriminatory measures,
… except for measures permitted under Articles XI, XII, XIV and XIV bis.”
6.934  Canada cannot claim that the Tariff Exemption is necessary in order to “eliminate
discrimination” between US suppliers and Canadian suppliers of distribution services for automobilesbecause, according to Canada, no Canadian supplier of those services benefits from the Tariff
Exemption.  Thus, if anything, the Tariff Exemption would give raise to “reverse discrimination”
against Canadian suppliers.
6.935  In any event, assuming that there was a Canadian beneficiary of the Tariff Exemption, since
the Tariff Exemption applies only to a few US suppliers, it would fail to “eliminate substantially alldiscrimination” against US and Mexican suppliers.
6.936  The truth is that, far from “eliminating” discrimination, the Tariff Exemption actually
“creates” additional discrimination, not only between the beneficiaries and the service suppliers of
third countries, but also vis-à-vis  the remaining US suppliers (actual or potential) and the Canadian
and Mexican suppliers (actual or potential). That result is clearly incompatible with the objective to
“liberalise ” trade in services among the parties stated in Article V:1.
6.937  The same is true of the CVA requirements attached to the Tariff Exemption, which are of
themselves inconsistent with GATS Article XVII and, consequently,  “discriminatory” for purposes of
Article V:1(b).
6.938  Moreover, assuming that the Tariff Exemption qu alified as an “agreement” in the meaning of
Article V:1, as being part of NAFTA, it would be inconsistent with the additional requirement
contained in Article V:4, which provides that:
“Any agreement referred to in paragraph 1 shall be designed to facilitate trade
between the parties to the agreement and shall not in respect of any Members outside
the agreement raise the overall level of ba rriers to trade in services within the
respective sectors or subsectors compared to  the level applicable prior to such an
agreement”
6.939  CUFSTA and then NAFTA have raised the barriers  to trade in services in the subsector of
distribution services for motor vehicles because they prevent Canada from issuing any new SROs to
service suppliers of other Members, effectively “freezing” the list of beneficiaries of the Tariff
Exemption as of  1989.
6.940  Likewise, assuming that the Tariff Exemption was an agreement covered by Article V:1, it
would also infringe Article V:6, which stipulates that:
“A service supplier of any other member that is a juridical person constituted under
the laws of a party to an agreement referred to in paragraph 1 shall be entitled toWT/DS139/R
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treatment granted under such agreement, provided that it engages in substantive
business operations in the territory of the parties to such agreement”
6.941  Article V:6 would thus require Canada to extend the treatment granted to the Big Three to any
juridical person constituted under the law of the United States or of Mexico and with substantial
business operations in those countries that are controlled or owned by EC nationals or juridicalpersons.
6. Response by Canada to the Complainants' Rebuttals
6.942  Canada  responds as follows:
(a) The duty-free treatment does not affect trade in wholesale services
6.943  (See Section VI, page 185, Applicability of the GATS to the Measures.)
(b) The measures do not accord more favourable treatment to service suppliers of certain
countries
6.944  Even if they could demonstrate some effect of the duty-free treatment on wholesale service
suppliers in the supply of such services, the compla inants are unable to substantiate their claims that
the measures de facto  accord more favourable treatment to the service suppliers of certain countries.
As Canada has argued from the outset, the nationality of the manufacturers qualifying for duty-free
treatment reveals no de facto  discrimination, and changes in the ownership of qualifying MVTO
manufacturers prove that the measures are indifferent to nationality.
6.945  When services are supplied by a commercial presence, in accordance with Article XXVIII(m)
of the GATS, the nationality of a service supplier is determined by where the juridical person owning
or controlling it is constituted or otherwise organized.
6.946  The European Communities argues that one cannot proceed in such an enquiry beyond one
level of ownership or control.
618  According to the European Communities,  DaimlerChrysler Canada
Inc. remains a service supplier of the United States, despite the purchase of Chrysler Corp. by
DaimlerChrysler AG.  Similarly, Nissan Canada is a US service supplier because it is majority owned
by a US company, although that company is in turn wholly-owned by Nissan Motor Co. Ltd. of Japan.
Japan rejects this characterization of Nissan Canada, and therefore appears to reject the EC’sargument, although for reasons left unspecified, it considers Chrysler Canada (now DaimlerChrysler
Canada Inc.) to be a US service supplier.
619
6.947  The European Communities claims support for its test in a footnote to the Panel Report in EC
– Bananas III .620  However, that footnote consists of obiter dicta remarks regarding the application of
Article XXVIII when not all of the juridical persons in a chain of ownership or control are juridicalpersons of a WTO Member.  In the present case, when all of the juridical persons at issue are juridical
persons of a Member, the nationality of a service supplier should be determined by the nationality of
the juridical persons with ultimate ownership or co ntrol, as such persons have the actual power to
legally direct the actions of the service supplier.  By this test, DaimlerChrysler Canada Inc. is a
service supplier of the European Community, while Nissan Canada is a service supplier of Japan.
                                                     
618 EC’s response to Question  34 from the Panel.
619 Japan’s response to Question 34 from the Panel.
620 EC’s response to Question  34 from the Panel, citing footnote 493 of Panel Reports on EC – Bananas
III, supra  note 269.WT/DS139/R
WT/DS142/RPage 222
6.948  However, even if the test proposed by the Eu ropean Communities were correct, the mere fact
that three of the four current qualifying automobile manufacturers621 would be US–owned is a
function of geography and the historical commercial role of the Big Three in North America rather
than governmentally-imposed discrimination.  It is more significant that if for example,
DaimlerChrysler reorganized such that DaimlerChrysler Canada Inc. became directly rather thanindirectly owned by DaimlerChrysler AG, it would ha ve no effect whatsoever on its qualifying status,
because the measures do not discriminate on the basis of the nationality of the service supplier.  It
should also be noted that although the European Communities lists Mercedes-Benz Canada Inc. as a
non-beneficiary of duty-free treatment,
622  imports of Mercedes-Benz vehicles qualify for duty-free
treatment as MVTO imports of DaimlerChrysler Canada Inc.
6.949  Both complainants have disputed Canada’s position that the distribution structure of the
motor vehicle industry precludes competition among wholesale service suppliers in their capacity as
service suppliers.  Japan, for example, has cited the Report of the Appellate Body in EC – Bananas III
for the proposition that there is competition among wholesale service suppliers even when they are
vertically-integrated.  However, the relevant paragraph of the Appellate Body Report merely notedthat vertically-integrated companies may provide wholesale trade services, and may be service
suppliers within the scope of the GATS to the extent that they are affected in their capacity as a
wholesale trade service suppliers by a measure in their supply of those wholesale trade services.
623
The Appellate Body Report offers no support for the proposition that there is competition amongdistribution service suppliers to import and distribute automobiles.
6.950  The European Communities has also asserted that such competition exists.  It has twice cited
Chrysler Canada’s importation and distribution of ve hicles manufactured by Mitsubishi of Japan as a
“concrete example” of such competition, on the basis that Chrysler and Mitsubishi were “unrelated”
to each other.
624  The facts are otherwise.  Throughout the period that Chrysler Canada imported
Japanese vehicles from Mitsubishi, Chrysler Canada and/or its parent, Chrysler Corp. had an equity
interest in Mitsubishi or jointly manufactured vehicles with Mitsubishi, or both.  When these
relationships ended, Chrysler ceased to import or distribute vehicles from Mitsubishi of Japan.  Thefacts of the Chrysler/Mitsubishi relationship confirm the absence of competition in the provision of
distribution services.
6.951  Both complainants have also argued that even if relationships with manufacturers preclude
competition among distribution service suppliers to import automobiles, the measures affect
competition among distributors in the sale of automobiles to retail dealers.
625  Canada rebutted these
arguments in its Response to the Panel’s Question 35.626  Canada noted that because the distribution
service suppliers have exclusive relationships with manufacturers of particular vehicles, retailers
cannot select among distributors for the supply of  those vehicles.
6.952  Moreover, the absence of competition in the distribution of automobiles is acknowledged in
the EC’s own laws.  Commission Regulation (EC)  No. 1475/95 of 28 June 1995 exempts certain
motor vehicle distribution and servicing arrangements from the EC’s competition laws.  Paragraph 4
of the preamble to the Regulation justifies this exemption on the grounds that: “… exclusive and
                                                     
621 The fourth, CAMI, is jointly-owned by judicial persons of the United States and Japan, while Volvo
Canada, which was a judicial person of the EC, is no longer manufacturing automobiles in Canada.
622 EC’s response to Question 34 from the Panel, Table 7.
623 Appellate Body Report on EC – Bananas III , supra  note 49, para. 227.
624 EC’s response to Question 35 from the Panel.
625 Japan’s responses to Questions 27 and 35 from the Panel; EC’s response to Question  35 from the
Panel.
626 Canada’s response to Question  35 from the Panel.WT/DS139/R
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selective distribution clauses can be regarded as indispensable measures of rationalization in the
motor vehicle industry …”.627
6.953  Finally, Japan has asserted that differences in the retail prices of automobiles caused by the
duty-free treatment “means that the conditions of competition between manufacturers/wholesale trade
service suppliers for sales to retailers will be negatively affected”.628  It is telling that Japan is unable
to decide whether those allegedly affected are manufacturers or wholesale service suppliers.  More
fundamentally, as Canada has already explained, Japan’s legal theory would produce the absurd result
that every tariff, by affecting the price of a product, violates national treatment for distribution
services for any product, such as automobiles or photographic film, in which there is a tendency to
single-brand distribution.  Indeed, by Japan’s reasoning, every import duty, and most other goodsmeasures, would potentially violate the GATS.
7. The European Communities' follow-up to Canada's response
6.954  As a follow-up to Canada's response, the European Communities  argues as follows:
(a) The Tariff Exemption affects trade in wholesale distribution services
6.955  (See Section VI.E, Applicability of the GATS to the Measures.)
(b) The measure accords more favourable treatment to US suppliers
6.956  To refute the EC's de facto  violation claim under GATS Article II, notably to object to the
EC's characterizing DaimlerChrysler Canada as a US supplier, Canada refers again to the "chain of
ownership" and "ultimate ownership" notions.  These notions, however, are simply not relevant under
Article XXVIII.  This is so irrespective of whether a company's "ownership chain" includes WTO
Members' "juridical persons" only, or also "persons" of non-WTO Members.
6.957  In fact, Article XXVIII(m)(ii) simply refers to "ownership" or "control" to determine what is
a "juridical person of another Member".  The application of that rule to the present case is rather
straightforward.  This case is concerned with the nationality of DaimlerChrysler Canada.  As
DaimlerChrysler US owns 100 per cent of Da imlerChrysler Canada shares, then it "owns"
DaimlerChrysler Canada.
6.958  On the other hand, Article XXVIII(m)(ii) adds no further requirement to determine the
"nationality" of a juridical person.  In particular, it makes no reference to any further ownership or
control relationship.  Therefore, whether DaimlerC hrysler US is in turn owned by some other
company is not relevant to review a claim in re spect of DaimlerChrysler Canada.  It would only be
relevant if a claim were to be assessed in respect of DaimlerChrysler US.
6.959  The fact that in EC – Bananas III  the Panel considered Jordanian ownership to be irrelevant
does not constitute a special derogation from the general Article XXVIII(m) rule for cases where the
ultimate control/ ownership is exercised by a juridical person of a third country.  In the Panel's words,
the dispute concerned "the commercial presence of service suppliers which are "persons" or owned or
controlled by such persons of a complainant and subsidiary companies owned or controlled by parent
                                                     
627 Commission Regulation (EC) No 1475/95 of 28 June 1995 on the application of Article 85(3) of the
Treaty to certain categories of motor vehicle distribution and servicing agreements, cited to Official Journal L
145, 29/06/95 p. 0025-0034, from http://europa.eu.int/eur-lex/en /lif/dat/1995/ en_395R1475.html  (Exhibit
CDA-16).  See also Article 81(3) (ex Article 85) of the Treaty in Exhibit CDA-17: Consolidated Version of the
Treaty Establishing the European Community, cited to Official Journal C 340, 10.11.1997, pp. 173-308, fromhttp://europa.eu.int/eur-lex/en/treaties/ index.html .
628 Japan’s response to Question 35 from the Panel.WT/DS139/R
WT/DS142/RPage 224
companies that are constituted or otherwise organized under the law of a complainant and are
engaged in substantive business operations in the territory of any other Member ".629  Based on this
premise, the Panel then continued:
"As a result , suppliers which are commercially present within the EC territory and
owned or controlled by, for example , Del Monte Mexico would be entitled to benefit
from GATS rights because it would not matter under Article XXVIII(m)  whether Del
Monte Mexico was owned or controlled by natural or juridical persons of Jordan, i.e. a
WTO non-Member, as long as Del Monte Mexico was incorporated in Mexico and
engaged in substantive business operations in the territory of Mexico or any other
Member ".630
6.960  It clearly results from the emphasized words that in the EC – Bananas III  dispute the first
owner was considered to be the relevant one.  The same must apply to the present case, as the owner
of DaimlerChrysler Canada is incorporated in the United States and engages in substantive business
operations in the territory of the United States.  Article XXVIII includes no exception or special rulefor cases where ultimate ownership or control is exercised by a non-Member company.  It has a single
rule where the relevant factor is whether the supplier, whose nationality is at issue, is owned or
controlled by a company incorporated in a WTO Member and conducts substantial business
operations in a Member.
6.961  Canada's response to the rebuttals calls for on e last remark in respect of the "nationality"
issue.  The fact that most Tariff Exemption beneficiaries are US-owned, including pursuant to
Article XXVIII(m) ownership test, is not a function of  geography or other accident, contrary to what
Canada argues.  It is a consequence of a deliberate choice to close the Tariff Exemption beneficiaries
list in 1989.  That choice was the function of a bilateral agreement between two WTO Members'
governments - the Government of Canada and the Government of the United States.
(c) Vertical integration does not exclude competition among providers of services
6.962  Canada's reading of the Appellate Body EC – Bananas III  Report must also be corrected.
6.963  In paragraph 227 of its Report, the Appellate Body did not consider that integrated companies
"may be services suppliers within the scope of the GATS to the extent that they are affected in their
capacity as a wholesale trade services suppliers by a measure in their supply of those wholesale trade
services".  The Appellate Body rather said that th e fact of providing services would make integrated
companies services suppliers and would therefore  make them affected as service suppliers.  In other
words, there is no separate requirement that service suppliers be affected "in their capacity as
wholesale trade services providers".
6.964  Canada eventually takes a position on the imports of Mitsubishi cars by Chrysler to the effect
that these imports would have always taken place while the two companies had an ownership link.
Canada does not supply any evidence in support of this allegation.  The European Communities notesthat according to the information on the Panel's record Chrysler has had no ownership interests in
Mitsubishi at least since 1993.  Yet, imports of Mitsubishi vehicles by Chrysler continued until
1996.
631
6.965  Canada even goes as far as to state that EC law "acknowledge[s] the absence of competition"
in the car sector.  The European Communities has difficulty to see how a piece of legislation
                                                     
629 Panel Report on EC – Bananas III (USA) , supra  note 269, para. 7.318.
630 Ibid., footnote 493.
631 Exhibit EC-16.WT/DS139/R
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operating in a different territory and market may have any relevance to assess the situation in the
Canadian market for the purposes of establishing a violation of GATS by Canada.
6.966  At any rate, the European Communities wishes to clarify that Commission Regulation (EC)
No 1475/95 of 28 June 1995 does not do what Canada says it does.  It rather exempts certain
restrictions on competition under strict conditions and limits.  It does so, however, on the assumptionand to the extent that this is necessary to enhance and promote more  competition on the car market.
That pro-competition rationale is so deeply rooted in  the regulation that pursuant to Article 3.3 of the
Regulation contract clauses whereby distributors would be completely prohibited from multi-brand
distribution cannot be exempted.
6.967  Furthermore, under Article 8.1 of Regulation  1475/9[5] the exemption from competition
rules may be withdrawn if a contract, which would otherwise meet the Regulation requirements,
concerns goods which are not subject to competition .  The rationale of this provision is explained in
paragraph 30 of the Preamble in the following terms:
"(30) Distribution and servicing agreements can be exempted, subject to the
conditions laid down in Articles 5 and 6, so long as the application of obligationscovered by Articles 1 to 4 brings about an improvement in distribution and servicing
to the benefit of the consumer and effective competition exists , not only between
manufacturers' distribution systems  but also to a certain extent within each system
within the common market.  As regards the categories of products set out in Article 1,
the conditions necessary for effective competition , including competition in trade
between Member States, may be taken to exist at present , so that European consumers
may be considered in general to take an equitable share in the benefit from theoperation of such competition."
6.968  It is apparent from the last emphasized language that Commission Regulation 1475/95 does
exactly the opposite of what Canada argues.  It does not "acknowledge the absence of competition".
It rather acknowledges the existence of competition and sets adequate rules to preserve and further
promote it.
8. Canada's follow-up response
6.969  Canada  responds as follows:
(a) The measures do not affect trade in services
6.970  (See Section VI.E, Applicability of the GATS to the Measures.)
(b) Duty-Free treatment does not accord more favourable treatment
6.971  In order to succeed under Article II, the complainants would have to demonstrate as well that
the measures accord more favourable treatment to the service suppliers of certain countries.
6.972  Both the complainants claim that the measures do this on a de facto  basis but they cannot
agree on the facts.  In particular, Japan complains that one of the long-time beneficiaries of the duty-
free treatment was Volvo, a Swedish company, a fact that the European Communities ignores.
6.973  Japan's sole contention on the question of more favourable treatment is that it need not offer
substantial evidence because its service suppliers are clearly excluded from ever qualifying for the
duty-free treatment.  However, even this is belied  by the cases of DaimlerChrysler Canada Inc. and
CAMI.WT/DS139/R
WT/DS142/RPage 226
6.974  The European Communities takes the more mech anistic, but equally unenlightening approach
of comparing the ownership of qualifying companie s.  As Canada has shown, this approach can
produce a variety of results and ignores benign geographic and historical explanations for why, by
some measures, there are more qualifying US manufacturers than others.
6.975  The European Communities argues that by operation of Article XXV III of the GATS,
DaimlerChrysler Canada Inc. is not a service supplier of the European Communities, because it is not
directly owned by DaimlerChrysler AG. However,  it misses the larger point:  the nationality of
DaimlerChrysler Canada Inc's ownership is entirely  irrelevant to its qualifying status because the
measures do not discriminate on the basis of the nationality of the service supplier.  If
DaimlerChrysler AG were to directly own DaimlerChrysler Canada Inc., it would not affect itsqualifying status for duty-free treatment.
6.976  In any event, the EC's interpretation of Article XXVIII is not correct.  For the most part,
Canada has addressed this issue in its response to the rebuttals.  However, Canada cannot leave
unchallenged the EC's suggestion that the "plain m eaning" of Article XXVIII(m) leads to a particular
result.  According to the European Communities, Article XXVIII(m) means that a service supplier
established in a Member is a service supplier of that Member, even if it is owned or controlled by a
juridical person of another Member and irrespective of who owns or controls that juridical person.
6.977  First, Canada suspects that the European Communities intended to argue that the service
supplier in the foregoing case must be considered a service supplier of the Member where the juridical
person that owns or controls it is established, irrespective of who owns or controls that juridical
person.
6.978  Second, even assuming the European Communities misstated its position, the absolutist
position it may have intended to argue is also wrong.  Article XXVIII(m) of the GATS defines who or
what is a "juridical person of another Member".  Neither Article XXVIII(m) nor any other paragraph
of Article XXVIII directly defines who or what is a "service supplier of another Member", which is
the pertinent question in Articles II and XVII of the GATS.  In order to determine who or what is a
service supplier of another Member, Article XXVIII(m) must be read in conjunction withArticles XXVIII(g), (j) and (n), which respectively define "service supplier", "person" and ownership
and control of a juridical person.
6.979  Article XXVIII(g) provides that a service supp lier is any person that supplies a service.
Article XXVIII(j) provides that a person is a natural or a juridical person.  Thus, a service supplier of
another Member is a natural or juridical person of another Member that supplies a service.  Therelevant definition for the present case is a juridical person of another Member that supplies a service.
6.980  Article XXVIII(m)(ii) provides that in the case of the supply of a service through a
commercial presence, a juridical person of another Member is a juridical person owned or controlled
by juridical persons of that Member identified in Article XXVIII(m)(i); that is, a juridical person of
another Member is a juridical person owned or controlled by a juridical person constituted orotherwise organized under the law of that other Member and engaged in substantive business
operations in that other Member or any other Member.
6.981  Article XXVIII(n) defines ownership or control.  A juridical person is owned by persons of a
Member if those persons own more than 50 per cent of the equity interest in it.  A juridical person is
controlled by persons of a Member if those persons have the power to name the majority of itsdirectors or otherwise to legally direct its actions.
6.982   All of the foregoing comes down to a simple principle: the nationality of a commercial
presence can be determined either by who owns it, or  by who controls it.  If "ownership" is used as
the defining criterion, Article XXVIII could conceivably be read to mean that one looks only to theWT/DS139/R
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direct ownership, although as Canada has noted, the source cited by the European Communities in
support of this approach is obiter dicta  and relates to persons of non-Members.  The better approach is
to determine nationality by who has ultimate owne rship because those persons have the real power to
direct the actions of the commercial presence.
6.983  If "control" is used as the defining criterion, the answer to who has the power to legally direct
the actions of a commercial presence will always be the person with the ultimate ownership.  In the
case of DaimlerChrysler Canada Inc., that person is DaimlerChrysler AG.  DaimlerChrysler AG,
which is organized under the laws of Germany, is the successor corporation to Daimler-Benz AG of
Germany, and is majority owned by the former stockholders of Daimler-Benz AG.632  It is, by all
measures, a juridical person of Germany.
6.984  In the case of CAMI, the European Communities appears to be suggesting that if two juridical
persons of Members other than Canada own a juridical person in Canada in its entirety, that juridical
person is Canadian because neither of the non-Canadian persons individually exercises majority
ownership or control, even though they jointly exer cise absolute ownership and control.  This makes
little sense.  It is the nationals of other Members that both own and legally direct the actions of thejuridical person in Canada.  By this measure, CAMI is a service supplier of both the United States and
Japan.
6.985  The mechanistic and arbitrary nature of the enterprise of determining the nationality of
service suppliers demonstrates just how unhelpful it is for identifying de facto discrimination.  By the
EC's logic, if Suzuki owned one more shar e of CAMI, or if DaimlerChrysler AG owned
DaimlerChrysler Canada Inc. directly, the entire nationality equation would change.  Yet neither
change would make the slightest difference to the qualifying status of the companies at issue.  Themeasures governing qualification, the MVTO and the SROs are completely neutral as to national
origin.
6.986  The European Communities appears to recognize th is when it argues that other data are more
relevant.  However, it is wrong when it insists that the relevant data are the share of imports receiving
duty-free treatment.  That data relates to goods, not to the supply of distribution services.  It cannot bepassed off as relevant for the purposes of Article II of the GATS.
6.987  If market share data is relevant at all, the data to consider is the share of wholesale
distribution trade services in automobiles held by each commercial presence.  Due to vertical
integration, that data will correspond almost exactly with their shares of automobile sales in Canada.
By this measure, even assuming that DaimlerChrysler Canada Inc. is a service supplier of the UnitedStates, Japanese distribution service suppliers have approximately 33 per cent of automobile
distribution in Canada, EC distribution service suppliers have approximately 9 per cent and US
distribution service suppliers have approximately 55 per cent.  If DaimlerChrysler AG is treated as a
service supplier of Germany, the EC share rises to approximately 20 per cent, while the US share falls
to approximately 43 per cent.  These figures offer no basis for a finding that the duty-free treatmentdiscriminates against distribution service suppliers of particular Members.
9. Further follow-up by the European Communities
6.988  As further follow-up to Canada's response, the European Communities  argues as follows:
6.989  The European Communities has noted that, by Canada’s own logic, before reaching the
conclusion that Chrysler Canada Ltd. is a service supplier of Germany, it would be necessary to
                                                     
632 "Summary of Proxy Statement/Prospectus for Chrysler Corporation Stockholders," 6 August 1998.
(Exhibit CDA-24).WT/DS139/R
WT/DS142/RPage 228
establish that DaimlerChrysler AG is “owned” or “controlled”  by  German persons, rather than by US
persons.
6.990  In response,  Canada contends that Daimler Chrysler AG “is majority owned by the former
stockholders of Daimler Benz AG” and, therefore, that “it is by all measures a juridical person of
Germany”. As evidence, Canada cites the document  included in Exhibit CDA-24.
6.991  It is well known that, as stated in that document, upon the merger of Chrysler Corporation and
Daimler Benz AG, the stockholders of Chrysler Corporation received approximately 42 per cent of
the shares of DaimlerChrysler AG, whereas the former stockholders of Daimler Benz AG received the
remaining 58 per cent.
6.992  However, contrary to what is implied by Canada, the above does not mean that German
persons “own” or “control” DaimlerChrysler AG in the sense of Article XXVIII of GATS. Canada
makes the erroneous assumption that all the former stockholders of Daimler Benz  AG  were German
persons. The truth, however, is that a considerable number of shares of Daimler Benz AG’ shares was
owned by US persons.
6.993  As shown by the table below, it may be estimated that the shares of DaimlerChrysler AG
issued to the holders of shares of Chrysler Corporation traded in the United States, together with the
shares of DaimlerChrysler AG issued to US persons holding shares of Daimler Benz AG,  accounted
upon the conclusion of the merger for 50.88 per cent of the share capital of DaimlerChrysler AG.
Thus, even assuming that, as claimed by Canada, only the “ultimate ownership” was relevant,
Chrysler Canada Ltd. would still be a US service supplier.
Number of shares % of total outstanding shares  
DaimlerChrysler AG
• Total outstanding ordinary
shares  of DaimlerChryslerAG
633960.1 million 100 %
• Shares of DaimlerChrysler AG
issued to former stockholders of
Chrysler Corporation634430. 4 million 44.82 %
• Shares of DaimlerChrysler AG
issued to US persons holdingshares of Daimler Benz AG
63558.2 million 6.06 %
                                                     
633 Combined Consolidated Statement of Income of DaimlerChrysler AG, included in the Proxy
Statement/Prospectus of DaimlerChrysler AG distributed to the shareholders of Chrysler Corporation prior to
the merger,  p. 108 (Exhibit EC-23).
634 Registration Statement under the Securities Act of 1933, Form F-4,  filed by DaimlerChrysler AG
with the Securities and Exchange Commission of the United States (Exhibit EC-24).
635 Ibid.WT/DS139/R
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G. ARTICLE XVII OF THE GATS
1. Arguments of Japan
6.994  Japan  argues as follows:
6.995  Canada is required to accord, pursuant to Article XVII of the GATS and its Schedule of
Specific Commitments, national treatment for wholesale trade services and service suppliers as wellas for certain services and service suppliers related to the production of motor vehicles.
6.996  With respect to wholesale trade services, the provision of duty-free import status to certain
domestic manufacturers (which are or can be wholesale trade service suppliers) is inconsistent with
Article XVII of the GATS, because:  (i) Canada has undertaken a commitment in a relevant sector and
mode of supply;  (ii) Canada has adopted or applied a measure affecting the supply of services in thatsector and mode of supply;  and (iii) the measure accords to service suppliers of other Members
treatment less favourable than it accords to like Canadian service suppliers.
636  Canada grants a
Canadian Auto Pact Manufacturer, that is also a wholesale trade service supplier, the Duty Waiver but
does not extend no less favourable treatment to like service suppliers of other Members, including
Japan.  This is inconsistent with Canada's obligations under Article XVII of the GATS.
6.997  With respect to certain services related to the production of motor vehicles, the CVA
requirement in practice requires the Auto Pact Manufacturers to purchase and use services supplied by
service suppliers in Canada instead of services supplied by those located outside Canada.  This
requirement results in a situation whereby the services supplied under Mode 1 (cross-border supply)
and Mode 2 (consumption abroad) by service suppliers of other Members are accorded treatment less
favourable than the treatment accorded to like services supplied by Canadian service suppliers located
in Canada.  This requirement is also inconsistent with the Government of Canada's obligations underArticle XVII of the GATS.
6.998  Article XVII of the GATS provides:
"1. In the sectors inscribed in its Schedule, and subject to any conditions and
qualifications set out therein, each Member shall accord to services and service
suppliers of any other Member, in respect of all measures affecting the supply ofservices, treatment no less favourable than that it accords to its own like services and
service suppliers ( footnote omitted ).
2. A Member may meet the requirement of paragraph 1 by according to services and
service suppliers of any other Member, either formally identical treatment or formallydifferent treatment to that it accords to its own like services and service suppliers.
3. Formally identical or formally different treatment shall be considered to be less
favourable if it modifies the conditions of competition in favour of services or service
suppliers of the Member compared to like services or service suppliers of any otherMember."
6.999  These provisions indicate that a three-step anal ysis is required to determine whether the Duty
Waiver is inconsistent with Article XVII of the GATS:
(i) Are wholesale trade services and other services related to the production of motor
vehicles covered in the Government of Canada's Schedule of Specific Commitments,
and what conditions and qualifications, if any, apply?
                                                     
636 See Panel Reports on EC – Bananas III , supra  note 269, para. 7.314.WT/DS139/R
WT/DS142/RPage 230
(ii) Are those services and service suppliers at issue are "like"?
(iii) Does the Duty Waiver modify the conditions of competition in favour of services or
service suppliers of Canada?
6.1000  The answer to each inquiry is yes.  Accord ingly, the Duty Waiver is inconsistent with
Article XVII of the GATS.
(a) The Duty Waiver accords more favourable treatment to Canadian wholesale trade
services and service suppliers in violation of Article XVII of the GATS
6.1001  Japan has found  that more than one hundred manufacturers regarded as Canadian service
suppliers within the meaning of Article XXVIII of the GATS are allowed to import automobiles –
including passenger cars, buses and specified commercial vehicles – duty-free from other Members.
Among them, one passenger car manufacturer, Intermeccanica, is a Canadian service supplier within
the meaning of Article XVII of the GATS.637  Other Auto Pact Manufacturers of Canadian origin
manufacture buses and commercial mo tor vehicles, which Japanese automobile industries may export
to meet demand if latent demand exists.  The Japanese motor vehicle industry may also offer
wholesale trade services for such buses and commercial vehicles if such demand exists.638  T h i s
demonstrates that there are Canadian motor vehicle wholesale trade service suppliers in Canada.
(i) Canada's specific commitment covers wholesale trade services of motor vehicles through
commercial presence
6.1002  As discussed by the panel in EC – Bananas III , during the Uruguay Round negotiations, the
participants agreed to follow a set of guidelines  for the scheduling of specific commitments under the
GATS.639  Among other things, the guidelines suggested that the participants employ the United
Nations Central Product Classification System  (CPC).  Canada adopted the CPC as the basis for
scheduling its GATS commitments.  Applying the panel's reasoning, any legal definition of the scope
of Canada's GATS commitments should be based on the CPC description of the sector and theactivities that it covers.
6.1003  CPC describes "wholesale trade services" as a sub-set of the broader sector of distributive
trade services which is described in the headnote to Section 6 as follows:
Distributive trade services consisting of selling merchandise to retailers, to industrial,
commercial, institutional or other professional business users, or to other wholesalers,or acting as agent or broker (wholesaling services) or selling merchandise for
personal or household consumption including services incidental to the sale of goods
(retailing services).  The principal services rendered by wholesalers and retailers may
be characterized as reselling merchandise, accompanied by a variety of related,
subordinated services, such as:  maintaining inventories of goods;  physicalassembling;  sorting and grading goods in large lots;  breaking bulk and redistribution
in smaller lots;  delivery services;  refrigeration services;  sales promotion services
rendered by wholesalers;  and services associated with retailers business, e.g .,
processing subordinated to selling, warehousing and garage services.
                                                     
637 In the past there were a few other domestic automobiles manufacturers that were eligible for the
Duty Waiver—Bombardier Inc. and Aurora.  See Bombar dier Inc., Logistic Equipment, Division Remission
Order  (Exhibit JPN-6, p. 73), and Aurora Cars Limited Remission Order  (Exhibit JPN-6, p. 102).
638 See Appellate Body Report on Korea – Alcoholic Beverages , supra  note 280, pp. 32-37
639 See Panel Reports on EC – Bananas III , supra  note 269, para. 7.289.WT/DS139/R
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6.1004  CPC division 61 applies to the sale, maintenance and repair services of motor vehicles and
motorcycles.
6.1005  CPC subclass 61111 applies to wholesale trade services for motor vehicles.  It reads as
follows:
"Wholesaling and commission agents' services of passenger motor cars, motor buses
and motor coaches, motor lorries and trucks, over-the-road truck tractors, semi-
trailers and trailers."
6.1006  As discussed by the panel in EC – Bananas III , wholesale trade services such as those
covered by CPC subclass 61111 are fully covered by the GATS.640  Companies such as General
Motors Canada, Ford Canada, Chrysler Canada, Toyota Canada, Honda Canada and Intermeccanica
are wholesale trade service suppliers of motor vehicles within the meaning of the GATS.
6.1007  Canada's specific commitment covers wholesale trade services under CPC class 6111 (sale of
motor vehicles including automobiles and other road vehicles) through commercial presence withoutconditions and qualifications within the meaning of Article XVII:1 of the GATS.
641  CPC 61111 is a
subclass of CPC 6111 and is, therefore, covered by the commitment.
6.1008  Canada has not limited, conditioned or qualified its commitment to these services.  Thus, it is
obliged to accord to services and service suppliers of any other Member in this sector including those
of Japan treatment no less favourable than the treatm ent that it accords to its own like services and
service suppliers.
(ii) The services and service suppliers at issue are "like "
6.1009  As discussed in the section regarding Article II of the GATS services supplied by Japanese
wholesale trade service suppliers and services supplied by Canadian service suppliers are "like",
regardless of whether the suppliers perform other functions related to the manufacturing of motor
vehicles, as discussed by the Panel in EC – Bananas III and confirmed by the Appellate Body.642  And
to the extent that Canadian service suppliers supply these "like" services, they and Japanese wholesaletrade service suppliers are "like" service suppliers.
(iii) The Duty Waiver modifies the conditions of co mpetition in favour of Canadian services and
service suppliers
6.1010  As discussed, "any measure bearing upon conditions of competition in supply of a service"
constitutes a measure "affecting the supply of services".  By exempting the imports of a CanadianAuto Pact Manufacturer from customs duties, the Duty Waiver reduces the cost that must be borne by
such a manufacturer in supplying wholesale trade services.  In this manner, less favourable treatment
that the Government of Canada accords to motor vehicles imported by Japanese wholesale trade
service suppliers modifies the conditions of competition in favour of Canadian services or service
suppliers compared to like services or service suppliers of other Members, including Japan.
                                                     
640 Ibid., para. 7.288.
641 Canada-Schedule of Specific Commitments, GATS/SC/16, 15 April 1994 pp. 47-49 (hereinafter
Canada's GATS Schedule ).
642 Panel Reports on EC – Bananas III , supra  note 269, para. 7.320 and Appellate Body Report on EC –
Bananas III , supra  note 49, para. 255 (q).WT/DS139/R
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6.1011  Therefore, Canada, by virtue of the Duty Waiver, accords to Japanese wholesale trade
services and service suppliers of motor vehicles treatment less favourable than it accords to its own
like services and service suppliers.  This is inconsistent with Canada's national treatment obligation
under Article XVII of the GATS.
(b) The Duty Waiver accords more favourable tr eatment to Canadian services and service
suppliers related to the production of motor vehicles
6.1012  In order to comply with the CVA requirement,  the Duty Waiver in practice requires the Auto
Pact Manufacturers to procure certain services supplied in Canada.  This favours certain Canadian
services, and thereby, service suppliers and accords less favourable treatment to like services and
service suppliers of other WTO Members.  In this way, the Duty Waiver is inconsistent with Canada'sobligations under Article XVII of the GATS.
(i) The services at issue
6.1013  Subsection 1(1) of the Schedule to the MVTO 1998 establishes which services qualify as
Canadian value added for the purposes of determining whether the CVA requirement is met.  The
relevant part of the CVA definition reads as follows:
"Canadian value added" means
(a) …
(iv) the part of the following costs that is reasonably attributable to the production
of the vehicles, namely . . .
(I) the cost of maintenance and repair work executed in Canada  on
buildings, machinery and equipment used for production purposes.
(K) the cost of engineering servi ces, experimental work and product
development work executed in Canada ,
…
(v) administrative and general expenses incurred in Canada  that are reasonably
attributable to the production of the vehicles . . .. ( emphasis added )
6.1014  Item (a)(iv)(I) refers to the cost of "maintenance and repair work on … machinery and
equipment used for production purposes". Item (a)(iv )(K) refers to the cost of "engineering services
used for production purposes".  Finally, item (a)(v) refers to "administrative and general services".
6.1015  Since information on the services claimed under these elements of the CVA is not publicly
available, it is not possible to explicitly identify  such services.  However, the CVA permits the Auto
Pact Manufacturers to claim the cost of such services with only one qualification – i.e. that the cost of
such services be "reasonably attributable to the production of motor vehicles".
6.1016  Accordingly, the specific types of services covered or potentially covered by these elements
of the CVA are very broad.  In the case of repair and maintenance services related to machinery and
equipment, such services include the repair and maintenance of potentially all of the equipment andcomponents of equipment related to the manufacturing process.  In the case of engineering services,
such services include process and production engineering services as well as engineering design
services.  In the case of administrative and general services, the list of potential services is immense,
and includes accounting services, data processing services, software services, and management
consulting services.WT/DS139/R
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(ii) Canada's Schedule of Specific Commitments
6.1017  Maintenance and repair work on machinery and equipment used for the production process
(item (a)(iv)(I) of the CVA), engineering services (item (a)(iv)(K) of the CVA) and administrative and
general expenses (item (a)(v) of the CVA) are included in service sectors inscribed in Canada's
Schedule of Specific Commitments.  As discussed below, with only minor exceptions, Canada hascommitted to providing national treatment for the va rious relevant services (maintenance and repair,
engineering, etc.), which are procured by the Auto Pact Manufacturers.
6.1018  With respect to maintenance and repair work  on machinery and equipment, Canada has
inscribed the following in its Schedule of Specific Commitments:
- repair services incidental to metal products, machinery and equipment including
computers and communication equipment on a fee or contract basis (CPC 8861 to
8866).
6.1019  The CPC defines these services broadly as "repair services incidental to metal products,
machinery and equipment".
6.1020  Canada has not inscribed any limitations on its national treatment obligation with respect to
the first three modes of supply (cross-border supply, consumption abroad, and commercial presence)
of these services.
6.1021  With respect to engineering services , Canada has inscribed the following in its Schedule of
Specific Commitments:
- advisory and consultative engineering services (CPC 8672);
- engineering design for industrial processes and production (CPC 86725);- engineering design services n.e.c. (CPC 86729);  and
- other engineering services (CPC 86729).
6.1022  According to the CPC, "advisory and consultative engineering services" include
recommendation services concerning engineering matters and study of the efficiency gains inproduction as a result of alternative process, technology or plant layout.  "Engineering design for
industrial processes and production" include engineering design services for production processes,
procedures and facilities; material flows, equipment layout, material handling systems, processes and
process control (which may integrate computer technology) for manufacturing plants; special
machinery, equipment and instrumentation systems; and any other design services for productionprocedures and facilities.  Design services include preliminary plans, specifications and cost
estimates, including working drawings, specificat ions regarding materials to be used, methods of
construction and/or installation.  "Engineering design services n.e.c." refer to other specialty
engineering design services, including prototype development and detailed designs for new products.
Other engineering services include all engineering services not elsewhere classified.
6.1023  Canada has inscribed one narrow limitation on its national treatment commitment regarding
these services.  This limitation pertains to cross-border supply of engineering services in the province
of Saskatchewan where a residency requirement applies for obtaining accreditation as an engineer.  In
all other provinces, including those where Canada's motor vehicle production plants are located,
Canada's national treatment obligation regarding the supply of these engineering services via modes 1,2 and 3 is not limited.
6.1024  With respect to administrative and general expenses , the following types of services are
inscribed in Canada's Schedule of Specific Commitments:WT/DS139/R
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- accounting, auditing and book-keeping services (CPC 862);
- taxation services (CPC 863);
- consultancy services related to the installation of computer hardware (CPC 841);
- software implementation services (CPC 842);
- data processing services (CPC 843);- database services (CPC 844);
- maintenance and repair services of office machinery and equipment including
computers (CPC 845);
- computer services (CPC 849);
- market research and public opinion polling (CPC 864);- management consulting services (CPC 865):
- financial management (CPC 86502);
- marketing management (CPC 86503);
- human resources management (CPC 86504); and
- production management (CPC 86505);
- services related to management consulting (CPC 866);
- public relations services (CPC 86506);
- placement and supply of personnel (CPC 866);
- packaging services (CPC 876);
- duplicating services (CPC 87904);
- translation and interpretation services (CPC 87905);
- commercial courier services (CPC 75121);- electronic data interchange (CPC 7523);  and
- on-line information and/or data processing including transaction processing (CPC
843).
6.1025  The only relevant limitations to the national treatment commitments undertaken by Canada in
the service sectors and sub-sectors listed above relate to accounting, auditing and book-keeping
services and to translation and interpretation services.  With respect to auditing, Canada inscribed in
its Schedule a residency requirement for accreditation as an auditor in the provinces of Alberta,
Newfoundland, Nova Scotia, Prince Edward Island, Manitoba and Saskatchewan.  This requirement
limits the scope of Canada's national treatment commitment with respect to cross-border supply of
such services as well as the supply through commercial presence of service suppliers of other
Members.  As for translation and interpretation services, Canada inscribed a citizenship requirement
for using the title "Certified translator" in the prov ince of Québec.  This qualification limits Canada's
commitment with respect to cross-bor der supply of translation services.
6.1026  Consequently, Canada's national treatment obligation is not limited with respect to all of the
other services listed above (through modes 1, 2 and 3), which form part of the administrative and
general expenses incurred by motor vehicle manufacturers.
(iii) The CVA requirement accords less favourable treatment to "like" services and service
suppliers
The services and service suppliers at issue are "like"6.1027  As discussed in paragraph 6.842, the Panel in EC – Bananas III discussed the issue of "like"
services and service suppliers.  In that case, the Panel had to determine whether wholesale trade
services provided by companies originating from the EC and ACP countries and those provided by
companies originating from other countries were like.  The Panel concluded as follows:
"… the nature and characteristics of wholesale transactions as such, as well as of each the
different subordinated services … are 'like' when supplied in connection with wholesaleWT/DS139/R
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services, irrespective of whether these services are supplied with respect to bananas of EC and
traditional ACP origin, on the one hand, or with respect to bananas of third country origin or
non traditional ACP origin on the other.  Indeed, it seems that the different service activities
taken individually is virtually the same and can only be distinguished by referring to the
origin of bananas in respect of which the service activity is being performed.  Similarly, inour view, to the extent that entities provide these like services, they are like service
suppliers."
643
6.1028  It can be deducted from the reasoning of the Panel that the nature and characteristics of
services are "like" irrespective of where they are supplied.  The CVA requirement and the equivalentrequirements in the SROs cover the above-noted se rvices generally and distinguish between services
solely on the basis of whether the services are "executed in Canada" (in the case of CVA
Items (a)(iv)(I) and (a)(iv)(K)) or whether the expenses related to the services are "incurred in
Canada" (in the case of CVA Item (a)(v)).  Accordingly, the services of Canada and other Members
are per se  "like".
644  And to the extent that Canadian service suppliers provide these "like"" services,
they and Japanese service suppliers are "like" service suppliers.
Services and service suppliers outside Canada are accorded less favourable treatment
(a) Modes of supply
6.1029  Article I:2(a) of the GATS defines Mode 1 (cro ss-border supply) as the supply of a service
"from the territory of one Member into the territory of any other Member", and Mode 2 (consumption
abroad) as the supply of a service "in the territory of one Member to the service consumer of anyother Member".  Also, Article XXVIII(f)(i) of the GATS defines a service of another Member as a
service which is supplied "from or in the territory of that other Member", in the case of Mode 1
(cross-border supply) or Mode 2 (consumption abroad).
6.1030  The discrimination that is created by the domestic content requirement arises from the use in
the definition of the CVA of the phrases "executed in Canada" and "incurred in Canada".
6.1031  In the case of CVA Items (a)(iv)(I) and (a)(iv)(K), where the services in question are
"executed in Canada", their costs can be included in the definition of Canadian value added.
Conversely, where the services are not executed in Canada, their costs cannot be included in the CVA
calculation.
6.1032  In the case of CVA Item (a)(v), where the costs associated with the services in question are
"incurred in Canada", they can be included in the definition of Canadian value added.  Conversely,
where the costs in question are not incurred in Canada, they cannot be included in the CVA
calculation.
6.1033  These phrases prevent the inclusion of costs in the CVA requirement where the services in
question are supplied under Mode 1 (cross-border supply) or under Mode 2 (consumption abroad),whereas costs of "like" services supplied in Canada are included in the CVA requirement.
                                                     
643 Panel Reports on EC – Bananas III , supra  note 269, para. 7.322.
644 In the context of trade in goods, this "principled" or " per se " approach to establishing like products
has been applied  by the Panel in Indonesia – Autos, supra  note 270, para. 14.141 and by the Panel in US – Non-
Rubber Footwear , supra  note 269, para. 6.12.  The same reasoning can be applied in the case of services where
the measure in question applies to services or a class of services generally.WT/DS139/R
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(b) Nature of the Less Favourable Treatment
6.1034  In the sectors inscribed in its Schedule of Specific Commitments which, as established above,
include the relevant elements of the CVA requirement, Canada has bound itself to accord no less
favourable treatment to services and service suppliers of any other WTO Member than that it accordsto its own like services and service suppliers.  Article XVII:3 of the GATS provides that the treatment
accorded to services and service suppliers of other WTO Members, whether formally identical or
formally different, "shall be considered to be less favourable if it modifies the conditions of
competition in favour of services and service suppliers of the Member maintaining the measure
compared to like services and service suppliers of any other Member".
6.1035  Since costs associated with services supplied under Mode 1 (cross-border supply) and Mode 2
(consumption abroad) are not eligible for the CVA calculation, the domestic content requirement
modifies the conditions of competition in favour of services supplied in Canada compared to like
services supplied under either Mode 1 or Mode 2 from or in the territory of other Members.
Accordingly, services and thereby service supp liers of the former benefit from the economic
inducement created by the domestic content requirement while like services and service suppliers of
the latter do not.
6.1036  In the case of item (a)(iv)(I) of the CVA, only the cost of maintenance and repair work on
machinery and equipment executed in Canada is included in the calculation of the CVA.  A contrario ,
this means that the cost of like maintenance and repair work executed outside Canada will not be
included in the calculation of the CVA.  Clearly, this requirement modifies the conditions of
competition in favour of maintenance and repair services on machinery and equipment supplied inCanada, over like services supplied under Mode 1 or Mode 2 from or in the territory of other
Members.  Hence, item (a)(iv)(I) of the CVA acco rds less favourable treatment to like repair and
maintenance services of other Members, and thereby their service suppliers.  This is inconsistent with
Canada's national treatment commitment in respect of the supply of repair and maintenance services
and service suppliers.
6.1037  Similarly, item (a)(iv)(K) of the CVA provides that only the cost of engineering services,
experimental work and product development work executed in Canada is included in the calculation
of the CVA.  A contrario , this implies that the cost of like engineering services executed outside
Canada will not be included in the calculation of  the CVA.  Again, this requirement modifies the
conditions of competition in favour of engineering services offered in Canada over like servicessupplied under Mode 1 or Mode 2 from or in the territory of other WTO Members.  Thus,
item (a)(iv)(K) of the CVA accords less favourable treatment to like engineering services of other
Members, and thereby their service suppliers.  This is inconsistent with Canada's national treatment
commitment in respect of the supply of engineering services.
6.1038  Item (a)(v) of the CVA definition provides that costs associated with services classified as
"general and administrative expenses" are included  in the CVA only if they are incurred in Canada.
A contrario , this implies that the cost of like services that are incurred outside Canada will not be
included in the CVA calculation.  This requirement modifies the conditions of competition in favour
of such services supplied in Canada over like services supplied under Mode 1 or Mode 2 from or in
the territory of other Members.  Thus, item (a)(v) of the CVA accords less favourable treatment to likeservices of other Members, and thereby their servic e suppliers.  This is inconsistent with Canada's
national treatment commitment in respect of the supply of such services.
6.1039  Accordingly, by virtue of the domestic content requirement, the Duty Waiver is inconsistent
with Article XVII of the GATS.WT/DS139/R
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2. Arguments of the European Communities
6.1040  The European Communities  argues as follows:
6.1041  The cost of certain services used by the beneficiaries as inputs for the manufacture of motor
vehicles is counted as CVA only when those services are supplied within the territory of Canada. As a
consequence, the CVA requirements provide an incentive for the beneficiaries to use Canadianservices over like services supplied from the territory of other Members into Canada through Mode 1
("cross-border delivery") or in the territory of other Members through Mode 2 ("consumption
abroad"), thereby infringing Canada’s obligations under GATS Article XVII.
6.1042  Specifically, the CVA calculation rules stipulate that the following items are to be counted as
CVA:
"(iv) the part of the following costs that is reasonably attributable to the production of the
vehicles, namely:
…
(G) fire and other insurance premiums, in respect of production inventories and the
production plant and equipment, paid to a company authorised by federal or provinciallaw to carry on business in Canada or a province .
…
(I) the cost of … repair work executed in Canada  on … machinery and equipment used
for production purposes.
…
(K) the cost of engineering services … executed in Canada .
…(v) administrative and general expenses incurred in Canada  that are reasonably
attributable to the production of the vehicles …"  ( emphasis added ).
6.1043  The meaning of the terms "carried on in Canada", "executed in Canada" and "incurred in
Canada" is not defined in the CVA calculation rules. During the consultations, the European
Communities asked Canada to confirm whether those terms mean that services supplied into Canadafrom the territory of another Member or in the territory of another Member cannot  be counted as
CVA. In view of the responses given by Canada, the European Communities understands that the
services of other Members supplied  through modes 1 and 2 are not counted as CVA.
6.1044  Article XVII:1 of GATS reads as follows:
"1.  In the sectors inscribed in its Schedule, and subject to any conditions and
qualifications set out therein, each Member shall accord to services and service
suppliers of any other Member, in respect of all measures affecting the supply of
services, treatment no less favourable than that it accords to its own like services and
service suppliers." (footnote omitted).
6.1045  Accordingly, in order to rule on the EC’s claim under GATS Article XVII the Panel is
required to make the following determinations:WT/DS139/R
WT/DS142/RPage 238
- whether Canada has undertaken in its Schedule national treatment
commitments for modes 1 and 2 with respect to the relevant sectors;
- whether the services of other Members supplied through modes 1 and 2 are
"like" the Canadian services;
- whether the CVA requirements "affect the supply" of the services concerned;
and
- whether the CVA requirements afford "less favourable treatment" to the
services of other Members than to Canadian services.
(a) The relevant sectors and modes of supply are covered by Canada’s commitments on
national treatment
6.1046  Canada has inscribed in its Schedule645 national treatment commitments for modes 1 and 2
with respect to the following  relevant sub-sectors:
- non-life insurance services (CPC 8129). This commitment covers inter alia
the insurance services referred to in item (iv) G of the CVA calculation rules;
- repair services incidental to machinery and equipment, including computers
and communications equipment on a fee or a contract basis (CPC 8861 to
8866). This commitment covers inter alia  the services described as "repair
work executed on machinery and equipment used for production purposes" in
item (iv) I of the CVA calculation rules; and
- engineering services (CPC 8672). Th is commitment covers the services
described as "engineering services" in item (iv) K.
6.1047  Canada has also undertaken national treatment commitments for modes 1 and 2 with respect
to a wide range of other services that are likely to figure among the beneficiaries’ "general and
administrative expenses" mentioned in item (v) of the CVA calculation rules. For example, that
category of expenses may include:
(1) professional services (e.g.,  the services falling within CPC* 861, CPC 862 and
CPC* 863);
(2) computer related services (e.g., CPC 841, CPC 842*, CPC 843*, CPC 844*,
CPC 845, CPC 849);
(3) other business services (e.g., CPC 86501, 86502, 86504, 86505, 86506, 86509, CPC
8676 and CPC 872);
(4) banking services (e.g., CPC 81115 to 81119, CPC 8113, CPC 8112, CPC  81339*
and CPC 81199*);
(5) telecommunication services (e.g., subsectors (a), (b), (c), (d), (e), (f) and (g)); or
(6) travel services (e.g., CPC 641, CPC 642/3 and CPC 7471).
                                                     
645 A copy of Canada’s GATS Schedule of Specific Commitments is attached (Exhibit EC –19).WT/DS139/R
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6.1048  While Canada’s relevant national treatment commitments are subject to certain horizontal
limitations, as well as to some sector and/or mode specific limitations, none of those limitations
allows the application of the CVA requirements.
(b) The CVA requirement is a  "measure affecting  the supply of services"
6.1049  As shown above, the CVA requirements, including those contained in the Letters of
Undertaking, are "laws, regulations or requirements" for purposes of Article III of GATT. For the
same reasons, the CVA requirements also are "measures"  for purposes of GATS Article XVII646.
6.1050  The term "supply of a service" has a broad coverage647.  According to GATS
Article XXVIII(b) it includes "… the production, distribution, marketing, sale and delivery of a
service".
6.1051  The term "affecting" is not defined in the GATS. In EC –Bananas III , the Panel interpreted
that term as covering:
"[A]ny measure bearing upon conditions of  competition in supply of a service,
regardless of whether the measure directly governs or indirectly affects the supply of
the service."648
6.1052  The Panel’s interpretation was upheld by the Appellate Body, which noted that:
"[T]he use of the term ‘affecting’ reflects the intent of the drafters to give a broad
reach to the GATS. The ordinary meaning of  the word ‘affecting’ implies a measure
that has ‘an effect on’, which indicates a broad scope of application. This
interpretation is further reinforced by the conclusions of previous panels that the term
‘affecting’ in the context of Article III of the GATT is wider in scope than such terms
as ‘regulating ’ or ‘governing"'649 (footnotes omitted).
6.1053  In the present case, the CVA requirements "affect the supply of a service" because, as shown
below, they provide an incentive for the beneficiar ies to use services supplied within the Canadian
territory over like services supplied in or from the territory of other Members, thereby modifying the
conditions of competition between them.
(c) Canadian services are "like" the services of other Members provided through modes 1
and 2
6.1054  The distinctions drawn by the CVA requirements are based exclusively on the territory where
the service is supplied, and not on the nature and characteristics of the services themselves. Clearly,
however, the mere fact that a service is supplied within the territory of Canada does not, of itself,
confer to that service any attribute which makes it, by definition, "unlike" any service of anotherMember supplied through modes 1 or 2.
                                                     
646 The term "measure" is defined in GATS Article XXVIII (a) as comprising:  "any measure by a
Member, whether in the form of a law, regulation, rule, procedure, decision, administrative action, or any other
form."  In turn, GATS Article I:3 (a) provides in relevant part that:  "(a) ‘measures by Members’ meansmeasures taken by:  (i) central, regional or local governments; […]".
647See, e.g., Panel Reports on EC – Bananas III , supra  note 269, para. 7.281.
648 Ibid.
649 Appellate Body Report on EC –  Bananas III , supra  note 49, para. 220.WT/DS139/R
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6.1055  For example, if one of the beneficiaries commissioned a legal opinion on the WTO
compatibility of the Auto Pact, the services provided by a trade lawyer based in Brussels would not
be, by definition, "unlike" those provided by a trade lawyer of Ottawa.
(d) Services of other Members supplied th rough modes 1 and 2 are afforded "less
favourable treatment" than Canadian services
6.1056  The "no less favourable treatment" requirement set forth in paragraph 1 of GATS
Article XVII has been specified in paragraphs 2 and 3 of that Article, which state that:
"2. A Member may meet the requirement of paragraph 1 by according to services and
service suppliers of any other Member, either formally identical treatment or formally
different treatment to that it accords to its own like service and service suppliers.
3.  Formally identical or formally different treatment shall be considered to be less
favourable if it modifies the conditions of competition in favour of services or service
suppliers of the Member compared to like services or service suppliers of any other
Members."
6.1057  In the present case, the services of other Members receive "formally different treatment":
while Canadian services are always counted as CVA, the services of other Members are not counted
as CVA when supplied through modes 1 and 2.
6.1058  That difference in treatment confers a competitive advantage to Canadian services. Using
Canadian services makes it easier for the beneficiaries to reach the required level of CVA, and hence
to qualify for the Tariff Exemption, than using like services of other Members supplied through
modes 1 or 2.  Consequently, all other conditions being equal, the beneficiaries will give preference to
Canadian services over like services of other Members supplied through modes 1 or 2. Thus, servicesof other Members are afforded "less favourable treatment" than like Canadian services.
3. Canada's response
6.1059  Canada  responds as follows:
6.1060  Japan, but not the European Communities, claims that the MVTO and the SROs, by granting
duty-free treatment to qualifying manufacturers, contravene Canada’s national treatment obligationsunder Article XVII of the GATS.
6.1061  Article XVII:1 of the GATS provides:
"In the sectors inscribed in its Schedule, and subject to any conditions and
qualifications set out therein, each Member shall accord to services and service
suppliers of any other Member, in respect of all measures affecting the supply ofservices, treatment no less favourable than that it accords to its own like services and
service suppliers."
6.1062  According to the analytical framework established by the Panel in EC – Bananas III , in order
to establish a breach of Article XVII, all three of the following elements need to be demonstrated:
(i) the Member has undertaken a commitment in a relevant sector and mode of supply;
(ii) the Member has adopted or applied a measure affecting the supply of services in that
sector and/or mode of supply; and
(iii) the Member's measure accords to service suppliers of another Member treatment less
favourable than that it accords to the Member's own like service suppliers.WT/DS139/R
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6.1063  Japan has failed to establish the existence of any of these elements. It has failed to show the
existence of a specific commitment by Canada for wholesale trade services of motor vehicles, because
Canada has not made one; it has failed to show that the measures, insofar as they accord duty-free
treatment to certain imported vehicles, affect service suppliers in their capacity as service suppliers;and it has failed to show either that the measures modify the conditions of competition as between
Canadian services and service suppliers and like services and service suppliers of other Members, or
even that such like services and service suppliers exist.
(a) Canada has not undertaken a commitment in a relevant sector
6.1064  Canada’s specific commitments are those listed and bound in its GATS Schedule
650 on the
basis of the UN Provisional Central Product Classification  (CPC).651  According to Japan’s
argument, the services at issue are wholesale trade services of motor vehicles.  However, Canada has
not made a specific commitment in respect of wholesale trade services of motor vehicles.
6.1065  Wholesale trade services of motor vehicles is listed in the Provisional CPC as classification
61111:
Wholesaling and commission agents' services of passenger motor cars, motor buses and
motor coaches, motor lorries and trucks, over-the-road truck tractors, semi-trailers and
trailers.  (Goods classified in CPC 491, 492.)652
6.1066  Classification 61111 is one of several breakouts from classification 6111 “Sales of motor
vehicles”, which in turn forms part of Division 61 of the Provisional CPC, “Sale, Maintenance and
Repair Services of Motor Vehicles and Motorcycles”.653  A separate division, Division 62, covers
“Commission Agents’ and Wholesale Trade Services, Except of Motor Vehicles and Motorcycles ”
(emphasis added ).  Division 62 includes a classification for “Wholesale trade services”, classification
622.654
6.1067  Canada’s Schedule distinguishes between commitments in respect of “Wholesale trade
services”, and those in respect of “Retailing services”.655  Under “Wholesale trade services”, Canada
has made commitments only in respect of certain services in classification 622; that is, for certain
wholesale trade services other than of motor vehicles.656
6.1068  The commitment to which Japan refers, under CPC  6111, is listed in Canada’s Schedule of
Specific Commitments only under “Retailing Services”.  It is not listed under “Wholesale trade
services”.  Canada’s specific commitments therefore do not extend, and were not intended to extend,to wholesale trade services for motor vehicles. 
 In the absence of such a commitment, there can be no
breach of Article XVII of the GATS.
                                                     
650 Canada’s GATS Schedule , supra  note 641.
651 United Nations Statistical Office, Provisional Central Product Classification , UN
Doc.ST/ESA/STAT/SER.M/77 (New York: United Nations, 1991) (hereinafter “ CPC ”).  See relevant sections
in Exhibit CDA-9.  See e.g., EC – Bananas - Recourse to Arbitration by the European Communities under
Article 22.6 of the DSU , Decision by the Arbitrators, WT/DS27/ARB, 9 April 1999, para. 6.24.
652 Ibid., p. 189.
653 Ibid., p. 130.
654 Ibid., p. 131-134.
655 Canada’s GATS Schedule, supra  note 641, pp. 47-49.
656 Ibid., II.4.B, p. 47.WT/DS139/R
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(b) Duty-free treatment under the MVTO and the SROs does not affect the supply of
wholesale trade services
6.1069  As Canada has argued above, in respect of Article II of the GATS, Japan has failed to show
that the MVTO and the SROs, by providing duty-free importation of automobiles for qualifying
manufacturers, affects wholesale distribution trade service suppliers in their capacity as servicesuppliers.  Japan has therefore failed to show that th e measures affect trade in services and are thereby
covered by the GATS.  Japan has thus also failed to demonstrate the second element of a breach of
Article XVII of the GATS.
(c) The MVTO and the SROs do not accord less favourable treatment to like services and
service suppliers
(i) Japan has failed to identify like service suppliers
6.1070  Even if Japan could satisfy the first two elements to demonstrate a breach of Article XVII of
the GATS, it would still have to show that the measures accord less favourable treatment to Japanese
wholesale distribution service suppliers than to like Canadian service suppliers.
6.1071  In the case of automobiles, there are no like Canadian wholesale distribution service
suppliers.  As Japan itself has acknowledged, all of the wholesale distribution service suppliers for
mass-produced automobiles are juridical persons of other Members.
6.1072  The only Canadian supplier of wholesale trade services for passenger cars that Japan has
identified is Intermeccanica.  Even the European Communities has acknowledged that Intermeccanica
is not “like”, describing it as an “artisanal producer of replicas of racing cars”.  To the extent that it is
a wholesale distribution service supplier at all, it is not like Honda Canada or Toyota Canada or any
other of the commercial presences identified by Japan as wholesale distribution service suppliers.
Japan has therefore failed to satisfy the third element of the test in respect of  wholesale distribution
services for passenger cars.
6.1073  Japan has offered no evidence whatsoever to substantiate its claim that there are Canadian
suppliers of wholesale distribution services for buses or specialized commercial vehicles that are
advantaged by the duty-free treatment under the MVTO or the SROs.  Nor has it identified any likeJapanese service suppliers.  The services provided by distributors of automobiles are no more like the
services provided by the distributors of buses or specialized commercial vehicles than the goods that
they distribute are like. Even if there were like service suppliers, the measures would not modify the
conditions of competition among them, because, as Canada has argued in respect of Article II, there is
no such competition, due to the integrated structure of the motor vehicle industry.  Japan has failed to
make even a prima facie case regarding the third element of the test in respect of wholesale
distribution services for specialized commercial vehicles and buses.
(ii) Duty-free treatment does not modify conditions of competition because there is no
competition
6.1074  Article XVII:2 of the GATS provides that:
"A Member may meet the requirement of paragraph 1 by according to services and
service suppliers of any other Member, either formally identical treatment or formally
different treatment to that it accords to its own like services and service suppliers."
6.1075  Article XVII:3 of the GATS elaborates that:WT/DS139/R
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"Formally identical or formally different treatment shall be considered to be less
favourable if it modifies the conditions of competition in favour of services or service
suppliers of the Member compared to like services or service suppliers of any other
Member."
6.1076  Thus, unlike Article II of the GATS, Article XVII explicitly provides that the test of the
standard of treatment accorded by Members is whether it modifies the conditions of competition as
between the services and service suppliers of that Member and the like services and service suppliers
of any other Member.
6.1077  For the same reasons that the measures, insofar as they accord duty-free treatment to certain
imported vehicles, do not affect the conditions of competition in respect of Article II of the GATS,
they do not do so in respect of Article XVII of the GATS either. All of the Japanese subsidiaries that
Japan has claimed are wholesale trade service suppliers are part of integrated entities that compete
with one another for product sales at the retail level but not at the wholesale level.  Due to the
structure of the motor vehicle industry, there is simply no competition among wholesale distributiontrade service suppliers.
6.1078  Japan has therefore failed to demonstrate any of the three elements necessary to show a
violation of Article XVII of the GATS.
(d) Article XVII of the GATS – CVA requirements
6.1079  Japan and the European Communities also claim that the CVA requirement under the
measures is inconsistent with Article XVII of the GATS.  In order to establish a breach of
Article XVII in respect of the CVA requirement, the complainants must establish the same threeelements that Japan failed to establish in respect of duty-free treatment.
657  They cannot do so.
(i) Canada has limited commitments in relevant sectors and modes of supply
6.1080  The complainants have identified certain CVA eligible services in respect of which Canada
has scheduled a specific national treatment commitment under Article XVII of the GATS.  They are:
- CVA item (a)(iv)(I): maintenance and repair work on buildings, machinery
and equipment; (CPC 8861 to 8866);658
- CVA item (a)(iv)(K): engineering services, experimental work and product
development work  (CPC 8672); and
- CVA item (a)(iv)(G): fire and insurance premiums (CPC 8129) (identified
only by the EC).
Both complainants have also alleged Canadian commitments in respect of a wide range of services
allegedly constituting “general and administrative expenses” under CVA item (a)(v).
6.1081  Canada’s national treatment commitments in respect of many of these services are subject to
limitations inscribed in its Schedule of Specific Commitments.659
                                                     
657 (i) the Member has undertaken a commitment in a relevant sector and mode of supply;  (ii) the
Member has adopted or applied a measure affecting the supply of services in that sector and/or mode of supply;
and (iii) the Member's measure accords to service suppliers of another Member treatment less favourable thanthat it accords to the Member's own like service suppliers.
658 For CVA items, see MVTO 1998.  For CPC references, see supra  note 651.WT/DS139/R
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- In respect of “Engineering services ” (CPC 8672), Canada has limited its
commitments by scheduling limitations on market access.  The limitation is
that most provinces, including those where automobiles are produced –
Ontario and Quebec – require either permanent residency or citizenship for
accreditation.  These limitations apply in respect of modes of supply (1), (2),and (4).
- According to Article XX:2 of the GATS and the Explanatory Note for the
Scheduling of Initial Commitments in Trade in Services ,
660 a measure that is
scheduled in respect of Article XVI (market access) and that is also
inconsistent with Article XVII (national treatment) is to be regarded as a
scheduled limitation or qualification in respect of Article XVII as well.  Thus,
the provincial residency and citizenship requirements for engineering services,
although scheduled as market access limitations, limit Canada’s national
treatment commitments as well.
- In respect of “Insurance and insurance-related services” which includes the
“Non-life insurance services” (CPC 8129)  identified by the EC, Canada has
scheduled several mode 1 market access limitations to the effect that services
must be provided through a commercial presence.661  As noted above, these
limitations apply to national treatment as well as market access.
- Canada has also scheduled as a national treatment limitation in respect of the
mode 2 supply of insurance services (consumption abroad), its 10 per cent
excise tax on net premiums paid to foreign direct insurance providers on acontract against risk ordinarily within Canada.
662
6.1082  Three of the services identified by the European Communities and/or Japan as falling within
“general and administrative expenses” are also subject to relevant limitations:
- In respect of “Accounting, auditing and bookkeeping services (CPC 862),
Canada has scheduled as modes 1 and 2 market access limitations, provincialrequirements, (including in Ontario) that auditing services be supplied by a
commercial presence, and citizenship or residence requirements for
accreditation (including Quebec and Ontario respectively).  As noted above,
such limitations apply equally to Canada’s national treatment commitments.
- In respect of “Placement and supply services of personnel” (CPC 872),
Canada has scheduled as a mode 2 market access limitation a requirement that
services must be supplied through a commercial presence.  As noted above,
this limitation also limits Canada’s national treatment commitments.
- In respect of “Travel agency and tour operator services” (CPC 7471), Canada
has scheduled as mode 1 limitations on market access the requirements that inOntario, travel agency and wholesalers services must be supplied through a
commercial presence and that in Quebec travel agencies services must be
                                                                                                                                                                    
659 See Canada’s GATS Schedule, supra  note 641.
660 Scheduling of Initial Commitments in Trade in Services: Explanatory Note, MTN.GNS/W/164.,
3 September 1993 (Exhibit CDA-10).
661 Canada: Schedule of Specific Commitments, Supplement 4, GATS/SC.16/Suppl.4, 26 February
1998, p. 4 (Exhibit CDA-11).
662 Canada’s GATS Schedule, supra  note 641, Sec. II.7.A, p. 54.  See also CPC, supra  note 651,
pp. 141-142.WT/DS139/R
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supplied through a commercial presence.  As noted above, these limitations
also limit Canada’s national treatment commitments.
- In respect of “Travel agency and tour operator services” (CPC 7471), Canada
has also scheduled as mode 1 limitations on national treatment, residency
requirements in Ontario for travel agents and wholesalers and residencyrequirements in Quebec for travel counsellors.
(ii) The only modes of supply that may be “affected” are modes 1 and 2
6.1083  The second element that the complainants must show is that the measures affect the supply of
services in a sector and/or mode of supply.  Two of the four different modes by which a service may
be supplied under the GATS are entirely unaffected by the CVA rules.
6.1084  Pursuant to the measures, the calculation of CVA may include the costs of certain services if
those services are “executed in Canada” in the case of maintenance and repair work or engineering
services; “incurred in Canada” in the case of administrative and general expenses”; and, in respect of
insurance premiums, paid to a company authorized  to carry on business in Canada.  All of these
services may therefore be included in CVA calculations if they are provided by a commercialpresence of another Member in Canada (mode 3); or provided by the presence of foreign nationals in
Canada (mode 4).
6.1085  Accordingly, any “effect” that the measures may have on the supply of services can only be
on the supply of certain services according to modes 1 or 2.  The complainants’ claims must therefore
be limited to the alleged effect of the measures on the provision of the identified services, in respect of
which Canada has made an unlimited commitment for those modes.
(iii) The measures do not accord less favourable treatment to foreign services or service suppliers
6.1086  As previously noted, pursuant to Article XVII .3, the test for less favourable treatment under
Article XVII of the GATS is whether the measure at issue modifies the conditions of competition as
between the domestic services and service suppliers and those of another Member.  The measures at
issue do not do so.
6.1087  Although the only applicable modes of supply are modes 1 and 2, one of the relevant
categories of CVA eligible services – maintenance and repair work on buildings, machinery and
equipment – in most cases must be provided in Canada; that is, other than by those modes.  The
maintenance of buildings and, generally, the repair work on production machinery and equipment in
those buildings can neither be done across a border nor consumed abroad.  General Motors cannot
reasonably be expected to ship its Canadian factories or heavy equipment to Japan to be maintained orrepaired.
6.1088  Similarly, although Japan and the European Communities have identified hotel and other
lodging services (CPC 641) and food and beverage  services (CPC 642/3) as being disadvantaged by
the CVA requirement, in general, the sole criterion that a manufacturer will use in determining
whether to consume those services abroad will be whether it is geographically advantageous to do so.A General Motors employee visiting Canada will not stay in a hotel in Japan.  Nor will that employee
go to Europe to eat or arrange to have meals catered from Brussels.  These choices have everything to
do with geography.  They have nothing to do with CVA requirements.
6.1089  Any competitive disadvantages in the foreign provision of these services are inherent in their
foreign character.  They do not arise from CVA requirements.  Canada is under no obligation tocompensate for such disadvantages, as Note 10 to Article XVII:1 of the GATS makes clear:WT/DS139/R
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"Specific commitments assumed under this Article shall not be construed to require
any Member to compensate for any inherent competitive disadvantages which result
from the foreign character of the relevant services or service suppliers."
6.1090  Given the foregoing, the complainants’ claims mu st be limited to those services that (a) may
be provided from another Member into Canada or consumed abroad; (b) are not the subject ofrelevant limitations; and (c) are not inherently disadvantaged by their foreign character.  The
complainants’ claims are effectively limited to certain of the services that may constitute “general and
administrative expenses”.
6.1091  Any assertion that the conditions of competition between the foreign suppliers of these
remaining services and like services supplied in Canada are modified by the CVA requirement isdemonstrably incorrect. The general and administrative expenses related to those services are trivial
compared to other CVA eligible costs such as la bour, heating, lighting and power, taxes, pension
contributions and depreciation, all of which are necessarily incurred in Canada.
6.1092  Canada's  Figure 2  demonstrates that MVTO manufacturers exceed their CVA requirements
on the basis of labour costs alone.  So does the only relevant SRO manufacturer, CAMI.  Qualifyingmanufacturers readily satisfy their CVA requirements without including the cost of any services
relating to these general and administrative expenses.  It simply cannot be that qualifying
manufacturers would choose where to source those services on the basis of CVA eligibility.  The
inclusion of those services in the list of CVA-eligible expenses therefore does not affect the
conditions of competition as between Canadian and foreign service suppliers.  As the evidence makes
clear, most of the qualifying manufacturers exceed their CVA requirements on the basis of labour
costs alone.
6.1093  It is therefore inconsistent with the facts for the complainants to suggest that the CVA
requirements in the MVTO and SROs would cause qualifying manufacturers to prefer to obtain these
remaining services in Canada rather than ab road when they can readily satisfy their CVA
requirements without including the costs of those services.  Accordingly, the inclusion of those
services in the list of  CVA-eligible expenses does not in any way affect the conditions of competitionas between Canadian and foreign service suppliers.
4. Rebuttal arguments by Japan
6.1094  Japan rebuts as follows:
(a) Wholesale trade services
6.1095  Contrary to its allegations, Canada has made a specific commitment in respect of wholesale
trade services of motor vehicles. Canada has made a commitment in respect of services in
classification 6111 of the CPC.  The Government  of Canada acknowledged that it made this
commitment in its initial response.  Had the Govern ment of Canada wanted to limit its commitment to
retail sale services, as it now argues, it would have had to inscribe CPC subclass 61112, a subclass
that narrows the broad scope of coverage of classification 6111 to retail services.  However, theGovernment of Canada did not.  Therefore, Canada 's commitment covers wholesale trade services for
motor vehicles.
6.1096  Moreover, Canada inscribed on its schedule an express limitation to its commitments in
respect of wholesale trade services  for motor vehicles. This limitation, which relates to the sales of
motor vehicles in the province of Saskatchewan, is not relevant in the present dispute but confirmsthat the Government of Canada's admission that Canada's commitments extend to wholesale trade
services of motor vehicles.  It is simply due to the fact that accepting the Government of Canada's
argument would result in the contradictory situation where Canada limits a commitment that it has notWT/DS139/R
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even made.  Rather, the only logical proposition is that the Government of Canada deemed it
necessary to inscribe the above-noted limitation simp ly because it wanted to restrict the commitment
that it undertook with respect to wholesale trade services of motor vehicles.
6.1097  The Government of Canada in this context argued in its arguments and its response to
Question 30 of the Panel that there are no like Canadian wholesale service suppliers since (a)Intermeccanica is not a wholesale trade service supplier, and (b) even if it were, it would not be like
service suppliers since its size and sales volume are vastly different from Japanese wholesale trade
service suppliers that the Government of Japan has identified, both of which fall short of proving the
Government of Canada's argument.  The Government of Canada argues that Intermeccanica does not
import automobiles for resale or distribute them at all.   But the fact is that it is qualified for the Duty
Waiver, and it has the capability and opportunity to import automobiles duty free at any time, whereas
Japanese service suppliers are excluded from qualifying for the Duty Waiver.
6.1098  The difference in the scale of companies and in the nature of their products do not affect the
likeness of the service suppliers insofar as those service suppliers supply services listed in the same
CPC category: wholesale trade services of motor vehicles.  The Panel on EC – Bananas III made this
clear by stating when determining the likeness of green and ripened bananas that "the CPC
descriptions do not make any distinction between green and ripened bananas."  Those wholesale trade
service suppliers the Government of Japan identified and Intermeccanica should be therefore all
regarded as like wholesale trade service suppliers of motor vehicles, unless otherwise specified in
Canada's schedule.
6.1099  The Government of Canada also emphasized in th is context that the Government of Japan has
offered no evidence to substantiate the claim that there are Canadian wholesale trade service suppliersfor buses or specialized vehicles.  The defense, how ever, is no longer valid in the presence of the
factual information that Canada provided: in response to Question 2(4) from Japan, Canada listed
eight companies who have imported and distributed vehicles other than automobiles under the MVTO
and seven companies under an SRO, which are wholesale trade services suppliers of Canada and
certain other WTO Members (but not including Japanese like service suppliers) as shown in ExhibitJPN-50.  And since Japanese wholesale trade service suppliers have the capability to produce and
distribute buses or specified commercial vehicles as argued by Japan, as in its response to the
Question 34 of the Panel, and at least one Japanese service supplier (Hino Diesel Trucks (Canada),
Ltd. imports and distributes trucks in Canada without enjoying the benefit under the Duty Waiver,
Japan would like to simply repeat the claim made al ready.  In addition, the argument that no Japanese
service suppliers are treated unfavourably because there existed no Japanese service suppliers does
not affect the determination of the violation of the GATS
663, as confirmed in Canada – Periodicals. 664
(b) CVA
6.1100  Canada emphasizes in relation to Article XVII that it has not undertaken a commitment in
respect of wholesale trade services of motor vehicles, by claiming that because Canada has madecommitments only in respect of certain wholesale trade services other than those of motor vehicles.
This claim is directly in contradiction with the definition given in CPC Classification List, where
category 6111 “Sale of motor vehicles” includes explicitly category 61111 “Wholesale trade services
of motor vehicles” and category 61112 “Retail sales of motor vehicles.”  Canada’s commitment lists
CPC 6111 without further specification.
                                                     
663 The existence of the domestic service suppliers which may enjoy favourable treatment needs to be
proven with respect  to the buses and specified comm ercial vehicles, but under the MVTO 1998 domestic and
foreign companies may acquire the Autopact Manufacturers as discussed, subject to certain conditions.  Such a
possibility is sufficient for the establishment of the violation of Article XVII of the GATS.
664 Panel and Appellate Body  Reports on Canada – Periodicals , supra  note 280.WT/DS139/R
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6.1101  Moreover, Canada itself appears to think that it has committed wholesale trade services of
motor vehicles, since on page 47 of Canada’s Schedules of commitments, under the heading
Wholesale trade services, Canada lists as one of the limitations on market access “Sale of Motor
Vehicles (Saskatchewan): Services must be supplied through a commercial presence” (GATS/SC/16,
at page 47).  If Canada claims Wholesale trade services do not include sales of motor vehicles, whywas there the need to put the limitation on market access?
6.1102  The Government of Japan also alleges that the CVA requirement for the Duty Waiver
explicitly excludes from the CVA calculation the cost of certain services related to motor vehicles that
are not executed in or incurred in Canada.  Thus,  as in the case of parts, components and materials
(discussed above), the CVA requirement de jure favours those services supplied in Canada andaccords less favourable treatment to like services supplied under Mode 1 or Mode 2 from or in the
territory of other WTO Members.  Thus the Duty Waiver is, by virtue of this domestic content
requirement, inconsistent with Canada’s obligations under Article XVII of the GATS.
6.1103  In response, Canada points out that its commitments in certain relevant service sectors are
subject to limitations.  However, there are still other commitments in a number of relevant servicesectors which are not subject to limitations, including maintenance and repair work on buildings,
machinery and equipment, and thus Canada is not entirely exempted from its obligations under
Article XVII in those sectors.
6.1104  Second, Canada also fails to prove that the CVA requirement accords no less favourable
treatment to like foreign services or service suppliers. It argues that “any competitive disadvantages in
the foreign provision of these services are inherent  in their foreign character,” not arising from the
CVA requirement.  However, apart from any disadvantage which may result from the foreigncharacter of relevant services and service suppliers, the CVA requirement itself gives a competitive
disadvantage, which is not inherent to services supplied under Mode 1 or Mode 2 from or in the
territory of other WTO Members, including engineering design services, over like services supplied in
Canada.  Therefore, the CVA requirement can not be justified by Canada’s incorrect assertion that any
disadvantages in these sectors are inherent in their foreign character.
6.1105  Canada also asserts that the conditions of competition are not modified since “most of
qualifying manufacturers exceed their CVA requirement on the basis of labour cost alone” and thus
they are not induced by the requirements to purchase services supplied in Canada.  However, as long
as there is discrimination in favour of services supplied in Canada against like services supplied
outside of Canada, how the requirement is actually met does not matter, the CVA requirementconstitutes a violation of Article XVII of the GATS.
5. Rebuttal arguments by the European Communities
6.1106  The European Communities  rebuts as follows:
6.1107  The European Communities has argued that since only services supplied in Canada may be
computed as CVA, the CVA requirements provide an incentive to use services supplied within theCanadian territory, instead of like services of other Members supplied “cross-border” (mode 1) or
through “consumption abroad” (mode 2).  Therefore, they amount to formally different, and less
favourable, treatment of certain services, which are “ CVA eligible” to the detriment of foreign
services and suppliers.
(a) The limitations on Canada’s national treatment commitments do not cover CVA
requirements
6.1108  Canada admits that it has undertaken national treatment commitments in respect of certain
CVA-eligible services mentioned by the Eu ropean Communities (maintenance and repair,WT/DS139/R
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engineering, insurance, and services which Canada admits fall within “general and administrative
expenses” class).  However, Canada points out that its schedules also include limitations to the above
commitments and relies on such limitations to attempt refuting EC’s arguments.  Yet Canada has not
succeeded in its demonstration.
6.1109  Although Canada may have to some extent limited some of its relevant national treatment
commitments, that limitation does not authorise the application of CVA requirements or of other
additional requirements: in other words, it does  not mean that Canada’s commitments keep no
residual value at all.
6.1110  This is made clear by the example of residency (and nationality) requirements , limiting
national treatment on engineering services  and on two services falling within “ general and
administrative expenses ”.  Residency and nationality requirements or commercial presence
requirements may in practice exclude the possibility to provide services through modes 1 and 2.
However, this does not mean that those limitations may cover any kind of restrictions on national
treatment.  If a Member has scheduled a limitation requiring commercial presence or residence, but
nevertheless decided not to enforce it, it cannot impose “other limitations” instead.  The CVArequirements, however, will apply regardless of whether Canada enforces a commercial presence or
residence requirement in respect of relevant services.
6.1111  The EC’s position is confirmed by Addendum 1  to the Explanatory Note circulated during the
Uruguay Round by the Group of Negotiations on Services. Addendum 1  makes clear that a residence
requirement does not amount to an across-the-board exemption in respect of modes 1 and 2.  It spells
out that only the expression “unbound” ensures that there is absolutely no commitment in respect of a
given mode:
“It is correct to use the term “unbound” for a mode of supply in a given sector where
a Member wishes to remain free to introdu ce or maintain measures inconsistent with
market access or national treatment”.
665
6.1112  The use of the term “unbound” is contrasted in Addendum 1  with the possibility to use more
specific limitations, including residency requirements, which are considered to provide “the certaintythat there are no other limitations with respect to the cross-border mode” additional to those which the
terms “residence” or “nationality” express.
666
6.1113  It is clear from Addendum 1  that any limitations and requirements in respect of a given
service that are not listed, including CVA requirements, could only be covered if that service were
“unbound” as regards mode 1 and 2.  Irrespective of whether residence requirements may, as a matterof fact, render provision of these services through mode 1 or 2 impossible, they do not cover different
legal requirements.
6.1114  Another illustration of this principle is provided by limitations attached to insurance and
insurance-related services .  For example, if one has regard to mode 2 limitations, Canada’s national
treatment column includes a reference to an insuran ce subsector, that is “Direct insurance other than
life",
667 which is the CVA-relevant one.  As Canada admits, on that specific subsector there is simply
no commercial presence requirement, but only a tax (10 per cent) on non-resident insurers’ services.
Moreover, the very fact that a limited restriction on mode 2 exists in Canada’s national treatment
limitations column also means that no other  limitation is authorised, hence not either the one resulting
                                                     
665 See Scheduling of Initial Commitments in Trade in Services:  Explanatory Note, Addendum ,
MTN.GNS/W/164/Add.1, 30 November 1993, point 7 (Exhibit CDA-8).
666 Ibid.
667See Canada:  Schedule of Specific Commitments, Supplement 4, GATS/SC.16/Suppl.4, 26  February
1998.WT/DS139/R
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from the application of the CVA requirements.  Otherwise, there would have been no reason to
inscribe this narrower limitation in the national treatment column.
6.1115  In the light of the above Canada cannot pretend that its schedule of National Treatment
commitments includes “ relevant limitations” for the CVA requirements in respect of modes 1 and 2.
If this inference were correct, it would be sufficient for a Member to have attached even the slightestlimitation to its commitments to be effectively exempted from respecting them at all.
(b) The CVA requirements accord “less favourabl e treatment” to foreign services and
service providers
6.1116  Canada has also tried to refute that CVA requirements favour services supplied within the
Canadian territory by alleging that resort to domestic services depends on some inherent difficulty touse/supply services through modes 1 and 2.
6.1117  It cannot go unnoticed that by doing so Canada is actually questioning the very rationale of
the condition that CVA-eligible services must be carried on in Canada in order to be actually counted
as CVA: why is Canada defending and enforcing those requirements if Canadian services and service
providers are favoured anyway by objective characteristics of the services at issue or of the market?
6.1118  Apart from that basic contradiction, Canada’s defence is affected by some fatal flaws.
6.1119  First, Canada has again drawn too general a conclusion from certain isolated  elements of its
regime.  In fact, based exclusively on its analysis of the maintenance and repair services  and of hotel
services  (which follow within the CVA class of “general and administrative expenses”) Canada
argues that no  CVA requirements accord “less favourable treatment” within the meaning of Article
XVII of the GATS.
6.1120  Moreover, even for those two categories Canada is arriving at its conclusion on the basis of
largely incorrect assumptions.  As to maintenance and repair of equipment, it may be true that
shipment abroad of heavy machinery may prove less eased than repair on the spot, just as it is true
that modes 1 and 2 may be ruled out for building maintenance.  But what about e.g., electronic
equipment, whether employed in actual manufacturing processes, or in monitoring, or perhaps in the
administrative units of a factory?  How about software sent abroad for update or virus removal?  And,as regards hotels, let us suppose that a new import arrangement is to be negotiated by GM Canada
with a foreign supplier.  CVA rules on general and administrative expenses mean that if negotiations
take place in the supplier’s country, hotel expenses incurred by the relevant Canadian sales manager
will not be computed as CVA, while if the foreign supplier is invited to Canada his hotel expenses
will.
6.1121  Examples like those just quoted simply disprove that there is some “inherently domestic”
character even in the two only services to which Canada has referred.  The truth of the matter is rather
that normally all services referred to in the EC's arguments can be provided through mode 1 and /or
mode 2.  The European Communities has also provided several additional examples in its reply to
Panel’s Question 28
668.  They further confirm that resort to domestically provided services is not a
geographical necessity.
                                                     
668 Indeed, the possibility for these services to be provided by telecommunications makes them suitable
for provision through mode 1. According to para. 19 of Scheduling of Initial Commitments in Trade in Services:
Explanatory Note (MTN.GNS/W/164, 3 September 1993 (Exhibit CDA-10):  "(a) Cross border supply -
International transport, the supply of a service through telecommunications or mail, and services embodied inexported goods (e.g., a computer diskette, or drawings) are all examples of cross-border supply, since theservice provider is not present within the territo ry of the Member where the service is delivered."WT/DS139/R
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6.1122  Last, in its arguments Canada rightly recalls that it is under no GATS obligation to make up
for “any inherent competitive disadvantages which result from the foreign character of the relevant
services”.  This is true, but it certainly does not authorise Canada to interfere in the competitive
situation so as to adversely affect the competitive conditions of foreign services and providers.  The
European Communities is not requesting of Canada that it take any compensatory step.  It is simplyrequesting that Canada abstain from changing the conditions of competition to the detriment of
foreign services and suppliers.
6.1123  As regards Canada’s contention that CVA requirements may already be met on the basis of
labour costs only, it has already been refuted in respect of Article III:4 (see Section VI.B).
6. Response by Canada to the complainants' rebuttals
6.1124  Canada  responds as follows:
(a) Article XVII – CVA
6.1125  The European Communities acknowledges that residency, nationality and commercial
presence requirements “may in practice exclude the possibility to provide services through modes 1
and 2”.  The European Communities nevertheless contends that even if such requirements “render theprovision of services through modes 1 or 2 impossible, they do not cover different legal
requirements”.  While this may be true, it is beside the point.  The CVA cannot possibly have any
effect on the supply by modes 1 or 2 of engineering services, insurance services, accounting, auditing
and bookkeeping services, placement and supply services, travel agency and tour operator services or
any other services identified by the complainants if the provision of services by those modes is
already impossible.
6.1126  In their responses to the Panel’s Question 34, Japan and the European Communities also
argue whether some of the services are physically capable of being provided by modes 1 or 2 and the
extent to which some foreign service suppliers may be inherently disadvantaged by their foreign
character within the meaning of Footnote 10 to Arti cle XVII.  However, they have not identified the
services or suppliers that remain unaffected by the factors Canada has raised.  Japan, for example,
argues that engineering services are not inherently disadvantaged by their foreign character within themeaning of Footnote 10, while ignoring that such services are subject to residency and citizenship
requirements that render impossible their provision by modes 1 or 2.  Moreover, neither of the
complainants addresses the fundamental point that manufacturers can meet their CVA requirements
without including the cost even of those services that do remain in issue, after all the limiting factors
have been taken into account.
6.1127  Japan seeks to reverse the burden of proof when it argues that Canada “fails to prove that the
CVA requirement accords no less favourable treatment to like foreign services or service suppliers”.
However, the burden does not lie with Canada.  It lies with the complainants to show that the CVA
requirements do accord less favourable treatment to their services or service suppliers.  As Canada has
demonstrated, the CVA requirements do not do so.
(b) Canada has not undertaken a commitment
6.1128  Japan’s assertion that Canada has made a relevant commitment because “Canada’s
commitment lists CPC 6111 without further specification” ignores entirely that Canada’s commitment
is scheduled only in respect of the retailing services sector.
669  By scheduling its commitment only
under retailing services, Canada plainly indicated that it did not apply to other types of services.  In
                                                                                                                                                                    
669 See Canada’s response to Question 31 from the Panel.WT/DS139/R
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any event, Article XVII of the GATS imposes obligations in respect of specific – that is, positive –
commitments.  It is binding on Members only in respect of sectors and sub-sectors in which they have
made commitments.
6.1129  Japan refers to Canada’s scheduled market access limitation requiring a commercial presence
for the sale of motor vehicles in Saskatchewan as evidence that Canada’s wholesale trade servicescommitments extend to motor vehicles.  That comm itment should have been listed under retailing
services but was incorrectly listed under wholesale trade services.  The fact that it was placed under
wholesale trade services in error is confirmed by the scope of Canada’s wholesale trade services
commitments which are explicitly limited to CPC 622, which expressly excludes wholesale trade
services of motor vehicles.
670  Japan has offered no rebuttal for this explicit limitation.  Canada notes
that Japan has not referred to the market access limitation for “Automobile Dealers and Salvage
Dealers” in Newfoundland, which immediately follows the Saskatchewan limitation.  The
Newfoundland limitation is also listed in the wholesale trade services sector, although it very clearly
relates to retail services.  The fact that Canada inadvertently listed two limitations incorrectly cannot
be the basis for construing a Canadian commitment in the face of Canada’s express limitation of itswholesale services commitments to CPC 622, its scheduling of a CPC 6111 commitment only in
respect of the retail services sector.  To construe a commitment where Canada has not explicitly made
one would contravene Article XVII:1 of the GATS, which limits Members’ obligations to specific
commitments only.
(c) The measures do not accord less favourable treatment
6.1130  It is unclear if Japan has abandoned its Article XVII claim that duty-free treatment under the
measures adversely affects conditions of competition for suppliers of wholesale services for specifiedcommercial vehicles and buses.  Japan appears in its rebuttal to limit its Article XVII argument to
automobile importers only.  It states that “[t]he measure, which allows importation of automobiles by
service suppliers of certain Members including Canada duty-free, whereas importation of automobiles
by like service suppliers of other Members at MFN duty, constitutes a violation of Article … XVII”.
6.1131  As Canada has explained, there are no “like” Canadian automobile wholesale service
suppliers.  Apart from its assertions with respect to Intermeccanica, which are unsubstantiated and
wrong, as explained in Canada’s Response to the Panel’s Question 30,
671 Japan has failed to list any
such service suppliers let alone make out a prima facie case.
6.1132  In its response to the Panel’s Question 34,672 Japan makes an oblique reference to service
suppliers that distribute buses and specified commercial vehicles.  Without indicating the claim inrespect of which these service suppliers are relevant, Japan states that it has “insufficient information”
relating to them.  Japan indicates that there may be one Japanese truck service supplier but does not
specify what sort of services it supplies.  It then  contends that information as to the nationality of
Japanese  service suppliers is “uniquely in the hands of the Government of Canada” and should be
provided by Canada.  In effect, Japan seeks to reverse the burden of proof, arguing that there may beJapanese service suppliers and there may be discrimination against them.  Canada knows of no such
discrimination and has no responsibility to respond to such vague, unsubstantiated speculation.
6.1133  When Japan alleges that its service suppliers have been disadvantaged, the onus rests on
Japan to make out a prima facie case that this is so.
673  This includes identifying those of its service
suppliers that it alleges to be affected.  It cannot demand that Canada make its case for it.  Havingfailed to identify any alleged Japanese wholesale service suppliers of buses or specified commercial
                                                     
670 See Canada’s response to Question 31 from the Panel.
671 Canada’s response to Question 30 from the Panel.
672 Japan’s response to Question 34 from the Panel.
673 See Appellate Body Report on US – Wool Shirts , supra  note 283, p. 12 et seq.WT/DS139/R
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vehicles, Japan has failed to make out a prima facie case that the duty-free treatment under the
measures is inconsistent with Article XVII of the GATS.
7. Japan's follow-up to Canada's response
6.1134  As a follow-up to Canada's response, Japan  argues as follows:
6.1135  With respect to the Government of Japan's claim that the Duty Waiver by virtue of the
eligibility restriction is inconsistent with Article XVII of the GATS, the Government of Japan has
demonstrated at paragraphs 127-130 of its second written submission that Canada's specific
commitments cover wholesale trade services for motor vehicles, and that a Canadian wholesale trade
service supplier (i.e. Intermeccanica) is a "like" service supplier which is qualified for the Duty
Waiver and has the capability and opportunity to import automobiles duty-free.  Thus, theGovernment of Japan maintains that Canada, by virtue of the Duty Waiver, accords to Japanese
wholesale trade services and service suppliers of motor vehicles, less favourable treatment than it
accords to its own like services and service suppliers.
6.1136  The Government of Japan has also demonstrated in Exhibit JPN-50 and paragraph 131 of its
second written submission that there exist several like domestic service suppliers which compete withat least one wholesale trade service supplier of Japanese origin (i.e. Hino Diesel Trucks (Canada),
Ltd.) in the case of specified commercial vehicles covered by the Duty Waiver.
6.1137  With respect to the Government of Japan's claim that the CVA is inconsistent with
Article XVII of the GATS, the Government of Japan has demonstrated in its response to Question #28
of the Panel and its second written submission that services covered by the CVA and Canada's
specific commitments could be supplied through mode 1, that these foreign services supplied from
outside Canada, either through mode 1 or mode 2, are excluded from ever being included in the CVAcalculation, and that the disadvantages caused by the CVA requirement are not inherent from their
foreign character.  Accordingly, as in the case of  parts, components and materials, the CVA, which
itself is a mandatory requirement, expressly discriminates against the supply of like foreign, including
Japanese,  services in favour of like domestic services.  Accordingly, it violates Canada's obligations
under Article XVII of the GATS.
8. The European Communities' follow-up to Canada's response
6.1138  As a follow-up to Canada's response, the European Communities  argues as follows:
6.1139  In its response to the complainants' rebuttals, Canada argues that the costs of CVA-eligible
services are counted irrespective of whether the service supplier is Canadian or foreign.  This
statement is misleading and irrelevant at the same time.  It is misleading, because it is only true inrespect of supply trough commercial presence or movement of natural persons modes.  It is irrelevant,
because as both the European Communities and Canada agree, EC's claim under Article XVII
concerns modes 1 and 2 only.
6.1140  Canada seems to concede that residence requirements do not cover other limitations on
national treatment commitments.  Contrary to Canada's view this is not beside the point, but rather the
basic point of the EC's claim for the whole range of the services that the European Communities has
mentioned in its presentation of its claims
6.1141  The truth is that the premise of Canada's conclusion is false.  The provision by modes 1 or 2
of the services listed by the European Communities is not "already impossible".  Canada has
mentioned certain limitations in respect of a limited range of the services at issue and has tried toWT/DS139/R
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draw a general conclusion from them.  The European Communities has replied to Canada's specific
objections.674  The other services are clearly unaffected by the factors that Canada has mentioned.
6.1142  In any event, it must be recalled that the European Communities is not required to show that
the CVA requirements have any actual effects.  Article XVII is concerned with "conditions of
competition", not with the actual effects of a measure, and a measure is inconsistent with it if itcreates less favourable conditions for like service suppliers of foreign origin.
675  T h e  C V A
requirements would apply even if Canada decided not to enforce its commercial presence and
residency requirements and therefore modify the conditions of competition.
9. Canada's follow-up response
6.1143  Canada  responds as follows:
(a) The measures do not deny national treatment to wholesale distribution trade service
suppliers
6.1144  At this late stage in the proceedings, Japan remains unable to demonstrate any of the three
elements required to make out a violation of Article XVII of the GATS concerning the suppliers of
wholesale distribution trade services.  Those elements are:  (i) a commitment in a relevant sector andmode of supply;  (ii) a measure affecting the supply of services in that sector and mode of supply;
and (iii) less favourable treatment accorded to services or service suppliers of another Member by the
measure.
6.1145  With respect to the first of these elements, Ja pan continues to attempt to hold Canada to a
commitment that Canada has not made.  Japan claims that in order for Canada to have limited its
motor vehicles services commitment to retail services, Canada would have had to limit its
commitment to subclass 61112 of the CPCs.  Japan's claim completely ignores that Canada'scommitment is expressly limited to retail services by its location in the "Retailing services"
sector/subsector.  Japan's claim seeks in effect to rewrite Canada's schedule of specific commitments.
It runs directly contrary to the principle, confirmed by the Panel in EC – Bananas III , that
commitments are binding on Members only in the sectors and sub-sectors in which they have made
commitments.
676  By scheduling its specific commitment in the "Retailing services" sector only,
Canada limited its commitment to that sector.  It is not for Japan to ignore the sectoral limitations on
Canada's commitments in order to hold Canada to an obligation to which it has not specifically agreed
to be held.
6.1146  As to the second element, whether the duty-free treatment affects the supply of services, it
does not.  All of Canada's arguments on this issue in Article II of the GATS are equally relevant hereand Canada relies on those arguments.  There is nothing new to say that Canada has not already said
under Article II.
6.1147  In respect of the third element, Japan has still failed to demonstrate the existence of "like"
service suppliers.  Japan claims that the difference in the scale of companies and the nature of their
products does not affect their likeness as service suppliers.  Japan continues to insist against all reasonthat Intermeccanica, an artisanal manufacturer that neither imports nor distributes vehicles at all, is
somehow like Toyota Canada or Honda Canada when it comes to the supply of wholesale distribution
trade services.
                                                     
674 EC's argumentation and response to Question 28 from the Panel.
675 Appellate Body Report on EC –  Bananas III , supra  note 49, para 244; Panel Report on EC –
Bananas III (USA) , supra  note 269, paras. 7.320 and 7.337.
676 Panel Reports on EC – Bananas III , supra  note 269, para. 7.305.WT/DS139/R
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6.1148  The passage Japan cites from the EC – Bananas III  Panel Report677 in support of its
contention addresses only whether banana ripening  should be considered a part of wholesaling.678  It
has nothing to do with the likeness of service suppliers.  Even if Intermeccanica did import vehicles,
its complete production run consists of less than 20 hand-built cars each year.  Its entire duty-free
import entitlement would be approximately what Honda Canada distributes in half-an-hour.Intermeccanica cannot by any measure be considered a like service supplier to the Japanese
automotive giants.
6.1149  Japan also relies on its Exhibit JPN-50, for the proposition that the measures discriminate
against Japanese suppliers of wholesale trade services in trucks or buses.  Keeping in mind that
Article XVII of the GATS concerns national treatment, JPN-50 actually demonstrates that nine of thetwelve beneficiaries identified are non-Canadian, a nd that five of them are European.  JPN-50 offers
no evidence that Canada accords less favourable treatment to the service suppliers of other Members
than it does to its own like service suppliers.  On the contrary, JPN-50 helps to explain not only why
the European Communities did not make an Article XVII claim but also why it limited its Article II
claim to automobiles only.  JPN-50 demonstrates th at in fact as well as law, non-Canadian and non-
US manufacturers do qualify for duty-free treatment under the measures.
VII. QUESTIONS
679 AND REPLIES
A. FACTUAL ARGUMENTS OF THE PARTIES
1. Questions and replies relating to factua l arguments on the measures at issue
(a) Question 12 (the ratio requirement)
The Auto Pact and the MVTO 1998 set the ratio re quirement at 75:100 for automobile manufacturers
benefiting from the duty waiver.  In light of this, could Canada please clarify why an explanation of
the "Auto Pact Background", found on an Industry C anada website, says this ratio is 95:100? (See,
Exhibit EC-20.)
(i) Reply from Canada
7.1 The minimum allowable ratio requirement is 75:100.  The average of the actual ratio
requirements for the four MVTO automobile manufacturers is approximately 95:100.
(b) Question 36 (the "actual" ratio requirements for MVTO automobile manufacturers)
In its reply to question 12 from the Panel following the first substantive meeting, Canada writes:
“The minimum allowable ratio requirement is 75:100.  The average of the actual ratio requirementsfor the four MVTO automobile manufacturing comp anies is approximately 95:100.”  Could Canada
please clarify what it means by “actual ratio requirements” and indicate in what instrument(s) this
average actual ratio requirement for the four  MVTO automobile manufacturers can be found.
(i) Reply from Canada
7.2 The "actual ratio requirement” for each MVTO  automobile manufacturer was determined on a
company-by-company basis for each class of vehicle, and represents the production to sales ratio for
that company during the base year (August 1, 1963 through July 31, 1964), as confirmed by audit.
                                                     
677 Panel Reports on EC – Bananas III , supra  note 269, para. 7.292.
678 Ibid., paras. 7.287 and 7.293.
679 Unless otherwise indicated, Questions are those put forward by the Panel.WT/DS139/R
WT/DS142/RPage 256
Each company was informed of the amount it had ach ieved in the base year.  This is the ratio that
each company must maintain in order to qualify each year as an MVTO beneficiary.
7.3 The actual amounts for the four automobile manufacturers are confidential information, and
cannot be released without the express permission of the companies.  The amounts range from a ratio
in the low-80s to 100, to a ratio in the high-90s to 100.  The average of the four amounts isapproximately 95 to 100.  There is no statutory inst rument setting out the ratio requirement for each
company.
(c) Question 37 (SROs – documents and beneficiaries)
Memorandum D-10-16-2 (para. 3) indicates that the Appendix listing manufacturers qualifying for
the duty waiver by SROs will be updated as required.
• Does this mean that the list may be expanded, a nd if so, how? If not, would updates be geared
toward eliminating SRO companies?
(i) Reply from Canada
7.4 The statement does not mean the list may be expanded.  It means that the list would be
updated if any changes to the list of qualified manufacturers were required.  For example, updates
would be required to reflect a change in a company’s name, or to remove companies that have ceasedmanufacturing.
• Does Exhibit EC-6, on the SROs (along with Summary Table of SROs in Exhibit EC-7)
contain in their current form all SROs in force?  If not, please supply copies of missing ones.
(ii) Reply from Canada
7.5 The European Communities stated that it has pr ovided evidence concerning all the SROs.
However, Exhibit EC-6 does not contain the current form of all the SROs still in force.  Exhibit EC-6
was apparently based on Memorandum D-10-16-2.  That memorandum lists the SROs for every
company still manufacturing, but it does not include companies that are still in existence but no longer
manufacturing.  The orders for those companies remain  in force, and are publicly available, but they
are not in use.  An order would only be repealed if the company concerned has ceased to exist, for
example as a result of bankruptcy.
7.6 Canada notes that the European Communities appears to be taking the position that the orders
themselves are the only evidence it needs to file in order to make a prima facie case that the SROs are
inconsistent with Canada’s WTO obligations.  Obviously, Canada disagrees, but given the European
position, and the fact that all the orders are publicly  available, it was for the European Communities to
file copies of every SRO it wanted the Panel to consider.  It is now past the deadline set by the Panel
for the submission of new evidence, and the European Communities has failed to provide even themost basic elements of proof in respect of the SROs that it has not provided.  Nevertheless, given the
Panel’s request, Canada is collecting all the missing orders, and will provide them no later than the
Second Substantive Meeting.  Canada submits, however, that these orders should not be considered as
part of the record before the Panel.WT/DS139/R
WT/DS142/R
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• Could Canada please indicate which of th e SRO beneficiaries are Canadian owned or
controlled.
(iii) Reply from Canada
7.7 Canada does not have this information readily available.  This is because the Government of
Canada does not   collect this information for the purposes of administering the SROs:  the ownership
and control of SRO companies are  irrelevant to their status under the Auto Pact.  However, some of
this information may be obtained by conducting searches of the companies’ reports filed with
provincial securities regulation bodies.  Provincial laws require publicly-traded companies to file
reports annually regarding ownership and other information.  Canada explained to Japan during the
consultations that this was the only way this information could be obtained.
7.8 In contrast, privately-owned companies are under no obligation to report any information
concerning the ownership of their shares.  This information can only be obtained directly from the
companies, assuming they are willing to provide it.  Private companies that are subsidiaries of
publicly-traded companies are an exception to this general rule.  Information concerning their
ownership can be obtained through the publi c filings of their parent corporations.
(d) Question 38 (Letters – comprehensiveness of exhibits)
Does Exhibit EC-2, which includes letters to the Mi nister of Industry from General Motors of Canada,
Ltd., Ford Motor Co. of Canada, Ltd., Chrysler Canada, Ltd. and American Motors (Canada), Ltd.,
contain all the letters written in 1965 by vehicle manufacturers to the then Canadian Minister of
Industry (which Japan and the EC refer to as “Letters of Undertaking”)?
(i) Reply from Canada
7.9 No.  For example, Volvo (Canada) Ltd. also supplied a letter.680
• Have these same companies written subsequent letters updating the 1965 ones?  If so, please
provide copies.
(ii) Reply from Canada
7.10 All four companies provided subsequent lette rs in 1968.  These letters do not update the
original letters, contain no undertakings of any sort, and are irrelevant.  They express the companies’opinions as to how well the system had worked in the first three years, and in some cases make
suggestions for future improvements.  In view of the Panel’s question, Canada has requested
permission from the companies to provide them to the Panel.
(iii) EC Comments on Exhibits submitted with Canada's Reply
7.11 With reference to Exhibit CDA-22, the European Communities argues that, as already
explained by the European Communities, the Letters of Undertaking submitted by the Big Four in
1965 envisaged that the Canadian Government and the beneficiaries would enter into new
“discussion” before the end of model year 1968. The Big Four testified  to the US Congress that in the
course of those “discussions” the Canadian Government requested them to sign further letters of
undertaking providing for an additional increase in CVA.
7.12 The Big Four did not accede to those requests. The letters contained in Exhibit  CDA – 22
were submitted by the Big Four in place of the letters of undertaking requested by the Canadian
                                                     
680 Attached as Exhibit CDA-18.WT/DS139/R
WT/DS142/RPage 258
Government. The Big Four’s reluctance to submit any further undertakings confirms that they did
regard the Letters of Undertaking submitted in 1965 as imposing binding requirements upon them,
rather than as a mere statement of the “results” they “hoped to achieve”681.  That distinction is clearly
made in the following passage of the letter submitted by Ford Motor Company of Canada, Ltd.:
7.13 “While we are opposed to any further letters of undertaking with respect to production
commitments, we do believe that additional increases in our future Canadian production will take
place, subject, of course to the normal uncertainties …”
• Have other vehicle manufacturers signed letters of this nature as well?  If so, please provide
copies.
(iv) Reply from Canada
7.14 No other manufacturers provided updating letters.  Other manufacturers did provide original
letters.  Canada submits these letters are irrelevant, because they are not requirements within the
meaning of Article III:4.  Nevertheless, Canada will attempt to provide all the letters, because the
Panel has asked for them.  They are confidential information and cannot be released without the
permission of the originating company.  Canada has requested such permission.  Letters provided willbe submitted as confidential information within th e meaning of section 3 of the Working Procedures
of the Dispute Settlement Understanding .
(v) EC Comments on Exhibits submitted with Canada's Reply
7.15 With reference to Exhibit CDA-20, the European Communities argues that with only one
exception
682, all the Letters of Undertaking included in th is Exhibit are drafted in identical terms. This
confirms that, far from being unilateral acts of the beneficiaries, the Letters are little else than an
official form filled in by the beneficiaries at the request of the Government.
7.16 With the same exception, all the Letters were submitted after the conclusion of the Auto Pact
in 1965,  some of them as a late as in 1984. Nevertheless, all of them continue to refer to the
“objectives” of the Auto Pact as the reason for giving the additional CVA commitments. Despite the
carefully chosen language, that reference confirms the linkage between the submission of the Letters
and the tariff benefits provided for in the Auto Pact.
7.17 It is worth noting that the Letters place the obligation to comply with the additional CVA
requirement on the same level as the obligation to  comply with the legally binding terms of the
MVTO or of the relevant SRO. Thus, by way of example the Letter of Undertaking submitted by
Collins Manufacturing Company Ltd. reads as follows in relevant part:
“… we are pleased to advise that our company undertakes  to meet the
conditions stipulated by Moto r Vehicles Tariff Order 1965.
“… our company also undertakes : …
1. To achieve an increase in Canadian Value Added… “ ( italics
supplied )
                                                     
681 See Canada’s response to Question 17 from the Panel.
682 The remaining Letter (submitted by Kaiser Jeep Canada Ltd) is very similar to the Letters submitted
by Canada Chrysler Ltd. and American Motors(Canada) Ltd. (Exhibit  EC–2).WT/DS139/R
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Page 259
7.18 It is also worth nothing that, like some of the Letters submitted by the Big Four, all the Letters
in this Exhibit include the additional undertaking to:
“… report to the Minister of Industry, Trade and Commerce such
information as the Minister requires pe rtaining to progress achieved by our
company, as well as to report the plans we make to fulfil our obligations
under this letter .” (emphasis added )
7.19 Furthermore, the Letters state that the beneficiary:
“understands that the Government w ill conduct an audit each year with
respect to the matters described in this letter”.
(e) Questions 39 (annual declarations by beneficiaries)
Under the MVTO 1998, each model year the beneficiar ies must submit, before they make their first
importations, a signed declaration to the Minister of National Revenue, in which they undertake for
the model year to comply with the CVA and rati o requirements (stipulated in MVTO 1998).  Could
Canada please indicate whether any of these undertakings in the signed declarations have gone above
the production-to-sales ratio and C VA requirements of the MVTO?
(i) Reply from Canada
7.20 Signed declarations do not contain any undertakings.  There are no figures contained in the
statement, which is in a form of declaration that is prescribed by the MVTO and is identical for all
companies.  The companies just fill in the blank spaces to identify the company, signing officer, year
of importation, etc.  The declaration contains only the following statements regarding the production-
to-sales ratio and CVA requirements:
(c)  the ratio of the net sales value of the vehicles of that class that are to be produced
in Canada by the company to the total net sales value of all vehicles of that class to be
sold for consumption in Canada by the company during the period August 1, 19... to
July 31, 19.... will be equal to or higher than the ratio achieved by the company in thebase year; and
(d)  the vehicles of  that class that are to be produced in Canada during the period
August 1, 19.... to July 31, 19.... will have a Canadian value added that is equal to or
greater than the Canadian value added in respect of all vehicles of that class that were
produced by the company in Canada during the base year.
A sample copy of the declaration is attached as Exhibit CDA-19.  It can also be found in Exhibit JPN-
7 (at page 7-6); an older version is available in Exhibit EC-9, as page 10 of Memorandum D-10-16-3.Other early versions can be found in the earlier versions of this memorandum, which form part of
Exhibit CDA-7.
• Have vehicle manufacturers operating under SROs submitted declarations in which they
undertake to go above their respective production-to-sales ratio and CVA requirements?
(ii) Reply from Canada
7.21 No.  There is no requirement in the SROs for manufacturers to submit any declarations,
annually or otherwise, and nor do they do so.WT/DS139/R
WT/DS142/RPage 260
7.22 Canada would draw the Panel’s attention to paragraph 6 of Memorandum D-10-16-2, which
states that companies must file a bond or renewal notice annually, in accordance with the terms of
their respective orders.  Neither the bond nor the “renewal notice” is a declaration.  The bond is a
security deposit for duties waived that might have to be collected at the end of the importation period
in the event of a failure to meet the legal requirem ents in the order.  Some companies have provided
bonds with expiry dates; in those cases, when the bond expires, the company must provide a new
bond or send a notice renewing the old one.
(f) Question 40 (annual reports by beneficiaries)
The arguments indicate that departmental memoranda spell out conditions for duty remission and
require manufacturer-beneficiaries to submit  reports demonstrating compliance with MTVO
conditions (and Letters of Undertaking, according to the EC) or their individual SROs, with these
reports detailing production costs, output and sales.
Are there relevant departmental memoranda othe r than D-10-16-3 (concerning the MVTO 1998) and
D-10-16-2 (concerning SROs)? If so, please provide copies.
(i) Reply from Canada
7.23 All the relevant memoranda have been filed as exhibits for the Panel.  Japan and the European
Communities between them have provided the current versions of memoranda D-10-16-2 and D-10-
16-3.  Canada has provided all previous versions of these memoranda (see Exhibits CAD-7-1, 7-3, 7-
4, 7-5).  The only other memoranda that deal even indirectly with the MVTO and SROs are D-10-16-
1 and D-17-3-1 (Exhibits CDA-7-7 and 7-8).
• Is it accurate to say that Revenue Canada audits the manufacturers’ reports after the close of
each model year, and if so, for what purpose?
(ii) Reply from Canada
7.24 Revenue Canada receives copies of the reports at the conclusion of each model year.  It then
conducts an audit for the purpose of ensuring that the legal requirements of the MVTO 1998 or the
applicable SRO have been satisfied.
7.25 Neither Revenue Canada, nor any other department, conducts an audit or other verification of
any figures that may be submitted in respect of the additional letters.  Industry Canada has in the past
reviewed the figures submitted in respect of the additional letters, but it no longer does so.  If a
company provides the information, it is simply filed as reported.  No other action is taken, regardless
of whether the numbers provided indicate that the company has met the letter amounts.
• Have any of the manufacturers operating under the MVTO indicated in their annual reports
that they have gone above the production-to-sales  ratio and CVA requirements of the MVTO? If
so, do these indications correspond to what had been undertaken in the signed declarations for
the relevant time-periods?
(iii) Reply from Canada
7.26 Respecting the first part of the question, companies in their annual reports state their actually
achieved ratio and CVA, without reference to whether the required amounts have been exceeded.
(See the sample reporting forms at Exhibit EC- 14.)  However, as a matter of fact, the MVTO
companies generally report figures far in excess of their requirements.WT/DS139/R
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7.27 Respecting the second part of the question, Canada refers the Panel back to Paragraph 1 of
Canada’s answer to Question 39, and, in particular, to clauses (c) and (d) of the prescribed form of
declaration.  As is clear from these clauses, the ratio and CVA requirements referred to in the
declaration are always the ratio and CVA achieved by the company in the base year.  Nothing is
undertaken in the declaration; the company only declares its intention to meet its base-yearrequirements.  Contrary to what is implied in th e second part of the question, there can never be a
difference between the ratio and CVA referred to in a declaration and the ratio and CVA requirements
of the MVTO.
• Have any  of the manufacturers operating under the SROs indicated in their annual reports
that they have gone above the production-to-sales ratio and CVA requirements of their SROs?  If
so, do these indications correspond to what had been undertaken in the signed declarations forthe relevant time-periods?
(iv) Reply from Canada
7.28 The answer to the first part of this question is the same as above:  companies report just the
amounts they have achieved, without reference to the amounts required.
7.29 Respecting the second part of the question, Canada refers the Panel to paragraph 3 of
Canada’s answer to Question 39, and reiterates that manufacturers covered by SROs are not required
to file declarations, annually or on any other basis.  The legal ratio and CVA requirements are always
specified in the applicable SRO.
(g) Question 41 (claims – the measures and products concerned)
Could the EC and Japan please clarify the scope of the measures and products concerned thereby of
their claims under GATT Article I and GATS Article II.
(i) Reply from Japan
7.30 Throughout its argument, including its claims under GATT Article I and GATS Article II, the
Government of Japan has consistently referred to the measures at issue as the "Duty Waiver".  Canada
implements and applies the Duty Waiver through domestic legislation, regulations, statutoryinstruments, departmental memoranda and administrative practices.  More specifically, Canada
implements the Duty Waiver  pursuant to:  (i) section 115 of the Customs Tariff  and section 23 of the
Financial Administration Act ;  (ii) the Motor Vehicles Tariff Order, 1998  (MVTO 1998);  (iii) letters
of undertaking signed by individual manufacturer s upon the demand of the Government of Canada;
(iv) Special Remission Orders (SROs) providing for the remission of customs duties on motorvehicles imported by specified manufacturers;  (v) departmental memoranda relating to the MVTO
1998 and the SROs;  and (vi) implementing measures taken thereunder.  The Government of Canada
also exercises administrative discretion regarding certain aspects of the Duty Waiver.  The scope of
the products concerned is all products covered by the Duty Waiver.
(ii) Reply from the EC
7.31 The claims submitted by the European Communities under GATT Article I and GATS Article
II concern the category of "automobiles", as defined in the MVTO 1998.
7.32 The measures concerned are the Auto Pact, the MVTO 1998 and the SRO issued to CAMI.
7.33 All the other claims submitted by the European Communities concern the three categories of
motor vehicles defined in the MVTO 1998 (i.e. "automobiles", "specified commercial vehicles" and"buses").WT/DS139/R
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(h) Question 1 from the EC (SRO beneficiaries)
Canada has referred to CAMI (twice) as being the only "relevant " SRO beneficiary in connection with
claims regarding the CVA requirements raised by the EC under GATT Article III:4 and GATS Article
XVII.  The EC’s Panel request, however, covers all SR Os.  What is the basis for Canada’s assertion
that CAMI is the only "relevant " SRO beneficiary in this dispute.
(i) Reply from Canada
7.34 Both Japan and the European Communities raised specific allegations only with respect to the
Canadian Big Three and Volvo (Canada) as MVTO beneficiaries, and to the two SRO automobile
manufacturers, namely CAMI Automotive Inc. and Intermeccanica.  That company was described by
the European Communities as, "an artisanal manufacturer of hand-built replicas of famous racingcars."  Canada, as the defending party, is not required to rebut the contents of the EC’s panel request,
but only the evidence presented to the Panel.  Accordingly, Canada’s rebuttal focuses on the Big
Three, Volvo (Canada) and CAMI.
(i) Question 2 from the EC (Auto Pact and measures at issue)
Canada has asserted that the Auto Pact is not a "measure ".  Does that mean that, in Canada’s view,
the Auto Pact is not a "measure " within the scope of this dispute?  If so, why?
(i) Reply from Canada
7.35 Yes, that is exactly what it means.  In Canada, treaties are not self-executing.  The provisions
of a treaty must be implemented in new or existing domestic law in order to be enforceable.
Accordingly, the Auto Pact itself is not a Canadian measure.  Rather, the measures are the domestic
laws, regulations and requirements implementing the Auto Pact; that is, the MVTO 1998 and the
various SROs.
(j) Question 3 from the EC (SROs'  relation to the Auto Pact)
Canada has indicated that the only measures in dispute are those that "implement " Canada’s
obligation under the Auto Pact, i.e. the MVTO 1998 and the SROs.  However, the EC understands
that the Auto Pact does not require the adoption of SROs, which therefore are purely unilateral
measures.  Nor does the Auto Pact require the gran ting of a tariff exempti on for imports from third
countries.  Is the EC’s understanding correct?
(i) Reply from Canada
7.36 Paragraph 3 of Annex A to the Auto Pact provides for the issuance of SROs.  It states: "The
Government of Canada may designate a manufacturer not falling within the categories set out above
as being entitled to the benefit of duty-free tr eatment in respect of the goods described in this
Annex.
683
(k) Question 5 from the EC (CVA and cost of sales for U.S. Big Three and Volvo)
Canada's Figure 2 shows that [sic] the total CVA reported by the US Big Three and Volvo as well as
the labour CVA of those manufacturers.  Could Ca nada complete that information with the aggregate
total cost of sales in Canada of those producers?
                                                     
683 See Exhibit EC-1, JPN-1.WT/DS139/R
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(i) Reply from Canada
7.37 The information is complete as presented.  Cost of sales is not relevant to those companies’
CVA requirements, which were calculated on the basis of their performance in the 1963-64 base year.
(l) Question 1 from Japan (Canada's response to factual assertions)
In its initial responses, the Government of Canada did not respond in full to the factual assertions
made by the Government of Japan and the European Communities.  In this connection, the
Government of Canada stated as follows:
The fact that Canada does not dispute a particular contention or allegation of Japan or the EC is not
to be taken as an admission that any such contention or allegation is accepted as true.  Many of the
contentions are either irrelevant to this dispute or are bald assertions made without any proof, and
are therefore not to be taken into account by the Panel in making its decision.  Canada will focus on
the main arguments and the matters the Panel needs to have before it in order to arrive at a correct
decision.
To the extent that Canada is of the view that a fa ctual assertion is irrelevant to the dispute or is
unsupported, it should indicate its views expressly to the Panel.  Therefore, the Government of Japanrequests the Government of Canada:
• to identify the factual statements in the init ial arguments of Japan and the European Communities
that Canada views as being irrelevant to this di spute and explain the nature of the irrelevancy.
• to identify the factual statements in such ar guments that Canada views as being unsupported, and
provide reasons for such views.
• to identify the factual statements in such argum ents that Canada disagrees with and explain such
disagreement and, if necessary, provide rebuttal evidence.
(i) Reply from Canada
7.38 Japan’s question demonstrates a fundamental misunderstanding of the nature of dispute
settlement under the DSU.  It is well settled in WTO jurisprudence that as complaining parties, Japan
and the European Communities must put forward the factual and legal arguments to establish their
claims.  Only once the complaining parties have presented sufficient evidence to establish apresumption of a WTO violation does the burden shift to Canada as the defending party to rebut the
presumptions
684 
7.39 As Canada has made clear, neither Japan nor the European Communities has established a
prima facie case of violation of any WTO obligation by Canada.  Therefore, the burden has not shifted
to Canada to rebut their contentions and Canada is not under any legal burden to provide rebuttalevidence.
7.40 Nevertheless, throughout its argumentation, Canada demonstrated the factual and legal errors
of the cases put forward by Japan and the European Communities.  It noted where the complainants’
allegations were irrelevant or unsupported and provided ample evidence to rebut those claims.  Japan
need only look at the Canadian arguments for the response to its question.
                                                     
684 Appellate Body Report on US – Wool Shirts , supra  note 283, pp. 12-17.WT/DS139/R
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(m) Question 2(1) from Japan (purpose of CVA and ratio requirements)
The Government of Canada argues that the CVA requir ement does not play a substantial role and all
the automobile manufacturers operate far in excess of the required production-to-sales ratios.
Nevertheless, the Government of Canada still mainta ins these two requirements.  Thus, there must be
reasons for maintaining them.  What are the reasons and background for setting and maintaining theCVA and manufacturing requirements?
(i) Reply from Canada
7.41 The purpose of setting the CVA requirement and the production-to-sales ratio was to ensure
that only qualified manufacturers receive the benefits of duty-free importation.
7.42 The CVA for each manufacturer was calculated for each class of vehicles (automobiles,
specified commercial vehicles and buses) in the 1963-1964 base year.  CVA levels in subsequent
years had to attain this threshold for the manufacturer to continue to qualify for duty-free importation.
The amount was expressed as a fixed dollar amount, and has remained constant throughout the
operation of the Auto Pact.
7.43 Similarly the production-to-sales ratio was ascertained for the 1963-1964 base year from the
net sales value of all vehicles of each class produced in the base year compared to the net sales value
of all vehicles of that class sold for consumption.  The ratio had to exceed 75 to 100; it had to attain at
least that level in subsequent years to permit duty-free importation.  The ratios have remained
constant for each manufacturer for each class of vehicles.
7.44 Today, these requirements ensure that importers claiming a duty exemption are qualified
manufacturers.  Such manufacturers receive duty -free treatment of imports from all non-NAFTA
countries, including Japan, Korea and EC member states.
(n) Question 2(2) from Japan (similarity of Letters)
Please explain why (i) the required percentages of the CVA set forth in the respective Letters of
Undertaking from the Auto Pact Manufacturers (Exh ibit JPN-5) are identical to each other and (ii)
the form and substance of such respective Letter s of Undertaking are very similar even though the
Government of Canada states that the CVA requirements set forth in such letters were set voluntarily
by the Auto Pact Manufacturers?  Please explain in detail the role of the Government of Canada in
drafting or otherwise participating in the preparation of these letters.
(i) Reply from Canada
7.45 Please refer to the answer provided for the Panel’s Question 17.
(o) Question 2(3) from Japan (Daiml erChrysler merger and MVTO status)
Please confirm whether the Government of Canada ha s extended to DaimlerChrysler the privilege to
import motor vehicles duty-free in Canada.  If so, wh at are the criteria and requirement for such an
extension?
(i) Reply from Canada
7.46 There is no question of extending to DaimlerChrysler the privilege to import vehicles duty-
free.  The question is whether DaimlerChrysler Canada Inc. will retain its MVTO status after the
merger.  The Government of Canada has not yet made this decision, which will be effective to the
date of the merger.WT/DS139/R
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7.47 The criteria that establish the conditions under which the waiver of customs duties would
cease to be granted can be found in the footnote to Annex 1002.1 of the Canada-US FTA.
(p) Question 2(4) from Japan (beneficiaries importing vehicles other than automobiles)
Please provide the names of the six vehicle manufacturers that currently utilize the MVTO to import
vehicles other than automobiles referred to and the names of seven vehicle manufacturers that
currently utilise the SROs to import vehicles other than automobiles, respectively.
(i) Reply from Canada
7.48 The following companies have given permission to the Canadian government to state that
they have imported vehicles other than automobiles under the MVTO or an SRO at least once in the
last 10 years (note that the resulting total exceeds the number previously referred to):
• MVTO:  General Motors of Canada Ltd., Ford of Canada Ltd., Chrysler Canada Ltd., Canadian
Blue Bird Coach, Ltd., Freightliner Corporation, Thomas Built Buses of Canada Ltd., Prevost
Highway Coach Manufacturer, New Flyer.
• SRO:  Capital Disposal Equipment Inc., MCI Motorcoach Industries, A. Girardin Inc., Navistar
International Corporation, Nova BUS, Western Star Trucks Inc., Les entreprises Michel CorbeilInc.
(q) Question 2(5) from Japan (imports  under the NAFTA and the MVTO/SROs)
Canada stated that "Eligible manufacturers may import vehicl es from outside the NAFTA area duty
free."  Does this statement mean that eligible manufacturers may import vehicles from the NAFTA
area duty free under the Duty Waiver as well?  If not, are eligible manufacturers prohibited from
importing vehicles from the NAFTA area duty free under the Duty Waiver?  If so, what is the legal
basis for this prohibition?
(i) Reply from Canada
7.49 Yes, eligible manufacturers may also import vehicles from the NAFTA area duty free.  As
stated, "Vehicles are entitled to the remission on condition that the goods are imported into Canada on
or after January 18, 1965 from any country entitled to the Most-Favoured-Nation Tariff".
(r) Question 8 from the EC (Letters  – verification of compliance)
Canada has admitted that it reviewed compliance with the Letters of Undertaking until 1996.
• Could Canada please provide any evidence that compliance is no longer verified?
(i) Reply from Canada
7.50 Canada cannot provide evidence of what it is not doing.  For decades, Canada accepted the
numbers provided by the companies, and performed the calculation for growth CVA on that basis,
without making any attempt to determine whether the amounts provided were correct.  Since model
year 1996, Canada has not even made the calculation.  If the companies provided information relating
to growth CVA, it was simply filed, and no other action was taken.WT/DS139/R
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• How did Canada collect the necessary informati on to verify compliance? Did Canada request the
Big Three to provide that information? If so, on what legal basis? Has that legal basis beenamended or repealed? Could Canada please provide a copy of the requests for information
addressed to the Big Three? If no requests for information were addressed, why did the Big Three
provide that information?
(ii) Reply from Canada
7.51 Canada requested the information on an annual basis.  There is no legal authority for
collecting the information.  In contrast, the MVTO – in the Schedule, s. 2(b) – and the SROs provide
explicit legal authority for the collection of information relevant to their administration.
• Have the Canadian authorities informed offici ally the Big Three that they are no longer
monitoring compliance with the Letters of Unde rtaking? If so, please provide a copy of the
relevant document. If not, how do the Big Three k now that they are no longer required to provide
the necessary information to enforce compliance?
(iii) Reply from Canada
7.52 Canada has not informed the Big Three in writing that it is no longer calculating whether the
letter amounts have been met.  The companies ha ve been informed verbally, through the regular
formal and informal contacts that occur between government officials and company executives.
• Did the Big Three report the information required to verify compliance with the Letters of
Undertaking at the end of model years 1997 and 1998?
(iv) Reply from Canada
7.53 Only two of them provided the information.
B. L
EGAL ARGUMENTS OF THE PARTIES
1. Questions and replies relating to claims ander Article I of the GATT
(a) Question 1 (test for de facto  discrimination)
Canada states that :
GATT and WTO cases demonstrate that to prove a de facto violation of Article I, claimants
must prove that a criterion that is neutral on its face is in fact able to be met only by products
of a particular origin or origins, such that na tional origin determines the tariff treatment the
product receives.  The simple fact is that MVTO and SRO duty remissions have been and arestill applied to products from a number of sources, including notably the complaining parties.
There is no incentive to source from any particular country.
Could Japan and the EC please comment on this test  of de facto discrimination proposed by Canada.
(i) Reply from Japan
7.54 The Government of Japan has never seen an instance in which a recognition was given to
such a test as is described by Canada using the language "GATT and WTO cases demonstrate that to
prove a de facto  violation of Article I, claima nts must prove that a criterion that is neutral on its face isWT/DS139/R
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in fact able to be met only by products of a particular origin or origins, such that national origin
determines the tariff treatment the product receives". Japan is of the view that such a test has never
been established in any panel or Appellate Body re port, despite the Canadian assertion.  If Canada
claims that it has been so established, we would like to see such concrete examples.
7.55 To be precise, as Canada mentioned, the Panel Report on EC – Import of Beef from Canada
case, as referred to in para. 232 of the Appellate Body Report for EC – Banana III  case, established
the following criteria for de facto  discrimination under Article I of GATT 1994.  The Panel found that
the EC's measure "had the effect of preventing access of 'like products' from other origin than the
United States, thus being inconsistent with most-favoured-nation principle in Article I."
7.56 When judged against this criteria, the Duty Waiver's discriminatory effect is evident as
follows.
7.57 The MVTO and SROs are on their face origin neutral as to motor vehicles imported duty-free
by Auto Pact Manufacturers.  However, as demons trated in argumentation and confirmed by Exhibit
CDA-6, the Duty Waiver has been "in effect" granted largely to products originating in Sweden and
Belgium and not so granted to "like" products originating in the territory of Japan.  As Canadaadmitted, Auto Pact Manufacturers have strong tendency to import automobiles from certain specific
sources in certain countries.  In fact, the evidence on record demonstrates that capital or other
business relationships between Auto Pact Manufacturers in Canada and other entities in those
countries are decisive in the determination of the countries of origin of duty-free imports, as shown in
Exhibits JPN-10 and JPN-11.
7.58 Thus, MVTO and SROs have the effect of preventing duty-free access of like products from
other origins than the particular countries and thus they constitute a violation of Article I of GATT1994.
(ii) Reply from the EC
7.59 The test advanced by Canada is unduly restrictive and would make it virtually impossible to
prove the existence of de facto discrimination.  In order to establish a de facto  violation of GATT
Article I:1 it is not necessary to show that "only" imports of a certain origin may benefit from the
advantage concerned.  Instead, it may be sufficient to show that imports of a certain origin benefit
disproportionately from that advantage.  The relevant  test is thus whether the disputed measure results
in an allocation of imports among supplying Members which is different from that that would have
prevailed in the absence of that measure.
7.60 Contrary to Canada’s assertion, previous GATT and WTO cases do not support Canada’s
very narrow interpretation of the notion of de facto  discrimination.
7.61 For example, in Spain – Unroasted Coffee685, the Panel ruled that Spain had acted
inconsistently with GATT Article I:1 by applying higher import duties on imports of certain varieties
of coffee ("unwashed arabica" and "robusta") that on a "like" variety ("mild" coffee).  Under the test
put forward by Canada, the complainant (Brazil) w ould have been required to show that no "mild"
coffee could be grown in Brazil, so that de facto  "only" imports from other countries could benefit
from the lower duty rate.  The Panel, however, deemed it sufficient that Brazil exported to Spain
"mainly" the varieties subject to the higher duty rate:
7.62 "The Panel further noted that Brazil exported to Spain mainly 'unwashed Arabica' and also
'Robusta' coffee which were both presently charged with higher duties than that applied to 'mild'
                                                     
685 Panel Report on Spain – Unroasted Coffee, supra  note 282.WT/DS139/R
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coffee.  Since these were considered to be 'like products' the Panel concluded that the tariff regime as
presently applied by Spain was discriminatory vis-à-vis  coffee originating in Brazil".686
7.63 Further confirmation is provided by EC – Bananas III .  In  that case, the Panel ruled that the
so-called "operator rules" used for allocating a tariff quota among different categories of distributors
of bananas violated de facto  Article II of GATS because while "most" service suppliers of
Complainants' origin fell in the less favoured ca tegory, "most" service suppliers of ACP origin fell
within the more favoured category.687
7.64 Yet, under the test proposed by Canada, the Panel could not have concluded that there was a
de facto  violation unless it had ascertained previously that "only" service suppliers of ACP origin, to
the exclusion of any actual or potential service supplier of any other Member, could ever qualify forthe more favoured category.
7.65 More specifically, in EC – Bananas III  the Panel based its finding that the "operator rules"
discriminated de facto  in favour of ACP suppliers on the fact that foreign suppliers of non-ACP origin
accounted for only 10 per cent of the relevant imports.
688  In comparison, imports under the MVTO
1998 and the SROs from countries other than the United States and Mexico account for less than3 per cent.
689  Thus, if anything, de facto  discrimination is even more blatant in this case than in EC –
Bananas III .
7.66 The above mentioned findings of EC – Bananas III  concerned Article II of GATS and not
Article I of GATT.  Nevertheless, it is submitted that the test of de facto  discrimination cannot be
different under those two provisions.  Indeed, it must be recalled that in EC – Bananas III  the
Appellate Body based its conclusion that Article II of GATS may apply to de facto violations
precisely on its similarity with GATT Article I:1.690
7.67 Further guidance is provided by the Panel Report on Japan  – Film,  where the Panel held that
the relevant test in order to determine whether a measure violates de facto Article III:4 is whether it
has "a disparate impact on imports" compared to domestic products.691  Once again, there is no reason
why the relevant standard of de facto  discrimination under GATT Article III should be different from
that under GATT Article I:1.  In fact, the Panel on Japan – Film  cited expressly past practice under
GATT Article I:1 in support of its  interpretation of Article III:4.692
(b) Question 2 (test for de facto  discrimination)
Is the complainants' basis for a claim of de facto discrimination that beneficiaries do not include all
potential importers of automobiles in Canada?  Is it al so the complainants' view that there would still
be an MFN violation if all potential importers were eligible beneficiaries under the scheme?
                                                     
686 Ibid., para. 4.10.
687 Panel Reports on EC – Bananas III , supra  note 269, paras. 7.350-7.351.  The Panel followed the
same reasoning in order to conclude that the "export cer tificates" and the "hurricane licenses" were also contrary
to GATS Article II (ibid., paras. 7.393 and 7.396).  These findings of the Panel were expressly upheld by theAppellate Body, Appellate Body Report on EC –  Bananas III , supra  note 49, paras. 243-244 and 248.
688 Panel Reports on EC – Bananas III , supra  note 269, paras. 7.332-7.334.
689 See EC's Tables 1 and 2.
690 Appellate Body Report on EC –  Bananas III , supra  note 49, paras.  231-232.
691 Panel Report on Japan – Film , supra  note 93, paras. 10.85-10.86 and 10.380-10.381.
692 Ibid., para. 10.86.WT/DS139/R
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(i) Reply from Japan
7.68 There would be no de facto  discrimination under GATT Article I if all potential importers of
motor vehicles may import motor vehicles duty-free without meeting any conditions for the Duty
Waiver—i.e. the eligibility restriction, the production-to-sales ratio and the CVA requirement.
7.69 Considering the private companies' trade tendency mentioned in the response above, even if
the eligibility will become open to all manufacturers in Canada including Toyota or Honda, the motor
vehicles produced by manufacturers in Japan having no manufacturing facilities in Canada such as
Nissan, or Fuji Heavy (Subaru) would not enjoy the benefits under the Duty Waiver and thus the mere
removal of the eligibility restrictions will not cure the violation of Article I of the GATT.
(ii) Reply from the EC
7.70 Yes.  The main beneficiaries of the Tariff Exemption are the Canadian subsidiaries of the US
Big Three, all of which have large manufacturing facilities in the USA and Mexico.  As a result, the
Tariff Exemption provides an advantage to imports from those two countries over imports from those
countries where the non-beneficiaries of the Tariff Exemption have their main manufacturing
facilities.
7.71 No.  If the Tariff Exemption was available under the same conditions to any potential
importer, there would be no de facto  violation of Article I of GATT.
7.72 The European Communities is not arguing that the Tariff Exemption discriminates de facto  in
favour of US and Mexican imports simply because those imports account currently for the majority of
imports into Canada.  It is very likely that, even in the absence of the Tariff Exemption, imports from
Mexico and the USA would still account for a large share of imports into Canada due to the existence
of NAFTA as well as to purely commercial factors, such as the closeness of the USA and Mexico tothe Canadian market.
7.73 The EC’s complaint is that reserving the Ta riff Exemption to the Big US Three has the
consequence that the share of US and Mexican imports into Canada is even larger than it would be if
the Tariff Exemption was available to all importers.  As already shown, this is demonstrated by the
fact that the share of US and Mexican imports under the Tariff Exemption (97 per cent in 1997) islarger than their share of total imports (80 per cent in the same year).
693
(c) Question 3 (foreign trade zones, drawback programs and end-use tariff classifications)
Canada has stated that "conditions that do not affect the origin from which a good must come are not
inconsistent with Article I.  Witness the widespread use of foreign trade zones, drawback programs
and end-use tariff classifications.  All of these result in like products bearing different rates of duty.But the distinctions are without regard to national origin".  Could Japan and the EC please comment
on these statements.
(i) Reply from Japan
7.74 As to the three measures referred to by Canada, Japan requested Canada to make clarification
by lodging our question previously.
7.75 As far as Japan knows at this point, these measures are clearly distinguishable from the Duty
Waiver.  Unlike the three measures above, the Duty Waiver is not available to all potential recipients
for importing motor vehicles from all potential source countries, because of its eligibility restriction,
                                                     
693 EC's Table 2.WT/DS139/R
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its other conditions, and the nature of the facts and circumstances within which it is implemented.
Such distinctions can be deduced from the questions posed by the Government of Japan.
(ii) Reply from the EC
7.76 The European Communities is not arguing that any condition unrelated to the imported goods
is as such contrary to the obligation to provide most favoured national treatment "unconditionally"laid down in GATT Article I:1.  As explained above, the EC's claim is that restricting the availability
of the Tariff Exemption to certain importers linked to US producers with large manufacturing
facilities in the USA and Mexico has the consequence of providing de facto  an advantage to goods
originating in the USA and Mexico over like goods originating in the European Communities.
(d) Question 4 (private vs. governmental action)
The panel in Japan – Measures affecting Consumer Photographic Film and Paper stated that "past
GATT cases demonstrate that the fact that an action is taken by private parties does not rule out the
possibility that it may be deemed to be governmental if there is sufficient government involvement
with it" and that this "possibility will need to  be examined on a case-by-case basis" (WT/DS44/R,
para. 10.56).  The panel also stated that the words "laws, regulations and requirements" in
Article III:4 "should be interpreted as encompassing a [similarly] broad range of government action
and action by private parties that may be assimilated to government action" (Ibid., para. 10.376).
Could all parties please comment on this statement.
(i) Reply from Japan
7.77 In Japan – Film , the main issue was whether or not a governmental measure existed .
However, the measures at issue are clearly and indisputably governmental measures (i.e. the MVTO1998, the SROs).  Although production and trade actions taken by motor vehicle
manufacturers/importers are private ones, those government measures affecting those private actions
bring about GATT Article I violation.
7.78 Assuming that the Panel had the letters of undertaking on its mind when posing this question,
it is the position of the Government of Japan that such letters are clearly "requirement" within themeaning of Article III:4 of the GATT 1994.
(ii) Reply from the EC
7.79 As noted in the first of the passages of the Panel Report on Japan – Film
694 quoted by the
Panel, it is now well established that formally "private" action may nevertheless be deemed
Governmental action subject to dispute settlement, provided that there is sufficient involvement of theGovernment in it.
7.80 In the present case, for the reasons already explained by the European Communities,
Canada’s position that the Letters of Undertaking are purely "private acts" of the Auto Pact
beneficiaries is clearly untenable. The submission of the Letters of Undertaking was requested by the
Canadian Government as a condition sine qua non  for  signing the Auto Pact. Further, the content of
the Letters was the subject of negotiations between each beneficiary and Canada’s Ministry of
Industry.  Moreover, the Canadian Government collects on a regular basis the necessary statistical
information to ascertain compliance with the Letters of Undertaking and there is evidence that it does
so in practice.
                                                     
694 Panel Report on Japan – Film , supra  note 93, para. 10.56.WT/DS139/R
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7.81 The Panel Report on Japan – Film695, as well as the previous Panel Reports on Japan –
Semiconductors696 and Japan – Agricultural Products697, also stand for the proposition that non-
binding "measures", such as Government recommendations or administrative guidance,  may
constitute a "measure" subject to dispute settlement.
7.82 In Japan  – Film ,  the Panel discussed the issue of whether the words "laws, regulations and
requirements" used in GATT Article III:4 have the same scope as the term "measure" in GATT
Article XXIII: 1(b) or in GATT Ar ticle XI, but did not consider it necessary to reach a conclusion.698
7.83 According to the complainant in that dispute, the United States, the terms "laws, regulations
and requirements" would reflect the drafters’ intention to cover "all" possible forms of governmental
action.699  In turn, the defendant, Japan, maintained that for a party to be subject to a government
"requirement",
"it must either (i) be legally obligated to carry out the request, or (ii) receive some advantage
from the government in exchange for compliance.   I n  o t h e r  w o r d s ,  t h e r e  m u s t  b e  e i t h e r  a
government sanction or the withholding of a government benefit that is attached, formally or
substantively, to non-compliance." 700
7.84 The European Communities agrees with the view expressed by the United States. Japan’s
position was based on the textual differences between GATT Article III:4, on the one hand, and
GATT Articles XI and XXIII (b), on the other hand.  That argument, however, is far from compelling.
The national treatment obligation contained in Article III:4 complements the prohibition on import
restrictions contained in Article XI.701  It would be absurd if non-binding border measures that restrict
imports were prohibited by Article XI, but then non-binding internal measures that discriminate
against imported products were permitted by Article III:4.
7.85 In any event, the Letters of Undertaking would qualify as "requirements" even if Japan’s
narrower interpretation of that term was adopted.  As already explained, unlike the measures at issue
in Japan – Film , which were often purely hortatory statements, the Letters of Undertaking are worded
in unequivocally mandatory language and purport to impose binding obligations upon thebeneficiaries.  Furthermore, to use Japan’s words, there is a sanction attached "substantively", if not
"formally", to non-compliance:  the withdrawal of the Tariff Exemption.
                                                     
695 According to the Panel Report on Japan – Film , supra  note 93, para. 10.49:  "…Moreover, we also
consider it conceivable … that even non-binding, hortat ory wording in a government statement of policy could
have a similar effect on private actors to a legally binding measure…".
696 See Panel Report on Japan – Semiconductors , supra  note 112, para. 117:  "The Panel considered that
the complex of measures exhibited the rationale as well as the essential elements of a formal system of export
control. The only distinction in this case was the absence of formal legal legally binding obligations… However,the Panel concluded that this amounted to a difference in form rather than substance because the measures wereoperated in a manner equivalent to mandatory requirements…".
697 Panel Report on Japan – Restrictions on Imports of Certain Agricultural Products , adopted on
21 August 1991, BISD 35S/163, 242.
698 Panel Report on Japan – Film , supra  note 93, para. 10.376.
699 Ibid., para. 10.375.
700 Ibid.
701 As noted by the Panel Report on Italian Agricultural Machinery,  supra  note 390, para. 11:  "… the
intention of the drafters of the Agreement was clearly to treat the imported products in the same way as the likedomestic products once they had been cleared through cust oms. Otherwise indirect protection could be given".
Similarly, the Panel Report on US – Petroleum, supra  note 73, noted, para. 5.2.2:  "… The general
prohibition of quantitative restrictions under Article XI … and the national treatment obligation of Article III…
have essentially the same rationale, namely to protect expectations of the contracting parties as to thecompetitive relationship between their products and those of the other contracting parties…".WT/DS139/R
WT/DS142/RPage 272
(iii) Reply from Canada
7.86 The Panel in Japan –Film  examined whether certain actions were "measures" in the sense of
Article XXIII:1(b), and considered whether they were also "laws, regulations and requirements" in the
sense of Article III:4.  That analysis offers little assistance to the Panel in this case.  The analysis of
"measure" was related to a very particular set of facts not present here.  The discussion of "laws,regulations and requirements" was predicated on an assumption for the purposes of analysis and does
not reflect a finding that the phrase should be interpreted as encompassing private action.
7.87 The Panel’s analysis of the word "measure" centered on considerations particular to the
country whose "measure" was under review.  The Panel noted:
In Japan, it is accepted that the government sometimes acts through what is referred to
as administrative guidance.  In such a case, the company receiving guidance from the
Government of Japan may not be legally bound to act in accordance with it, but
compliance may be expected in light of the power of the government and a system of
government incentives and disincentives arising from the wide array of government
activities and involvement in the Japanese economy.
702
7.88 The Panel also noted that another Panel Report had concluded that Japanese administrative
guidance was a "measure" because it emanated from the government and was effective in the
Japanese context.  The Panel therefore found that its own analysis would have to be sensitive to the
context in which government actions are taken, and the effect they have on private actors.703
7.89 The Panel then concluded that the definition of "measure" must be a broad one, including
government actions that are non-binding on their face, provided they have effects similar to bindingones, such as sufficient incentive or disincentive to cause parties to act in a particular manner.  Here
again, the conclusion was premised on the Japanese context of the measures at issue.  The Panel
referred specifically to situations in which there is a high degree of collaboration between government
and industry, as exists in Japan.  The Panel stated that in such instances, even hortatory wording could
have effects similar to binding measures.
704
7.90 The Canadian regulatory system is quite different from that of Japan.  The concept of
"administrative guidance" that was central to the Panel’s definition of "measure" does not exist.
Canada governs through a system of laws and regulations that impose definite obligations and provide
specific consequences for failure to comply.  A non-binding act will not have the same consequences
as it would in Japan.  These factors should be taken into account in deciding what is or is not a"measure" in this case.
7.91 The Panel then turned to the question of whether private acts could be deemed to be
governmental.  The Panel noted previous decisions in which private acts were found to be "measures".
The Panel cited, inter alia , Japan – Trade in Semiconductors
705, in which the Panel found that
apparently private acts had been taken in an administrative structure that exerted "maximum possiblepressure" to influence private decisions.  This system had the same "rationale as well as the essential
elements of a formal system".
706  The Panel therefore concluded that private acts could be deemed to
be governmental where there was sufficient government involvement.
                                                     
702 Panel Report on Japan – Film , supra  note 93, para. 10.44.
703 Ibid., para. 10.46.
704 Ibid., para. 10.49.
705 Panel Report on Japan – Semiconductors , supra  note 112.
706 Panel Report on Japan – Film , supra  note 93, para. 10.54.WT/DS139/R
WT/DS142/R
Page 273
7.92 Whether any given private act can be attributed to the government is therefore a question of
fact, to be determined by the degree of government involvement in the act at issue.  As the Panel in
Japan – Film  noted, this question must be answered on a case-by-case basis.707  Canada would
emphasize the differences between the Canadian and Japanese administrative systems; in Canada,
there is no general administrative system exerting "maximum possible pressure" on private actions.The Canadian government does not have the sort of pervasive influence on private decisions that was
present in the cases where private acts were attributed to governments – the government must take
direct action through a law or regulation.  Canada therefore submits that the additional letters, as
private actions, cannot be "measures" in the Canadian context.  They are not statutes or regulations,
are non-binding, and cannot be enforced.
7.93 Even if the Panel were to decide that the letters are measures, there remains the question of
whether they are "laws, regulations and requirements" within the meaning of Article III:4.  The Panel
in Japan  – Film  made no findings on the interpretation of this phrase.  It concluded that none of the
alleged measures violated GATT Article III:4.  It could thus assume that all the actions at issue were
"laws, regulations and requirements", without actually deciding the point.  The Panel said explicitlythat for the purposes of argument, it would treat every  action at issue as a requirement, including those
it had already found were not even "measures".
708  To conclude that the Panel was deciding that any
of these "measures" were in fact requirements would be a serious misinterpretation of the Panel’s
decision.
(e) Question 5 (criteria for advantage)
Japan has stated, inter alia, that "it is clear from Article I that the granting of any advantage cannot
be made conditional on any criteria not related to th e imported product itself.  This is embodied in the
words 'immediately and unconditionally' and has been verified in the Indonesia  – Autos Panel Report
(paras.14.144-14.147)". … " Applying the foregoing legal interpretation to the facts of this case, the
advantage of the Duty Waiver has been made conditional on an eligibility restriction and on the
fulfilment of Canadian content and manufacturing re quirements.  None of these criteria are related to
the imported motor vehicles themselves.  Accord ingly, Canada is not granting unconditional MFN
treatment to motor vehicles originating in the territories of all WTO Members in its application of the
Duty Waiver" (emphasis added).  Could Canada please comment on these statements.
(i) Reply from Canada
7.94 Japan has misinterpreted the meaning of "unconditionally" in Article I.  Canada addressed this
point in its argumentation.  There is no prohibition in Article I of origin-neutral terms and conditions
on importation that apply to the importers   as opposed to the products  being imported.  Article I
prohibits only conditions related to the national origin of the imported product.
7.95 Japan’s argument is based on a single passage in a single, unappealed, WTO case:  Indonesia
–Autos .709  The Panel was examining Indonesian measures under which "Pioneer companies" could
import parts and components duty free.  Only one company qualified as an importer.  It could import
duty free under three conditions.  First, parts and components had to be used in the assembly of a
"National Car" (of which there was only one).  Second, they had to be imported by Pioneer companies
(of which there was only one) producing National Cars.  Third, the company had to meet a local
content requirement.710
                                                     
707 Ibid., para. 10.56.
708 Ibid., paras. 10.376 and 10.377.
709 Panel Report on Indonesia – Autos, supra  note 270.
710 Ibid., para. 14.146.WT/DS139/R
WT/DS142/RPage 274
7.96 Japan has argued from this that the limitation on the identity of importers, and the CVA and
ratio requirements are "conditions" within the meaning of Article I.  Thus Japan argues that the tariff
treatment of vehicles in Canada is "conditional" upon the manufacturer being on a list of companies
operating under the MVTO or an SRO, and upon that importer meeting its CVA and ratio
requirements.
7.97 This cannot be what the Panel meant, since it has no basis in GATT jurisprudence.  Not the
least of its problems is the fact that it would read Article II out of the GATT.  That Article specifically
contemplates tariff bindings being subject to "terms, conditions  or qualifications".  In any event,
Article I prohibits only treatment that discriminates on the basis of nationality.  Thus, as Canada made
clear in its initial response:
"[T]he proper test of whether the imposition of a condition or criterion infringes
Article I is whether that condition or criterion is both a) insufficient to afford a basis to
distinguish the products as not "like", and b) of a nature that results in discriminatory
import treatment on the basis of the national origin of the product."
7.98 Article I simply does not apply to origin-neutral conditions on importation, including tariff
rate quotas, end-use tariff distinctions or foreign trade zone programmes.
7.99 In Canada’s view the Panel in Indonesia – Autos  did not intend its analysis to be given the
broad reading offered by Japan.  It quite properly found that Indonesia’s measures were de facto
violations of Article I, because only Korean products were in fact capable of meeting the conditions
imposed by Indonesia.  The Panel therefore found that the Indonesian measures, in their application,
amounted to differential treatment on the basis of national origin.
7.100  In summary, all three Indonesian conditions, in spite of their apparent neutrality, were
inconsistent with the requirement of Article I:1 that an "advantage, favour or privilege" be accorded
"unconditionally".  In practice they determined the national origin of the products that could be
imported duty free, and as such violated Article I.  There is no such condition in any of Canada’s
impugned automotive measures, and hence no violation of Article I.
(f) Question 6 (eligibility restriction and de facto  discrimination)
Japan has stated that "the fact that the eligibility restriction de facto excludes certain motor vehicles
from certain countries  from benefiting from the Duty Waiver amounts to a violation of the MFN
obligation in GATT Article I".  Could Canada please comment on this statement.
(i) Reply from Canada
7.101  Japan’s statement is false: the MVTO and the SROs do not exclude motor vehicles of any
national origin, whether de facto  or de jure .  Manufacturers are free to import vehicles of any national
origin; the evidence led by Japan itself in Japan's Table 6 proves that MVTO and SRO beneficiaries
import vehicles of many national origins, including Japan and member states of the EC.
(g) Question 7 (criteria for SRO status)
Japan has stated that: "The criteria for determining initial eligibility for SRO status were uncertain
and arbitrary as the Government of Canada reserved the right under the Canada – US Auto Pact to
designate manufacturers as entitled to the Duty waiver and there is no mentioning of the criteria that
might be applied for such designations."  Could Canada please comment on this statement, and alsoexplain the criteria that were used for granting SROs.WT/DS139/R
WT/DS142/R
Page 275
(i) Reply from Canada
7.102  The criteria for determining initial eligibilit y for SRO status were neither uncertain nor
arbitrary.  Vehicle manufacturers not in operation during the base year (August 1, 1963 to July 31,
1964) only had to request the issuance of an SRO.  The request could be made verbally or in writing
to the responsible officials in the Department of Industry.
7.103  The Canadian government would determine whether the company in question was capable of
matching the CVA and ratio performance of the MVTO companies.  If so, the order was granted.  It
would then be duly passed, following the same pr ocedures as would be used for any other Canadian
regulation.
(h) Question 8 (measures at issue and applicability of GATT Article XXIV)
The EC has stated that "the measures in dispute are neither part of, nor required by NAFTA, but
rather a derogation from that agreement.  Accord ingly, they cannot be 'exempted' from Article I by
virtue of Article XXIV".  Could Canada please comment on these statements.
(i) Reply from Canada
7.104  The EC’s statement is incorrect.  The measures are not, and cannot be, a derogation from the
NAFTA.  Annex 300-A of the NAFTA specifically provides both for the continuation of the Auto
Pact and for the maintenance by Canada of its duty-free treatment pursuant to the Auto Pact.
7.105  Even if the NAFTA did not so provide, Article XXIV of the GATT exempts from Article I
the provision of duty-free treatment to products of members of a free-trade area.  Nothing in Article I
states that preferential duty-free treatment is only exempt from Article I to the extent that it is "part
of" or "required by" the principal agreement establishing a free-trade area.  For example, parties to aninterim free-trade agreement (or customs union) often accelerate the elimination of duties among
themselves.  Nothing in Article XXIV would preclude the parties from accelerating duty-free
treatment through a separate agreement or even unilaterally, even though they are not "required" to do
so by the principal agreement.
(i) Question 9 (measures at issue and applicability of GATT Article XXIV)
The EC has stated that "Article XXIV:5 does not provide a legal basis for adopting all sorts of
measures otherwise incompatible with Article I.  That provision merely authorises the 'formation of a
free-trade  area'.  Consequently, only those measures that are inherent in that objective can be
exempted by Article XXIV".  Could Canada please comment on these statements.
(i) Reply from Canada
7.106  Canada has not claimed an Article XXIV exemption for "all sorts of measures".  Canada has
raised Article XXIV in response to the EC’s complaint that Canada has accorded its duty-free
treatment on a basis inconsistent with Article I of the GATT because most of the vehicles that receive
duty-free treatment originate in the United States or Mexico.  Canada has noted that a party to a free-trade agreement, or an interim agreement for the formation of a free-trade area, is exempt from
Article I by reason of Article XXIV when it grants duty-free treatment to the products of other parties
to the free-trade agreement.  This is what Canada has done with respect to products from the
United States and Mexico.
7.107  The Panel does not need to define the legal limits of the Article XXIV exception, nor to
devise tests such as what measures are "inherent" in the objective of a free-trade area.  Whatever elseWT/DS139/R
WT/DS142/RPage 276
may be exempted by Article XXIV, and whatever else may be "inherent" in the objective of a free-
trade area, duty-free treatment clearly is.
(j) Question 10 (U.S. Big Three vs. foreign pr oducers and other manufacturers in the
United States)
Could Canada please comment on the EC's statemen t that the "only and exclusive purpose [of the
measures in dispute] is to provide an advantage to the US Big Three, not only vis-à-vis the foreign
producers of motor vehicles but also vis-à-vis other manufacturers established in the United States".
(emphasis added)
(i) Reply from Canada
7.108  The European Communities seeks to substantiate its claim that the measures do not fall within
the NAFTA.  In fact they do, as Canada explained in its response to question 9.
7.109  The EC’s particular complaint identified by the Panel in paragraph 18 is rather obscure.  One
of the original beneficiaries of the measures was the Canadian subsidiary of an EC manufacturer,
Volvo.  Moreover, the status of manufacturers in the Un ited States is irrelevant to this dispute.  The
measures accord duty-free treatment to qualifying manufacturers in Canada.  They have no bearing on
the ability of manufacturers established in the United States to import vehicles from Canada, and
vehicles produced in the United States by all manufacturers may enter Canada duty free, whether
under the Auto Pact or the NAFTA.
(k) Question 11 (CVA and ratio requirements and Article XXIV:8(b))
In view of Canada's contention that any preferenti al treatment of products of the United States and
Mexico is justifiable under GATT Article XXIV, could Canada please clarify how it regards the CVAand ratio requirements found in the Auto Pact, given that Article XXIV:8(b) provides:  "A free-trade
area shall be understood to mean a group of two or more customs territories in which the duties and
other restrictive regulations of commerce … are eliminated on substantially all the trade between the
constituent territories in products originating in such territories". (emphasis added)
(i) Reply from Canada
7.110  The CVA and ratio requirements are not restrictive regulations of commerce within the
meaning of Article XXIV:8.  They are the eligibility requirements contained in the MVTO and SRO
definition of "manufacturer", existing to ensure that beneficiaries actually manufacture in Canada.
They do not in any way restrict commerce between Canada, the United States or Mexico, and thus donot disqualify the North American free-trade area from the definition in Article XXIV:8(b).
7.111  In any event, the question as to whether the CVA and ratio requirements are restrictive
regulations of commerce is moot.  Anybody meeting the NAFTA certification of origin can import
any vehicle from the United States and Mexico under the NAFTA, without regard to the CVA and
ratio requirements.  These requirements apply only to imports made under the MVTO or an SRO.This can be clearly seen in the case of the American manufacturing arms of Toyota and Honda.
Vehicles built by these companies enter Canada duty-free under the NAFTA without regard to the
CVA and ratio requirements.  The same is true of vehicles imported by MVTO or SRO companies.  If
the vehicles are certified as NAFTA-originating, they can enter Canada from the United States duty-
free, irrespective of the CVA and ratio requirements.WT/DS139/R
WT/DS142/R
Page 277
(l) Question 42 (Canada's Figure 4  – imports under the MVTO and SROs)
Could Canada please supplement the import data shown in Canada's original Figure 4 with data for
imports receiving duty-free treatment under (i) the MVTO or SROs from the United States and
Mexico, and (ii) imports coming in under NAFTA by meeting NAFTA rules of origin.  (Please
distinguish the data by these two groups.)
(i) Reply from Canada
7.112  The information provided in Figure 4  was intended to respond to Japan's claims regarding
discrimination in favour of Belgian and Swedish manufacturers as depicted in Japan's Table 5.  The
data used to produce Figure 4 , which shows that Japanese-origin vehicles represent a significant
percentage of import sales, were purchased from the same source that Japan used to create its Table 5.Both Table 5 and Figure 4  show sales of imported vehicles by units .  The company that provided the
data does not separate sales of North American or igin.  Canadian, American and Mexican sales are
provided as a single number representing domestic sales, and Canada cannot separate the data.
Canada has not been able to obtain sales data for US and Mexican vehicles from any other source.
Therefore, as an alternative, Canada is providing the information based on value  of imports.  Figure 5
(below) shows the percentage of MVTO imports originating in North America, Japan, Europe, and the
rest of the world.  The actual values of these imports are provided in Exhibit CDA-25.WT/DS139/R
WT/DS142/RPage 278
Canada's Figure 5
95.182.750.892.39
92.875.250.971.82
95.212.811.341.67
96.591.391.571.77
97.270.731.121.76
98.040.330.931.91
97.770.330.982.11
96.580.511.643.13
88.0090.0092.0094.0096.0098.00100.00
1991 1992 1993 1994 1995 1996 1997 1998Figure 5 - Imports Under MVTO and SROs
(Percentage of Vehicles Imported by Origin, Based on Value)
North America Japan Eur ope Other CountriesWT/DS139/R
WT/DS142/R
Page 279
7.113  NAFTA came into effect on 1 January 1994.  Canada does not have records of sales of
NAFTA imports – again, sales statistics available to the Canadian government treat all North
American vehicles as domestic.  As an alternative, Canada is providing the information based on
value  of NAFTA imports for each year since 1994.  The following numbers represent the total value
of all vehicles imported under the NAFTA, without regard to the identity of the importer:
1994:  $431,736,609
1995:  $557,865,152
1996:  $697,478,247
1997:  $845,203,5301998:  $1,655,496,286
7.114  The European Communities requested that Ca nada provide NAFTA certificates for the
vehicles imported from the United States in 1998.  The 1998 certificates for Chrysler Corporation are
attached.  Also attached are the 1998 and 1999 certificates for the Ford Motor Company.  Canada
does not have 1998 certificates for General Motors Corp., but it does have them for 1999.  It shouldbe noted, however, that General Motors of Canada Ltd. did not import any models in 1998 that it did
not also import in 1999.  Those models were produced in the same factories in both years.  The
Certificates are attached as Exhibit CDA-26.
7.115  The companies obtained certificates because they are necessary for vehicles entering the
United States and Mexico.  They were provided to Canada for information purposes to confirm their
ability to meet NAFTA rules of origin requirements.  Canada understands that the companies also
provide certificates to major customers buying large numbers of vehicles, some of whom wantconfirmation that they are purchasing North American vehicles.
7.116  The companies continued to import North American vehicles under the MVTO because that
is the practice they have been following since 1965.  As 1998 was the first year that duty-free
importation from the United States under the NAFTA was possible, some had not completely adjusted
their administrative practices to the new regime.
(m) Question 43 (data on cost of sales)
Could Canada please supplement the data shown in Exhibit CDA-2 by indicating the aggregate cost
of sales each year for each of the producers listed.
(i) Reply from Canada
7.117  Exhibit CDA-27 shows the aggregate cost of sale s data for each model year since 1963-64 for
General Motors of Canada Ltd., Ford of Canada Ltd., Chrysler Canada Ltd., (as it then was) and
Volvo (Canada) Ltd.  Figures 6  and 7 contrast the differing CVAs applicable to the MVTO, SROs,
and letters.  Figure 7  demonstrates how the cost of sales number would be used to calculate the
growth amounts specified in the letters.  The cost of sales from the base year would be subtractedfrom the cost of sales in each subsequent model year.  The resulting amount would then be multiplied
by 60 per cent (in the case of the Big Three) or 40 per cent (in the case of Volvo (Canada) Ltd.).  The
result of this calculation would then be added to  the base year requirement, producing the growth
amount for the particular company.WT/DS139/R
WT/DS142/RPage 280
Canada's Figure 6
Figure 6 - How Does the Canadian-Value-Added (CVA)
Requirement Work for Automobile Manufacturers
MVTO - Legal Requirement
Base Yea r
CVAModel Yea r
CVA1 = or >
0.01.02.03.04.05.06.07.0
Base
YearCVA - Re quired  
CVA - Total Re ported   CVA - Labour Re ported   The Total Required CVA for
MVTO Automobile Manufacturers
has not changed since the base
year and is insignificant.
(Billions of $)
1 Model Year = August 1 - July 31
2 Cost of Sales = Cost of Production for Automobiles Produced in Canada and Sold for Consumption in
Canada + Cost of Automobiles Imported for Consumption in Canada (based on Value for Duty)SRO - Legal Requirement
Each SRO specifies a CVA requirement for the company concerned
Example
CAMI Automotive Inc. CVA is 60% of model year cost of sales.2
= or >
CAMI Automotive Inc. meets its CVA requirement in Labour alone.CAM ICanada
GazetteCanada
GazetteCanada
GazetteCanadaGazetteWT/DS139/R
WT/DS142/R
Page 281
Canada's Figure 7
Figure 7 - The Canadian-Value-Added (CVA)
Amount in the Letters
Letters - Not  Legally Binding
1 The amount for the Big Three is 60%.  The amount for Volvo (Canada) Ltd. is 40%. CVA Target
and Growth
Amounts
A one-time
specified CVA
target amountby July 31,
1968.1968
31JULYTarget  Amount:
60%1=Manufacturer’s
Cost of Sales
(Current
Model Year)Manufacturer’s
Cost of Sales
(Base
Year)
xCVA
GrowthGrowth  Amount:WT/DS139/R
WT/DS142/RPage 282
7.118  Note that the calculation in some letters refers to subtracting the cost of sales of the previous
year, rather than the base year.  In practice, however, when calculations were performed, they were
done always using the base year.
(n) Question 44 (imports and comp anies' capital relationships)
Could Canada please comment on Japan 's statement that "[e]ach qualified manufacturer in fact
imports vehicles only from countries where its parent company, or a company with which it has a
capital relationship, has production facilities. "
(i) Reply from Canada
7.119  In practice, Canada understands that it is characteristic of the globalized automotive industry
that there be some sort of capital, manufacturi ng or similar relationship between the automobile
manufacturers and companies from whom they import.  This appears to be true not only of the
qualified manufacturers but also of Japanese and EC manufacturers.  Certainly, neither of the
complainants has offered any evidence to the contrary.
7.120  Canada notes that, at least in Canada, this practice is the choice of the companies, and is in no
sense required by Canadian measures.  Nothing in the Canadian measures requires or induces such
relationships as a condition of importation, nor do Canadian measures limit the choice of relationships
on the part of the companies.  Under the Canadian measures, the qualified manufacturers are entitled
to source vehicles from wherever they choose regardless of any relationships.  When companies do
choose to enter into relationships, they are free to establish such relationships without limitation as to
company or country.
7.121  The breadth of these private choices demonstrates the globalization of the automotive
industry.  The affiliations of manufacturers extend to virtually all significant producing countries.  For
example, according to information provided by th e Big Three, those companies alone currently have
vehicle manufacturing affiliations involving at least 24 separate countries, including Japan, France,
Germany, Portugal, Sweden and the United Kingdom.  Canada refers the Panel to its response to the
complainants' rebuttals, where, in responding to Japan's Article I allegation, Canada lists all of these24 countries.  Canada also refers the Panel to its Exhibit CDA-12, in which Canada has provided a
complete list of global automotive affiliations for 1999.
7.122  Again, these are private decisions.  Canadian measures do not require such a wide geographic
spread of company relationships, nor do Canadian measures in any way limit manufacturers from
expanding their relationships to other companies or countries.  Canada points out that, independent ofany requirements of Article I, it is evident that the companies' choices have resulted in a wide
geographic sweep of relationships and of imports.
(o) Questions 45 (MFN import duty rates on motor vehicles since 1965)
Could Canada please provide figures showing the applicable Canadian MFN import duty rates on
motor vehicles since 1965, including any evolution in these rates.WT/DS139/R
WT/DS142/R
Page 283
(i) Reply from Canada
Canada's MFN Tariff on Motor Vehicles Since 1963
EFFECTIVE DATE BOUND RATE
April 1, 1963 17.5%
June   1, 1969 15.0%
January 1, 1980 14.3%  (Tokyo Round Reductions Commence)
January 1, 1981 13.6%
January 1, 1982 12.8%
January 1, 1983 12.1%
January 1, 1984 11.4%
January 1, 1985 10.7%
January 1, 1986   9.9%
January 1, 1987   9.2%
January 1, 1995   8.6%  (Uruguay Round Reductions Commence)
January 1, 1996   8.0%
January 1, 1997   7.3%
January 1, 1998   6.7%
January 1, 1999   6.1%
(p) Question 2(6) from Japan (foreign trade zo nes, drawback programs and end-use tariff
classification)
Canada has referred to foreign trade zones, drawback programs and end-use tariff classification.
Japan does not understand the relevance of these measures to this present case.
• Under Canada’s own analogy between the Auto Pa ct and foreign trade zones, must the Auto
Pact Manufacturers pay the customs duty exempt ed at the border under the Duty Waiver on the
imported vehicles when they sell those vehicles to any person within Canada?  Can Canada
provide the definition of the foreign trade zone and an example in which the Auto Pact is
administered in such a manner?
• Under Canada’s own analogy between the Auto Pact and drawback programs, must the Auto
Pact manufacturers re-export the vehicles importe d duty free under the Duty Waiver to any other
country in order to enjoy the benefit of the duty drawback?  Can Canada provide the definition
and an example in which the Auto Pact is administered in such a manner?
• Under Canada’s own analogy between the Auto Pact and end-use tariff classification, must
the vehicles imported duty free under the Duty Waiver be used in any product other than theimported vehicle itself?  Can Canada provide the defi nition of the end-use tariff classification and
an example in which the Auto Pact is administered in such a manner?
• Under each of the respective schemes described above, is it supposed that importers must be
qualified to enjoy the duty exemption?  If so, what are the conditions for the qualification oreligibility?
(i) Reply from Canada
7.123  Japan has misunderstood Canada’s argument.  Canada did not at any time claim the MVTO
and SROs are themselves foreign-trade-zone programmes, duty drawback programmes, or end-use
tariff classifications.  Canada was responding to Japan’s argument that any condition on importation
that is not related to the product itself must be a violation of Article I.  This argument is wrong, asWT/DS139/R
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demonstrated by the existence of numerous programmes that create conditions on importation that are
not related to the product itself.
7.124  Foreign-trade-zone programmes require products to be imported by particular importers, for a
particular use.  Duty drawback programmes require products to be incorporated into finished products
and re-exported.  End-use classifications require products to be put to a particular use.  Each of theseis plainly a  condition  on importation, unrelated to the products themselves.  Each is permitted.
7.125  The mere fact that the MVTO and SROs set conditions for importation does not in and of
itself determine whether those measures violate Article I.  That Article does not prevent the
imposition of terms and conditions on importation.  It does not prevent Members from limiting the
number of eligible importers, or from setting eligibility criteria for those importers.  If it did, allimport licensing schemes would be prohibited.  Articl e I only prevents the granting of an advantage to
the products of one country without immediately a nd unconditionally extending that advantage to the
products of all Members.
(q) Question 4 from the EC (Canada's Figure 4  – imports under the MVTO and SROs)
Canada's Figure 4 appears not to show the impor ts under the MVTO 1998 and SROs originating in
the USA and Mexico.  Also, the percentages shown in that figure do not appear to take into account
those imports.  Could Canada explain that appar ent omission?  Does it mean that since 1991 all
imports from the US and Mexico were made under the CUSFTA/NAFTA?  Could Canada indicate
what would be the relevant percentages if US and Mexican imports made under the MVTO 1998 and
the SROs are taken into account?
(i) Reply from Canada
7.126  There was no omission.  Canada prepared Figure 4 on the basis of the list of countries in
Japan’s Table 6.  The supporting data for the figure is found in Exhibit CDA-6.  This does not mean
that since 1991 all imports from the United States and Mexico were made under CUSFTA/NAFTA.
The percentages are irrelevant to the Japanese argument that Canada was rebutting.
(r) Question 6 from the EC (data on cost of  parts and materials and cost of sales)
Could Canada please provide the following data, on average for all the MVTO and SRO beneficiaries
of each class of vehicles, for the most recent model year for which the information is available:
• the percentage of the cost of parts and materials to the cost of sales.
• the percentage of CVA to the cost of sales of the vehicles produced in Canada.
• the percentage of CVA to the cost of sales of the vehicles sold in Canada.
(i) Reply from Canada – preliminary note
7.127  The figures provided are all for model year 1996-97.
(ii) Reply from Canada - the percentage of the cost of parts and materials to the cost of sales.
7.128  Note:  Cost of sales is a term that includes only the cost to the manufacturer of vehicles sold
for consumption in Canada.  In other words, cost of sales is the sum of (i) the cost of producing
domestic vehicles sold for consumption in Canada, and (ii) the cost of vehicles imported for sale in
Canada (based on their value for duty).  Cost of sales excludes vehicles sold for export.  Canada does
not collect, and does not have, a "cost of sales" for all vehicles produced in Canada.  Thus, when theWT/DS139/R
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European Communities asks for the percentage of parts and materials to cost of sales, the result is
meaningless.  It takes the value of all parts and materials used in Canadian production, and compares
it to the cost of only those vehicles sold for consumption in Canada (whether imported or domestic).
This obviously inflates the percentages.
7.129  The percentages of parts and materials to cost of sales (of vehicles sold for consumption in
Canada) are as follows:
Automobiles:  167%;
SCVs:  211%;
Buses:  192%.
(iii) Reply from Canada - the percentage of CVA to th e cost of sales of the vehicles produced in
Canada.
7.130  Note:  This question asks for a comparison of CVA to the cost of sales of only those vehicles
produced in Canada.  As Canada explained above, Canada does not have the cost of sales figure
requested, because it would include the cost of vehicles exported.  Canada is providing the percentage
of CVA to the cost of sales of vehicles produced in Canada and sold for consumption in Canada.  This
inflates the percentages, because it compares total CVA to only a portion of the cost of sales (that is, it
leaves out the cost of sales of imported vehicles).
7.131  The percentages of CVA to the cost of vehicles produced in Canada and sold for consumption
in Canada are:
Automobiles:  204%;
SCVs:  203%;
Buses:  188%.
(iv) Reply from Canada - the percentage of CVA to the cost of sales of the vehicles sold in
Canada.
7.132  Note:  Canada does not have the cost of sales of all vehicles sold in Canada, which would
include vehicles sold for export.  As stated above, Canada can only provide the percentage of CVA to
the cost of sales of vehicles sold for consumption in Canada.  This is the calculation used indetermining whether companies like CAMI Automotiv e Inc. have met the CVA requirements in their
respective SROs.
7.133  The available percentages are:
Automobiles:  47%;
SCVs:  57%;
Buses:  116%.WT/DS139/R
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(s) Question 7 from the EC (1998 automobile imports from the US and Mexico under the
MVTO)
Could Canada please indicate how many automobile s (units and/or value) were imported during 1998
from the USA and Mexico by the MVTO beneficiaries:
• under the Tariff Exemption
• under NAFTA
• under the MFN duty rate
(i) Reply from Canada
• under the Tariff Exemption
7.134  The total value of automobiles imported from the United States under the MVTO in 1998 was
$9,541,000,000.  The total value of automobiles imported from Mexico under the MVTO in 1998 was
$419,000,000.  These numbers added together amount to $9,960,000,000.
7.135  Note:  This number is not the same as that provided for "North America" for 1998 in Exhibit
CDA-25, provided in response to the Panel's Question 42.  That question asked for the total for allvehicles  imported under both the MVTO and the SROs, not just the MVTO.
• under NAFTA
7.136  The total for all vehicles is provided in response to the Panel's Question 42.  Because the
European Communities has asked for information re lating only to the MVTO beneficiaries, and not
the SROs, it would be necessary to determine the import values for each company individually, and
then aggregate them.  Canada does not have individual company data, and therefore cannot providethe information requested.
• under the MFN duty rate
7.137  Canada does not have this information for the same reason discussed above.
(t) Question 52 (private vs. governmental action)
Could the EC and Japan respond to the arguments by Canada in its response to Panel Question 4 that
the Panel Report in Japan – Measures Affecting Consumer Photographic Film and Paper offers littleassistance to the Panel in this case, especially because "[t]he Panel’s analysis of the word 'measure'
centred on considerations particular to the country whose 'measure' was under review"?
(i) Reply from Japan
7.138  As the Government of Japan stated in its response to Panel Question 4, it shares ultimate
conclusion with Canada that the Film case is not relevant to the present case.  Every measure subject
to a WTO panel procedure has its own unique characteristics reflecting the economic, social and
political situations in the country under review.  In Canada's response to the Panel Question 4, Canada
seemingly attempts to dismiss Japan's claim on the Letters of Undertaking being in violation of
Article III:4 by way of discussing the "measure" in the sense of Article XXIII:1(b) of GATT at length,
instead of discussing the "requirements" in the sense of Article III:4.  It is the latter provision of
GATT that Japan is claiming the violation of in the present case, as stated in its response to Panel'sQuestion 51 and other documents.WT/DS139/R
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(ii) Reply from the EC
7.139  The Panel on Japan  – Film  is relevant for this case in two different respects.
7.140  First, the panel held that "the fact that action is taken by private parties does not rule out the
possibility that it may be deemed governmental if there is sufficient government involvement in it".711
7.141  That finding was presented by the Panel as a restatement of a well-established and generally
applicable principle, and not as an exceptional finding justified by the unique features of the Japanese
political system.  If anything, the degree of Gove rnment involvement in the Letters of Undertaking is
greater than in some of the actions that were considered as Government "measures" in Japan –
Film .712
7.142  Second, the panel ruled that "even non-binding, hortatory wording in a government statement
of policy could have a similar effect on private actors to legally binding measure".713
7.143  Again, the Panel formulated that conclusion in generally applicable terms and did not confine
it to the specific circumstances of the case under consideration.  In any event, as already explained by
the European Communities, this issue does not even arise in this case.  Unlike the Japanese measures,
the Letters of Undertaking are not mere statements of Government policy.  They are drafted inmandatory language and have been regarded as binding by both parties.  Moreover, the submission of
the Letters of Undertaking was a necessary condition for the granting of the Tariff Exemption.  By
contrast, in Japan – Film  there was no direct link between the measures and the granting of any
specific government benefit.
2. Questions and replies relating to claims under Article III:4 of the GATT
(a) Question 13, in part (the ratio requirements)
The EC argues that the ratio requirement is inconsistent with GATT Article III:4 because the
maximum limit on the total sales value in practice operates "so as to restrict exclusively the sales of
imported motor vehicles".  In this connection, the EC further states that  "the ratio requirements have
the consequence that the beneficiaries cannot, withou t losing the entitlement to the Tariff Exemption,
sell in Canada any imported motor vehicles in excess of a certain amount that is directly related to
the sales value of their domestic production of motor vehicles".
The EC also that the ratio requirement is inco nsistent with Article 2.1 of the TRIMs Agreement
because it falls within the scope of Item 1(b) of  the Illustrative List. The EC explains this view by
stating that "under the ratio requirements the amoun t of imported motor vehicles that a beneficiary
may sell in Canada (and, therefore, that it may be in terested in 'purchasing') varies according to the
value of the motor vehicles which it exports".
• Is the EC's argument regarding the inconsistency of the ratio requirement with Article III:4 of the
GATT identical to its argument on the inconsistency of that requirement with Item 1(b) of the
Illustrative List annexed to the TRIMs Agreement?
                                                     
711 Panel Report on Japan – Film , supra  note 93, para. 10.56.
712 See, e.g., ibid., paras. 10.298-10.299.
713 Ibid., para. 10.49.WT/DS139/R
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(i) Reply from the EC
7.144  No.  They are similar but not identical.  The European Communities claims that the ratio
requirements violate Article III:4 because they place a quantitative limit on the sales of motor vehicles
imported under the Tariff Exemption.  Whether or not that limit is linked to the volume of exports is
irrelevant in order to establish a violation of Article III:4.  For that, it is sufficient to show that sales ofimported goods are limited, while sales of like domestic goods are not.
7.145  On the other hand, the EC’s claim under Item 1 (b) of the Illustrative List is that the ratio
requirements place a limit on the sale of imported vehicles which is "related" to the amount of
vehicles exported by each beneficiary.  Thus, this claim involves an additional element, which is not
required in order to establish a violation of Article III:4, namely that the limitation on internal sales berelated to the value of exports.
(b) Question 14 (the ratio requirements)
In support of the view that the production-to-sales ra tio requirement is inconsistent with Article III:4
of the GATT, Japan describes a situation in which an Auto Pact Manufacturer decides to sell
additional motor vehicles produced in Canada, which "would increase the competition for sales of
like imported motor vehicles".
• Is it the view of Japan that any measure which leads to increased domestic production of a
product and hence increases the competitive pressure faced by like imported products as a result
of an increase in domestic sales of that product is per se inconsistent with Article III:4?
• How does Japan respond to the argument of Canada that the production-to-sales ratio is
comparable to "a production-based subsidy, which requires a certain level of production to
receive a certain level of benefits", and that such a production-based subsidy is not a violation of
Article III?
• Related to this, what is the view of Japan on the argument advanced by Canada that "[N]either
the GATT not any other WTO Agreement prohibits measures that increase production levels;
there is no authority anywhere for the proposition that a mere increase in domestic production
negatively affects the conditions of competition for like imported products"?
(i) Reply from Japan
Japan will address these points in its rebuttal.
(c) Question 15 (the ratio requirements)
With reference Canada's previous arguments, could Canada please explain its views on whether or
not the production-to-sales ratio affects the internal sale in Canada of imported motor vehicles other
than those imported by MVTO and SRO beneficiaries?
(i) Reply from Canada
7.146  The production-to-sales ratios do not affect the internal sale of any vehicles in Canada,
imported or domestic.  Canada's previous arguments address the EC argument that the ratios operateto cause beneficiary companies to limit their sales of imports, without limiting their sales of domestic
vehicles.  The paragraphs thus explain why the ratios do not affect the internal sale of MVTO and
SRO imports.  The ratios merely determine whether the company’s imports will be dutiable or duty-
free.  MVTO and SRO companies are free to import and sell as many vehicles as they choose.  AsWT/DS139/R
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long as sales are within the relevant ratio, imports remain duty-free.  Once sales exceed that ratio, the
manufacturer must pay the normal MFN duty on subsequent imports.  In either case, there is no effect
on the conditions of sale on the internal market in Canada.
7.147  The ratios determine whether or not products are subject to duty.  In other words, the only
possible effect relates to the importation of the products.
7.148  The production-to-sales ratios also do not affect the internal sale of vehicles imported by non-
MVTO or SRO companies.  These companies are not required to keep any ratio whatsoever and can
import and sell vehicles, subject only to Canada’s MFN duty on motor vehicles.  The EC’s argument
cannot apply to them.
7.149  Canada would also note that the ratios have no actual or intended effects on market conditions
in Canada.  As Canada stated, Canadian production levels are well above the minimal levels required
by the ratios.  The ratios thus have not increased the number of domestic vehicles available for sale in
the Canadian market.  Manufacturers are producing vehicles for commercial reasons, and not in order
to increase their ability to import.
(d) Question 16 (meaning of "require" in Chapeau of TRIMs Illustrative List)
Canada states that the text of the TRIMs Agreement "i s explicit in stating that a prohibited TRIM must
'require' the purchase or use of domestic products." Could Canada further elaborate on its views on
the meaning of the word "require" in the Chapeau of the Illustrative List of the TRIMs Agreement
especially in light of the statement that "TRIMs which are inconsistent with Article III:4 of GATT
1994 include those …compliance with which is necessary to obtain an advantage, and which
require…"
(i) Reply from Canada
7.150  The Chapeau to paragraph 1 of the Illustrative List refers to "TRIMs that are inconsistent with
the obligation of national treatment provided for in paragraph 4 of Article III of GATT 1994."  It
therefore deals only with measures that have alre ady been found to be TRIMs, and sets out a two-step
test to determine whether they are covered by the List.
7.151  First, the measure must be either  mandatory or enforceable under domestic law or under
administrative rulings, or such that compliance with it is necessary to obtain an advantage.  Second,
the alleged measure must require  one of the actions set out in sub-paragraphs (a) and (b).
7.152  The first part of the test in the Chapeau goes to whether the alleged prohibited TRIM is a
binding measure.  If the answer to this questi on is "no", then the TRIM is not covered by the
Illustrative List.  If the answer is "yes", then it must be determined whether the binding is of the type
listed in sub-paragraphs (a) or (b).
7.153  The CVA requirements contained in the MVTO and SROs are binding measures within the
meaning of the Chapeau.  They are mandatory and enforceable.  However, these requirements are not
covered by the second part of the test in the Chapeau because they do not "require" the actions listed
in sub-paragraphs (a) and (b).  They do not (a) "require" the purchase or use of domestic products, andthey do not (b) "require" that purchase or use of imported products be limited to an amount related to
the volume or value of domestic products exported.  They are not included in the examples of
prohibited TRIMs.
7.154  The additional CVA amounts found in the letters do not fall within the scope of Article III:4,
and are not covered by the first part of the test in the Chapeau, because they are neither mandatory norenforceable, and they need not be complied with in order to obtain an advantage.WT/DS139/R
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(e) Question 17 (the Letters)
Canada submits that the arguments of the EC that certa in Letters of Undertaking were required of the
manufacturers as a condition of Canada's signing the Auto Pact, and that the beneficiaries have
assumed that a failure to meet them would result  in Canada withdrawing the Tariff Exemption, are
without basis in fact. Canada states that a failure to meet the voluntary undertakings would not lead
to denial of duty-free treatment and that reve nue Canada does not review whether MVTO companies
have met their commitments under the letters.
In light of the statements of the EC and of Ja pan, and without prejudice to the Panel's view on
whether the Letters of Undertaking are properly described as "requirements" within the meaning of
GATT Article III:4, could Canada provide a detailed explanation of:
• the circumstances surrounding the submission of the Letters of Undertaking, in particular as
regards the nature of the role, if any, of Canadian authorities and the relationship of the Lettersto the Auto Pact;
• the nature of the commitments contained in the Letters;
• the current practical significance, if any, of these commitments;
• the relationship of the commitments contained in the Letters to the requirements of the MVTO
1998 and the SROs; and
• arrangements, if any, for gathering information on the application of the commitments contained
in the Letters.
(i) Reply from Canada
7.155  At the conclusion of the Auto Pact, the Canadian government sought assurance from the
affected companies that they understood the new system .  It provided them with a draft letter outlining
what the requirements would be under the Pact, and what it hoped would be achieved as a result.  The
companies were free to modify the letter in any wa y they chose – for example, the letter from General
Motors of Canada Ltd. is different in both form and substance from the others, and in no way affected
that company’s MVTO status.
7.156  The commitments in the letters are statements of what was hoped to be achieved under
Canada’s implementation of the Auto Pact system.  They have no legal status or existence in Canada,
because they are not contracts, statutes, or regulations.  They cannot create any form of obligation or
duty.  As Canada stated, the Canadian government lacks the legal authority to deny MVTO and SRO
benefits for a failure to meet the commitments.  No other form of punishment can be imposed either.
7.157  The letters have no current practical significance.  No benefits depend on meeting the CVA
levels contained in the letters and no sanctions exist for failing to do so.  Neither the government, northe affected companies, consider the letters to be binding in any way.
7.158  The CVA amounts in the letters are unrelated to the requirements of the MVTO and the
SROs.  Those requirements determine whether companies are entitled to duty-free benefits in any
given year.  They stand on their own, and are complete in themselves.  The letters are an expression ofWT/DS139/R
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what was hoped would be achieved through the Auto Pact system.  Success or failure in meeting those
expectations has no bearing on meeting MVTO or SRO requirements.
7.159  There are no arrangements for collecting the in formation relating to the application of the
letters.  Some of it is contained in the information collected to verify whether companies are meeting
their legal requirements under the MVTO and SROs.  Much of it is not, and the Canadian governmentmakes no effort to collect it.  While some companies provide it anyway, the government does not
audit or otherwise verify the amounts those companies report.
(f) Question 18 (the Letters and private vs. governmental action)
Canada argues that certain Letters of Undertaking are not "requirements" within the meaning of
GATT Article III:4 on the grounds that they have no legal status and no legal effect, and that theCanadian Government lacks the legal authority to deny  duty-free eligibility in case of a failure to
meet the voluntary undertakings in such Letters.  What is Canada's view on the argument of the EC
and Korea that GATT/WTO case law, as stated most recently in the Panel Report on Japan –
Measures affecting Consumer Photographic  Film and Paper (WT/DS44/R), supports the
characterization of the Letters of Undertaking as measures which are attributable to the Governmentof Canada?
(i) Reply from Canada
7.160  The arguments of the European Communities and Korea are wrong.  The letters are not
measures within the meaning of Article III:4 b ecause they are not binding on the companies that
submitted them.
7.161  The panel in Japan – Film  was clear in stating that whether an act is a "measure" must be
determined on a case-by-case basis, having regard to the context in which the act was taken.  Privateacts can only be measures where there is sufficient government involvement, for example where the
administrative structure exerts "maximum possible pressure" on private actions, and has the "rationale
as well as the essential elements of a formal system".
714  In the Canadian context, there is no system of
administration beyond the formal regulatory system.  The government cannot direct private action
without a specific law or regulation.  No law or regulation required the submission of the letters, andno law or regulation requires the companies to meet the commitments they gave.  The letters therefore
cannot be measures.
7.162  Even if the Panel were to find that the letters are "measures", there would remain the question
of whether they are "laws, regulations and requirements" within the meaning of Article III:4.  Canada
recalls here its answer to the Panel’s question 4.  The panel in Japan – Film  did not address the
interpretation of this phrase;  instead, it twice noted that "requirement" appears to be narrower in
meaning than "measure".  It subsequently assumed for the purposes of its analysis that "laws,
regulations and requirements" encompassed a broad range of government actions and private actions
that may be assimilated to government action.
7.163  Japan and the European Communities, as the complaining parties, bear the burden of
demonstrating that the letters are attributable to the Canadian government and are "laws, regulations
or requirements" within the meaning of Article III:4.  Since the circumstances present in previous
cases are not present here, the complaining parties cannot discharge this burden.
                                                     
714 Panel Report on Japan – Film , supra  note 93, para. 10.54, citing Panel Report on Japan –
Semiconductors , supra  note 112.WT/DS139/R
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(g) Question 46 (the ratio requirements)
The EC states that "the ratio requirements have the consequences that the beneficiaries cannot,
without losing the entitlement to the Tariff Exem ption, sell in Canada any imported motor vehicles in
excess of a certain amount that is directly related to the sales value of their domestic production of
motor vehicles."
In its response to Panel Question 13, the EC observes that "the ratio requirements violate Article III:4
because they place a quantitative limit on the sales of motor vehicles imported under the Tariff
Exemption."
The EC also has argued that "the ratio requirements are internal measures subject to Article III, and
not to Article XI, because they do not affect the right to import motor vehicles, but the right to sellthem in Canada."
Could the EC further explain whethe r its argument is that the ratio requirements restrict the internal
sale in Canada of any imported motor vehicles or that they restrict the internal sale in Canada of
those motor vehicles that are imported duty-free?
(i) Reply from the European Communities
7.164  The European Communities claims that the ratio requirements limit the sale in Canada of
motor vehicles imported under the Tariff Exemption.
(h) Question 47 (the ratio requirements)
What is the EC's response to the argument of C anada that the only possible effect of the ratio
requirement relates to the importation of products in question (Canada's response to Panel
Question 15) and to the observation of Canada that  "the EC's argument would convert a measure
setting out the terms under which importation takes place – which is manifestly a border measure –into a limitation on internal sales under Article III:4"?
(i) Reply from the EC
7.165  The ratio requirements do not restrict the right to import motor vehicles under the Tariff
Exemption.  They limit the right to sell in Canada vehicles already imported in Canada under the
Tariff Exemption.  Therefore, the ratio requirements are internal measures in the sense of Article IIIof GATT and not border measures.  As already explained by the European Communities, the
distinction between import measures subject to GATT Article XI and internal measures subject to
GATT Article III is a formal one, and not one based on the effects of the measures on the volume of
imports.
(i) Question 48 (the ratio requirements)
With reference to Canada's argument that the ratio requirements do not affect the internal sale of
imported motor vehicles, could Canada respond to the ar gument of the EC that "any increase in the
sales value of motor vehicles produced in Canada by the beneficiary will give rise automatically to an
identical increase in the value of permitted domestic sales," whereas "an increase in imports of motor
vehicles does not entail any increase in the value of permitted domestic sales"?
(i) Reply from Canada
7.166  The EC's argument is based on a mistaken premise.  There is no limit on domestic sales under
any circumstances for any manufacturer or any other person.  Therefore, the EC's reference to
"permitted domestic sales" is inapt.  Canada refers the Panel to its previous arguments, which explainWT/DS139/R
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the workings of the ratios.  Production does not affect in any way the value of vehicles that can be
sold in Canada.  It has the potential to affect only the value of vehicles that can be imported duty-free.
7.167  The production-to-sales ratio does not set any type of quantitative restriction on either the
value or volume of domestic sales, either of domestic or imported vehicles.  In the event that a
company were operating at or near its ratio, the company would simply begin paying duty on itsvehicle imports.  Of course, as Canada made clear in its initial response, manufacturers are in fact
operating well above the required ratios.  But there is no limit in either case on how many imported
vehicles may be sold in Canada.
7.168  As Canada now understands the EC argument, it relates exclusively to vehicles imported
duty-free under the MVTO or SROs.  It argues that because there is a limit on the value that can beimported duty-free, the vehicles so imported are disadvantaged in respect of their internal sale.  The
European Communities concedes that other imported vehicles receive treatment no less favourable
than that accorded to domestic vehicles, as required by Article III.
7.169  There is no basis in Article III for distinguishi ng between otherwise like products on the basis
of whether the products were subject to an import duty.  The question is whether imported vehicles –regardless of whether some or all of them were subject to import duty at the border – are treated less
favourably than like domestic vehicles for purposes of internal laws, regulations or requirements
affecting their sale.  The answer in the case of the Canadian measures is clearly no.  There is no limit
on how many like imported vehicles can be sold.  There is a potential limit on how many of those like
vehicles will have been imported duty free, but that is not an Article III question.  Article III applies to
measures affecting internal competition between imported and domestic products, after imported
products have cleared the border, and any customs duties have been paid.
(j) Question 49 (the ratio requirements)
Could Canada further explain whether its position that the ratio requirements do not affect the
internal sale of imported motor vehicles is based on the fact that current production levels exceed the
ratio requirements?
(i) Reply from Canada
7.170  While it is true that the level of Canadian production is such that the companies could be
importing substantially more vehicles duty free than they currently choose to do, that is not the reason
that Canada has said that the ratio requirements do not affect the internal sale of imported motor
vehicles.  Rather, the reason is as explained above in the response to Question 48.  There is no
restriction on the internal sale of vehicles, whether a manufacturer is below, at or above its ratio.  Allvehicles, whether imported or domestic or, if impor ted, whether imported duty-free or subject to duty,
or imported by a qualifying manufacturer or a non-qua lifying manufacturer, are subject to exactly the
same rules respecting internal sale, and all other matters subject to Article III.  There are no limits of
any kind on internal sale;  any manufacturer can always  sell as many vehicles as the market demands.
(k) Question 50 (the Letters)
With respect whether or not the Letters of Undertaking are "requirements" within the meaning of
GATT Article III:4,  could Canada comment on:
• the argument of the EC that "the Letters of Undertaking had been negotiated with the Canadian
Ministry of Industry and that their submission was regarded by Canada as a condition sine qua
non for signing the Auto Pact"WT/DS139/R
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(i) Reply from Canada
7.171  The European Communities has failed to support these allegations with any evidence.
Moreover, the historical record does not support the EC's allegations.  Canada's files do not indicate
either that the texts were "negotiated" or that submission of the letters was a sine qua non for signing
the Auto Pact.  Canada's response to the Panel's Question 17 was based on such information as it has.Government records show that Canada provided a draft of the letters, but it is inaccurate to say that
the letters were "negotiated".  Neither do the records support the EC position that the letters were a
condition sine qua non  for signing the Auto Pact.  There is nothing in the records to indicate what
Canada would have done if the companies had not delivered the letters.  However, it is illogical to
believe that Canada would have annulled the agreement without the letters, given that it was acarefully negotiated bilateral treaty.
7.172  What the European Communities claims as support for its argument on this point is at best
ambiguous.  The reference provided is to a statement in Exhibit EC-22 made by a Chrysler
Corporation executive, who said that prior to the signing of the Auto Pact, Canada sought assurances
that its industry would remain viable.  He did not state that Canada made the provision of letters a
condition sine qua non .
• the argument of the EC that the Canadian Go vernment requested affected companies to make
specific commitments with respect to increases in Canadian value added
(ii) Reply from Canada
7.173  The record shows that Canada did request undertakings respecting Canadian-value-added.
• the arguments of the EC regarding the alleged m onitoring by Canadian authorities of compliance
with the Letters of Undertaking
(iii) Reply from Canada
7.174  These EC arguments are speculative and without support on the record.  The European
Communities invokes a thirty-five year old letter containing prospective expectations of an industry
executive.  However, whether or not there ever were such "audits" on a quarterly or annual basis in
the early years of the Auto Pact, there are no such audits now.  Indeed, the Canadian Government
does not now review any information pertaining to th e letters.  As the letters were never enforceable,
there is no clear record as to when Canada ceased informal reviews of information provided in respectof the letters.  At this point it is clear that there is no practice of review at all.  It is Canada's
understanding that the companies are fully aware that no reviews are carried out.
7.175  The European Communities descends into speculation and innuendo in claiming that the
Government monitors CVA under the MVTO only to ob tain information pertinent to the letters.  The
CVA in the MVTO is a binding obligation, and is monitored and enforced for that reason.
7.176  The European Communities tries to find support for its speculations by citing the Canadian
Government's own public avowal that the letters are not binding.  The European Communities claims
that because the Government website also observes that the letters "typically" have been met, this
demonstrates that the government must be monitori ng to make such a statement.  Leaving aside that
the word "typically" connotes something less than full compliance with what the EuropeanCommunities alleges to be binding letters, it should be noted that the Big Three at least have long
publicly and proudly boasted of the extent of their activities in Canada, much as companies and
corporations do throughout the world to get credit for the good things they do for the countries in
which they operate.  That does not mean that those good things are required.WT/DS139/R
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7.177  It follows that the EC's conclusions are as bereft of merit as the speculations on which they
are built.  As Canada explained, whatever may have been in the minds or aspirations or expectations
of government and industry in years past, there is no truth to the EC claim that these letters have any
current effect, nor does Canada ascertain, audit or  otherwise review "compliance" with the letters.
• the argument of Japan that statements of the Chief Executive Officers of two of the Auto pact
beneficiaries demonstrate that the letters of Undertaking are "binding and operative"
(iv) Reply from Canada
7.178  While the Canadian Government was not involved in or consulted regarding the apparently
informal remarks that were quoted, it may be doubted whether, even as an expression of company
perception, there was any intended legal significance in the choice of words on the part of these
executives.  There perhaps should be some allowan ce for hyperbole in an informal setting in any
event, and this was a time of some tension between auto companies as to their relative contributions to
the Canadian economy.  Regardless, Canada doubts very much that executives of these companies or
of any other qualifying manufacturer would make these statements using the same words today,
because Canada has made it clear that the letters are not binding.
(l) Question 51 (the Letters and FIRA  and EEC-Regulation on Imports of Parts and
Components )
Could the EC and Japan state their views on the argument that under the tests articulated in FIRA
and EEC-Regulation on Imports of Parts and Com ponents the letters of Undertaking are not
"requirements" within the meaning of GATT Article III:4.
(i) Reply from Japan
7.179  The Government of Japan has refuted the Canadian argument that the letters of undertaking
are not "requirements" within the meaning of Article III of the GATT.  Canada tries to focus only on
the surface of the letters and other legal instruments and hide substantial role and significance of the
letters.  It is quite implausible that private companies voluntarily submit to the government the
commitments of local contents in their production when such commitments only restrict those
companies' activities.  It is of no merit for Canada to argue that the letters have not been expresslyimplemented by a Canadian law or regulation and that the MVTO 1998 and SROs do not, on their
face, provide for sanctions in the event that the comm itments in the letters are not complied with.  The
signatories of the letters viewed them as binding, the letters contain audit and reporting requirements,
and there is no expiry date on the letters.  The MVTO 1998 and the SROs are "Orders in Council"
which are statutory instruments that can be revoked or amended by the Government of Canada.  Theletters of undertaking are enforceable as the Government of Canada is capable of revoking or
amending the relevant instruments if the commitments in the letters are not implemented.
7.180  In any event, the Government of Japan is of the view that the Canadian characterisation of the
tests articulated in the FIRA and Parts and Components cases is inaccurate at best.  Both of these
cases found the "voluntary" undertakings to be "requirements" within the meaning of Article III:4.
7.181  In Canada –  FIRA , the voluntary undertakings were "requirements" primarily because they
became conditions for which compliance could be enforced (para. 5.4).  As noted, the letters of
undertaking were conditions for the original duty-free treatment and were and continue to be
enforceable through withdrawal of the advantage via revocation or amendment of the MVTO 1998
and the SROs.  In EEC –  Parts and Components , the Panel found that Article III:4 refers not only to
requirements which an enterprise is legally bound to carry out (as in the FIRA  case) but also those
which an enterprise voluntarily accepts in order to obtain an advantage from the government.  TheWT/DS139/R
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letters of undertaking were entered into by the signatories in order to obtain the advantage of the Duty
Waiver from the Government of Canada.
7.182  Thus, the letters of undertaking in this dispute are clearly "requirements" within the meanings
in both Panel Reports.  Had Canada been able to point to a case where a panel found  similar
undertakings falling outside the scope of "requirements" under Article III:4, the Canadian argumentwould have been more persuasive.
(ii) Reply from the European Communities
7.183  The European Communities has already addressed th is argument.  For ease of reference, the
relevant passages are reproduced here below:
"Canada claims that its interpretation of the term "requirement" is derived from
Canada – FIRA
715 and EC – Parts and Components .716  Those reports, however, in no
way suggest that the panels purported to formulate, or that they were applying, a set of
generally applicable criteria.
"In any event, the Letters of Undertaking fit within the same pattern as the measures at
issue in EC –  Parts and Components .  As explained by Canada, in that case the Panel
found that the undertakings to increase local content given by the subsidiaries of
certain Japanese companies were "requirements" because they were a "condition
precedent to obtaining a benefit".  The same is true of the Letters of Undertaking.  The
Canadian Government would not have concluded the Auto Pact if the Big Three had
not submitted the Letters of Undertaking.
"The only difference between the two case s is that the EC antidumping regulations
envisaged that, if the undertakings were breached or withdrawn, the EC Commission
could (but was not obliged to) re-institute proceedings and eventually impose anti-
circumvention duties.717  The MVTO does not envisage expressly the possibility to
impose sanctions.  That does not mean, however, that the Letters are unenforceable.Given the linkage between the conclusion of the Auto Pact and the submission of the
Letters established by the Canadian Government, there has always been a tacit
understanding between the parties that if the beneficiaries failed to comply with the
Letters, the Canadian Government would withdraw the tariff benefits."
(m) Question 53 (the Letters)
The EC argues that, because of the link between th e submission of the Letters of Undertaking and the
conclusion of the Auto Pact, "the beneficiaries have assumed that, were they to disregard the
commitments contained in the Letters, the Ca nadian Government would withdraw the Tariff
Exemption.  The Canadian Government could do so  simply by repealing or amending the MVTO
1998.  There is nothing, either in the MVTO 1998, or  in any other provision of Canadian law, that
could prevent the Canadian Government from taking that action."
• Could the EC further explain the factual basis for its contention that the beneficiaries have
assumed that non-compliance with the commitments in the Letters of Undertaking would result in
withdrawal of the tariff exemption?
                                                     
715 Panel Report on Canada – FIRA , supra  note 126.
716 Panel Report on EEC – Parts and Components , supra  note 127.
717 Panel Report on EEC – Parts and Components , supra  note 127, para. 5.20.WT/DS139/R
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(i) Reply from the European Communities
7.184  As shown by the European Communities, the Letters of Undertaking were negotiated by the
beneficiaries and Canada's Ministry of Industry in parallel with the negotiation of the Auto Pact, and
submitted only a few days before the conclusion of the Auto Pact.
7.185  Furthermore, chief executives of the US Big Three, as well as the US officials who negotiated
the Auto Pact, testified before the US Congress that the Canadian Government made of the
submission of the Letters of Undertaking a necessary  condition for the conclusion of the Auto Pact
and, indeed, regarded the Letters as being an "important part" of the Auto Pact..
7.186  The European Communities has also shown that , for their part, the Big Three gave the
undertakings contained in the Letters subject to the condition that the Canadian Government wouldsign the Auto Pact and adopt the necessary implementing regulations.
7.187  Thus, although the Letters are formally unilateral acts of the beneficiaries, they embody an
agreement between the beneficiaries and the Canadi an Government involving mutual obligations for
both parties.  Even in the absence of any express provision to that effect, it is implicit in any
agreement involving mutual obligations that if one of the parties fails to fulfil its obligations, the otherparty is released from complying with its own obligations.
718  In view of that, the beneficiaries could
but assume that, if they did not comply with thei r part of the agreement, the Canadian Government
could legitimately reciprocate by withdrawing the tariff benefits.
• What are the views of the EC on the argument t hat to argue that the Letters are enforceable
because nothing in Canadian law prevents Canada from repealing or ame nding the MVTO is a
fundamental misstatement of WTO law because WTO agreements apply to actions that Members
have taken and not to actions that Members could take?
(ii) Reply from the EC
7.188  Canada's argument mischaracterize the EC position.  The European Communities has not
argued that the Letters are "enforceable" simply because "nothing in Canadian law prevents Canada
from repealing or amending the MVTO".  The EC's position is that the Letters of Undertaking are
"enforceable" because the granting of the Tariff Exemption was conditional upon the submission ofthe Letters and the Canadian Government has the necessary authority to withdraw the Tariff
Exemption, should the beneficiaries fail to comply with the terms of the Letters.  The European
Communities made the argument mentioned by the Panel in response to a previous argument raised
by Canada to the effect that the European Communities "has provided no legal basis under which
Canada could withdraw benefits for a failure to meet the commitments under the Letters".
7.189  In any event, the measures in dispute in this case are not the sanctions that Canada could
impose in case of violation of the Letters of Undertaking, but rather the Letters themselves, which are
an action "taken" by the Canadian Government already in 1965.  The possibility to withdraw the
Tariff Exemption has been cited by the European Communities only as a further indication that the
Letters are "requirements".
7.190  Finally, it must be recalled that, as confirmed by Japan – Film , the WTO Agreements may
apply where the Government has not even the possibility to impose a sanction in the event of lack of
compliance, such as for example in the case of a simple statement of government policy.  A fortiori ,
                                                     
718 In the law of contracts, this basic notion is reflected in the so-called exceptio non adimpleti
contractus, an exception to the effect that the plaintiff is not entitled to sue unless it has performed its own part
of a contract. The same principle finds expression in Article 60 of the Vienna Convention on the Law ofTreaties, of 23 May 1969.WT/DS139/R
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the WTO Agreement may apply also in cases where the Government can impose a sanction, even if is
not mandatorily required to do so.  Indeed, as mentioned above in response to question 51, EC – Parts
and Components  concerned precisely that type of situation.
3. Questions and replies relating to claims under the TRIMS Agreement
(a) Question 13 (the ratio requirements)
The EC argues that the ratio requirement is inconsistent with GATT Article III:4 because the
maximum limit on the total sales value in practice operates "so as to restrict exclusively the sales of
imported motor vehicles".  In this connection, the EC further states that  "the ratio requirements have
the consequence that the beneficiaries cannot, withou t losing the entitlement to the Tariff Exemption,
sell in Canada any imported motor vehicles in excess of a certain amount that is directly related to
the sales value of their domestic production of motor vehicles".
The EC also argues that the ratio requirement is inconsistent with Article 2.1 of the TRIMs Agreement
because it falls within the scope of Item 1(b) of  the Illustrative List. The EC explains this view by
stating that "under the ratio requirements the amoun t of imported motor vehicles that a beneficiary
may sell in Canada (and, therefore, that it may be in terested in 'purchasing') varies according to the
value of the motor vehicles which it exports".
• Is the EC's argument regarding the inconsistency of the ratio requirement with Article III:4 of the
GATT identical to its argument on the inconsistency of that requirement with Item 1(b) of the
Illustrative List annexed to the TRIMs Agreement?
(i) Reply from the European Communities
7.191  No.  They are similar but not identical.  The European Communities claims that the ratio
requirements violate Article III:4 because they place a quantitative limit on the sales of motor vehiclesimported under the Tariff Exemption.  Whether or not that limit is linked to the volume of exports is
irrelevant in order to establish a violation of Article III:4.  For that, it is sufficient to show that sales of
imported goods are limited, while sales of like domestic goods are not.
7.192  On the other hand, the EC’s claim under Item 1 (b) of the Illustrative List is that the ratio
requirements place a limit on the sale of imported vehicles which is "related" to the amount ofvehicles exported by each beneficiary.  Thus, this claim involves an additional element, which is not
required in order to establish a violation of Article III:4, namely that the limitation on internal sales be
related to the value of exports.
• With regard to the EC's argument concerning Item  1(b) of the TRIMs Illustrative List, could
the EC further explain its view that the ratio requirement limits "an enterprise's purchases or use
of imported products to an amount related to the volume or value of local products that it
exports"?
(ii) Reply from the European Communities
7.193  The ratio requirements do not limit expressly the "purchase" or "use" of imported goods but
their  internal "sale".  Nevertheless, it seems obvious that by limiting the "sales" of imported goods,
the ratio requirements limit necessarily their "purch ase".  In any event, it must be recalled that the
Illustrative List of prohibited TRIMs is not an exhaustive one.  Even if Item 1 (b) did not cover
measures that restrict the "sale" of imported goods, it would be necessary to conclude by analogy that
a measure that limits the sale of imported goods to an amount related to the value of exports of theWT/DS139/R
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company concerned is also a TRIM inconsistent with GATT Article III:4 and, therefore, prohibited by
Article 2.1 of the TRIMs Agreement.
• In light of the reference made by the EC in it s arguments on Item 1(b) of the TRIMs Illustrative
List to its analysis of the inconsistency of the ratio requirement with Article 3.1(a) of the SCMAgreement, does the EC consider that the ratio re quirement is inconsistent with Item 1(b) of the
TRIMs Agreement and with Article 3.1(a) of the SC M Agreement for the same reason, i.e. because
it makes the duty-free treatment legally conti ngent upon export performance ? Could the EC in
this regard further explain its view of the relati onship between Item 1(b) of the Illustrative List of
the TRIMs Agreement, on the one hand,  and Articl e 3.1(a) of the SCM Agreement, on the other?
(iii) Reply from the European Communities
7.194  No.  The same facts give raise to two violations, but the "reason" for each violation is
different.  The European Communities claims that the ratio requirements fall within Item 1(b) because
they limit the internal sale of vehicles imported under the Tariff Exemption to an amount "related" to
the value of exports.  Whether or not the Tariff Exemption is a "subsidy" in the meaning of Article 1
of the SCM Agreement, and whether it is "contingent upon export performance" in the sense ofArticle 3.1(a) of the SCM Agreement are not pert inent considerations in deciding that claim.
7.195  In turn, the European Communities considers that  the Tariff Exemption constitute a "subsidy"
prohibited by Article 3.1(a) of the SCM Agreement, because the ratio requirements attached thereto
make it "contingent upon export performance".  The success of that claim does not depend on whether
the ratio requirements limit the sale of imported vehicles in violation of Article III:4 and Item 1(b) of
the Illustrative List.
7.196  The relationship between the TRIMs Agreement and the SCM Agreement has been discussed
in detail in the Panel Report on Indonesia – Automobiles.
719  That report concluded, amongst other
things, that:
"… the SCM and TRIMs Agreement cannot be in conflict, as they cover different
subject matters and do not impose mutually exclusive obligations. The TRIMs
Agreement and the SCM Agreement may have overlapping coverage in that they mayboth apply to a single legislative measure, but they have different foci, and they
impose different types of obligations."
720
7.197  The European Communities agrees with that analysis.
(b) Question 16 (meaning of "require" in Chapeau of TRIMs Illustrative List)
Canada states that the text of the TRIMs Agreement "i s explicit in stating that a prohibited TRIM must
'require' the purchase or use of domestic products." Could Canada further elaborate on its views on
the meaning of the word "require" in the Chapeau of the Illustrative List of the TRIMs Agreement
especially in light of the statement that "TRIMs which are inconsistent with Article III:4 of GATT
1994 include those …compliance with which is necessary to obtain an advantage, and which
require…"
(i) Reply from Canada
7.198  The Chapeau to paragraph 1 of the Illustrative List refers to "TRIMs that are inconsistent with
the obligation of national treatment provided for in paragraph 4 of Article III of GATT 1994."  It
                                                     
719 Panel Report on Indonesia – Autos, supra  note 270, paras. 14.47-14.55.
720 Ibid., para. 14.52.WT/DS139/R
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therefore deals only with measures that have alre ady been found to be TRIMs, and sets out a two-step
test to determine whether they are covered by the List.
7.199  First, the measure must be either  mandatory or enforceable under domestic law or under
administrative rulings, or such that compliance with it is necessary to obtain an advantage.  Second,
the alleged measure must require  one of the actions set out in sub-paragraphs (a) and (b).
7.200  The first part of the test in the Chapeau goes to whether the alleged prohibited TRIM is a
binding measure.  If the answer to this questi on is "no", then the TRIM is not covered by the
Illustrative List.  If the answer is "yes", then it must be determined whether the binding is of the type
listed in sub-paragraphs (a) or (b).
7.201  The CVA requirements contained in the MVTO and SROs are binding measures within the
meaning of the Chapeau.  They are mandatory and enforceable.  However, these requirements are not
covered by the second part of the test in the Chapeau because they do not "require" the actions listed
in sub-paragraphs (a) and (b).  They do not (a) "require" the purchase or use of domestic products, and
they do not (b) "require" that purchase or use of imported products be limited to an amount related to
the volume or value of domestic products exported.  They are not included in the examples ofprohibited TRIMs.
7.202  The additional CVA amounts found in the letters do not fall within the scope of Article III:4,
and are not covered by the first part of the test in the Chapeau, because they are neither mandatory nor
enforceable, and they need not be complied with in order to obtain an advantage.
(c) Question 46 (the ratio requirements)
The EC states that "the ratio requirements have the consequences that the beneficiaries cannot,
without losing the entitlement to the Tariff Exem ption, sell in Canada any imported motor vehicles in
excess of a certain amount that is directly related to the sales value of their domestic production of
motor vehicles."
In its response to Panel Question 13, the EC observes that "the ratio requirements violate Article III:4
because they place a quantitative limit on the sales of motor vehicles imported under the Tariff
Exemption."
The EC argues that "the ratio requirements are internal measures subject to Article III, and not to
Article XI, because they do not affect the right to import motor vehicles, but the right to sell them in
Canada."
Could the EC further explain whethe r its argument is that the ratio requirements restrict the internal
sale in Canada of any imported motor vehicles or t hat they restrict the internal sale in Canada of
those motor vehicles that are imported duty-free?
(i) Reply from the EC
7.203  The European Communities claims that the ratio requirements limit the sale in Canada of
motor vehicles imported under the Tariff Exemption.WT/DS139/R
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4. Questions and replies relating to claims under the SCM Agreement
(a) Question 13, in part (the ratio requirements)
In light of the reference made by the EC in its ar guments on Item 1(b) of the TRIMs Illustrative List to
its analysis of the inconsistency of the ratio requirement with Article 3.1(a) of the SCM Agreement,does the EC consider that the ratio requirement is inconsistent with Item 1(b) of the TRIMs
Agreement and with Article 3.1(a) of the SCM Agre ement for the same reason, i.e. because it makes
the duty-free treatment legally contingent upon exp ort performance ? Could the EC in this regard
further explain its view of the relationship between Item 1(b) of the Illustrative List of the TRIMs
Agreement, on the one hand,  and Article 3.1( a) of the SCM Agreement, on the other?
(i) Reply from the European Communities
7.204  No.  The same facts give raise to two violations, but the "reason" for each violation is
different.  The European Communities claims that the ratio requirements fall within Item 1(b) because
they limit the internal sale of vehicles imported under the Tariff Exemption to an amount "related" tothe value of exports.  Whether or not the Tariff Exemption is a "subsidy" in the meaning of Article 1
of the SCM Agreement, and whether it is "contingent upon export performance" in the sense of
Article 3.1(a) of the SCM Agreement are not pert inent considerations in deciding that claim.
7.205  In turn, the European Communities considers that  the Tariff Exemption constitute a "subsidy"
prohibited by Article 3.1(a) of the SCM Agreement, because the ratio requirements attached thereto
make it "contingent upon export performance".  The success of that claim does not depend on whether
the ratio requirements limit the sale of imported vehicles in violation of Article III:4 and Item 1(b) ofthe Illustrative List.
7.206  The relationship between the TRIMs Agreement and the SCM Agreement has been discussed
in detail in the Panel Report on Indonesia – Autos .
721  That report concluded, amongst other things,
that:
"… the SCM and TRIMs Agreement cannot be in conflict, as they cover different
subject matters and do not impose mutually exclusive obligations. The TRIMs
Agreement and the SCM Agreement may have overlapping coverage in that they may
both apply to a single legislative measure, but they have different foci, and they
impose different types of obligations."722
7.207  The European Communities agrees with that analysis.
(b) Question 19 ("mere possibility" and contingency)
The EC states: "The mere possibility that in some cases a beneficiary may be required to use domestic
goods instead of imported goods in order to qualify for the subsidy is sufficient to trigger the
application of Article 3.1(b)".  Could the EC please elaborate on this statement in light of the drafters'use of the term "contingent" in Article 3.1(b).  Fu rther, could the EC also elaborate on the relevance
of GATT Article III:8(b), which reads: "The provisions of this Article shall not prevent the payment of
subsidies exclusively to domestic producers ... ", in particular, with regard to whether a value-added
test as a criterion for determining who falls with in the class of "domestic producers" would be in
violation of SCM Article 3.1(b) .
                                                     
721 Panel Report on Indonesia – Autos, supra  note 270, paras. 14.47-14.55.
722 Ibid., para. 14.52.WT/DS139/R
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(i) Reply from the European Communities
7.208  For the reasons already explained, the European Communities is of the view that
Article 3.1(b) of the SCM Agreement does not prohibit only those conditions that require the actual
use of domestic goods by the beneficiary.  It prohibits any condition that gives preference to the use ofdomestic over imported goods, whether or not that condition results in all cases in the actual use of
domestic goods by the beneficiaries.
7.209  In other words, Article 3.1(b) prohibits any subsidy that is "contingent" upon a condition that
favours the use of domestic over imported goods, and not merely those subsidies that are "contingent"
upon the actual use of domestic goods.  In the case at hand, the subsidy is "contingent" in law upon avalue added requirement that gives preference to the use of domestic over imported goods.
Consequently, the subsidy is "contingent upon the use of domestic over imported goods" in the
meaning of Article 3.1(b).
7.210  In any event, assuming arguendo  that "contingent upon the use of domestic over imported
goods" meant contingent upon the actual use of domestic goods, Article 3.1(b) does not require thatthat condition be a necessary one.  In fact, Article 3.1(b) prohibits the granting of subsidies that are
contingent upon the use of domestic over imported goods, "whether solely or as one of several
conditions".
7.211  This may cover the situation where a subsidy is simultaneously subject to two or more
cumulative conditions.  But it may as well apply to the situation where a subsidy is subject two or
more alternative conditions, so that compliance with any of them gives a right to the subsidy.  If one
of those conditions is "the use of domestic over imported goods" the subsidy must be deemedprohibited by Article 3.1(b), even if it is also possible to qualify for the subsidy by complying with
other alternative non-prohibited conditions, such as using domestic labour or domestic services.
7.212  Finally, although for the reasons above mentioned, the European Communities considers that
the CVA requirements are contingent "in law" upon the use of domestic over imported goods, it has
also submitted in the alternative that the CVA requirements make the subsidy contingent "in fact"upon the use of domestic over imported goods.
7.213  Regarding the relevance of GATT Article III:8(b), and, in particular, with regard to whether a
value-added test as a criterion for determining who falls within the class of "domestic producers"
would be in violation of SCM Article 3.1(b):  The Tariff Exemption is not a subsidy "paid" to
domestic producers in the meaning of GATT Article III:8(b).  As confirmed by the Appellate Body inCanada – Periodicals , Article III:8 (b) exempts from the obligations of Article III only the payment
of subsidies involving the expenditure of revenue by the government.
723  Thus, for example, tax
exemptions724 or reductions in transportation or postal rates725 have been found not to be covered by
Article III:8(b).  For the same reason, a subsidy in the form of a tariff exemption is not exempted by
that provision either.726
7.214  Furthermore, assuming arguendo  that Article III:8(b) applied to subsidies in the form of tariff
exemptions, the terms of Article III:8(b) only exempt  the "payment" of the subsidy.  The exemption
                                                     
723 Appellate Body Report on Canada – Periodicals, supra  note 280, p.34.
724 See the Panel Reports on US – Malt Beverages, supra  note 427, para. 5.10; and Panel Report on
Indonesia – Autos, supra  note 270, paras. 14.41-14.46.
725 Appellate Body Report on Canada – Periodicals, supra  note 280, pp. 32-35.
726 In the Panel Report on Indonesia – Autos, supra  note 270, paras. 14.83-14.92, the granting of tariff
benefits contingent upon compliance with certain local content requirements was found to be inconsistent withGATT Article III:4 and prohibited by Article 2.1 of the TRIMs Agreement.WT/DS139/R
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does not extend to any conditions attached to the subsidy, such as local content or value added
requirements727, which have discriminatory effects additional to those of the subsidy itself.
7.215  The application of a value added requirement is not necessary for determining who is a
"domestic producer".  Moreover, if that justification was accepted, Panels would have to ascertain in
each case what level of domestic value added is sufficient to confer the status of "domestic producer".In fact, if that determination was left to each Member’s discretion, the prohibition on local content
requirements would become dead letter.  Members could easily circumvent that prohibition simply by
setting the level of domestic value added at a level such that it requires necessarily the use of domestic
goods.  Yet, the incompatibility with GATT Artic le III:4 of local content requirements, including
those compliance with which is necessary to obtain an advantage, is now well established byprecedent and has been confirmed beyond any possible doubt in Item 1(a) of the Illustrative List of
prohibited TRIMs.  Canada itself has conceded that the granting of subsidies contingent upon a local
content requirement is inconsistent with GATT Article III:4.
7.216  Finally, since the Panel has raised this question under the heading of "The SCM Agreement",
the European Communities would like to recall that, by its own terms, Article III:8(b) of GATT onlyprovides an exemption from the obligations contained in the other paragraphs of GATT Article III.  It
does not provide an exception with respect to the prohibition of subsidies contingent upon the use of
domestic over imported goods contained in Article 3.1(b) of the SCM Agreement.  To the extent that
there was a conflict between GATT Article III:8(b) and Article 3.1(b) of the SCM Agreement, the
latter would prevail in accordance with the General Interpretative Note to Annex 1 A.
(c) Question 20 ("duties borne" and inputs)
The EC remarks: "Duties 'borne' by an exported pr oduct means duties on inputs that are consumed in
the production of that product".  Please explain the legal basis for your view .
(i) Reply from the European Communities
7.217  The remark by the European Communities quoted in the Panel’s question refers to Footnote 1
of the SCM Agreement.  That Footnote is introduced by the clause:  "In accordance with the …provisions of Annexes I through III of  this Agreement".  That clause limits the scope of the exception
to the definition of "subsidy" in Article 1 provided for in Footnote 1 with respect to the remission of
import duties to the two situations described in Item (i) of Annex I, as further interpreted in Annexes
II and III, i.e.:  (i) when imported inputs are used in the manufacture of the exported products;  and (ii)
when domestic inputs having the same quality and characteristics are substituted for imported inputsin the production of exported products.  Item (i) makes it clear that in both cases the inputs must be
"consumed" in the production of the exported products.
(d) Question 21 (the ratio requirements)
Japan states: "Actually, the MVTO and SROs by virtue of the ratio requirement provide the legal
mechanism where the subsidy is contingent upon expor t performance.  The fact that this mechanism is
best understood if explained in the context of a mathematical formula does not diminish its legal
effect".  Is Japan arguing that the duty waiver is export-contingent in law?  Please elaborate.
                                                     
727 According to the Panel Report on Indonesia – Autos, supra  note 270, "… the purpose of Article III:8
(b) is to confirm that subsidies to producers do not violate Article III, so long as they do not have any
component that introduces discrimination between imported and domestic products…" (para. 14.43) "… ArticleIII:8 (b) of GATT does not constitute a defence to any measure providing discrimination between domestic andimported products, including local content requirements" (footnote 686).WT/DS139/R
WT/DS142/RPage 304
(i) Reply from Japan
7.218  It is the position of the Government of Japan that the production-to-sales ratio is in law export
contingent.  The formula expressing such terms of the ratio as stipulated in applicable Canadian law
(i.e. the MVTO 1998 and the SROs) demonstrates clearly that it makes the Duty Waiver contingent
on export performance.
(e)  Question 22 (the measures at issu e and production-based subsidies)
Canada states: "Yet production-based subsidies are not violations of GATT Article III".  Could
Canada further elaborate on this point and on the possible relevance of GATT Article III:8(b).
(i) Reply from Canada
7.219  Canada’s statement that production-based subs idies are not violations of GATT Article III
was a reference to the fact that such subsidies are actionable, not prohibited, under the SCM
Agreement.
7.220  Canada’s statement was made to refute what appears to be Japan’s contention that the
production-to-sales ratios are inconsistent with Article III:4 of the GATT because they serve toincrease domestic production and therefore competition against imported vehicles.  In its argument,
Canada noted that Japan’s underlying assumption was incorrect – the ratios do not increase domestic
production beyond what would otherwise be achieved, as demonstrated by the fact that all of the
automobile manufacturers produce vehicles far in excess of what the ratios require.
7.221  However, even if Japan’s assumption were correct, it would be wrong at law to conclude that
an increase in domestic production as a result of the ratios was inconsistent with Article III:4 of the
GATT.  This is because this argument would read Section III of the SCM Agreement out of existence.Furthermore, Article III:8(b) of the GATT explicit ly recognizes that production-based subsidies to
domestic producers, which inherently increase domestic production, are not subject to Article III of
the GATT.
728  By Japan’s argument, any subsidy that increases domestic production would be a
violation of Article III of the GATT.  This would read out of existence both Article III:8 of the GATT
and Part III of the SCM Agreement which makes production-based subsidies actionable rather thanprohibited.
7.222  The receipt of duty-free treatment contingent on achieving certain production-to-sales ratios
may not be a subsidy at all, by analogy with the exemptions in the SCM Agreement and in particular,
footnote 1 to the SCM Agreement.  In the alternative, if the Panel finds that it is a subsidy, it is a
subsidy maintained on imports:  it is imported vehicles that are exempted from Canada’s 6.1 percentMFN duty.
7.223  In the further alternative, it is a production-based subsidy, by virtue of the requirement to
achieve production-to-sales ratios in order to qualify for duty-free treatment (although benefits are not
linked to production in the sense that production beyond the ratio does not increase benefits).  It is not
a subsidy contingent upon either export performance or the use of domestic over imported goodsbecause of the absence of either sort of contingency.
(f) Question 23 (subsidies and import facilitation)
Canada states:  "... that the duty-free treatment und er the MVTO and the SROs amounts to a subsidy
contingent upon exportation … is an odd allegation, because duty-free treatment is granted to
                                                     
728 See Panel Report on United States – Measures Affecting the Importation, Internal Sale and Use of
Tobacco , adopted 4 October 1994, BISD 41S/131, paras. 109, 111.WT/DS139/R
WT/DS142/R
Page 305
imports".  The EC responds: "In any event, whether or not the tariff exemption "facilitates" imports is
irrelevant.  The SCM Agreement does not provide any exception for export subsidies with 'import
facilitating' effects."  How would Canada rebut the EC's response?
(i) Reply from Canada
7.224  Canada is not suggesting that the SCM Agreemen t provides an exception for export subsidies
with "import facilitating effects".  Canada maintains that the duty-free treatment is not an export
subsidy at all.
7.225  The Appellate Body has stated that a proper interpretation of a provision of an agreement
must be made on the basis of a careful examination of the text, context and object and purpose of that
provision.729  This is what Canada has proposed for Article 3.1(a) of the SCM Agreement.
7.226  The Appellate Body has also found that illustrative lists, although not exhaustive, "exemplify
the kinds of programmes" covered by a provision.730  This is precisely why Canada has relied on the
Illustrative List of Export Subsidies in Annex I to the SCM Agreement.  Canada’s measures  are not
even remotely like those on the Illustrative List.  The European Communities concedes this, but
describes it as "irrelevant", because the Illustrative List is not exhaustive.  On the contrary, as theAppellate Body has found, it is highly relevant.
(g) Question 24 (the Letters and CVA figures)
Without prejudice to whether the Letters of Un dertaking constitute "requirements" under GATT
Article III:4, could Canada please respond to the EC arguments in this regard, including the figures
relating to CVA levels .
(i) Reply from Canada
7.227  The letters do not constitute "requirements".  Even if they did, it is incorrect to assume that
some beneficiaries "cannot possibly" meet their CVA requirements without using some domestic
parts and materials.  The EC’s suggestion that "parts and materials may account on average for as
much as 80 per cent of the cost of sales of motor vehicles assembled in Canada" is belied by Japan’s
Exhibit JPN-43-3 (which Canada understands was not withdrawn, unlike the Japanese language
exhibits JPN-43 and JPN-43-2).  JPN-43-3 demonstr ates that the cost of parts and materials as a
percentage of cost of sales can vary widely.  For Honda, it was 54 per cent in both 1996 and 1997.
For Toyota, it was 69 per cent in 1996 and 63 per cent in 1997.  It is unclear from the exhibit whether
these statistics include Honda and Toyota’s manufacturing facilities in Canada.
(h) Question 25 (the CVA requirements and export performance)
Could Canada please respond to the EC argument that "... the CVA re quirements would be operating
as an export performance condition" .
(i) Reply from Canada
7.228  The EC’s argument again depends on the incorrect premise that the letters are requirements.
Moreover, the argument, like the EC’s "mere possibility" argument, stretches the definition of"contingent upon" well past what it can reasonably bear.  The argument appears to be that in some
cases, manufacturers would export vehicles, in order to meet their CVA requirements, in order to
qualify for the right not to pay duty on other vehicles that they would then import from Europe or
                                                     
729 Appellate Body Report on US – Gasoline, supra  note 487, p. 17.
730 Appellate Body Report on Canada – Periodicals, supra  note 280, pp. 33-34.WT/DS139/R
WT/DS142/RPage 306
Japan (and that according to the EC’s GATT Article III arguments, they could then not sell).  Even if
such treatment constitutes a subsidy, receipt of such treatment is not, de jure   or de facto , conditional
upon, dependent upon or tied to the export of vehicles.  Manufacturers may achieve their CVA
requirements by any means they choose.
(i) Question 26 (contingency – "in law" and "in fact" vs. "express" and "implicit")
The EC states:  "Article 3.1(a) draws a distincti on between contingency 'in law' and contingency 'in
fact', and not between 'express' and 'implicit' contingency".  Could Canada please respond to this
comment .
(i) Reply from Canada
7.229  The European Communities has cited no authority for its assertion and has offered no
explanation of what it considers to be the differe nce between implicit contingency and contingency in
fact.  It is a generally accepted principle that laws must be explicit, not implicit.  Accordingly, under
Article 3.1(a), a subsidy is contingent in law upon export performance where the underlying legal
instruments of that subsidy expressly provide that the subsidy is available to enterprises only on the
condition that they export or undertake to develop exports.  A subsidy is contingent in fact upon
export performance where there is no express requirement to export, but the facts and circumstances
are such that there is an implicit requirement to export (or to undertake export development) for it to
benefit from a subsidy.
(j) Question 54 (the CVA requirements and exportation)
The EC states:  "Thus, in definitive, the CVA requirements make the tariff exemption 'contingent'
either upon the use of domestic over imported goods, contrary to the prohibition of Article 3.1(b);and/or, as the sole alternative, upon export performance, in violation of the prohibition contained in
Article 3.1(a)".  If, as the EC observes, " … the relevant CVA amount includes not only the CVA
contained in the motor vehicles sold domestically but also the CVA of any exported motor vehicles
(and in some cases of exported original equipmen t parts)"  (Emphasis added), could the EC explain
why a manufacturer not using any domestic goods would need to export in order to meet the CVA
requirements.
(i) Reply from the European Communities
7.230  The CVA requirements contained in the Letters of Undertaking and in the SROs stipulate that
the total CVA contained in the motor vehicles sold in Canada or exported (and in some cases also in
the OEM parts) must represent a certain percentage of the cost of sales of the motor vehicles sold in
Canada, i.e. not including the cost of sales of the vehicles produced in Canada and exported, but
including the cost of sales of any imported vehicles sold in Canada.
7.231  Thus, if a beneficiary exports some motor vehicles (or OEM parts) the denominator of the
fraction (i.e. the cost of sales in Canada) is less than if those vehicles are sold in Canada.  On the other
hand, the numerator (i.e. the CVA amount) remains the same, irrespective of whether the vehicles areexported or sold in Canada.
7.232  As shown by the European Communities, the cost of parts and materials a accounts, on
average, for 80 per cent of the cost of sales of the motor vehicles produced in Canada, while labour
and other manufacturing overheads account for the remaining 20 per cent.  This means that a
beneficiary which does not export any motor vehicles or parts will not be able to meet the CVArequirements in the Letters or in the SROs (from 40 per cent to 60 per cent of the cost of sales in
Canada), unless it uses a substantial amount of domestic parts and materials (at least 20 per cent to
40 per cent of the cost of sales).WT/DS139/R
WT/DS142/R
Page 307
7.233  The only conceivable way in which a beneficiary could meet the CVA requirements in the
Letters and the SROs without using any domestic parts or materials at all is by exporting, so that the
non-parts CVA contained in the exported cars can be added to the non-parts CVA of the vehicles sold
in Canada.
7.234  The above may be illustrated by means of the following example.  Assume that a beneficiary
subject to a 40 per cent CVA requirement produces in  Canada 1,000 vehicles with a cost of sales of
10,000 $ each.  Assume further that:  1) parts and materials account for 80 per cent of their cost of
sales, i.e. 8,000 $ per unit;  2) the vehicles contain no domestic parts and materials at all;  and
3) labour and all the other costs included in the cost of sales, with a total value of 2,000 $ per unit, are
exclusively of Canadian origin.  If the beneficiary sold all the vehicles in Canada, the ratio CVA tocost of sales in Canada would be 20 per cent (1,000 units X 2,000 $ / 1,000 units X 10,000 $).  On the
other hand, if the beneficiary exported 500 units, the ratio CVA to cost of sales in Canada would be
40 per cent (1,000 units X  2,000 $ / 500 units X 10,000 $).
7.235  For the sake of simplicity, the above example does not take into account the cost of sales in
Canada of imported vehicles.  Nevertheless, as explained above, the cost of those sales increases thedenominator, which means that in the above example the beneficiary would have to export even a
larger share of its domestic production in order to meet the CVA requirements without using any
Canadian parts or materials.
(k) Question 55 (paragraphs (g), (h), and (i) of  the SCM Illustrative List and the measures
at issue)
Canada states: "It is contextually significant that duty or tax exemption or remission programmes,
such as those described in paragraphs (g), (h), and (i) of the Illustrative List, are deemed not toconstitute export subsidies when they are not excessive."  Could Canada please elaborate on how, in
Canada's view, paragraphs (g), (h), and (i) of the Illustrative List should inform the Panel's
determination of whether the Canadian duty-free trea tment is an export subsidy.  Is Canada arguing
that, even if the import duty exemption were in excess of 6.1%, it would only be an export subsidy if it
was linked directly to exported goods?
(i) Reply from Canada
7.236  Canada is not claiming that the duty exemption in  this case is identical to those listed in items
(g), (h) and (i) of the Illustrative List.  Rather, Canada's point is that those three items consider a tax
or duty rebate to be actionable only if it is excessive.  An excessive duty rebate would be, in practical
terms, no different from a legal duty exemption coupled with a cash subsidy.  Whether such a subsidy
was an export subsidy would depend on whether it was contingent upon export performance.
However, in item (i) of the Illustrative List, a non-excessive duty exemption was specifically
considered not to be an export subsidy even in the case of blatant export contingency.  That context
supports Canada's position that the duty waiver in this case is neither a subsidy nor an export subsidy.
(l) Question 61 (implementation time-period)
Article 4.7 of the Agreement on Subsidies and Countervailing Measures states:
If the measure in question is found to be a prohibited subsidy, the panel shall recommend that
the subsidizing Member withdraw the subsidy without delay.  In this regard, the panel shall
specify in its recommendation the time-period within which the measure must be withdrawn.
In the event that the Panel were to find the exis tence of a prohibited subsidy, what would Canada
consider to be an appropriate time-period for impl ementation, given the use of the phrase “without
delay” in Article 4.7?WT/DS139/R
WT/DS142/RPage 308
(i) Canada's reply
7.237  It is difficult to respond to this hypothetical question, given that Canada does not agree that
the duty-free treatment in this case is a subsidy.  Nevertheless, assuming for the purposes of this
question that the Panel would find the existence of a prohibited subsidy, Canada submits that “without
delay” should be interpreted in a manner that would allow Canada a reasonable opportunity toimplement the Panel’s findings.
7.238  The rationale for creating an expedited dispute settlement process in Article 4 of the SCM
Agreement is that prohibited subsidies are assumed to have trade-distorting effects harmful to the
interests of other Members.  Thus, while the existen ce of such effects is not relevant to determining
whether a “subsidy” is prohibited, their presence or absence should be taken into account indetermining the appropriate time period to be accorded under Article 4.7 in any particular case.
7.239  The measures in this case have no prejudicial or trade-distorting effects.  Moreover, there is
no demonstrable urgency in dealing with measures th at have been in place for thirty-five years, the
only effect of which is to increase imports from countries other than the United States and Mexico –
principally the European Communities and Japan.
7.240  The Canadian measures clearly have no trade distorting effects in any export market, and their
structure makes it unlikely that this will ever change.  The alleged subsidy is a grant of duty-free
treatment in direct proportion to imports, and the formulas for the CVA and the production-to-sales
ratios are such that both exports and domestic purchases could be reduced  without any loss in duty-
remission benefit.
7.241  Empirical evidence confirms this.  Canadian exports of vehicles to the European
Communities and Japan are negligible; the alleged subsidy therefore cannot be causing any distortionsin those markets.  Canadian exports to the United States are attributable to the US duty waiver, and to
proximity, not to any alleged subsidy, as explained in paragraphs 97-98 of Canada’s first written
submission.
7.242  Canada also draws the Panel’s attention to the arguments it made in paragraphs 21 and 22 of
its first written submission.  This case is not about a single discrete measure – what Japan has calledthe “Duty Waiver” and the European Communities “the Tariff Exemption”.  Canada’s implementation
of the Auto Pact involves complex measures; indeed, the complaining parties have purported to
challenge a wide variety of matters, not all of which can even be characterized as “measures”.  Japan,
for example, has cited the MVTO 1998, the SROs, the Customs Tariff , the Financial Administration
Act, the letters of undertaking, departmental memoranda, and unidentified “implementing measures”.
(Japan’s first written submission, para. 16.)  Irrespective of the status of these so-called measures, the
duty-free treatment cannot be withdrawn without affecting every aspect of Canada’s regime.
7.243  For Canada, implementing changes to measures of such long duration will involve
consultations with provinces and stakeholders, the requisite changes to legislation, and the design of
replacement measures.  For the manufacturers, it will involve a change in years of business practice,which cannot be accomplished quickly.
7.244  Finally, Canada notes that the measures have been in existence for decades, and that the
complaining parties themselves have not made any suggestion during these proceedings that there is
an urgent need for action.  Should such a claim be made at this late stage of the proceedings, it should
be rejected.
7.245  Having regard to the foregoing, “without delay” should not require Canada to make any
adjustments until 12 months after the adoption of the Panel’s recommendations and rulings.WT/DS139/R
WT/DS142/R
Page 309
(ii) Comment from Japan on Canada’s Reply
7.246  With respect to the determination of an appr opriate time-period for implementation, there is a
significant difference between the relevant rules and procedures of the DSU and the special and
additional rules and procedures set forth in Article 4.7 of the SCM Agreement. Japan recognizes that
paragraph 3 of Article 21 of the DSU allows an  implementing Member “a reasonable period of time”
to implement the recommendations or rulings of the DSB, where it is impracticable to comply
immediately.  In contrast, Article 4.7 of the SCM Agreement requires a panel to recommend that a
subsidy be withdrawn “without delay”.
7.247  Canada claims that the measures at issue are “complex,” citing even the Financial
Administration Act , apparently in support of its contention that changes to the WTO-inconsistent
programs “would effect every aspect of Canada’s re gime.”  However, not a single Canadian statute
would need to be altered in any way to abolish the illegal aspects of the regime.  Instead, Canada
would only need to repeal the offending portions of the statutory and administrative orders that
actually implement the regime, to withdraw the prohibited subsidies.  Canadian authorities should be
able to accomplish within a few months the process of consulting with the provinces and“stakeholders” – all of which are or should be aware of the challenges to the regime and the likelihood
that it would be adjudged to be WTO-inconsistent.
7.248  In Brazil – Export Financing Programme for Aircraft , the Appellate Body confirmed the
Panel’s interpretation that “without delay” meant 90 days in the circumstances of that case.  In Japan’s
view, we find nothing in the current case which warrants a period longer than the one granted in the
Brazil case.  Thus, the period of twelve months requested by Canada is far too long.
7.249  Canada’s argument that the presence or absence of trade distorting effects should be taken
into account in determining the appropriate time-period for implementation under Article 4.7 is
neither justified by the text of the SCM Agreement nor supported by any authority. As a matter of
fact, however, as argued in Japan’s prior submissions to the Panel, the measures do have trade-
distorting effect, which should not be permitted to continue.
7.250  In paragraph 6 of Canada's response, Canada merely repeats its previous assertions that are
not relevant to the Question, and this should simply be dismissed as irrelevant.
7.251  With regard to paragraph 8 of Canada's response, it must also be noted that it is irrelevant to
the interpretation of "without delay", whether or not any suggestion for "an urgent need for action"
was made by the complaining parties during the proceedings of the current panel.
7.252  In conclusion, in the circumstances of this case, the words “without delay” in Article 4.7
should be interpreted to mean just that.  There is no reason to delay unduly the withdrawal of the
prohibited subsidies.  To permit a long and draw n-out process of implementation would signal to
other WTO Members who may appear before other panels that the orders of the panel are less than
mandatory and that compliance need not occur pr omptly.  Accordingly, Japan suggests that all
recommendations be implemented within no longer than 90 days.WT/DS139/R
WT/DS142/RPage 310
(iii) Comment from the European Communities on Canada’s Reply
7.253  In response to Question 61, Canada advances the extraordinary claim that, in the event that
the Panel were to find the existence of a prohibited subsidy, Canada  should be accorded no less than
twelve months in order to adopt the necessary implementing measures731.
7.254  Canada’s main justification for that request is that the subsidy has “no prejudicial or trade
distorting effect732” and that there is no need for “urgent action733”.
7.255  The European Communities disagrees with those unsupported assertions. Canada’s argument
begs the question: if the ratio and the CVA requirements have no effects at all, why are they enforced?
Contrary to Canada’s claims, there is no “empirical evidence734” whatsoever that the subsidy has no
effect on the level of exports. No doubt, both NAFTA and geographical proximity facilitate Canadianexports to the Unites States. That does not exclude, however, that the subsidy may result in an even
higher level of exports to the United States
735.
7.256  The best proof that the subsidy does have harmful effects is that the European Communities
and Japan, which together with the United States (the beneficiary of the measures in dispute) are the
world’s largest manufacturers of motor vehicles and parts and components thereof, have brought thiscase. Furthermore, they have been supported by Korea,  another major manufacturer.
7.257  In any event,  whether or not the subsidy has any prejudicial effects is not a relevant
consideration in determining the duration of the time period for implementation under Article 4.7 of
the SCM Agreement.
7.258  Article 4.7 constitutes a departure from the general rule contained in Article 21.3 of the
Dispute Settlement Understanding (the “DSU”)
736. The chief purpose of Article 4.7 is to provide
faster remedies than those available under the DSU. Thus, whereas Article 21.3 of the DSU allows a“reasonable period of time” to implement whenever it is impracticable to comply immediately,
Article  4.7 requires that prohibited subsidies be withdrawn “without delay”  in all cases.
7.259  Logic demands that implementation “without delay” should not take longer than
implementation within “a reasonable period of time”. Yet Canada’s argument  would have precisely
that absurd result.
7.260  The effects of a measure found to be inconsistent with the WTO Agreement have not been
deemed relevant in determining the duration of the “reasonable period of time”. As made clear by a
long line of cases, “the reasonable period of time should be the shortest period possible within the
legal system of the Member to implement the recommendations and rulings of the DSB”
 737.
                                                     
731 Canada’s response to Question 61 from the Panel.
732 Ibid.
733 Ibid.
734 Ibid.
735 In any event, this argument does not address the claim that the subsidy violates Article 3.1 b) of the
SCM Agreement.
736 The provisions of Article 4.2 though 4.12 are listed as “special or additional rules and procedures”
in Appendix 2 to the DSU.
737 Arbitration award in EC – Measures concerning Meat and Meat Products (Hormones) ,
WT/DS26/15, WT/DS48/13, 29 May 1998, para. 26. See also the Arbitration awards in Indonesia – Certain
Measures affecting the Automobile Industry , WT/DS54/15, WT/DS55/14, WT/DS59/13, WT/DS64/12,
7 December 1998 (hereinafter Arbitration Report on Indonesia – Autos ), para. 22; Australia – Measures
affecting the Importation of Salmon , WT/DS18/9, 23 February 1999, para. 38; and Appellate Body Report on
Korea – Alcoholic Beverages , supra  note 280, para. 37.WT/DS139/R
WT/DS142/R
Page 311
Consequently, the effects of a measure may not a fortiori  be a relevant factor in assessing what
constitutes implementation “without delay” for the purposes of Article 4.7.
7.261  The following argument recently put forward by Canada in Brazil – Aircraft is also pertinent:
“… Article 7.9 of the SCM Agreement provides that countermeasures may be
imposed if actionable subsidies are not withdrawn within six months of the adoptionof the Panel or Appellate Body reports. It is logical that where a subsidy is required to
be withdrawn without delay , the timeframe for withdrawal must be shorter than the six
month period provided under Article 7.9 and in no circumstances should be longer
than six months
738”.
7.262  Previous cases under Article 4.7 confirm that the effects of a subsidy are not a relevant
consideration. To this date, Article 4.7 of the SCM Agreement has been applied in three occasions739.
In all the three cases, the Panel recommended that  the subsidy be withdrawn within 90 days. The
Panels seem to have reached that conclusion in light of the nature of the measures and of the internal
procedures required in order to implement the Panel’s ruling. On the other hand, there is no indication
in the reports that the Panels took into account the effects of the subsidy.
7.263  Even assuming that the effects of the subsidy were a relevant factor, Canada’s request for
twelve months would still be unwarranted. Panels en joy some discretion to specify in each particular
case the time period within which the subsidy must be withdrawn. But they cannot depart from the
benchmark of “without delay”.
7.264  Implementation twelve months after the adoption of the Panel Report can under no
circumstances be regarded as implementation “without delay”. The ordinary meaning of the terms
“without delay” ( sans retard  in French; sin demora  in Spanish) is “at once”740, “le plus vite
possible741”. Canada’s request is incompatible with the ordinary meaning of “without delay” and
would effectively read out of Article 4.7 that requirement.
7.265  In this regard, it is worth recalling that in Australia – Automotive Leather  the panel took the
view that the implementation period of seven mont hs and one-half months requested by Australia
could not “reasonably be described as corresponding to the requirement that the measure must bewithdrawn without delay
742”.
7.266  Canada also claims that “implementing changes … will involve consultations with provinces
and stakeholders, the requisite changes to legislation and the design of replacement measures”743.
While it is arguable, in the light of the precedents above mentioned, that the duration of the internal
procedures required for implementation may be a relevant factor, Canada has provided no evidence ofthe existence in   Canadian law of any mandatory procedural requirements which may delay the
withdrawal of the subsidy for as much as twelve months.
7.267  The truth is that the MVTO 1998 and the SROS are both Orders-in-Council, i.e. acts of the
executive branch, which can be amended or repealed within a relatively short period of time. The
                                                     
738 Appellate Body Report on Brazil – Export Financing Programme for Aircraft , adopted on 20
August 1999, WT/DS46/AB/R, (hereinafter Appellate Body Report on Brazil – Aircraft), para. 52.
739 Panel Report on Australia – Subsidies Provided to Producers and Exporters of Automotive Leather ,
WT/DS126/R (hereinafter, Panel Report on Australia – Automotive Leather ) paras. 10.6 and 10.7; Panel Report
on Canada – Aircraft, supra note 495, para. 10.4; and Panel Report on Brazil – Aircraft, supra  note 490, para. 8.5.
740 The Shorter Oxford English Dictionary on Historical Principles, Third Edition, p. 511.
741 Dictionnaire alphabetique et analogique de la Langue Francaise Paul Robert, 1964, VI, p.164
742 Panel Report on Australia – Automotive Leather , supra  note 739, para. 10.6.
743 Canada’s response to Question 61 from the Panel.WT/DS139/R
WT/DS142/RPage 312
Letters of Undertaking, being informal acts of the Government,  could be dealt with even more
expeditiously. The Customs Tariff and the Financial Administration Act744 confer to the Canadian
executive the necessary authority for the adoption of the MVTO 1998 and the SROs but are not
themselves measures in dispute. Therefore, there is no need to repeal or amend them in order to
withdraw the subsidy. Finally, the Auto Pact is, according to Canada, a non self-executing agreementwhich would fall outside the scope of this dispute
745. In any event, the Auto Pact merely requires
Canada to grant duty-free treatment to imports by the Auto Pact manufacturers from the United
States. On the other hand, the Auto Pact does not require Canada to grant duty-free treatment to
imports by the Auto Pact beneficiaries from third countries, nor to imports by the SRO beneficiaries,
irrespective of the source. Thus, there is no need to amend the Auto Pact in order to withdraw thosesubsidies.
7.268  Canada also raises the argument that “for the manufacturers, it will involve a change in years
of business practice, which cannot be accomplished quickly
746”. The pertinence of this type of
considerations has been rejected in arbitrations under Article 21.3 DSU. As noted by the Arbitrator in
Indonesia – Autos :
“In virtually every case in which a measure has been found to be inconsistent with a
member’s obligations under the GATT 1994 or any other covered agreement, and
therefore, must be brought into conformity with that agreement, some degree of
adjustment by the domestic industry of the Member concerned will be necessary
[…] Structural adjustment to the withdrawal or the modification of an inconsistent
measure, therefore, is not a ‘particular circumstance’ that can be taken into account
in determining the reasonable period of time under Article 21.3 c).”747
7.269  The same considerations are valid a fortiori  in assessing what constitutes implementation
“without delay” in the sense of Article 4.7 of the SCM Agreement.
7.270  For the above reasons, the European Communities submits that the Panel should recommend
that the subsidy be withdrawn within 90 days from the adoption of the report.
5. Questions and replies relating to claims regarding applicability of the GATS
(a) Question 27 (the duty waiver and Article XXVIII)
Canada argues that none of the examples listed in Article XXVIII relates to access to or to taxation of
goods provided by a service supplier.  Could the EC and Japan please elaborate on how the duty
waiver relates to the measures listed in Article XXVIII.
(i) Reply from Japan
7.271  Judging from the wording of the definitions of "the supply of a service" and "measures by
Members affecting trade in services" in GATS Articl e XXVIII, it is appropriate to interpret that the
listed definitions are not exhaustive.
7.272  The procurement of automobiles is an integral part of the "supply" of wholesale trade services
of motor vehicles within the meaning of Article XXVIII (b), since the supply of wholesale trade
services mainly consists of procuring products from manufacturers and reselling them to retailers.
                                                     
744 See Canada’s response to Question 61 from the Panel.
745 Canada’s response to Question 2 from the EC.
746 Canada’s response to Question 61 from the Panel.
747 Arbitration Report on  Indonesia – Autos , supra  note 737, para. 23.WT/DS139/R
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7.273  The Duty Waiver, by reducing the procurement cost of automobiles that is borne by the Auto
Pact Manufacturers (who are also wholesale trade service suppliers), necessarily affects the
profitability in supplying wholesale trade services – procuring and reselling automobiles.  In turn, it
affects the conditions of competition between wholesale trade service suppliers in selling automobiles
to retail service suppliers (dealers) and the maintenance and expansion of their dealer networks.  Thus,the Duty Waiver constitutes measures by Members affecting trade in wholesale trade services within
the meaning of Article XXVIII.
(ii) Reply from the European Communities
7.274  Contrary to what is implied by the question, GATS Article XXVIII (c) does not contain a list
of "measures" affecting trade in services, but rather a list of matters in respect of which such measures
could be taken.
748
7.275  The use of the term "include" in GATS Article XXVIII (c) makes it clear that the list
contained in that provision does not purport to be exhaustive, but merely illustrative.
7.276  A Note prepared by the GATT Secretariat in 1991749 in order to clarify the definitions of the
terms contained in the then draft GATS described as follows the limited purpose ofArticle XXVIII (c) [Article XXXIV (c) in the draft]:
7.277  "The definition supplements that of supply of a service.  It specifies that measures dealing
with the consumer side of the transaction (purchase, payment and use), transportation and
communication, as well as constraints on physical or juridical presence, are within the scope of the
agreement…"
7.278  Thus, the purpose of Article XXVIII (c) is merely to confirm that measures adopted in respect
of certain matters are also within the scope of GATS, rather than attempting to define the scope of
application of GATS, something which is already done in GATS Article I:1.750
7.279  The illustrative nature of Article XXVIII (c) is evidenced by the fact that, for example, it does
not include measures in respect of the "production" of services.  Yet, there can be no question that a
measure limiting the output of a service provider is a measure "affecting the supply of services".
Indeed, that type of measure is expressly mentioned in GATS Article XVI:2 (c) as a limitation onmarket access.
7.280  The illustrative nature of Article XXVIII (c) has been confirmed by the Panel Report on EC –
Bananas III .
751  According to that Report, the controllin g criterion in order to determine whether a
measure is covered by GATS is not whether it regulates a matter listed in Article XXVIII (c), but
whether it "affects" trade in services:
7.281  "… In principle no measures are excluded a priori from the scope of the GATS as defined by
its provisions.  The scope of the GATS encompasses any measure of a Member to the extent it affects
the supply of a service…".752
                                                     
748 Panel Reports on EC – Bananas III , supra  note 269, para.  7.280.
749 MTN.GNS/W/139, 15 October 1991, para. 6.
750 The Note by the Secretariat of 15 October 1991, observes the following with respect to Article I:1 of
GATS, para. 4:  "This important provision determines the scope of the GATS. Its full meaning is clarified
through the definition of each of its elements: measures, by Parties, affecting, trade in services."
751 Panel Reports on EC – Bananas III , supra  note 269, para . 7.280.
752 Ibid., para. 7.285.WT/DS139/R
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7.282  That finding was affirmed by the Appellate Body.753  Further, the Appellate Body confirmed
that that the term "affect" must be interpreted broadly754 and upheld the Panel’s finding that the rules
for the allocation of a tariff quota for bananas "affected" the provision of distribution services for
those goods.
7.283  In view of the above, there is no scope left for arguing that the measure in dispute in this case,
which is also a tariff measure, like the one at issue in EC – Bananas III , is excluded a priori  from the
GATS’ coverage simply because it is not explicitly listed in Article XXVIII (c).
(b) Question 29 ("critical to the scope and pr ofitability" and "measure affecting trade in
services")
Canada argues against the analogy between the measur es at issue in this case and the EC import
licensing regime on bananas, on the grounds that the latter was "critical" to the scope and
profitability of the provision of distribution servi ces.  Could Canada please clarify the meaning of the
term "critical" in this context and how it is used to determine whether a certain measure would be
considered a "measure affecting trade in services" .
(i) Reply from Canada
7.284  Canada was not proposing "critical" as a test.  The test, as established by the Appellate Body
in EC – Bananas III755 is whether a measure does or does not affect a service supplier in its capacity
as a service provider and in its supply of services.  Canada used the term "critical" to contrast the very
significant effect that access to import licences had on importers in EC – Bananas III  in their capacity
as importers, i.e. their ability to compete for the provision of the service of importing bananas, with
the absence of any effect whatsoever of the 6.1 per cent duty on the ability of vehicle distributors tocompete for the service of distributing vehicles.
7.285  As Canada noted, under the EC’s bananas regime, the right to import bananas within the
tariff-rate quota was allocated by a system of licences.  It was critical to the outcome of EC – Bananas
III that the EC measures deliberately and drastically took distribution business away from certain
suppliers and gave it to others.  Those distributors that did not receive licences faced a prohibitivetariff, which meant that they were effectively prevented from distributing bananas in the EC, unless
they were prepared to pay an exorbitant quota rent to the licence holder.  That is, they were affected
by the import licensing regime in their capacity as distributors.
7.286  The EC’s measures in EC – Bananas III   also imposed differential levels of duty, but it is
significant that these were not even mentioned in relation to trade in services but, properly, only inrelation to trade in goods.  Differential duties may affect goods as goods, but they do not and cannot
affect service suppliers in their capacity as servic e suppliers.  To hold that they do would render null
the three categories of measures identified by the Appellate Body in EC – Bananas III
756 would ignore
the definitions of "supply of a service" and "measures by Members affecting trade in services" in
Article XXVIII of the GATS, would contradict the Addendum  to the Explanatory Note on the
Scheduling of Initial Commitments in Trade in Services , and would create conflicts between the
GATS and differential treatment of goods authorized under the GATT.  The GATS complements the
rights and obligations of the GATT, but was not intended to subsume or contradict them.
                                                     
753 Appellate Body Report on EC  – Bananas III , supra  note 49, para.220.
754 Ibid.
755 Appellate Body Report on EC – Bananas III , supra  note 49.
756 Ibid., para. 221.WT/DS139/R
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(c) Question 58 (interface of GATT and GATS)
Canada has raised the point that differential tariffs arise for a number of reasons.  Such differential
tariff treatment may have adverse commercial consequences for certain service suppliers in the
importing country compared with other service suppliers, particularly where the industry is
characterised by a high degree of vertical integration.
Assuming such differential tariffs are fully consistent with GATT 1994, it may be held that they "affect
trade in services", which is not to imply that such  measures necessarily breach GATS obligations.  In
the case of differential tariffs arising from re gional economic integration agreements, it would seem
logical for any examination of that matter to procee d directly to GATS Article V that deals with the
matter.
However, in other cases unrelated to regional economic integration agreements and thus where
GATS Article V is irrelevant – anti-dumping and CVD orders which are themselves fully consistent
with the provisions of GATT 94 and the Anti- dumping or SCM Agreements, for example – such
differential tariffs may also be considered to have the incidental consequence of "affecting trade in
services" and, moreover, raise the question as to whether less favourable treatment is being accorded
to certain services providers either in terms of GATS Article II or Article XVII.
Could the delegations of Japan and the EC comment on this?(i) Reply from Japan
7.287  As this question is answered in the rebuttal of Japan, the Duty Waiver is not an anti-dumping
or countervailing duty, and therefore the Panel is not required to decide on the consistency between
these GATT-consistent measures and the GATS.  The Panel in the EC – Bananas III also wisely
rejected the argument on the consistency between GATT-consistent measures and the GATS, saying
that the Panel "need not decide in this case how to resolve a conflict that may never arise "between
GATT and GATS provisions.
7.288  It is the position of the Government of Japan  that to the extent that this Panel is considering
this issue in the context of this dispute, the only  difference between the Duty Waiver and the measure
at issue in the EC – Bananas III  is the magnitude of the discrimination of the customs duty in
question, not its nature.   It is therefore the position of the Government of Japan that to the extent thatsuch argument was irrelevant to the EC – Bananas III case, it is equally irrelevant to this dispute.
(ii) Reply from the European Communities
7.289  Differential tariff treatment may "affect the supply of services" in the sense of GATS
Article I:1.  Nevertheless, as rightly noted in the Panel's question, that does not mean that tariff
differentials are per se  contrary to GATS Article XVII or Article II.  For that, it would still be
necessary to show that in casu  the tariff differential provides more favourable treatment to domestic
service suppliers than to foreign service providers, or to service suppliers of one or more Members
than to service suppliers of other Members, respectively.
7.290  The tariff differential at issue in this case is fundamentally different from those resulting from
the existence of a free-trade area ("FTA") established in conformity with Article XXIV GATT.Canada grants the Tariff Exemption only to a limited number of importers/distributors.  By contrast,
in a FTA any importer/distributor is entitled to import duty free any goods from the other constituent
territories of the FTA.  For that reason, the mere existence of a FTA is unlikely to give a competitive
advantage to service suppliers of a particular Member at the expense of service suppliers of other
Members.  In fact, in the present case neither the European Communities nor Japan claim that theWT/DS139/R
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FTA between Canada and the United States established by NAFTA gives raise to a violation of
Article II.  Rather the complainants' claim is that Article II of GATS is breached by the additional
privileges granted to certain US importers/distributors under the Tariff Exemption.
7.291  Contrary to what is implied in the question, whether or not a FTA gives raise to a violation of
GATS Article II is not a question to be examined directly within the framework of Article V GATS.As a first step, it is necessary to establish that there is a prima facie violation of GATS Article II.
Indeed it must be recalled that the existence of a FTA formed in accordance with GATT
Article XXIV does not necessarily presuppose the existence of an Economic Integration Agreement
meeting the requirements of Article V GATS and vice-versa.
7.292  The Tariff Exemption also is easily di stinguishable from anti-dumping ("AD") and
countervailing ("CV") duties.  In the first place, unlike the Tariff Exemption, AD and CV duties do
not discriminate formally among importers/distribut ors.  AD and CV duties apply to all imports from
a given exporting country, or at least to all imports manufactured by a certain undertaking,
irrespective of the identity of the importer/distributor.  By contrast, the Tariff Exemption applies only
and exclusively to imports by a limited number of designated importers/distributors.
7.293  Second, even those importers/distributors which are related to an exporter/manufacturer
subject to AD/CV measures have several options to import the goods that they distribute without
being required to pay AD or CV duties:  (a) to purchase the goods from an unrelated supplier in the
same exporting country;  (b) to purchase the goods from a supplier (related or unrelated) in another
country not covered by the AD/CV measure; or (c) to stop selling at dumped prices or to renounce the
subsidy.  In contrast, there is nothing that a non-beneficiary can do in order to obtain the Tariff
Exemption, short of taking over one of the existing beneficiaries.
7.294  Finally, it must be recalled that AD and CV duties are remedies against practices that distort
competition among goods, and consequently al so among the distributors of those goods.
Furthermore, both AD
757 and CVD duties758 must be applied on non-discriminatory basis on imports
from all sources.  Therefore, AD and CV duties do not "modify the conditions of competition" in
favour of those service suppliers who distribute goods not subject to those measures.  Rather, AD andCV duties serve to re-establish a level playing field between those suppliers who distribute
dumped/subsidised goods and those suppliers who distribute non dumped/non subsidised goods.
6. Questions and replies relating to claims under Article II of the GATS
(a) Question 33 (the measures at issue and GATS Article V)
Without prejudice to Canada's stated position that the duty waiver is not inconsistent with Article II of
the GATS and in the light of the third-party ar gument from the United States, could Canada clarify
whether it sees any relevance of Article V of the GATS to the arguments put forward by the
complainants?
(i) Reply from Canada
7.295  Article V of the GATS is relevant to demonstrate that the scope of the GATS was not
intended to extend to measures according duty-free treatment to goods.  Had those drafting the GATS
ever imagined that trade-in-goods provisions such as duty remission programs might constitute
measures "affecting trade in services", the exemption in Article V:1 of the GATS would have been
extended to agreements liberalizing trade in g oods, and not just agreements liberalizing trade in
services.  To hypothesize the relevance of Article V of the GATS in the event that the GATS was
                                                     
757 C.f. Article 9.2 of the Agreement on Implementation of Article VI of GATT 1994.
758 C.f. Article 19.3 of the SCM Agreement.WT/DS139/R
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found to apply to the duty-free treatment of goods would require contorting the scope of the GATS
beyond the intentions of its drafters.
7.296  If the Panel nevertheless finds that the measures according duty-free treatment to goods fall
within the scope of the GATS, then Canada agrees with the United States that with respect to any
more favourable treatment allegedly accorded to US service suppliers, the measures would be subjectto the MFN exception conferred by Article V:I of the GATS.
(b) Question 34 (ownership and control)
Canada argues that when the nationality of service suppliers (distributors) is ascertained in
accordance with the GATS provisions, no service suppliers of a particular Member are favoured or
disadvantaged.  Please clarify whether service supp liers, as individual economic operators (which in
some cases might be distinct from manufacturers), are service suppliers of other Members according
to Article XXVIII.  And, to the extent possible,  provide factual information on the ownership and
control situation of these operators .
(i) Reply from Japan
7.297  With respect to wholesale trade services relate d to automobiles, the relevant service suppliers
and their ownership are set out in Japan's Tables 1 and 2.
7.298  To summarise the evidence, in Japan's Table 1 the wholesale trade service suppliers of the
Auto Pact Manufacturers are identified—Chrysle r Canada, Ford Canada, GM Canada, Volvo Canada
and CAMI and their ownership is sp ecified.  Applying the ownership test in paragraphs (m) and (n) of
GATS Article XXVIII, the first three companies are US service suppliers and the fourth is a Swedish
service supplier.
759  With respect to the fifth company, it is not a Japanese service supplier within the
meaning of paragraph (n) of GATS Article XXVIII.760
7.299  Japan's Tables 1 and 2 list the following whol esale trade service suppliers of the non-Auto
Pact Manufacturers: Toyota Canada Inc., Nissan Canada Inc., Mazda Canada Inc., Suzuki Canada,
Honda Canada Inc., Subaru Canada Inc., BMW Canada  Inc. and Volkswagen Canada Inc.  Others not
listed on these tables include subsidiaries of South Korean manufacturers (e.g., Hyundai, etc).  Asevident from those tables, all of these companies are non-Canadian and non-US, according to
paragraphs (m) and (n) of Article XXVIII.
7.300  It can be concluded from the foregoing evidence  that US subsidiaries that supply wholesale
trade services benefit from the Duty Waiver and none of the Japanese subsidiaries that supply like
services benefit from the Duty Waiver.
7.301  For the sake of avoidance of misunderstanding, the Government of Japan would like to
emphasize that even if one or more Japanese service suppliers were granted duty-free treatment under
the Duty Waiver (which is not the case), Canada could not justify according less favorable treatment
to other Japanese service suppliers.
                                                     
759 This could change to a US service supplier as a result of Ford Motor Co’s 1 March 1999 agreement
with AB Volvo to purchase Volvo’s world-wide passenger car business.  On 8 March 1999, AB Volvo’sshareholders approved the transaction.  The transactio n will close following the receipt of regulatory approvals.
Source:  Ford Motor Co., Form 10-K Annual Report (US Securities and Exchange Commission), fiscal yearended December 31, 1998.
760 According to the information given to the Ministry of International Trade and Industry of the
Government of Japan by Suzuki Motor Corporation, only General Motors Group owns 40,237,358 preferred
shares of CAMI in addition to ordinary shares equally owned by and between General Motors Corporation andSuzuki Motor Corporation.WT/DS139/R
WT/DS142/RPage 318
7.302  The Government of Japan has only insufficient information relating to service suppliers
which distribute buses and specified commercial vehicles imported from abroad into Canada,
although, to the extent of the knowledge of the Government of Japan, there is at least one Japanese
service supplier named Hino Diesel Trucks (Canada), Ltd.   Since the information as to the nationality
of the service suppliers is uniquely in the hands of the Government of Canada, the information on thisaspect should be provided by the Government of Canada.  Accordingly, the Government of Japan has
submitted a question to Canada on this issue.  It is, nevertheless, the understanding of the Government
of Japan that no Japanese service suppliers are eligible for the duty exemption in connection with
buses and specified commercial vehicles.
(ii) Reply from the European Communities
7.303  The European Communities has already provided the requested factual information on
ownership and control with respect to the five w holesale distributors that are entitled to import
automobiles under the Tariff Exemption in the EC's Table 5.
7.304  As shown in that Table, three of those five wholesale distributors (Ford Motor Co. of Canada
Ltd., General Motors Co. of Canada Ltd and Chrysler Canada Ltd.) can be considered as servicesuppliers of the United States in accordance with the criteria set forth in GATS Article XXVIII m)
and n), while another distributor (CAMI Automotive Inc.) is a joint venture between a Japanese
company (Suzuki Motors Corp.) and a US company (General Motors Corp.).
7.305  The fifth wholesale distributor (Volvo Canada Ltd.) was controlled by Volvo AB, of Sweden,
until January 1999, when Volvo AB agreed to sell its passenger car business to Ford Motor Co., of the
United States.  At any rate, Volvo Canada Ltd closed its Canadian assembly plant in December 1998,
with the consequence that it will loose the right to import motor vehicles under the Tariff Exemptionas of July1999.
7.306  Ford Motor Co. of Canada Ltd, General Motors Co. of Canada Ltd and Chrysler Canada Ltd.
account for the vast majority of sales of automobiles imported under the Tariff Exemption.
7.307  As clarified by the Panel Report in EC – Bananas III
761, the fact that a juridical person of
Member A that controls a service supplier established in Member B is in turn controlled by anotherperson of Country C does not prevent from considering that service supplier as a service supplier of
Member A for GATS purposes.  Thus, contrary to Canada’s assertions, Chrysler Canada Ltd., can still
be regarded as a service supplier of the United States, despite the fact that its US parent company,
DaimlerCrhysler Corp, is controlled by DaimlerChrysler AG of Germany following the merger of
Chrysler with Daimler-Benz.
7.308  The EC's Table 7 (below) provides the requeste d ownership information with respect to the
major wholesale distributors which are not entitled to import automobiles under the Tariff Exemption.
The Table reflects the information available to the EC’s and does not purport to be exhaustive.
7.309  The EC's Table 7 shows that, with only one ex ception (Nissan Canada Inc.) all the major
wholesale distributors of automobiles which do not benefit from the Tariff Exemption are servicesuppliers of Members other than the United States. Thus, for example, Volkswagen Canada Inc. is a
service supplier of Germany because it is owned by a juridical person constituted under German law,
Volkswagen AG, which is engaged in substantial business operations within the German territory.
                                                     
761 Panel Reports on EC – Bananas III , supra  note 269, footnote 493.WT/DS139/R
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EC's Table 7
Country of origin of the major suppliers of wholesale trade services for automobiles which do not
befit from the Tariff Exemption
Service supplier Parent company % of shares
owned by parent
companyCountry of
incorporation of
parent company
Volkswagen
Canada Inc.Volkswagen AG 100 Germany
BMW Canada Inc. BMW AG 100 Germany
Mercedes-Benz
Canada Inc.DaimlerChrysler
AG100 Germany
Honda Canada Inc. Honda Motor Co.
American Honda
Motor Co.*50.14
49.86Japan
USA
Toyota Canada
Inc.Toyota Motor
Corp.
Mitsui & Co.50
50Japan
Japan
Nissan Canada Inc. Nissan Motor Co.
Ltd.
Nissan North
America Inc.**38.3
61.7Japan
USA
Subaru Canad a
Inc.Fuji Heavy
Industries Ltd.100 Japan
Mazda Canada Inc. Mazda Moto r
Corp.
Itochu Corp.60
40Japan
Japan
Hyundai Canad a
Inc.Hyundai Motor
Co.100 Korea
Porsche Canada
Ltd.Porsche AG 100 Germany
Lada Canada Inc. ???  ??? ???
* A fully owned subsidiary of Honda Motor Co., of Japan.
** A fully owned subsidiary of Nissan Motor Co. Ltd., of Japan.WT/DS139/R
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(iii) Reply from Canada
7.310  Article XXVIII(m) of the GATS provides that a "juridical person of another Member" is a
juridical person which is either: (i) constituted or otherwise organized under the law of that other
Member … or (ii) in the case of the supply of a service through commercial presence, owned or
controlled by … juridical persons of that other Member identified under subparagraph (i).
7.311  Article XXVIII(n)(i) of the GATS provides that a juridical person  is "owned" by persons of a
Member if more than 50 per cent of the equity interest in it is beneficially owned by persons of that
Member.
7.312  Chrysler Canada Ltd. is now DaimlerChrysler Ca nada Inc..  It is a wholly-owned subsidiary
of the DaimlerChrysler Corporation (a United States  company), which in turn is 100 per cent owned
by DaimlerChrysler AG of Germany.
7.313  According to Article XXVIII(m)(i), DaimlerChrysler AG is a juridical person constituted
under the law of Germany.  DaimlerChrysler Canada  Inc. is owned by DaimlerChrysler AG through
DaimlerChrysler Corporation.  DaimlerChrysler Canada Inc. is therefore a juridical person of
Germany, according to Article XXVIII(m)(ii) and XXVIII(n)(i).
7.314  Similarly, Nissan Canada Inc. is a juridical person of Japan, although according to Japan's
Table 2, it is majority-owned by Nissan North America Inc. of the United States.  This is because
Nissan North America Inc. is itself 100 per cent owned by Nissan Motor Co. Ltd. of Japan.
7.315  While Volvo Canada Limited was operating as a manufacturer in Canada, it was wholly-
owned by Volvo AB of Sweden.  It was theref ore a juridical person of Sweden by operation of
Articles XXVIII(m) and (n).  Volvo Canada Limited is now indirectly wholly-owned by the Ford
Motor Company.
7.316  CAMI Automotive Inc. is 50 percent owned by General Motors of Canada Limited and
50 per cent owned by the Suzuki Motor Company of Japan.  General Motors of Canada is wholly-
owned by the General Motors Corporation of the United States, making it a juridical person of the
United States for the purposes of Article XXVIII.  CAMI is therefore owned 50/50 by juridical
persons of the United States and Japan.  Under Article XXVIII(n)(i), ownership by persons of aMember requires an equity interest greater than 50 per cent.  Persons of neither the United States or
Japan own CAMI individually because neither Genera l Motors nor Suzuki individually owns greater
than 50 per cent.  Together however, they own 100 per cent of CAMI.  CAMI can therefore be said to
be a juridical person of both the United States and Japan.
(c) Question 35 (vertical integration)
Canada argues that in the supply of wholesale trade services for automobiles there is no competition
between wholesale trade service suppliers since wholesale suppliers are subordinated to
manufacturers and therefore the question of an effect on conditions of competition does not arise.
Does vertical integration between manufacturers and suppliers of wholesale trade services excludeany actual or potential competition at the wholesale trade level?  To what extent does vertical
integration between manufacturers and suppliers of wholesale trade services also exclude competition
with respect to sales to retailers?WT/DS139/R
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Page 321
(i) Reply from Japan
7.317  As the Appellate Body Report for EC – Bananas III confirmed, even if wholesale trade
service suppliers are integrated with manufacturers,  to the extent they are engaged in providing
wholesale trade services, they are wholesale trade service suppliers.
7.318  And vertical integration between manufacturers and suppliers of wholesale trade services
does not exclude any actual and potential competition at the wholesale trade level, since an integrated
manufacturer, in its capacity as a wholesale trade service supplier, competes with other wholesale
trade service suppliers as to the sales of automobiles to retail service suppliers (dealers) and the
maintenance and expansion of their dealers networks.  This type of competition is relevant to this
dispute because dealers are consumers of the wholesale trade services provided by the servicesuppliers in question.  To the extent that manufacturers/wholesale trade service suppliers are to sell
automobiles to retail service suppliers (i.e. dealers), there is competition between those
manufacturers/wholesale trade service suppliers with respect to sales to retailers, notwithstanding
their vertical integration.
7.319  Further, differences in the retail prices of automobiles caused by the Duty Waiver will
necessarily affect sales volumes and will lead to differences in profitability in supplying wholesale
trade services between manufacturers/wholesale service suppliers.  This means that the conditions of
competition between manufacturers/wholesale trade service suppliers for sales to retailers will be
negatively affected.
(ii) Reply from the European Communities
7.320  No.  Although the major wholesale distributors of automobiles present in the Canadian
market are vertically integrated with manufacturers
762, that does not exclude any actual or potential
competition amongst them with respect to the purchase of motor vehicles from manufacturers for
wholesale resale.
7.321  In the first place, some foreign manufacturers of automobiles have little or no presence at all
in the Canadian market (e.g., Renault, Peugeot-Citroen, Fiat, Mitsubishi, Proton or Tata).
7.322  Those potential new entrants have basically three options in order to penetrate into the
Canadian market:  to set up their own distributors; to designate an independent distributor; or to
appoint as a distributor an existing integrated distributor.  The last option is not unusual, in particular
when the model ranges of the two manufacturers c oncerned are complementary.  By way of example,
in the past Chrysler has imported and distributed in Canada motor vehicles manufactured by
Mitsubishi, an unrelated Japanese producer (see Exhibit EC-16, Table 1.7).
7.323  Thus, while it may be true that, as argued by  Canada, Honda Canada and Ford Canada would
not compete for the distribution in Canada of vehicl es manufactured by Ford in the United States, they
may compete, not only with other integrated distributors but also with independent distributors, for
the distribution of vehicles produced by a fore ign manufacturer without a distribution network in
Canada.  The Tariff Exemption confers upon the beneficiaries a competitive advantage in that marketbecause it lowers their import costs and, therefore, gives them the possibility to offer better
purchasing terms to the foreign manufacturer.
7.324  Secondly, even with respect to motor vehicl es of the parent company’s brand, vertically
integrated distributors may face competition from parallel importers.
                                                     
762 The affiliation of some distributors, such as Lada Canada Inc., is nevertheless unclear, as shown in
Table 7.WT/DS139/R
WT/DS142/RPage 322
Regarding the question, "To what extent does vertical integration between manufacturers and
suppliers of wholesale trade services also exclude competition with respect to sales to retailers?":
7.325  Canada’s argument is built on the wrong assumption that wholesale distribution services are
provided by the wholesalers exclusively to the manufacturers. The truth, however, is that wholesalerdistributors of automobiles act as intermediaries between the manufacturers and the retailers (and in
some cases final consumers, e.g., in the case of so-called "fleet sales" to big purchasers).  They
provide a service to retailers as much as to the manufacturers.  In fact, except in the rare cases where
wholesale distributors of automobiles act as mere agents for the manufacturers, the "buyer" of the
service, i.e. the person who actually "pays" for the distribution service, is the retailer and not themanufacturer.
7.326  Quite clearly, vertical integration between manufacturers and wholesale distributors of
automobiles, even if it were complete, would not exclude per se competition among wholesale
distributors with respect to sales to retailers and final consumers.  Vertical integration has the only
consequence that Honda Canada and Ford Canada cannot compete to resell the same automobiles to
retailers.  But it does not prevent them from comp eting in order to resell to dealers automobiles
manufactured by their respective parents which are directly competitive and substitutable with each
other. In other words, the absence of intra-bra nd competition among wholesalers does not exclude
inter-brand competition.
(iii) Reply from Canada
7.327  Canada notes that the arguments in question are found in its initial response.
7.328  It is not clear if the question refers to vertical integration in the motor vehicle industry only,
or to vertical integration generally.  In the motor vehicle industry, a combination of vertical
integration and exclusive distribution arrangements does exclude any actual or potential competition
at the wholesale trade level.  The same is not necessarily true of other industries.  For example, it is
not the case in the bananas business, where even those companies that were vertically integrated had
the "capability and opportunity to enter the wholesale service market".763
7.329  Contrary to what was implied by the European Communities in its argument, the Appellate
Body’s findings in EC – Bananas III  in respect of integrated wholesalers were specific to the facts of
the case.  The Appellate Body stated that:  "even if a company is vertically-integrated, … to the extent
that it is also engaged in providing "wholesale trade services" and is therefore affected in that
capacity by a particular measure of a Member in its supply of those ‘wholesale trade services’,  that
company is a service supplier within the scope of the GATS".764  (emphasis added )
7.330  The fact that a wholesale service supplier is integrated does not mean that it is necessarily
outside the scope of the GATS, but nor does it mean that it necessarily falls within the scope of the
GATS either.  The determining factor is whether that service supplier is affected in its capacity as a
service supplier and in its supply of those services.  The nature of the motor vehicle industry is suchthat there is no competition among wholesale service suppliers in the supply of wholesale trade
services.  Japan confirmed this in its arguments.
[Regarding the question "to what extent does vertical integration between manufacturers and suppliers
of wholesale trade services also exclude competition with respect to sales to retailers?":]
7.331  If the EC’s reference to retailers was meant to suggest that retailers could choose among
wholesale service suppliers, the suggestion is wrong.  Wholesaling by definition entails sales to
                                                     
763 Panel Reports on EC – Bananas III , supra  note 269, para. 7.320.
764 Appellate Body Report on EC –  Bananas III , supra  note 49, para. 227.WT/DS139/R
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retailers.  Wholesalers purchase goods from manufacturers and resell them to retailers.  A headnote to
Division 6 of the CPC states that:  " The principal services rendered by wholesalers and retailers may
be characterized as reselling merchandise , accompanied by a variety of related, subordinated services
…".  ( emphasis added )
7.332  "Reselling" necessarily implies that the reseller has purchased the good in the first place. It is
uncertain to what extent the commercial presences of the motor vehicle manufacturers identified by
the complainants as "wholesalers" have purchased the vehicles from the manufacturers.  If they have
not, they cannot be said to be wholesalers at all.  The complainants have offered no evidence on this
point.
7.333  Even assuming that these commercial presences are wholesalers, they do not compete for
sales to retailers for the same reason that they do not compete to distribute the vehicles of particular
manufacturers.  The so-called wholesalers have exclusive distribution arrangements with the
manufacturers.  Accordingly, retailers of specific brands of vehicles cannot select among wholesale
service suppliers for the supply of those vehicles.  Retail dealers of Honda automobiles cannot for
example, approach General Motors of Canada and ask General Motors to supply them with Hondas
from the Honda Motor Company of Japan.  Those retaile rs must rely on Honda Canada Inc. to provide
those vehicles.
7.334  It is possible that the European Communities was suggesting that duty-free treatment may
influence which brands of vehicles retailers choose to sell and that this consequentially influences
their choice of service supplier.  However, this simply underscores that what benefits from the duty-
free treatment is particular goods (the vehicles) and that there is no competition in the provision of
distribution services for those goods.  To contend th at the measure affects wholesale service suppliers
through retailers implies that every measure affecting goods not only affects wholesale service
suppliers of those goods but also the retailers of the goods as well.  No measures affecting goods
would not also "affect" services.  The EC’s argument would obliterate the distinction among the three
categories of measures by the Appellate Body in EC – Bananas III.765
(d) Question 56 (the measures at issue and GATS Article V)
In its reply to question 33 from the Panel, Canada said that if the Panel found that the duty waiver fell
within the scope of the GATS it agreed with the United States that with respect to any more
favourable treatment allegedly accorded to US serv ice suppliers, the measures would be subject to the
MFN exception conferred by Article V:1 of the GATS.  Could Canada elaborate further on how the
mesures at issue could be considered consistent with the paragraph 6 of Article V, concerning thetreatment of service suppliers of Members not parties to the economic integration agreement?
(i) Reply from Canada
7.335  Canada did not invoke the Article V:1 exception, because the tariff measures in question do
not affect trade in services and hence are not subject to the GATS.  Article V:1 of the GATS covers
agreements liberalizing trade in services but it does not cover tariff measures taken pursuant toagreements liberalizing trade in goods, such as those creating free-trade areas or customs unions.
Canada submits that such measures are not exempted under Article V:1 because, until the EC and
Japanese claims in this case, no one, including the drafters of the GATS and those involved in EC –
Bananas III,  had ever thought that tariff measures were within the scope of the GATS.
7.336  Canada stated that if the Panel nevertheless found that the measures according duty-free
treatment fell within the scope of the GATS, Canada would endorse the suggestion of its NAFTA
partner, the United States, that by extension, Article V:1 of the GATS would apply to any alleged
                                                     
765 Appellate Body Report on EC –  Bananas III , supra  note 49, para. 221.WT/DS139/R
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MFN violation arising from a provision of the NAFTA.  This would be because the NAFTA is,
among other things, an agreement liberalizing trade in services and therefore falls within Article V:1
of the GATS.
7.337  It is not entirely clear to Canada why the Panel is raising Article V:6 in the context of
Article V:1.  Article V:6 of the GATS creates an obligation on Members to grant service suppliersthat are juridical persons of another Member constituted under the laws of a party to an agreement
liberalizing trade in services the treatment granted under the services liberalizing agreement, provided
that the juridical person engages in substantive business operation in the territories of the parties to the
services liberalization agreement.  Because neither of the complainants claimed a violation of Article
V:6 in its request for a panel, alleged violations of Article V:6 of the GATS are not properly withinthe Panel's terms of reference.
7.338  If the Panel's question is intended to suggest that an inconsistency with Article V:6 would
negate the exception afforded by Article V:1, Canada cannot agree.  In contrast with paragraphs (a)
and (b) of Article V:1, there is nothing in Article V:6 itself or elsewhere in Article V to suggest that
Article V:6 constitutes a condition limiting the application of the Article V:1 exception.  If it had beenintended as such a condition, it would have been included in Article V:1 rather than drafted as an
independent obligation.
7.339  In any event, the NAFTA fully satisfies Article V:6. The treatment granted by the NAFTA
chapters that specifically address trade in services (Chapters 11, 12 and 14) is granted to service
suppliers that are juridical persons of other Members constituted under the laws of the NAFTA parties
and engaging in substantial business activities there.  To the extent that the tariff treatment granted by
the trade in goods provisions of the NAFTA affects trade in services – and in Canada's view it doesnot – that tariff treatment is also granted to service suppliers that are juridical persons of other
Members constituted under the laws of the NAFTA parties and engaging in substantial business
activities there.  This includes Canada's duty-free treatment for qualifying manufacturers, as permitted
under the NAFTA.
• Also, hypothetically, what would be Canada's justification for more favourable treatment
accorded to non-NAFTA service suppliers?
7.340  Canada does not understand the question but would be pleased to receive a clarification of it
and an opportunity to respond.  [The Panel decided not to pursue this matter.]
(e) Question 57 (the measures at issue and de facto  discrimination)
The EC and Japan claim that Auto-Pact manufacturers, as suppliers of wholesale trade services, are
accorded more favourable treatment in a manner which constitutes de facto discrimination againstother like service suppliers.  Does this impl y that Auto-Pact manufacturers and other service
suppliers receive formally identical treatment?  Ho w could this relate to the Auto-Pact manufacturers
being a closed list?
(i) Reply from Japan
7.341  The claim of the Government of Japan with regard to the eligibility restriction is that Japanese
service suppliers are de facto  excluded from ever qualifying for the Duty Waiver due to various
conditions set forth under the MVTO 1998 and the SROs as outlined in Japan's arguments as well as
the fact that Auto Pact Manufacturers are limited to those on "a closed-list".  Since GATS Article II
applies to de facto  discrimination as well as de jure  discrimination, it is not necessary to address the
significance of "formally identical treatment" in the context of this dispute.WT/DS139/R
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(ii) Reply from the European Communities
7.342  No.  The treatment received by the Big Three and CAMI is formally, and not simply de facto ,
more favourable than that accorded to the other suppliers of wholesale distribution services for
automobiles.  The European Communities clai ms that the Tariff Exemption results in de facto
discrimination in the sense that, although those differences in treatment are not formally based on theorigin of the service suppliers, de facto  US suppliers receive more favourable treatment than the
suppliers of other Members.
7.343  The fact that the list of beneficiaries was frozen as of 1989 reinforces the discriminatory
effects of the Tariff Exemption, because it means that other suppliers of distribution services for
automobiles cannot obtain the Tariff Exemption, even if they are also established as manufacturers inCanada and meet CVA and ratio requirements equivalent to those imposed upon the beneficiaries.
7.344  Finally, the fact that the list was frozen at the request of the United States evidences that the
effects of the Tariff Exemption are by no means the result of geography or accident, as claimed by
Canada, but the intended consequence of a deliberate policy to provide an advantage to the US
suppliers over the suppliers of other Members.
(f) Question 59 (origin of wholes ale trade service suppliers)
Could Japan please clarify on what basis it has classified three suppliers of wholesale trade services
for buses and specified commercial vehicles as Canadian in Exhibit JPN-50.
Could Japan please provide necessary material to support the Canadian origin of these suppliers.7.345  As for the nationality of the “juridical person”,  Article XXVIII (m)(i) and (ii) and (n)(i) of
the GATS prescribe as follows:
(m) “juridical person of another Member” means a juridical person which is either:
(i) constituted or otherwise organi zed under the law of that other
Member, and is engaged in substantive business operations in the
territory of that Member or any other Member; or
(ii) in the case of the supply of a service through commercial presence,
owned or controlled by:
1. natural persons of that Member; or
2. juridical persons of that other Member identified under
subparagraph (i);
(n) a juridical person is:
(i) “owned” by persons of a Member if more than 50 per cent of the
equity interest in it is beneficially owned by persons of that Member;
…
7.346  Based on the information provided by the Government of Canada in its response to
Question (4) of the Government of Japan, the three suppliers of wholesale trade services classified as
Canadian in Exhibit JPN-50, which are A. Girardin Inc., Les Enterprises Michel Corbeil Inc. andWestern Star Trucks Inc., have imported vehicles from other countries into Canada.  Those companies
provide services through a commercial presence in Canada.  If those companies are not owned or
controlled by natural persons of a country other than Canada or juridical persons of countries other
than Canada identified under subparagraph (m)(i), those companies are not “juridical persons of
another Member”, and it follows that those companies are juridical persons of the Member (Canada).WT/DS139/R
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7.347  On the homepage of the Canadian Department of Industry (Industry Canada)
(http://strategis.ic.gc.ca/), Industry Canada stated that “Both Thomas Built and Canadian Bluebird are
American-owned.  A. Girardin and Michel Corbeil Enterprises Inc. are wholly-owned Canadian
companies.”  (See page 3 of attachment 1 to this response [assigned name:  Exhibit JPN-51].)
Therefore, Japan concluded that A. Girardin and Michel Corbeil Enterprises Inc. are service suppliersof Canadian origin.
7.348  On the homepage of Industry Canada ( http://strategis.ic.gc.ca /), it is also indicated that
ownership of Les Enterprises Michel Corbeil Inc. (see attachment 2 [assigned name:  Exhibit JPN-
51]) and Michel Corbeil Enterprises Inc. (see attachment 3 [assigned name:  Exhibit JPN-51]) is
Canadian.  This homepage also indicates that the ownership of Western Star Trucks Inc. is Canadian(see attachment 1 [assigned name:  Exhibit JPN-51]).  Based on the information from Industry Canada
on the ownership of those three companies, it is reasonable to presume that more than 50 per cent of
their equity interests is owned by Canadians.
7.349  Please see attachments 1-3 [assigned name:  Exhibit JPN-51], which substantiates Japan's
above conclusion.
(g) Question 60 (origin of wholesale trade service suppliers)
Could Canada please confirm that the three suppliers of wholesale trade services for buses and
specified commercial vehicles, listed as Canadian in Exhibit JPN-50, are of Canadian origin.
7.350  The three companies listed as Canadian in Exhibit JPN-50 are A.Girardin Inc., Les
Entreprises Michel Corbeil Inc., and Western Star Trucks Inc.  Canada has the following information
about their “origin”:  A.Girardin Inc. and Les Entreprises Michel Corbeil Inc. are both privately-owned companies incorporated in Canada.  To Ca nada’s knowledge, both companies are Canadian-
owned.  Western Star Trucks Inc. is a company incorporated in Canada.  It is wholly-owned by a
Canadian-incorporated company, Western Star Trucks Holdings Ltd., which in turn is controlled by a
Singapore-incorporated company, Western Star International, which owns 42 per cent of Western Star
Holdings.
7.351  Canada notes that Japan has not adduced any evidence in the record to support its assertion
that the three companies at issue are “suppliers of wholesale trade services”.  As Canada noted in its
Response of 25 June 1999 to the Panel’s Question 35, wholesalers purchase goods and resell them to
retailers.  A headnote to Division 6 of the CPC states that: “the principal services rendered by
wholesalers and retailers may be characterized as reselling merchandise…”  Manufacturers thatimport vehicles but do not resell them to retailers are not “suppliers of wholesale trade services”.
7.352  Eligible manufacturers that do import buses or SCVs are not necessarily “wholesale trade
service suppliers”.  For example, they may import bus or SCV chassis (which are considered to be
vehicles under the MVTO and the SROs) as inputs for finished vehicles of their own manufacture;
they may re-import vehicles of their own manufacture that have been exported for modification inother countries; or they may import vehicles as retailers (i.e. for direct sale to end-users).  None of
these activities would constitute the supply of wholesale trade services.
7.353  In its Response of 25 June 1999 to Japan’s Question 2(4), Canada stated only that the three
companies in question, among others, “have imported vehicles other than automobiles under the
MVTO or an SRO at least once in the last 10 years”.  At paragraph 131 of its Second WrittenSubmission of 2 July 1999, Japan subsequently declared  all of these companies to be “wholesale trade
service suppliers”.  It has offered no evidence to substantiate this assertion.WT/DS139/R
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7. Questions and replies relating to claims under Article XVII of the GATS
(a) Question 28 (services supplied through mode 1)
The EC quotes some examples of services potentially affected by the CVA, which can be supplied
through mode 1 and which cannot be considered to be inherently disadvantaged due to their foreign
character.  Could the EC and Japan please identify all services sectors affected by the C VA whichcan be supplied through mode 1.
(i) Reply from Japan
7.354  Since the CVA applies to services in general and only the Government of Canada has full
information on the types of services that are or could be included in the CVA, it is not possible for the
Government of Japan to identify all service sectors affected by the CVA which can be suppliedthrough mode 1.  However, only one example of disc rimination is sufficient to establish a violation of
GATS Article XVII.
7.355  Japan's initial argumentation lists three general categories of services that, on their face,
would qualify for inclusion in the CVA calculation.  These services could be supplied through mode
1.  For example:
• Repair and maintenance services  – These services could be supplied through mode 1 in situations
where machinery and/or equipment would be repaired with the technical advice rendered throughtelecommunications means.  Examples of such machinery and/or equipment include computer
hardware, control boards, and moveable mechanical equipment and devices.  Other examples
include repair and maintenance services of high-tech machines supplied through
telecommunications means from outside of Canada.
• Engineering Services  –  These services could be supplied through mode 1 in situations where
experimental work and/or product development work in relation with motor vehicle
manufacturing is conducted in the form of technical advice rendered through telecommunications
means.  Examples of such services include engine ering services related to the design of a motor
vehicle assembly line supplied through telecommunications means from outside of Canada.
Engineering services related to the operation of such line of production could also be supplied
through telecommunications means from outside of Canada.  As a result, engineering services arenot inherently domestic as incorrectly suggested by the Government of Canada.  For example, it is
possible for engineers outside of Canada to monitor the production process of facilities located in
Canada.
• General Services  – Accounting, data processing, software implementation, and management
consulting are a few examples of general services that could be supplied through mode 1.
Examples of such services include production data processing services rendered through
telecommunications means from outside of Canada, software that can be upgraded through
telecommunications means, book keeping that could be performed through telecommunications
means, management, corporate governance and human resources studies that could be performed
through telephone conference by foreign firms upon receipt of relevant information from themanufacturer.WT/DS139/R
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(ii) Reply from the European Communities
7.356  As a preliminary remark, it should be noted that the examples quoted by the European
Communities included not only examples of supply through mode 1 ("cross-border" supply), but also
examples of supply through mode 2 ("consumption abroad").
7.357  The European Communities considers that in principle all the service sectors listed in its
initial argumentation (i.e. "non-life insurance services", "repair services incidental to machinery and
equipment", "engineering services", "professional services", "computer related services", "banking
services", "telecommunication services", "travel services" and other "business services") can be
supplied through mode 1 and/or mode 2.  Further, mo st of them, if not all, can be supplied through
mode 1.
7.358  As regards, "non-life insurance services" (C PC 8129) and "engineering services" (CPC 8672),
Canada applies some limitations to the supply through mode 1.  While for the reasons explained
elsewhere, those limitations do not exclude a violation of Article XVII, their very existence
demonstrates that provision through mode 1 is not impossible.
7.359  The same is true of many sub-sectors falling within the category of "general and
administrative expenses" such as "accounting, auditing and book-keeping services" (CPC 862766);
"management consulting services" (CPC 865767);  "placement and supply services of personnel"
(CPC 872768);  "travel agencies and tour operator services" (CPC 7471769); "telecommunication
services" (sub-sectors a), b), c), d) e) and f)770); and "banking services"771.
7.360  As regards the remaining services mentioned in the EC argument, it is not difficult to
conceive examples of supply though mode 1:
7.361  Foreign legal consultants (CPC 861*):  the Canadian Association of Auto Pact beneficiaries
requests from a Brussels law firm with no commercial presence in Canada, to give a legal opinion on
the WTO compatibility of the Auto Pact.  In response, that law firm sends by fax a memorandum
setting out the reasons why the Auto Pact violates the WTO Agreement.
7.362  Taxation services (CPC 863*):  Intermeccanica is considering to set up a subsidiary in the
EU.  It requests a tax consultant based in Brussels  to advise on what member State would constitute
the best location from a tax point of view.  Both the request and the answer are delivered through
e-mail.
7.363  Computer related services:  GM Canada asks Siemens Germany to design the computer
hardware and software for its new factory in Quebec (CPC 841 and 842*);  GM Canada outsources
the processing of bills to a company in Bangalore (India) (CPC 843*);  GM Canada subscribes to theelectronic version of the EC Official Journal published in Luxembourg (CPC 844*).
7.364  Technical testing and analysis services (CPC 8676):  the R & D department of GM Canada
sends a sample of a new ecological fuel made from maple syrup to the Max Planck Institute in
Hamburg for further testing.  The results are delivered by e-mail.
                                                     
766 GATS/SC/16, p. 18 (Exhibit EC-19).
767 Ibid., p. 30.
768 Ibid., p. 33.
769 Ibid., p. 70.
770 GATS/SC/16/Suppl.3, p.2 (Exhibit EC-19).
771 GATS/SC/16/Suppl.4, p. 1 (Exhibit EC-19).WT/DS139/R
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7.365  Arguably, a few of the sub-sectors identified by the European Communities (e.g., "repair
services incidental to machinery and equipment"  (CPC 8861 to 8866) and "hotel and lodging" (CPC
641) and "food and beverage serving" (CPC 642/3) cannot be supplied through mode 1.  Nevertheless,
as evidenced by the examples provided by the Eu ropean Communities, all of them can be provided
though mode 2.
(b) Question 30 ("like" service suppliers)
Canada argues that there are no Canadian wholesale distribution service suppliers which are "like"
Japanese suppliers.  Could Canada please clarify on what grounds Intermeccanica should not be
considered "like" other suppliers of wholesale trade services for automobiles.  Could it also clarify on
what grounds Canadian suppliers of wholesale trade  services for buses and specialised commercial
vehicles should not be considered "like" suppliers of wholesale trade services for automobiles.
(i) Reply from Canada
7.366  Canada notes that it is Japan that has the burden of proof in making its claim that
Intermeccanica is a "like" service supplier.  Japan has provided no evidence or explanation for this
claim.  Japan has simply asserted that "Intermeccanica is a Canadian service supplier within themeaning of Article XVII of the GATS".  It neither  substantiated that assertion nor addressed whether
the services Intermeccanica allegedly supplies are wholesale distribution trade services. In keeping
with the well-established principle, confirmed by the Appellate Body in  United States – Measure
Affecting Imports of Woven Wool Shirts and Blouses from India
772, that the initial burden of proof lies
on the complaining party to establish a prima facie case, the onus is on Japan to explain why
Intermeccanica should be considered "like" other suppliers of wholesale trade services for
automobiles.  Japan has failed to meet its burden.  The onus has not shifted to Canada because Japanhas not made out a prima facie case.
7.367  In any event, there are two fundamental reasons why Intermeccanica is not "like" other
suppliers of wholesale trade services for automobiles.  In the first place, it is not a supplier of
wholesale trade services at all.  As the European Communities acknowledged, it is a producer  of
automobiles.  It is not a wholesaler and is irrelevant for the purposes of a GATS analysis.  It does notimport automobiles for resale or distribute them at all.
7.368  Secondly, even if it were a wholesale distribution supplier, which it clearly is not, its size and
sales volumes, and the vehicles it "distributes", are vastly different from those of any of the
commercial presences identified by Japan as wholesale distribution service suppliers.  Intermeccanica
has 8 employees.
773  It has never produced more than 22 vehicles in a year.  The vehicles it does
produce are hand-built replicas of famous automobiles.  It is simply preposterous to contend that it is
a potential competitor774 for the wholesale distribution business of companies like Toyota or Honda,
which import tens of thousands of cars each year.  Even if Intermeccanica were a wholesale
distribution service supplier, it would be utterly "unlike" the foreign service suppliers listed by Japan.
(ii) Reply from Canada
7.369  Regarding "on what grounds Canadian suppliers of wholesale trade services for buses and
specialised commercial vehicles should not be considered 'like' suppliers of wholesale trade services
for automobiles", again, the burden of proof lies with Japan to substantiate its allegations.  Again, it
has failed to do so.  In its initial arguments, Japan stated that:
                                                     
772 Appellate Body Report on US – Wool Shirts , supra  note 283, p. 12 et seq .
773 See Exhibit JPN-12.
774 Even if such competition were feasible, which it is not due to the relationships between the parent
manufacturers and their Canadian subsidiaries.WT/DS139/R
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… Auto Pact Manufacturers of Canadian origin manufacture buses and commercial
motor vehicles, which Japanese automobile industries may export to meet demand if
latent demand exists.  The Japanese motor vehicle industry may also offer wholesale
trade services for such buses and commercial vehicles if such demand exists.  This
demonstrates that there are Canadian motor vehicle wholesale trade service suppliersin Canada.
7.370  Of course, Japan has demonstrated nothing of the sort.  It has simply asserted that there are
Canadian manufacturers  of buses and (specified) commercial vehicles.  However, it has failed to
adduce any evidence whatsoever that there are Canadian suppliers of wholesale trade services forbuses and specified commercial vehicles.  The manufacture of a good and the wholesale distribution
of that good are two distinct activities.  The GATS arguments of both complainants with respect to the
effect of duty-free treatment seek to erase this distinction.  The Panel must not permit this.
7.371  Whether Canadian suppliers of wholesale trade services for buses and specified commercial
vehicles are "like" Japanese suppliers of wholesale trade services for automobiles should bedetermined on a case-by-case basis, just as it must with like goods.
775  This determination is rendered
impossible (and moot) by Japan’s failure to identify any Canadian suppliers of wholesale trade
services for buses and specified commercial vehicles.  Moreover, such "likeness" cannot be assumed.
In the passage quoted above from Japan’s arguments, Japan did not even claim that its automobile
manufacturers produce, or have the ability to produce, buses or specified commercial vehicles, let
alone that they or their related commercial presences in Canada are capable of providing wholesale
distribution services for either class of vehicle.
(c) Question 31 (commitments in Canada's GATS Schedule)
The entry B. "wholesale trade services" in Canada's schedule does not explicitly exclude wholesale
trade services for motor vehicles.  On what grounds is Canada claiming that it is excluded?
(i) Reply from Canada
7.372  The entry B. "Wholesale trade services" at page 47 of Canada’s Schedule of Specific
Commitment776 does explicitly exclude wholesale trade services for motor vehicles.  It does this in the
first column, which indicates the sector or sub-sector to which Canada’s commitments apply, by
noting at the bottom of that column that the commitments apply to the services in CPC 622 only.
CPC 622 covers certain wholesale trade services excluding those for motor vehicles.  CPC 622 fallsunder Division 62 of the CPC which is entitled "Commission Agents’ and Wholesale Trade Services,
Except of Motor Vehicles ". (emphasis added )
Canada argues that the commitment under CPC 6111, listed under retailing services, does not extend
to wholesale trade services.  Why did Canada not indicate in this entry the exclusion of wholesaletrade of motor vehicles?
(ii) Reply from Canada
7.373  Canada did indicate the exclusion of wholesale trade services for motor vehicles in this entry
by scheduling its commitment under "Retailing Services".  Article XVII of the GATS extends only tospecific commitments.  That is, it is binding on Members only in sectors and sub-sectors in respect of
                                                     
775 See the Report of the Working Party on Border Tax Adjustments , adopted 2 December 1970, BISD
18S/97, para. 18 and the Appellate Body  Report  on Japan – Alcoholic Beverages,  supra note 271, pp. 19-23.
776 Canada's GATS Schedule, supra  note 641.WT/DS139/R
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which they have made commitments.777  By scheduling its CPC 6111 commitments in the "Retailing
Services" sector only, Canada did not bind itself in respect of other sectors such as "Wholesale trade
services".
(d) Question 32 (the CVA requirements and mode 4)
Canada argues that most of the qualifying manufact urers exceed their CVA requirements on the basis
of labour costs alone.  Could Canada please provid e factual information on those manufacturers who
do not meet the CVA requirements on the basis of labour costs alone.  To what extent do labour costs
include the purchase of services which could be supplied by natural persons under mode 4?
(i) Reply from Canada
7.374  All of the MVTO manufacturers meet their CVA requirements on the basis of labour costs
alone, as do all SRO manufacturers operating unde r a base-year CVA requirement.  Four SRO
manufacturers operating under 40 or 50 per cent CVA requirements have, in some recent years, not
met those requirements on the basis of labour costs alone.
7.375  The cost of any service supplied by mode 4 is fully CVA-eligible.  Services supplied by mode
4 are not included in the heading for labour costs, but may be included under other CVA headings.
(e) Question 34 (ownership and control)
7.376  (See  p. 317)
(f) Question 35 (vertical integration)
Canada argues that in the supply of wholesale trade services for automobiles there is no competition
between wholesale trade service suppliers since wholesale suppliers are subordinated to
manufacturers and therefore the question of an effect on conditions of competition does not arise.Does vertical integration between manufacturers and suppliers of wholesale trade services exclude
any actual or potential competition at the wholesale trade level?  To what extent does vertical
integration between manufacturers and suppliers of wholesale trade services also exclude competition
with respect to sales to retailers?
(i) Reply from Japan
7.377  As the Appellate Body Report for EC – Bananas III confirmed, even if wholesale trade
service suppliers are integrated with manufacturers,  to the extent they are engaged in providing
wholesale trade services, they are wholesale trade service suppliers.
7.378  And vertical integration between manufacturers and suppliers of wholesale trade services
does not exclude any actual and potential competition at the wholesale trade level, since an integrated
manufacturer, in its capacity as a wholesale trade service supplier, competes with other wholesale
trade service suppliers as to the sales of automobiles to retail service suppliers (dealers) and the
maintenance and expansion of their dealers networks.  This type of competition is relevant to this
dispute because dealers are consumers of the wholesale trade services provided by the servicesuppliers in question.  To the extent that manufacturers/wholesale trade service suppliers are to sell
automobiles to retail service suppliers (i.e. dealers), there is competition between those
manufacturers/wholesale trade service suppliers with respect to sales to retailers, notwithstanding
their vertical integration.
                                                     
777 Panel Reports on EC – Bananas III , supra  note 269, para. 7.305.WT/DS139/R
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7.379  Further, differences in the retail prices of automobiles caused by the Duty Waiver will
necessarily affect sales volumes and will lead to differences in profitability in supplying wholesale
trade services between manufacturers/wholesale service suppliers.  This means that the conditions of
competition between manufacturers/wholesale trade service suppliers for sales to retailers will be
negatively affected.
(ii) Reply from the European Communities
7.380  No.  Although the major wholesale distributors of automobiles present in the Canadian
market are vertically integrated with manufacturers778, that does not exclude any actual or potential
competition amongst them with respect to the purchase of motor vehicles from manufacturers for
wholesale resale.
7.381  In the first place, some foreign manufacturers of automobiles have little or no presence at all
in the Canadian market (e.g., Renault, Peugeot-Citroen, Fiat, Mitsubishi, Proton or Tata).
7.382  Those potential new entrants have basically three options in order to penetrate into the
Canadian market:  to set up their own distributors; to designate an independent distributor; or to
appoint as a distributor an existing integrated distributor.  The last option is not unusual, in particularwhen the model ranges of the two manufacturers c oncerned are complementary.  By way of example,
in the past Chrysler has imported and distributed in Canada motor vehicles manufactured by
Mitsubishi, an unrelated Japanese producer (see Exhibit EC-16, Table 1.7).
7.383  Thus, while it may be true that, as argued by  Canada, Honda Canada and Ford Canada would
not compete for the distribution in Canada of vehicl es manufactured by Ford in the United States, they
may compete, not only with other integrated distributors but also with independent distributors, for
the distribution of vehicles produced by a fore ign manufacturer without a distribution network in
Canada.  The Tariff Exemption confers upon the beneficiaries a competitive advantage in that market
because it lowers their import costs and, therefore, gives them the possibility to offer better
purchasing terms to the foreign manufacturer.
7.384  Secondly, even with respect to motor vehicl es of the parent company’s brand, vertically
integrated distributors may face competition from parallel importers.
Regarding the question, "To what extent does vertical integration between manufacturers and
suppliers of wholesale trade services also exclude competition with respect to sales to retailers?":
7.385  Canada’s argument is built on the wrong assumption that wholesale distribution services are
provided by the wholesalers exclusively to the manufacturers. The truth, however, is that wholesalerdistributors of automobiles act as intermediaries between the manufacturers and the retailers (and in
some cases final consumers, e.g., in the case of so-called "fleet sales" to big purchasers).  They
provide a service to retailers as much as to the manufacturers.  In fact, except in the rare cases where
wholesale distributors of automobiles act as mere agents for the manufacturers, the "buyer" of the
service, i.e. the person who actually "pays" for the distribution service, is the retailer and not themanufacturer.
7.386  Quite clearly, vertical integration between manufacturers and wholesale distributors of
automobiles, even if it were complete, would not exclude per se competition among wholesale
distributors with respect to sales to retailers and final consumers.  Vertical integration has the only
consequence that Honda Canada and Ford Canada cannot compete to resell the same automobiles to
retailers.  But it does not prevent them from comp eting in order to resell to dealers automobiles
                                                     
778 The affiliation of some distributors, such as Lada Canada Inc., is nevertheless unclear, as shown in
Table 7.WT/DS139/R
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manufactured by their respective parents which are directly competitive and substitutable with each
other. In other words, the absence of intra-bra nd competition among wholesalers does not exclude
inter-brand competition.
(iii) Reply from Canada
7.387  Canada notes that the arguments in question are found in its initial response on these points.
7.388  It is not clear if the question refers to vertical integration in the motor vehicle industry only,
or to vertical integration generally.  In the motor vehicle industry, a combination of vertical
integration and exclusive distribution arrangements does exclude any actual or potential competition
at the wholesale trade level.  The same is not necessarily true of other industries.  For example, it is
not the case in the bananas business, where even those companies that were vertically integrated hadthe "capability and opportunity to enter the wholesale service market".
779
7.389  Contrary to what was implied by the European Communities,  the Appellate Body’s findings
in EC – Bananas III  in respect of integrated wholesalers were  specific to the facts of the case.  The
Appellate Body stated that:  "even if a company is vertically-integrated, … to the extent that it is also
engaged in providing "wholesale trade services" and is therefore affected in that capacity by a
particular measure of a Member in its supply of those ‘wholesale trade services’,  that company is a
service supplier within the scope of the GATS".780  (emphasis added )
7.390  The fact that a wholesale service supplier is integrated does not mean that it is necessarily
outside the scope of the GATS, but nor does it mean that it necessarily falls within the scope of the
GATS either.  The determining factor is whether that service supplier is affected in its capacity as a
service supplier and in its supply of those services.  The nature of the motor vehicle industry is such
that there is no competition among wholesale service suppliers in the supply of wholesale tradeservices.  Japan confirmed this in its arguments.
[Regarding the question " to what extent does vertical integration between manufacturers and
suppliers of wholesale trade services also exclude competition with respect to sales to retailers? ":]
7.391  If the EC’s reference to retailers was meant to suggest that retailers could choose among
wholesale service suppliers, the suggestion is wrong.  Wholesaling by definition entails sales toretailers.  Wholesalers purchase goods from manufacturers and resell them to retailers.  A headnote to
Division 6 of the CPC states that:  " The principal services rendered by wholesalers and retailers may
be characterized as reselling merchandise , accompanied by a variety of related, subordinated services
…".  ( emphasis added )
7.392  "Reselling" necessarily implies that the reseller has purchased the good in the first place. It is
uncertain to what extent the commercial presences of the motor vehicle manufacturers identified by
the complainants as "wholesalers" have purchased the vehicles from the manufacturers.  If they have
not, they cannot be said to be wholesalers at all.  The complainants have offered no evidence on this
point.
7.393  Even assuming that these commercial presences are wholesalers, they do not compete for
sales to retailers for the same reason that they do not compete to distribute the vehicles of particular
manufacturers.  The so-called wholesalers have exclusive distribution arrangements with the
manufacturers.  Accordingly, retailers of specific brands of vehicles cannot select among wholesale
service suppliers for the supply of those vehicles.  Retail dealers of Honda automobiles cannot for
example, approach General Motors of Canada and ask General Motors to supply them with Hondas
                                                     
779 Panel Reports on EC – Bananas III , supra  note 269, para. 7.320.
780 Appellate Body Report on EC –  Bananas III , supra  note 49, para. 227.WT/DS139/R
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from the Honda Motor Company of Japan.  Those retaile rs must rely on Honda Canada Inc. to provide
those vehicles.
7.394  It is possible that the European Communities was suggesting that duty-free treatment may
influence which brands of vehicles retailers choose to sell and that this consequentially influences
their choice of service supplier.  However, this simply underscores that what benefits from the duty-free treatment is particular goods (the vehicles) and that there is no competition in the provision of
distribution services for those goods.  To contend th at the measure affects wholesale service suppliers
through retailers implies that every measure affecting goods not only affects wholesale service
suppliers of those goods but also the retailers of the goods as well.  No measures affecting goods
would not also "affect" services.  The EC’s argument would obliterate the distinction among the threecategories of measures by the Appellate Body in EC – Bananas III .
781
(g) Question 59 (origin of wholesale trade service suppliers)
Could Japan please clarify on what basis it has classified three suppliers of wholesale trade services
for buses and specified commercial vehicles as Canadian in Exhibit JPN-50.
Could Japan please provide necessary material to support the Canadian origin of these suppliers.
7.395  As for the nationality of the “juridical person”,  Article XXVIII (m)(i) and (ii) and (n)(i) of
the GATS prescribe as follows:
(m) “juridical person of another Member” means a juridical person which is either:
(i) constituted or otherwise organi zed under the law of that other
Member, and is engaged in substantive business operations in theterritory of that Member or any other Member; or
(ii) in the case of the supply of a service through commercial presence,
owned or controlled by:
natural persons of that Member; orjuridical persons of that other Member identified under
subparagraph (i);
(n) a juridical person is:
(i) “owned” by persons of a Member if more than 50 per cent of the
equity interest in it is beneficially owned by persons of that Member;
…
7.396  Based on the information provided by the Government of Canada in its response to
Question (4) of the Government of Japan, the three suppliers of wholesale trade services classified asCanadian in Exhibit JPN-50, which are A. Girardin Inc., Les Enterprises Michel Corbeil Inc. and
Western Star Trucks Inc., have imported vehicles from other countries into Canada.  Those companies
provide services through a commercial presence in Canada.  If those companies are not owned or
controlled by natural persons of a country other than Canada or juridical persons of countries other
than Canada identified under subparagraph (m)(i), those companies are not “juridical persons ofanother Member”, and it follows that those companies are juridical persons of the Member (Canada).
7.397  On the homepage of the Canadian Department of Industry (Industry Canada)
(http://strategis.ic.gc.ca/), Industry Canada stated that “Both Thomas Built and Canadian Bluebird are
American-owned.  A. Girardin and Michel Corbeil Enterprises Inc. are wholly-owned Canadian
companies.”  (See page 3 of attachment 1 to this response [assigned name:  Exhibit JPN-51].)
                                                     
781 Ibid., para. 221.WT/DS139/R
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Therefore, Japan concluded that A. Girardin and Michel Corbeil Enterprises Inc. are service suppliers
of Canadian origin.
7.398  On the homepage of Industry Canada ( http://strategis.ic.gc.ca /), it is also indicated that
ownership of Les Enterprises Michel Corbeil Inc. (see attachment 2 [assigned name:  Exhibit JPN-
51]) and Michel Corbeil Enterprises Inc. (see attachment 3 [assigned name:  Exhibit JPN-51]) isCanadian.  This homepage also indicates that the ownership of Western Star Trucks Inc. is Canadian
(see attachment 1 [assigned name:  Exhibit JPN-51]).  Based on the information from Industry Canada
on the ownership of those three companies, it is reasonable to presume that more than 50 per cent of
their equity interests is owned by Canadians.
7.399  Please see attachments 1-3 [assigned name:  Exhibit JPN-51], which substantiates Japan's
above conclusion.
(h) Question 60 (origin of wholesale trade service suppliers)
Could Canada please confirm that the three suppliers of wholesale trade services for buses and
specified commercial vehicles, listed as Canadian in Exhibit JPN-50, are of Canadian origin.
7.400  The three companies listed as Canadian in Exhibit JPN-50 are A.Girardin Inc., Les
Entreprises Michel Corbeil Inc., and Western Star Trucks Inc.  Canada has the following information
about their “origin”:  A.Girardin Inc. and Les Entreprises Michel Corbeil Inc. are both privately-
owned companies incorporated in Canada.  To Ca nada’s knowledge, both companies are Canadian-
owned.  Western Star Trucks Inc. is a company incorporated in Canada.  It is wholly-owned by a
Canadian-incorporated company, Western Star Trucks Holdings Ltd., which in turn is controlled by a
Singapore-incorporated company, Western Star International, which owns 42 per cent of Western StarHoldings.
7.401  Canada notes that Japan has not adduced any evidence in the record to support its assertion
that the three companies at issue are “suppliers of wholesale trade services”.  As Canada noted in its
Response of 25 June 1999 to the Panel’s Question 35, wholesalers purchase goods and resell them to
retailers.  A headnote to Division 6 of the CPC states that: “the principal services rendered bywholesalers and retailers may be characterized as reselling merchandise…”  Manufacturers that
import vehicles but do not resell them to retailers are not “suppliers of wholesale trade services”.
7.402  Eligible manufacturers that do import buses or SCVs are not necessarily “wholesale trade
service suppliers”.  For example, they may import bus or SCV chassis (which are considered to be
vehicles under the MVTO and the SROs) as inputs for finished vehicles of their own manufacture;
they may re-import vehicles of their own manufacture that have been exported for modification in
other countries; or they may import vehicles as retailers (i.e. for direct sale to end-users).  None of
these activities would constitute the supply of wholesale trade services.
7.403  In its Response of 25 June 1999 to Japan’s Question 2(4), Canada stated only that the three
companies in question, among others, “have imported vehicles other than automobiles under theMVTO or an SRO at least once in the last 10 years”.  At paragraph 131 of its Second Written
Submission of 2 July 1999, Japan subsequently declared  all of these companies to be “wholesale trade
service suppliers”.  It has offered no evidence to substantiate this assertion.WT/DS139/R
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8. Questions and replies relating to third-party arguments
(a) Question 1 from the European Communities to the United States (the measures at
issue and GATS Article V)
The United States have suggested that even if the measure in dispute were found to be inconsistent
with GATS Article II, they would nevertheless be covered by the exception conferred by GATSArticle V:1.
That position appears to be based on a misunderstanding of the nature of the measures in dispute.
Those measures are not part of, nor required by  NAFTA.  Some of the measures implement the
provisions of the 1965 Auto Pact between the USA and Canada (namely, the tariff exemption forimporting vehicles from the United States granted to a number of manufacturers already established
in Canada in 1956 under the MVTO 1998).  The remaining measures are purely unilateral ones, not
required either by NAFTA or by the Auto Pact ( namely, the tariff exemption granted to the same
manufacturers under the MVTO 1998 for importing vehicles from third countries, including Mexico,
as well as the so-called Special Remission Orders issued to manufacturers not established in Canadain 1965).
(a) Is it the view of the United States that the Auto Pact qualifies as an agreement of the
type mentioned in Article V:1 of GATS?
(b) Does the United States take the view that Article V:1 of GATS provides an exception
also with respect to the adoption of purely unilateral measures that are not part of, nor required by anagreement of the type mentioned in that provision?
(i) Reply from the United States
7.404  (a) No.
(b) Article V:1 may apply to such measures in some cases depending, inter alia , on their
nature.
(b) Question 2 from the European Communities to the United States (the measures at issue
and GATS Article V)
It is generally admitted that Panels cannot take into account affirmative defenses unless invoked by
one of the main parties to a dispute.
(a) Does the United States take the view that the panel could reject a claim on the basis
of Article V:1 GATS, even if that provision was not invoked by Canada?
(b) Who bears the burden of proving that an agreement fulfils the conditions of
Article V:1?
(i) Reply from the United States
7.405   The United States agrees with the Europ ean Communities that a panel cannot take into
account affirmative defenses unless such defenses are invoked by one of the parties to the dispute.The panel in United States  – Customs User Fee  arrived at a similar conclusion, noting "GATT
practice has been for panels to make findings only on those issues raised by the parties to theWT/DS139/R
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dispute."782  This practice is reflected in Article 7.2 of the WTO Understanding on Rules and
Procedures Governing the Settlement of Disputes.
(c) Question 3 from the European Communities to the United States (the measures at issue
and GATT Article XXIV)
The United States has indicated that even if the measures in dispute were found to be inconsistent with
GATT Article I in that de facto they provide more favourable treatment to goods originating in
Mexico and the USA, such violation would nevertheless be covered by GATT Article XXIV.
Yet in 1996 the United States requested a renewal of the 1965 waiver for the Auto Pact,
notwithstanding the fact that in the meantime th e United States had concluded the CUSFTA and the
NAFTA with Canada, both of which purport to establish a free-trade  area.  Why did the United States
consider it necessary to make such a request?
(i) Reply from the United States
7.406  In view of the fact the European Communities has noted that "[t]he Auto Pact is an
asymmetrical agreement that imposes different obligations on each of the two signatories, the US
waiver does not appear to be relevant in a case involving Canadian measures.
(d) Question 4 from the European Communities to the United States (the measures at issue
and GATT Article XXIV and GATS Article V)
Do Article XXIV GATT and Article V:1 GATS provide an exception only with respect to the claims
submitted by the EC under GATT Article I and GATS Arti cle II respectively, or also with respect to all
the other claims submitted by the EC under the GATT, the TRIMs Agreemen t, the SCM Agreement
and the GATS?
(i) Reply from the United States
7.407  As a third party in these proceedings the United States limited its presentation to a few points
that may be of relevance to the Panel in examining this dispute.  The questions raised by the European
Communities in question 4 range beyond the scope of the US presentation, and the United States is
not prepared to provide views on these matters at this time.
(e) Question 5 from the European Communities to  the United States (freezing of SRO list of
beneficiaries)
The EC has alleged, and Canada has not disput ed, that Article 1200.1 of the CUSFTA, which "froze "
the list of beneficiaries of the Auto Pact and of the Special Remission Orders as of 1989, was inserted
at the request of the United States.
(a) Why did the United States demand the inclusion of that provision?
(b) How did Article 1200.1 of the CUSFTA cont ribute to the liberalisation of trade in
motor vehicles and distribution services for automobiles between the United States and Canada, as
compared to the pre-existing situation?
                                                     
782 Panel Report on United States – Customs User Fee , adopted on 2 February 1998, BISD 35S/290,
para. 124.WT/DS139/R
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(i) Reply from the United States
7.408  For purposes of clarification, the United States notes that the European Communities appears
to have erroneously cited to Article 1200.1 of the US-Canada Free-Trade Agreement; the United
States believes the relevant provision is Annex 1002.1 of that agreement.  As a third party in theseproceedings the United States limited its presentation to a few points that may be of relevance to the
panel in examining this dispute.  The questions raised by the European Communities in question 5
range beyond the scope of the US presentation, and the United States is not prepared to provide views
on these matters at this time.
VIII.  THIRD-PARTY ARGUMENTS
A. I
NDIA 'S ARGUMENTS AS A THIRD PARTY
8.1 As a third party, India  argues as follows:
8.2 The complaining parties, i.e. Japan and the European Communities, have argued that the
Tariff exemption and CVA requirements granted, pursuant to the signing of the 1965 Agreementbetween USA and Canada on the import of automotive products (hereinafter referred to as the 'Auto
Pact') are inconsistent with various provisions of the WTO Agreement, including the MFN obligation
set out in Article I of GATT; the national treatment obligation set out in Article III of GATT; the
provisions of the TRIMs Agreement and the provisions of the Subsidies and Countervailing Measures
Agreement.
8.3 These are important issues and their legal status and consistency with WTO provisions has to
be examined very carefully. However, as a third party, India will not be addressing all of the factualand legal issues raised in this proceeding. Instead, India will be presenting its views on two issues –
namely, Article I and III of GATT, which in India's view are the cornerstone of the multilateral
trading system, the primacy of which India strongly believes in. If India does not make comments on
a particular factual or legal claim, it does not mean that India either agrees or disagrees with the
position taken by any of the parties on these issues.
8.4 It is India's view that the Panel will need to determine whether the measures under dispute
afford "less favourable treatment" to imported products than to domestic products, that is whether the
measure is consistent with the provisions of Article III of GATT, or not. It is our view that a mere
contending that certain provisions of the Auto Pact give preference, all other conditions being equal,
to Canadian goods over like imported goods, is not sufficient. It must be established that theprovisions specifically grant certain privileges to the domestic industry, which are otherwise not
available to foreign industry, irrespective of the conditions that the latter may satisfy.  Canada is not a
developing country.  Otherwise, India would have also suggested for the Panel to go beyond the legal
framework and also examine the basic objectives of the domestic law, since developing countries
have to at times  provide certain incentives to encourage domestic industry.  Such measures areusually not inconsistent with  the provisions of Article III of GATT, even though they may at times
appear to be so.
8.5 Similarly, the Panel would also need to determine  whether the 'Auto Pact' is consistent with
the provisions of Article I – that is, whether or not it fulfils the MFN obligation. The important issue
in India's view is to see whether the Auto Pact provides any advantage to imports of automobilesoriginating in the US and Mexico, vis-à-vis imports of like products originating from other Member
countries. Even though on its face value the tariff exemption provided by the Auto Pact appears to be
non-discriminatory, the Panel will need to examine whether the beneficiaries of this exemption haveWT/DS139/R
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largely been companies based in the US and Mexico, or whether companies based outside the
NAFTA parties have also been able to benefit, from what Canada terms  as an instrument which has
helped transformed Canada "from a highly protective automotive market into one of the most open
markets in the world for automotive products and investment, both as a matter of law and in practice".
While regional trading arrangements are important building blocks of the multilateral trading system,the benefit that they give to Members which are parties to the arrangement cannot  under any
circumstance be at the cost of the rights and benefits of Members which are not  parties to the RTA.
B. K
OREA 'S ARGUMENTS AS A THIRD PARTY
8.6 As a third party, Korea  argues as follows:
1. Introduction
8.7 The Government of the Republic of Korea wishes to note that, as a manufacturer and exporter
of motor vehicles and components, as well as a provider of services related thereto, it has a substantial
trade interest in the matters raised in the presen t dispute. In this regard, the Korean Government
emphasizes that it shares the view advanced by the complainants in this proceeding that the measures
under dispute783 with respect to the selective and discriminatory removal of customs duties on the
importation of certain motor vehicles  involve numerous inconsistencies with Canada's obligations
under the GATT 1994, the TRIMS Agreement, the SCM Agreement and the GATS, respectively. In
this respect, Korea wishes to clarify its position with  respect to some of the main legal issues relevant
to this dispute.
2. GATT 1994
(a) Article I:1 GATT 1994
8.8 With regard to Article I:1 of the GATT 1994, Korea considers that the Tariff Exemption
applied by Canada is clearly inconsistent with this provision in that Canada has failed to accord
"immediately and unconditionally" the removal of customs duties with respect to like products
originating in or destined for the territories of all other WTO Members. Article I:1 embodies a very
broadly worded and unconditional obligation to accord Most-Favored-Nation Treatment with respect
to trade in goods. Indeed, while MFN-type treaty clauses have existed in treaties for centuries prior tothe entry into force of the GATT 1994 and the WTO Agreement, the precise obligations under such
clauses have not always been as broadly form ulated as under Article I:1 of the GATT 1994.
784 Against
this background, the original drafters of Article I:1 of the GATT clearly intended to emphasize the
wide application and unconditional nature of the obligations specified therein with respect to MFN
treatment for the purposes of trade in goods. Specifically, in the present case, if Canada affords, withrespect to "customs duties," any "advantage" in connection with the importation of motor vehicles
originating in any other country, its obligation und er Article I:1 of the GATT 1994 is to "immediately
and unconditionally" accord the same treatment with respect to like products originating in the
territories of all other WTO Members.
                                                     
783 The tariff exemption selectively applicable to certain imports of motor vehicles, including the
"ratio" requirements as well as the CVA requirements contained in the Auto Pact, as supplemented by the letters
of undertaking, and in the MVTO 1998; and the tariff exemptions applicable to the importation of motor
vehicles, including the "ratio" and CVA requirements  attached thereto, provided for in the SROs.
784 For an overview of the historical meaning applie d to MFN-type clauses, please refer to The World
Trading System: Law and Policy of International Economic Relations, John H. Jackson.WT/DS139/R
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(b) The Tariff Exemption relates to a customs duty  within the terms of Article  I:1 of the
GATT 1994
8.9 The Tariff Exemption clearly relates to a customs duty within the meaning of Article I:1, as it
waives the otherwise applicable normal MFN duty applied by Canada.
(c) The Tariff Exemption is an advantage within the meaning of Article I:1 of the GATT
1994
8.10 Although these issues have been dealt with at some length in the complainants' arguments,
Korea notes that the Tariff Exemption clearly c onstitutes an "advantage" within the meaning of
Article I:1 of the GATT 1994 relating to customs duties because certain imported motor vehicles are
exempt from otherwise applicable customs duties. The exemption from the outset was limited to the
imports of the original qualifying Auto Pact manufacturers and imports made pursuant to company-
specific SROs, thereby conferring an advantage over non-beneficiaries.
(d) The products are "like" products
8.11 As the Tariff Exemption is designed to cover all motor vehicles (with some minor
exceptions), and does not involve criteria based on the characteristics of those products, it is clear that
the motor vehicles for which the duty waiver applies and other imported motor vehicles which cannot
benefit from the duty waiver are ‘like products’.
(e) The advantage is not accorded immediat ely and unconditionally to like products
originating in all WTO Members
8.12 In the view of Korea, the clear and unqualified obligation under Article I:1 of the GATT 1994
is to accord "immediately and unconditionally" any advantage to like products originating in the
territories of all WTO Members. Under the Tariff Exemption, however, the advantages with respect to
the waiver of customs duties are limited to the beneficiaries under the Auto Pact. In addition, the
advantage provided under the Tariff Exemption is subject to several conditions relating, inter alia, to
the CVA and ratio requirements. These conditions imposed do not relate to the imported products
themselves. In this respect, in Indonesia – Autos , the panel clearly stated that under Article I:1 of the
GATT 1994, any advantage "cannot be made conditional on any criteria not related to the imported
product itself."
(f)  The advantages accorded to products orig inating in particular WTO Members has not
been accorded to like products originat ing in the territories of all WTO Members
8.13 Under the terms of the Auto Pact and subsequent instruments, the beneficiaries under the
Auto Pact are restricted to a closed group. The Auto Pact beneficiaries are, in principle, allowed to
import motor vehicles from any national origin. However, as was detailed in Japan's argument, in
reality these manufacturers have tended to choose imports from a limited number of countries, based
on previous commercial links and other factors. The majority of vehicles entitled to the Tariff
Exemption are of particular national origin. Furthermore, due to the fact that the list of eligibleimporters has been frozen since 1 January 1989, it is clear that in practice, the duty waiver advantage
has not been accorded to like products originating in all WTO Members and importers with capital or
commercial links with producers in other WTO Member countries, such as Korea, have not been
accorded the same advantage.
8.14 The advantage of the Duty Waiver is clearly linked in law and fact to production of Canadian
origin motor vehicles by the importer in accordance with the Requirements of MVTO 1998.
Therefore, contrary to Canada’s allegations, the advantage discriminates based on the origin of theWT/DS139/R
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products because a producer/importer of Korean origin motor vehicles cannot obtain the benefit of the
Duty Waiver which is only granted to producers/importers of Canadian origin cars. Thus, Canada's
allegation that "Which Member's products benefit at any given time depends entirely on commercial
decisions made by the manufacturers" as stated in its argument is groundless.
8.15 Canada argues that the preponderance of vehicles imported from the United States and
Mexico is irrelevant because any advantage they may receive is due to Canada's free-trade agreement
with these countries.  Finally, Korea wishes to empha size that, contrary to Canada's implicit assertion,
there is no decision or finding in any WTO bodies that NAFTA is consistent with Article XXIV of the
GATT 1994. Moreover, contrary to Canada's unsupported allegation, GATT 1994 does not explicitly
state that the formation of a free-trade agreement consistent with Article XXIV (assuming, arguendo ,
that this were to be the case) of the GATT 1994 provides "[…] an exception to Article I:1, de jure  and
de facto ."
G. Article III:4 of the GATT 1994
8.16 With respect to Article III:4 of the GATT 1994, Korea considers that the Canadian
requirements relating to minimum CVA targets, one of the conditions upon which the Tariff
Exemption is based, affords "less favorable treatment" within the meaning of Article III:4 with respect
to "laws, regulations and requirements affecting" the internal sale, offering for sale, purchase,
transportation or use of imported parts and materials which are used in the manufacture of motor
vehicles, or parts of motor vehicles, than the treatment afforded to like domestic goods.
8.17 Korea notes that, with respect to the CVA requirements expressly contained in the MVTO
1998 and the SROs, such instruments are considered statutory instruments under the CanadianStatutory Instruments Act.
785 As such, they clearly constitute "laws, regulations or requirements"
within the meaning of Article III:4. With regard to  the CVA requirements set forth in the letters of
undertaking signed by the Auto Pact manufacturers, Korea considers that the substantive undertakings
contained in these letters and the circumstances under which these commitments were undertaken
mean that they fall within the definition of "requirements" under Article III:4 and that, therefore,Article III:4 is equally applicable with respect to the CVA commitments contained therein. In this
respect, the inclusion of the word "requirements" in addition to "laws [and] regulations" in
Article III:4 suggests that acts involving private parties which might not have immediate or apparent
legal consequences in the formalistic sense were nonetheless intended to fall within the scope of this
provision if the surrounding circumstances reveal that the parties in fact considered themselves boundto the relevant rule or requirement. This view was confirmed in Japan – Film
786in which it was stated
that an action taken by private parties may be deemed governmental if there is "sufficient government
involvement with it."
8.18 In this respect, the letters of undertaking were signed by the Auto Pact beneficiaries as a
condition by the Canadian government for its agreeing to conclude the Auto Pact. As has been notedby the European Communities, the fact that non-co mpliance has remained exceptional despite the lack
of articulated sanctions for failing to meet the CVA requirements, in addition to the establishment of
certain procedures to monitor compliance of the benefi ciaries, indicates that the letters of undertaking
are not considered voluntary by either party and as such properly fall within the definition of
"requirements" under Article III:4.
8.19 In the view of Korea, the CVA requirements as described above "affect" the internal sale,
offering for sale etc. with respect to the relevant parts, materials and equipment. In this regard, Korea
notes that the term "affect" as used in Article III:4 is intended to have a broad meaning, which was
                                                     
785Statutory Instruments Act , R.S.C. 1985, c.S-22, s.2.
786 Panel Report on Japan – Film , supra  note 93, para. 10.56.WT/DS139/R
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confirmed in Italian Agricultural Machinery787 in which the Panel concluded that the term
encompassed "laws or regulations which might adversely modify the conditions of competition
between the domestic and imported products on the internal market." In this regard, the CVA
requirements clearly adversely affect conditions of competition on the market as a constant incentive
exists to use domestic over imported goods in order to reach the required CVA levels and thus benefitfrom the Tariff Exemption. Finally, Korea considers that the CVA requirements entail a less favorable
treatment for imported goods within the meaning of Article III:4 in that, as the Tariff Exemption is
directly linked to the attainment of certain CVA targets, imported goods are placed at a competitive
disadvantage.  Canada’s allegations that Canadian-produced products play no role in determining
whether an automobile manufacturer meets its CVA levels is clearly contradicted by the MTVO 1998itself which lists the cost of parts produced in Canada  (and the cost of materials to the extent that they
are of Canadian origin) as one of the elements included in the definition of CVA.
3. TRIMS Agreement
(a) The applicability of the TRIMs Agreement to the present dispute
8.20 With respect to the TRIMs Agreement, Korea notes that Article 2.1 of this Agreement
provides, in relevant part, that:
"[N]o Member shall apply any TRIM that is inconsistent with the provisions of
Article III […] of the GATT."
8.21 With respect to Article 2.1, it was stated in Indonesia – Autos
788 that:
"By its terms, Article 2.1 requires two elem ents to be shown to establish a violation
thereof: first, the existence of a TRIM; second, that TRIM is inconsistent with
Article III […] of GATT."
8.22 In this regard, Korea believes that the CVA requirements as well as the ratio requirements
which are conditions that must be met for the application of the Tariff Exemption, clearly fall within
the ordinary meaning of "investment measures" and are "trade-related." In addition, the requirements
as applied are inconsistent with Article III:4 of the GATT 1994. In particular, the requirements fall
clearly within paragraph 1(a) of the illustrative list of TRIMs which are inconsistent with Article III:4of the GATT 1994 contained in the Annex to the TRIMs Agreement.
(b) The CVA requirements and ratio requirements are "investment measures"
8.23 The Tariff Exemption is conditioned upon, inter alia , meeting the relevant CVA and ratio
requirements.
789 In this respect, the requirements expressly seek to influence the behaviour of the
beneficiaries with regard to, among others, their maintenance of certain levels of production inCanada as well as choices with respect to sources of supply as between Canadian and non-Canadian
sources. Thus, the requirements are directly linked to encouraging patterns of investment in the
Canadian automotive industry which are in line with the Canadian Governments policy objectives in
this sector. The CVA and ratio requirements therefore naturally fall within the scope of any
reasonable interpretation of the term "investment measures."
8.24 In Indonesia – Autos , the Panel found that certain Indonesian measures with respect to the
automobile industry conditioned various customs and tax benefits upon the compliance with particular
local content requirements. The Panel found that the Indonesian measures were:
                                                     
787 Panel Report on Italian Agricultural Machinery,  supra  note 390, 64, para. 12.
788 Panel Report on Indonesia – Autos, supra  note 270, para. 14.64.
789 As applicable under the Auto Pact, Letters of Undertaking, the MVTO 1998 and the SROs.WT/DS139/R
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"[…] aimed at encouraging the development of local manufacturing capability for
finished motor vehicles and parts and components in Indonesia. Inherent to this
objective is that these measures necessarily have a significant impact on investment
in these sectors. For this reason we consider that these measures fall within any
reasonable interpretation of the term “investment measures”.
8.25 In this respect, by conditioning the granting of the Tariff Exemption on the maintenance of
specified levels of domestic content as well as defined ratios of Canadian production to sales in
Canada, these requirements certainly involve a "significant impact on investments." The requirements
therefore fall plainly within the definition of investment measures for the purposes of the TRIMs
Agreement.
(c) The CVA and ratio requirements are "trade-related"
8.26 In Indonesia – Autos  the Panel noted that local content requirements are necessarily trade-
related "[…] because such requirements, by definition, always favor the use of domestic products over
imported products, and therefore affect trade." The CVA requirements, insofar as they are obligatory
in order to obtain the Tariff Exemption, constitute  local content requirements and hence will "always"
affect trade.
8.27 The ratio requirements are also clearly trade-related or "related to trade in goods" as is
specified in Article 1 of the TRIMs Agreement.  The ratio requirement obliges a beneficiary to
maintain a specified proportion between the sales value of each category of vehicle sold in Canada
and the sales value of the motor vehicles of that category manufactured in Canada and therefore is
directly related to and affects the conditions of trade with respect to those goods. Canada appears to
take the position that because the ratio requirements are mostly complied with, this fact alonesomehow means that the measures cannot be trade-related.  This assertion is clearly baseless. The fact
that particular manufacturers are, at a given time, complying with the ratio requirements clearly does
not operate to alter the determination as to whether the measures which include the ratio requirements
are themselves trade-related.
(d) The CVA and ratio requirements fall under the Illustrative List of prohibited TRIMs
8.28 Paragraph 1 of the Illustrative List of prohibited TRIMs provides, in relevant part, that:
"TRIMs that are inconsistent with the obligation of national treatment provided for in
paragraph 4 of Article III of GATT include those [with which compliance is
necessary] to obtain an advantage, and which require:
(a) the purchase or use by an enterprise of products of domestic origin or from any
domestic source, whether specified in terms of particular products, in terms of
volume or value of products, or in terms of a proportion of volume or value of its
local production; or
(b) that an enterprise purchases or use of imported products be limited to an amount
related to the volume or value of local products that it exports."
8.29 As noted above, the CVA requirements are TRIMs which must be complied with in order to
obtain an "advantage" within the meaning of paragra ph 1, which, in this context, consists of the Tariff
Exemption. In addition, the CVA requirements clearly require the "purchase or use […] of products of
domestic origin or from any domestic source, […] in terms of a proportion of volume or value of its
local production." Under the MVTO 1998, for example, the calculation of CVA, which is required inorder to obtain the Tariff Exemption, includes, inter alia, "the cost of parts produced  in Canada, and
the cost of materials to the extent that they are of Canadian origin ." (emphasis added ).WT/DS139/R
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8.30 Given that, in many, if not most, circumstances,  the required level of CVA cannot be attained
without resorting to the purchase of parts produced in Canada or materials of Canadian origin, the
CVA requirements therefore effectively impose an obligation to purchase or use products of domestic
origin or from a domestic source in order to qualify for the Tariff Exemption and therefore fall within
the scope of paragraph 1(a) of the Annex.
8.31 In addition, the ratio requirements fall within the scope of paragraph 1(b). For example, as has
been noted by the European Communities, in those cases where the ratio requirement is 100 to 100, if
a beneficiary sells all its production in Canada, the consequence of this would be that such beneficiary
could not sell any motor vehicles imported under the Tariff Exemption because this would result in a
production-to-sales ratio of less than 100 to 100. Therefore, for the purposes of obtaining the TariffExemption, the beneficiaries’ purchase of imported products is limited to an amount which is
"related" to the value of local products which it exports within the meaning of paragraph 1(b). Canada
itself notes that if the ratio requirements are not complied with "[…] a manufacturer may have to pay
duty on some of those vehicles." Canada asserts, however, that this does not constitute a limit on the
purchase or use of imported products. This reasoning completely ignores the fact that it is sufficientfor the purposes of item 1 of the illustrative li st that compliance with the ratio requirements is
necessary to obtain an advantage, which in this case consists of the Tariff Exemption. It is not
necessary to demonstrate that the ratio requirem ents must be complied with in order to import
vehicles at all.
8.32 In addition, Korea notes that the use of the words "related to" in paragraph 1(b) suggests that
investment measures falling within this provision do not have to expressly stipulate that imports are
limited in relation to the value of local products exported by the beneficiary. Rather, it is sufficientthat the circumstances of the operation of the measure reveal that there are actual or potential
limitations on the purchase or use of imported products, and that there is some logical relation or
connection between this limitation and the level of local products exported.
4. SCM Agreement
(a) Applicability of the SCM Agreement to the present dispute
8.33 With respect to the SCM Agreement, Korea cons iders that the Tariff Exemption constitutes a
countervailable subsidy within the meaning of Ar ticles 1 and 2 of the SCM Agreement. Moreover,
Korea believes that this subsidy falls within the scope of prohibited subsidies within the meaning of
Article 3.1(a) and 3.1(b).
(b) The Tariff Exemption constitutes a countervailable subsidy within the meaning of
Articles 1 and 2 of the SCM Agreement
8.34 Article 1.1 of the SCM Agreement provides, in relevant part, that:
"[A] subsidy shall be deemed to exist if:
(a)(1) there is a financial contribution by a government […] i.e. where:
…(ii) government revenue that is otherwise due is foregone or not collected (e.g., fiscal
incentives such as tax credits);
…
andWT/DS139/R
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(b) a benefit is thereby conferred."
8.35 In this regard, Korea notes that customs duties clearly constitute a source of  "government
revenue." Moreover, the requirement to pay customs duties upon imports of motor vehicles is
generally applicable and the waiver of such customs duties operates by way of exception. Thus theordinarily applicable customs duties constitute government revenue "that is otherwise due," and,
where the Exemption operates, this revenue is "foregone or not collected" within the meaning of
Article 1.1(a)(1)(ii). Finally, the Tariff Exemption clearly provides a "benefit" within the meaning of
Article 1.1(b). As was noted in Canada – Aircraft
790 "[…]  the ordinary meaning of 'benefit' clearly
encompasses some form of advantage." The Tariff Exemption clearly provides an advantage in that
only a limited number of beneficiaries are exempted from payment of the customs duties on imports
while the generally applicable customs duties continue to apply with respect to other importers.
C. The Tariff Exemption constitutes a prohibited  subsidy within the meaning of Article 3.1(a)
and 3.1(b) of the SCM Agreement
8.36 Article 3 of the SCM Agreement provides, in relevant part, that:
"[T]he following subsidies, within the meaning of Article 1, shall be prohibited:
(a) subsidies contingent in law or in fact, whether solely or as one of several conditions,
upon export performance […]
(b)  subsidies contingent, whether solely or as one of several conditions, upon the use of
domestic over imported goods.
8.37 In the view of Korea, the CVA requirements, which form part of the conditions for the
application of the Tariff Exemption, fall within the scope of Article 3.1(b).  For the purposes of
calculating CVA, the MVTO 1998 provides that the relevant costs shall include "the cost of parts
produced in Canada, and the cost of materials to the extent that they are of Canadian origin."Therefore, a component in reaching the required levels of CVA depends upon the use of the use of
domestic over imported goods. The attainment of the required amounts of CVA is an express
condition for the availability of the Tariff Exemption and the cost of Canadian parts and materials
constitute a de jure  component in reaching these amounts.
8.38 In addition, Korea considers that the ratio requirements, the fulfilment of which are conditions
for the availability of the Tariff Exemption, fall within the scope of Article 3.1(a) in that they are
"contingent" upon "export performance." As noted in  the EC's argument, where the ratio requirement
imposed on the beneficiary is 100 to 100, the possibility of making any imports under the Tariff
Exemption, and thus the ability to obtain any subsidy, will directly depend on, and therefore be
"contingent" upon whether the beneficiary exports any of its motor vehicles manufactured in Canada.If the beneficiary exports no such vehicles it cannot make any imports under the Tariff Exemption
without falling below the required Ratio. In addition, in other cases where the relevant Ratio is lower
than 100 to 100, the value of the imports which can be made under the Duty Exemption is still
directly related (and therefore contingent) upon the value of vehicles manufactured in Canada which
are exported by the beneficiary.
8.39 Thus, Canada's allegation that "[I]t is abundantly clear that under the Canadian measures, the
benefit of the duty-free treatment is contingent upon import performance, not export performance." as
stated in its argument is not true.
                                                     
790 Panel Report on Canada – Aircraft, supra note 495 .WT/DS139/R
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5. GATS
(a) Article II GATS
8.40 With regard to Article II of the GATS, Korea considers that the Tariff Exemption is
inconsistent with the MFN obligation provided therein. Article II:1 provides that:
"With respect to any measure covered by this Agreement, each Member shall accord
immediately and unconditionally to services and service suppliers of any other
member treatment no less favorable than it accords to like services and service
suppliers of any other country."
8.41 Article II:2 provides for exceptions to this obligation, provided that any measures inconsistent
with the MFN obligation are listed in the Annex on Article II exemptions. As has been noted by thecomplainants, however, Canada has not listed an y exemption which would cover "wholesale trade
services."
8.42 Consequently, a violation of Article II of the GATS will be established where it is shown that
a measure is covered by GATS, and, with respect to services and service suppliers of any other
Member, Canada accords treatment less favorable than it accords to like services and service suppliersof any other country.
(b) The Tariff Exemption is a measure covered by GATS
8.43 The Tariff Exemption clearly falls within the meaning of Article I:1, which states that this
Agreement applies to measures "affecting trade  in services."  In EC – Bananas III, it was noted that
the term "affecting" in Article I:1 was to be given a broad interpretation. In particular, it was noted
that "the use of the term 'affecting' reflects the intent of the drafters to give a broad reach to the GATS.
The ordinary meaning of the word 'affecting' implies a measure that has 'an effect on', which indicates a
broad scope of application."
8.44 This interpretation contrasts sharply with Canada's  very restrictive interpretation." In particular,
Canada seeks to distinguish the present measures from the measures in dispute in EC – Bananas III  on
the grounds that in the latter case the application of the measures were "[…] critical to the scope and
profitability of the provision of services […] and to the ability of [distributors] to import at all ."
Conversely, Canada appears to suggest that the pres ent measures can only be deemed to be "affecting"
trade in services if they are similarly "critical" to th e ability to import or provide the relevant services "at
all." Clearly, such a test bears no resemblance to the ordinary meaning of the term "affecting" nor to the
clear indications as to the broad m eaning attributed to this term in EC – Bananas III  noted above. In this
respect, the Tariff Exemption clearly affects trade in services, inter alia , because it reduces the cost
for the limited number of beneficiaries in supplying wholesale trade services and therefore modifies
competition by placing such beneficiaries at a competitive advantage for the supply of such services.
The measures thus produce an effect on trade in services and, consequently, are covered by GATS.
(c) The Tariff Exemption accords an advantage to wholesale trade service and service
suppliers of the United States and Sweden, and, consequently, less favorable treatment to likeservices and service suppliers in other countries
The services and service providers at issue are like
8.45 Importers who are beneficiaries under the Tariff Exemption offer trade services to distribute
domestically produced and imported motor vehicles. Similarly, Non-Auto Pact manufacturers offer
like wholesale trade services. In EC – Bananas III  it was stated that:WT/DS139/R
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"[T]he nature and characteristics of wholesale transactions as such, as well as of each
of the different subordinated services […] are 'like' when supplied in connection with
wholesale services, irrespective of whether these services are supplied with respect to
bananas of EC and traditional ACP origin, on the one hand, or with respect to
bananas of third country origin or non traditional ACP origin on the other. Indeed, itseems that the different service activities taken individually is virtually the same and
can only be distinguished by referring to the origin of bananas in respect of which the
service activity is being performed. Similarly, in our view, to the extent that entities
provide these like services, they are like service suppliers."
791
8.46 By analogy, both Auto Pact manufacturers and non-Auto Pact manufacturers are rendering
"like" services "in connection with wholesale trade services." In addition, "to the extent that Auto Pact
manufacturers and non-Auto Pact manufacturers provide like services, they are like suppliers."
8.47 The Tariff Exemption clearly fails to accord treatment no less favourable with respect to
services and service suppliers of any other country.  The advantages accorded under the TariffExemption are only available to a closed category of manufacturers which are also service suppliers.
This closed category is comprised almost exclusively of Service suppliers of the United states and
Canada.  This fact, coupled with the prohibitive eligibility criteria ensures that the advantage
conferred under the Tariff Exemption is not accord ed immediately and unconditionally to service
suppliers in any other country.  In this respect, the Tariff Exemption operates to discriminate against
services and service suppliers of certain WTO Members in favour of others and is therefore
inconsistent with the MFN requirement under Article II of GATS.
The Tariff Exemption confers an advantage on wholesale trade services and service suppliers that are
eligible for the exemption
8.48 In EC –  Bananas III  it was noted that the obligations contained in Article II:1 of the GATS to
extend "treatment no less favorable" should be interpreted to require proving "no less favorable
conditions of competitions." In this respect, the Tariff Exemption affects the conditions ofcompetition because Auto Pact manufacturers do not need to pass on import duties in the sales price
of automobiles while non-Auto Pact manufacturers are required to do so. Therefore, wholesale trade
service suppliers who pay the MFN duty are placed at a competitive disadvantage and are therefore
accorded less favorable treatment.
(d) Article XVII GATS
8.49 With regard to the national treatment obligation in Article XVII of the GATS, Korea
considers that the Tariff Exemption is inconsistent with this provision. Canada is obliged under
Article XVII of the GATS and its schedule of specific commitments to grant national treatment with
respect to wholesale trade services and service suppliers including such services and service suppliers
relating to the production of motor vehicles.
8.50 Article XVII of GATS, paragraphs 1, 2 and 3, respectively, provide that:
"In the sectors inscribed in its schedule, and subject to any conditions and
qualifications set out therein, each Member shall accord to services and service
suppliers of any other Member, in respect of all measures affecting the supply of
services, treatment no less favorable than it accords to its own like service suppliers.
                                                     
791 Panel Reports on EC – Bananas III , supra  note 269, para. 7.322.WT/DS139/R
WT/DS142/RPage 348
8.51 A Member may meet the requirement of paragraph 1 by according to services and service
suppliers of any other member, either formally identical treatment or formally different treatment to
that it accords to its own like services and service suppliers.
8.52 Formally identical or formally different treatmen t shall be considered to be less favorable if it
modifies the conditions of competition in favor of services or service suppliers of the membercompared to like services or service suppliers of any other Member."
(e) Wholesale trade services of motor vehicles through commercial presence are covered in
Canada's Schedule of Specific Commitments
8.53 Canada's specific commitment covers wholesale trade services under CPC
792 class 6111 (sale
of motor vehicles including automobiles and other road vehicles) through commercial presence
without conditions or qualifications under Article XVII:1 of the GATS. As Canada has not limited,
conditioned or qualified its commitment in these services it is required to accord to services and
service suppliers of any other member in this sector treatment no less favorable than the treatment it
accords its own like services and service suppliers.
(f) The services and service suppliers are "like"
8.54 Korea endorses the argument by Japan, with respect to the interpretation of EC – Bananas III ,
that Auto Pact manufacturers and Non-Auto Pact manufacturers are rendering "like" services "in
connection with wholesale trade services," "irrespective of whether these services are supplied with
respect to automobiles imported by the Auto Pact manufacturers or their related companies on the one
hand or with respect to automobiles imported by the Non-Auto Pact manufacturers on the other hand."
And that, to the extent that the Auto Pact manuf acturers and Non-Auto Pact manufacturers "provide
these like services, they are like service suppliers," whether or not they have production facilities in
Canada.
(g) The Tariff Exemption modifies the conditions of competition in favor of Canadian
services and service suppliers
8.55 The Tariff Exemption modifies conditions of competition in favor of only certain service
suppliers in that it applies the Tariff Exemption only to Auto Pact manufacturers who are also
wholesale trade service suppliers. The savings in import duty costs due to the Duty Waiver provides
the Auto Pact Manufacturers a competitive advantage in wholesale services because of the lower
import duty costs and corresponding financing costs savings. Therefore, the less favorable treatment
accorded by Canada to imports by Non-Auto Pact Manufacturers' wholesale trade service suppliersmodifies the conditions of competition between ce rtain Canadian services and service suppliers and
like services or service suppliers of other Members who are  granted less favorable treatment.
Consequently, the application of the Tariff Exemption by Canada is inconsistent with its obligation of
national treatment under Article XVII of the GATS.
(h) The Tariff Exemption accords more favorabl e treatment to Canadian services and
service suppliers related to the production of motor vehicles
8.56 Korea notes that, in order to achieve stipulated CVA requirements, Auto Pact manufacturers
are in effect obliged to obtain certain services supp lied in Canada.  In this respect, Canadian services
and service suppliers are accorded more favorable treatment as compared with like services and
service suppliers of other WTO Members. In this regard, therefore, the Tariff Exemption isinconsistent with Canada's obligations under Arti cle XVII of the GATS. The types of services which
                                                     
792 United Nations Central Product Classification System.WT/DS139/R
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may be counted towards the achievement of CVA are defined in the MVTO 1998.793  The definition
of CVA in the MVTO 1998 with respect to services includes:
(a)(iv) "the part of costs that is reasonably attributable to the production of vehicles,
namely,
(I) the cost of maintenance and repair work executed in Canada on buildings,
machinery and equipment used for production purposes.
(K) the cost of engineering services, expe rimental work and product development
executed in Canada.
[…]
(v) administrative and general expenses incurred in Canada that are reasonably
attributable to the production of the vehicles."
8.57 The types of services which might be covered in these CVA categories is potentially very
broad. In this regard, as noted by Japan, Canada's schedule of specific commitments contains very few
limitations on its commitment to provide national tr eatment with respect to these various services
(with regard to modes 1, 2 and 3), which are procured by the Auto Pact manufacturers.
(i) The CVA requirements accord less favorable treatment to "like" services and service
suppliers
Like services and service suppliers
8.58 In EC – Bananas III , the Panel considered the issue of "like" services and suppliers. With
respect to whether wholesale trade services prov ided by companies originating in the European
Communities and ACP countries on the one hand, and companies originating from other countries on
the other hand, were like, it was stated that:
"[T]he nature and characteristics of wholesale transactions as such, as well as of each
of the different subordinated services […] are 'like' when supplied in connection with
wholesale services, irrespective of whether these services are supplied with respect to
bananas of EC and traditional ACP origin, on the one hand, or with respect to
bananas of third country origin or non traditional ACP origin on the other. Indeed, itseems that the different service activities taken individually is virtually the same and
can only be distinguished by referring to the origin of bananas in respect of which the
service activity is being performed. Similarly, in our view, to the extent that entities
provide these like services, they are like service suppliers."
794
8.59 By analogy, the nature and characteristics of the services at issue are "like" irrespective of
where they are supplied. Therefore, to the extent that Canadian service suppliers and other service
suppliers provide these "like" services, they are "like" suppliers.
                                                     
793 Subsection 1(1) of the Schedule to the MVTO 1998.
794 Panel Reports on EC – Bananas III , supra  note 269, para. 7.322.WT/DS139/R
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I.2 Services and service suppliers outside Canada are accorded less favorable treatment
I.3 Modes of supply
8.60 The CVA requirements, insofar as they require that the services in question be "executed in
Canada," as applicable under items (a)(iv)(I) and (a)(iv)(K), or that the cost for services be "incurred
in Canada" in the case of item (a)(v), accord less favorable treatment to service suppliers outside
Canada in that they prevent the inclusion of costs in calculating CVA where the services are supplied
under Mode 1 (cross-border supply) or under Mode 2 (consumption abroad).  Conversely, the cost of
"like" services which are supplied in Canada are included for the purposes of calculating CVA.
J. Scope of the less favorable treatment
8.61 Under Article XVII:3 of the GATS, treatment accorded to services and service suppliers of
other WTO Members shall be considered to be "less favorable if it modifies the conditions of
competition in favor of services and service suppliers of the member maintaining the measurecompared to like services and service suppliers of any other Member."
8.62 Under the CVA requirements, costs associated with services supplied under Mode 1 (cross-
border supply) and Mode 2 (consumption abroad) are excluded from the calculation of CVA.
Consequently, the exclusion of these costs for the purpose of CVA in these cases modifies the
conditions of competition in favor of services supplied in Canada compared to like services under
Mode 1 or Mode 2 from or in the territory of other Members.
6. Conclusion
8.63 On the basis of the factual and legal considerations above, Korea considers that the
inconsistency of the Canadian Tariff Exemption with its obligations under Articles I:1 and III:4 of the
GATT 1994, Article 2.1 of the TRIMs Agreement, Articles 3.1(a), 3.1(b) and 3.2 of the SCM
Agreement and Articles II and XVII of the GATS has been conclusively demonstrated.
C. T
HE UNITED STATES ' ARGUMENTS AS A THIRD PARTY
8.64 As a third party, the United States  argues as follows:
8.65 As a third party, the United States does not attempt to respond to all of the factual and legal
issues raised in this proceeding.  Instead, the United States reserves its comments for one issue that it
believes bears emphasis; that is, the relevance of Article XXIV of the General Agreement on Tariffs
and Trade 1994  ("GATT 1994") to these proceedings.  Further, the United States would raise one
issue that has not yet been addressed, but which the panel may wish to keep in mind;  namely, the
possible relevance of Article V of the General Agreement on Trade in Services  ("GATS") to this case.
The fact that no comment is made on a particular factual or legal claim does not mean that the
United States agrees or disagrees with the position of any of the parties in this case.
1. Legal Arguments
(a) GATS Article V
8.66 It is appropriate to mention one issue that thus far has not been mentioned by any party:
namely, the possible relevance of GATS Article V.  That Article, which is analogous to GATT
Article XXIV, recognizes that GATS members may enter into agreements liberalizing trade in
services.
8.67 Specifically, Article V provides that:WT/DS139/R
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1. This Agreement shall not prevent any of its Members from being a party to or
entering into an agreement liberalizing trade in services between or among the parties
to such an agreement, provided that such an agreement:
(a) has substantial sectoral coverage ( footnote  omitted ), and
(b) provides for the absence or elimination of substantially all discrimination, in
the sense of Article XVII, between or among the parties, in the sectors
covered under subparagraph (a), through:
(i) elimination of existing discriminatory measures, and/or
(ii) prohibition of new or more discriminatory measures,
either at the entry into force of that agreement or on the basis of a
reasonable time-frame, except for measures permitted under Articles
XI, XII, XIV and XIV bis.
2. In evaluating whether the conditions under paragraph 1(b) are met, consideration may
be given to the relationship of the agreement to a wider process of economic
integration or trade liberalization among the countries concerned.
8.68 In 1994, the United States, Canada, and Mexico implemented the North American Free Trade
Agreement ("NAFTA"), a comprehensive free-trade ag reement governing trade in goods and services,
trade-related intellectual property rights, and other matters.  NAFTA Chapters 11 (Investment),12 (Trade in Services), 13 (Telecommunications), 14 (Financial Services), and 16 (Temporary Entry),
together with other services-related provisions of the NAFTA, create a North American free-trade
zone for services.
8.69 The services provisions of the NAFTA fall sq uarely within the terms of GATS Article V:1.
The NAFTA provides the elimination or absence of substantially all discrimination among the threeParties across the range of services sectors.  The agreement is substantial both in terms of the number
of sectors it covers and the volume of trade affected.  Moreover, it applies across all modes of supply.
8.70 The European Communities and Japan argue that duty-free treatment offered under the Auto
Pact confers, de facto , certain benefits on US-owned automobile companies that, in the complainants’
view, are wholesale services suppliers for purposes of the GATS.  The European Communities andJapan argue that those benefits contravene GATS Article II.  Canada has rejected the complainants’
claim.
8.71 The United States takes no position here on the merits of the EC's GATS Article II
arguments, or Canada's rebuttal.  However, should it ultimately sustain the EC's position on this issue,
the Panel should consider the application of GATS Article V to the measures at issue.
8.72 To the extent that they provide more favorable treatment to US services suppliers than to like
services suppliers of other Members, as the European Communities asserts, Canada's measures would
be subject to the implied exception to GATS Article II conferred by GATS Article V:1.  Specifically,
the more favourable treatment that the Europ ean Communities is seeking to condemn is being
accorded by a member of an economic integration agreement of the type specified by Article V:1 tothe services suppliers of another member of that agreement.
(b) GATT Article XXIV
8.73 In a parallel argument with respect to trade in goods, the European Communities alleges that
"the Tariff Exemption is inconsistent with GATT Article I:1 in that de facto  it provides an advantageWT/DS139/R
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to imports of automobiles originating in the United States and Mexico vis-à-vis  imports of like
products originating in other Members."
8.74 The arguments offered above with respect to GATS Article V are also relevant in response to
this assertion.  As Canada has noted, to the extent the United States and Mexico attain benefits that
other countries do not, GATT Article XXIV sanctions  such treatment.  As partners in a free-trade
area, Canada, the United States, and Mexico are permitted to offer to each other advantages that are
not extended to other countries.
IX. INTERIM REVIEW
9.1 On 27 October 1999, Canada and Japan requested the Panel to review certain aspects of the
interim report that had been transmitted to the parties on 13 October 1999, in accordance withArticle 15.2 of the DSU.
795  The European Communities indicated that it had no comments.  As for a
possible review meeting with the Panel, Canada and Japan expressed a preference to respond in
writing to each other's comments.  The Panel thus invited the parties to submit written responses to
each other's comments by 11 November 1999; Canada and Japan did so.  No further comments were
accepted after that date.
9.2 We have reviewed the arguments and suggestions presented by Canada and Japan and have
finalized our report, taking into account those comments by the parties which we considered justified.
9.3 For the descriptive part (i.e. Sections I-VIII), where requested, we inserted language found in
the original submissions of the parties, unless that language already appeared in the descriptive part.
These insertions may be found in paragraphs 5.132-5.138, 5.142-5.143, 5.217-5.220, 6.15, 6.42-6.45,
6.66, 6.91-6.94, 6.121-6.123, 6.162, 6.190-6.194, 6.274, 6.361-6.363, 6.436, 6.450, 6.792, and
6.1134-6.1137, as well as in footnotes 34 and 308; Canada's Figures  1-7 were also inserted.  Although
appearing in the Legal Arguments section (Section VI), paragraphs 5.90-5.116 and 5.271 were
duplicated in Section V for completeness, as requested.  Paragraph 4.6 and footnotes 44, 46 and 275
were added for clarification, as requested.  Paragraphs 2.3-2.6, 2.8, 2.10, 2.14, 2.29, 2.35 and 6.417,
as well as footnote 33, were revised in the light of Canada's comments.  In addition, other
typographical and technical refinements were made.  Paragraph 4.3 was left intact despite a requestthat it be deleted.
9.4 For both the Findings and the Conclusions and Recommendations sections (i.e. Sections X
and XI), we made minor linguistic, typographi cal and technical corrections and also added
clarifications.  Specifically, footnotes 800 and 811 were added for clarification, as requested;
paragraph 10.4 was revised, with paragraphs 10.3-10.6 reordered; and terminology as to the measuresat issue was corrected in paragraphs 10.264, 10.290, 10.308, 11.1(g) and 11.1(i).
9.5 A number of more substantive modifications were also made in response to comments from
the parties.  In particular, paragraph 10.39 was revised as requested to reflect Canada's position better.
In that paragraph, the key issue is Canada's view of what constitute "origin-neutral" conditions on
importers, referred to in the second sentence, to which no objection was posed.  A sentencesummarizing Canada's argument as to the relevant test of Article I:1 consistency was deleted from the
end of the paragraph because these ideas are already presented in paragraph 10.35.  Paragraph 10.44
was revised as requested to provide a more accurate reflection of Canada's position on the issue of
intra-firm trade in the automotive sector; the basic point of the paragraph – i.e. that the importers will
import only from related parties – is not altered.  Paragraphs 10.52-10.54 were revised to provide amore detailed reflection of Canada's arguments, thus adding balance.  Paragraph 10.81 has been
                                                     
795 The descriptive part of the report (i.e. Sections I-VIII) was issued to the parties on 5 August 1999
for comment.  On 20 August 1999 Canada and Japan submitted comments and the European Communitiesindicated that it did not wish to do so.WT/DS139/R
WT/DS142/R
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revised to  make it clear that the idea expressed in this paragraph is not that use of imported products
prevents a manufacturer from benefitting from the import duty exemption, but rather that the use of
imported products does not contribute to meeting the conditions for benefitting from the exemption.
Paragraphs 10.83 and 10.84 were revised to reflect better Canada's position that measures only affect
the internal sale or use of products if they have a potential effect under current circumstances and not,as previously stated in paragraph 10.83, if they have an actual effect under current circumstances.
Paragraphs 10.225, 10.230, 10.292 and 10.293 were revised to reflect Canada's comment that their
argument that the import duty exemption is not a measure affecting trade in services does not also
extend to the CVA requirements.
9.6 In addition, and taking into consideration Japan's view that remedies may be a relevant
consideration when determining whether to apply judicial economy, we have elaborated on Section
X.C.2 (Claims under the SCM Agreement:  CVA requirements) by undertaking an examination of the
consistency of the CVA requirements with Article 3.1(b).
796
X. FINDINGS
A. INTRODUCTION
1. Measures at issue
10.1 The parties to this dispute disagree as to the consistency with various provisions of the GATT
1994 (GATT), the TRIMs Agreement, the SCM Agreement and the GATS, of an exemption from
customs duties accorded by Canada on the importation of motor vehicles subject to certain conditions
("import duty exemption").  This import duty exemption arises out of Canada's implementation of the
Auto Pact, which was concluded between Canada and the United States in January 1965.  It is
currently applied by Canada pursuant to the Motor Vehicles Tariff Order 1998 (MVTO 1998) and anumber of Special Remission Orders (SROs).
797
10.2 The MVTO 1998 provides that the importation of certain categories of motor vehicles798 is
free from payment of the otherwise applicable MFN tariff if imported by a manufacturer of a category
of motor vehicles in accordance with the conditions set out in the schedule to the MVTO 1998.  The
schedule to the MVTO 1998 provides that the term "manufacturer" means:
"…a manufacturer of a class of vehicles who
(a) produced vehicles of that class in Canada in each of the four consecutive
quarters of the base year;  and
(b) produced vehicles of a class in Canada in the 12-month period ending on July
31 in which the importation is made where
(i) the ratio of the net sales value of the vehicles produced to the net
sales value of all vehicles of that class sold for consumption in Canada by the
                                                     
796 Initially we chose not to examine claims under Article 3 of the SCM Agreement regarding the CVA
requirements.  Japan took issue with this decision with respect to claims under Article 3.1(b) of the SCMAgreement but not claims under Article 3.1(a) of that Agreement.  Hence, we only elaborated findings on thoseclaims under 3.1(b).
797 The MVTO 1998 and the SROs also provide for an import duty exemption with respect to certain
parts and components for use as original equipment in the manufacture of motor vehicles.  That exemption has
not been contested in this dispute.
798 We note that the MVTO 1998 defines "motor vehicles" as comprising (i) automobiles, (ii) specified
commercial vehicles, and (iii) buses.  The SROs follow this definition.WT/DS139/R
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manufacturer in that period is equal to or higher than the ratio of the net sales
value of all vehicles of that class produced in Canada by the manufacturer in
the base year to the net sales value of all vehicles of that class sold for
consumption in Canada by the manufacturer in the base year, and is not in
any case lower than 75 to 100, and
(ii) the Canadian value added is equal to or greater than the Canadian
value added in respect of all vehicles of that class produced in Canada by the
manufacturer in the base year."
The term "base year" means the 12-month period beginning on 1 August 1963 and ending on 31 July
1964.
10.3 A number of motor vehicle manufacturers who had no production operations in Canada
during the 1963-64 base year have been accorded the right to import motor vehicles duty free into
Canada pursuant to company-specific SROs which provide that the manufacturers must meet criteria
with respect to the ratio between the net sales value of vehicles produced in Canada and the net salesvalue of all vehicles sold for consumption in Canada and with respect to the Canadian value added in
the production of motor vehicles.
10.4 In sum, to qualify for the import duty exemption, an eligible manufacturer of a class of
vehicles must meet the following conditions:  (1) a manufacturing presence in Canada  which, with
respect to the MVTO 1998, is expressed in terms of a base year,  along with local production of
vehicles of the class being imported in the current year ("manufacturing presence");  (2) a production-
to-sales ratio requirement, as reflected in the MVTO 1998 and the SROs ("ratio requirement");  and
(3) a Canadian value added requirement, as reflected in the MVTO 1998 and the SROs ("CVA
requirement").  We also note that, according to complainants, additional CVA requirements are
contained in various Letters of Undertaking.
799
10.5 In 1989, the category of motor vehicle manufactu rers eligible for the import duty exemption
under the then applicable MVTO or pursuant to company-specific SROs was closed in accordancewith an obligation assumed by Canada under the Canada-United States Free Trade Agreement.
800
10.6 While the eligibility for the import duty exem ption provided for under the MVTO 1998 and
the SROs is thus confined to certain motor vehicle manufacturers, the right of those manufacturers to
import motor vehicles duty free is not subject to a limitation with respect to the origin of such
vehicles.
10.7 We note the difference in product coverage of the various claims of Japan, on the one hand,
and the European Communities on the other.  The product coverage of Japan's claims – those under
the GATT, the TRIMS Agreement, the SCM Agreement and the GATS – includes the three categories
of "motor vehicles" as defined in the MVTO 1998 (with certain exceptions not relevant to this
proceeding), including "automobiles", "buses" and "specified commercial vehicles".801  Similarly, the
product coverage of the European Communities' claims under GATT Article III, the
TRIMS Agreement, the SCM Agreement and Article XVII of the GATS also include all three
categories of motor vehicles.802  However, the European Communities' claims under GATT Article I
                                                     
799 Although we note the statement by the European Communities in Section V.A.1(b), supra , that it is
also challenging the Canada-US Auto Pact as such, no claims are made as to the Auto Pact as distinct from those
made against the MVTO 1998, the SROs and the Letters of Undertaking.
800 We note that the Canada-United States Free Trade Agreement as such is not at issue in this dispute.
801 See supra para. 2.19.
802 See supra para. 5.20.WT/DS139/R
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and GATS Article II are limited in their product coverage to "automobiles" as defined in the
MVTO 1998.803
10.8 For the purposes of our analysis of all the parties' claims, unless otherwise specified, in
referring to "product(s)" we mean to include all three categories of "motor vehicles" as defined in the
MVTO 1998.
2. Order of consideration of claims
10.9 In our analysis of the legal issues in this case, we shall follow the order in which the
complainants presented their claims.  Accordin gly, we shall first address claims under GATT
Article I:1, followed by those under GATT Article III:4, and those under the TRIMs Agreement.  We
shall then turn to claims under the SCM Agreement.  Finally, we shall address claims under the
GATS.
3. Rules of treaty interpretation
10.10  Article 3.2 of the DSU directs panels to clarify WTO provisions "in accordance with
customary rules of interpretation of public international law".  It is generally considered that the
fundamental rules of treaty interpretation set out in Articles 31 and 32 of the Vienna Convention have
attained the status of rules of customary international law.  These Vienna Convention articles provideas follows:
ARTICLE 31
General rule of interpretation
1. A treaty shall be interpreted in good faith in accordance with the
ordinary meaning to be given to the terms of the treaty in their context and
in the light of its object and purpose.
2. The context for the purpose of the interpretation of a treaty shall
comprise, in addition to the text, including its preamble and annexes:
(a) any agreement relating to the treaty which was made
between all the parties in connexion with the conclusion of the treaty;
(b) any instrument which was made by one or more parties in
connexion with the conclusion of the treaty and accepted by the otherparties as an instrument related to the treaty.
3. There shall be taken into account together with the context:
(a) any subsequent agreement between the parties regarding the
interpretation of the treaty or the application of its provisions;
(b) any subsequent practice in the application of the treaty
which establishes the agreement of the parties regarding its interpretation;
                                                     
803 See supra para. 5.19.WT/DS139/R
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(c) any relevant rules of international law applicable in the
relations between the parties.
4. A special meaning shall be given to a term if it is established that the
parties so intended.
ARTICLE 32
Supplementary means of interpretation
Recourse may be had to supplementary means of interpretation, including the
preparatory work of the treaty and the circumstances of its conclusion, in order toconfirm the meaning resulting from the application of article 31, or to determinethe meaning when the interpretation according to article 31:
(a) leaves the meaning ambiguous or obscure; or
(b) leads to a result which is manifestly absurd
or unreasonable.
10.11  As noted by the Appellate Body in its report on Japan – Alcoholic Beverages , "Article 31 of
the Vienna Convention provides that the words of the treaty form the foundation for the interpretive
process:  'interpretation must be based above all upon the text of the treaty'.  The provisions of the
treaty are to be given their ordinary meaning in thei r context. The object and purpose of the treaty are
also to be taken into account in determining the meaning of its provisions".
804
10.12  Our understanding of these rules of interpretation is that, even though the text of a term is the
starting-point for any interpretation, the meaning of a term cannot be found exclusively in that text;  in
seeking the meaning of a term, we also have to take  account of its context and to consider the text of
the term in light of the object and purpose of the treaty.  Article 31 of the Vienna Convention
explicitly refers to the "ordinary meaning to be give n to the terms of the treaty in their [the terms']
context and in the light of its [the treaty's] object and purpose".805  The three elements referred to in
Article 31 – text, context and object and purpose – are to be viewed as one integrated rule of
interpretation rather than a sequence of separate tests to be applied in a hierarchical order.806  O f
course, context and object and purpose may simply confirm the textual meaning of a term.  In many
cases, however, it is impossible to give meaning, even  "ordinary meaning", without looking also at the
context and/or object and purpose.807
10.13  It is in accordance with these rules of trea ty interpretation that we will examine the WTO
provisions at issue in this case.
                                                     
804 Appellate Body  Report  on Japan – Alcoholic Beverages,  supra note 271, pp. 11-12.
805 See Appellate Body Report on  Brazil – Measures Affecting Dessicated Coconut , adopted on
20 March 1997, WT/DS22/AB/R, p. 15.
806 "The Commission by heading the article 'General rule of interpretation' in the singular and by
underlining the connection between paragraphs 1 and 2 and again between paragraph 3 and the two previous
paragraphs, intended to indicate that the application of the means of interpretation in the article would be asingle combined operation.  All the various elements, as they were present in any given case, would be throwninto the crucible and their interaction would give the legally relevant interpretation".  Yearbook of theInternational Law Commission  (1966) Vol. II, A/CN.4/SER.A/1966/Add.1, 219 and 220.
807 To find "ordinary meaning", reference is often made to an authoritative language dictionary.
However, very few – if any – words have only one dictionary meaning.  Thus, even the step of choosing the
relevant dictionary meaning(s) in pursuit of "ordinary meaning" – often the very first step in treaty interpretation– necessarily involves a reference to the context in whic h the word is used.  Referring to the object and purpose
of an agreement may also be indispensable to arriving at the meaning of a word.WT/DS139/R
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B. CLAIMS UNDER THE GATT AND THE TRIM S AGREEMENT
1. Claims Under Article I:1 of the GATT
(a) Introduction
10.14  As described above in the introductory section of the findings, Canada accords an import duty
exemption on motor vehicles if imported by importers  who meet certain conditions.   This import duty
exemption is provided for in the MVTO 1998 and certain SROs.
10.15    The European Communities and Japan claim that this import duty exemption is inconsistent
with Article I:1 of the GATT, which provides in relevant part:
"With respect to customs duties and charges of any kind imposed on or in connection
with importation ..., any advantage, favour, privilege or immunity granted by anycontracting party to any product originating in … any other country shall be accorded
immediately and unconditionally to the like product originating in … the territories of
all other contracting parties."
10.16  The parties do not dispute that the import duty exemption is an "advantage" within the
meaning of Article I:1 with respect to "customs duties and charges of any kind on or in connectionwith importation".  It is also not in dispute that there are imported products which do not benefit from
this exemption which are like imported products which benefit from the exemption.
10.17  Two main arguments have been advanced with respect to the alleged inconsistency of this
import duty exemption with Article I:1. Firstly, Japan argues that the import duty exemption is
inconsistent with Article I:1 because, by conditioning the exemption on criteria which are unrelated to
the imported product itself, Canada fails to accord the exemption immediately and unconditionally to
like products originating in the territories of all WTO Members. Secondly, both the EuropeanCommunities and Japan argue that the limitation of the eligibility for the import duty exemption to
certain motor vehicle manufacturers is inconsistent with Article I:1 on the grounds that it entails
de facto  discrimination in favour of products of certain countries.
(b) Whether the import duty exemption is awarded "immediately and unconditionally"
10.18  We first consider the argument of Japan that, by making the import duty exemption
conditional upon criteria  which are unrelated to the imported product itself, Canada fails to accord the
import duty exemption immediately and unconditionally to like products originating in all WTO
Members. By "criteria unrelated to the imported products themselves," Japan means the various
conditions which confine the eligibility for the exemption to certain motor vehicle manufacturers in
Canada.
10.19  We note that in developing this argument, Japan refers to the Concise Oxford Dictionary
definition of the word "unconditional" as meaning "not subject to conditions", and cites Indonesia
Autos
808 and Belgian Family Allowances809, as well as the Working Party Report on the Accession of
Hungary810, as authority for the proposition that the subjecting of an advantage to any condition
unrelated to the product is inconsistent with Article I:1.
10.20  We also recall Canada's response that Japan misinterprets the "immediately and
unconditionally" clause in Article I:1 and that Article I:1 contains no prohibition of origin-neutral
                                                     
808 Panel Report on Indonesia – Autos, supra  note 270.
809 Panel Report on Belgian Family Allowances , supra  note 276.
810 Report of the Working Party on the Accession of Hungary, supra note 276.WT/DS139/R
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terms and conditions on importation that apply to the importers  as opposed to the products  being
imported.  According to Canada, Article I:1 prohibits only conditions related to the national origin of
the imported product.  Canada thus argues that it is entitled to treat like products differently so long as
the distinction in treatment is based on criteria other than national origin. Canada argues that in the
instant case the conditions under which the import duty exemption is accorded are consistent withArticle I:1 in that they are based on the activities of importing manufacturers and not on the origin of
the products.  Canada further argues that to hold  otherwise would be to "read Article II out of the
GATT", given that Article II specifically contemplates tariff bindings being subject to "terms,
conditions  or qualifications"
811.
10.21  We note that the argument of Japan that the import duty exemption is inconsistent with
Article I:1 because it is conditioned upon criteria that are unrelated to the imported products is distinct
from Japan's argument that the import duty exemption violates Article I:1 because it discriminates in
practice in favour of products of certain countries. Thus, Japan advances an interpretation of Article
I:1 which distinguishes between, on the one hand, the issue of whether the advantage arising out of
the import duty exemption is accorded "unconditionally" as required by Article I:1, and, on the other,the issue of whether that advantage is accorded without discrimination as to the origin of products.
10.22    As explained below, we believe that this interpretation of Japan does not accord with the
ordinary meaning of the term "unconditionally" in Article I:1 in its context and in light of the object
and purpose of Article I:1.  In our view, whether an advantage within the meaning of Article I:1 is
accorded "unconditionally" cannot be determined independently of an examination of whether it
involves discrimination between like products of different countries.
10.23  Article I:1 requires that, if a Member grants any advantage to any product originating in the
territory of any other country, such advantage must  be accorded "immediately and unconditionally" to
the like product originating in the territories of all other Members.  We agree with Japan that the
ordinary meaning of "unconditionally" is "not s ubject to conditions". However, in our view Japan
misinterprets the meaning of the word "uncondit ionally" in the context in which it appears in
Article I:1. The word "unconditionally" in Article I:1 does not pertain to the granting of  an advantage
per se , but to the obligation to accord to the like products of all Members an advantage which has
been granted to any product originating in any country. The purpose of Article I:1 is to ensure
unconditional MFN treatment. In this context, we consider that the obligation to accord
"unconditionally"  to third countries which are WTO Members  an advantage which has been granted
to any other country means that the extension of th at advantage may not be made subject to conditions
with respect to the situation or conduct of those coun tries. This means that an advantage granted to the
product of any country must be accorded to the like product of all WTO Members without
discrimination as to origin.
10.24   In this respect, it appears to us that there is an important distinction to be made between, on
the one hand, the issue of whether an advantage within the meaning of Article I:1 is subject toconditions, and, on the other, whether an advantage, once it has been granted to the product of any
country, is accorded "unconditionally" to the like product of all other Members.  An advantage can be
granted subject to conditions without necessarily implying that it is not accorded "unconditionally" to
the like product of other Members.  More specifically , the fact that conditions attached to such an
advantage are not related to the imported product itself does not necessarily imply that suchconditions are discriminatory with respect to the origin of imported products. We therefore do not
believe that, as argued by Japan, the word "unconditionally" in Article I:1 must be interpreted to mean
that making an advantage conditional on criteria not related to the imported product itself is per se
inconsistent with Article I:1, irrespective of whether and  how such criteria relate to the origin of the
imported products .
                                                     
811 Supra  para. 7.97.WT/DS139/R
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10.25  We thus find that Japan's argument is unsupported by the text of Article I:1.  We also consider
that there is no support for this argument in the GATT and WTO reports cited by Japan.  A review of
these reports shows that they were concerned with measures that were found to be inconsistent with
Article I:1 not because they involved the application of conditions that were not related to the
imported product but because they involved conditions that entailed different treatment of importedproducts depending upon their origin.
10.26  Thus, the measure at issue in Belgian Family Allowances  was "the application of the Belgian
law on the levy of a charge on foreign goods purchased by public bodies when these goods originated
in a country whose system of family allowances did not meet specific requirements."
812 The panel
determined that this levy was an internal charge within the meaning of Article III:2 of the GATT and
found that it was inconsistent  with Article I:1:
"According to the provisions of paragraph 1 of Article I of the General Agreement,
any advantage, favour, privilege or immunity granted by Belgium to any product
originating in the territory of any country  with respect all matters referred to in
paragraph 2 of Article III shall be granted immediately and unconditionally to the likeproduct originating in the territories of all contracting parties.  Belgium has granted
exemption from the levy under consideration to products purchased by public bodies
when they originate in Luxemburg and the Netherlands, as well as in France, Italy,
Sweden and the United Kingdom.  If the General Agreement were definitively in
force in accordance with Article XXVI, it is clear that the exemption would have to
be granted unconditionally to all other contracting parties (including Denmark and
Norway).  The consistency or otherwise of the system of family allowances in force in
the territory of a given contracting party with the requirements of the Belgian law
would be irrelevant in this respect, and the Belgian legislation would have to be
amended insofar as it introduced a discrimination between countries having a given
system of family allowances and those wh ich had a different system or no system at
all, and made the granting of the exemption dependant on certain conditions ."
813
(emphasis added )
10.27   Similarly, the reference made by Japan to the Working Party Report on the Accession of
Hungary concerns tariff exemptions and reductions granted in the framework of co-operation
contracts. The GATT Secretariat, in response to a request for a legal opinion, commented that "the
prerequisite of having a co-operation contract in order to benefit from certain tariff treatment appearedto imply conditional most-favoured-nation treatme nt and would, therefore, not appear to be
compatible with the General Agreement".
814
10.28   With respect to the Panel Report on Indonesia – Autos, we note that the panel determined
that certain customs duty and tax benefits provided by Indonesia to imports of "National Cars" and
parts and components thereof from Korea were advantages within the meaning of Article I, and thatthese "National Cars" and their parts and components imported from Korea were like other similar
motor vehicles and parts and components from other Members. The panel then proceeded to
"…examine whether the advantages accorded to national cars and parts and
components thereof from Korea are unconditionally accorded to the products of other
Members, as required by Article I.  The GATT case law is clear to the effect that any
                                                     
812 Panel Report on Belgian Family Allowances , supra  note 276, para. 1.
813 Ibid., para. 3.
814 Report of the Working Party on the Accession of Hungary, supra note 276, para. 12.WT/DS139/R
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such advantage (here tax and customs duty benefits) cannot be made conditional on
any criteria that is not related to the imported product itself."815
Significantly, in support of the statement that "the GATT case law is clear to the effect that any suchadvantage (…) cannot be made conditional on any criteria that is not related to the imported product
itself", the panel referred to the Panel Report on Belgian Family Allowances.
816  As discussed above,
that Panel Report dealt with a measure which distinguished between countries of origin depending
upon the system of family allowances in force in th eir territories. We further note that, following this
statement, the panel on Indonesia – Autos  identified certain conditions which entailed discrimination
between imports of the subject products from Korea and like products from other Members, and
found that these measures were thus inconsistent with Article I of the GATT.817 The statement in the
Panel Report that an advantage within the meaning of Article I "cannot  be made conditional on any
criteria that is not related to the imported product itself" must therefore in our view be seen in relation
to conditions which entailed different treatment of like products depending upon their origin.
10.29  In sum, we believe that the panel decisions and other sources referred to by Japan do not
support the interpretation of Article I:1 advocated by Japan in the present case according to which theword "unconditionally" in Article I:1 must be in terpreted to mean that subjecting an advantage
granted in connection with the importation of a product to conditions not related to the imported
product itself is per se  inconsistent with Article I:1, regardless of whether such conditions are
discriminatory with respect to the origin of products. Rather, they accord with the conclusion from our
analysis of the text of Article I:1 that whether conditions attached to an advantage granted in
connection with the importation of a product offend Article I:1 depends upon whether or not such
conditions discriminate with respect to the origin of products.
10.30  In light of the foregoing considerations, we reject Japan's argument that, by making the
import duty exemption on motor vehicles conditional on criteria that are not related to the imported
products themselves, Canada fails to accord the exemption immediately and unconditionally to the
like product originating in the territories of all WTO Members. In our view, Canada's import duty
exemption cannot be held to be inconsistent with Article I:1 simply on the grounds that it is grantedon conditions that are not related to the imported products themselves. Rather, we must determine
whether these conditions amount to discrimination between like products of different origins.
(c) Whether the import duty exemption discriminates in favour of motor vehicles of certain
countries
10.31  We thus turn to the issues raised by the comp lainants to support their view that the import
duty exemption involves discrimination in favour of motor vehicles of certain countries. We begin by
recapitulating the main arguments of the parties.
10.32  Japan argues that, by virtue of the eligibility restriction, the import duty exemption accorded
by Canada on motor vehicles discriminates in practice by according an advantage to motor vehicles
from certain countries while effectively denying the same advantage to like motor vehicles originatingin the territories of other WTO Members. Japan submits that, although the beneficiaries of the import
duty exemption are ostensibly permitted to import motor vehicles of any national origin, in practice
they have chosen and will continue to choose to  import the products of particular companies from
particular countries, in consideration of their previous history of transactions, capital relationships,
and the nationality of companies investing in the bene ficiaries.  In the view of Japan, this means that
the eligibility restriction and other conditions attach ed to the exemption effectively limit access to the
advantage to certain Members having the companies with which the beneficiaries have certain
                                                     
815 Panel Report on Indonesia – Autos, supra  note 270, para. 14.143.
816 Ibid., para. 14.144.
817 Ibid., paras. 14.145-148.WT/DS139/R
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commercial relationships.  Japan further argues that the discriminatory nature of the exemption was
strengthened due to the fact that the list of eligible importers has been frozen since 1 January 1989. As
evidence of the discriminatory character of the import duty exemption, Japan adduces statistics which
show that in 1997, 96% of Sweden's imports into Canada, and 94% of Belgium's were duty-free (in
both cases these were imports of Volvos and of Saabs, the latter partly owned by GM, with VolvoCanada and GM Canada both being eligible manufacturer beneficiaries).  Japan compares this with
just under 30% of duty-free imports for the whole of the European Communities, and of just under
5% for Korea and just under 3% for Japan.
818 Japan also points to the fact that Volvos and Saabs are
imported under the import duty exemption from Belgium or Sweden while like vehicles produced by
Japanese manufacturers are imported subject to the MFN rate.819  We note that at the initial stage of
this proceeding Japan's argument concentrated on the discrimination in favour of imports from
Belgium and Sweden as compared with imports from Japan;  subsequently Japan has also contended
that there is discrimination in favour of imports from the United States and Mexico.
10.33  The European Communities argues that, although the import duty exemption on its face is
non-discriminatory in that it applies equally with respect to all imports of automobiles by thebeneficiaries, irrespective of their country of origin,  in reality the main beneficiaries are subsidiaries
of US companies with large manufacturing facilities in the United States and Mexico, and the benefit
of the exemption therefore accrues almost exclusively to imports from these two countries.  In support
of this, the European Communities states that in 1997, imports of automobiles from the United States
and Mexico accounted for 97% of all duty-free imports into Canada, when in contrast imports from
these two countries accounted for only 80% of all imports of automobiles into Canada.
820  According
to the European Communities, this "disproportionate" share is not a result of commercial factors but isthe result of the import duty exemption. Moreover,  whereas in 1997 the vast majority of imports from
Mexico and the United States benefited from the import duty exemption, most imports from other
sources were subject to customs duties.
821
10.34  Both Japan and the European Communities argue that their claim that the import duty
exemption gives rise to de facto  discrimination is supported by relevant GATT and WTO Panel
Reports.
10.35   Canada argues that  the claim of  the comp lainants that the import duty exemption involves
de facto  discrimination in favour of products of certain countries is without foundation in law or in
fact.  According to Canada, GATT and WTO dispute settlement cases demonstrate that to prove a de
facto  violation of Article I:1 it must be shown that a criterion that is neutral on its face is in fact able
to be met only by products of a particular origin or origins such that national origin determines the
tariff treatment the product receives.  In the case at hand, there are no such criteria that determine the
origin of the products which may be imported under the import duty exemption. In the view of
Canada, the mere limitation of the number of eligible importers is not inconsistent with Article I:1
given that there are no conditions restricting the origin of products imported by the beneficiaries. Inthis connection, Canada submits that there is no basis in GATT and WTO case law for the view that a
de facto  violation of Article I:1 can be established on the basis of the commercial decisions of
importers with respect to their sources of supply.
10.36   Canada further submits that the complainants have failed to adduce evidence supporting their
claim of discrimination. The lack of factual support for this claim is illustrated by the fact that thecomplainants differ on which third countries benefit from the allegedly more favourable treatment.  In
addition, the statistics adduced by the complainants to demonstrate that the products of some countries
receive a disproportionate share of the duty-free benefit do not provide evidence of discrimination.
                                                     
818  Supra  Japan's Table 6.
819  Supra  Japan's Tables 9 and 10.
820  Supra  EC's Table 1.
821  Supra  EC's Table 2.WT/DS139/R
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With respect to the data presented by Japan, Canada argues that these data are inaccurate, incomplete
and irrelevant to the establishment of a violation of Article I:1. In any event, even Japan's data show
that in 1996 there were 1,776 duty-free import sales of vehicles from Sweden, compared with 4,502
duty-free import sales from Japan. Canada also submits data822 showing that during the years 1991-98
Japanese-origin vehicles have benefitted from the import duty exemption to a much greater extentthan have vehicles of Belgium, Sweden and several other WTO Members. Canada rejects as irrelevant
Japan's comparison between luxury models impor ted from Belgium and Sweden and luxury models
imported from Japan.  With respect to the statistics adduced by the European Communities, Canada
argues that the European Communities fails to explain how these statistics constitute evidence of
discrimination within the meaning of Article I:1, and that,  even if it were true that an advantage isgranted de facto  to products of the United States and of Mexico, such advantage would be exempted
from Article I:1 by virtue of Article XXIV.
10.37  In respect of this disagreement between the parties on whether or not the import duty
exemption accorded by Canada under the MVTO 1998 and SROs involves discrimination in favour of
products of certain countries, we note first that Japan and the European Communities do not contestthe fact that this exemption applies to imports from any country entitled to Canada's MFN rate. We
therefore consider that the fundamental legal question before us is how the MFN requirement in
Article I:1 must be applied to a measure which, on the one hand,  involves a limitation to certain
importers of an advantage granted in connection with the importation of a product but which, on the
other hand, does not impose conditions regarding the origin of the products which can benefit from
such advantage.  More specifically, the question arises whether such a measure can be considered to
give rise to de facto  discrimination between like products originating in the territories of different
Members.
10.38  In this regard, we note that GATT/WTO jurisprudence has established that Article I:1
encompasses both de jure  and de facto  forms of discrimination.
823 The instant case differs from
situations addressed in some of the Panel Reports refe rred to by the parties with respect to the issue of
de facto  discrimination under Article I:1 in that in the present case such discrimination is alleged to
arise from conditions with regard to the importers eligible for the import duty exemption rather than
from conditions applied with respect to the products imported by such importers: the complainants
essentially argue that there is de facto  discrimination as a result of the fact that only certain importers
in Canada qualify for the import duty exemption.  In their view, this effectively limits the benefit of
that exemption to the products of certain Members in whose territories are located companies relatedto those importers.
10.39  By contrast, Canada submits that  Article I:1 does not prohibit the imposition of origin-neutral
terms and conditions on importation that apply to importers as opposed to the products being
imported.  As we understand this argument, Canada takes the view that terms and conditions that
apply to importers are "origin-neutral" if they do no t provide for limitations with respect to the origin
of products which may be imported by the importers.
10.40  Though we do not contest the validity of the proposition that Article I:1 does not prohibit the
imposition of origin-neutral terms and conditions on importation that apply to importers, we believe
that the interpretation advocated by Canada of what "origin-neutral" means in this context is unduly
narrow.  We see no basis in the text of Article I:1 to hold that, where a measure reserves an importduty exemption to certain importers, the consistency of that measure with Article I:1 depends solely
on whether or not there are restrictions on the origin of products imported by such importers.  Rather,
we believe that account should also be taken of the possibility that the limitation of the exemption to
                                                     
822  Supra  Canada's Figure 4.
823 See Appellate Body Report on EC –  Bananas III , supra  note 49, para. 232.  See also Panel Report
on EEC – Beef from Canada , supra  note 282; Panel Report on Spain – Unroasted Coffee , supra  note 282; and
Panel Report on Japan – SPF Lumber, supra  note 282.WT/DS139/R
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certain importers may by itself have a discriminatory impact on the treatment of like products of
different origins.
10.41  As described above in the introductory section of these findings, the category of importers
eligible for the import duty exemption accorded by Canada under the MVTO 1998 and the SROs is
confined to manufacturers who were present in Canada  in a particular base year and who meet certain
performance requirements.  In addition, since 1989 no new motor vehicle manufacturers have been
able to qualify for the exemption. We note in this regard that among the manufacturers who currently
benefit from the exemption are companies which have links of ownership or control with motor
vehicle producers based in certain countries. Thus, with respect to automobiles, the current
beneficiaries of the MVTO 1998 are fully-owned subsidiaries of General Motors, Ford, Chrysler andVolvo.
824 On the other hand, there are automobile manufacturers in Canada which are subsidiaries of
companies based in other countries and which do not enjoy the import duty exemption.
10.42  We consider that, for the purpose of determining whether the limitation of eligible importers
has an impact on the origin of products imported under the import duty exemption, the foreign
affiliation of automobile manufacturers in Canada which benefit  from the import duty exemption,  ascompared with the foreign affiliation of automob ile manufacturers who are not entitled to the
exemption,  is of particular significance when viewed in conjunction with the evidence before us
regarding the predominantly, if not exclusively, "intra-firm" character of trade in automotive products.
10.43  In this regard, we note the arguments and evidence presented by the complainants that the
global automotive industry is highly integrated and characterized by a high degree of intra-firm trade.
In particular, evidence adduced in this proceeding shows that the import patterns of the major
automotive corporations in Canada are such that they import only their own make of motor vehicles
and those of related companies.
825  Thus,  General Motors in Canada imports only GM motor vehicles
and those of its affiliates; Ford in Canada imports only Ford motor vehicles and those of its affiliates;
the same is true of Chrysler and of Volvo. These four companies all have qualified as beneficiaries of
the import duty exemption.  In contrast, other motor vehicle companies in Canada, such as Toyota,
Nissan, Honda, Mazda, Subaru, Hyundai, Volkswag en and BMW, all of which also import motor
vehicles only from related companies, do not benefit from the import duty exemption.  The evidence
also shows that General Motors has imported Saabs and Suzukis duty free into Canada and that
General Motors has an ownership in the foreign producers of these vehicles.  Similarly, between
1971-1993 when Mitsubishi and Chrysler ran a joint venture, Chrysler imported motor vehicles from
Mitsubishi into Canada duty-free, but these imports ceased after the termination of the joint-ventureaffiliation.
10.44  We further note the statement by Canada that it is characteristic of the globalized automotive
industry that there be some sort of capital, ma nufacturing or similar relationship between the
automobile manufacturers and companies from which they import.
826   We also note that, as part of its
defence to the claims raised under Article II of the GATS, Canada stresses the vertical integrationbetween distributors and manufacturers of motor vehicles and the fact that distributors will not import
and distribute motor vehicles produced by other manufacturers unless there is that capital,
manufacturing or similar relationship.
10.45  We conclude from this analysis that the lim itation of the eligibility for the import duty
exemption to certain importers in Canada who are affiliated with manufacturers in certain countriesaffects the geographic distribution of the imports of motor vehicles under the import duty exemption.
                                                     
824 We note the recent changes that have occurred in the ownership of Chrysler and Volvo, as described
in the factual arguments section of this report, and, in the case of Volvo, the implications of these changes for its
status as a beneficiary of the import duty exemption.
825 See Exhibit JPN-10.
826 Supra  para.7.119.WT/DS139/R
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While these eligible importers are not in law or in fact prevented from importing vehicles under the
exemption from any third country,  in view of thei r foreign affiliation and the predominantly, if not
exclusively, "intra-firm" character of trade in this sector, imports will tend to originate from countries
in which the parent companies of these manufacturers, or companies related to these parent
companies, own production facilities.  Whether or not a like product of a WTO Member in practicebenefits from the import duty exemption depends upon whether producers in the territory of that
Member are related to any of the eligible Canadian motor vehicle manufacturers.  Thus, in reality the
conditions on which Canada accords the import duty exemption on motor vehicles entail a distinction
between exporting countries depending upon whether or not producers in such countries are related to
the eligible manufacturers.  We therefore consider that , in a context of intra-firm trade, the limitation
of the availability of the import duty exempti on to certain manufacturers, including fully-owned
subsidiaries of firms based in a very limited number of third countries,  discriminates as to the origin
of products which will benefit from the import duty exemption.
10.46  We note Canada's argument that the origin of products imported under the import duty
exemption is determined by commercial decisions of the importers and that such decisions cannot bethe basis for finding a violation of Article I:1.  In this regard, we wish to stress that, in finding that the
conditions attached to the import duty exemption discriminate as to the origin of products imported
under this exemption, we are not denying that the decisions taken by individual importers as to the
sourcing of their supplies are commercial decisions in which the Government of Canada is not
involved.  In our view, however, the issue is no t whether the Government of Canada is somehow
directing importers to import from particular sources;  it clearly is not. While there is no involvement
of the Government of Canada in decisions by individual importers, what is attributable to theGovernment of Canada is that, as a result of the limitation of the number of eligible importers, the
geographic distribution of imports benefitting from the import duty exemption is determined by the
commercial decisions of a closed category of importers mainly consisting of subsidiaries of firms
based in certain countries,  rather than by the commercial decisions of a broader, open-ended group of
importers.
10.47  We have carefully considered the evidence provid ed by the parties with respect to the origin
of imports under the import duty exemption.  In this respect, we note in particular the argument of
Canada that the available evidence, such as the data contained in Canada's Figure 4, shows that
imports under the import duty exemption originate from a number of countries, including Japan,
Belgium and Sweden, and that in recent years imports from Japan have accounted for a greaterpercentage of imports under the import duty exemption than imports from some other countries, such
as Sweden, Belgium and the United Kingdom.
10.48  We consider that the evidence presented by Canada shows that the conditions attached to the
import duty exemption do not prevent imports of motor vehicles from a range of countries, including
the complainants, from benefitting from the exemption.  This evidence also confirms the point madeby Canada that the eligible manufacturers have affi liations with companies in a range of countries. At
the same time, we do not believe that these data are in contradiction with our view that the import
duty exemption favours products of certain countri es depending upon the affiliation of  producers
located in those countries to the importers in Canada who are eligible for the import duty exemption.
We note in this connection that other data before us, presented by the European Communities andJapan, reveal very significant differences between the percentages of imports of automobiles from
individual countries that have benefitted from the import duty exemption.  The difference between the
United States, Mexico, Sweden and Belgium, on the one hand, and other European countries and
Japan on the other - not to mention other major motor vehicle producers such as Korea - is
particularly striking.
827 We also consider significant the data presented by the European Communities
and Japan regarding imports of automobiles from different sources as percentages of total imports
                                                     
827 Infra  EC's Table 2, Japan's Table 6.WT/DS139/R
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under the import duty exemption.828  We therefore believe that the fact that imports under the import
duty exemption have originated from a number of countries, as a consequence of the capital
relationship between eligible importers and producers in those countries, does not warrant a
conclusion that the import duty exemption is accorded on equal terms to like products of different
origin.
10.49   As explained above, our view of the discriminatory character of the import duty exemption is
based on an analysis of the consequences, in the context of an industry characterized by intra-firm
trade,  of the limitation of the number of eligible importers to manufacturers with particular foreign
affiliations.  We believe that, while not of decisive importance, the  historical context of the import
duty exemption provides further support for this view.  We recall that this measure stems from abilateral agreement between Canada and the United States designed to resolve a long-standing trade
dispute between Canada and the United States over trade in automotive products.  This agreement was
designed inter alia  to achieve rationalization of production in the North-American market. From the
perspective of Canada this involved the granting  of import duty exemptions as an encouragement to
US owned motor vehicle manufacturers to expand their production operations in Canada.  Wetherefore consider that at the outset the import duty exemption was expected to benefit mainly imports
from particular sources.
10.50  In light of the foregoing considerations, we find that, by reserving the import duty exemption
provided for in the MVTO 1998 and the SROs to certain importers, Canada accords an advantage to
products originating in certain countries which advantage is not accorded immediately and
unconditionally to like products originating in the territories of all other WTO Members.
Accordingly, we find the application of this measure to be inconsistent with Canada's obligationsunder Article I:1of the GATT.
(d) Applicability of Article XXIV of the GATT
10.51  Having found that the import duty exemption is inconsistent with Article I:1 of the GATT, we
now turn to the arguments of the parties with respect to the applicability of Article XXIV to the
exemption.
10.52  We note that Canada raises Article XXIV in response to the complaint of the European
Communities that Canada has accorded duty-free treatment on a basis inconsistent with Article I of
the GATT, because most of the vehicles that receive duty-free treatment originate in the United States
or Mexico.  Canada notes that it had formed a free-trade area with the United States and Mexico and,
therefore, granting duty-free treatment to products of its free-trade partners is exempt from Article I:1by reason of Article XXIV.
10.53  The European Communities submits that there is currently no free-trade area between Mexico
and Canada;  that the import duty exemption is neither part of nor required by NAFTA; that, to the
extent the import duty exemption is based on an international agreement, that agreement – the Auto
Pact – lacks the necessary coverage to bring it wi thin the ambit of Article XXIV; and that the import
duty exemption is not a measure necessary for the formation of a free-trade area.
10.54  Canada contests the arguments of the European Communities, indicating that there is no
doubt about the existence of a free-trade area between Canada, the United States and Mexico; that
Article XXIV status does not require the total elimination of all duties among the members of a free-
trade area; that the European Communities is in erro r in arguing that the measures in dispute are not
part of NAFTA because the NAFTA specifically prov ides for the continuation of duty-free treatment
pursuant to the Auto Pact; that in any event nothing in  Articles I or XXIV states that preferential duty-
free treatment is exempt from Article I only to the extent that it is "part of" or "required by" the
                                                     
828 Infra  EC's Table 1, Japan's "New" Figure 4.WT/DS139/R
WT/DS142/RPage 366
principal  agreement establishing the free-trade area, and that the objective of a free-trade area is, if
nothing else, duty-free treatment among its Members.
10.55  We recall that in our analysis of the impact of the conditions under which the import duty
exemption is accorded, we have found that these conditions entail a distinction between countries
depending upon whether there are capital relationships of producers in those countries with eligibleimporters in Canada. Thus, the measure not only grants duty-free treatment in respect of products
imported from the United States and Mexico by manufacturer-beneficiaries;  it also grants duty-free
treatment in respect of products imported from third countries not parties to a customs union or free-
trade area with Canada. The notion that the import duty exemption involves the granting of duty-free
treatment of imports from the United States and Mexico does not capture this aspect of the measure.In our view, Article XXIV clearly cannot justify a measure which grants WTO-inconsistent duty-free
treatment to products originating in third countries not parties to a customs union or free trade
agreement.
10.56  We further note that the import duty exemption does not provide for duty-free importation of
all like products originating in the United States or Mexico and that whether such products benefitfrom the exemption depends upon whether they are imported by certain motor vehicle manufacturers
in Canada who are eligible for the exemption. While in view of the particular foreign affiliation of
these manufacturers, the exemption will mainly benefit products of the United States and Mexico,
products of certain producers in these countries who have no relationship with such manufacturers are
unlikely to benefit from the exemption.  Thus, in practice the import duty exemption does not apply to
some products that would be entitled to duty-free treatment if such treatment were dependant solely
on the fact that the products originated in the United States or Mexico.  We thus do not believe thatthe import duty exemption is properly characterized as a measure which provides for duty-free
treatment of imports of products of parties to a free-trade area.
10.57  Based on the foregoing considerations, we find that Article XXIV of the GATT does not
provide a justification for the inconsistency with Article I of the import duty exemption made
pursuant to the measures at issue. We see no need to address other issues raised by the partiesregarding the application of Article XXIV to the import duty exemption.
2. Claims Under Article III:4 of the GATT and the TRIMs Agreement
10.58  The claims presented under Article III:4 of the GATT pertain to conditions concerning the
level of Canadian value added and the maintenance of a certain ratio between the net sales value of
vehicles produced in Canada and the net sales value of vehicles sold for consumption in Canada.
10.59  We note that the complainants have also raised claims under the TRIMs Agreement with
respect to these aspects of the measures at issue in this dispute.  Both complainants claim that the
conditions regarding Canadian value added are inconsistent with Article 2.1 of the TRIMs Agreement.
The European Communities claims that the conditions regarding the maintenance of a ratio between
the net sales value of motor vehicles produced in Canada and the net sales value of motor vehiclessold for consumption in Canada are also inconsistent with that provision.
10.60  We note that, in two recent dispute settlement proceedings, consideration has been given to
the issue of the sequence of the examination of claims raised with respect to the same measure under
Article III:4 of the GATT and the TRIMs Agreement.
10.61  In EC – Bananas III  (ECU), claims were raised under Article III:4 of the GATT and
Article 2.1 of the TRIMs Agreement regarding aspects of the European Communities' import
licensing procedures for bananas. The panel in that dispute decided to treat the claims under Article
2.1 of the TRIMs Agreement together with its consideration of the claims under Article III:4 of theWT/DS139/R
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GATT.829 The panel found that the allocation to certain operators of a percentage of the licences
allowing the importation of third-country and non-trad itional ACP bananas at in-quota tariff rates was
inconsistent with the requirements of Article III:4 of the GATT.830 In light of that finding, the panel
did not consider it necessary to make a specific ruling on whether this aspect of these import licensing
procedures was also inconsistent with Article 2.1 of the TRIMs Agreement.831
10.62  In Indonesia – Autos , claims under Article III:4 of the GATT and Article 2.1 of the TRIMs
Agreement were raised with respect to certain local content measures applied by Indonesia regarding
automobiles. The panel in that dispute decided that it should first examine the claims under the
TRIMs Agreement on the grounds that "the TRIMs Agreement is more specific than Article III:4 as
far as the claims under consideration are concerned".832 After finding that the measures at issue were
inconsistent with Article 2.1 of the TRIMs Agreement,833 the panel determined that it was not
necessary to make a finding on the question of whether these measures were inconsistent with
Article III:4 of the GATT.834
10.63  In the present dispute, the parties have not explicitly addressed this question of which of the
claims raised under Article III:4 of the GATT and Article 2.1 of the TRIMs Agreement should beexamined first. Implicit in the order in which they have presented their claims is the view that these
claims should be addressed first under Article III:4 of the GATT.  While we are aware of the
statement made by the Appellate Body  in EC – Bananas III ,  and referred to by the panel in
Indonesia – Autos,  that a claim should be examined first under the agreement which is the most
specific with respect to that claim, we are not persuaded that the TRIMs Agreement can be properly
characterized as being more specific than Article  III:4 in respect of the claims raised by the
complainants in the present case.  Thus, we note that there is disagreement between the parties notonly on whether the measures at issue can be considered to be "trade-related investment measures"
but also on whether the Canadian value added requirements and ratio requirements are explicitly
covered by the Illustrative List annexed to the TRIMs Agreement. It would thus appear that,
assuming that the measures at issue are "trade-rel ated investment measures", their consistency with
Article III:4 of the GATT may not be able to be determined simply on the basis of the text of theIllustrative List but may require an analysis base d on the wording of Article III:4. Consequently, we
doubt that examining the claims first under the TRIMs Agreement will enable us to resolve the
dispute before us in a more efficient manner than examining these claims under Article III:4.
10.64  In light of the foregoing considerations, we deci de that, consistent with the approach of the
panel in EC – Bananas III , we will examine the claims in question first under Article III:4 of the
GATT.
(a) CVA requirements
10.65  The European Communities and Japan claim that Canada acts inconsistently with Article III:4
of te GATT by reason of conditions with respect to the level of CVA requirements as set forth in the
MVTO 1998, SROs and certain Letters of Undertaking.
10.66  We  first examine the claims raised with regard  to the CVA requirements provided for in the
MVTO 1998 and the SROs and next examine the claims raised with regard to the CVA requirements
contained in the Letters of Undertaking.
                                                     
882299  Panel Report on EC – Bananas III (ECU) , supra  note 269, para. 7.168.
883300  Ibid., para. 7.182.
883311  Ibid., paras. 7.185-7.187.
883322  Panel Report on Indonesia – Autos, supra  note 270, para. 14.63.
883333  Ibid., para. 14.91.
883344  Ibid., para. 14.93.WT/DS139/R
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(i) CVA requirements provided for in the MVTO 1998 and in the SROs
10.67  The MVTO 1998 provides that one of the conditions which must be met by a manufacturer in
order to be eligible for duty-free importation of motor vehicles is that the Canadian value added in the
production of vehicles of a class is equal to or greater than the Canadian value added in respect of all
vehicles of that class produced in Canada by the manufacturer in the base year.835 The term "base
year" in this context means the 12 month period beginning on August 1, 1963 and ending on July 31,
1964. Because the Canadian value added requirement is expressed in terms of value added in the base
year, it is essentially a requirement to achieve a fixed nominal amount of value added.
10.68  CVA requirements as a condition for eligibility for duty-free importation of motor vehicles
are also provided for in the SROs.836 In SROs issued before 1984, these CVA requirements are
expressed in terms of a combination of a specified percentage of cost of production and a level of
Canadian value added achieved during the base period applicable to each individual SRO.  SROs
issued after 1984 contain CVA requirements expressed in terms of  a percentage of cost of sales.837
10.69  In this connection, the term "Canadian value added" has been defined as including (i) the
costs of parts produced in Canada and of materials of Canadian origin that are incorporated in themotor vehicles; (ii)  direct labour costs incurred in Canada; (iii) manufacturing overheads incurred in
Canada; (iv) general and administrative expenses incurred in Canada that are attributable to the
production of motor vehicles; (v) depreciation in respect of machinery and permanent plant equipment
located in Canada that is attributable to the production of motor vehicles, and (vi) a capital cost
allowance for land and buildings in Canada that are used in the production of motor vehicles.
838
10.70  The complainants claim that the CVA requirements in the MVTO 1998 and the SROs are
inconsistent with Article III:4 by reason of the treatment accorded to imported parts, materials andnon-permanent equipment for use in the production of motor vehicles.
10.71  Article III:4 of the GATT provides in relevant part:
"The products of the territory of any cont racting party imported into the territory of
any other contracting party shall be accorded treatment no less favourable than that
accorded to like products of national origin in respect of all laws, regulations andrequirements affecting their internal sale, offering for sale, purchase, transportation,
distribution or use."
10.72  Accordingly, in order to substantiate this cl aim, it must be demonstrated that (i) the CVA
requirements involve a law, regulation or requirement affecting the internal sale, offering for sale,
purchase, transportation, distribution or use of such imported parts, materials and non-permanentequipment, and (ii) this law, regulation or requirement accords less favourable treatment to imported
parts, materials and non-permanent equipment products than that accorded to like domestic
products.
839
10.73   We note that it has not been contested in this dispute that, as stated by previous GATT and
WTO panel and appellate body reports,  Article III:4 applies not only to mandatory measures but also
to conditions that an enterprise accepts in order to receive an advantage,840 including in cases where
                                                     
835 Supra  para. 2.23.
836 Supra  para. 2.32.
837 Supra  para. 2.33.
838 Supra  para. 2.26.
839 See, e.g., Panel Report on US – Gasoline, supra  note 306, para. 6.5, and Panel Report on Japan –
Film , supra  note 93, para. 10.369.
840 See, e.g., Panel Report on EEC – Parts and Components , supra  note 127, para. 5.21.WT/DS139/R
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the advantage is in the form of a benefit with respect to the conditions of importation of a product.841
The fact that compliance with the CVA requirements is not mandatory but a condition which must be
met in order to obtain an advantage consisting of the right to import certain products duty-free
therefore does not preclude application of Article III:4.
10.74  We further note that   the parties agree that the MVTO 1998 and the SROs are legal
instruments that fall within the scope of the notio n of "laws, regulations or requirements" within the
meaning of Article III:4. In addition, it has not been contested that the distinction made between
domestic products and imported products in the definition of Canadian value added is based solely on
origin and that, consequently, there are imported products which must be considered to be like the
domestic products the costs of which are included in the definition of Canadian value added.
10.75  However, the parties disagree on whether or not the CVA requirements affect the "internal
sale,…or use" of imported products within the meaning of Article III:4 and provide less favourable
treatment in this respect to imported products than to like domestic products. The arguments of the
parties on these issues can be briefly summarized as follows.
10.76  Central to the claim of the European Communities and Japan is the fact that the definition of
Canadian value added for purposes of the MVTO 1998 and the SROs includes the costs of domestic
parts, materials and non-permanent equipment, but excludes the costs of like imported products. The
complainants argue that, as a result of the exclusion of imported products from the definition of
Canadian value added, the CVA requirements affect the "internal sale,..or use" of products because
they modify the conditions of competition betw een domestic and imported products, and that the
CVA requirements accord less favourable treatment to imported products by providing an incentive to
use domestic products.  They reject Canada's argument that, because the CVA requirements do notstipulate that use of domestic products is a necessary condition and can be easily met on the basis of
labour costs alone, they play no role in parts sourcing decisions, and therefore  do not affect the
"internal sale,…or use" of products. According to the complainants, this argument disregards the
discrimination against the use of imported products  resulting from the exclusion of the costs of
imported products from the definition of Canadian value added. In addition, the complainantsconsider that this argument is inconsistent with  the principle articulated in GATT and WTO case law
according to which Article III should be interpreted in light of its objective of protecting the effective
equality of competitive opportunities and with the principle that the actual trade effects of a measure
are in this respect of no legal relevance. The comp lainants also contest that the evidence adduced by
Canada actually shows that motor vehicle manufacturers  can easily meet the CVA requirements onthe basis of labour costs alone.
10.77  Canada argues that the CVA requirements in the MVTO 1998 and the SROs do not in law
require the use of domestic products because they can be met on the basis of other elements of value
added, such as labour costs.  Canada also submits that, as a factual matter, evidence shows that the
required CVA amounts are at such a low level that they can be easily met through labour costs alone.Because the use of domestic products is not in law or in fact required, the CVA requirements do not
affect the conditions of competition between imported and domestic products and do not play a role in
parts sourcing decisions of the motor vehicle manufacturers.  As a consequence, the CVA
requirements do not affect the "internal sale,…or use" of imported products, nor do they provide less
favourable treatment to imported products. Thus, in the view of Canada, there is an importantdistinction to be made between, on the one hand, a value added requirement which does not
necessitate the use of domestic products and, on the other, a local content requirement which can only
be met by the use of domestic products.   According to Canada, the notion that the mere inclusion of
domestic products in the definition of a value added requirement is per se  inconsistent with
Article III:4 is contradicted  by relevant GATT and WTO panel reports and is inconsistent with
                                                     
841 See, e.g., Appellate Body Report on EC – Bananas III , supra  note 49, para. 211.WT/DS139/R
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established principles of burden of proof in WTO dispute settlement because it would free
complainants from having to demonstrate that contested measures have any effects on the conditions
of competition between imported and domestic products.  Canada submits that the Illustrative List in
the TRIMs Agreement confirms its view that the use of domestic products must be required in order
for a local content or value added requirement to be inconsistent with Article III:4.
10.78  In our examination of the merits of these arguments, we take into account certain well
established considerations regarding the interpretation of Article III:4. The "no less favourable
treatment obligation" in Article III:4 has been c onsistently interpreted as a requirement to ensure
effective equality of opportunities between imported products and domestic products.  In this respect,
it has been held that, since a fundamental objective of Article III is the protection of expectations onthe competitive relationship between imported and domestic products, a measure can be found to be
inconsistent with Article III:4 because of its potential discriminatory impact on imported products.
842
The requirement of Article III:4 is addressed to ""relative competitive opportunities created by the
government in the market, not to the actual choices made by enterprises in that market."843  Both in
relation to Article III:2 and Article III:4 it has been established that the actual trade effects of adisputed measure are not a decisive criterion in determining whether the requirements of these
provisions are met in a given case.
844 Finally, as stated by the Appellate Body, a determination of
whether there has been a violation of Article III:4 does not require a separate consideration of whether
a measure affords protection to domestic production.845
10.79  As noted above, Canada's principal argument in response to the claim that the CVA
requirements provide less favourable treatment with in the meaning of Article III:4 is that these
requirements do not affect the "internal sale,… or use" of imported products because they do not inlaw or in fact require the use of domestic products and therefore play no role in the parts sourcing
decisions of manufacturers.
10.80  With respect to whether the CVA requirements affect the "internal sale,…or use" of products,
we note that, as stated by the Appellate Body, the ordinary meaning of the word "affecting" implies a
measure that has "an effect on" and thus indicates a broad scope of application.
846 The word
"affecting" in Article III:4 of the GATT has been interpreted to cover not only laws and regulations
which directly govern the conditions of sale or purchase but also any laws or regulations which might
adversely modify the conditions of competition between domestic and imported products.847
10.81  We note that it is undisputed that the definition of Canadian value added includes the costs of
domestic, i.e. Canadian, parts, materials and non-permanent equipment but excludes the costs ofimported parts, materials and non-permanent equipment.  Given that the CVA requirements are
among the conditions that must be met to obtain the benefit of duty-free importation of motor
vehicles, the exclusion of imported products from the calculation of the Canadian value added means
that, whereas the use of domestic products by a manufacturer in Canada can contribute to the
fulfilment of a condition necessary to obtain an advantage, the use of imported products cannotcontribute to the fulfilment of this condition.
10.82  In light of our interpretation of the word "affecting" in Article III, we consider that a measure
which provides that an advantage can be obtained by using domestic products but not by using
imported products has an impact on the conditions of competition between domestic and imported
                                                     
842 Panel Report on US – Section 337, supra  note 280, paras. 5.11 and 5.13.
843 Panel Report on US – Malt Beverages, supra  note 427, para. 5.31.
844 See, e.g., Appellate Body  Report  on Japan – Alcoholic Beverages,  supra note 271, p. 16; Panel
Report on EC – Bananas III (ECU) , supra  note 269, para. 7.179.
845 Appellate Body Report on EC –  Bananas III , supra  note 49, para. 216.
846 Ibid., para. 220.
847 Panel Report on Italian Agricultural Machinery,  supra  note 390, para. 12.WT/DS139/R
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products and thus affects the "internal sale,… or use" of imported products, even if the measure
allows for other means to obtain the advantage, such as the use of domestic services rather than
products. Consequently,  the CVA requirements, which confer an advantage upon the use of domestic
products and deny that advantage in case of the use of imported products, must be regarded as
measures which "affect" the "internal sale,… or use" of imported products, notwithstanding the factthat  the CVA requirements do not in law require the use of domestic products.
10.83  We also see no merit in Canada's argument that the CVA requirements do not in practice
"affect" the internal sale or use of imported parts and materials because the CVA levels are so low that
they can be easily met on the basis of labour costs alone. As discussed above, based on the ordinary
meaning of the term "affecting", the  CVA requirement s must be considered to affect the internal sale
or use of imported products because they have an effect on the competitive relationship between
imported and domestic products by conferring an advantage upon the use of domestic products while
denying that advantage if imported products are used.  Thus, we consider that the fact that it is easier
to meet the CVA requirements and thus to obtain the benefit of the import duty exemption if domestic
products are used than if imported products are used is sufficient to find that these requirements affectthe internal sale or use of products, and we do not believe that we need to examine how important the
CVA requirements are under present circumstances as a factor influencing the decisions of motor
vehicle manufacturers in Canada regarding the choice between domestic parts, materials and non-
permanent equipment, on the one hand, and imported parts, materials and non-permanent equipment,
on the other.
10.84  The idea that a measure which distinguishes between imported and domestic products can be
considered to affect the internal sale or use of imported products only if such a measure is shown tohave an impact under current circumstances on decisions of private firms with respect to the sourcing
of products is difficult to reconcile with the concept of the "no less favourable treatment" obligation in
Article III:4 as an obligation addressed to governments to ensure effective equality of competitive
opportunities between domestic and imported products, and with the principle that a showing of trade
effects is not necessary to establish a violation of this obligation. In this respect, it should beemphasized that, contrary to what has been argued by Canada, the present case does not involve "the
possibility of a future change in circumstances creating the potential for discrimination" or
"discrimination that might exist after a change in circumstances that could occur at some unspecified
time in the future."
848   Rather, the present case clearly involves formally different treatment of
imported and domestic products albeit that the actual trade effects of this different treatment may beminimal under current circumstances.  We therefore disagree with Canada's assertion that the CVA
requirements do not entail a "current potential for discrimination under present circumstances."
849  As
a consequence, whether or not in practice motor vehicle manufacturers can easily meet the CVA
requirements of the MVTO 1998 and the SROs on the basis of labour costs alone does not alter our
finding that the CVA requirements affect the internal sale or use of products. We therefore do notconsider it necessary to examine the factual issues raised by the parties in support of their different
views on this matter.
10.85  In light of the foregoing considerations, we find that the CVA requirements affect the internal
sale or use in Canada of imported parts, materials and non-permanent equipment for use in the
production of motor vehicles. We further consider that the CVA requirements accord less favourabletreatment within the meaning of Article III:4 to imported parts, materials and non-permanent
equipment than to like domestic products because, by conferring an advantage upon the use of
domestic products but not upon the use of imported products, they adversely affect the equality of
competitive opportunities of imported products in relation to like     domestic products.
                                                     
848 Supra  paras. 6.335and 6.336.
849 Supra  para. 6.336.WT/DS139/R
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10.86  In the latter regard,  we note Canada's argument that GATT and WTO panel reports and the
Illustrative List in the TRIMs Agreement support its view that a local content requirement or a value
added requirement is inconsistent with Article III:4 only if the use of domestic products is required.
10.87  We find this argument not persuasive. First, the equality of competitive opportunities between
domestic and like   imported products is affected if a measure accords an advantage to the sale or use of
domestic products but not to the sale or use of lik e imported products, regardless of whether or not
that advantage can also be obtained by other means. The less favourable treatment of imported
products which is the result of the denial of the advantage in case of sale or use of imported products
is not negated by the fact that the advantage may also be obtained by other means than sale or use of
domestic products. We therefore find that Canada's argument is unsupported by the plain meaning ofthe "no less favourable treatment" obligation in Article III:4.
10.88  Second, while it is true that GATT and WTO panel reports which have found local content
requirements to be in violation of Article III:4 have dealt with conditions which could only be met
through the use of domestic products,
850 nothing in the reasoning in these reports suggests that they
support  the general proposition that measures relating to local content or value added are inconsistentwith Article III:4 only if the use of domestic products is a necessary condition.
10.89  Third,  as to Canada's argument that the Illustrative List in the TRIMs Agreement supports its
view that a measure linking an advantage to the use of domestic products is inconsistent with
Article III:4 only if the measure "requires" the use of domestic products,  we consider that by
definition the illustrative nature of the List means that it does not constitute an exhaustive statement of
measures incompatible with Article III:4.
10.90  In light of the foregoing considerations, we find that Canada acts inconsistently with
Article III:4 of the GATT by according less favourable treatment to imported parts, materials and
non-permanent equipment than to like domestic products w ith respect to their internal sale or use as a
result of the application of CVA requirements as one of the conditions for eligibility for the import
duty exemption of motor vehicles under the MVTO 1998 and the SROs.
10.91  In light of the finding in the preceding paragraph, we do not consider it necessary to make a
specific ruling on whether the CVA requirements provided for in the MVTO 1998 and the SROs are
inconsistent with Article 2.1 of the TRIMs Agreement.  We believe that the Panel's reasoning in EC –
Bananas III as to why it did not make a finding under the TRIMs Agreement after it had found that
certain aspects of the EC' licensing procedures were inconsistent with Article III:4 of the GATT also
applies to the present case.
851   Thus, on the one hand, a finding in the present case that the CVA
requirements are not trade-related investment measures for the purposes of the TRIMs Agreement
would not affect our finding in respect of the  inc onsistency of these requirements with Article III:4 of
the GATT since the scope of that provision is not limited to trade-related investment measures.  On
the other hand,  steps taken by Canada to bring these measures into conformity with Article III:4
would also eliminate the alleged inconsistenc y with obligations under the TRIMs Agreement.
(ii) Commitments with regard to CVA contained in certain Letters of Undertaking
10.92  In addition to the provisions regarding Canadian value added contained in the MVTO 1998
and the SROs, the complainants contest the consistency with Article III:4 of the GATT of conditions
regarding Canadian value added contained in certain Letters of Undertaking, dated 13 and 14 January
                                                     
850 Panel Report on Italian Agricultural Machinery,  supra  note 390; Panel Report on Canada – FIRA,
supra  note 126; Panel Report on Indonesia – Autos, supra  note 270.
885511  Panel Report on EC – Bananas III (ECU) , supra  note 269, para. 7.186.WT/DS139/R
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1965, which were addressed by four Canadian motor vehicle producers852 to the Canadian Minister of
Industry.
10.93  In response to a question from the Panel,  Canada indicated that other manufacturers had also
submitted letters containing undertakings regarding Canadian value added. Canada subsequently
provided copies of eighteen such letters writte n over the period 1965-1984.  We consider that, since
the complainants in their arguments specifically me ntion only the four Letters of Undertaking written
on 13 and 14 January 1965, these other letters are not at issue.
10.94   The Letters written in January 1965 set forth certain undertakings by the four companies that
were additional to the requirement in the proposed Au to Pact to maintain Canadian value added at a
level equal to or greater than the level of Canadian value added in the period 1 August 1963-31 July1964.   Specifically, the Letters state that the manufacturers will: (i) increase in each ensuing model
year over the base model year Canadian value added in the production of vehicles and original
equipment parts by an amount equal to 60 per cent of  the growth in their market for automobiles sold
for consumption in Canada and by an amount equal to 50 per cent of the growth in their market for
commercial vehicles sold for consumption in Canada, and (ii) achieve a specified increase in theannual Canadian value added by the end of the model year 1968.
10.95  The information available to the Panel indicates that the undertakings made in 1965 by the
four motor vehicle producers have not been revoked or terminated.  A publication by Industry Canada
dated 10 June 1998 containing background information on the Auto Pact states:
"Assemblers also undertook to achieve CVA in vehicle assembly and/or parts
production by a fixed dollar amount set for each company (1964 value) plus 60
percent of the annual growth in the value of their Canadian sales of cars, by 50
percent of growth in truck sales, and by 40 percent of growth in bus sales. These
conditions are outlined in a letter of undertaking by each company and, while non-
binding, typically have been met."
10.96   Japan and the European Communities submit that the conditions in these Letters with respect
to the achievement of Canadian value added are "requirements" within the meaning of Article IIIwhich accord less favourable treatment to imported parts and materials than to like domestic products
with respect to their internal sale or use.   Ca nada argues that the Letters are not "requirements"
covered by Article III:4.
10.97  It follows that we must first address the question of whether Article III:4 is applicable to the
Letters of Undertaking as "requirements."
853 There is no dispute between the parties that these Letters
are not "laws" or "regulations" for purposes of  Article III:4.
10.98    While there is no disagreement between the parties as to the principle that it is possible for
action of private parties to constitute a "requirement" within the meaning of Article III:4, they differ
on whether or not in the case at hand the involvement of the Government of Canada has been such
that the conditions mentioned in the Letters can be properly treated as "requirements."
10.99  The European Communities submits, first,  that the Letters are acts which are attributable to
Canada because of the role played by Canadian authorities in the submission of the Letters.  In the
                                                     
852 General Motors of Canada, Ltd., Ford Motors Co. of Canada, Ltd., Chrysler Canada, Ltd., and
American Motors (Canada) Ltd.
853 We note that the parties have also expressed different views on the more general issue of whether
the Letters constitute "measures" which are subject to WTO disciplines.  However, in connection with theclaims presented under Article III:4 we only need  to consider whether these conditions constitute
"requirements" within the meaning of that provision.WT/DS139/R
WT/DS142/RPage 374
view of the European Communities, the Letters were submitted in response to a request from the
Government of Canada and their text was based on a model provided by the Canadian Ministry of
Industry;  the commitments made in the Letters did not advance the commercial interests of the firms;
and statements made by the chief executive officers of the firms in question in a debate on the Auto
Pact in the United States Congress indicate that the Letters were negotiated by the firms with the
Canadian Ministry of Industry and that the Letters were regarded by Canada as a sine qua non  for
signing the Auto Pact. Second, the European Communities argues that the wording of the Letters
indicates that the commitments contained therein were regarded as binding obligations.  Third, the
European Communities considers that the Letters are enforceable by the Government of Canada,
notwithstanding that there is not explicitly a sanction attached to the non-compliance with theconditions stipulated in the Letters. Because of the link between the submission of the Letters and the
conclusion of the Auto Pact, the firms in question have assumed that in case of non-compliance with
the commitments given in the Letters, the Government of Canada would withdraw the import duty
exemption. Finally, the European Communities refers to reporting and auditing procedures provided
for in the Letters and to steps taken by the Government of Canada to ascertain compliance with thecommitments contained in the Letters.
10.100  Japan argues that the Letters of Undertaking were submitted by Canadian motor vehicle
manufacturers, at the request of the Government of Canada,  in order to obtain the advantage of the
import duty exemption.   Japan further submits that the commitments contained in the Letters are
binding, that the Letters contain audit and reporting requirements, and that there is no expiry date in
the Letters.  In the view of Japan, the Letters are enforceable in that the Government of Canada can
revoke or amend the MVTO 1998 or the SROs in case of non-compliance with the Letters.  It istherefore irrelevant that the Letters have not been implemented in Canadian law and that the MVTO
1998 and the SROs do not provide for sanctions in the event that the commitments contained in the
Letters are not complied with.
10.101  Canada denies that the Letters were required of the motor vehicle producers as a condition of
Canada's signing the Auto Pact, that the Letters were negotiated between the Government of Canadaand the firms in question, and that the firms have assumed that a failure to meet the commitments in
the Letters would result in a withdrawal of the impor t duty exemption.  Canada explains that at the
conclusion of the Auto Pact the Canadian Government sought assurances from the affected companies
that they understood the new system and provided  them with a draft letter outlining what the
requirements would be under the Auto Pact and what it hoped would be achieved as a result.  Thecommitments contained in the Letters are statements of what was hoped to be achieved under
Canada's implementation of the Auto Pact system.  Canada submits that the Letters are not legally
binding under Canadian law.  The Letters are not c ontracts or statutory instruments.  Neither the
Government of Canada nor the companies consider the Letters binding in any way.  Canada also
submits that the Letters are not enforceable because the Government of Canada lacks the legalauthority to deny the benefits under the MVTO or SROs for a failure to meet the commitments in the
Letters.  The Panel Reports on Canada – FIRA and on EEC – Parts and Components   support the
view that the Letters are not "requirements" with in the meaning of Articl e III:4 because  compliance
with the Letters is neither legally enforceable nor a condition necessary to obtain an advantage.
Finally, Canada points out that it does not gather information pertaining to status of compliance withthe commitments contained in the Letters.
10.102  We note that several GATT and WTO Panel Reports have found that actions by private
parties can constitute "requirements" within the meaning of  Article III:4.
10.103  The Panel Report in Canada – FIRA discusses the status of certain undertakings offered by
foreign investors as "requirements" within the meaning of Article III:4:WT/DS139/R
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"The Panel first examined whether the purchase undertakings are to be considered
'laws, regulations or requirements' within the meaning of Article III:4. As both parties
had agreed that the Foreign Investment Review Act and the Foreign Investment
Review Regulations –whilst providing for th e possibility of written undertakings- did
not make their submission obligatory, the question remained whether theundertakings given in individual cases are to be considered "requirements" within the
meaning of Article III:4. In this respect the Panel noted that Section 9(c) of the Act
refers to "any written undertakings…relating to the proposed or actual investment
given by any party thereto conditional upon the allowance of the investment" and that
section 21 of the Act states that 'where a person who has given a writtenundertaking…fails or refuses to comply with the undertaking' a court order may be
made "directing that person to comply with  the undertaking". The Panel further noted
that written purchase undertakings –leaving aside the manner in which they may have
been arrived at (voluntary submission, encouragement, negotiation, etc)- once they
were accepted, became part of the conditions under which the investment proposalswere approved, in which case compliance could be legally enforced. The Panel
therefore found that the word "requirements" as used in Article III:4 could be
considered a proper description of existing undertakings."
854
10.104  The Panel Report on EEC – Parts and Components states the  following:
"The Panel noted that Article III:4 refers to 'all laws, regulations or requirements
affecting the internal sale, offering for sale, purchase, transportation, distribution or
use'.  The Panel considered that the comprehensive coverage of  'all laws, regulationsor requirements affecting (emphasis added) the internal sale, etc. of imported
products suggests that not only requirements which an enterprise is legally bound to
carry out, such as those examined by the FIRA Panel (BISD 30S/140, 158), but also
those which an enterprise voluntarily accepts in order to obtain an advantage from the
government constitute 'requirements' within the meaning of that provision."
855
10.105  More recently, the question of the interpretation of the phrase "laws, regulations and
requirements" in Article III:4 was considered in the Panel Report on Japan – Film but the Panel did
not actually make findings on this question.856
10.106  It is evident from the reasoning of the Panel Reports in Canada – FIRA  and in EEC – Parts
and Components  that these Reports do not attempt to state general criteria for determining whether a
commitment by a private party to a particular course of action constitutes a "requirement" for
purposes of Article III:4. While these cases are instructive in that they confirm that both legally
enforceable undertakings and undertakings accepted by a firm to obtain an advantage granted by a
government can constitute "requirements" within the meaning of Article III:4, we do not believe that
they provide support for the proposition that either legal enforceability or the existence of a linkbetween a private action and an advantage conferred by a government is a necessary condition in
order for an action by a private party to constitute a "requirement."  To qualify a private action as a
"requirement" within the meaning of Article III:4 means that in relation to that action a Member is
                                                     
854 Panel Report on Canada – FIRA , supra  note 126, para. 5.4.
855 Panel Report on EEC – Parts and Components , supra  note 127, para. 5.21.
856 The Panel stated:  "A literal reading of the words all laws, regulations and requirements in
Article III:4 could suggest that they may have a narrower scope than the word measure in Article XXIII:1(b).However, whether or not these words should be given as broad a construction as the word measure, in view of
the broad interpretation assigned to them in the cases cited above, we shall assume for the purposes of our
analysis that they should be interpreted as encompassing a similarly broad range of government action andaction by private parties that may be assimilated to government action. " Panel Report on Japan – Film , supra
note 93, para. 10.376.WT/DS139/R
WT/DS142/RPage 376
bound by an international obligation, namely to provide no less favourable treatment to imported
products than to domestic products.
10.107  A determination of whether private action amounts to a "requirement" under Article III:4
must therefore necessarily rest on a finding that there is a nexus between that action and the action of
a government such that the government must be held responsible for that action. We do not believethat such a nexus can exist only if a government makes undertakings of private parties legally
enforceable, as in the situation considered by the Panel on  Canada – FIRA , or if a government
conditions the grant of an advantage on undertakings made by private parties, as in the situation
considered by the Panel on  EEC – Parts and Components .  We note in this respect that the word
"requirement" has been defined to mean "1. The action of requiring something;  a request. 2.  A thingrequired or needed, a want, a need.  Also the action or an instance of needing or wanting something.
3.  Something called for or demanded;  a condition which must be complied with."
857 The word
"requirements" in its ordinary meaning and in light  of its context in Article III:4 clearly implies
government action involving a demand, request or the imposition of a condition but in our view this
term does not carry a particular connotation with respect to the legal form in which such governmentaction is taken.  In this respect, we consider that, in applying the concept of "requirements" in
Article III:4 to situations involving actions by privat e parties, it is necessary to take into account that
there is a broad variety of forms of government of action that can be effective in influencing the
conduct of private parties.
10.108   In light of these considerations, we proceed to analyze whether in the case at hand there is a
connection between the undertakings given by the four motor vehicle manufacturers and actions of
the Government of Canada such that these undertakings must be regarded as "requirements" withinthe meaning of Article III:4. To this end, we consider first the arguments and evidence presented by
the parties with respect to the nature of the in volvement of the Government of Canada in the
submission of the Letters. We next examine the arguments and evidence presented by the parties
with respect to the question as to   whether or not the commitments contained in the Letters are binding
and enforceable, and whether or not the Government of Canada monitors compliance with thesecommitments.
10.109  With respect to the circumstances surrounding th e submission of the Letters of Undertaking,
the evidence before us shows that the Letters were submitted by Canadian motor vehicle
manufacturers in response to a request made by the Government of Canada in the context of the
anticipated conclusion of the Auto Pact between Canada and the United States.
10.110  That the Letters were submitted in response to a request from the Canadian Government is
evident from the text of the Letters. First, the opening  sentence of one of these Letters reads:
"This letter is in response to your request for a statement with respect to the proposed
agreement between the Governments of Canada and the United States concerning
trade and production in automotive products, as you have described it to us."
10.111  Second, there is substantial similarity in structure and content and wording of the Letters. In
this regard, it has been confirmed by Canada in the proceedings before the Panel that the Government
of Canada provided the motor vehicle manufacturers in question with a draft letter. Third, the text of
the Letters shows that the Canadian Government had made requests for specific commitments
regarding Canadian value added.
858 In the proceedings before the Panel, Canada has confirmed that
                                                     
857 The New Shorter Oxford English Dictionary (Clarendon Press, 1993) Vol. II, 2557.
858 One of the Letters states:  "You have requested that we should increase Canadian value added in our
products by $121 million between 1964 and the end of the model year 1968, as outlined under condition (4).
Also you have requested that the amount should be further increased to the extent required under condition (3)stated above."WT/DS139/R
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the Government of Canada did request undertakings respecting Canadian value added.  Finally,
testimony before the United States Congress of the chief executives of the companies in question also
confirms that the Letters were written in response to a request by the Government of Canada.859
10.112  The European Communities and Canada disagree on the question of whether the Letters were
the subject of "negotiations" between the companies in question and the Government of Canada.860
We believe that the evidence before us is not conclusive with respect to whether or not the Letters
were the subject of negotiations between the motor vehicle manufacturers and the Government of
Canada. However, this lack of clarity as to whether or not the content of the Letters was the subject of
negotiations between the manufacturers and the Government of Canada does not detract from the
undisputed evidence that the Letters were submitted in response to a request from the Government ofCanada.
10.113  Another relevant aspect of the role of the Government of Canada with regard to the
submission of the Letters of Undertaking concerns the relationship between the submission of these
Letters and the conclusion of the Auto Pact.  In this respect, the evidence before us shows that the
Letters were requested by the Government of Canada, and submitted by the companies in question, inconnection with the anticipated conclusion of the Auto Pact. The Letters were submitted several days
before the signature of the Auto Pact.  The opening sentence of each of the Letters refers to "the
                                                     
859 Supra  para. 5.62.
860In support of its view that the Letters were negotiated with the Government of Canada, the European
Communities refers to the following statements made before the US Congress:  "The Canadian Government
asked us to write them a letter stating our understanding of the provisions of the agreement as it was finallydetermined and to ask for our endorsement of the principles to the extent that we did understand them andassigned to us an objective whereby, over the 4 years that are involved in this agreement, we would undertake to
increase out Canadian production or our Canadian value."
"The agreement was entered into by Canada only after Canada received assurances from the Canadian
vehicle manufacturers which were designed to protect and stimulate Canada's much smaller and less developedmanufacturing industry."
"…it ought to be a matter of record that there have been such conversations between the
Canadian Government and each of the Canadian automobile manufacturers, and that the results of
those conversations –that is the letters of assurance, or statements of intentions, are an important part of
this agreement as a whole from the Canadian standpoint."
"…we knew during the course of the negotiations that went on for many, many months that
the Minister of Industry of Canada was holding conversations with the automobile manufacturingcompanies in Canada in respect of their intentions as to production under the differing conditions of the
prospective agreement.  …It took the Canadian government some time to formulate what was in the
letters but I would say [that we became aware of the terms of the letters] in the winter certainly of1964.  …I imagine that during the separate conversations that the companies had with the Minister ofIndustry, that the discussion was perhaps a common one, and perhaps the Minister of Industry drafted aproposed letter that he discussed with each of them that had identical language in it, and that theseletters were taken by the Canadian companies and modified to suit their particular circumstances and
returned to the ministry with a lot of common language remaining."
By contrast, Canada has referred to the following statement of a chief executive of one of the companies in
question:
"I can speak for General Motors and I can say that there have been no secret agreements, there have
been no negotiations. The Canadian Government asked us to write them a letter stating our understanding of the
provisions of the agreement as it was finally determined and to ask for our endorsement of the principles to the
extent that we did understand them and assigned to us an objective whereby, over the 4 years that are involved
in this agreement, we would undertake to increase our Canadian production or our Canadian value." (emphasisadded by Canada).WT/DS139/R
WT/DS142/RPage 378
agreement between the Governments of Canada and the United States concerning trade and
production in automotive products."  It is evident that the companies had been informed of the
objectives and provisions of the proposed agreement:  the Letters mention the main objectives of the
agreement, express the companies' support for these objectives, and note the conditions under which
the Auto Pact provides for the duty-free importation of motor vehicles and certain automotive partsinto Canada. In three of the Letters, the para graph containing the undertakings with regard to
Canadian value added starts with the following sentence:
In addition to meeting these stipulated conditions and in order to contribute to
meeting the objectives of the agreement …" ( emphasis added )
10.114  Finally, in two Letters the implementation of the Auto Pact is mentioned as a condition for the
undertakings:
"The following comments assume that  the proposed agreement for duty-free
treatment has the full support of the respective Governments, and that the program
may be expected to continue for a considerable period of time."
 and"Our undertakings are, of course, conditional upon the execution of that agreement,
upon the adoption of an order in council, and regulations substantially in the form of
the drafts that you have already delivered to us, and upon an acceptable response in
respect of the enclosed supplementary letter."
10.115  It follows that the anticipation of the conclusion of the Auto Pact was a key factor in the
decision of the companies to respond positively to th e request of the Government of Canada that the
companies make commitments with regard to the growth in the level of Canadian value added in theiroperations. The companies made their undertakings conditional upon the conclusion and
implementation of the Auto Pact and viewed these undertakings as contributing to the objectives of
the Auto Pact. Given that, in submitting the undertakings before the conclusion of the Auto Pact, the
companies in question were motivated by expectations concerning the benefits they would derive
from this agreement through the import duty exemptio n, it is possible to view this aspect of the
relationship between  the action of the private parties and the role of the Government of Canada in
terms of an undertaking offered by private parties as a condition for obtaining a benefit from a
government. Though the information before us does not establish conclusively that, as alleged by the
European Communities, the undertakings contained in the Letters were regarded by the Government
of Canada as a condition sine qua non  for the conclusion of the Auto Pact, there is sufficient evidence
to conclude that the actions of the companies ma nifestly depended upon (anticipated) action by the
Government of Canada in the form of the conclusion of an international agreement.
10.116  We now turn to the issues raised by the partie s with respect to whether or not the Letters of
Undertaking are binding and enforceable and whether or not the Government of Canada monitors
compliance with the Letters.
10.117  The parties differ as to whether or not the commitments contained in the Letters of
Undertaking are "binding". In this respect, we note  first that the Letters provide that the companies
"undertake" to achieve very specific, verifiable objectives with respect to the level of Canadian value
added in their operations. Several Letters discuss in detail the companies' understanding of, and their
concerns regarding,   particular technical aspects of the implementation of the value added criteria,notably the methodology for the computation of Canadian value added, and draw attention to factors
that may limit the ability of the companies to meet the stated objectives. Second, various statements in
the Letters indicate that the word "undertake" was used in the sense of a formal commitment.  For
example, one of the Letters states:WT/DS139/R
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"Subject to the imponderables mentioned above, it is our intention and that of our
affiliates to make every effort feasible to meet the objectives of the agreement to be
made between the Governments of Canada and the United States, and to achieve the
indicated goal as rapidly as possible.
(…)In conclusion, therefore, I am prepared to say at this time that, first (name of the
company) has plans underway to increase Canadian value added by about $ 30
million in each of the first 2 years of the plan; and, second, we are continuing our
studies of ways to accomplish the remainder of the program and will undertake to
meet the full objective of $121 milion by the end of the model year 1968.
It is anticipated that these studies will take between 3 and 4 months to finish, and I
will be prepared to discuss the results with you when they are completed. From time
to time, as requested, we will be glad to discuss our current operations and our plans
for future development with the Minister of Industry, and to receive and consider his
suggestions."
In three of the four Letters of Undertak ing the final paragraphs read as follows:
"(name of the company) also agrees to report to the Minster of Industry, every 3
months beginning April 1, 1965, such information as the Minister of Industry
requires pertaining to progress achieved by our company, as well as plans to fulfill
our obligations under this letter .  In addition, (name of the company) understands that
the Government will conduct an audit each year with respect to the matters described
in this letter. ( emphasis added )
We understand that before the end of model year 1968 we will need to discuss
together the prospects for the Canadian automotive industry and our company's
program."
In one of these Letters, these paragraphs are preceded by the following statement:
"The undertakings given in this letter are to be adjusted to the extent necessary for
conditions not under the control of the (name of the company) or of any affiliated
(name of the company) company, such as acts of God, fire, earthquake, strikes at any
plant owned by (name of the company) or by any of our suppliers, and war
."
10.118  In view of the specificity of the undertakings; the precision as regards the modalities of their
implementation; the reference to the undertakings  as "obligations"; the commitment to provide
information "required" by the Ministry of Industry pertaining to "progress achieved…as well as plans
to fulfill" these obligations;  and the explicit refere nce to the need to adjust the undertakings in case of
force majeure , it is reasonable to conclude that the companies, by submitting these Letters, accepted
responsibility vis-à-vis  the Government of Canada with respect to the achievement of the conditions
contained in the Letters.   We therefore consider that the commitments contained in the Letters wereintended to be binding as obligations of the companies in question notwithstanding that, as argued by
Canada, the Letters do not have a specific legal status under Canadian law.
10.119   Japan and the European Communities argue that the Letters are enforceable because there is
nothing to prevent Canada from amending or rep ealing the MVTO 1998 or the SROs to withdraw the
import duty exemption as a response to non-compliance with the commitments contained in theLetters of Undertaking. The European Communities also submits that, because of the link between the
submission of the Letters of Undertaking and the conclusion of the Auto Pact, the beneficiaries haveWT/DS139/R
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assumed that, were they to disregard the commitments contained in the Letters, the Canadian
Government would withdraw the import duty exemptio n. Canada points out that the Letters are not
enforceable because there is no legal basis upon which Canadian authorities can deny the right of duty
free importation in response to a failure to meet a commitment in the Letters. In Canada's view,
whether or not the letters could be made enforcea ble through amendments to the MVTO and the SRO
is irrelevant as the WTO Agreements only deal with measures actually applied by Members.  Canada
further rejects as unsupported by evidence the argument of the European Communities that there has
been a tacit understanding between the companies and the Government that the import duty
exemption would be revoked in case of non-compliance with the commitments provided for in the
Letters.
10.120  The information before us shows that Canada has not taken steps to create specific legal
authority under its domestic law that would enable the Government of Canada to take action in
response to a failure by the companies to meet th e commitments given in the Letters of Undertaking.
Specifically, there is nothing in the legal instruments adopted by Canada in connection with its
domestic implementation of the Auto Pact to indicate that the import duty exemption can bewithdrawn in case of a failure to meet these comm itments.  In this respect, we consider that the
arguments of the European Communities and Japan regarding steps that Canada could take to make
the Undertakings enforceable by amending relevant regulations are somewhat speculative.
10.121  However,  we do not believe that the issue of whether or not the Letters of Undertaking are
enforceable through the use of sanctions in case of non-compliance through the withdrawal of the
import duty exemption is of decisive importance. Rather, the procedures for the provision of
information to the Minister of Industry, the comm itment "to discuss together the prospects for the
Canadian industry and our company's program" and the conduct of a yearly audit demonstrate that the
Government of Canada would play an active role in ascertaining implementation of the commitments.
The choice of an informal mechanism with regard to  the implementation of the Letters rather than  a
formal enforcement mechanism involving the possibi lity of sanctions in case of non-compliance does
not mean that there was no active involvement of the Government of Canada with regard tocompliance with these commitments. In the latter regard, we note that in the proceedings before the
Panel Canada has confirmed that at least until model year 1996 it gathered information on an annual
basis with respect to the achievement of the Canadi an value added levels stipulated in the Letters of
Undertaking.
10.122  In sum, the evidence before the Panel shows that:  (i) in making the undertakings contained in
the Letters, the companies acted at the request of the Government of Canada;  (ii)  the anticipated
conclusion of the Auto Pact was a key factor in the decision of the companies to submit these
undertakings; (iii) the companies accepted responsibility vis-à-vis  the Government of Canada with
respect to the implementation of the undertakings contained in the Letters, which they described as
"obligations" and in respect of which they undertook to provide information to the Government ofCanada and indicated their understanding that the Government of Canada would conduct yearly
audits; and (iv) at least until model year 1996, the Government of Canada gathered information on an
annual basis concerning the implementation of the conditions provided for in the Letters.
10.123  In light of this evidence, we consider that the involvement of the Government of Canada in
the action taken by the four companies was such that the commitments contained in the Letters ofUndertaking can be regarded as "requirements" within the meaning of Article III:4. Where a
government requests a firm to make commitments as specific as those contained in the Letters of
Undertaking and to record them in writing in letters addressed to the government,  and these
commitments are described by the firms as "obligations" in respect of the fulfilment of which they
undertake to provide information to, and to consult with, the government, it is evident that there is
action of private parties directed by, or at the very least expected by, the government. That the Letters
do not have a specific legal status under Canadian law in the sense that they are not contracts orWT/DS139/R
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statutory instruments does not negate the fact that government action was effective in inducing
companies to make commitments vis-à-vis  the Canadian Government with respect to the conduct of
their business operations in Canada in a manner that was regarded as binding by the companies. The
ordinary meaning of the term "requirement" does not support the proposition that, where a
government induces a firm to make a clearly specified, verifiable commitment vis-à-vis  that
government to act in a particular manner, such a commitment only qualifies as a "requirement" if it is
embodied in an instrument with a defined legal status under the law of the country in question.
10.124  We note Canada's argument that, regardless of the past status of the Letters, they are not
"requirements" today.  Canada submits that, even before the complaints had brought this case, Canada
had publicly stated that the Letters were not binding, and that it has stopped making any effort toverify whether companies achieved the amounts contained in the Letters.
10.125  We note that, except for the conditions relating to the achievement of a specific level of
Canadian value added in 1968, the commitments made in the Letters of Undertaking were not limited
in time. The commitments to increase Canadian value added by a specified percentage of market
growth applied to "each model year over the preceding model year." The Letters contain no expirydate. Evidence before the Panel indicates that the undertakings have not been terminated.
10.126  The information before us does not indicate that the companies in question no longer consider
themselves to be bound vis-à-vis  the Government of Canada in respect of the commitments contained
in the Letters. On the contrary, statements made in October and November 1997 by chief executive
officers of the Ford Motor Company of Canada and of Chrysler Canada Ltd. suggest that these
companies continued to regard these commitments as binding on them ( "each member must meet a
60 per cent Canadian value added commitment" and "we have exceeded those requirements by acountry mile").
861 We also note that in a publication dated 10 June 1998 which provides background
information on the Auto Pact, Industry Canada explicitly mentions commitments made by
manufacturers with respect to Canadian value added:
"Assemblers also undertook to achieve CVA in vehicle assembly and/or parts
production by a fixed dollar amount set for each company (1964 value) plus 60percent of the annual growth in the value of their Canadian sales of cars, by 50
percent of growth in truck sales, and by 40 percent of growth in bus sales. These
conditions are outlined in a letter of undertaking by each company and, while non-
binding, typically have been met."
10.127  This clearly suggests that as recently as June 1998 the Government of Canada viewed such
undertakings as part of its policy respecting the implementation of the Auto Pact and that at least at
that time the Government of Canada possessed the information necessary to ascertain the status of
compliance with the conditions contained in the Letters of Undertaking. Finally, while Canada has
indicated that it has ceased verifying compliance with the undertakings,  we recall that nothing in the
information before us suggests that the Government of Canada has taken steps to terminate theUndertakings.
10.128  Under these circumstances, we believe that the information provided by Canada during the
Panel proceedings that it has recently ceased gathering information on the CVA amounts contained in
the Letters of Undertaking is not a sufficient basis for us to conclude that the Letters should no longer
be treated as "requirements" within the meaning of Article III:4 as of the date on which the terms ofreference of this Panel were established.
10.129  We consider that, as requirements within the meaning of Article III:4, the commitments
contained in the Letters of Undertaking with respect to Canadian value added affect the internal sale
                                                     
861 Supra  paras. 5.49 and 5.50.WT/DS139/R
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or use of imported products and afford less favourable treatment to imported products than to like
domestic products because these commitments are easier to meet if domestic products are used than if
imported products are used. In this connection, we recall that in our analysis of the claims raised with
respect to the CVA requirements provided for in  the MVTO 1998 and the SROs we have rejected
Canada's argument that a measure relating to the use of domestic products is inconsistent withArticle III:4 only if that measure in law or in fact requires the use domestic products.  Similarly, we
recall our view expressed in that connection that the actual trade effects of the CVA requirements are
of no legal consequence in the context of Article III:4.  We therefore do not believe it is necessary to
examine the arguments of the parties on the question of whether or not the commitments contained in
the Letters of Undertaking in practice can easily be met by the firms in question.
10.130  In light of the foregoing considerations, we find that Canada acts inconsistently with
Article III:4 of the GATT by according less favourable treatment to imported products than to like
domestic products with respect to their internal sale or use as a result of the conditions contained in
Letters of Undertaking with respect to Canadian value added.
10.131  For reasons explained in paragraph 10.91, we do not consider it necessary to make a finding
on whether these conditions are inconsistent with Article 2.1 of the TRIMs Agreement.
(b) Ratio requirements
10.132  We now proceed to examine whether Canada acts inconsistently with Article III:4 of the
GATT by reason of the provisions of the MVTO 1998 and of the company-specific SROs which
stipulate that, as a condition for eligibility for duty-free importation of motor vehicles, manufacturers
must maintain a certain ratio between the net sales value of vehicles produced in Canada and the net
sales value of all vehicles of that class sold for consumption in Canada ("ratio requirements").
10.133  We note that, while the European Communities explicitly requests us to find that these ratio
requirements are inconsistent with Article III:4 of the GATT, Japan's initial presentation of its
arguments does not include a request for such a finding.
862 In this argumentation, Japan presents
several arguments on this issue and reserves its right to elaborate on the claims presented on this
matter in Japan's request for the establishment of a panel.863 At the first meeting with the parties, we
rejected a preliminary objection raised by Canada with respect to Japan's reservation of its right to
elaborate on these claims.864  At that meeting, we also posed several questions to Japan on the
arguments presented by Japan in its initial argumentation regarding the inconsistency of the ratio
requirements with Article III:4.865  Though Japan responded that it would address the issues raised by
the Panel in its rebuttal, Japan's subsequent argumentation is completely silent on the matter of thealleged inconsistency of the ratio requirements with Article III:4.
10.134  In light of the fact that Japan's request for fi ndings as set out in its initial argumentation does
not include the issue of the inconsistency of the ratio requirements with Article III:4, that
subsequently Japan has offered no further argumentation on this matter during the course of the panel
proceedings, and that it has not responded to our que stions on this issue, we conclude that Japan has
not presented a claim that the ratio requirements are inconsistent with Article III:4 of the GATT.
Alternatively, assuming arguendo  that the arguments presented by Japan in its initial argumentation
can properly be described as amounting to a claim, we find that Japan has failed to substantiate this
claim.  We therefore limit ourselves to a consideration of the claim raised by the European
Communities.
                                                     
862 Supra  para. 3.1.
863 Supra  para. 4.2.
864 Supra  Section VI.C.
865 Question 14 from the Panel.WT/DS139/R
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10.135  The European Communities claims that the ratio requirements provided for in the MVTO
1998 and the SROs are inconsistent with Article III:4  because they provide less favourable treatment
to imported motor vehicles than to like domestic motor vehicles with respect to their internal sale.
10.136  As noted above, the parties agree that the MVTO and the SROs are covered by the term
"laws, regulations or requirements" in Article III:4. It is also undisputed that the ratio requirementsapply to imported and domestic motor vehicles that are like products within the meaning of
Article III:4.
10.137  In the view of the European Communities, the ra tio requirements "affect" the internal sale of
motor vehicles because they provide an incentive to limit the sales of imported motor vehicles,
thereby modifying the conditions of competition between those vehicles and domestic motor vehiclesthe internal sale of which is not subject to any similar restriction.
10.138   In support of its view that the ratio requirements afford less favourable treatment to imported
motor vehicles than to like domestic vehicles w ith respect to their internal sale, the European
Communities submits that the ratio requirements place a maximum limit on the total sales value of all
motor vehicles sold for consumption in Canada which in practice operates so as to restrict exclusivelythe sales of imported motor vehicles.  While an increase in the sales value of motor vehicles produced
in Canada by the beneficiary will automatically give rise to an identical increase in the value of
permitted domestic sales, an increase in imports of motor vehicles does not entail an increase in the
value of permitted domestic sales. As a result, the beneficiaries cannot, without losing the entitlement
to the import duty exemption, sell in Canada any imported motor vehicles in excess of a certain
amount which is directly related to the sales value of their domestic production of motor vehicles.
Because no similar limit is placed on the internal sale of domestic motor vehicles, the ratiorequirements afford less favourable treatment to im ported motor vehicles with respect to their internal
sale in Canada.
10.139  In response to questions from the Panel, the European Communities has stated that it claims
that the ratio requirements limit the internal sale in Canada of motor vehicles  imported under the
tariff exemption
866 and that the ratio requirements are internal measures in the sense of Article III and
not border measures because "they limit the right to sell in Canada vehicles already imported in
Canada under the tariff exemption."867 We therefore proceed on the understanding that the claim of
the European Communities concerns the implications  of the ratio requirements with respect to the
internal sale of those motor vehicles which have been imported duty-free.
10.140  Canada submits that the ratio requirements do not fall within the scope of Article III:4
because they do not affect the internal sale of any motor vehicles in Canada, imported or domestic.  In
the view of Canada, the argument of the European Communities that the ratio requirements entail a
restriction on the internal sale of imported motor vehicles rests on a misunderstanding of the operation
of the ratio requirements. In this regard, Canada points out that, since manufacturers can always
ensure that they stay within their ratios by paying duty on imported motor vehicles, the ratios cannotlimit the internal sale of  imported vehicles.  The ratio requirements have an effect on the importation
of motor vehicles in that they limit the total value of motor vehicles that a manufacturer may import
duty-free. However, the ratio requirements  do not affect the conditions of sale of motor vehicles after
their importation.   In this connection, Canada argues that the European Communities fails to make a
distinction between measures affecting the importation of products and measures affecting importedproducts after their importation.
10.141  In light of the claim of the European Communities and the counterarguments of Canada, we
must determine whether and how the ratio requirements affect the conditions of the internal sale in
                                                     
866 Supra  para. 7.164.
867 Supra  para. 7.165.WT/DS139/R
WT/DS142/RPage 384
Canada of motor vehicles imported under the import duty exemption, i.e. motor vehicles imported
duty-free by beneficiaries of the MVTO 1998 and of the company-specific SROs, as compared with
the conditions of sale of like vehicles produced in Canada by the beneficiaries. Specifically, we must
establish whether or not the ratio requirements entail a restriction on "the right to sell in Canada
vehicles already imported under the tariff exemption", as alleged by the European Communities andas contested by Canada.
10.142  The ratio requirements mean that a certain ratio must be maintained between the net sales
value of vehicles produced by a manufacturer and the net sales value of all vehicles of that class sold
for consumption in Canada by the manufacturer. The net sales value of all vehicles sold for
consumption in Canada includes the value of domestic vehicles and the value of vehicles which havebeen imported duty free but does not include the value of motor vehicles on the importation of which
import duties have been paid.  As a consequence of the ratio requirements,  the net sales value of all
vehicles of a class sold for consumption in Canada by a manufacturer cannot exceed the sales value of
vehicles of that class produced in Canada by the same manufacturer by a certain amount.
10.143   Since the ratio requirements apply to "the net sales value of all vehicles of that class sold for
consumption in Canada" there is no formal distinction between vehicles on the basis of their origin.
Thus, on its face, the limitation on the sales value of vehicles sold for consumption in Canada operates
without distinction between imported and domestic vehicles.  The question before us is whether in
practice this limitation has the effect of restricting the internal sale of motor vehicles which have been
imported duty-free, without imposing a similar restriction on the internal sale of like domestically
produced motor vehicles.
10.144  We note that, if a vehicle imported under the import duty exemption is sold for consumption
in Canada, the sales value of that vehicle will lead to an increase in the net sales value of vehicles sold
for consumption in Canada but will not affect the net sales value of vehicles produced in Canada. The
ratio between these values will therefore decline. On the other hand, in the case of a domestically
produced vehicle, production and sale of such a vehicle lead to identical increases in the net sales
value of vehicles produced in Canada and the net sales value of vehicles sold for consumption inCanada.  Hence, the ratio between these values will not be affected.
10.145  It follows that, as a result of the ratio requirements, the net sales value of vehicles sold for
consumption in Canada and imported duty-free is subject to a limitation. The maximum possible sales
value of vehicles sold for consumption in Canada and imported duty-free is realized if a manufacturer
exports its entire production of domestically produced vehicles, in which case the net sales value ofvehicles sold for consumption in Canada and accounted for by vehicles which have been imported
duty free is equal to the net sales value of the vehicles produced in Canada by the manufacturer.
10.146  However, the notion of a limitation of the net sales value of motor vehicles sold for
consumption in Canada and imported duty free is not by itself sufficient to find in favour of the claim
of the European Communities. Rather, to substantiate this claim, it must be shown that this limitationarises from a restriction on the internal sale of such imported motor vehicles. In other words, it must
be demonstrated that, because of the ratio requirements, motor vehicles which have been imported
duty-free are subject  to a restriction as regards the internal sale of such vehicles in Canada.
10.147  In this respect, we note that, where the net sales value of duty-free imported motor vehicles
sold for consumption in Canada reaches the limit allowed under the ratio requirements, the
beneficiary is no longer entitled to duty-free treatment of imports. Further sales in Canada of imported
motor vehicles will therefore be sales of vehicles on which import duties will have been paid. At the
same time, vehicles already imported duty-free will not be affected. We note that the EuropeanWT/DS139/R
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Communities has not contested Canada's explanation of this aspect of the operation of the ratio
requirements.868
10.148  We therefore consider that the effect of the ratio requirements in limiting the share of the net
sales value of all vehicles sold for consumption in Canada which is accounted for by vehicles that
have been imported duty-free is a direct consequence of the fact that, beyond a certain value ofimports, further imports of motor vehicles become subject to payment of import duty. This limitation
on the net sales value of duty-free imported motor vehicles is not effected through a restriction on the
internal sale of such motor vehicles subsequent to their importation. While the European
Communities claims that the ratio requirements "limit the right to sell in Canada vehicles already
imported under the Tariff Exemption", it has not s hown how the ratio requirements could create a
situation in which a motor vehicle manufacturer who has been allowed to import a vehicle duty-free is
subsequently confronted with a limitation of his "right to sell" such a vehicle in Canada. What is
referred to by the European Communities as a "limitatio n" on the internal sale of such vehicles in fact
is a limitation on the value of vehicles that can be imported duty-free.
10.149  For purposes of Article III, the manner in which the ratio requirements affect the treatment
accorded to motor vehicles with respect to the condit ions of their importation is irrelevant. That there
is a limitation on the net sales value of vehicles which can be imported duty-free therefore cannot
constitute a grounds for finding a violation of Article III:4. The fact that internal sales of domestic
vehicles are not subject to a "similar" limitation is also without relevance. By definition, a violation of
Article III cannot be established on the basis of a comparison between the conditions of internal sale
of domestic products with the conditions of importation of imported products.
10.150  In light of the foregoing considerations, we find that the European Communities has failed to
demonstrate that, by applying ratio requirements under the MVTO 1998 and the SROs as one of the
conditions determining the eligibility of duty-free importation of motor vehicles, Canada is according
to motor vehicles imported duty free less favourable treatment with respect to their internal sale than
to like domestic motor vehicles. The claim of the European Communities regarding the inconsistency
of the ratio requirements with Article III:4 must therefore be rejected.  Because of this finding withrespect to the claim of the European Communities re garding the consistency of the ratio requirements
with Article III:4 of the GATT, we must also reje ct the claim of the European Communities that these
requirements are inconsistent with Article 2.1 of the TRIMs Agreement.  We note in this regard that
the European Communities claims that these ratio requirements are trade-related investment measures
which are inconsistent with Article 2.1 of the TRIMs Agreement because they violate Article III:4 ofthe GATT.
C. C
LAIMS UNDER THE SCM A GREEMENT
10.151  The European Communities and Japan claim that the import duty exemption provided by the
Canadian Government to certain motor vehicle manufacturers under the MVTO 1998 and the SROs
constitutes a subsidy within the meaning of Article 1 of the Agreement on Subsidies andCountervailing Measures (SCM Agreement).  They further claim that, because this import duty
exemption is accorded upon fulfilment of certain ratio requirements and CVA requirements, it is
contingent upon export performance within the meaning of Article 3.1(a) of the SCM Agreement and
contingent upon the use of domestic over imported goods within the meaning of Article 3.1(b) of the
SCM Agreement and is thus prohibited under those provisions.
1. Ratio requirements
10.152  In the view of the European Communities and Japan, the import duty exemption constitutes
"revenue . . . foregone" which is "otherwise due", and hence a financial contribution exists within the
                                                     
868 Supra  para. 6.369.WT/DS139/R
WT/DS142/RPage 386
meaning of Article 1.1(a)(1)(ii) of the SCM Agreement.  This import duty exemption confers a benefit
on the manufacturers in question in that the manufacture rs are allowed to retain funds that they would
otherwise have been obliged to pay as import dutie s.  The complainants further consider that the
import duty exemption is contingent, in law and in fact, upon export performance, because eligibility
for it is based on the fulfilment of production-to-sales ratios which require a manufacturer beneficiaryto export.
10.153  Canada contends that the import duty exemption does not represent a subsidy within the
meaning of Article 1 of the Agreement or an export subsidy within the meaning of Article 3.1(a) of
the Agreement.  The overriding purpose of the SCM Ag reement is to discipline subsidies that distort
trade, and it would be contrary to the objective of trade liberalisation to characterise a measure thatfacilitates imports as an improper trade distortion.  Further, the import duty exemption is unlike any of
the practices identified in the Illustrative List of  Export Subsidies contained in Annex I to the SCM
Agreement (Illustrative List).
10.154  Canada submits that the ratio requirements do not make the import duty exemption contingent
in law upon export performance, because nothing in either the MVTO 1998 or any of the SROsindicates that the import duty exemption is available only on the condition that the subject
manufacturers achieve any particular export performance.  Canada also argues that the ratio
requirements do not make the import duty exemption contingent in fact upon export performance,
because the import duty exemption is not "tied to" exportation or export earnings within the meaning
of footnote 4 of the SCM Agreement.  In this context, Canada explains how, in its view, the import
duty exemption is entirely independent of export volume.
(a) Order in which issues will be addressed
10.155  Article 3.1(a) of the SCM Agreement provides that subsidies "within the meaning of
Article 1" which are contingent upon export performance are prohibited.  Consequently, in order for a
measure to be an export subsidy within the meaning of Article 3.1(a) of the SCM Agreement, it must
be a subsidy within the meaning of Article 1 of that  Agreement.  Accordingly, we will first examine
whether the import duty exemption identified by the European Communities and Japan is a subsidywithin the meaning of Article 1 of the SCM Agreem ent, and then consider whether that subsidy is
contingent upon export performance within the meaning of Article 3.1(a) of the Agreement.
(b) Whether the import duty exemption is a subsidy within the meaning of Article 1
10.156  Article 1.1 of the SCM Agreement provides, in relevant part, that:
"For the purposes of this Agreement, a subsidy shall be deemed to exist if:(a)(1) there is a financial contribution by a government or any public body within
the territory of a Member (referred to in this Agreement as "government"), i. e.
where:
. . .
(ii) government revenue that is otherwise due is foregone or not collected (e. g.
fiscal incentives such as tax credits) ( footnote omitted );
. . .
and
(b) a benefit is thereby conferred."WT/DS139/R
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Page 387
It is clear from Article 1.1 that two criteria must be met in order for a subs idy to exist within the
meaning of that Article.  First, there must be a financial contribution by a government.  Second, a
benefit must thereby be conferred.  We will consider each criterion in turn.
(i) Financial contribution by a government
10.157  The European Communities argues that, because customs duties are imposed, collected and
appropriated by the Canadian Government, they constitute "government revenue".  Given that the
importation of motor vehicles into Canada is, in principle, subject to customs duties, an exemption
from such duties means that the Canadian Government is "foregoing" revenue that would otherwise
be "due".  A financial contribution therefore exists within the meaning of Article 1.1(a)(1)(ii) of theSCM Agreement.  Japan argues that "government revenue" is raised through internal taxes and other
charges, including customs duties.  Since government revenue is foregone when a customs duty is
waived, the import duty exemption amounts to a financial contribution
10.158  Canada argues that an import duty exemption for goods does not necessarily constitute
revenue foregone under Article 1.1(a)(1)(ii).  If it did, then a subsidy would exist whenever a Memberunilaterally applied a rate of duty lower than its bound rate.  To define such a programme as
"subsidies" would be contrary to the object and purpose of the WTO Agreement, which explicitly
identifies tariff reductions as contributing to the objectives of the Agreement.
10.159  It will be recalled that, under Article 1 of the SCM Agreement, there is a financial
contribution and hence a possible subsidy where "government revenue that is otherwise due is
foregone or not collected (e.g. fiscal incentives such as tax credits)".  The term "revenue" has been
defined, inter alia , as "[t]he annual income of a government or State, from all sources, out of which
public expenses are met".
869  The word "otherwise" has been defined, inter alia , to mean "in other
circumstances".870  The adjective "due" has been defined, inter alia , to mean "[t]hat is owing or
payable as an obligation or debt".871
10.160  Examining the Canadian import duty exemption in light of the ordinary meaning of the words
above, we consider that customs duties represent "government revenue".  In respect of whether thecustoms duties at issue in this case represent government revenue otherwise due, we recall that the
import duty exemption is accorded to particular importers and not to others, and further consider that,
in the absence of the import duty exemption, imports by manufacturer beneficiaries which are
shielded from duties by that exemption would be subject to duties.  In respect of whether those
customs duties represent the foregoing of government revenue otherwise due, we recall that Canadaapplies an MFN duty on motor vehicles originating in non-NAFTA countries at the rate of 6.1 per
cent.  We further recall that certain duties conti nue to apply with respect to imports originating in
NAFTA countries. While light trucks from Mexico and all motor vehicles from the United States
enter Canada duty-free under the NAFTA, motor vehicles from Mexico other than light trucks are
subject to 1.3 or 2.4 per cent duties.
872  Finally, we recall that, in order for motor vehicles to qualify
for the preferential duty treatment applicable with  respect to imports originating in NAFTA countries,
they must satisfy certain rules of origin and reporting requirements which are not applicable in order
to receive the import duty exemption at issue in th is dispute.  Thus, even motor vehicles imported
from Mexico and the United States in a tariff cate gory subject to zero duty would not necessarily be
eligible for duty-free treatment absent the import duty exemption.  Accordingly, absent the import
duty exemption accorded to certain companies un der the MVTO 1998 and the SROs, those companies
would be liable to pay duties of up to 6.1 per cent on the motor vehicles in question.  We find,
                                                     
869 The New Shorter Oxford English Dictionary (Clarendon Press, 1993), Vol. 2, 2579.
870 Ibid., 2032.
871 The New Shorter Oxford English Dictionary (Clarendon Press, 1993), Vol. 1, 761.
872 See supra footnote 492.WT/DS139/R
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therefore, that the import duty exemption constitutes the "foregoing" of government revenue which is
"otherwise due".
10.161  We now address Canada's argument that, if an import duty exemption were necessarily
treated as revenue foregone, a subsidy would exist every time a WTO Member applied a rate lower
than its bound rate, and this would be contrary to the object and purpose of the WTO Agreement,which explicitly identifies tariff reductions as contributing to the objectives of the Agreement.  In our
view, a Member's bound rate merely represents the maximum  duty a Member may impose in respect
of imports from WTO Members; the mere fact that a WTO Member applies a level of duties lower
than the bound rate would not mean that it is fo regoing revenue that is "otherwise due".  More
importantly, while the preamble to the WTO Agreement recognises that the "substantial reduction oftariffs" contributes to fulfilling certain objectives of the WTO Agreement, it does not follow that tariff
reductions will always be WTO-consistent.  For example, the reduction of tariffs in a discriminatory
manner could give rise to a violation of Article I of GATT 1994.  Similarly, we consider that the
foregoing of government revenue otherwise due, in the form of customs duties, and in a manner
which is specific within the meaning of Article 2, ma y give rise to a subsidy which is subject to the
disciplines of the SCM Agreement.
873
10.162  Canada also argues that, if an import duty exemption were necessarily treated as revenue
foregone, a subsidy would exist every time generalised preferences or duty drawbacks were granted
by a WTO Member.  In our view, however, these examples advanced by Canada involve factual and
legal considerations distinct from those in the case at hand.  For instance, a generalised system of
preferences accords favourable treatment to certain products from certain countries, and all such
products from those countries receive favourable treatment.  That situation is distinct from the case athand, where some  importers of a product – the manufacturer beneficiaries – are accorded favourable
treatment as compared with other importers of the same product from the same country .  As for duty
drawbacks, item (i) of the Illustrative List indicates the circumstances in which the remission or
drawback of import charges on imported inputs consumed in the production of the exported product
constitutes an export subsidy.  When read in conjunction with footnote 1 to the SCM Agreement, item(i) would appear to indicate – although this is not an issue we need decide in this dispute – that non-
excessive duty drawback is not to be considered a subsidy within the meaning of Article 1 of the
Agreement.
10.163  Having concluded that the Canadian  import duty exemption constitutes the "foregoing" of
government revenue which is "otherwise due" within the meaning of Article 1.1(a)(1)(ii) of the SCMAgreement, we find that it gives rise to a financial contribution within the meaning of
Article 1.1(a)(1) of the Agreement.
(ii) Benefit
10.164  Having found that a financial contribution exists on the part of the Canadian Government
through the import duty exemption provided to ce rtain motor vehicle manufacturers, we must now
consider the second criterion set out in the definition of a subsidy in Article 1, that is, benefit.
10.165  A benefit has been defined, inter alia , as "(An) advantage".
874  Further, the Appellate Body
has stated in Canada – Aircraft :
"The dictionary meaning of 'benefit' is 'advantage', 'good', 'gift', 'profit', or, more
generally, 'a favourable or helpful factor or circumstance'. ( footnote omitted ) . . .
                                                     
873 Our conclusions in this respect are consistent with those reached by the panel in Indonesia – Autos .
In that dispute, the panel found that exemptions from import duties involved the foregoing of governmentrevenue otherwise due.  Panel Report on Indonesia – Autos, supra  note 270, para. 14.155.
874 The New Shorter Oxford English Dictionary (Clarendon Press, 1993), Vol. 1, 214.WT/DS139/R
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These definitions also confirm that the Panel correctly stated that 'the ordinary
meaning of 'benefit' clearly encompasses some form of advantage.' ( footnote
omitted )"875
In our view, the fact that the manufacturer beneficiaries need not pay customs duties that would
otherwise be due – and that would be paid by non- qualifying manufacturers – constitutes just such an
advantage.  We find that the financial contribution made through the import duty exemption,
therefore, confers a benefit within the meaning of Article 1.1(a)(2) of the SCM Agreement.
(iii) Illustrative List as context
10.166  Canada posits that footnotes 1 and 5, in conjunction with items (g), (h) and (i) of the
Illustrative List of Export Subsidies, make it clear that non-excessive exemption or remission
programmes are not subsidies.  Footnote 1 to Article 1.1(a)(1)(ii) excludes certain non-excessive
exemptions or remissions such as duty drawbacks from the definition of a "subsidy", notwithstanding
that they confer a benefit directly on exports.  It is therefore difficult, in Canada's view, to justify
extending the definition of "subsidy" to capture non-excessive duty exemptions or remissions on
imports.
10.167  We note that Canada does not contend that the measure at issue here falls within the scope of
footnote 1.  Rather, it would appear that Canada is making the contextual argument that, based on a
principle derived from footnotes 1 and 5 and items (g), (h) and (i) of the Illustrative List, "non-
excessive exemptions [from] or remissions" of duties are not subsidies, and that the import duty
exemption in this case is just such a "non-excessive" exemption or remission.  In response to a
question from the Panel, Canada explains that "[a]n excessive duty rebate would, in practical terms,
be no different from a legal duty exemption coupled with a cash subsidy."876
10.168  We recall that footnote 1 to Article 1.1(a)(1)(ii) provides that:
"In accordance with the provisions of Article XVI of GATT 1994 (Note to Article
XVI) and the provisions of Annexes I through III of this Agreement, the exemption of
an exported product from duties or taxes borne by the like product when destined for
domestic consumption, or the remission of such duties or taxes in amounts not inexcess of those which have accrued, shall not be deemed to be a subsidy."
Items (g), (h) and (i) of the Illustrative List (i. e., Annex I referred to in footnote 1) provide further
elaboration regarding the application of this principle.
10.169  Item (i) of the Illustrative List relates to import charges, and is thus most closely related to the
measures at hand.  Under item (i), the remission or  drawback of import charges "in excess of those
levied on imported inputs that are consumed in the production of the exported product" is a prohibited
export subsidy.  Thus, the concept of "excessive" remission or drawback of import charges involves a
comparison between the import duties levied on inputs consumed in the production of an exported
product
877, on the one hand, and the amount of the remission or drawback granted on the other.  In the
case at hand, Canada has never contended that the import duty exemption in question represents the
remission or drawback of import charges on imported inputs that are consumed in the production of
exported products.  On the contrary, qualifying motor vehicle manufacturers earn an import duty
exemption in respect of motor vehicles that are sold in the Canadian market.  Nor has Canada made
any effort to demonstrate that the amount of the import duty exemption was calculated as a function
                                                     
875 Appellate Body Report on Canada – Measures Affecting the Export of Civilian Aircraft , adopted on
20 August 1999, WT/DS70/AB/R (hereinafter Appellate Body Report on Canada – Aircraft ), para. 153.
876 Supra  para. 7.236.
877 As defined in footnote 61 to Annex II of the SCM Agreement.WT/DS139/R
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of, or in fact bears any relationship to, the import charges levied on imported inputs that are consumed
in the production of an exported product.  Thus, we fail to understand how the concept of "excessive"
exemption or remission is of relevance to this dispute,  or in what sense it could be said that Canada's
import duty exemption in this case is not "excessive".878
10.170  Having concluded that the import duty exemption represents a financial contribution by the
Canadian Government and that a benefit is thereby conferred, we find that the import duty exemption
constitutes a subsidy within the meaning of Article 1 of the SCM Agreement.
(iv) Specificity
10.171  We note that Article 1.2 of the SCM Agreement states:
"A subsidy as defined in paragraph 1 shall be subject to the provisions of Part II
['Prohibited Subsidies'] or shall be subject to the provisions of Part III ['Actionable
Subsidies'] or V ['Countervailing Measures']  only if such a subsidy is specific in
accordance with the provisions of Article 2."
10.172  We further note that Article 2.3 of the SCM Agreement states:
"Any subsidy falling under the provisions of Article 3 shall be deemed to be
specific."
Given that the central issue of the claims under the SCM Agreement in this dispute is whether the
import duty exemption falls within the provisions of Article 3, we need not, and do not, address the
question of specificity separately.
(c) Whether the import duty exemption is "contingent . . . upon export performance"
10.173  In the previous section, we have concluded that the import duty exemption under the MVTO
1998 and the SROs gives rise to a financial contribution that confers a benefit, and thus represents a
subsidy within the meaning of Article 1 of the SCM Agreement.  We now consider whether that
subsidy is contingent upon export performance within the meaning of Article 3.1(a) of the Agreement.
10.174  Article 3.1 of the SCM Agreement provides, in relevant part:
"Except as provided in the Agreement on Agriculture, the following subsidies, within
the meaning of Article 1, shall be prohibited:
(a) subsidies contingent, in law or in fact ( footnote omitted ), whether solely or as
one of several other conditions, upon export performance, including those illustrated
in Annex I ( footnote omitted );
10.175  The European Communities and Japan argue that  the import duty exemption is contingent
upon export performance by reason of the ratio requirements.  The European Communities explains
how, where the required ratio is 100:100 or higher, a beneficiary cannot sell in Canada any value of
motor vehicles imported under the import duty exemption unless it exports an equivalent value of
                                                     
878 Our views with respect to paragraphs (g) and (h) of the Illustrative List, relating to indirect taxes, are
similar.  Put simply, an export subsidy exists under these two items if the Member exempts or remits indirect
taxes "in excess" of the amount of indirect taxes that would be payable if the product were sold in the domestic
market.  Given that the measure in question here has no relation to the amount of indirect taxes that would bepayable if the exported product had been sold in the domestic market, we fail to grasp how the concept of"excessive" remission is relevant to the case at hand.WT/DS139/R
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domestically manufactured motor vehicles.  Where the requirement is less than 100:100, by exporting
part of its domestic production, a beneficiary would see the value of motor vehicles which it may
import duty-free into Canada increase by an amount equal to the value of the exported vehicles.  It
would therefore qualify for a larger subsidy than if it sold all its domestic production in Canada.  The
ratio requirements hence function as requirements to export.  Japan explains how, where the ratiorequirement is 100:100, the only way for a manufacturer beneficiary importing motor vehicles and
selling them in Canada to maintain compliance with  this requirement is to export the vehicles it
produces.  Where the ratio requirement is less than 100:100, the only way for a manufacturer
beneficiary importing motor vehicles and selling th em in Canada to maintain compliance with this
requirement is to export the vehicles it produces, but a lower requirement imposes a lesser degree ofpressure in comparison with the situation in which the requirement is 100:100.
10.176  In Canada's view, even if there is a subsidy, there is no export contingency in law.  A subsidy
is export-contingent in law where the underlying legal instruments establishing that subsidy expressly
provide for it to be available only on condition of export performance.  The relevant legal condition
for the import duty exemption is achievement of a production-to-sales ratio, and neither productionnor sales, nor a ratio of the one to the other, is synonymous with exportation.
10.177  Canada further argues that there is no export contingency in fact, because the import duty
exemption is available to manufacturer beneficiaries whether they export or not and the import duty
exemption is entirely independent of export volume.  Specifically, there is no direct nexus between
receipt of the import duty exemption and the exportation of vehicles.  Not only are there no penalties
if exports do not take place or bonuses if additional exports do take place, but the benefit of the import
duty exemption can be increased while exports are decreased.  The only way to increase the benefit ofthe import duty exemption is to increase imports, which can be done even while decreasing
production and exports.
10.178   As a threshold matter, we note the disagreement of the parties regarding the concepts of "in
law" and "in fact" export contingency.  The European Communities argues that, where the
requirement to export is stated expressly in the law or is implicit in other requirements that are sostated in the law, the subsidy is contingent in law upon export performance.  Where the requirement to
export does not result from the terms of the law, or at least from those terms alone, but from factual
elements outside the law, the subsidy is contingent in fact upon export performance.  Japan does not
specifically address this issue.  Canada, on the othe r hand, argues that a subsidy is contingent in law
upon export performance where the underlying legal instruments of that subsidy expressly providethat the subsidy is available to enterprises only on condition of export performance.  In response to a
question from the Panel, Canada argues that a subsidy is contingent in fact upon export performance
where there is no express requirement to export, but the facts and circumstances are such that there is
an implicit requirement to export.
10.179  The term "law" has been defined, inter alia , as "that which is laid down, ordained, or
established."
879  Following from this definition, export contingency in law, in our view, must refer to
the situation where one can ascertain, on the face of the law (or other relevant legal instrument), that
export contingency exists.  In other words, an examination of the terms of the underlying legal
instruments of the subsidy in question would suffice to determine whether or not export contingency
in law exists.  We do not mean by this, however, that the terms of the law must – as Canada suggests– "expressly provide" that the subsidy is contingent upon export performance, but rather, that the
existence of export contingency can be demonstrated on the basis of the law or other relevant legal
instrument, without reference to external factual elements.
10.180  We find confirmation of our view on this issue in a recent statement of the Appellate Body in
Canada – Aircraft :
                                                     
879 Black's Law Dictionary (West Publishing Co.,1968, Fourth Edition), 1028.WT/DS139/R
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"In our view, the legal standard expressed by the word 'contingent' is the same for
both de jure  or de facto  contingency.  There is a difference, however, in what
evidence may be employed to prove that a subsidy is export contingent.  De jure
export contingency is demonstrated on the basis of the words of the relevant
legislation, regulation or other legal instrument .  Proving de facto export contingency
is a much more difficult task.  There is no single legal document which will
demonstrate, on its face, that a subsidy is 'contingent . . . in fact . . . upon export
performance'.  Instead, the existence of this  relationship of contingency, between the
subsidy and export performance, must be inferred  from the total configuration of the
facts constituting and surrounding the granting of the subsidy, none of which on itsown is likely to be decisive in any given case."
880  (first emphasis added )
10.181  In light of our view regarding the distinction between "in law" and "in fact" export
contingency, we now consider whether the Canadian import duty exemption is contingent in law upon
export performance.
10.182  We note that the ratio requirements applicable to the MVTO 1998 beneficiaries are, "as a
general rule", 95:100 for automobiles, at least 75:100 for SCVs and at least 75:100 for buses.881  With
respect, specifically, to the four automobile  manufacturer beneficiaries under the MVTO 1998,
Canada has stated, in response to a question from the Panel, that the amounts of the ratio requirements
are confidential.882  Canada adds that they range from the low-80s:100 to the high-90s:100, and the
average of the four amounts is approximately 95:100.  We further note that the SROs issued prior to
1997 set the minimum ratio requirement at 75:100.  Regarding the SROs issued since 1997, almost all
such SROs have the ratio requirement set at 100:100.883
10.183  The word "contingent" has been defined, inter alia , as "conditional, dependent".884  Further,
the Appellate Body has stated in Canada – Aircraft :
"In our view, the key word in Article 3.1(a) is 'contingent'.  As the Panel observed,
the ordinary connotation of 'contingent' is 'conditional' or 'dependent for its existence
on something else'. ( footnote omitted )  This common understanding of the word
'contingent' is borne out by the text of Article 3.1(a), which makes an explicit link
between 'contingency' and 'conditionality' in stating that export contingency can be
the sole or 'one of several other conditions '."885
10.184  In light of the above ordinary meaning of the word "contingent", we first examine the
situation in which the ratio requirement is 100:100 or higher886.  For instance, a company selling $100
worth of motor vehicles in Canada must produce $100 worth of motor vehicles in Canada in order to
receive an import duty exemption for its imports of motor vehicles.  However, for every unit value of
motor vehicles that it imports duty-free, it would ha ve to export an equivalent unit value of motor
                                                     
880 Appellate Body Report on Canada – Aircraft, supra  note 875, para. 167.
881 Supra  para. 2.25.
882 Supra  para. 7.3.  We recall the Appellate Body's statement in Canada – Aircraft : " . . . [A] panel has
broad legal authority to request information from a Member that is a party to a dispute, and . . . a party so
requested has a legal duty  to provide such information." ( emphasis added )  While we do not consider that the
precise amounts of the ratio requirements for the MVTO manufacturers are necessary to our analysis,  we notethat the Appellate Body further stated: " . . . [A] panel should be willing expressly to remind parties – during thecourse of dispute settlement proceedings – that a refusal to provide information requested by the panel may leadto inferences being drawn about the inculpatory character of the information withheld."  Appellate Body Reporton Canada – Aircraft, supra  note 875, paras. 197 and 204.
883 Supra  para. 2.34.
884 The New Shorter Oxford English Dictionary (Clarendon Press, 1993), Vol. 1, 494.
885 Appellate Body Report on Canada – Aircraft, supra  note 875, para. 166 ( emphasis in original ).
886 We note that one ratio requirement – that for Navistar International – is higher than 100:100.WT/DS139/R
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vehicles produced in Canada, in order to maintain its production-to-sales ratio.  Notwithstanding the
fact that the requirement is set out as a production-to-sales ratio, we fail to see how a manufacturer
beneficiary could access the import duty exemption – and still maintain its production-to-sales ratio –
without exporting.  In cases where the production- to-sales ratio is 100:100, the only way to import
any motor vehicles duty-free is to export, a nd the amount of import duty exemption allowed is
directly dependent upon the amount of exports achieved.  Given that, where the ratio requirement is
100:100, it is impossible to import duty-free withou t exporting, the import duty exemption is clearly
"conditional" or "dependent" upon exportation.
10.185  Canada contends that a manufacturer beneficiary subject to a 100:100 ratio requirement
which is in fact performing at a higher-than-require d ratio could increase its duty-free imports while at
the same time reducing its exports.  We agree with Canada that such a situation is in fact possible.
Thus, for example, a manufacturer might, in year x, produce $500 worth of motor vehicles in Canada,
export $450 worth of motor vehicles from Canada, import $50 worth of motor vehicles pursuant to the
import duty exemption and thus, in total, sell $100 worth of motor vehicles in Canada.  In this case,
the manufacturer beneficiary has achieved a production-to-sales ratio of 500:100.  The following year,that manufacturer beneficiary might continue to produce $500 worth of motor vehicles in Canada, but
reduce its exports to $400 while increasing its duty-free imports to $100 (leaving an actual
production-to-sales ratio of 500:200, well in excess of the required ratio).  Under these circumstances,
the manufacturer beneficiary has decreased its exports while increasing the amount of its duty-free
imports (and thus the amount of the subsidy).
10.186  Canada considers that the type of situation set out above establishes that there is no sufficient
"nexus" between the exports and the subsidy and th at the import duty exemption is not, therefore,
"contingent . . . upon export performance".  We disagree.  In our view, the situation posited by Canada
simply demonstrates that a manufacturer beneficiary may in a given year choose not to fully exercise
its entitlement to the import duty exemption, while in a subsequent year more fully availing itself of
that entitlement.  Looked at from another angle,  it could be said that the manufacturer beneficiary
exceeded the production-to-sales ratio necessary in order to obtain the amount of import dutyexemption it required, and that it therefore had a certain margin of flexibility to reduce exports and/or
increase duty-free imports in subsequent years.  The fact remains, however, that the manufacturer
beneficiary could not have imported any motor vehicles duty-free in either year without exporting an
equivalent value of motor vehicles in that year.  Thus, the subsidies are clearly contingent upon export
performance, in as much as the import duty exemption obtained was conditional or dependent uponexporting an equivalent value of motor vehicles.  The fact that the manufacturer beneficiary exceeded
the amount of exports necessary to obtain the amount of subsidy in question in no way changes this.
10.187  We have noted that ratio requirements for some manufacturer beneficiaries are set at 100:100
or higher and for others at less.
887  We have examined the situation in which the ratio requirement is
100:100 in light of the ordinary meaning of the word "contingent".  Accordingly, we now consider thesituation in which the ratio requirement is less than  100:100 in light of the ordinary meaning of the
word "contingent".
10.188  Let us assume that the ratio requirement is 75:100, the "minimum allowable ratio
requirement"
888.  A manufacturer beneficiary sells $100 wort h of motor vehicles in Canada and must,
therefore, produce $75 worth of motor vehicles in Canada in order to satisfy the ratio requirement.Having done so, it is entitled to import $25 worth of motor vehicles duty-free or, in other words, has a
duty-free "allowance" or "entitlement" of up to $25.  Admittedly, no exports have occurred, nor do
they need to, for the manufacturer beneficiary to receive the import duty exemption up to this amount.
We accept that the import duty exemption is not contingent upon export performance up to this
amount.
                                                     
887 See supra para. 10.182.
888 Supra  para. 7.1.WT/DS139/R
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10.189  However, if the manufacturer beneficiary wishes to import any amount above  its duty-free
"allowance" and still receive the import duty exemp tion, it would have to export an amount equivalent
to that exceeding this "allowance",  so as to ensure that the production-to-sales ratio remains unaltered.
In the present case, if it wishes to import $75 rather than $25 worth of motor vehicles duty-free, which
is $50 more than its "allowance", it would have to export $50 worth of motor vehicles.  For every unitvalue of duty-free imports above the "allowance", it is required to export an equivalent unit value of
its production in Canada.  Indeed, other things being equal, the more the manufacturer beneficiary
exports, the more it can import duty-free.  For instance, if it then exports $100 worth of motor
vehicles, it can import $125 worth of motor vehicles duty-free.  In our view, the relationship between
the import duty exemption and export performance in this situation is such that the former is"conditional" or "dependent" on the latter.
10.190  Of course, the manufacturer beneficiary could steadily increase its domestic production and
its domestic sales, all the while respecting the 75:100 ratio, and the value of duty-free imports that it is
allowed would increase proportionally without any exports occurring.  However, this does not change
the fact that, to import duty-free in excess of its "allowance", the manufacturer beneficiary is obligedto export an amount equivalent to that in excess.
10.191  We therefore find that, with the exception of the one situation where the ratio requirement is
less than 100:100 and the manufacturer beneficiary wishes to access an import duty exemption only
up to the amount of its duty-free "allowance", there is a clear relationship of contingency between the
import duty exemption and export performance.  The fact that, where the ratio requirement is less than
100:100, some amount of import duty exemption is  accessible without exports occurring cannot
possibly mean that the import duty exemption in its totality should be considered not to be export-
contingent.  In other words, the import duty exemp tion is contingent upon export performance even if,
where the ratio requirement is less than 100:100, th e manufacturer beneficiary may fulfil it to receive
a certain amount of import duty exemption without exporting, because , in order to receive a greater
amount of import duty exemption, it is obliged to export .
10.192  We note that it is the law (or other relevant legal instrument) – the MVTO 1998 and the SROs
– that creates this construct, i.e., an import duty exemption upon condition of meeting certain ratio
requirements.  It is the law that determines what a particular manufacturer beneficiary's ratio
requirement will be.  And, in the case of a ratio requirement lower than 100:100, although the
manufacturer beneficiary has a choice as to the amount of the import duty exemption it wishes to
access, it is the law that determines the consequences of that choice for the manufacturer beneficiary,
or, otherwise put, it is the law that then establishes contingency upon export performance.  We find,
on the basis of our foregoing discussion, that the MVTO 1998 and the SROs demonstrate, on their
face, that the import duty exemption is contingent upon export performance, and we have not needed
to refer ourselves to "the total configuration of the facts constituting and surrounding the granting of
the subsidy"
889.  Being demonstrable "on the basis of the words of the relevant legislation, regulation
or other legal instrument"890, export contingency in respect of the Canadian import duty exemption
exists in law.
10.193  With specific reference to the four MVTO automobile manufacturer beneficiaries, Canada
claims, in response to a question from the Panel, that there is no statutory instrument setting out the
ratio requirement.891  Canada submits that the actual ratio  requirement for each MVTO automobile
manufacturer beneficiary was determined on a company-by-company basis for each class of vehicle.
Each company was informed of the production-to-sales ratio it had achieved in the base year, and that
is the ratio that each company must maintain in order to qualify as an MVTO manufacturer
                                                     
889 Appellate Body Report on Canada – Aircraft, supra  note 875, para. 167.
890 Ibid.
891 Supra  para. 7.3.WT/DS139/R
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beneficiary each year.892  We consider, however, that, while no statutory instrument sets out the ratio
requirement for each automobile manufacturer beneficiary, it is the Canadian Government which
determined, pursuant to the MVTO 1998 , the ratio requirement for each automobile manufacturer
beneficiary.  That is, the MVTO 1998 requires that each automobile manufacturer beneficiary be
subject to a ratio requirement and establishes a formula on the basis of which the individual ratiorequirement for each automobile manufacturer benefici ary is to be calculated.  Thus, the existence of
export contingency with respect to the four MV TO automobile manufacturer beneficiaries can be
determined on the basis of the MVTO 1998 itself.
10.194  We note that the European Communities and Japan have, in the alternative , made an
argument as to export contingency in fact.  Ha ving found that the Canadian import duty exemption is
contingent in law upon export performance, we need not, and do not, address this argument.
10.195  Having examined the import duty exemption in light of the ordinary meaning of the text of
Article 3.1(a), we now address what Canada considers to be the context in which Article 3.1(a) must
be interpreted, i.e. the Illustrative List.  Canada argues that the Illustrative List is an important guide
to identifying the practices that constitute export  subsidies, and the Canadian import duty exemption
is unlike any of the measures in the Illustrative List.  Canada emphasises that, in each of the practices
identified in the Illustrative List, there is a cl ear and direct nexus between the subsidy and the
exported product, and the amount of the subsidy increases with the volume of exports.  We recall,
however, that the test set out in Article 3.1(a) is contingency upon export perfomance, and not a
"nexus" between the subsidy and the exported product.  And we have established that the import duty
exemption is contingent upon export performance by reason of the ratio requirements.
10.196  Canada posits that, because the only remissions of import charges identified in the Illustrative
List are those that are both excessive and linked directly to an exported product, only such remissions
of import charges may be considered subsidies contingent upon export performance.  We recall that
Article 3.1(a) prohibits "subsidies contingent . . . upon export performance, including those illustrated
in Annex I  [the Illustrative List]".  It is thus reasonable, in our view, to consider that the Illustrative
List may be of some utility in informing the notion of export contingency in certain precise situations.We find it difficult to accept, however, that the practices identified in the Illustrative List represent a
circumscription – in the manner suggested by Canada – of the conditions under which a subsidy is
deemed to be contingent upon export performance.  Indeed, the use of the words "including" and
"illustrated" makes it clear that, while all practices identified in the Illustrative List are subsidies
contingent upon export performance, there may be other practices not identified in the Illustrative Listthat are also subsidies contingent upon export performance.
10.197  Accordingly, the Illustrative List does not establish any general definition of the
circumstances in which an exemption or remission is to be considered an export subsidy.
Specifically, we do not find any basis in the cited provisions – or, for that matter, anywhere else in the
SCM Agreement – for Canada's view that, because the only remissions of import charges identified inthe Illustrative List are those that are both excessive and linked directly to an exported product, only
such remissions of import charges may be considered subsidies contingent upon export performance.
Item (i) is the only one in the Illustrative List th at deals with the remission of import charges, but it is
specific to imported inputs.  It cannot be considered to establish a general rule as to all remissions of
import charges.
10.198  Turning now to the object and purpose of the SCM Agreement, Canada submits that the
purpose of the SCM Agreement is to discipline subsidies that distort trade, and that the only real
effect on trade of the Canadian import duty exemption is to increase the volume of duty-free imports
into Canada of vehicles that would not qualify for such treatment under the NAFTA.  Canada also
argues that, even assuming that the import duty exemption can be considered a subsidy, it is a subsidy
                                                     
892 Supra  para. 7.2.WT/DS139/R
WT/DS142/RPage 396
of imports, not of exports.  In response to a question from the Panel, Canada submits that, in the
alternative, the import duty exemption is a produc tion-based subsidy by virtue of the production-to-
sales ratio requirements.
10.199  In order for a measure to fall within the scope of the SCM Agreement's prohibition of export
subsidies, it need only be a subsidy within the m eaning of Article 1 which is contingent upon export
performance within the meaning of Article 3.1(a).  In this case, while the subsidy in question is
provided through the mechanism of a duty exemption for imports and thus arguably "facilitates
imports", that does not change the fact that the subsidy is contingent upon export performance and
thus falls within the scope of Article 3.1(a).  In any event, and whether or not it also "facilitates
imports", a subsidy which is contingent upon export performance can be expected to affect exporters'behaviour.  Thus, even if a showing that an export subsidy did not have any "real effect" on exports
were a defence to a claim under Article 3.1(a) – which of course it is not – Canada has not convinced
us that the subsidy in question has not had any "real effect" in increasing Canadian exports of motor
vehicles.  Finally, we note that Canada's argument could, taken to its extreme, lead to the conclusion
that a financial contribution in the form of the foregoing of import duties could never give rise to anexport subsidy or, indeed, to any subsidy.  Item (i) of the Illustrative List, however, clearly foresees
that the excessive remission or drawback of certain import charges constitutes a prohibited export
subsidy.
10.200  We recall Japan's argument that the Canadian import duty exemption falls within item (a) of
the Illustrative List of Export Subsidies, that is, "th e provision by governments of direct subsidies to a
firm . . . contingent upon export performance."  Having established that the Canadian import duty
exemption violates Article 3.1(a) of the SCM Ag reement by reason of its being contingent upon
export performance, we need not, and do not, address this argument.
10.201  For the reasons discussed in this section, we find that the Canadian import duty exemption is
a subsidy within the meaning of Article 1 of the SCM Agreement which is "contingent . . . in law . . .
upon export performance" within the meaning of Article 3.1(a) of the Agreement.  We therefore find
that Canada acts inconsistently with its obligations under Article 3.1(a) of the SCM Agreement.
2. CVA requirements
10.202  In the previous section of this report, we concluded that the import duty exemption provided
by the Canadian Government to certain motor vehicle manufacturers under the MVTO 1998 and the
SROs constitutes a subsidy within the meaning of Article 1 of the SCM Agreement ( supra  paras.
10.156-10.170).  We now consider whether, as the European Communities and Japan claim, theimport duty exemption is contingent upon the use of domestic over imported goods within the
meaning of Article 3.1(b) of the SCM Agreement because it is accorded upon fulfilment of certain
Canadian value-added ("CVA") requirements, a nd is thus prohibited under that provision.
(a) Factual considerations
10.203  We recall that three types of CVA requirements are at issue in this dispute.
10.204  First , there are the CVA requirements under the MVTO 1998 itself.  Under the MVTO 1998,
a manufacturer is entitled to benefit from the import duty exemption if, inter alia , that manufacturer's
total Canadian value added with respect to a class of vehicles is equal to or greater than that
manufacturer's total value added with respect to that same class of vehicles in the base year. The term
"Canadian Value Added" is defined in the MVTO 1998 as including: (i) the cost of parts produced in
Canada and of materials of Canadian origin that are incorporated in the motor vehicles; (ii) direct
labour costs incurred in Canada; (iii) manufacturing overheads incurred in Canada; (iv) general and
administrative expenses incurred in Canada that are attributable to the production of motor vehicles;
(v) depreciation in respect of machinery and permanent plant equipment located in Canada that isWT/DS139/R
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attributable to the production of motor vehicles; and (vi) a capital cost allowance for land and
buildings in Canada that are used in the production of motor vehicles.
10.205  Second , there are CVA requirements in the SROs.  SROs issued after 1984 typically require
that the total CVA of a manufacturer's vehicles produ ced in Canada in a given year must be at least 40
per cent of the cost of sales of vehicles sold in Canada in the same year.  By way of exception, onemanufacturer (CAMI) must meet a requirement that the total CVA of its vehicles and original
equipment manufacturing parts produced in Canada in a given year must be at least 60 per cent of the
cost of sales of vehicles sold in Canada in the same year.
10.206  Third , there are Letters of Undertaking.  Letters signed by General Motors, Ford, Chrysler
and American Motors provide for two additional commitments with respect to CVA, i.e ., to increase
in each ensuing model year over the base model year CVA in the production of vehicles by an amount
equal to 60 per cent of the growth in their market for automobiles sold for consumption in Canada and
by an amount equal to 50 per cent of the growth in their market for commercial vehicles sold for
consumption in Canada, and to achieve a stipulated increase in the annual CVA by the end of model
year 1968.
(b) Arguments of the parties
10.207  The European Communities acknowledges that access to the import duty exemption is not
explicitly conditioned upon the use of domestic over imported goods, but that it is rather conditioned
upon reaching a certain level of CVA. It asserts, however, that because the use of domestic parts and
materials may be sufficient, or at least contribute, to meeting the CVA requirements, the import duty
exemption is contingent in law upon the use of domes tic over imported goods.  In short, the European
Communities considers that Article 3.1(b) prohibits any condition that gives preference to domesticover imported goods, irrespective of whether in practice domestic goods are actually used by the
beneficiary.  The European Communities further argues in the alternative that the import duty
exemption is in fact contingent upon the use of domestic over imported goods.  In this respect, the
European Communities asserts that parts and materials amount on average to as much as 80 per cent
of the cost of sales of motor vehicles assembled in Canada.
10.208  Japan claims that the import duty exemption is contingent in law upon the use of domestic
over imported goods, in that Article 3.1(b) prohibits subsidies that are contingent upon a condition
that requires  the use of domestic over imported goods, as well as subsidies contingent on a condition
that favours  the use of domestic over imported goods.  Japan further argues in the alternative that the
import duty exemption is contingent in fact upon the use of domestic over imported goods in the caseof the SROs to automobile manufacturers and the Letters of Undertaking which impose 60 per cent
CVA requirements.
10.209  Canada responds that the import duty exemption is not contingent in law on the use of
domestic over imported goods.  Moreover, Canada contends that Article 3.1(b) contains no reference
to contingency in fact and extends only to contingency in law.  Even if Article 3.1(b) did extend tocontingency in fact, the import duty exemption is not contingent in fact upon the use of domestic
goods, because the words "contingent upon" should be interpreted to apply to subsidies that are
conditional upon or tied to  the use of domestic over imported goods.  The import duty exemption is
available to manufacturers whether or not they use domestic goods, provided they meet their CVA
requirements.  Canada points to the fact that a manufacturer may include in the calculation of CVAnot only goods, but direct labour costs, overhead, general and administrative expenses, depreciation
and capital cost allowance for land and buildings.WT/DS139/R
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(c) Contingency in Law
10.210  We first consider whether the Canadian import duty exemption is contingent in law upon the
use of domestic over imported goods.
10.211  Article 3.1 provides, in relevant part:
"Except as provided in the Agreement on Agriculture, the following subsidies, within
the meaning of Article 1, shall be prohibited:
……………………
(b) subsidies contingent, whether solely or as one of several other conditions,
upon the use of domestic over imported goods."
10.212  In our examination of the complainants' claims under Article 3.1(a) of the SCM Agreement,
we examined the concepts of "in law" and "in fact" export contingency ( supra  paras. 10.178-10.179)
and concluded that export contingency in law refers to the situation where one can ascertain, on the
face of the law (or other relevant legal instrument), that export contingency exists.  Equally,
contingency in law upon the use of domestic over imported goods must refer to the situation where
the contingency is demonstrable "on the basis of the words of the relevant legislation, regulation orother legal instrument"
893 rather than "the total configuration of the facts constituting and surrounding
the granting of the subsidy"894.  Accordingly, we must first exam ine the legal instruments in question
here in order to determine whether eligibility fo r the import duty exemptions is contingent in law
upon the use of domestic over imported goods.
10.213  As we noted in the section of our report relating to claims under Article 3.1(a) of the SCM
Agreement, the word "contingent" has been defined, inter alia , as "conditional, dependent".895  It is in
light of this ordinary meaning of the word "con tingent" that we must examine whether, under the
CVA requirements outlined above, access to the import duty exemption is conditional or dependent
upon the use of domestic over imported goods.
10.214  We recall the view of the European Communities and Japan that Article 3.1(b) extends to
subsidies contingent on a condition that favours or gives preference to the use of domestic over
imported goods.  The complainants argue that the words "over imported" would be redundant if thisprovision were interpreted to mean simply "contingent on the use of domestic goods".  We note
however that the text of Article 3.1(b) refers to subsidies "contingent upon the use" of domestic over
imported goods.  This language thus creates a direct link between the subsidy and the use of domestic
goods.  We do not believe that the addition of the words "over imported" can be construed to weaken
that link.  Rather, we believe that they were intended simply to emphasize that such subsidies areprohibited because of their probable adverse effects on other Members.
10.215  The European Communities further argues that its interpretation furthers the object and
purpose of Article 3.1(b), which it considers to be to avoid that subsidies be used to discriminate
between domestic and imported goods used in the manufacture of other goods.  We recognize that
Article 3.1(b) in some sense has its roots in Article III:4 of GATT and in certai n interpretations of that
provision, which relates to non-discrimination.  We do not consider however that Article 3.1(b) ipso
facto  has the same scope as Article III:4.  To the contrary, while Article III:4 of GATT speaks of
"treatment no less favourable" and of requirements "affecting" internal sale, Article 3.1(b) speaks of
subsidies "contingent upon the use of domestic over imported goods".  We are unwilling to import
                                                     
893 Appellate Body Report on Canada – Aircraft , supra  note 875, para. 167.
894 Ibid.
895 The New Shorter Oxford English Dictionary (Clarendon Press, 1993), supra  note 884.WT/DS139/R
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into Article 3.1(b) legal principles derived from the interpretation of a text which differs so markedly
from that of Article 3.1(b).
10.216  In applying these principles to the case at hand, we note that, while under the MVTO 1998
and SROs access to the import duty exemption is contingent upon satisfying certain CVA
requirements,896 a value-added requirement is in no sense synonymous with a condition to use
domestic over imported goods.  In this regard, we recall that the definition of "CVA" in the MVTO
1998 includes, in addition to parts and materials of Canadian origin, such other elements as direct
labour costs, manufacturing overheads, general and administrative expenses and depreciation.  Thus,
and depending upon the factual circumstances, a manufacturer might well be willing and able to
satisfy a CVA requirement without using any domestic goods whatsoever.  Under thesecircumstances, it would be difficult for us to co nclude that access to the import duty exemption is
contingent, i.e. conditional or dependent, in law on the use of domestic over imported goods within
the meaning of the SCM Agreement.
10.217  Finally, we recall the European Communities' argument that Article 3.1(b) prohibits
subsidies contingent, whether solely or as one of several other conditions , on the use of domestic over
imported goods.  The European Communities concedes that this may cover the situation where a
subsidy is simultaneously subject to two or more cumulative conditions (including the use of domestic
over imported goods).  The European Communities asserts, though, that this may also cover the
situation where a subsidy is subject to two or more alternative conditions, so that compliance with any
of them gives a right to the subsidy.  If one of those conditions is "the use of domestic over imported
goods" the subsidy must be deemed prohibited by Article 3.1(b), even if it is also possible to qualify
for the subsidy by complying with other alterna tive non-prohibited conditions, such as using domestic
labour or domestic services.  Thus, the European Communities argues that the use of domestic over
imported goods need not be a "necessary" condition in order for a subsidy to be prohibited under
Article 3.1(b) of the SCM Agreement.
10.218  According to Canada, use of the clause "whether solely or as one of several other conditions"
in Article 3.1(a) and (b) of the SCM Agreement means that the use of domestic goods or exportperformance does not have to be the only condition for the receipt of the subsidy.  There may also be
additional conditions to fulfil, but each condition must be mandatory.  Canada contends that the clause
is not satisfied simply because the use of domestic goods or export performance is among the ways to
qualify for the subsidy.  In the context of Article 3.1(a), for example, Canada denies that a subsidy is
contingent on export performance if receipt of the subsidy depends on either exporting or sellingdomestically.
10.219  The basic disagreement between the parties concerns whether the phrase "several other
conditions" in Article 3.1(b) of the SCM Agreement would include several alternative  conditions
(including the use of domestic over imported goods).  We do not consider it necessary to resolve this
disagreement, since we are not confronted with a situation where the bestowal of a subsidy iscontingent in law on the fulfilment of several alternative conditions.  The import duty exemption at
issue is contingent in law on three clear conditions, all of which must be met: (1) manufacturing
presence, (2) ratio requirements, and (3) CVA requirements.  The use of domestic over imported
goods is not an alternative condition, in law, for access to the import duty exemption.  For that reason,
the question of whether the prohibition in Article 3.1(b) applies in circumstances where the use ofdomestic over imported goods is one of several, alternative, conditions for the bestowal of a subsidy
does not arise.
                                                     
896 However, with regard to the CVA requirements in the Letters of Undertaking, we recall our
observation in para. 10.120 that the legal instruments adopted by Canada in connection with the implementation
of the Auto Pact do not provide for the authority to withdraw the import duty exemption in case of a failure tomeet the commitments contained in these Letters. Compliance with these commitments is not explicitly a factorin determining the eligibility for the import duty exemption.WT/DS139/R
WT/DS142/RPage 400
(d) Contingency in fact
10.220  Having concluded that the import duty exemptions in this dispute are not contingent in law
upon the use of domestic over imported goods, we must now consider the complainants' assertion in
the alternative that those exemptions are contingent in fact  upon the use of domestic over imported
goods.
10.221  We note the disagreement of the parties as to whether Article 3.1(b) extends to the situation
where a subsidy is contingent in fact upon the use of domestic over imported goods.  In this context,
we recall that Article 3.1 is, as clearly indicated by its chapeau, the provision that sets out the
subsidies prohibited under the SCM Agreement.  Paragraphs (a) and (b) are both part of Article 3.1
and manifestly similar.  It is hard to imagine how  the inclusion of the words "in law or in fact" in
paragraph (a) and the absence of such words in paragraph (b) could be but a reflection of the intention
of the drafters.  We further recall that the Appellate Body has held in Japan – Alcoholic Beverages
that "omission must have some meaning".897  That two provisions so alike and juxtaposed together
should differ from each other in such specific respect signals, in our view, that the omission of the
words "in law or in fact" from Article 3.1(b) was deliberate and that Article 3.1(b) extends only tocontingency in law.
10.222  For the reasons discussed in this section, we are unable to find that the Canadian import duty
exemption is a subsidy within the meaning of Article 1 of the SCM Agreement which is "contingent
… upon the use of domestic over imported goods" within the meaning of Article 3.1(b) of the
Agreement.  We reject the European Communities' and Japan's claim accordingly.
D. C
LAIMS UNDER THE GATS
1. Introduction
10.223  The complainants argue that the import duty exemption granted to some
manufacturers/wholesalers of motor vehicles in Canada ("manufacturer beneficiaries") by the MVTO
1998 and by the SROs, is inconsistent with Canada's obligations under Article II of the GATS, in that
it grants more favourable treatment to suppliers of the United States than to suppliers of the European
Communities and Japan.  Japan alone claims that the import duty exemption is inconsistent withCanada's obligations under Article XVII of the GATS in that it grants more favourable treatment to
Canadian suppliers of wholesale trade services for motor vehicles, which benefit from duty-free
treatment, than to Japanese suppliers, which do not.
10.224  Both complainants also claim that the CVA requirements in the MVTO 1998 and in the SROs
are inconsistent with Article XVII of the GATS, in that they require manufacturers of motor vehiclesto achieve a minimum of Canadian value added in order to benefit from the import duty exemption,
therefore according more favourable treatment to services supplied in Canada than to services of other
Members supplied through modes 1 ("cross-border supply") and 2 ("consumption abroad").  The
complainants point out that the CVA requirements create an incentive for manufacturer beneficiaries
to procure services from suppliers established in Canada to the detriment of services supplied throughmodes 1 and 2.
10.225  Canada rejects the claims of the complainants on the grounds, first, that the import duty
exemption is not a measure affecting trade in services within the meaning of Article I of the GATS.
With respect to the Article II claim, Canada argues that the import duty exemption does not modify
the conditions of competition in favour of services and service suppliers of the United States, for tworeasons: (i) there are European and Japanese wholesale trade service suppliers of motor vehicles
which benefit from the import duty exemption; and (ii) due to vertical integration between
                                                     
897 Appellate Body Report on Japan – Alcoholic Beverages , supra  note 271, p. 18.WT/DS139/R
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manufacturers and wholesalers in the motor vehicle industry, there is no effective competition at the
wholesale trade level, so that granting the import duty exemption to manufacturer beneficiaries cannot
be said to affect competition.  With respect to the claim by Japan that the import duty exemption also
violates Article XVII of the GATS, Canada responds that it has no specific commitments in wholesale
trade services for motor vehicles and that therefore it is not bound by the national treatment obligationin this sector.  In addition, Canada argues that there are no "like" Canadian and Japanese suppliers of
wholesale trade services for motor vehicles to whom national treatment would apply and that, as for
Article II, due to vertical integration between ma nufacturers and wholesale trade service suppliers,
there is no competition which can be affected at the wholesale trade level.
10.226  With respect to the claim that the CVA re quirements in the MVTO 1998 and in the SROs
violate Article XVII of the GATS, Canada responds th at a series of circumstances exclude that these
measures could violate any of its specific commitments: (i) Canada has inserted relevant limitations to
its commitments in the relevant sectors; (ii) the supply of many of the relevant services through
modes 1 and 2 is not technically feasible; (iii) where it is technically feasible, the supply of the
relevant services through modes 1 and 2 suffers from a competitive disadvantage, due to the inherentforeign character of these services and not to the CVA requirements; and (iv) most manufacturer
beneficiaries achieve the required proportion of Canadian value-added through their employment of
Canadian labour so that the effect of the CVA requirements on their procurement of services is
minimal.
10.227  In addition, if the Panel were to find that the import duty exemption was a measure affecting
trade in services within the meaning of Article I of the GATS, Canada endorses the suggestion made
by the United States in its third-party submission that Article V:1 would apply to any alleged violationof Article II arising from a provision of the NAFTA, such as the measures at issue in this case.
10.228  In our consideration of the claims raised under the GATS, we first examine the general issue
of whether the measures, which the complainants claim to be in violation of Articles II and XVII of
the GATS, constitute "measures affecting trade in services" within the meaning of Article I of the
GATS.  Second, we examine the consistency of the import duty exemption, granted under the MVTO1998 and the SROs, with Article II and with Canada's specific commitments under Article XVII of
the GATS in wholesale trade services.  We then consider the compatibility of the CVA requirements
in the MVTO 1998 and in the SROs with Canada's specific commitments under Article XVII of the
GATS in various services sectors related to the production of motor vehicles, which the complainants
claim to be affected by the CVA requirements.  Finally, we address the role of Article V of the GATSwith respect to the import duty exemption, which the complainants claim to be in violation of
Article II of the GATS.
2. Measures affecting trade in services
10.229  The complainants argue that the import duty exemption and the CVA requirements in the
MTVO 1998 and in the SROs are "measures affec ting trade in services" within the meaning of
Article I of the GATS.  They note that the panel and the Appellate Body in EC – Bananas III
898  found
that the term "affecting" has a broad scope of application and that accordingly no measures are a
priori  excluded from the scope of application of the GATS.  They also point out that the panel in EC –
Bananas III  found that the list of matters in Article XXVIII(c) in respect of which measures by
Members affecting trade in services can be taken is an illustrative one and that the word "affecting" in
Article XXVIII cannot be read as meaning merely "in respect of".
10.230  Canada responds that the import duty exemption is not a "measure affecting trade in services"
within the meaning of Article I of the GATS, because, as a tariff measure,  it affects the goods
themselves and not the supply of distribution services.  According to Canada,  the import duty
                                                     
898 Panel Report on EC – Bananas III , supra  note 269.WT/DS139/R
WT/DS142/RPage 402
exemption does not affect a manufacturer in its capacity as a service supplier and in its supply of a
service.
10.231  We note that Article I:1 of the GATS establishes that "this Agreement applies to measures by
Members affecting trade in services".  The panel and the Appellate Body in EC – Bananas III  found
that the term "affecting" in Article I of the GATS has a broad scope of application and thataccordingly no measures are a priori  excluded from the scope of application of the GATS.  The panel
in EC – Bananas III  pointed out that:
" ... the drafters [of the GATS] consciously adopted the terms 'affecting' and 'supply
of a service' to ensure that the disciplines of the GATS would cover any measure
bearing upon conditions of competition in supply of a service, regardless of whetherthe measure directly governs or indirectly affects the supply of the service."
899
10.232  The Appellate Body upheld this finding of the panel and noted that:
" ... the use of the term 'affecting' reflects the intent of the drafters to give a broad reach
to the GATS.  The ordinary meaning of the word 'affecting' implies a measure that has
'an effect on', which indicates a broad scope of application."900
10.233  The Appellate Body also found that, in addition to measures affecting trade in g oods as goods
and measures affecting the supply of services as serv ices, falling respectively a nd exclusively within the
scope of the GATT 1994 or GATS:
 "there is yet a third category of measures that could be found to fall within the scope
of both the GATT 1994 and the GATS.  These are measures that involve a service
relating to a particular good or a service supplied in conjunction with a particular
good.  In all such cases in this third category, the measure in question could bescrutinized under both the GATT 1994 and the GATS."
901
10.234  We note that Article I of the GATS does not a priori  exclude any measure from the scope of
application of the Agreement .  The determination of whether a measure affects trade in services
cannot be done in abstract terms in isolation from examining whether the effect of such a measure is
consistent with the Member's obligations and commitments under the GATS.  In this case, the
determination of whether the MVTO 1998 and SROs are measures affecting trade in services within
the meaning of Article I of the GATS should be done on the basis of the determination of whether
these measures constitute less favourable treatment for the services and service suppliers of some
Members as compared to those of others (Article II) and/or for services and service suppliers of other
Members as compared to domestic ones (Article XVII).
10.235  Therefore, we do not address the issues of whether the MVTO 1998 and SROs affect trade in
services in isolation from the issue of whether such measures have an effect that is inconsistent with
an obligation in the Agreement.
3. Claims Under Article II of the GATS
10.236  The complainants claim that the import duty exemption granted by the MVTO 1998 and
SROs to some manufacturers/wholesalers of motor vehicles – the manufacturer beneficiaries – 
violates Article II of the GATS in that it const itutes more favourable treatment accorded to services
                                                     
899 Panel Report on EC – Bananas III (USA) , supra  note 269, para. 7.281.
900 Appellate Body Report on EC –  Bananas III , supra  note 49, para. 220.
901 Ibid., para. 220.WT/DS139/R
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and service suppliers of the United States than that accorded to those of other Members. We note that
Article II (1) of the GATS establishes that:
"With respect to any measure covered by this Agreement, each Member shall accord
immediately and unconditionally to services and service suppliers of any other
Member treatment no less favourable than that it accords to like services and servicesuppliers of any other country".
10.237  The complainants argue that the import duty exemption constitutes de facto  discrimination
because, although the criteria for obtaining the exemption contained in the MTVO 1998 and SROs are
not based on nationality, in fact all the beneficiaries are suppliers of the United States.  Japan also
claims that the import duty exemption is inconsistent  with the requirement in Article II that treatment
no less favourable be granted "immediately and unconditionally".  Canada argues that among the
beneficiaries of the exemption there are companies which are suppliers of the European Communities
and of Japan.  It argues further that it is not possible to maintain that the measure modifies the
conditions of competition among wholesale trade suppliers of motor vehicles because, due to vertical
integration and exclusive distribution between manuf acturers and wholesalers of motor vehicles, there
is no competition to be affected at the wholesale trade level.
(a) Whether the import duty exemption affects wholesale trade services
10.238  The complainants claim that the import duty exemption affects the supply of wholesale trade
services, as it modifies the conditions of competition between the beneficiaries of the duty-free
treatment and other wholesale trade service suppliers of imported motor vehicles which do not benefit
from the same treatment.  In particular, the import duty exemption would directly affect the cost of the
goods being distributed and indirectly affect the cost and/or profitability of the related wholesale tradeservices.  Canada responds that the import duty exemption is not a measure affecting trade in services
within the meaning of Article I of the GATS, because, as a tariff measure, it affects the goods
themselves and not the supply of distribution services.  According to Canada, such measures do not
affect a service supplier in its capacity as service supplier and in its supply of a service.  On the basis
of the Report of the Appellate Body in EC – Bananas III , Canada argues that the import duty
exemption is a measure falling exclusively within the scope of the GATT 1994, as it affects trade in
goods as goods, unlike other measures which involve a service relating to a particular good or a
service supplied in conjunction with a particular good, which are subject to both the GATT 1994 and
the GATS.
10.239  We note that if, on the one hand, it could be argued that the import duty exemption directly
affects trade in goods and that it does not directly govern the supply of distribution services, on the
other hand it cannot be maintained that it does not indirectly affect the supply of distribution services.
Like the measures at issue in the EC – Bananas III  case, the import duty exemption granted only to
manufacturer beneficiaries bears upon conditions of competition in the supply of distribution services,
regardless of whether it directly governs or indirectly affects the supply of such services.  In our view,therefore, the import duty exemption falls in the third category of measures, identified by the
Appellate Body in EC – Bananas III , as involving "a service relating to a particular good or a service
supplied in conjunction with a particular good", which "could be scrutinized under both the GATT
1994 and the GATS".
10.240  Canada points out that potentially all tariff measures could be found to affect trade in
services, and particularly distribution services.  It therefore argues that, if it is found that the import
duty exemption is a measure affecting trade in services, other tariff measures would have to be seen as
"measures affecting trade in services", which might lead to the anomalous result that some measures
which are legal under the GATT could be found to be in violation of the GATS.  For example,WT/DS139/R
WT/DS142/RPage 404
differential tariffs which are legal under GATT Articles XXIV and VI might be found to violate
Article II of the GATS.
10.241  Canada also points out that its view that tariff measures cannot be considered measures
affecting trade in services is supported by Addendum 1 to the Scheduling Guidelines ( Scheduling of
Initial Commitments in Trade in Services: Explanatory Note - Addendum , MTN.GNS/W/164/Add.1)
which provides the following answer to question 6 on whether it is "necessary to reserve the right to
impose customs duties and regulations on the movement of goods in relation to the supply of a
service":
"There is no requirement in the GATS to schedule a limitation to the effect that the
cross-border movement of goods associated with the provision of a service may besubject to customs duties or other administrative charges.   Such measures are subject
to the disciplines of the GATT.".
10.242  In the present case the issue of measures which maybe legal under the GATT but constitute a
violation of the GATS does not arise.  More importantly, the issue before us is not the effect of the
differential between the MFN rate of duty and the pr eferential zero-duty itself, but rather, the effect of
measures which reserve access to duty-free goods to a closed category of service suppliers, while
excluding others.
10.243  We note that although the answer to the quest ion on custom duties in the Addendum to the
Scheduling Guidelines makes it clear that Members are not required to schedule customs duties, the
measures which are claimed to be inconsistent with the GATS in this case are not "customs duties and
regulations on the movement of goods in relation to the supply of a service", but regulations which
reserve access to duty-free goods to a closed category of service suppliers, i.e. manufacturerbeneficiaries, while excluding others.  Canada would not therefore be required to schedule the
differential tariff rates applied to imports of motor vehicles; it would only be required to schedule
limitations and/or list MFN exemptions relating to measures which prevent certain distributors from
having access to the right to import motor vehicles duty free.
10.244  The complainants argue that there is no difference in nature between the import duty
exemption and the measures at issue in the EC – Bananas III  case.  The first, like the second, confers
a tariff advantage on a restricted category of suppliers, which allows them to import and resell under
more favourable conditions.  The complainants note that the tariff quota at issue in EC – Bananas III
did not prevent operators from obtaining licences , as licences were freely tradeable.  However,
importers who had been allocated licences by the European Communities would be able to retain the"tariff quota rent" (the advantage of importing in-quota goods at preferential rates), while other
operators would have to buy licences at an additional cost on the market.  The complainants also note
that if it is the case that the measures at issue in EC – Bananas III  and the import duty exemption are
of the same type, differences in the intensity of their restrictive effect should not matter in the
determination of whether the measures affect trade in services, as there is no de minimis  rule in
Article II or XVII of the GATS.
10.245  Regarding the analogy with the measures at issue in the EC – Bananas III  case, Canada
responds that the measure which determined the allocati on of licences in that case directly affected the
importers/distributors of bananas, while in the present case the differential duty on motor vehicles
affects only trade in goods.  Moreover, according to Canada, in EC – Bananas III  the issue of the
effect on distribution services of an existing differential duty was not even addressed by the panel.
Canada also makes the point that, unlike differential duties such as those resulting from the import
duty exemption, the quota for the allocation of licences in EC – Bananas III  made it impossible for
some distributors to obtain licences and this restrictive effect was not mitigated by the fact that the
licences were freely tradeable, as the tariff quota rent charged by licence holders was substantial.WT/DS139/R
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10.246  We note that both sets of measures allow some wholesale trade service suppliers to import
and resell under more favourable conditions, while putting at a competitive disadvantage other
suppliers, who have to pay the tariff or buy licences out of the tariff quota.  Canada's claim that the
tariff quota and licensing system in EC – Bananas III , unlike the import duty exemption under the
Auto Pact, "was critical to the scope and profitability of the provision of services by the independentbanana distributors and to the ability of even the in tegrated distributors to import at all" appears to be
based on a quantitative assessment of the effect of the measures at issue, rather than on a distinction
between tariff measures and import quotas: in the EC – Bananas III  case, in spite of the quota system,
licences were freely tradeable, so that the effect of the system was to put some distributors at a
competitive disadvantage rather than to prevent th em from selling in-quota bananas.  In both cases
there is an economic disadvantage.  We note, therefore, that it is not relevant to distinguish between
the measures at issue in EC – Bananas III  and the measures at issue in this case on the basis of the
extent of their effect on trade in services.
(b) Whether service suppliers are "like"
10.247  The complainants argue, and Canada does not contest, that manufacturer beneficiaries and
non-manufacturer-beneficiaries provide "like" services and are "like" service suppliers, irrespective of
whether their services are supplied with respect to motor vehicles imported by the manufacturer
beneficiaries or with respect to motor vehicles imported by non-manufacturer-beneficiaries, and
regardless of whether or not they have production facilities in Canada.
10.248  We agree that to the extent that the service suppliers concerned supply the same services, they
should be considered "like" for the purpose of this case.
(c) Whether treatment no less favourable is accorded
(i) Structure of competition in the wholesale trade services market
10.249  Canada argues that it is not possible to establish whether treatment no less favourable has
been granted or not, due to vertical integration and exclusive distribution arrangements existing in the
motor vehicle industry between manufacturers a nd wholesale trade service suppliers, which exclude
any actual or potential competition at the wholesale trade level.  Canada points out that thecharacteristics of the motor vehicles industry also prevent vertically integrated companies from
wholesaling vehicles manufactured by other compan ies.  According to Canada, this factor should
distinguish this case from EC  –- Bananas III , where it was held that, in spite of vertical integration,
the characteristics of the industry allowed even operators forming part of vertically integrated
companies to enter the wholesale service market.
10.250  The complainants point out that, in spite of vertical integration and exclusive distribution
agreements in the motor vehicle industry, it is possible to establish less favourable treatment of
wholesale trade services suppliers because there is potential competition among wholesalers for the
procurement of vehicles from manufacturers and actual competition for sales to retailers of directly
competitive vehicles.  They argue that the existence of potential competition for purchases frommanufacturers is confirmed by the fact that in the past Chrysler, a company of United States origin,
distributed in Canada vehicles manufactured by Mitsubishi, a company of Japanese origin.  The
complainants also rely on the ruling of the Appellate Body in EC – Bananas III , which held that "even
if a company is vertically integrated ... to the exte nt that it is also engaged in providing 'wholesale
trade services' ... that company is a service supplier within the scope of the GATS."
902
10.251  Canada responds that the Chrysler-Mitsubishi relationship is not a good example of
competition in the wholesale trade market, as the two companies were related through a joint venture
                                                     
902 Ibid., para. 227.WT/DS139/R
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agreement.  It also contests that actual competition exists for sales to retailers, as, due to exclusive
distribution arrangements between manufacturers and wholesalers, retailers will always have to
address the same wholesaler for a particular brand of vehicle.
10.252  We note that in the EC – Bananas III  case the Appellate Body found that:
" ... even if a company is vertically integrated ... to the extent that it is also engaged in
providing 'wholesale trade services' ... that company is a service supplier within the
scope of the GATS". 903
10.253  In our view, vertical integration of prod uction and distribution does not exclude the
possibility of considering the distribution operator as a service supplier, which may be affected in its
capacity as a service supplier by measures such as the import duty exemption, regardless of whetheractual competition exists in the wholesale trade market.  We also note that vertical integration might
determine the absence of actual competition among wholesalers with respect to the procurement of
vehicles from manufacturers, but it neither rules out potential competition in the wholesaler-
manufacturer relationship, nor actual competition in the wholesaler-retailer relationship.  Although
due to the existing structure of the market, wholesale trade service suppliers procure their vehiclesfrom the same manufacturers, no government measure prevents even a vertically integrated wholesale
distributor from approaching different manufacturers for the procurement of motor vehicles.
Regarding competition for sales to retailers, the fact that, due to exclusive distribution arrangements
between manufacturers and wholesalers, retailers have to address the same wholesaler for a particular
brand of vehicle (absence of intra-brand competition), does not exclude competition among
wholesalers providing directly competitive vehicles (inter-brand competition).
10.254  We therefore find that vertical integration and exclusive distribution arrangements between
manufacturers and wholesalers in the motor vehicle industry do not rule out the possibility that
treatment less favourable may be granted to suppliers of wholesale trade services for motor vehicles.
We also find that vertical integration and exclusive distribution arrangements do not preclude
potential competition among wholesalers for the pr ocurement of vehicles from manufacturers and
actual inter-brand competition for sales to retailers.
(ii) Manufacturing presence and closed list of Auto Pact manufacturer beneficiaries
10.255  The complainants argue that although the criteria for eligibility for the import duty exemption
are not expressly based on nationality, the import duty exemption constitutes de facto  discrimination
under Article II of the GATS as all or almost all services suppliers of other Members who benefit
from the exemption are of the United States.  Canada responds that not only is nationality not acriterion for granting the import duty exemption under the Auto Pact, but also that the measures do
not de facto  grant more favourable treatment to the suppliers of one Member, namely, the United
States.  Canada points out that at least two manufacturer beneficiaries are of EC origin (Volvo Canada
Ltd. and DaimlerChrysler Canada Inc.), and one is a 50/50 joint venture between juridical persons of
Japan and the United States (CAMI Automotive Inc.).  This claim is rejected by the EuropeanCommunities and Japan.  In their replies to question 57 from the Panel both complainants have
maintained that the import duty exemption results in de facto  discrimination, but have also pointed out
that in their view the existence of a closed list  of manufacturer beneficiaries constitutes formally
different treatment.
10.256  We note that Article XXVIII(m) of the GATS provides the following definition of a "juridical
person of another Member":
"'juridical person of another Member' means a juridical person which is either:
                                                     
903 Ibid., para. 227.WT/DS139/R
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(i) constituted or otherwise organized under the law of that other Member, and is
engaged in substantive business operations in the territory of that Member or any
other Member; or
(ii) in the case of the supply of a service through commercial presence, owned or
controlled by:
1. natural persons of that Member; or
2. juridical persons of that other Member identified under
subparagraph (i)."
10.257  In our view, DaimlerChrysler Canada Inc. is a service supplier of the United States within the
meaning of Article XXVIII(m)(ii)(2) of the GATS, because it is controlled by DaimlerChryslerCorporation, a juridical person of the United States according to subparagaph (i) of
Article XXVIII(m).  What is relevant, therefore, is that DaimlerChrysler Corporation is a juridical
person of the United States.  The fact that, in tu rn, DaimlerChrysler Corporation may be controlled by
a juridical person of another Member is not releva nt under Article XXVIII of the GATS.  In order to
define a "juridical person of another Member" Article XXVIII(m) of the GATS does not require theidentification of the ultimate controlling juridical or natural person: it is sufficient to establish
ownership or control by a juridical person of another Member, defined according to the criteria set out
in subparagraph (i).
904
10.258  Regarding CAMI Automotive Inc., it appears that it is a company jointly owned by Suzuki
Motor Co. of Japan and by General Motors Corp. of the United States.  The European Communities
have argued that, although CAMI is jointly owned by juridical persons of Japan and of the United
States, it should be regarded as a juridical person of the United States as it is controlled by GeneralMotors Corp., a juridical person of the United States.  The European Communities points out that
General Motors Corp. is the largest single shareholder of Suzuki Motor Co. and that Japanese
nationals constitute a minority in the board of directors of CAMI.  In our view, however, no evidence
has been presented which would allow the Panel to determine which juridical person "controls"
CAMI, within the meaning of Article XXVIII(n)(ii) of the GATS.
10.259  As regards Volvo Canada Ltd., it should be noted that ownership and control of this company
passed from Volvo AB of Sweden to Ford Motor C o. of the United States in January 1999, when the
former agreed to sell its passenger car business to the latter.  As a consequence, Volvo Canada Ltd. is
now a juridical person of the United States according to Article XXVIII(m) of the GATS.  Moreover,
as Volvo Canada Ltd. closed its Canadian plant in December 1998, it would lose its right to importmotor vehicles duty free under the import duty exemption.
10.260  The MVTO 1998 restricts eligibility for the impor t duty exemption to manufacturers who had
operated in Canada in the base year 1963-64, while SROs allowed other individual manufacturers to
qualify until 1989, subject to manufacturing presence and CVA requirements referring to different
base years.  Eligibility for SROs, howev er, ended in 1989, effectively freezing the status quo  of the
beneficiaries of the import duty exemption.  This is confirmed by Canada's reply to question 37 from
the Panel, which says that the list of manufacturers under the SROs cannot be expanded, but only
                                                     
904 In the EC – Bananas III  case, on the point of the determination of the origin of a juridical person,
the panel stated that: "… suppliers which are commercially present within the EC territory and owned orcontrolled by, for example, Del Monte Mexico would be entitled to benefit from GATS rights because it would not
matter under Article XXVIII(m) of GATS whether Del Monte Mexico was owned or controlled by natural or
juridical persons of Jordan, i.e. a WTO non-Member, as long as Del Monte Mexico was incorporated in Mexico
and engaged in substantive business operations in the territory of Mexico or any other Member." See, Panel Reporton EC – Bananas III (USA) , supra  note 269, footnote 493, para. 7.318.WT/DS139/R
WT/DS142/RPage 408
updated to reflect a change in a company's name or to remove companies that have ceased
manufacturing.  The category of manufacturer beneficiaries is therefore currently a closed one, so that
after 1989 it became impossible for other manufacturers/wholesalers to fulfil the criteria required in
order to qualify for the import duty exemption.
10.261  Although none of the criteria for granting the import duty exemption is expressly based on
nationality, the manufacturing presence requirement, referring to the period 1 August 1963 – 31 July
1964 in the MVTO 1998, has allowed only three service suppliers of the United States (Chrysler
Canada Ltd., General Motors of Canada Ltd. and Ford Motor Company of Canada Ltd.) and one
service supplier of Sweden (Volvo Canada Ltd.) to qualify for the import duty exemption.905  It was
noted above that Volvo Canada Ltd. recently passed under the control of a juridical person of theUnited States (Ford Motor Co.).  SROs have been used to expand the category of manufacturer
beneficiaries by allowing two other manufacturers/wholesalers of automobiles (Intermeccanica of
Canada and CAMI, a 50/50 joint venture between Suzuki Motor Co. of Japan and General Motors
Corp. of the United States) and several manufacturers/wholesalers of buses and specified commercial
vehicles to qualify for the import duty exemption.
10.262  In our view, the import duty exemption, as provided in the MVTO 1998 and SROs, results in
less favourable treatment accorded to services and service suppliers of any other Member within the
meaning of Article II:1 of the GATS, as such benefit is granted to a limited and identifiable group of
manufacturers/wholesalers of motor vehicles of some Members, selected on the basis of criteria such
as the manufacturing presence in a given base year.  We also note that the manufacturing presence
requirements in the MVTO 1998 and in the SROs explicitly exclude suppliers of wholesale trade
services of motor vehicles, which do not manufacture vehicles in Canada, from qualifying for theimport duty exemption.  In addition, the fact that in 1989 the Government of Canada stopped granting
SROs makes the list of the beneficiaries of the import duty exemption a closed one.  As a result,
manufacturers/wholesalers of motor vehicles of some Members can import vehicles into Canada duty-
free, while manufacturers/wholesalers of other Members are explicitly prevented from importing
vehicles duty free into Canada.
10.263  We do not address separately the claim by Japan that the import duty exemption is
inconsistent with the requirement in Article II  that treatment no less favourable be accorded
"immediately and unconditionally", as in our view this claim is addressed by our finding relating to
whether the import duty exemption constitutes "treatment less favourable" within the meaning of
Article II of the GATS.
10.264  In light of the foregoing, we find that with respect to the import duty exemption, granted to a
limited number of manufacturers/wholesalers of motor vehicles, Canada has failed to accord
immediately and unconditionally to services and service suppliers of any other Member treatment no
less favourable than it accords to like services and service suppliers of any other country.  We find,
therefore, that the import duty exemption acco rded pursuant to the MVTO 1998 and the SROs is
inconsistent with the requirements of Article II:1 of the GATS.
4. Applicability of Article V of the GATS
10.265  In its third-party submission the United States claims that the MVTO 1998 and SROs, to the
extent that they provide more favourable treatment to service suppliers of the United States, are
subject to the exception to Article II of the GATS  conferred by Article V:1 of the GATS.  According
to the United States this is so, because the more favourable treatment the complainants are seeking to
                                                     
905 The MVTO 1965, which implemented the Canada-US Auto Pact in Canada, originally applied to six
automobile producers (American Motors, Chrysler, Ford, General Motors, Studebaker and Volvo), all of North
American origin with the exception of Volvo, and to a number of producers of specified commercial vehicles
and buses.WT/DS139/R
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condemn is being accorded by a member of an economic integration agreement of the type specified
by Article V:1, the North American Free Trade Agreement (NAFTA), to the service suppliers of
another Member of that agreement.  The United States also points out that the services provisions of
NAFTA clearly fall within the terms of GATS Article V:1.  Canada does not invoke Article V, as it
maintains that the MVTO 1998 and SROs are not measures affecting trade in services within themeaning of Article I of the GATS.  However, if the Panel were to find that the MVTO 1998 and
SROs were measures affecting trade in services inconsistent with Article II of the GATS, Canada
argues that they are covered by Article V:1 of the GATS.
10.266  The complainants argue that Article V cannot apply to the facts of this case, because the
MVTO 1998 and SROs are unilateral measures and cannot be considered an "agreement" within themeaning of Article V:1 of the GATS (the original Auto Pact is no longer being implemented by the
United States).  The complainants also point out that even if the MVTO 1998 and SROs were to be
considered an agreement within the meaning of Article V:1 of the GATS, this would lack the
substantial sectoral coverage required by Article V:1(a), it would fail to eliminate substantially all
discrimination in the sense of Article XVII between or among the parties (Article V:1(b)) and itwould raise the overall level of barriers to trade in services in the sector (Article V:4).  Both
complainants also point out that the MVTO 1998 and SROs cannot be considered a part of NAFTA,
as NAFTA contains prohibitions on import duty exemptions and perfomance requirements.  They
note that NAFTA does not require, it merely allows Canada to maintain the MVTO 1998 and SROs
by means of express exceptions.
10.267  We note that Article V:1 of the GATS provides in relevant part:
"1. This Agreement shall not prevent any of its Members from being a party to or
entering into an agreement liberalizing trade in services between or among the parties
to such an agreement, provided that such an agreement:
(a) has substantial sectoral coverage ( footnote omitted ), and
(b) provides for the absence or elimination of substantially all discrimination, in
the sense of Article XVII, between or among the parties, in the sectors covered undersubparagraph (a), through:
(i) elimination of existing discriminatory measures, and/or
(ii) prohibition of new or more  discriminatory measures"
10.268  We note the argument of the United States that the measures at issue in this case are covered
by Article V:1 of the GATS because they are accorded by a member of NAFTA to the servicesuppliers of another member of the same economic integration agreement.  In our view, however, the
MVTO 1998 and SROs are measures which cannot be considered as part of NAFTA provisions on
liberalization of trade in services;  rather, NAFTA  members have agreed to allow their continued
implementation through specific exceptions granted to Canada.  Paragraph 1 of Annex 300-A.1 of
NAFTA states that "Canada and the United States may maintain the Agreement ConcerningAutomotive Products between the Government of Canada and the Government of the United States of
America".  Annex I – Canada of the NAFTA also states that "Canada may grant waivers of custom
duties conditioned, explicitly or implicitly, on the fulfilment of performance requirements".
10.269  Even assuming that the MVTO 1998 and the SROs could be brought within the scope of the
services liberalization provisions of NAFTA, we  note that the import duty exemption under the
MVTO 1998 and SROs is accorded to a small num ber of manufacturers/wholesalers of the United
States to the exclusion of all other manufacturers/wholesalers of the United States and of Mexico.
The MVTO 1998 and SROs, therefore, provide more favourable treatment to only some and not allWT/DS139/R
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services and service suppliers of Members of NAFTA, while, according to Article V:1(b), an
economic integration agreement has to provide for "the absence or elimination of substantially all
discrimination, in the sense of Article XVII", in or der to be eligible for the exemption from Article II
of the GATS.
10.270  Although the requirement of Article V:1(b) is  to provide non-discrimination in the sense of
Article XVII (National Treatment), we consider that once it is fulfilled it would also ensure non-
discrimination between all service suppliers of other parties to the economic integration agreement.  It
is our view that the object and purpose of this provision is to eliminate all discrimination among
services and service suppliers of parties to an economic integration agreement, including
discrimination between suppliers of other parties to an economic integration agreement.  In otherwords, it would be inconsistent with this provision if a party to an economic integration agreement
were to extend more favourable treatment to service suppliers of one party than that which it extended
to service suppliers of another party to that agreement.
10.271  Moreover, it is worth recalling that Article V provides legal coverage for measures taken
pursuant to economic integration agreements, which would otherwise be inconsistent with the MFN
obligation in Article II.  Paragraph 1 of Article V refers to "an agreement liberalizing trade in
services".  Such economic integration agreements typically aim at achieving higher levels of
liberalization between or among their parties than that achieved among WTO Members.  Article V:1
further prescribes a certain minimum level of liberalization which such agreements must attain in
order to qualify for the exemption from the general MFN obligation of Article II.  In this respect, the
purpose of Article V is to allow for ambitious liberalization to take place at a regional level, while at
the same time guarding against undermining the MFN obligation by engaging in minor preferentialarrangements.  However, in our view, it is not within the object and purpose of Article V to provide
legal coverage for the extension of more favourable treatment only to a few service suppliers of
parties to an economic integration agreement on a selective basis, even in situations where the
maintenance of such measures may explicitly be provided for in the agreement itself.
10.272  In light of the foregoing, we find that Article V:1 of the GATS does not exempt Canada from
its obligations under Article II of the GATS with respect to the MVTO 1998 and SROs.
5. Claims Under Article XVII of the GATS  – import duty exemption
10.273  Japan alone claims that the import duty exemption also violates Article XVII of the GATS in
that it constitutes more favourable treatment accorded to Canadian services and service suppliers,
which have the right to import vehicles duty free, than to Japanese ones who do not.
10.274  We note that Article XVII of the GATS establishes that:
"1. In the sectors inscribed in its Schedule, and subject to any conditions and
qualifications set out therein, each Member shall accord to services and service
suppliers of any other Member, in respect of all measures affecting the supply of
services, treatment no less favourable than that it accords to its own like services andservice suppliers.  ( Footnote reads:   Specific commitments assumed under this
Article shall not be considered to require any Member to compensate for any inherent
competitive disadvantages which result from the foreign character of the relevant
services or service suppliers.)
2. A Member may meet the requirement of paragraph 1 by according to services
and service suppliers of any other Member, either formally identical treatment or
formally different treatment to that it accords to its own like services and service
suppliers.WT/DS139/R
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Page 411
3. Formally identical or formally differ ent treatment shall be considered to be
less favourable if it modifies the conditions of competition in favour of services or
service suppliers of the Member compared to like services or service suppliers of any
other  Member."
10.275  Japan claims that the import duty exemption affects the supply of wholesale trade services, as
it modifies the conditions of competition between Canadian beneficiaries of the duty-free treatment
and foreign wholesale trade service suppliers of imported motor vehicles which do not benefit from
the same treatment.  In particular, the import duty  exemption would directly affect the cost of the
goods being distributed and indirectly affect the cost and/or profitability of the related wholesale trade
services.
10.276  Canada argues that the import duty exemption is not a measure affecting trade in services
within the meaning of Article I of the GATS, because, as a tariff measure, it affects the goods
themselves and not the supply of distribution services.  According to Canada, such measures do not
affect a service supplier in its capacity as service supplier and in its supply of a service. Canada
further argues that: (i) it has not undertaken co mmitments in wholesale trade services of motor
vehicles; (ii) if it had undertaken commitments it did not need to schedule custom duties as national
treatment limitations; (iii) there are no "like" Canadian and Japanese suppliers of wholesale trade
services for motor vehicles in Canada; and (iv) as with Article II, it is not possible to argue that the
import duty exemption modifies the conditions of  competition among wholesale trade suppliers of
motor vehicles because, due to vertical integration and exclusive distribution between manufacturers
and wholesalers of motor vehicles, there is no competition to be affected at the wholesale trade level.
10.277  Our analysis with respect to the Article II claim on how the import duty exemption affects
wholesale trade services of motor vehicles, within the meaning of Article I of the GATS, also applies
to this claim under Article XVII of the GATS (see above, paragraphs 10.239-10.246).
(a) Whether Canada has undertaken commitments on wholesale trade services of motor
vehicles
10.278  Japan argues that Canada's Schedule of Specific Commitments includes wholesale trade of
motor vehicles either under the general entry "B. Wholesale trade services" or under the more specific
entry "Sale of motor vehicles including autom obiles and other road vehicles", United Nations
Provisional Central Product Classification (CPC) number 6111.  Japan also points out that under
"B. Wholesale trade services", Canada lists a limitation for the state of Saskatchewan applying to "sale
of motor vehicles".  According to Japan, by inse rting this limitation Canada is implying that its
commitments on wholesale trade services also includ e wholesale services for motor vehicles.  Canada
responds that its entry "B. Wholesale trade services" expressly refers to CPC 622, which excludes
distribution of motor vehicles and that the insertion of a limitation with respect to motor vehicles is ascheduling error.  It also points out that CPC entry "6111" is inscribed under the heading "C. Retail
services" and therefore should be read as a commitment only on retail services for motor vehicles.
10.279  We note that the CPC entry 622 (Wholesale trade services) does not have a sub-heading for
motor vehicles, and that sub-heading 62282 (Wholesale trade services of transport equipment other
than motor vehicles, motorcycles and bicycles) expressly excludes motor vehicles.  In our view, the
fact that Canada has inscribed a limitation applying to motor vehicles with respect to the entry
"Wholesale trade services (622)" in its schedule does not in itself constitute sufficient evidence toconclude that it has undertaken a commitment on wholesale trade services of motor vehicles.
10.280  Nevertheless, Canada has also listed in its schedule of commitments an entry for "Sale of
motor vehicles including automobiles and other road vehicles" with an explicit reference to CPC
number 6111.  In the United Nations Provisional Central Product Classification, the entry "6111 Sale
of motor vehicles including automobiles and othe r road vehicles" includes two sub-headings: "61111WT/DS139/R
WT/DS142/RPage 412
Wholesale trade services of motor vehicles"; and "61112 Retail sales of motor vehicles".  In our view,
if Canada had meant to limit this commitment only to  retail services it should have inscribed entry
61112 (Retail sales of motor vehicles) in its schedule rather than 6111 (Sale of motor vehicles).
10.281  We note that there is a discrepancy between the inclusion  of the whole CPC entry 6111 and
the heading of the commitment ("C. Retailing services") in page 48 of Canada's schedule.  However,the fact that entry 6111 has been listed under the heading C. Retailing services does not constitute
sufficient evidence to exclude a commitment with respect to wholesale trade services of motor
vehicles.  If the heading were to prevail, the systemic impact would be that all unqualified CPC
numbers in Members' schedules of commitments, referring to clearly and precisely defined
subsectors, would be undermined, at least when their combination with headings is inconsistent.  Forthese reasons we consider that the description of the CPC should prevail and that the commitments
contained in page 48 of Canada's schedule also apply to wholesale trade of motor vehicles.
10.282  We find therefore that, by inscribing the CPC entry "6111 Sale of motor vehicles including
automobiles and other road vehicles" in its schedule of specific commitments, Canada has undertaken
a commitment also covering "61111 Wholesale trade services of motor vehicles".
(b) Whether services are "like"
10.283  Japan contends that there are "like" Japanese and Canadian wholesale service suppliers of
motor vehicles, including automobiles as well as  buses and specified commercial vehicles. Canada
contests the existence of like wholesale service suppliers.  Japan points out that while some Canadian
suppliers have qualified for the import duty exemption under SROs (Intermeccanica and three
manufacturers of buses and specified commercial vehicles), Japanese suppliers cannot import vehicles
duty-free, unless they acquire, or are acquired by, a Canadian subsidiary of one of the existingmanufacturer beneficiaries.
10.284  Canada points out that Intermeccanica is "unlike" any Japanese wholesale service supplier of
motor vehicles because it is not a wholesaler but only a manufacturer and even if it were a wholesaler,
its size, sales volumes and the products it manufactures are vastly different from those of any of the
establishments identified by Japan as suppliers of wholesale trade services of motor vehicles.According to Japan, the scale of companies and the nature of the products they supply should not
affect the determination of likeness, insofar as se rvice suppliers supply services listed in the same
CPC category.  In this respect Japan argues that Intermeccanica is "like" other Japanese suppliers of
wholesale trade services for motor vehicles in Canada.
10.285  In our view, Intermeccanica, which manufactures and sells directly to consumers a small
number of vehicles (artisanal replica racing cars) per year, should not be considered a supplier of
wholesale trade services of motor vehicles, as it does not seem to be supplying "wholesale trade
services of motor vehicles" as defined in CPC 6111.
10.286  With respect to wholesale trade services suppliers of buses and specified commercial
vehicles, Canada argues that Japan has failed to id entify any Canadian or Japanese suppliers of these
services.  Japan contests this allegation, arguing that there is at least one Japanese supplier operating
in Canada (Hino Diesel Trucks) and that other Japanese wholesale trade service suppliers of motor
vehicles have the capability to produce and distribute buses or specified commercial vehicles.  Japan
also points out that in response to question 2(4) from Japan, Canada has listed 15 companies which
have imported and distributed vehicles other than automobiles under the MVTOs and SROs at leastonce in the last 10 years.  According to Japan, at least three of these companies are of Canadian origin
in accordance with Article XXVIII(m) of the GATS.
10.287  In response to a supplemental question from the Panel, Japan has produced supporting
material to demonstrate that three companies which were granted the import duty exemption underWT/DS139/R
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SROs, A. Girardin Inc., Michel Corbeil Inc., and Western Star Trucks Inc., are juridical persons of
Canada according to Article XXVIII(m) of the GATS.   In response to another supplemental question
from the Panel, Canada has confirmed that, to its knowledge A. Girardin Inc. and Michel Corbeil Inc.
are Canadian-owned companies.  Regarding Western Star Trucks Inc., Canada has pointed out that it
is wholly owned by another Canadian incorporated company (Western Star Trucks Holding Ltd.),which in turn is controlled by a Singaporean incorporated company (Western Star International).
10.288  Canada, however, argues that Japan has failed to prove that the three Canadian companies,
which have benefited from the import duty exemption, are suppliers of wholesale trade services.
Canada points out that these companies may import buses or chassis for specified commercial
vehicles as inputs for finished vehicles; they may re-import vehicles of their own manufacture thathave been exported for modification in other countries; or they may import vehicles as retailers.
Canada points out, however, that none of these activities would constitute supply of wholesale trade
services, which consists principally in re-selling merchandise, according to the definition contained in
Section 6 of the CPC.
10.289  Regarding wholesale trade services of buses and specified commercial vehicles, we note that
Japan has identified one Japanese service supplier and argued that Japanese wholesale suppliers of
automobiles could enter the market.  We further note that the CPC entry "6111 sale of motor vehicles
including automobiles and other road vehicles" also includes wholesale trade of buses and specified
commercial vehicles.  In our view, however, there is no clear evidence before the Panel that the
Canadian manufacturers of buses and specified commercial vehicles, which benefit from the import
duty exemption, also supply wholesale trade servi ces of motor vehicles as defined in the CPC.
Canada has contested that these companies are "like" suppliers of wholesale trade services for motorvehicles and Japan, with whom the burden of proof rests, has not produced evidence to demonstrate
the contrary.  We note that, in the absence of "like" domestic service suppliers, a measure by a
Member cannot be found to be inconsistent with the national treatment obligation in Article XVII of
the GATS.
10.290  Accordingly, we find that Japan has failed to demonstrate that the import duty exemption
accorded pursuant to the MVTO 1998 and the SROs constitutes treatment less favourable accorded to
Japanese service suppliers  than that accorded to like Canadian service suppliers.
6. Claims Under Article XVII of the GATS  – CVA requirement
10.291  The CVA requirements in the MVTO 1998 and in SROs require manufacturer beneficiaries to
achieve a minimum of Canadian value-added, a part of which may be made up through the purchaseof services supplied in Canada, as a condition for obtaining the import duty exemption.  With respect
to services, Canadian value-added means the part of the following costs that is reasonably attributable
to the production of motor vehicles: (i) the cost of maintenance and repair work executed in Canada
on buildings, machinery and equipment used for pro duction purposes; (ii) the cost of engineering
services, experimental work and product development work executed in Canada; (iii) administrativeand general expenses incurred in Canada.  The European Communities notes that CVA also includes
(iv) "fire and insurance premiums, in respect of production inventories and the production plant and
equipment, paid to a company authorised by federal or provincial law to carry on business in Canada
or a province".
(a)  CVA requirements as affecting services related to the production of motor vehicles
10.292  The complainants argue that the CVA requirements provide an incentive for the beneficiaries
of the import duty exemption to use services supplie d within the Canadian territory rather than like
services supplied in or from the territory of other Members, thus modifying the conditions of
competition among them.  Canada does not contest the claim that CVA requirements affect the supply
of services.WT/DS139/R
WT/DS142/RPage 414
10.293  We  note that the CVA requirements, in stipulating that only services supplied domestically
may count toward CVA,  affect directly the services which are supplied through modes 1 and 2 .  We
therefore need to determine whether such effect is consistent with Canada's commitments under
Article XVII.
(b) Whether services affected by the CVA requi rements are covered by Canada's specific
commitments in services
10.294  The complainants argue that all services affected by the CVA requirements are included in
Canada's schedule of specific commitments, while none of the limitations inscribed cover the CVA
requirements.  Canada points out that relevant national treatment limitations have been inscribed for
potentially affected services listed by the complainants.
10.295  In addition, the complainants argue that there are several services affected by the CVA
requirements which can be supplied though modes 1 and 2, where Canada has scheduled no
limitations and that, even in those sectors where limitations have been scheduled, such limitations do
not exempt Canada from its Article XVII obligations with respect to the CVA requirements.906  They
point out that the CVA requirements are not listed as limitations in Canada's schedule ofcommitments and that other limitations such as natio nality, residency or establishment requirements,
which would impede the supply of a service cross-border, cannot be used to justify the CVA
requirements.  For this purpose the complainants re fer to the answer to question 7 in the Addendum 1
to the Scheduling Guidelines ( Scheduling of Initial Commitments in Trade in Services: Explanatory
Note - Addendum , MTN.GNS/W/164/Add.1).
907  Canada responds that limitations which it had
scheduled such as nationality, residency or establishment requirements make the supply of a service
through modes 1 and 2 impossible, so that where these limitations exist, the CVA requirements cannotviolate Article XVII.
10.296  We note that Canada has undertaken specific commitments in all the sectors listed by the
complainants as being affected by the CVA requirements and that it has inscribed some partial
limitations on national treatment with respect to some of these sectors.  In our view, however, even
the national treatment limitations which have been scheduled, however restrictive, cannot be deemed
                                                     
906 (1) With respect to the first CVA requirement, "maintenance and repair work executed in Canada on
buildings, machinery and equipment used for production purposes," the complainants note that Canada has
included the following services in its schedule of specific commitments: repair services incidental to metal
products, machinery and equipment including computers and communication equipment on a fee or contract
basis (CPC 8861 to 8866) ;  (2) with respect to the second CVA requirement, "engineering services,
experimental work and product development work executed in Canada," the complainants note that Canada'shas included the following services in its schedule of specific commitments: engineering services (CPC 8672) ;
(3) With respect to the third CVA requirement, "administrative and general expenses incurred in Canada," the
complainants note several services sectors included in Canada's schedule of specific commitments including:
professional services, computer related services, other business services, banking services, telecommunicationservices, courier services and travel services ;  (4) With respect to the fourth CVA requirement, "fire and
insurance premiums, in respect of production inventories and the production plant and equipment, paid to acompany authorised by federal or provincial law to carry on business in Canada or a province" the EuropeanCommunities notes that Canada has included the following services in its schedule of specific commitments:
non-life insurance services (CPC 8129) .
907 "How relevant is a reservation for a residence requirement, nationality condition or commercial
presence requirement under cross-border trade:  does that not rather imply that cross-border trade is notallowed and therefore the correct entry should be 'unbound'? "
"It is correct to use the term 'unbound' for a mode of supply in a given sector where a Member wishes
to remain free to introduce or maintain measures in consistent with market access or national treatment.
However, it has been pointed out by participants that in some cases there is advantage in inscribing a particular
limitation (e.g., a residency requirement or a commercial presence requirement) instead of the term 'unbound' inthat trading partners have the certainty that there are no  other limitations with respect to the cross-border mode.
(See also para. 8 of the scheduling guide on residency requirements, and para. 6 on nationality requirements.)"WT/DS139/R
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to also cover the CVA requirements.  Only a specific limitation referring to the CVA requirements or
an "unbound" entry would achieve this effect, as the inscription of another specific limitation (such
as a residency requirement or a commercial presen ce requirement) would imply that there are no other
limitations than the one listed with respect to the cross-border mode.
10.297  We find, therefore, that Canada has undertaken specific commitments in those sectors which
the complainants claim to be affected by the CVA requirements, and that the limitations that have
been listed do not cover the CVA requirements.
(c) Technical feasibility and inherent competitiv e disadvantage of modes 1 and 2 services
10.298  Canada points out that with respect to the first CVA requirement relating to services,
"maintenance and repair work executed in Canada on buildings, machinery and equipment used forproduction purposes", there can be no discrimination against services supplied through modes 1 and 2,
as cross-border supply and consumption abroad of these services are not technically feasible.  On
hotel and other lodging services and food and beverages services, it argues that choices regarding
these services are dictated by geography and have nothing to do with the CVA requirements.
According to Canada, the competitive disadvantage in  the foreign provision of many services listed by
the complainants as being affected by the CVA requ irements is inherent in the foreign character of
these services and, as stated in footnote 10 to Article XVII, should not be regarded as a national
treatment restriction.
10.299  The complainants argue that even if inherent disadvantages due to foreign character existed
for some modes 1 and 2 services, the disadvantages caused by the CVA could not be considered
inherent.  They point out that Canada's argument that modes 1 and 2 services relating to the
production of motor vehicles are already inherently disadvantaged due to their foreign charactercontradicts the very aim of the CVA requirements, that is, to favour services supplied in Canada.  In
addition the complainants note that footnote 10 to Article XVII only exempts Members from having
to compensate for inherent competitive disadvantages due to foreign character, while in this case
Canada would only be required to abstain from taking a measure which creates a disadvantage for
modes 1 and 2 suppliers.
908
10.300  We consider that, although the supply of some repair and maintenance services on machinery
and equipment through modes 1 and 2 might not be technically feasible, as they require the physical
presence of the supplier, all other services listed by  the complainants as being affected by the CVA
requirements, including some consulting and advisory services relating to repair and maintenance of
machinery, can be supplied through modes 1 and 2.  We further consider that treatment lessfavourable granted to services supplied outside Canada cannot be justified on the basis of inherent
disadvantages due to their foreign character.  Footnote 10 to Article XVII only exempts Members
from having to compensate for disadvantages due to foreign character in the application of the
national treatment provision; it does not provide cover for actions which might modify the conditions
of competition against services and service suppliers which are already disadvantaged due to theirforeign character.
10.301  We therefore find that lack of technical feasibility only excludes the supply of some repair
and maintenance services on machinery and equipment through modes 1 and 2 from Canada's national
treatment obligation.  We also find that any eventual inherent disadvantages due to the foreign
character of services supplied through modes 1 and 2 do not exempt Canada from its nationaltreatment obligation with respect to the CVA requirements.
                                                     
908 Footnote to Article XVII states:  "Specific commitments assumed under this Article shall not be
considered to require any Member to compensate for any inherent competitive disadvantages which result fromthe foreign character of the relevant services or service suppliers."WT/DS139/R
WT/DS142/RPage 416
(d) Whether it is relevant that CVA requirements might be met on the basis of labour costs
alone
10.302  Canada argues that, considering that (1) any possible effects of the CVA requirements
impinge only on services supplied through modes 1 and 2, (2) relevant limitations have been inscribed
in the schedule for the services sectors at issue, (3) the supply of some services through modes 1 and 2is not technically feasible, and (4) no compensation is due for any inherent competitive disadvantage
resulting from the foreign character of services; the complainants' national treatment claims should
thus be limited to certain services that constitute "general and administrative expenses".  According to
Canada the inclusion of this last category of services in the list of CVA eligible expenses, however,
does not affect the conditions of competition between  Canadian and foreign service suppliers, as there
is evidence that most of the qualifying manufacturers exceed their CVA requirement on the basis of
labour costs alone.
10.303  The complainants note that the national treatment obligation in Article XVII of the GATS,
like that of Article II of the GATT, protects competitive opportunities, not actual trade flows.  They
note that, if measures such as the CVA requirements create an incentive for using locally suppliedservices, it is not necessary to show that they have any actual effect on trade flows.  Therefore, even if
the CVA requirements were met by all manufacturer beneficiaries on the basis of labour costs alone,
such measure would still constitute a violation of Article XVII, so long as there was discrimination in
favour of services supplied in Canada against like services supplied outside Canada.  Moreover, the
complainants point out that with respect to the Article XVII claim, Canada argues that  most of the
qualifying manufacturers exceed their CVA requirements on the basis of labour costs alone, thusadmitting implicitly that some manufacturers might not do so.
10.304  We note that Article XVII requires each Member to accord to services and service suppliers
of any other Member treatment no less favourable than  it accords to its own like services and service
suppliers, and that it defines treatment less favourable as formally different or formally identical
treatment which modifies the conditions of competition in favour of domestic services and service
suppliers.  In our view, the CVA requirements may affect the conditions of competition betweenservices supplied in Canada and services of other Members supplied from outside Canada through
modes 1 and 2, even where a manufacturer meets its CVA requirements on the basis of labour costs
alone.  In fact, CVA requirements constitute an incentive to purchase services supplied in Canada and
such incentive will be effective unless the requirements for a given period of time have already been
met through labour costs.  Moreover, even where for a given period of time it is clear that CVArequirements are going to be met on the basis of labour costs alone, thus rendering redundant any
possible incentive to purchase services supplied in Canada, there is no evidence that the CVA
requirements will also be met in the future on the basis of labour costs alone and that, consequently,
there will be no discriminatory effect on trade in services.
10.305  We, therefore, find that the fact that most manufacturer beneficiaries currently exceed their
CVA requirements on the basis of labour costs alone does not undermine the role of the CVA
requirements as a discriminatory incentive favouring services supplied in Canada against services
supplied from outside Canada through modes 1 and 2.
(e) Whether treatment no less favourable is accorded
10.306  The complainants argue that the phrases "executed in Canada" and "incurred in Canada"
prevent the inclusion in the CVA requirements of all services supplied under modes 1 and 2.  The
complainants therefore claim that the CVA requirem ents constitute less favourable treatment granted
to like services and service suppliers of other Members, in that they create an economic incentive for
manufacturer beneficiaries to purchase services supplied in Canada, thus modifying the conditions of
competition in favour of services supplied in Ca nada compared to those of other Members suppliedWT/DS139/R
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through modes 1 and 2 (from and in the territory of other Members).  Canada points out that the
supply of services through modes 3 ("commercial presence") and 4 ("presence of natural persons") is
unaffected by the CVA requirements as all mode 3 and 4 suppliers, Canadian and non-Canadian, can
benefit from the CVA requirements.
10.307  We note that the CVA requirements in the MVTO 1998 and SROs do not discriminate
between domestic and foreign services and service suppliers operating in Canada under modes 3 and
4.  This observation, however, does not suffice to conclude that the requirements of Article XVII are
met.  In our view, it is reasonable to consider for the purposes of this case that services supplied in
Canada through modes 3 and 4 and those supplied from the territory of other Members through modes
1 and 2 are "like" services.  In turn, this leads to the conclusion that the CVA requirements provide anincentive for the beneficiaries of the import duty exemption to use services supplied within the
Canadian territory over "like" services supplied in or from the territory of other Members through
modes 1 and 2, thus modifying the conditions of competition in favour of services supplied within
Canada.  Although this requirement does not distinguish between services supplied by service
suppliers of Canada and those supplied by service suppliers of other Members present in Canada, it isbound to have a discriminatory effect against services supplied through modes 1 and 2, which are
services of other Members.
10.308  In light of the foregoing, we find that the CVA requirements on manufacturer beneficiaries
contained in the MVTO 1998 and the SROs accord less favourable treatment to services of other
Members supplied though modes 1 and 2 and are therefore inconsistent with Canada's obligations
under Article XVII of the GATS.
XI. CONCLUSIONS AND RECOMMENDATIONS
A. C
ONCLUSIONS
11.1 In light of the above findings, we conclude  as follows:
(a) Canada acts inconsistently with Article I:1 of the GATT 1994 by according the
advantage of an import duty exemption to motor vehicles originating in certain
countries, pursuant to the MVTO 1998 and the SROs, which advantage is not
accorded immediately and unconditionally to like products originating in the
territories of all other WTO Members;
(b) the inconsistency of these measures with Article I:1 of the GATT 1994 cannot be
justified under Article XXIV of the GATT 1994;
(c) Canada acts inconsistently with Article III:4 of the GATT 1994 by according less
favourable treatment to imported parts, materials and non-permanent equipment than
to like domestic products with respect to their internal sale or use, as a result of
application of the CVA requirements as one of the conditions determining eligibilityfor the import duty exemption on motor vehicles under the MVTO 1998, the SROs
and as a result of conditions concerning CVA requirements contained in certain
Letters of Undertaking;
(d) the European Communities has failed to demonstrate that Canada acts inconsistently
with Article III:4 of the GATT 1994 by applying ratio requirements under theMVTO 1998 and the SROs as one of the conditions determining eligibility for the
import duty exemption on motor vehicles;WT/DS139/R
WT/DS142/RPage 418
(e) Canada acts inconsistently with its obligations under Article 3.1(a) of the
SCM Agreement by granting a subsidy which is contingent in law upon export
performance, as a result of the application of the ratio requirements as one of the
conditions determining eligibility for the import duty exemption on motor vehicles
under the MVTO 1998 and the SROs;
(f) The European Communities and Japan have failed to demonstrate that Canada acts
inconsistently with its obligations under Article 3.1(b) of the SCM Agreements by
granting a subsidy which is contingent upon the use of domestic over imported goods,
as a result of the application of the CVA requirements as one of the conditions
determining eligibility for the import duty exemption on motor vehicles under theMVTO 1998 and the SROs;
(g) Canada acts inconsistently with Article II of the GATS by failing to accord
immediately and unconditionally to services and service suppliers of any other
Member treatment no less favourable than that it accords to like services and service
suppliers of any other country, with respect to the granting of the import dutyexemption to a limited number of manufacturers/wholesalers of motor vehicles
pursuant to the MVTO 1998 and the SROs;
(h) the inconsistency of these measures with Article II of the GATS cannot be justified
under Article V of the GATS;
(i) Japan has failed to demonstrate that the import duty exemption granted pursuant to
the MVTO 1998 and the SROs constitutes treatment less favourable accorded to
Japanese suppliers of wholesale trade services of motor vehicles than that accorded tolike Canadian service suppliers, within the meaning of Article XVII of the GATS;
and
(j) Canada acts inconsistently with Article XVII of the GATS by according treatment
less favourable to services and service suppliers of other Members, supplied through
modes 1 and 2, than it accords to its own like services and service suppliers, as aresult of the application of the CVA requirements as one of the conditions
determining eligibility for the import duty exemption on motor vehicles under the
MVTO 1998 and the SROs.
11.2 Under Article 3.8 of the DSU, in cases where there is infringement of the obligations assumed
under a covered agreement, the action is considered prima facie  to constitute a case of nullification or
impairment of benefits under that agreement.  Accord ingly, we conclude that to the extent that Canada
has acted inconsistently with the provisions of the covered agreements, as described in the preceding
paragraph, it has nullified or impaired benefits accruing to the complainants under those agreements.
B. R
ECOMMENDATIONS
11.3 With respect to our conclusions regarding Canada's obligations under Articles I:1 and III:4 of
the GATT 1994, and Articles II and XVII of the GATS, the Panel recommends  that the Dispute
Settlement Body request Canada to bring its measures into conformity with its obligations under the
WTO Agreement.
11.4 With respect to our conclusions regarding Canada's obligations under the SCM Agreement,
we note that Article 4.7 of the SCM Agreement provides:
"If the measure in question is found to be a prohibited subsidy, the panel shall recommend
that the subsidising Member withdraw the subsid y without delay.  In this regard, the panelWT/DS139/R
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Page 419
shall specify in its recommendation the time-period within which the measure must be
withdrawn."
11.5 Accordingly, we recommend that the Dispute Settlement Body request Canada to withdraw
the export subsidy without delay.
11.6 With respect to the time-period within which the measure must be withdrawn, Article 4.7 of
the SCM Agreement requires a Member to withdraw  the prohibited subsidy "without delay" and it is
"in this regard" that a panel must specify a time-period within which the prohibited subsidy must be
withdrawn.  The noun "delay" has been defined to mean, inter alia , "the action or process of delaying;
procrastination; lingering; putting off", while the verb to "delay" has been defined, inter alia , as to
"put off to a later time; postpone, defer".909  Thus, in its ordinary meaning, the phrase "without delay"
suggests that the Member must not put off, postpone or defer action, but must rather act as quickly as
possible to withdraw the prohibited subsidy.  T hus, in examining what time-period would represent
withdrawal "without delay" in a particular case, we consider that we may take into account the nature
of the steps necessary to withdraw the prohibited subsidy.  We do not, however, agree with Canada
that we should take into account the existence or absence of adverse or trade-distorting effectsresulting from the prohibited subsidy, nor the time required to design replacement measures, as these
factors are not related to the consideration of wh at time-period would repres ent withdrawal "without
delay".
11.7 Applying these principles to the case at hand, we note that the MVTO 1998 and the SROs are
both Orders-in-Council, and as such are acts of the executive, and not the legislative, branch of
government.  The amendment or revocation of an act of the executive branch can normally be
effectuated more quickly than would be the case if legislative action were required.  In light of theforegoing and of the information before the Panel, we consider that a time-period of 90 days would be
appropriate.
910  We therefore recommend  that the Dispute Settlement Body request Canada to
withdraw the export subsidy within 90 days.
__________
                                                     
909 The New Shorter Oxford English Dictionary (Clarendon Press, 1993), Vol. 1, 623.
910 We note that, in those disputes involving a prohibited subsidy in which legislative action was not
required, panels have specified a time-period of 90 days.  See Panel Report on Australia – Automotive Leather ,
supra  note 748;  Panel Report on Brazil – Aircraft, supra  note 490;  Panel Report on Canada – Aircraft, supra
note 495.