CANADA - CERTAIN MEASURES CONCERNING PERIODICALS
Document: Original: English CANADA - CERTAIN MEASURES CONCERNING PERIODICALS Report of the Panel
Date: 14 March 1997
Document codes: WT/DS31/R
Complainant: U.S.
Respondent: Canada
Dispute stage: Appellate Body
Agreements cited: Art. III, XI  GATT 1994

CANADA - CERTAIN MEASURES CONCERNING PERIODICALS
Report of the Panel
The report of the Panel on is being
circulated to all Members, pursuant to the DSU. The report is being circulated as an
unrestricted document from 14 March 1997 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 in the 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.
(ii)
E. Concluding Remarks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78
VI. CONCLUSIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78

I. INTRODUCTION
1.1 On 11 March 1996, the United States requested Canada to hold consultations pursuant to Article 4
of the Understanding on Rules and Procedures Governing the Settlement of Disputes (DSU) and
Article XXIII of the General Agreement on Tariffs and Trade 1994 (GATT 1994) on certain measures
maintained by Canada, namely, measures prohibiting or restricting the importation into Canada of certain
periodicals; tax treatment of so-called "split-run" periodicals; and the application of favourable postage
rates to certain Canadian periodicals (). These consultations were held on 10 April 1996.
As they did not result in a satisfactory adjustment of the matter, the United States, in a communication
dated 24 May 1996, requested the Dispute Settlement Body (DSB) to establish a panel to examine the
matter ().
1.2 The DSB, at its meeting on 19 June 1996, established a panel on the matter in accordance with
Article 6 of the DSU. In document WT/DS31/3, the Secretariat reported that the Panel would have
the following standard terms of reference and composition:
"To examine, in the light of the relevant provisions of the covered agreements cited by the
United States in document WT/DS31/2, the matter referred to the DSB by the United States
in that document and to make such findings as will assist the DSB in making the
recommendations or in giving the rulings provided for in those agreements".
1.3 On 25 July 1996, the Panel was constituted with the following composition:
Chairman: Mr. Lars Anell
Panelists: Mr. Victor Luiz do Prado
Mr. Michael Reiterer
1.4 No Members reserved their rights to participate in the Panel proceedings as a third party.
1.5 The Panel met with the parties to the dispute on 11 October 1996 and 14-15 November 1996.
The Panel submitted its report to the parties on 21 February 1997.
II. FACTUAL ASPECTS
2.1 This Panel concerns three Canadian measures: Tariff Code 9958 which prohibits the importation
into Canada of certain periodicals; Part V.I of the Excise Tax Act, as enacted by Bill C-103 of
15 December 1995, which imposes an excise tax on certain "split-run" periodicals; and the application
of certain postal rates to certain Canadian periodicals including through actions of Canada Post
Corporation and the Department of Canadian Heritage.
A. Tariff Code 9958 - Import Prohibition
2.2 In 1965, the Canadian Government enacted Tariff Code 9958, in Schedule VII of the Customs
Tariff. It is put into effect by Article 114 of the Customs Tariff which provides that "the importation
into Canada of any goods enumerated or referred to in Schedule VII is prohibited".1 Tariff Code 9958
applies if an issue of a periodical imported into Canada is a special edition, including a split-run or
regional edition, that contains an advertisement that is primarily directed to a market in Canada and
1R.S.C. 1985, c. 41 (3rd Suppl.) as amended to 30 April 1996, s.114, Sch. VII, Item 9958, (1996 Customs Tariff:
Departmental Consolidation) Ottawa: Minister of Supply & Services Canada, 1996.

that does not appear in identical form in all editions of that issue of the periodical that were distributed
in the periodical's country of origin. The Code defines an "issue" to include a special annual issue,
and a "periodical" to mean a periodical, the issues of which other than the special annual issue, are
published at regular intervals of more than six days and less than fifteen weeks and are distributed
as issues of a distinct publication or as a supplement to more than one newspaper, but does not include
a catalogue, a newspaper, or a periodical, the principal function of which is the encouragement,
promotion or development of the fine arts, letters, scholarship or religion.
2.3 For the purposes of determining whether or not an advertisement is primarily directed at the
Canadian market, a number of factors are taken into consideration such as whether there are enticements
to the Canadian market, references to the goods and services tax, listing of Canadian addresses as
opposed to foreign addresses, and specific invitations to Canadian consumers only.
2.4 The Code also applies where an issue of a periodical imported into Canada is an edition in
which more than five per cent of the advertising content consists of advertisements directed to the
Canadian market. Advertisements directed to the Canadian market include those that indicate specific
sourcesof productorservice availabilityinCanada orwhichincludespecific termsorconditionsrelating
to the sale of goods or services in Canada.2 The publisher of a periodical is notified by the Department
of National Revenue for Customs and Excise when a periodical is found to be in contravention of Tariff
Code 9958.3
2.5 In 1988, the Canadian Parliament enacted an exception to Tariff Code 9958 which allows
Canadian publishers to have their periodicals, which must otherwise be Canadian issues of Canadian
periodicals, typeset or printed wholly or partially in the United States.
B. Part V.I of the Excise Tax Act
2.6 In 1995, Bill C-103, which added Part V.I - Tax on Split-run Periodicals to the Excise Tax
Act, became law.4 The amendment calls for the imposition, levy and collection, in respect of each
split-run edition of a periodical, a tax equal to 80 per cent of the value of all the advertisements contained
in the split-run edition. The tax is levied on a per issue basis. The value of all advertisements in a
split-run edition of a periodical is the total of all the gross fees for all the advertisements contained
in the edition.5 The term "periodical" means printed material that is published in a series of issues
that appear not less than twice a year and not more than once a week. Where an issue of a periodical
is published in several versions, each version is an edition of the issue. Each edition of the issue must
be considered separately when determining whether an edition is a split-run edition. The definition
of "periodical" explicitly excludes a catalogue which is substantially made up of advertisements.6
2.7 The amendment defines a split-run edition as an edition of an issue of a periodical that:
(i) is distributed in Canada;
2The Department of National Revenue for Customs and Excise has adopted and published guidelines providing details
relating to the application and administration of Code 9958 of the Customs Tariff (Revenue Canada Memorandum D9-1-10,
21 May 1993).
3The Importation of Periodicals Regulations (C.R.C., c. 533 as amended on 30 April 1996) describe the review process
as carried out by an officer or the Deputy Minister of the Department of National Revenue for Customs and Excise.
4An Act to amend the Excise Tax Act and the Income Tax Act, S.C. 1995, c. 46.
5Ibid., s. 38.
6Ibid., ss.35(1) and 35(5).

(ii) in which more than 20 per cent of the editorial material is the same or substantially
the same as editorial material that appears in one or more excluded editions of one
or more issues of one or more periodicals; and
(iii) contains an advertisement that does not appear in identical form in all the excluded
editions.
There are two exclusionary provisions. Under the first, the particular edition is not a split-run edition
if it is an edition that is primarily circulated outside Canada. In effect, this is an exemption for editions
that are distributedin Canada, but are mainly distributedoutside Canada. Under the second, a particular
edition of an issue of a periodical that would otherwise be a split-run edition is not a split-run edition
if all the advertisements in the particular edition appear in identical form in one or more editions of
that issue that are primarily distributed outside Canada and that have a combined circulation outside
Canada that is greater than the circulation in Canada of the particular edition. The purpose is to prevent
a publisher from qualifying for this exemption by having all the advertisements in its Canadian split-run
edition also appear in one of its excluded editions that has a very small circulation.7
2.8 Further, a grandfathering provision provides limited "grandfathering" treatment to certain existing
periodicals that distributed Canadian split-run editions prior to 26 March 1993. A particular periodical
is eligible for "grandfathering" treatment and therefore not subject to the tax on split-runs if the number
of split-run editions per year does not exceed the number of split-run editions that were distributed
during the 12-month period ending on 26 March 1993, provided that the periodicals continue to be
similar in editorial content and direction to the split-run editions distributed before that date. If the
number of split-run editions per year is increased, the tax applies to the additional split-run editions.8
2.9 Depending on the circumstances, the person responsible for paying the tax is the publisher,
a person connected with the publisher, the distributor, the printer or the wholesaler of the split-run
edition. (The Excise Tax Act stipulates that a person is considered to be connected to another person
if one of them is controlled by the other or if both of them are controlled by the same person.9 A
corporation is controlled by a particular person if 50 per cent or more of its share of capital with voting
rights belongs to that person or to persons with whom that person does not deal at arm's length. A
partnership is controlled by a particular person if the person or persons with whom that person does
not deal at arm's length is or are entitled to 50 per cent or more of the partnership's income.10) The
responsible person is the first of these persons who resides in Canada.11 The responsible person can
be domestic- or foreign-owned or controlled. In order to ensure enforcement and collection of the
tax, the tax is imposed on a person who resides in Canada. The persons connected with the responsible
person are jointly and severally liable for payment of the tax.12 As well, where the responsible person
is a distributor, a printer or a wholesaler (and if there is more than one), they are jointly and severally
liable for payment of the tax.13 Where a person other than the publisher pays the excise tax in respect
of a split-run edition, the person is deemed to have paid the tax on behalf of the publisher of the
periodical. The legislation authorizes the person to recover the amount of the tax from the publisher
7Ibid., ss.35(5).
8Ibid., s. 39.
9Ibid., ss.35(2).
10Ibid., ss.35(3).
11Ibid., ss.35(1).
12Ibid., s. 41.1.
13Ibid., s. 41.2.

in a court of competent jurisdiction or to deduct or withhold the amount from any amount payable
by the person to the publisher or distributor of the periodical.14
C. Funded and Commercial Postal Rates
2.10 In 1981, the Canada Post Corporation (hereafter called Canada Post) was established by the
Parliament of Canada as a Crown corporationpursuant tothe Canada Post Corporation Act (CPC Act).15
Crown corporations are created by one of three methods: an Act of Parliament; letters patent under
the Canada Business Corporations Act; or Articles of Incorporation under the Canada Business
Corporations Act. According to a treatise on Crown law cited by Canada, Crown corporations are
created to separate the management of an activity from continuous partisan intervention and to provide
independence from the close financial controls within the government departmental structure.16 The
Government of Canada gains control over, and accountability from, Crown corporations primarily
through the Financial Administration Act (FA Act) and its Regulations. The FA Act endeavours to
strike a balance between the desires for public accountability and for private industry independence.
Parliament is required to approve the creation, mandate, and financing of new parent Crown corporations.
Government approval is required for annual corporate plans operating and capital budgets, and major
corporate acquisitions. The FA Act and the CPC Act define the responsibilities for the direction and
daily operation of the corporations.
2.11 The Canada PostpublicationentitledPublicationsMailPostalRates, (effective 4 March 1996),
describes the three categories of publications mail postal rates which are the subject of this dispute:
the "funded" publications rates and the commercial "Canadian" and commercial "International"
publications rates. The first two categories apply to periodicals published and printed in Canada.
"Funded" rates are rates that are subsidized by the Canadian Government and commercial rates are
for publications ineligible for "funded" rates. "Canadian" rates are commercial rates available to
Canadian publications and "International" commercial rates apply to all foreign publications mailed
in Canada.
(i) "Funded" rates
2.12 Since its incorporation, the Government of Canada has provided funding to Canada Post to
supportspecial ratesof postagefor eligiblepublicationsthroughthe PublicationsDistributionAssistance
Program (hereafter called the Program). The Program, which was developed to promote Canadian
culture, provided funding throughCanada Post toeligible Canadian publications, includingperiodicals,
mailed in Canada for delivery in Canada. "Funded" postal rates are available to Canadian-owned and
-controlled paid circulation publications that are published and printed in Canada and meet certain
editorial and advertising requirements. In January 1990, the Government announced plans to gradually
phase out the Program and replace it with a system of direct funding to eligible publications. Since
the announcement, funding available for the Program has been gradually reduced. On 30 April 1996,
the current policy and funding agreement concerning the Program between Canada Post and the
Department of Canadian Heritage (hereafter called Canadian Heritage) was set to expire. At that time,
available funding would have been directed to eligible publishers through a replacement program.17
14Ibid., ss.41.3(2).
15R.S.C. 1985, c. C-10.
16P. Lordon, Crown Law (Toronto: Butterworths 1991) at 49, 57 and 58. The next five sentences are also from this
source.
17Canada Gazette, Part II, Vol 130, No. 10, Newspapers and Periodicals Regulations, repeal, SOR/96-209, 23 April
1996, Regulatory Impact Analysis Statement.

2.13 The Program and its funding structure was extended for three years through a Memorandum
of Agreement (MOA), signed in March 1996 and effective 1 May 1996, between the Department of
Communications (now the Department of Canadian Heritage) and Canada Post.18 This new agreement
provides for payments of funds in quarterly instalments by Canadian Heritage to Canada Post "in
exchange for providing prescribed postage rates for publications deemed eligible to the Publications
Assistance Program", and the transfer of the program administration from Canada Post to Canadian
Heritage.19 Canadian Heritage had requested within the new agreement that Canada Post initiate the
complete removal of funded publications mail from the regulations associated with the CPC Act, effective
April 1996.20 On 23 April 1996, Canada Gazette published a repeal of the Newspapers and Periodicals
Regulations pursuant to Subsection 19(1) of the CPC Act. The revocation was intended to facilitate
the transfer of eligibility assessment from Canada Post to Canadian Heritage, to reduce the Program's
administrativecostswhileexpeditingandsimplifyingmodificationstoitspolicies21, and toallowCanada
Post and Canadian Heritage to respond more appropriately and more rapidly to Program and customer
needs.
2.14 The amounts authorized by the MOA are CD$58 million for the period commencing 1 May 1996
and ending 31 March 1997; CD$57.9 million for the period 1 April 1997 to 31 March 1998; and
CD$47.3 million for the period 1 April 1998 to 31 March 1999.
2.15 Canadian Heritage administers the eligibilityrequirements for the Program based onthe criteria
specified in Schedule A to the MOA. Canadian Heritage is responsible for the administration of the
eligibility requirements for the Program, and Canada Post must accept for distribution all publications
that are eligible under the Program once the publication is approved by Canadian Heritage. For eligible
publications to receive funded rates, the publisher must first enter into a sales agreement with Canada
Post prior to posting under the Program. Rates of postage for publications eligible under the Program
are set out in Schedule C of the MOA and are as follows:
a) First 10,000 copies of an issue addressed to Bona Fide Subscribers and newsdealers in
Canada:
per kg or fraction thereof: Year 1: $0.390
Year 2: $0.395
Year 3: $0.405
or, per individually addressed copy whichever is the greater:
Year 1: $0.078
Year 2: $0.079
Year 3: $0.081
b) Copies exceeding the first 10,000 copies of an issue addressed to Bona Fide Subscribers
and newsdealers in Canada:
per kg or fraction thereof: Year 1: $0.430
Year 2: $0.435
Year 3: $0.445
or, per individually addressed copy, whichever is the greater:
Year 1: $0.086
Year 2: $0.087
18Memorandum of Agreement (MOA) Concerning the Publications Assistance Program Between the Department of
Communications and Canada Post Corporation.
19Canada Gazette, Part II, Vol 130, No. 10.
20Ibid.
21Ibid.

Year 3: $0.089
(Year 1: 1 May 1996 to 31 March 1997; Year 2: 1 April 1997 to 31 March 1998;
Year 3: 1 April 1998 to 31 March 1999.)
2.16 In order to be eligible for funded rates, Canadian publicationsmust generallymeet the following
criteria: (i) produced by a person or company whose primary business is publishing22; (ii) Canadian
ownership and control; (iii) published, printed and mailed in Canada; (iv) edited in Canada23; (v)
eligible editorial categories24; (vi) minimum paidcirculation requirement25; (vii)maximum advertising
allowance26; (viii) frequency27; and (ix) minimum price.28
(ii) Commercial "Canadian" and commercial "International" rates
2.17 Canada Post has authority to set its commercial rates outside of regulation, pursuant to subsections
16(1) and 21(a) of the CPC Act, for any person who has entered into an agreement with Canada Post
for (a) the variation of rates of postage on the mailable matter of that person in consideration of his
mailing in bulk, preparing the mailable matter in a manner that facilitates the processing thereof or
receiving additional services in relation thereto;...".29 In order to take advantage of this provision and
receive commercial postal rates and service, a publisher must enter into an agreement with Canada
Post. For a Canadian publication, this agreement is the "Publications Mail Product Service Agreement"30,
and for a foreign publication mailed in Canada, this agreement is the "International Publications Mail
Product (Canadian Distribution) Sales Agreement".31 These arrangements are intended to benefit
Canadian and foreign publications and their subscribers by reducing mailing costs and improving delivery
standards. Appendix A of each "Agreement" contains the commercial "Canadian" and commercial
"International" rates. These rates are identical to those found in the Publications Mail Postal Rates
(referred to in paragraph 2.11) which divides commercial rates into those that apply for (i) mail service
for Canadian publications that are ineligible for "funded" rates (Rate Code 5); and (ii) mail service
for international publications (Rate Code 6 or what are called "International" rates in this dispute).
Further, special agreements may be entered into for both Canadian and non-Canadian publications
whereby terms and conditions (including rates of postage) may be established on a case-by-case basis.
22Funded rates cannot be used to promote a specific business, service, fraternal, trade or professional organizations
(MOA).
23An eligible publication must be edited by persons residing in Canada (editing encompasses the commissioning of editorial
material and artwork, supervising writers, illustrators and photographers regarding the final format of the material, as well
as laying out, copy editing and proofreading, and otherwise preparing the contents for printing) (MOA).
24Eligible publications must be published for the dissemination to the public consisting of either news, comment and
analysis of news and articles on topics of current public interest; or articles on religion, the sciences, agriculture, forestry,
the fisheries, social or literary criticism, reviews of literature or the arts, or be an academic or scholarly journal; or articles
promoting public health and published by a non-profit organization administered on a national or provincial basis (MOA).
25No less than 50 per cent of an eligible publication's total circulation must be paid circulation (MOA).
26No more than 70 per cent of the space, including advertising inserts, in an eligible publication may be devoted to
advertising (MOA).
27It must be published not less than twice a year and not more than 56 times a year (MOA).
28It must have a stated subscription price of $0.50 or more per copy and $6.00 or more per year.
29R.S.C. 1985, c.C-10, s. 21(a).
30Canadian Publications Mail Products Sales Agreement, 1 March 1995.
31International Publications Mail Product (Canadian Distribution) Sales Agreement, 1 March 1994.

2.18 Publications must meet the six criteria enumerated below in order for their publishers to enter
into either a "Publications Mail Products Sales Agreement" or an "International Publications Mail Product
Sales Agreement". Additionally for the former, the publication "must be a newspaper, newsletter or
periodical, published, printed and mailed in Canada".32 Additionally for the latter, the publications
"must be a newspaper, newsletter or periodical printed outside of Canada or registered under Rate
Code 5 prior to 1 March 1992".33
Six criteria:
(i) publishedfor the purposes of disseminating tothe publicnews, articlescontaining comments
on or analysis of the news, and articles with respect to other topics currently of interest to the
general public;
(ii) devoted primarily to one or more of religion, the sciences, agriculture, forestry, the
fisheries, social or literary criticism or reviews of literature or the arts, or academic or scholarly
writings;
(iii) published at a frequency of not less than four times a year;
(iv) addressed to a subscriber, non-subscriber, company or to a newsdealer in Canada;
(v) containing not more than 70 per cent of the space devoted to advertising in more than
50 per cent of the issues published during any twelve month period; and
(vi) published by or at the direction of a person whose principal business is publishing.
2.19 The rates for the commercial "Canadian" and commercial "International" publications mail
service are summarized as follows:
Commercial "Canadian" rates:
Minimum postage per addressed copy (100g or less) Price per copy
Local rural rates $0.103
Local urban rates $0.231
Regional rates $0.184
National rates $0.378
Commercial "International" rates:
Minimum postage per addressed copy (100g or less) Price per copy
Rates for foreign magazines, newspapers or
newsletters mailed in Canada (inbound) $0.436
Two sub-categories include discounts for palletization and by-pass. Non-subsidized Canadian publications
can receive discounts of $0.01 to $0.02 per copy if palletized, and discounts ranging from $150.00
to $200.00per truckload for a by-passor downstream entry. These discounts are not available generally
to foreign publications mailed in Canada. Further, the commercial "Canadian" and commercial
"International" categories have not been subject to regulation since 1994 and 1992, respectively.34
32Canadian Publications Mail Products Sales Agreement, para. 5.1.
33International Publications Mail Product (Canadian Distribution) Sales Agreement, para. 4.1.
34SOR/94-210, 24 February 1994 and SOR/91-641, 7 November 1991.

III. MAIN ARGUMENTS
3.1 The United States asked the Panel to find that:
(a) Tariff Code 9958 is inconsistent with Article XI of GATT 1994;
(b) Part V.I of the Excise Tax Act is inconsistent with Article III:2 of GATT 1994, or
in the alternative, Article III:4 of GATT 1994; and
(c) The application by Canada Post of lower postal rates to domestically-produced
periodicals under the "funded" and "commercial" rate systems is inconsistent with
Article III:4 of GATT 1994, and is not a domestic subsidy within the meaning of
Article III:8 of GATT 1994.
3.2 Canada asked the Panel to find that:
(a) Tariff Code 9958 is justifiable under Article XX(d) of the GATT 1994;
(b) Article III of GATT 1994 does not apply to Part V.I of the Excise Tax Act, and if
the Panel decides that it does apply, Part V.I is consistent with Article III of GATT
1994;
(c) Article III:4 of GATT 1994 does not apply to the commercial rates charged by Canada
Post, and the funds paid by the Department of Canadian Heritage to Canada Post for
the "funded" rates are allowable subsidies pursuant to Article III:8(b) of GATT 1994.
A. Tariff Code 9958 - Import Prohibition
(i) Article XI:1
3.3 The United States argued that the Canadian import prohibition on the products listed in Tariff
Code 9958 is a violation of Article XI:1 of GATT 1994, which prohibits quantitative restrictions on
imports. By its terms, Tariff Code 9958 applies both to special Canadian editions of magazines that
are also published in versions targeted at readers in other countries (i.e. split-runs) and to magazines
producedsolely for the Canadian market. In either case, the importban applies if the periodical contains
even a small amount of advertising directed primarily at Canadian readers - single advertisement in
the case of split-runs and five per cent or more of the advertising space in the case of magazines
generally. The ban eliminates these magazines from the Canadian magazine market, and ensures that
only Canadian magazines can compete for domestically-oriented advertising. Canada did so for the
specific purpose of ensuring that Canadian magazines can enjoy a monopoly on the sale of magazines
containingsuch advertisements. Advertisingis an importantsource of revenue for magazine publishers.
Thus, granting domestic magazines a monopoly on local advertising provides them a competitive
advantage over foreign-produced magazines that are denied the right to carry such advertisements.
3.4 Canada argued that the United States claim that the Canadian legislation creates a "monopoly"
for Canadian publishers of advertisements directed at the Canadian market is inconceivable in the North
Americanenvironment. Theexistenceof"spillover"advertising,wherebyadvertisementsforgenerally-
available products in wide-circulation US magazines automatically reach the Canadian public, with
very significant consequences for the competitiveness of the Canadian industry, is sufficient by itself
to prevent the creation of any true monopoly. The "monopoly" effect complained of by the United
States has nothing to do with the first part of the Code, dealing with split-runs, or with the Excise
Tax Act. It is true that the second part of the Tariff Code prevents the entry of foreign magazines

with substantial amounts of advertising directed specifically at Canadian, as a means of preventing
an easy way to get around the split-run prohibition. However, the 5 per cent rule applies only to a
limited type of advertising with Canadian addresses and phone numbers, and this aspect of the policy
has not been carried forward to the excise tax provisions, which are strictly limited to the split-run
phenomenon.
(ii) Article XX(d)
3.5 Canada added that Tariff Code 9958 is a measure intended to secure the attainment of the
objectives of Section 19 of the Income Tax Act. The issue is whether Tariff Code 9958 can be justified
as a necessary measure within the meaning of Article XX(d). Because it forms an integral part of a
package of measures with a single objective, it can be so justified on a natural and reasonable reading
of the treaty language. Canadian public policy for the magazine industry is designed to provide
Canadians with a distinctive vehicle for the expression of their own ideas and interests. Such a vehicle
faces enormous competition from foreign magazines for both advertising and readership. Public policy
measures aim to balance the need to establish and maintain a place for Canadian periodicals in their
own domestic market while at the same time ensuring that Canadians have unrestricted access to foreign
periodicals. To achieve this long-standing policy objective, government policy has focused on two
areas: advertising and distribution. The Government of Canada has introduced a series of measures
to ensure that magazines with editorial content developed for the Canadian market can compete for
the limited advertising revenues. These measures include Tariff Code 9958, Sections 35-41 of the
Excise Tax Act and Section 19 of the Income Tax Act. Section 19 of the Income Tax Act allows a
deduction for advertising directed at the Canadian market. Tariff Code 9958 restricts the importation
into Canada of periodicals whose advertising has been purchased especially to reach a Canadian audience.
The general objective of these measures is to help the Canadian periodical industry raise advertising
revenues. Tariff Code 9958 ensures the achievement of this goal, with Section 19 of the Income Tax
Act.
"Secure compliance"
3.6 The United States referred to the panel on United States - Standards for Reformulated and
Conventional Gasoline ("US - Standards for Gasoline") which states that a party invoking an exception
under Article XX(d) has to demonstrate the following elements:
"(1) that the measures for which the exception are being invoked - that is, the
particular trade measures inconsistent with the General Agreement - secure
compliance with laws or regulations themselves not inconsistent with the General
Agreement;
(2) that the inconsistent measures for which the exception is being invoked are
necessary to secure compliance with those laws or regulations; and
(3) that the measures are applied in conformity with the requirements of the
introductory clause of Article XX.
In order to justify the application of Article XX(d), all the above elements have to be satisfied".35
35Panel Report on United States - Standards for Reformulated and Conventional Gasoline, adopted on 20 May 1996,
WT/DS2/R, para. 6.31 (emphasis in original).

3.7 Canada’ s import prohibition fails to meet any of these requirements. With respect to the first
requirement, Canada has failed to demonstrate that its import ban secures compliance with Section 19
of the Income Tax Act. Canada has not claimed that the import ban is meant to enforce the income
tax provisions, only that the import ban and the income tax measures advance the same objective (through
different means), which is to channel all domestic advertising to domestic magazines.
3.8 Canada noted that the conformity of the Income Tax Act with GATT 1994 is not being
challenged. Tariff Code 9958 and Section 19 of the Income Tax Act are conceived to deal with the
problem of split-runs with inserted Canadian advertising. The idea is that the income tax provision
would cover magazines printed in Canada and the border measure would cover magazines printed outside
the country. The effectiveness of the non-deductibility provision standing by itself would obviously
be very limited. The problem is that of foreign companies that sold into the Canadian market but are
not subject to Canadian income tax. This would be more than a loophole, given the open nature of
the Canadian economy and the degree of import penetration. It would largely destroy the effectiveness
of the income tax measures.
3.9 Canada drew the Panel's attention to the panel report on EEC - Regulations on Parts and
Components36 ("EEC - Partsand Components") whichintroducesa very stringenttestfor the application
of Article XX(d), under which the non-conforming measures have to be necessary for the enforcement
of another law, and not merely in order to ensure that the objectives of that law be fulfilled. This
test is entirely appropriate where the issue is the enforcement of regulatory statutes and ordinary fiscal
measures designed to raise revenue, where compliance with the statute is virtually synonymous with
the attainment of its objectives. If, for example, an environmental measure is complied with, its objective
is ipso facto attained.
3.10 The EEC - Parts and Components panel interpreted Article XX(d) in terms of enforceability
as opposed to measures designed to ensure that the objectives of another measure are not undermined.
Canada is not challenging that decision or its reasoning. It makes sense in the context of regulatory
statutes with prohibitions or even tax statutes that are designed to raise revenue and prevent tax evasion.
It is doubtful, on the other hand, that an enforceability test is meaningful in the case of a fiscal or other
economic incentive where formal compliance is not the real object, and substantial compliance can
not be separated from the underlying social and economic objectives the measure is designed to secure.
In the case of a fiscal incentive whose sole purpose is to influence business decisions in a certain
direction, compliance has to be judged in terms of effectiveness. Canada suggests, therefore, that the
application of the exception in Article XX(d) should take account of the nature of the measures under
consideration, and that the test in the EEC - Parts and Components panel decision should not be rigidly
applied without taking account of these circumstances.
3.11 Further, the US consideration that compliance is always a matter of enforceability, no more
no less, may be a valid proposition, as held in EEC - Parts and Components, for mandatory legislation
based on prohibitions or exactions. Compliance and effectiveness are synonymous in the case of the
vast majority of legislative measures. But Section 19 is not an ordinary tax measure, designed to raise
revenue for the public purse or prevent tax evasion. In the case of a fiscal or other economic incentive
whose sole purpose is to influence business decisions in a certain direction, compliance has to be judged
in terms of effectiveness as well as enforceability. The distinction is between formal compliance and
real or substantial compliance, which in thiscase has nothing todo with whether deductions are properly
claimed but with the policy behind this entire set of measures.
36Panel Report on European Economic Community - Regulations on Parts and Components, adopted on 16 May 1990,
BISD 37S/132.

3.12 The United States argued thatthe panel onEEC - PartsandComponents dismissesthe argument
that Article XX(d) permits governments to maintain GATT-inconsistent measures to "ensure the
attainmentof the objectivesof [GATT-consistent]lawsand regulations"rather than topreventviolations
of the GATT-consistent laws or regulations.37 That panel stated that the interpretation it rejects would
make the function of Article XX(d) "substantially broader" and would not be consistent with the fact
that Article XX(d) applies only in the specific circumstances set out in that paragraph - namely, to
secure compliance with GATT-consistent laws or regulations.
3.13 Canada's claim that the import ban does not seek "formal compliance" with Section 19 of the
Income Tax Act, but rather "real or substantial compliance", which Canada admits "has nothing to
do with whether deductions are properly claimed", is simply another way of stating that the import
ban helps advance the same overall (protectionist) aim as Section 19. However, the import ban does
not "secure compliance" with Section 19, and thus does not fall within the purview of Article XX(d).
If accepted, Canada's view of Article XX(d) would allow WTO Members to adopt all manner of GATT-
inconsistent measures on the ground that they further the same objectives as other protectionist legislation.
As the EEC - Parts and Components panel makes clear, the phrase "secure compliance" does not reach
measures that merely help ensure that domestic policy goals are realized.
"Necessary"
3.14 The United States noted that the panel report on United States - Section 337 of the Tariff Act
of 1930 ("US - Section 337") observed that :
"[A] contracting party cannot justify a measure inconsistent with another GATT provision as
'necessary' in terms of Article XX(d) if an alternative measure which it could reasonably be
expected to employ and which is not inconsistent with other GATT provisions is available to
it".38
The normal way for tax authorities to enforce income tax provisions is to audit the relevant tax returns,
and to make adjustments to those returns where necessary to secure compliance. Tax, civil, or criminal
penalties may be imposed where warranted in individual cases. Such measures would normally be
entirely consistent with GATT and in any event would be applied to particular taxpayers, not to imports.
It is extraordinary for income tax enforcement measures to take the form of restrictions on trade in
goods. Canada has demonstrated no basis for why, of all possible measures, it is necessary to impose
a blatantly GATT-inconsistent import ban to secure compliance with Section 19 of the Income Tax
Act nor why normal tax enforcement procedures were insufficient.
3.15 Canada stated that the panel in US – Section 33739 held that the term "necessary" required
the use of the least trade-restrictive measure available. Canada submits that there are noother measures,
less restrictive or otherwise, that would accomplish the objective. If split-runs could be imported,
with Canadian advertisements often placed by businesses for which Canadian tax liability is irrelevant,
the program would simply no longer work.
3.16 Canada therefore reiterates its suggestion that the application of the exception in Article XX(d)
should take account of the nature of the measures under consideration, and that the test in the EEC -
Parts and Components and the US - Section 337 panel decisions should not be rigidly applied without
37Ibid., para. 5.17 (emphasis added).
38Panel Report on United States - Section 337 of the Tariff Act of 1930, adopted on 7 November 1989, BISD 36S/345,
para. 5.26.
39Ibid., at 392, paras. 5.25-5.27.

taking account of these circumstances. The Panel should recall that Code 9958 and the income tax
provision have always been considered part of a single, indivisible package of complementary, indivisible
measures and should be treated as such for the purposes of Article XX(d).
3.17 The United States stated that even if one were to credit Canada's argument that Article XX(d)
covers measures necessary to secure the attainment of the domestic policy goals embedded in other
laws, the import ban would still not be "necessary" for such a purpose. The objective of Section 19
is to support Canada's magazine industry. Canada has not shown why GATT-consistent measures
(such as subsidies paid directly to producers) would not reasonably be available to it for advancing
this objective.
(iii) Chapeau to Article XX
3.18 Canada noted that each term of Article XX(d), including its Preamble, should be given
consideration when examining whether Tariff Code 9958 could be justified as a necessary measure
within the meaning of the treaty. Since Tariff Code 9958 is a "measure" directed against imports from
all foreign countries and not only the United States, it is "not applied in a manner which would constitute
a means of arbitrary or unjustifiable discrimination between countries where the same conditions prevail",
as stated in the preamble to Article XX. Similarly, having regard to the application of Tariff Code
9958 since its adoption, it could not be claimed that it has been "applied in a manner which would
constitute ... a disguised restriction on international trade". Tariff Code 9958 is not applied in such
a way as to constitute a restriction on international trade, as the evidence so strongly demonstrates,
nordoesitprohibitthe importationof foreignperiodicalsintoCanada orthreaten theirdominantposition
in the English-Canadian market place.
3.19 The United States considered that because the import ban does not satisfy the terms of
paragraph (d) of Article XX, the Panel does not need to ascertain whether or not it is in conformity
with the introductory clause of Article XX. However, were the Panel to reach this issue, it should
find that Canada’ s import ban does not meet the requirements of the introductory clause, because the
import ban constitutes "a means of arbitrary and unjustifiable discrimination between countries where
the same conditions prevail," and is also "a disguised restriction on international trade." In the US
- Standards for Gasoline case, the Appellate Body states that whatever else the term "disguised restriction
oninternationaltrade" means, it couldbe read to encompass any " . . . restrictionsamounting toarbitrary
or unjustifiable discrimination in international trade taken under the guise of a measure formally within
the terms of an exception listed in Article XX".40 The import ban’ s "arbitrary" and "unjustifiable"
nature is apparent from the very structure of Tariff Code 9958. Application of the import ban depends
on advertising content and on sales in more than one country - factors that are relevant only for purposes
of distinguishing between those categories of foreign-produced magazines that compete with Canadian
magazines for Canadian advertisingrevenues and those thatdonot. The importban therefore constitutes
a "disguised restriction on international trade".
3.20 Moreover, the expression "between countries" in the chapeau to Article XX includes a
comparison between Canada and other countries as well as between countries other than Canada. The
import prohibition bars only magazines produced outside Canada, thus discriminating in favour of
magazines produced in Canada. There are no relevant conditions prevailing in Canada or elsewhere
that would justify the discrimination imposed on foreign-produced split-runs. Thus, for the reasons
discussed above, the import ban constitutes "arbitrary or unjustifiable discrimination between countries
where the same conditions prevail".
40Appellate Body Report on United States - Standards for Reformulated and Conventional Gasoline, adopted on 20 May
1996, WT/DS2/AB/R at 25.

3.21 Canada consideredthatthe UnitedStates argued that the prohibitionon arbitraryorunjustifiable
discrimination requires a comparison between other countries and Canada, and not just between countries
other than Canada. This, in effect turns this Article into a national treatment proviso. An import
prohibition or restriction could never meet this test. The effect would be to remove Article XI almost
completely from the range of measures that can potentially be subject to Article XX derogations. The
interpretation suggested here is novel. It does not correspond to the way the chapeau to Article XX
has been interpreted in the past, as shown by the 1982 decision on United States - Prohibition on Imports
of Tuna and Tuna Products from Canada41, and the 1983 decision on United States - Imports of Certain
Automotive Spring Assemblies.42 In both those decisions, a US import prohibition was held not to be
discriminatory within the meaning of the chapeau to Article XX, because it applied equally to all foreign
countries exporting to the United States.
B. Part V.I of the Excise Tax Act
3.22 The United States argued that the excise tax was designed specifically to shore up Canada's
GATT-inconsistent import prohibition. Canada did not deny that this is so, or that the tax was designed
to eliminate the competition between split-run magazines and domestically produced magazines. The
purpose of the tax is protectionist - namely, to ensure that only Canadian magazine producers capture
all of the revenues associated with advertisements directed specifically at Canadian readers. The
Canadian magazine tax is designed to ensure that foreign-based publishers forego the commercially
attractive option of publishing a split-run edition of an existing magazine for the Canadian market.
Any such edition will be hit with a prohibitive 80 per cent excise tax. This means that foreign magazine
producers contemplating sales in the Canadian market can not make use of the economies of scale that
split-run editions provide. Split-run editions drive down per unit production costs by spreading the
expense of producing articles and photographs over a greater number of magazines. The Canadian
tax ensures that no foreign-based publisher can take advantage of those lower costs to compete in the
Canadian market against wholly Canadian-produced magazines.
3.23 Canada's policy of protecting its domestic publishing industry from import competition is long-
standing. Since the early 1900s, Canada has provided subsidized, lower postal rates exclusively to
Canadian-produced magazines.43 More recently, Canada sought to protect its industry by targeting
imported periodicals sold into Canada as "split-run" or "regional" editions. A publisher produces a
"split-run" edition of a single issue of a magazine by separating ("splitting") the editorial content (articles,
photographs, artwork, etc.) and the advertising content of the magazine. The publisher then produces
two or more separate regional editions of the issue of the magazine. Each edition shares some or all
of the editorial content, but the advertising content in each edition may differ, because each edition
is distributed in a different geographic market and the advertising is directed at that specific market.
3.24 Concerned that imported split-run editions of magazines would divert advertising revenues
from domestic competitors, Canada enacted Tariff Code 9958 in 1965 specifically to prohibit the
importation of split-run editions as well as any other magazine containing a more than a de minimis
amount of advertising directed at the Canadian public, and in 1976 prohibited income tax deductions
for advertisements placed in foreign-owned publications. Within a matter of a few decades, however,
technological advances made it practical for foreign-based publishers to transmit editorial material
electronically across the border into Canada and to publish split-run editions in Canada, thus avoiding
41Panel Report on United States - Prohibition on Imports of Tuna and Tuna Products from Canada, adopted on 22 February
1982, BISD 29S/91 .
42Panel Report on United States - Imports of Certain Automotive Spring Assemblies, adopted 26 May 1993, BISD 30S/107.
43A Question of Balance, Report of the Task Force on the Canadian Magazine Industry, 1994 ("Task Force Report")
at 72.

the application of Tariff Code 9958. To plug this perceived loophole - and ensure that split-run editions
could not compete in the domestic marketplace - Canada enacted a punitive excise tax on split-run editions
in December 1995.
3.25 In an opinion dated 15 August 1990, Investment Canada advised Time Canada Ltd., a company
controlled by Time Warner, Inc. of New York, N.Y., that its proposal to publish a Canadian edition
of Sports Illustrated was not inconsistent with Section 15 of the Investment Canada Act. Based on
that opinion, on 11 January 1993, Time-Warner announced plans to publish in Canada a special Canadian
edition of Sports Illustrated magazine. Recognizing that Tariff Code 9958 could not be relied upon
to keep a Canadian-produced version of Sports Illustrated or other foreign-based magazines out of
the Canadian market, the Canadian Government respondedtoTime’ sannouncement on26March 1993,
by establishing a Task Force on the Canadian Magazine Industry whose mandate was "to recommend
ways in which the current measures [supporting the Canadian magazine industry] could be brought
up-to-date".44
3.26 The Task Force concluded that it in the absence of additional legislation it was highly likely
that a significant number of US split-runs would be sold in Canada. The Task Force estimated that
there were 53 potential US consumer magazine entrants into the Canadian market, and 70 potential
US business and trade magazine entrants, and that the majority of these would actually enter the Canadian
market.45 In December 1994, the Canadian Government announced its intention to implement the Task
Force’ s recommendation to implement a new excise tax on all split-run magazines that contain ads
directed at Canadians.46 On 25 September 1995, the Government formally introduced Bill C-103,
the excise tax bill, inthe Canadian House of Commons. In introducingBillC-103, Minister of Canadian
Heritage Dupuy stated: "Sports Illustrated Canada managed to get around custom tariff 9958, because
most of its content was sent electronically from the United States. It was simply a loophole in the
tariff laws since electronic transmission made it possible to avoid tariff regulations. . . . Task Force
members explored several avenues and finally concluded that the proposed excise tax was the best
solution. It could be designed and implemented in order to avoid split-run editions".47 In the
Parliamentary debate, one Member described the bill in the following terms:
"[I]t is important to be very clear about the nature of the bill. In essence it is designed
tokillinternationalcompetitionbetween magazines,morespecificallymagazines which
come into Canada. The killing of that competition kills a lot of good things which
flow from competition".48
3.27 Canada argued that the excise tax measure is designed to prevent the diversion of advertising
to low-cost publications reproducing recycled editorial content, at the expense of publications created
for Canadians. The Excise Tax Act is carefully designed to deal with a particular combination of
circumstances. What it targets is the combination of recycled editorial content plus Canadian
advertisements. Magazines derive their revenues predominantly from the sale of advertising space
and from the circulation of the magazine. Advertising revenue is by far the most important revenue
stream for Canadian magazines, accounting for 60 per cent of total revenue. Circulation revenue accounts
for 33 per cent of total revenue, or $287 million. Advertising revenue is crucial for the Canadian
44Task Force Report at iii.
45Task Force Report at 50-52.
46News Release, Canadian Heritage, December 22, 1994 at 1.
47Commons Debates at 14790-1 (Sept. 25, 1995).
48Commons Debates at 14795 (statement of Mr. Monte Solberg).

magazine industry, allowing the publisher to provide the magazine at an affordable cost or, in some
cases, free of charge.
3.28 Canada explained that there is a direct correlation between circulation, advertising revenue
and editorial content. The larger the circulation, the more advertising a magazine can attract. With
greater advertising revenue, a publisher can afford more to spend on editorial content. The more a
publisher spends, the more attractive the magazine is likely to be to its readers, resulting in circulation
growth. Similarly, a loss of advertising revenue will produce a "downward spiral". Less advertising
entails less editorial, a reduction in readership and circulation and a diminished ability to attract
advertising. Magazines can be sold on newsstands, or through subscriptions, or distributed at no cost
toselected consumers. The Canadian market is notlarge, particularlywhen compared to the US market.
It is also highly fragmented from a language perspective. There are two official languages in Canada
as well as a number of other languages. Canadian English-language publications face toughcompetition
on newsstands; they account for only 18.5 per cent of English-language periodicals distributed on
newsstands, where space is dominated by foreign publications. Subscriptions are the main source of
circulation revenue for most Canadian magazines.
3.29 The constraints imposed by the demographics of the Canadian market have a significantimpact
on the ability of a magazine primarily addressed to Canadian interests to obtain the broad base of
circulation that is necessary to achieve economic viability. Canadian magazine publishers compete
with other media for the same limited amount of advertising dollars in the Canadian market. Magazines
have been losing market share to other media forms such as direct mail and television. It is unlikely
that the share held by magazines will increase. The amount of money spent by advertisers to reach
Canadian consumers is also not likely to grow. In addition, "spillover" advertising (the ability of
advertisers of internationally distributed products to reach Canadian consumers through US magazines)
is a further limitation on the competitive position of the Canadian industry. Canadian periodical
publishers face a major competitive challenge in their business environment that is not common to
their counterparts in countries with a larger population to serve. The pivotal fact is the penetration
of the Canadian market by foreign magazines. Canadian readers have unrestricted access to imported
magazines. At the same time, Canadian readers have demonstrated that they value magazines that
address their distinct interests and perspectives. However, foreign magazines dominate the Canadian
market. They account for 81.4 per cent of all newsstand circulation and slightly more than half (50.4
per cent) of the entire circulation of English-language magazines destined for the general public in
Canada.
3.30 Magazines are a particularly good medium for advertisers wishing to reach a specific market
defined by regional location. Both Canadian and foreign magazines currently have regional editions
in their respective home markets. Publishers and advertisers recognize the importance of regional
editions as an advertising vehicle. The marketing strategy behind regional editions is that they allow
publishers to offer very specific advertising vehicles for advertisers interested in targeting a particular
audience, hence they maximize advertising revenues. Some foreign publishers view Canada as a separate
"region" within their own national market. The "Canadian" regional edition produced by such publishers
generally contains the same editorial content as the other editions but different advertising content,
reflecting the addition of advertisements from Canadian advertisers. The term "split-run" is used in
Canada to refer to such a Canadian regional edition. For a foreign publisher, the incentive to produce
a Canadian regional edition of its magazine containing advertising directed at Canadians is, of course,
profit. A profit for the foreign publisher only requires that the incremental revenue from advertising
in the regional edition exceeds the costs of producing the split-run. Since its fixed costs have already
been recovered in the larger home market, this offers an inviting prospect for a foreign magazine.
3.31 The Task Force onthe Canadian Magazine Industry was established as a resultof the anticipated
publication of Sports Illustrated Canada. Sports Illustrated Canada was a split-run edition that was

printed in Canada using text that was electronically transmitted from the United States. The editorial
content of Sports Illustrated Canada was largely the same as the content in the American editions of
Sports Illustrated but it contained advertisements that had been specifically purchased to reach a Canadian
audience. Tariff Code 9958 was not applicable to Sports Illustrated Canada because it was printed
in Canada rather than being imported. The emergence of Sports Illustrated Canada as a new split-run
edition revealed the limitations of Canada's existing policy instruments. Accordingly, the Task Force
was created to recommend ways to bring these policy instruments up to date. The Task Force's main
recommendation was that an excise tax be imposed on advertising contained in split-run editions of
periodicals that are distributed in Canada. The object of the excise tax is not to discourage readership
of foreign magazines, but to maintain an environment in which Canadian magazines can exist in Canada
alongside with imported magazines. It is also intended to foster conditions in which indigenous
magazines can be published, distributed and sold in Canada on a commercial basis. The tax is consistent
with the broad principles of the cultural and media policies of successive federal governments.
(i) Article III:2 versus coverage under the General Agreement on Trade in
Services (GATS)
Applicability of Article III of GATT 1994
3.32 The United States argued that Canada's 80 per cent excise tax on split-run editions is inconsistent
with Article III:2, first sentence, of GATT 1994 because it creates an artificial distinction between
"split-run"magazines and allothertypesof magazines and applies the 80per cent tax solely tosplit-runs.
It therefore applies a higher tax to certain types of imported magazines than to "like" domestic magazines.
3.33 Canada argued that this dispute concerns the provision of advertising services to Canadian
advertisers and that Part V.I of the Excise Tax Act was a measure pertaining to advertising services.
A magazine publisher derives revenue from both the sale of the magazine to consumers and from the
sale of advertising space to advertisers. The sale of the right to advertise to a magazine's audience
is an advertising service. As the tax imposed by the Excise Tax Act is imposed on the revenues earned
through the provision of advertising services by a magazine publisher, it is a tax in respect of the
provision of an advertising service. Multilateral trade disciplines on advertising services fall within
GATS and not GATT 1994; Article III of GATT 1994 does not apply to Part V.I of the Excise Tax
Act. However, the terms of reference direct the Panel to examine only trade matters within the purview
of GATT 1994. Thus, the examination of Part V.I of the Excise Tax Act in light of GATS is not covered
by the terms of reference. The first distinctive aspect of a magazine is its character as a public good
which is largely defined by its content. The second distinctive feature is the magazine's dual nature
in that it is both a consumer good and an advertising service with two distinct revenue streams. The
two separate revenue streams are circulation revenue, which is derived from the sale of a good, and
advertising revenue, which is derived from the sale of a service. The two consumers are readers and
advertisers. Allmagazinesexhibitthisessentialduality,whichrepresentstwodistincteconomicoutputs.
3.34 GATT 1994 establishes the standards that govern international trade in goods. The central
obligations of GATT 1994 are the tariff concessions by which WTO Members commit themselves (in
ArticleII and the Schedules) tolimitthe level of tariffs theywill impose onimportsfrom otherMembers.
A second obligation is that of the most-favoured-nation ("MFN") obligation in Article I. Articles III
through XVII comprise most of the other substantive obligations of GATT 1994. These obligations
apply to goods only. Article III of GATT 1994 sets out the national treatment obligation pertaining
to treatment of imported goods. The Uruguay Round has produced a similar framework for trade in
services. Specific commitments are recorded in national schedules that are attached to, and form an
integral part of, the GATS. Every undertaking contained in a schedule to GATS is a binding commitment
to allow the supply of the service in question on the terms and conditions specified and to not impose

any new measures that would restrict entry into the market or the operation of the service. In the absence
of any scheduled commitments, there are no disciplines on the introduction or the maintenance of
measures of any type, even those that may be inconsistent with market access or national treatment
commitments. Advertisingservices appear on the Services Sectoral Classification Listof the Secretariat
under the business sector.49 The provision of advertising services is consequently a GATS matter,
not a GATT matter.50 Canada has not undertaken any commitments in respect of the provision of
advertising services in its Schedule of Specific Commitments. In the absence of any scheduled
commitments, there are no restrictions on Canada in respect of the introduction of measures concerning
the provision of advertising services. In particular, Canada is not bound, nor in any way obliged,
to provide national treatment to Members of the WTO in respect of the provision of advertising services
in the Canadian market.
3.35 This challenge in respect of the Excise Tax Act measures is an indirect attempt by the United
States to obtain trading benefits that it has been unable to obtain directly. In the guise of a GATT
goods argument, the United States now attempts to persuade the Panel to allow it to have access to
a service sector to which, in full accordance with the terms of international trade law, it is presently
not entitled. Should the Panel agree that a Member can obtain benefits under a covered agreement
that have been expressly precluded under another covered agreement, the Panel risks introducing
uncertainty into the relationship between GATS and GATT disciplines.
3.36 The United States argued that the Canadian argument was baseless because: (1) nothing in
GATS purports to reduce or eliminate the obligations that GATT has imposed since 1947; (2) GATS
does not have primacy over GATT with respect to measures affecting trade in goods; and (3) Canada
can observe its obligations under GATT Article III consistently with the provisions of GATS. There
is no indication in the Agreement Establishing the WTO, GATT, or GATS, that adoption of GATS
was intended as a limitation on the scope of GATT 1994. Had the negotiators intended to adopt a
principle as fundamental as the one Canada now puts forward, they certainly would have provided
for it in the text of GATT, GATS or WTO Agreement. In the absence of such an indication, or an
irreconcilable conflict - neither of which Canada can point to here - GATT and GATS must be applied
according to their terms. (It is theoretically possible that the same measure may be covered by, and
may even violate, both agreements. Indeed, a measure may violate more than one goods agreement
as well, provided the measure is within the scope of each agreement and is inconsistent with the
provisions of each.) By contrast, the negotiators of the WTO did establish a rule for addressing conflicts
between GATT 1994 and the multilateral agreements on trade in goods in Annex 1A to the WTO
Agreement.51 By their terms, GATT Article III:2 covers taxes applied to products "directly or indirectly",
and GATT Article III:4 applies even to measures affecting services connected to goods, such as
"distribution" and "transportation".
49Canada notes that there are three Articles in Part III of the GATS on Specific Commitments, entitled Market Access,
National Treatment, and Additional Commitments (Articles XVI, XVII and XVIII respectively). In general, the classification
of sectors in national schedules is based on the Secretariat's Services Sectoral Classification List. This reference list of the
Secretariat is based on the Central Product Classification (CPC) of the United Nations. See Services Sectoral Classification
List: Note by the Secretariat, MTN.GNS/W/120 (10 July 1991). See also Scheduling of Initial Commitments in Trade in
Services: Explanatory Note, MTN.GNS/W/164 (3 September 1993).
50Canada cites United Nations, Dept. of International Economic and Social Affairs, Statistical Office of the United Nations,
Provisional Central Product Classification, Statistical Papers, Series M No. 77, U.N. Doc. ST/ESA/STAT/SER.M/77 (New
York: United Nations, 1991) at 147-148, 173. Item 8711 states: sale or leasing services of advertising space or time. Services
provided in soliciting advertising space or time for newspapers, other periodicals, and television stations. Item 8712 states:
planning, creating and placement services of advertising. Planning, creating and placement services of advertisements to
be displayed through the advertising media. Item 8719 states: other advertising services. Other advertising services not
elsewhere classified, including outdoor and aerial advertising services and delivery services of samples and other advertising
material.
51See General interpretive note to Annex 1A.

3.37 Canada's decision not to inscribe relevant commitments on advertising services in its GATS
schedule of specific commitments means that Canada is not assuming certain GATS obligations as to
those services. Canada does not thereby insulate all measures having any connection to advertising
from review under any other WTO agreement. Such a result would improperly exalt GATS over GATT
and other WTO agreements. Canada's view would open a huge hole in GATT because there is no
shortageof "service-related" measures thatcouldbe usedtodiscriminateagainstimportedgoods. Under
Canada's interpretation, a Member could, consistently with GATT: tax the rental of foreign cars,
place a prohibitive surcharge on telecommunication services that are carried out using imported
equipment, or impose a room tax on personsstaying at hotelsthatwere builtusing importedconstruction
materials. Although each of these measures relates to the provision or consumption of a service, each
also obviously imposes a competitive disadvantage on imported products and provides protection to
domestic production, and each would be within the scope of GATT Article III. It is irrelevant whether
or not the excise tax could be a measure affecting trade in advertising services. The excise tax is a
direct or indirect tax on a product, split-run magazine editions, within the meaning of Article III:2.
3.38 Canada noted that it does not claim that there is a conflict between GATT 1994 and GATS
in this case. The two treaties may very well apply in their own respective jurisdiction. GATS does
not have as its object, and does not result in, the carving out of part of the jurisdiction of GATT 1994.
The negotiators of GATS have merely developed new rules for a sector of international trade to which
the existing rules did not apply. They have not, in doing so, redefined the scope of Article III of GATT
1994. The interpretation suggested by Canada of the area of application of Article III with respect
to the provisions relating to services would have been the same in 1993 before the GATS treaty came
into force. The interpretation is autonomous and based on specific terms of Article III:2 as well as
on its intent and its original scope. The issue of overlapping obligations or conflicts arises because
of the existence of two treaties, GATT 1994 and GATS, which contain different sanctions with respect
to the provisions relating to services. Because of the existence of these two treaties which may apply
to a given measure, it is necessary to interpret the scope of application of each such as to avoid any
overlap. Such overlaps between the areas of GATT 1994 and GATS could lead to conflicts in the
application of the treaties which should be resolved on the basis of the rules of interpretation of public
international law.
3.39 The Canadian interpretation of the scope of ArticleIII:2 of GATT 1994 and ArticleI:1 of GATS
avoids such overlaps, respects the autonomy of each treaty and ensures the harmonious application
thereof. It is not necessary in the instant case to determine the primacy of one treaty over the other.
The Panel does not have to decide this question since there is no conflict. What must be decided is
the individual scope of Article III:2 of GATT 1994 and Article I:1 of GATS. Part V.1 of the Excise
Tax Act is a measure regarding the provision of services which is dealt with by Article I:1 of GATS.
It is on the basis of an interpretation of the specific terms of Article III:2 of GATT 1994 and of
Article I:1 of GATS, made in accordance with Article 31 of the Vienna Convention on the Law of
Treaties, that the scope of application of each of the two treaties must be determined. The analysis
of the measure which is the subject of the dispute leads to the determination of which of the two treaties
apply. Canada does not rely on the rules of conflict to resolve the question of the applicability of
Article III:2 of GATT to Part V.I of the Act. It is the interpretation of the word "indirectly" in
Article III:2 which enables Canada to conclude that the Article does not apply to this measure.
3.40 To determine which disciplines apply to a given measure, one must examine not only the object
of the tax and the fiscal mechanism used, but most of all one must examine the effects of the tax, by
distinguishing between principal and incidental effects. Some relevant factors for such a determination
are: the nature of the economic activity covered by the measure, the structure and effects of the measure
and the intention of the measure. A measure may have different aspects and may, as a result, attract
different disciplines under different agreements, but no single aspect of a measure should be subject
to both disciplines at the same time. In any case at the margins of the two disciplines, Canada suggests

that the dominant or essential characteristics of the economic activity at issue should control the
determination of whether GATT or GATS is applicable. In the case of the excise tax on split-run
periodicals, the principal effect is to restrict the access of foreign publishers to the Canadian advertising
market since, inprinciple the periodical could very wellbe sold onthe Canadian market withadvertising
not specifically addressed to Canada. This is evidenced by the fact that plans for prospective split-runs
for the Canadian market are based on actual sales in Canada of the original version of the magazine
which does not contain specific advertising for that market.
3.41 The tax is intended to prevent the penetration of the Canadian advertising market by publishers
who sell their advertising services in association with split-run magazines. It is clear that the measure
pertains to the supply of a service and as such isa measure that WTO Members intended tobe disciplined
under GATS. This was recognized by the United States Trade Representative, in the 1995 National
Trade Estimate Report on Foreign Trade Barriers (NTE), where Canada's practices with respect to
split-run advertising were listed and described under the heading Services Barriers.52
3.42 The United States responded that Canada's suggestion that GATT or GATS should apply based
on the "dominant or essential characteristics of the economic activity at issue" was simply a test Canada
had invented. Like Canada's other assertions relating to the GATS, it found no support in any of the
WTO Agreements or their negotiating history. Adoption of such a test would alter the rights and
obligations of WTO Members, in violation of Article 3.2 of the DSU. The United States submitted
that whereas Canada referred to the need to avoid conflicts between GATT and GATS, it had failed
to identify exactly what those conflicts were. A true "conflict" between two agreements arose only
where compliance with one agreement necessarily resulted in non-compliance with the other. This
simply was not the case with respect to the excise tax. Applying taxes to imported split-run magazines
in a GATT-consistent manner (i.e., at a rate no higher for split-run than for non-split-run magazines)
in no way requires Canada to breach its GATS obligations with regard to advertising services or any
other service sector. Moreover, there is nothing that is even "inconsistent" about the obligations that
the two agreements impose on Canada. The United States also asserted that, although USTR's 1995
NTE Report listed the excise tax and other similar Canadian barriers under the heading of "services
barriers", the report noted that these practices "restrict US access to the Canadian market for publications
andmedia advertising"(emphasis added). In the 1996NTE report, the UnitedStates discussedCanadian
restriction on US publications under the heading "Import Policies", not "Services Barriers".
"Taxes applied directly or indirectly to products"
3.43 The United States further argued that the tax is covered by Article III because it is imposed
on the split-run edition which, like all magazines, are "products" for purposes of GATT. Magazines
are physicalgoodsthatare manufactured, traded, and inthe absence of a bansuchas Canada's, imported.
While the amount of the tax is measured in terms of "the value of all advertising in the edition," the
tax is applied to each split-run edition. By its terms the tax is applied "in respect of each split-run
edition of a periodical". Moreover, the tax is applied on a "per issue" basis. In addition, the obligation
to pay the tax is imposed on those who produce or trade in the magazine as a final product, such as
the publisher,distributor,printerorwholesaler,asopposedtothosewhodesignorpurchaseadvertising.
Finally, even the method of calculating the tax is based on revenues derived from an integral element
of the physical magazine itself - the printed advertisements. Thus, the excise tax is applied directly
on split run editions themselves, not on a service offered in connection with such editions.
52See 1995 National Trade Estimate Report on Foreign Trade Barriers (Washington, D.C.: United States Trade
Representative, 1995) at 38.

3.44 Canada argued that the tax is not applied directly to a split-run magazine and in particular
it is not based on, or applied to, the price of a split-run magazine. The tax is applied to the value
of advertising carried by each issue of a split-run magazine and is assessed against the publisher of
the split-run magazine, as the seller of the advertising service. The expression "in respect of each
edition" serves as a basis for determining and calculating liability that relates to advertising revenue
as the subject matter of the tax. The significant point, which decisively identifies the subject matter
of the tax, is that the tax is measured not in terms of the price of the magazine but in terms of the
advertising revenues it generates.
3.45 The tax is imposed on the publisher in the publisher's capacity as a provider of advertising
services. The tax is tied to the service provided rather than the good. The publisher is the person
responsible for the payment of the tax. The distributor, the printer and the wholesaler have been
identified as potentially liable where it would be impossible to collect the tax in Canada from the
publisher. In such cases, the Act grants those persons a right of recovery against the publisher.53
Accordingly, there is no doubt that the ultimate liability falls on the publisher, and because the ad
valorem basis of the tax is advertising, this liability arises directly out of the services dimension of
the publisher's business. The collection mechanism is designed to ensure that there is always a person
in Canada from whom the tax can be collected. It is doubtful whether collection machinery should
ever be used as a basis for characterizing the nature of a tax, and in the particular circumstances of
this case it would be entirely inappropriate.
3.46 The United States responded that Canada's allegation that the excise tax is collected from the
publisher in connection with its provision of advertising services ignored that the publisher was the
producer of the magazine as a product. With regard to imported magazines, Canada admitted that
it is the distributor "who has to pay the tax". A magazine's distributor had absolutely no connection
to the provision of any "advertising services". Moreover, if the foreign publisher of the imported
magazine did not have a sufficient business presence in Canada, the magazine's distributor who paid
the tax would be unlikely to obtain indemnification from the publisher at all. Indeed, the excise tax
on split-run magazines was collected in a fashion similar to other excise taxes on products, such as
the excise taxes in the Japan - Alcoholic Beverages case, and the federal excise taxes in the US - Malt
Beverages case. Like the split-run tax, in those cases the excise taxes with respect to domestic products
were collected from the producer, and the excise taxes with respect to imported products were collected
from the importer, who was essentially a type of distributor.
3.47 Article III:2, first sentence, governs taxes applied directly or indirectly to products. Canada’ s
argument that the tax is actually on advertising services confuses how the tax is measured (i.e., in terms
of advertising fees) with what the tax applies to (i.e., split-run editions). There is ample additional
evidence that the excise tax is a tax applied to split-run magazines as a product:
- The Task Force’ s recommendation - which the Canadian Government adopted and which
the Canadian Parliament enacted - describes the tax as a tax "imposed on a magazine
or periodical".54
- In introducing the bill to enact the excise tax, Minister of Canadian Heritage Dupuy
stated that the excise tax "would apply to all periodicals distributed in Canada and
containing more than 20 per cent of reused editorial material as well as one or more
advertisements aimed at Canadians", and that "[t]he publisher, the distributor, the printer
53Excise Tax Act, R.S.C. 1985, c. E-15 as amended by S.C. 1995, c. 46, s. 41.3(2).
54Task Force Report at vi, 64 .

or the wholesaler of any magazine subject to the tax would be responsible for paying
the tax".55
- Following House of Commons passage of the excise tax bill, Canadian Heritage issued
a press release describing the tax as follows: "The amendment to the Excise Tax Act
will place an excise tax on split-run magazines distributed in Canada that contain more
than 20 per cent recycled material . . . and one or more advertisements aimed at
Canadians".56
Thus, during the time the excise tax was being formulated and enacted, Canadian officials had considered
the tax to be a tax imposed on split-run magazines. It is only in the context of this panel proceeding,
and in the light of US claims that the tax is inconsistent with Article III of GATT 1994, that Canada
has advanced the argument that the tax is really a tax on advertising services and not a tax on split-run
magazines. Indeed, given the statements of Canadian Government officials that the excise tax was
designed to eliminate split-runs from its market, Canada's argument that split-run magazines are neither
directly nor indirectly subject to the excise tax is not credible.
3.48 Even if the tax is not applied directly to split-runs, it is at a minimum applied indirectly to
them because it is based on one of the two key uses to which magazines are put - in this case, the
placement of advertisements. Moreover, it is impossible to separate the advertising that goes into a
magazine from the magazine itself. Advertising is a significant component of commercial magazines,
typically accounting for half or more of total pages. A magazine’ s advertisements can significantly
affect its appeal and usefulness to readers. In addition to virtually eliminating their use as advertising
vehicles - thus drastically reducing the revenues available to market such magazines - the tax reduces
the appeal of such magazines to Canadian readers by effectively eliminating advertisements of interest
to them.
3.49 Canada argued that the excise tax does not apply "indirectly" to a good within the meaning
of Article III:2. In discussions at the London session of the Preparatory Committee, it was suggested
that the word "indirectly" covers a tax not on a product as such but on the processing of the product".57
The panel report in Japan - Customs Duties, Taxes and Labelling Practices on Imported Wines and
Alcoholic Beverages58 gave an interpretation of the term "indirectly" that was consistent with this reading:
"The Panel...found that the wording "directly or indirectly" and "internal taxes... of any kind"
implied that, in assessing whether there is tax discrimination, account is to be taken not only
of the rate of the applicable internal tax but also of the taxation methods (e.g. different kinds
of internal taxes, direct taxation of the finished product or indirect taxation by taxing the raw
materials used in the product during the various stages of its production) and of the rules for
the tax collection (e.g. basis of assessment)".
The concept of "indirectly" in Article III:2 does not capture measures that are disciplined under GATS.
It is intended to capture taxes that apply to "inputs" that contribute to the production of a good – raw
materials, service inputs, intermediate inputs, etc. The question of whether the excise tax is covered
55Commons Debates at 14790, Sept. 25, 1995 (emphasis added).
56House of Commons Passes Bill C-103, News Release, Department of Canadian Heritage, Nov. 3, 1995 at 2 (emphasis
added).
57EPCT/A/PV/9 at 19; and EPCT/W/181 at 3.
58Panel Report on Japan - Customs Duties, Taxes and Labelling Practices on Imported Wines and Alcoholic Beverages,
adopted on 10 November 1987, BISD 34S/83 at 118, para. 5.8.

by Article III:2 of GATT 1994 by reason of the expression "indirectly" must be examined in light
of the relationship between GATS and GATT 1994.
3.50 Article III:2, to the extent that it allows a challenge of measures relating to services that
"indirectly" impact on trade in goods, covers only measures concerning inputs such as raw material
or services inputs that are directly involved in the production of a good. Taxes on such production
inputs are properly subject to Article III:2 because they affect the costs and prices, and therefore the
competitive position of goods that are subject to Article III:2. It is important, however, for the Panel
to distinguish service inputs that are directly involved in the production of a good and services that
are "end-products" in their own right. The publishers' advertising services, although closely associated
with the magazines, are separate products. They are not involved in the production process of the
magazines. The advertising services of the publisher are not, like labour in the production of a car,
an input in the production of a good.
3.51 In order for a measure with respect to services to fall "indirectly" under Article III:2 of the
GATT 1994, it has to affect the competitive situation of the importer on the market. In other words,
the provision of the service has to be ancillary to the provision of the good in that market. The situation
is reversed where the good produced by the exporter is used to gain access to a service market. In
such an instance, the provision of the good becomes ancillary to the provision of the service which
has the effect of transferring jurisdiction from GATT 1994 to GATS. Consequently, the argument
on Article III:2 (and Article III:4) does not hold. Otherwise, such a restrictive interpretation could
considerably diminish the scope of GATS and could lead to absurd situations such as those provided
as examples by the United States. For example, irrespective of a Member's right not to make
commitments with respect to foreign legal services, it would be impossible to maintain measures that
restrict access when provided in a printed format. If allowed, the US interpretation of the expression
"indirectly" would force Canada to accord national treatment to foreign publishers with respect to
advertising services when it did not make any commitments in that respect in GATS. Such an
interpretation would create an imbalance in carefully negotiated concessions on services sectors made
by WTO Members during the last round of Multilateral Trade Negotiations. It would also void GATS
of its effectiveness as it concerns Canada's right not to make commitments on advertising services.
3.52 If the United States is successful in persuading the WTO to condemn Canada's measures as
inconsistent with GATT, the United States will be able to obtain direct access to a market from which
it is otherwise properly precluded under international law. The measures in question are designed
to protect access to Canada's advertising services market and they are effective in doing so. If the
measures are struck down under the guise of GATT inconsistency, the WTO will have facilitated an
unnegotiated concession on the part of Canada. The consequences of such an effect are far reaching.
If the WTO is in any doubt about the nature of the dispute, it must simply look at what the United
States will gain if successful. The United States will not gain greater access for its magazines. These
magazines in exactly the same form as they are distributed in the United States already enter unimpeded.
It will gain access to Canada's advertising market and the revenues to be had in that market.
3.53 The periodical publication industry is one which combines two commercial activities which
are economically linked, the production of periodicals and the sale of advertising services. It cannot
be denied that the autonomous economic activity which is the sale of advertising services significantly
contributes to the financial viability of the publishing industry. However, this has nothing to do with
the designation of two separate activities of an industry for the purposes of the application of GATT
1994and GATS. The fact thatan integratedindustryuses some of itscommercial activities and revenues
so generated in order to facilitate the marketing of some of its other activities should not influence
the characterization of the activities for the purposes of determining which sections of the WTO apply
to them. The key element in the application of Article III:2, when considering whether a tax applies
indirectly to a good, is whether this tax affects indirectly the global income generated by the industry

under consideration. Hence the distinction made by Canada between a service as an input in the
production of a good, which is within the scope of Article III:2, and a service which is a product of
an independent activity such as the advertising services of a publisher, which are within the scope of
ArticleI:1 of GATS. Canada alsoraised the furtherdistinctionwhichmust be made between the services
that are within the scope of GATT 1994 and GATS on the basis of the accessory or principal nature
of the service. A service, as an input in the production of a good, is an accessory in the production
of a good. However, the advertising services of a publisher are the principal product for which a
periodical is the accessory.
3.54 A large number of services result in the production of a good. The fact that the result of the
provision of the service is physically incorporated in the production of a good is not in itself a key
factor in the characterization of the measure which relates to such a service. It is because of the
economicintegrationofthetwoactivitieswhichformtheperiodicalpublicationindustrythatadvertising,
in its physical form, is incorporated into periodicals. It is because a periodical is the accessory of the
advertising service, its vehicle, that advertising in its physical form is incorporated into a periodical.
It is not because advertising is physically "necessary" to the material production of a periodical as an
editorial vehicle. Unlike printing services (the work of the printers), the advertising services of the
publisher have nothing to do with the physical production of periodicals. Those services only relate
to the financial viability of the integrated activities of the periodical publishing industry. This has nothing
to do with the protection found in Article III:2 of GATT 1994. To extend the scope of Article III:2
and of the phrase "indirectly" would result in en extension beyond natural and reasonable meaning
in the circumstances. The level of integration of an industry cannot be a factor in the characterization
of a measure which relates to one of its activities for the purposes of determining which WTO treaties
applies thereto. The only factors applicable are the nature of the measure and the scope of application
of each of the two treaties.
3.55 There are no contradictions in the Canadian approach. Canada provided a general description
of the periodical publishing industry and pointed out the integration of advertising and publishing
activities. This explains the close relationship of these activities as far as overall income for the industry
is concerned as well as the accessory nature of periodicals for the advertising services of publishers.
Canada's main position is very clear. There is no doubt that the advertising services of publishers
are services that are not accessory services or inputs in the production of periodicals. The fact that
these services are part of the integrated activities of a publisher and that the income which results from
them contributes to the overall financial viability of the industry does not affect the characterization
of the activity for the purposes of the applicability of Article III:2. The latter does not apply to measures
relating to the ability of a publisher to market its advertising services. Part V.1 of the Excise Tax
Act is beyond the scope of Article III:2 of GATT 1994.
3.56 The United States asserted that neither the plain meaning of the term "indirectly" in Article III:2,
nor the limited negotiating history concerning it, supports a restrictive meaning of that term. Rather,
the negotiating history reveals that a tax with respect to the processing of a product was one example,
but not necessarily the only example, of an "indirect" tax on a product. Advertisements are a substantial
feature or component of a magazine as a product, accounting for half or more of the pages of a typical
magazine sold in Canada. It is not logical to say, as Canada does, that a tax with respect to inputs -
that is to say, things that are consumed in making a product - is a tax directly or indirectly on a product,
but a tax that concerns a major feature or component of that actual product is not. If anything, the
latter is more directly a tax applied to the product itself. Advertisements affect a magazine's price,
cost, and competitive position as much as any input consumed in the production of a product. The
carrying of advertisements is, moreover, a major use to which magazines are put. A tax with respect
to a substantial use of a product can be viewed as a tax, directly or indirectly, applied to the product.

(ii) Conformity of Part V.I with Article III of GATT 1994
3.57 Canada observed thatthere isan artificialquality toany attempt toassesshow ArticleIII applies
to a tax that has never been applied to a foreign product. It has been assumed that the tax does not
apply to imported products in view of the maintenance of Tariff Code 9958. Article III:2 requires
a comparisonof animportedand a domesticproduct,a comparisonthathas toremain purelyhypothetical
in this case. Subject to this observation, Canada provides an alternative argument to be considered
in the event the Panel is of the view that Part V.I is a taxation measure that applies to magazines as
"goods" and that an examination of the application of Article III of GATT 1994 has to be conducted.
3.58 The United Statesremarked that, byCanada's ownadmission,the excise tax appliestoimported
(as well as domestically produced) magazines. To the extent that the tax had not actually been levied
on imported split-runs, it is because those imports had been completely banned by Canada. It is entirely
possible that even if there were no import ban the excise tax would still not be levied because the tax
is set at such a high level that it would likely discourage producers from marketing imported split-runs
in the first place. It is well-settled in GATT that the level of actual imports is not the basis for assessing
whether a violation of GATT Article III exists. The 1949 Working Party on Brazilian Internal Taxes
stated that the obligations of Article III "were equally applicable whether importsfrom other contracting
parties were substantial, small or non-existent".59 This is because the purpose of Article III is not to
protect expectations on trade volumes, but rather "expectations on the competitive relationship between
imported and domestic products".60
3.59 Thus, the plain fact that the excise tax is mandatory legislation that applies by its terms to
imported magazines brings it within the purview of Article III. The principle that actual imports are
not required is especially appropriate in this case because Canada has banned the relevant imports to
which the tax would otherwise apply. A WTO Member cannot use a GATT-inconsistent import
prohibition to shield its discriminatory domestic regulations from scrutiny. In the absence of the import
prohibition,the excise tax wouldimmediately affect importedsplit-runmagazines. By making imported
split-runs prohibitively expensive to sell in Canada, the tax would accomplish what the import ban
now does: the absence of imported split-runs in the Canadian market. The effect of this scheme is
that dozens of US split-runs would be sold in Canada but for barriers Canada has erected to their sale.
This case isnotbased onCanada’ s treatment of US publishers’ split-run magazines produced inCanada.
Such magazines are not imported products within the scope of GATT Article III.
(a) Article III:2, first sentence
Like product issue
3.60 The United States argued that the Canadian excise tax created an artificial distinction between
otherwise entirely like products - split run and non-split run magazine editions - based on the extent
to which the same or a similar version of the product was sold abroad. The excise tax defines a split-run
magazine entirely in terms of its relationship to another magazine sold outside Canada. It is, therefore,
impossible to determine whether a magazine is a split-run based simply upon an examination of its
physical form, its editorial content, or its advertising content. The fact that a similar edition of a
magazine is sold in a country other than Canada does not differentiate the magazine from another
magazine in terms of physical characteristics, end-uses, content, advertising, or any other attribute.
In fact, the defining characteristic of a split-run magazine under the excise tax - the existence of another
59The 1949 Working Party on Brazilian Internal Taxes, adopted on 31 June 1949, BISD II/181, 185, para. 16 .
60Panel Report on United States - Taxes on Petroleum and Certain Imported Substances, adopted on 17 June 1987, BISD
34S/136, 158, para. 5.1.9.

magazine sold outside Canada - is an extraneous factor having nothing to do with the character of the
split-run itself.
3.61 Canada argued that periodicals with editorial content developed for the Canadian market and
split-runs substantially reproducing foreign editorial content are not "like products" within the meaning
of Article III:2 and are distinguishable on the basis of their content, the essential characteristic of any
magazine. Magazines are distinct from ordinary articles of trade. Magazines are intended, by their
very nature, for intellectual consumption as opposed to physical use (like a bicycle) or physical
consumption (like food). It follows that the intellectual content of a cultural good such as a magazine
must be considered its prime characteristic. Consequently, the "like product" analysis of whether
importedsplit-runmagazinesshare the samecharacteristics asdomestic magazineswitheditorialcontent
developed for the Canadian market must be approached in terms of intellectual content as opposed
to the traditional approach of examining material or physical characteristics. The periodical industry
is keenly aware of the importance of editorial content. It is editorial content and its ability to attract
readers that determine the ability of a periodical to attract advertising revenues to securing its financial
viability.
3.62 Periodicals with editorial content developed for the Canadian market and split-run periodicals
envisaged by the legislation are distinct products on the basis of their editorial content. The definition
of "split-run edition" reflects this distinction. Editorial material developed for the Canadian market
reflects a Canadian perspective and contains specific information of interest to Canadians. The content
is qualitatively different from editorial material copied from foreign publications.
3.63 What has been saidof the essentialpropertiesof magazines isequally applicable totheirend-use.
The end-use of a magazine is not simply reading; it is the transmission and acquisition of specific
information. The information in, for example, a sports magazine, cannot be considered essentially
the same as that in a philosophical journal. Any attempt to characterize the "end-use" of products
so broadly that they all end up in the same category would deprive this consideration of any real meaning
and would run afoul of the principle that the expression "like" in this context is to be narrowly
construed.61
3.64 The United States argued that a distinction of the type Canada had drawn in its excise tax
should be inherently suspect under Article III because it is founded on distinctions other than differences
between the products being sold in the importing country. In US - Standards for Gasoline, the panel
rejected an argument that the US "Gasoline Rule" did not provide less favourable treatment to imported
products as compared to like domestic products because it treated similarly situated parties similarly
noting that
"in the Malt Beverages case, a tax regulation according less favourable treatment to
beer on the basis of the size of the producer was rejected".
and observing that, under the US argument in that case
"imported goods would be exposed to a highly subjective and variable treatment
according to extraneous factors. This would thereby create great instability and
61Appellate Body Report on Japan - Taxes on Alcoholic Beverages, adopted 11 July 1996, WT/DS8/R, WT/DS10/R
and WT/DS11/R .

uncertainty in the conditions of competition as between domestic and imported goods
in a manner fundamentally inconsistent with the object and purpose of Article III". 62
3.65 The same concerns about "highly subjective and variable treatment according to extraneous
factors" that the panel identified also apply in this case. The "extraneous factors" on which application
of Canada’ s excise tax depends are the existence or non-existence of a product sold in a country other
than Canada, and the extent of that product’ s similarities to, and differences from, the product sold
in Canada. The United States described examples that it considered showed how Canada's distinction
between split-runs and other magazines produced odd and arbitrary results based on sales of products
outside Canada.
3.66 Canada argued that the point is not whether originality could be perceived as such, but whether
there was a difference between the two products at issue - the split-run replicating a foreign magazine,
on the one hand, and the domestic magazine with original content, on the other. This had nothing
to do with "subjective and variable treatment according to extraneous factors" as identified in the panel
on US - Standards for Gasoline. It made no difference in terms of product characteristics whether
the gasoline was handled by refiners, blenders, or producers. Gasoline was gasoline, but any careful
examination would show that content differences between split-runs and original Canadian magazines
were characteristics of the products themselves. A recurring theme of the United States argument is
that the Canadian legislation is not based upon objective product differences; that it is based on a
distinction unrelated to product characteristics. This is said to be the result of a definition that depends
entirely on the existence of a foreign companion edition with sales outside Canada. In the words of
the United States, this is an extraneous factor that has nothing to do with the character of the split run
itself. On the contrary, it has everything to do with the character of the split-run itself. The legislation
doesnotfocus onthe existenceof a so-called companion editionas afactor unrelatedtothe characteristics
of a split-run marketed in Canada. It focuses on the fact that the split-run marketed in Canada is to
a substantial degree no more than a reproduction of a foreign edition, with the content characteristics
invariably associated with such material. It is not the existence of a foreign companion edition, or
sales of that edition outside Canada, that counts. It is the reproduction in the Canadian split-run of
content that originated in that foreign edition. Contrary to the United States argument, this is a product
characteristic of the split-run magazine. The replication of foreign content is not only an attribute of
the split-run – a defining attribute, in fact – it is readily discernible from an examination of the product
itself.
3.67 Canada further considered that the United States’ approach to like products is necessarily over-
broad because it ignores the only basis on which one magazine can be distinguished from another -
the content. If magazines are treated as ordinary articles of manufacture, defined only by the fact that
they are physically made up of printed paper and staples, then it would obviously have to follow that
all magazines are exactly the same. The United States submission even implies when it refers to Canada's
tariff item 49.02, that newspapers, journals and periodicals are like goods. This leads to the second
basic principle Canada referred to in this connection: that "like product" determinations under Article
III.2 are to be made on a case-by-case basis. The reason for proceeding case-by-case is obvious: to
avoid over-generalization and a mechanical or automatic transfer of criteria that are suitable in one
context to another context where they no longer properly apply. A case-by-case approach is one that
62United States - Standards for Reformulated and Conventional Gasoline, op. cit., paras. 6.11-6.12 (emphasis added).
The United States added that in United States - Taxes on Automobiles, DS31/R (29 Sept. 1994, unadopted), the panel (para.
5.55) found that "Article III:4 does not permit treatment of an imported product less favourable than that accorded to a like
domestic product, based on factors not directly relating to the product as such. The Panel found therefore that, to the extent
that treatment under the CAFE measure was based on factors relating to the control or ownership of producers/importers,
it could not in accordance with Article III:4 be applied in a manner that also accorded less favourable treatment to products
of foreign origin" (emphasis added).

takes account of the particular circumstances. It cannot be denied that cultural products are different,
that they have their own distinguishing characteristics. By treating them as if they were ordinary items
of merchandise trade, the United States has ignored the entire rationale of the case-by-case approach.
3.68 The chief and for all practical purposes the only distinguishing characteristic of a magazine
is its content. Content plays a role in the case of cultural products that is analogous to physical properties
in the case of ordinary items of trade. Content is what the reader is looking for – the message and
not the medium. The end-use of a magazine is the transmission of specific information. A magazine
has a utilitarian function – it may be to keep up on current events; to acquire information about specific
topics like computers or investments; in some cases, to provide entertainment – but in every case, the
function and value of the magazine to the reader is inseparably linked to its specific content or subject
matter. The United States’ emphasis on physical properties leads inevitably to a lumping together of
all magazines as indistinguishable commodities, contrary to the principle of narrow construction and
the case-by-case approach. The approach that Canada advocates, giving content the decisive role, does
not lead to the opposite extreme. Magazines can easily be classified by type, either broadly or narrowly,
on the basis of content. Exactly where the lines are to be drawn can be a matter of judgment, but
no more so than in the case of any other like product determination.
3.69 The legislation uses the concept of original material as the defining element – material that
is not, to quote the statute, "the same or materially the same as editorial material" in editions that
circulate primarily in foreign markets. This criterion of original versus replicated material might seem
abstract at first, but in its practical effect it refers to a dividing line that is very easily recognized.
Original material means content developed for and aimed at the Canadian market – this means Canadian
content in terms of subject matter as opposed to authorship or production. The idea that Canadian
content is the same as foreign content is simply not tenable. The events, topics and people covered
will be Canadian. They may not be exclusively Canadian, but the balance will be recognizably and
even dramatically different than in a replicated foreign publication, where articles on Canada are close
to non-existent. Foreign magazines are almost devoid of content dealing with Canada, and what little
there is quite logically fails to reflect a Canadian perspective. Even where the topics covered are the
same, the perspective will be different. Some of these qualities like "perspective" are admittedly
somewhat intangible; but where cultural products are at issue, these assessments cannot be avoided.
And they fall well within the legitimate range of the kind of "discretionary judgment" the Appellate
Body has identified as inherent in like products determinations for the purposes of Article III –
discretionary but not arbitrary. It is the prevailing characteristics of each category that we should look
at in determining whether or not publications created for Canada are the same as publications replicated
from foreign editions. There may be individual articles that might conceivably have appeared in either
type of magazine. Some issues might be more different or less different than others. But the prevailing
pattern is what counts. Canadian content and foreign content are significantly different. Local
publications deal with local topics. People are preoccupied with their own affairs and communities.
Periodicals are the mirror image of those communities. The content of a periodical created for one
community will necessarily differ from what is created for another community.
3.70 Further, the only actual magazines the United States has chosen to exhibit in this case are Pulp
& Paper,63 which is not a split-run and has no relevance to the Excise Tax Act, Paris Match and The
Economist. Paris Match is an imported non-split-run and The Economist is an imported split-run that
is exempt from the tax as a North American edition without advertising specifically directed at the
Canadian market. Noneofthese magazines isrelevant tothe comparisonbetween domestic and imported
products that has to be made under Article III:2, first sentence. But the evidence is readily available,
becausethereare grand-fatheredsplit-runsinCanada thatcanbe comparedwithotherdomesticCanadian
63Referred to in paragraph 3.91.

magazines. This evidence has been filed by Canada, although Canada does not bear the burden of
proof. The evidence consists of Time US, Time Canada and Maclean’ s – what the United States would
call a foreign companion magazine, a split-run that would be taxable without the grandfathering provision,
and an original domestic magazine. And the issue, in a nutshell, is whether the last two – Time Canada
and Maclean's – are "like" products, having regard to the narrow construction and the case-by-case
approach mandated by the Japan - Alcoholic Beverage Appellate ruling.
3.71 Canada's evidence in the form of actual magazines provides typical examples of a split-run
in the form of Time Canada, the parent edition in the form of Time US, and a domestic magazine in
the form of Maclean’ s. The proper basis of comparison is of course Maclean’ s and Time Canada.
Almost every article in Maclean’ s deals with Canada. This is true of the editorial, the letters, the
business news, the entertainment coverage, the arts, crime, people, the law, much of the news –
everythingin fact butthe lead internationalstoriescoveringabout 8 outof 88pages. Next, a comparative
look at Time Canada shows that it has practically no reference to Canada or Canadian subject. There
are two out of 21 letters from Canadian sources. There is a travel advisory on Montreal, but it turns
out to be about an exhibit dedicated to an American landscape architect. The difference between Time
Canada and Maclean’ s is striking. It would escape no reader and no consumer. This is about as typical
an example as one could find. These are mainstream, mass circulation magazines. Canada suggests
that there is a significant, objective, discernible difference between a split-run and a magazine created
with original content for the Canadian market.
3.72 The United States contested Canada's argument that imported split-runs were not like or directly
competitive or substitutable with non-split runs because non-split-runs contain original content that
is from a Canadian perspective. An examination of the structure of the tax showed this to be false.
Moreover, even if thisassertion were trueitwouldnot form a legitimatebasisfor distinguishingbetween
otherwise like products. First, by its terms the tax applied or did not apply, to particular magazines
irrespective of their editorial"perspective". For example, a magazine published solely for the Canadian
market, or that contained no advertising specifically directed at Canadians, automatically avoided the
tax regardlessof how"foreign" its contentsmightbe. However, the very same magazine became subject
to the tax if it had a somewhat different foreign companion edition. Second, the editorial content need
not be "original" at all. Rather, a magazine could avoid the tax, but still be identical to what is sold
abroad, as long as the publisher did not advertise to Canadians. This suggested that the real basis for
the distinction is simply whether the magazine might compete for advertising revenues with purely
domestically produced Canadian magazines. That, indeed, is a purpose that Canada did not hide.
Finally, even if one could somehow credit Canada's argument that it is seeking through the excise
tax to ensure "original content" in magazines sold in Canada this purpose would be equally illegitimate.
If GATT permitted governments to require that imported goods be designed exclusively or primarily
for their markets, they could easily insulate their markets from the comparative economic advantages
of other WTO Members. Such a result would undermine the foundations of international trade.
3.73 The recent Appellate Body report in Japan - Alcoholic Beverages shares the focus of the US
- Standards for Gasoline panel report on objective product differences in judging product likeness.
There the Appellate Body observed:
"The Report of the Working Party on Border Tax Adjustments, adopted by the
CONTRACTING PARTIES in 1970, set out the basic approach for interpreting 'like
or similar products' generally in the various provisions of GATT 1947:
...The interpretation of the term should be examined on a case-by-case basis. This
would allow a fair assessment in each case of the different elements that constitute a
"similar" product. Some criteria were suggested for determining, on a case-by-case
basis, whether a product is "similar"; the product's end-uses in a given market;

consumers' tastes and habits, which change from country-to-country; the product
properties, nature and quality.
This approach was followed in almost all adopted panel reports after Border Tax Adjustments". 64
The Appellate Body found that the term "like product" in Article III:2, first sentence must be "construed
narrowly" in light of the existence of the second sentence of Article III:2 which covered "directly
competitive or substitutable" products, and that distinguishing between "like products" and "directly
competitive or substitutable" products "is a discretionary decision that must be made [by panels] in
considering the various characteristics of the products in individual cases".65
3.74 Thus the Appellate Body in Japan - Alcoholic Beverages, like the US - Standards for
Gasoline decision, endorsed a case-by-case approach that focused on differences in products, rather
than on distinctions based on extraneous factors such as the production method. The illustrative list
of like-product factors cited by the Appellate Body - end-uses, the product’ s properties, and so forth
- are identical for a magazine sold only in Canada and a magazine for which a companion edition is
sold abroad. While "like product" in Article III:2, first sentence, must be interpreted narrowly, it
cannot be interpreted so narrowly as to permit less favourable treatment based on distinctions between
literally identical products depending on whether a companion product is sold in another market. This
interpretation would be so narrow as to eliminate "like product" altogether from Article III:2, first
sentence.
3.75 Canada considered thatthe US arguments onthe likeproductissuefailed topresentany positive
evidence that an imported split-run had enough in common with original-content Canadian magazines
to allow them to be considered like products. The absence of such evidence is fatal because the United
States had the burden of proof. Canada was not suggesting that a magazine had only one attribute.
Nor did it back away from the proposition that the assessment had to take into account all the relevant
circumstances. But the circumstances had to be weighed and balanced according to their importance,
and editorial content was the most important distinguishing feature and was the chief and for all practical
purposes the only distinguishing characteristic of a magazine. A magazine is nothing without its content
which was what defined the end-use and the value of a magazine to its readers. Treating content as
"one attribute among many" as the United States would say, would tend to sweep all or at least very
broad classes of magazines into the same category. This would disregard the narrow characterization
of like products required by the Appellate Body in Japan - Alcoholic Beverages.
3.76 As the complainant, the United States bears the burden of proving that Canada acted inconsistently
with its obligations under Article III:2, first sentence. This is a principle of long standing in GATT
jurisprudence. To date the United States has made no effort to discharge this burden. Instead, it has
relied upon general allegations and assertions such as the following: "there is no identifiable difference
between split-run magazines, on the one hand, and magazines without a companion edition, on the
other hand, in terms of their physical characteristics, appearance, uses, tariff classifications, or even
editorial content". Such statementsdonot constitutethe empirical evidence requiredtobothsubstantiate
the claim made by the United States that all magazines are the same or that magazines based on local
content are the same as magazines replicating foreign content; and to fulfil the burden of proof borne
by the United States.
3.77 While Canada also recognized the definitionof what constitutes a "like product"by the Working
Party on Border Tax Adjustments, it considered that the "like products" test requires a much more
64Appellate Body Report on Japan - Taxes on Alcoholic Beverages, op. cit.,at 20.
65Ibid., at 21 (emphasis added).

sophisticated analysis than that suggested by the United States. The Working Party had concluded
that the determination of what constitutes "like products" must be made on a case-by-case basis in order
to allow for the consideration of the specific circumstances of each case. In that context the Working
Party suggested some criteria: "... the product's end-uses in a given market; consumers' tastes and
habits, which change from country to country; the product's properties, nature and quality".66 This
line of thinking evolved into an established GATT practice and was recently reaffirmed by the panel
in US - Standards for Gasoline.
3.78 The United States considered that with Canada's argument - that the US like product analysis
is incomplete because it relies solely on the physical characteristics of magazines, and ignores their
editorial content - Canada appears to concede that there is no other basis to consider split-run magazines
and other magazines to be "unlike" based on the specific criteria established by the Appellate Body
inJapan - AlcoholicBeverages. By focusingsolely on "editorialcontent", Canada ignores the Appellate
Body’ s instruction that the analysis of "like product" must take into account "the various characteristics
of products in individual cases".67 Editorial content is only one attribute of a magazine, among many.
The type, texture, colour, thickness, and even the perfume, of the paper can be important factors to
market appeal. The dimensions of the magazine, the manner in which its pages are bound, the
typesetting, and the appearance of the ink, can also be significant. The type, appearance, and frequency
of advertisements may be a factor in a consumer's purchasing decision as well. Readers may purchase
a magazine in part for the information its advertisements contain about where and how to purchase
products or services locally. All of these attributes - including editorial content - combine to form
an overall package that a consumer may or may not be attracted to. For the Canadian and US magazine
industries, editorial content generally represents substantially less than 20 per cent of the cost of
producing a consumer magazine.
3.79 Even if one were to examine editorial content in isolation, Canada’ s argument that magazines
can be differentiated solely according to the percentage of "original" versus "non-original" editorial
content they contain is untenable. There simply is no readily identifiable difference in actual editorial
content between what the excise tax deems to be "original" and "non-original" content. That is because
the distinction drawn by the excise tax is not based on the specific contents of magazines distributed
in Canada but simply on whether those contents are used in magazines distributed abroad. A magazine
reader in Canada cannot discern whether a magazine is "original" or not based on an examination of
the magazine’ s contents, and thus could not be expected to consider "non-original" magazines to be
any different from "original" magazines. For purposes of consumer use - as well as use by advertisers
- magazines are judged by what they themselves offer, not by what a companion edition may contain.
3.80 In fact, Canada’ s "original content" requirement is not really meant to ensure that magazines
sold in Canada have any particular type of content. Rather, it is meant to ensure that one type of
production method - regional or split-runs - cannot be employed for magazines sold in the Canadian
market. A distinction drawn to favour one type of production method has obvious protectionist
implications and is not one that GATT should countenance for distinguishing between otherwise-like
products.
3.81 Further, Canada’ s argument that split-runs usually differ from magazines sold only in Canada
with respect to the perspective and orientation of their editorial content is legally irrelevant. A panel
must assess the distinction that a measure actually draws, not a distinction a measure might have drawn
but does not. In this case, to the extent the excise tax concerns content, it differentiates between
magazines whose content is contained in a product sold in another country and magazines whose content
66Border Tax Adjustments (Report of the Working Party adopted on 2 December 1970), BISD 18S/97.
67Appellate Body Report on Japan - Taxes on Alcoholic Beverages, op. cit., at 21 (emphasis added).

is sold only in Canada. Thus, the excise tax simply does not differentiate between content based on
its Canadian focus or perspective. Application of the excise tax does not turn merely on a magazine’ s
"originality". A magazine distributed both inside and outside Canada becomes subject to the tax based
solely on the inclusion of a single advertisement that is not identical in both editions. The very same
magazine whose several editions do not differ in advertising is not taxed. Canada has advanced no
basis for distinguishing between magazines based on the type of advertisements they contain.
3.82 For example, a science magazine escapes from the tax even if it contains absolutely no articles
about Canadian scientists or Canadian scientific research so long as it is not sold outside Canada. The
very same magazine would be subject to the tax if it is sold both in Canada and abroad and contained
an advertisement that differed between the version sold in Canada and the version sold abroad. Yet
the same magazine would not be subject to the tax if it is sold both inside and outside Canada but did
not contain suchan advertisement. Thus, the excise tax does not, infact, distinguish between magazines
based on their editorial content, let alone based on the orientation of the content. Rather, it applies
based on factors related to whether a magazine was produced for more than one market, and advertising
content. Article III:2 doesnot permit governments to distinguishbetween otherwise like products based
on such business and trade factors.
3.83 With regard to the Canadian assertion that the US analysis of like product with respect to the
excise tax is unacceptably general and would necessarily lead to the conclusion that all magazines are
the same like product, regardless of content, the Appellate Body made clear in Japan - Alcoholic
Beverages that product likeness for purposes of Article III must be addressed on a case-by-case basis
and in the light of all relevant circumstances. Thus, no sweeping once-and-for-all product likeness
determinations are appropriate for magazines or other products. The distinction between "original"
and "non-original" content was not based on objective content differences, or any differences at all,
based on a comparison of products sold in Canada. Whether or not distinctions may ever properly
be drawn between magazines based on their editorial content is not an issue that is before this Panel.
The excise tax distinguishes between products based on whether a similar product is sold abroad, not
on objective content differences between products being sold in Canada.
3.84 Canada argues that because magazines contain intellectual or cultural content, they should receive
unique treatment under GATT. Many products, as diverse as works of art, designer clothing,
phonograph records and cinematographic films containintellectual orcultural content. Likemagazines,
these products were in widespread use prior to the adoption of GATT 1947. But of these products,
only cinematographic films were accorded special treatment in GATT 1947. Had the drafters of GATT
1947 sought to treat other intellectual or cultural products differently from products in general, they
would have done so.
3.85 Canada argued that the United States insists that it is impossible to determine whether a magazine
is a split-run simply upon an examination of its physical form, its editorial content, or its advertising.
This simply misses the point. A casual reader might not in fact know whether a magazine is a split-run
or simply an imported foreign magazine. There might be practically no difference between the two.
Time US and Time Canada are very close. But that basis of comparison is irrelevant, because the
comparison is not between imported magazines and imported magazines. The comparison is between
imported split-run with the domestic magazine – Time Canada and MacLean’ s. And here the reader
would have no difficulty in seeing that the two are very different products, offering completely different
benefits to the prospective reader. The point, in sum, is not whether a split-run can be identified as
such by the consumer. It is whether it can be identified as a significantly different product when
compared to a domestic magazine that is not a split-run.
3.86 The UnitedStates makes the same pointwhen itsaysa magazine reader inCanada cannot discern
whether a magazine is original or not, based on an examination of the magazine’ s contents, and thus

could not be expected to consider non-original magazines to be any different from original magazines.
This is based on the same misperception. The point is not whether originality can be perceived as
such, but whether there is a difference between the two products at issue – the split-run replicating
a foreign magazine, on the one hand, and the domestic magazine with original content, on the other.
And nothing the United States has said casts any doubt on the proposition that difference would be
obvious to any reader. This has nothing to do with subjective and variable treatment according to
extraneous factors, as identified in the panel report on US - Standards for Gasoline. That situation
obviously had nothing to do with objective product differences. It makes no difference in terms of
product characteristics whether the gasoline is handled by refiners, blenders, or producers, or what
data these various companies are likely to hold. Gasoline is gasoline, but any careful examination
willshowthatcontentdifferencesbetween split-runsandoriginalCanadian magazines arecharacteristics
of the products themselves.
3.87 At some points the United States refers to split-runs as a production method. In fact it is not
a production method, it is a specific type of magazine. The United States says that a distinction drawn
to favour one production method over another has protectionist implications that GATT should not
countenance. This reflects a passage of the United States - Measures Affecting Alcoholic and Malt
Beverages ("US - Malt Beverages") decision that was specifically overruled in Japan - Alcoholic
Beverages.68 In any event, it mischaracterizes the legislation, which distinguishes not on the basis
of production method but of product content. The United States argument on like products is based
on a highly abstract reading of the Canadian legislation taken out of its real-world context. It is based
in fact on a refusal to take account of the effect of the distinction between original and reproduced
content on which the legislation is based. But it is only on the basis of the effect of the distinction
that one can determine whether in fact the legislation has the effect of taxing imported products in excess
of like domestic products.
3.88 Canada noted the United States' contention that Canadian content or Canadian perspective are
legally irrelevant, and that a panel must assess the distinction a measure actually draws, not a distinction
it might have drawn but does not. In fact, the point is to assess what the legislation actually does –
not simply what it says but what it does. It is obvious that the basis of the legislation – content
reproduced from foreign sources – has concrete effects. These are effects that any reader can see –
from the stories, the people, the subjects and – indeed – the perspective. They determine the character
and the subject matter of the publication. The suggestion that these are not objective, visible product
differences makes no sense. When the United States says that the nature of the content is irrelevant
because that is not the distinction the legislation actually draws, they are asking the Panel simply to
close its eyes to the actual operation and effect of the legislation in a real-world context. The implication
is that one should look at the form, not the substance; that the assessment should be in the abstract
and that the concrete effect should be ignored. None of this makes sense in the context of Article III:2,
first sentence, which requires a finding of excess taxation in fact. One of the reasons why Canadian
magazines do not sell well in the US market is precisely that they have a different content, content
designed for Canadians. The American public is not attracted to this content. If American consumers
can recognize the difference between an American and a Canadian magazine, surely Canadians can
recognize it just as easily.
3.89 The United States asserted that the terms of the excise tax itself define the distinction Canada
has drawn and this is what is at issue in this case. An analysis of the way the tax is structured shows
the two to be like products. Canada's claim that the United States had failed to produce evidence of
imported split-runs ignores the fact that Canada has banned imported split-runs. Canada could not,
68Panel Report on United States - Measures Affecting Alcoholic and Malt Beverages, adopted on 19 June 1992, BISD
39S/274, para. 5.25.

on the one hand, ban the relevant imported product, then argue on the other hand that there are no
"real-life" examples of how that (banned) product is actually similar to domestic products, or actually
competes. In fact, Canada's own example - Time Canada and Maclean's - does not involve an imported
split-run magazine. Moreover, one simply could not say that the concrete effects of the terms of the
excise tax are to separate out imported split-runs (of which there are none) thathave no Canadian content
from domestic non-split-runs that do.
3.90 In the US - Section 337 panel report, the panel stated that it "had to assess whether or not Section
337 may lead to the application to imported products of treatment less favourable than that accorded
to products of the United States [i.e. domestic] origin. It noted that this approach is in accordance
with previous practice of the Contracting Parties in applying Article III, which has been to base their
decisions on the distinctions made by the laws, regulations or requirements themselves and on their
potential impact, rather than on the actual consequences for specific imported products" (emphasis
added). In this case, the excise tax law itself did not distinguish between editorial content that is about
Canada and editorial content that is not, but is instead based on the existence or non-existence of a
similar product in a foreign country, and on advertising.
3.91 The United States questioned the necessity for specific product examples in light of this analysis
of the US - Section 337 panel report and Canada's longstanding import ban. The United States argued
that while there were no specific examples of imported split-runs because none exist; should the Panel
find specific examples relevant, a useful comparison to demonstrate the "likeness" of imported and
Canadian-produced magazines exists between a US (non-split-run) magazine, Pulp & Paper, and Pulp
& Paper Canada, a Canadian magazine unconnected to Pulp & Paper (US). The two publications
have substantially similar editorial content and subject matter - pulp and paper technology, products,
processes and marketing. Both contain a number of technical reports on various paper and pulp subjects
that have little, if any, connection with particular paper and pulp operations in either Canada or the
United States. Both contain information about paper and pulp operations and statistics in both Canada
and the United States. Both contain a wide variety of advertisements from suppliers of products and
services directly related to the pulp and paper products. Both contain classified advertising sections,
and both contain an advertisers' index. Only a handful of pages out of the 78 pages in Pulp & Paper
Canada were devoted to exclusively Canadian pulp and paper, and the vast majority of the publication
consists of advertisements and feature articles that did not focus specifically on Canadian production
or issues. Moreover, a Canadian paper industry publication reader study conducted by an independent
advertising agency indicated that the two magazines have comparable readership and that readers use
these magazines for the same purposes such as product information and mill news. Based on these
and other similarities, the United States argued there can be no doubt that Pulp & Paper Canada is
"like" Pulp & Paper (US). The United States further argued that these examples also show the
importance of advertisements to the usefulness and appeal of magazines as products. The ads in the
pulp and paper magazines are so obviously highly useful to those in the pulp and paper business. Both
the Canadian and the US publications go so far as to contain an advertisement directory so that readers
can more readily access pertinent advertisements.
3.92 In response to Canada's reliance on the editorial content of the Time Canada and Maclean's,
the United States argued that this editorial content does not show that split-run and non-split-run
magazines are not like products. First, one example out of over 1,000 magazines sold in Canada hardly
proves the point. The fact is that, under the terms of the excise tax, a non-split-run magazine need
not contain any "Canadian" editorial content, as long as the content is not sold outside Canada, or
the advertisements in the Canadian and foreign editions are identical. Second, even as to these two
magazines, Canada ignores the similarities between the two products, in terms of all factors other than
Canadian focus. Indeed, the similarities are so great - including with respect to subject matter - that

the two magazines were recognized to be direct competitors by industry witnesses in testimony before
a Canadian Senate committee.69
3.93 The United States considered that Canada sought to minimize the significance of the fact that
itsWTOtariff commitments didnotdistinguishbetween split-runsand non-splitruns. Canada'srelevant
tariff binding also includes newspapers, which are obviously not like products. However, the fact
that Canada’ s tariff binding reflects the single Harmonized System (HS) heading for all magazines
does provide support for a finding that split-runs and non-split-runs are the same like product. The
Appellate Body in Japan - Alcoholic Beverages stated that, while broad GATT tariff bindings that cut
across HS headings may not be useful to determine product likeness, GATT 1947 practice has looked
to similar categorization in the HS itself in determining like product:
"Uniform classification in tariff nomenclatures based on the Harmonized System (the
'HS') was recognized in GATT 1947 practice as providing a useful basis for confirming
'likeness'inproducts. However, there isa major differencebetween tariff classification
nomenclature and tariff bindings or concessions made by Members of the WTO under
Article II of GATT 1994. There are risks in using tariff bindings that are too broad
as a measure of product 'likeness'.... Many of [the] least-developed countries, as well
as other developing countries, have bindings in their schedules which include broad
ranges of products that cut across several different HS tariff headings . . .".70
3.94 Thus, the Appellate Body distinguished between the situation in which products fell within
common HS categories, and the situation in which a Member made broad tariff bindings that cut across
multiple HS categories. In this case, all periodicals, whether split-run or not, and whether or not they
contain advertising, are included within the same HS category: HS 49.02. The fact that the distinction
Canada is drawing in this case is not one reflected in the HS supports our claim that split-runs and
non-split-runs are the same like product.
3.95 Withregard tothe Canadian argument thatimplementation of its importban througha provision
initstariff code isproofthatthere are differences intariffclassificationbetween split-runsand non-split-
runs, the Appellate Body in Japan - Alcoholic Beverages referred to universally-accepted HS
nomenclature, not to one Member’ s protectionist restrictions that happen to find themselves in that
Member’ s "Customs Tariff". The reason why it was practice under GATT 1947 to look to HS
nomenclature is because it generally reflects an objective assessment of the intrinsic similarity of products.
As far as the United States knew, Canada is unique in drawing lines (in a "tariff-related" provision
or elsewhere) based on an artificial distinction such as "split-run" versus "non-split-run". Thus, the
Panel should reject Canada’ s effort to be rewarded for its import ban, and find that the common HS
classification of split-runs and non-split-runs provides additional support for a finding that split-runs
and non-split-runs are the same like product.
3.96 Canada considered that the US reference to the Canadian tariff classification in heading 49.02
had the effect of sweeping not only all periodicals, but newspapers as well into a single very
comprehensive classification. The inappropriateness of this kind of result was pointed out by the
Appellate Body in its recent decision on Japan - Alcoholic Beverages, when it said that "tariff bindings
that include a wide range of products are not a reliable criterion for determining or confirming product
"likeness" under Article III:2".71 The use of tariff classifications in this case is especially inappropriate.
69See, e.g. Senate of Canada, Proceedings of the Standing Senate Committee on Banking, Trade and Commerce, Issue
no. 49 (30 November 1995) at 57, 64 (testimony of officials of Canadian Magazine Publishers Association).
70Appellate Body Report on Japan - Taxes on Alcoholic Beverages, op. cit., at 22.
71Ibid. at 22.

The categories of products listed under tariff item 49.02 are as diverse as periodicals and newspapers.
Where the policy framework relates to periodicals and their intellectual content, the argument that the
two media are "like" would be difficult to sustain. Tariff Code 9958 has effectively carved split-runs
out of the general tariff classification; it has been in effect for over 30 years, through several GATT
rounds, including the most recent Uruguay Round. The de facto exclusionof split-runs from the general
tariff classification means at the very least that the US position can derive no support from tariff
classification.
3.97 With respect to the support the United States seeks in the HS category, the fact is that this
classification is far too broad to serve as a basis for identifying like products. Surely the fundamental
point in the Appellate Body decision is that any very broad tariff classification is inappropriate, whether
it is based on the HS or on tariff bindings. The short answer to the United States argument based on
the common HS classification is that, at least in the case of this category, it is far too broad. It puts
all magazines and all newspapers into a single global grouping. It also has the practical effect of making
editorial content irrelevant. In the circumstances of this case, the use of tariff classifications is
inconsistent with the requirement stipulated by the Appellate Body that "like products" under Article III:2,
first sentence, should be narrowly construed.
Discrimination
3.98 Canada considered that the first sentence of Article III:2 speaks of products "imported into
the territory" of a contracting party, and it deals with tax discrimination against imported products.
There is no such discrimination on the facts of this case. To get around this difficulty, the United
States has introduced the notion of "foreign-based" split-runs meaning periodicals produced in Canada
but replicating foreign editorial content. This is a concept that simply has no legal meaning in the
context of Article III:2. If the product is domestically produced, and is not physically moved across
the border, it is not an imported product. And if there is no imported product, then there is nothing
to which Article III can apply. But even if there were imported split-runs on the Canadian market,
the absence of discrimination would be clear. Some imported magazines might attract the tax, but
not to any greater extent than the domestically produced split-runs which were and remain the primary
object of the legislation. For this reason, the measure is consistent with Article III:2 on its face and
in its operation and practical effect. There is no reason why a measure that is non-discriminatory in
both form and effect – de jure and de facto – should be considered inconsistent with Article III:2.
3.99 As the Appellate Body has observed in US - Standards for Gasoline in connection with
Article III:4 that where there is "identity of treatment – constituting real, not merely formal, equality
of treatment ... it is difficult to see how inconsistency would have arisen in the first place". The same
conclusion is equally valid here. That the tax is free from any taint of overt discrimination is clear
from the terms of the legislation, which make no distinction between domestic and imported products.
Canada provided an example of the Canadian-owned magazine, Harrowsmith Country Life. Before
the adoption of Part V.1, this magazine had two editions - a Canadian edition and a US edition. The
Canadian and the US editions had different advertisements and a certain amount of common editorial
content. Because more than 20 per cent of the editorial content in the Canadian edition was the same
as that in the US edition, the tax would have applied to the Canadian edition (even if the editorial content
was entirely produced in Canada). As a result of the excise tax, Harrowsmith Country Life stopped
publishing its US edition. It could hardly be suggested that the tax is discriminatory in its practical
operation, since it was designed to prevent the production in Canada of split-runs.

3.100 The Appellate Body on Japan - Alcoholic Beverages72 held that where imported products are
taxed in excess of "like domestic products", the general principle set out in Article III:1 may be assumed
to have been violated. There is consequently no need to apply that principle as a "separate test" in
order to find an inconsistency with Article III:2, first sentence. The Appellate Body has thus established
a balance in the interpretation of Article III:2. The concept of "like products" is to be very narrowly
construed, on a case-by-case basis in a way that requires "discretionary judgment"; but once the
determination is made, excess taxation of imported products entails a violation without any need to
conduct a further inquiry under paragraph 1. The essential elements of the interpretation of this provision
have thus been authoritatively identified.
3.101 One question, however, was not addressed in the recent decision: whether taxation of imported
products "in excess of" like products is to be determined in terms of classes of products, or whether
any single instance of differential taxation creates an automatic per se violation even when it results
from fiscal classifications that are not themselves discriminatory in form or in fact. The answer is
clear bothfrom the wording of Article III:2, first sentence, and from the object and purpose of Article III
as a whole, which is the prevention of discrimination against imported products. The use of the plural
in referring to "imported products" and "like domestic products" indicates clearly that the concern
is with classes of products, not with the isolated instances of differential taxation that necessarily result
when product "A" is taxed at a different rate than product "B" because it happens to fall into a different,
but non-discriminatory, fiscal classification.
3.102 This interpretation also seems necessary to create a workable rule. Article III:2 is not intended
toimposefiscal harmonizationinrates, methodsorclassifications. It therefore remains notonlypossible
but inevitable that domestic fiscal classifications may in certain instances have the effect of subdividing
or straddling "like product" categories, or otherwise crossing "like product" category lines. Since
fiscal classifications have no other purpose than to allow differences in tax treatment, any such
classifications that failed to correspond precisely to "like product" categories under Article III:2, first
sentence, would automatically lead to a violation. Quite apart from imposing a degree of harmonization
that goes beyond the language or the purpose of this provision, such an interpretation would lead to
an intolerable unpredictability so long as "like product" determinations are to be made on a case-by-case
basis, as the recent decision has reaffirmed.
3.103 It could also lead, paradoxically, to results that would make nonsense of the Appellate Body's
assumption that excess taxation under Article III:2 automatically entails a departure from the general
principles in Article III:1; and that would in fact make nonsense of the underlying purpose of Article III.
It could lead to situations where fiscal classifications decisively favouring imported products would
be considered inconsistent with the first sentence of Article III:2, so long as the tax classification
attracting the higher rate contained at least some imported products. It makes no sense to say that
ArticleIII isautomatically violatedinany case where tax differences resultfrom domestic classifications
that are "origin-neutral" in form and that might even favour imported products in effect – as might
well be true of the tax at issue here. A particular instance of differential taxation in such circumstances
should not create a per se violation, absent a discriminatory effect or cause to believe such an effect
to be probable.
3.104 The UnitedStates consideredthatthe Canadian argument thatunderArticleIII:2, firstsentence,
a "single" or"particular" instanceof higher taxationof a certain subsetof a broader category of imported
like products "should not create a per se violation, absent a discriminatory effect or cause to believe
such an effect to be probable", meritless for a number of reasons. First, the United States is not
72Ibid.

confronted with a mere "single" or "particular" instance of higher taxation of imported products than
domestic like products in this case. Rather, a broad group of imported products - split-run magazines
- is taxed at higher, not lower, rates than a broad group of like Canadian products - non-split run
magazines. Canada has neither defined nor identified what it considers to be a "single instance" of
discriminatory treatment in the context of this case.
3.105 In addition, Canada claims that the Appellate Body in the Japan - Alcoholic Beverages decision
somehow left the dooropen toallowfor discriminatory highertaxes applied tocertain imported products
within a category of like products. The Appellate Body left no such opening. It made it clear at page 19
that "[i]f the imported and domestic products are 'like products', and if the taxes applied to the imported
products are 'in excess of' those applied to the like domestic products, then the measure is inconsistent
with Article III:2, first sentence". No further test of "discriminatory effect" or discriminatory aim,
is warranted. Canada's proposed "discriminatory effect" test based on "classes" of products if flatly
inconsistent with the recent panel and Appellate Body decision in Japan - Alcoholic Beverages. In
that case, once the panel found vodka and shochu to be like products, the taxation of imported vodka
at a higher rate than domestic shochu (even though the tax was facially neutral) was found to be a
violation of Article III:2, first sentence. This finding was affirmed by the Appellate Body.
3.106 The United States considered that Canada's argument that, in the absence of such a
"discriminatory effect" test, a scheme that, overall, favoured imports over domestic products, might
be found to violate Article III:2, first sentence, suggested that less favourable treatment of certain
imported products could be counterbalanced by more favourable treatment of others. The US - Section
337 panel decisively rejected any such "balancing" of less-favourable and more-favourable treatment,
observingthat"suchan interpretationwouldlead togreat uncertaintyaboutthe conditionsofcompetition
between imported and domestic products and thus defeat the purpose of Article III".73 Similarly, in
the panel report on US - Malt Beverages report, the panel observed that "Article III...requires treatment
of imported products no less favourable than that accorded to the most-favoured domestic products".74
Thus, the fact that imported and domestic split-run magazines receive the same tax treatment is irrelevant.
Rather, thefact thatimportedsplitrunmagazines aretaxed more heavilythanlikedomestic non-split-run
magazines establishes the requisite higher taxation under Article III:2, first sentence.
3.107 According to the United States, the fact that Article III:2 is phrased in terms of "products"
does not mean that tax discrimination with respect to one product is outside the scope of Article III:2,
or that such discrimination would be GATT-consistent as long as it is restricted to one product. In
thiscase the drafters clearly intendednondifference between the treatment of the pluraland the treatment
of the singular. This fact is confirmed by the drafting of the Note Ad Article III (which refers to the
"like domestic product" and the "imported product") and Article III:3, a special case of application
of Article III:2 which refers to the "taxed product". The 1970 Working Party report on Border Tax
Adjustments, which is often referred to in this connection, uses the singular and plural forms in free
variation. It is not necessary to demonstrate that all imported magazines are taxed more heavily than
all domestic like magazines, or even that the average tax on all imported magazines is higher than the
average tax on all like domestic magazines.
3.108 Finally, Canada’ s proposed "discriminatory effect" test appears to be based on predictions of
the level of future trade flows. It iswell-establishedthatArticleIII is notdesignedtoprotectexpectations
of relative trade flows, but rather to ensure equal competitive conditions for imported products.
Moreover, in this case, the type of effects analysis Canada suggests would be impossible. There is
no basis for judging future levels of split-run magazine imports because Canada has completely eliminated
73Panel Report on United States - Section 337 of the Tariff Act of 1930, op. cit., at para. 5.14.
74Panel Report on United States - Measures Affecting Alcoholic and Malt Beverages, op. cit., para. 5.17.

them from its market for the last 30 years. Given its GATT-inconsistent ban, Canada should not be
permitted to defend the excise tax on grounds that a small volume of imports would be subject to it.
3.109 Canada responded that itsinterpretation of discrimination underArticle III:2 wouldnot require
any overall balancing test as the United States stated. It would not require prediction of trade flows
and is not an aim-and-effect test in another guise. It says only that if the fiscal categories of a contracting
party are origin-neutral and exhibit no inherent bias against imported products, then the mere existence
of suchcategories, withdifferentialrates of taxation,doesnotviolateArticleIII:2. A simplifiedexample
illustrates this point. Suppose raspberries are taxed higher than strawberries, and that all red berries
are determined to be like products. Under the Canadian view, there is no violation if the two categories
apply to both imported and domestic products and there is no inherent bias against imported products.
The United States would say there is a violation because a box of imported raspberries is taxed higher
than a box of domestic strawberries. This is accurate only if a single instance of differential taxation
creates a violation. Canada submits that there is no violation because imported products as a class
are not being subjected to excess taxation over domestic products. The US interpretation leads to results
that are close to absurd and would not reflect the language of Article III:2, first sentence, in particular
the use of the plural, nor its object and purpose which is non-discrimination or more specifically to
protect expectations of the competitive relationship between imported and domestic products. Further,
in the Japan - Alcoholic Beverages case, it is clear from paragraph 5.19 of the report that the panel
based its findings on the assumption that shochu was largely a domestic product.
3.110 The United States responded that Canada's attempt to distinguish this case from the Japan -
Alcoholic Beverages case based on the fact that most shochu was produced domestically in Japan, while
in this case one could not show that split-run magazines have a comparable import focus, is inappropriate.
Canada has banned the relevant imports. Of course there is no preponderance of imported split-run
magazines overdomestic split-runs. There isalsonobasisfor judgingfuture levelsof split-runmagazine
imports because Canada has completely eliminated them from its market for the last 30 years. Given
its GATT-inconsistent ban, Canada should not be permitted to defend the excise tax on grounds that
a small amount of imports would be subject to it, or that a small percentage of split-run magazines
would be imported. Moreover, the United States contested Canada’ s claims that the US argument
would prevent differential taxation of strawberries and raspberries, if the two fruits were found to be
like products. In fact, the distinction the excise tax draws is not analogous to distinguishing between
raspberries and strawberries (which are different fruits), but is instead analogous to distinguishing between
raspberriesand raspberries. Specifically,itisanalogoustodistinguishingbetweenraspberriesproduced
in fields whose harvest is sold only in one country, and raspberries produced in fields whose harvest
is sold in multiple countries.
(b) Article III:2, second sentence
Directly competitive or substitutable
3.111 The United States argued that in the event the Panel does not find split-runs and non-split-runs
to be "like products" for purposes of Article III:2, first sentence, it should find them to be "directly
competitive or substitutable" products within the meaning of Article III:2, second sentence, of GATT
1994. The Appellate Body in Japan - Alcoholic Beverages provided that, in assessing an allegation
of a violation of Article III:2, second sentence, one must examine whether:
"(1) the imported products and the domestic products are "directly competitive or
substitutable products" which are in competition with each other;
(2) the directly competitive or substitutable imported and domestic products are "not
similarly taxed"; and

(3) the dissimilar taxation of the directly competitive or substitutable imported [and]
domestic products is "applied . . . so as to afford protection to domestic
production".75
Canada has not challenged the fact that split-runs and non-split runs are "not similarly taxed". The
80 per cent tax applies solely to split-runs. Split-runs and non-split runs are "directly competitive or
substitutable", and the excise tax is "applied so as to afford protection to domestic production". Thus,
the excise tax violates Article III:2, second sentence.
3.112 The Appellate Body in Japan - Alcoholic Beverages indicated that "directly competitive or
substitutable" products was a "broader category" of products than "like products" in Article III:2.76
The Appellate Body observed that it was appropriate to examine such factors as physical characteristics,
common end-uses, tariff classifications, and the "market place", but that the "decisive criterion" in
determining whether products were directly competitive or substitutable was "common end-uses".77
Split-runs and non-split runs compete in the Canadian market and have common end-uses. Magazines
covering the same general subject matter - e.g., current events magazines, hobby magazines, technical
journals - compete with each other whether or not they are split-runs. Whether a magazine is split-run
or not cannot be determined simply by examining the magazine, but is based, instead, on how similar
the magazine is to a magazine sold outside Canada in another country. Split-runs, as defined by the
excise tax, do not differ from other magazines in any way related to their ability to compete with other
magazines. Indeed, the excise tax is applied precisely, and solely, because split-runs compete with
wholly domestically produced magazines for readers and advertising. As discussed above with respect
to the issue of like product, the distinction between split-runs and other magazines is not based on
content. Even if one could somehow credit Canada’ s assertion that the content of non-split-runs has
more of a "Canadian perspective" than split-runs, this distinction could not possibly be considered
a different "end-use".
3.113 Canada argued that split-run edition periodicals are not "directly competitive with or substitutable
for" periodicals with editorial content developed for the Canadian market. Although they may be
substitutable advertising vehicles, they are not competitive or substitutable information vehicles.
Moreover, as mentioned above, the excise tax on advertising contained in split-run editions was not
introduced so as to protect the Canadian production of periodicals and it does not have this effect.
Rather, it was adopted to prevent an unfair practice in the advertising service sector. Under the second
sentence of Article III:2 and the Ad Article III, Paragraph 2, the complaining party must demonstrate
that a tax is being applied to imported products or domestic products that are "directly competitive
or substitutable" and that the tax is being applied "in such a way as to protect domestic production".
The complainant bears the burden of proof. The United States must therefore demonstrate that split-run
edition periodicals and periodicals with editorial content developed for the Canadian market are
competitive or substitutable products, and that the Parliament of Canada imposed the 80 per cent tax
on split-run edition periodicals in order to protect Canadian production of periodicals which are not
split-run editions.
3.114 The interpretation of this phrase shares many characteristics with the interpretation of "like
products". A case-by-case approach is required here as well – in other words, an interpretation that
takes account of all the relevant circumstances, and in particular the unique characteristics of cultural
products. It’ s also a multi-factorial analysis, as it is for like products as well – no single test is decisive.
To a significant extent, one takes account of all the factors that go into a like products determination,
75Appellate Body Report on Japan - Taxes on Alcoholic Beverages, op. cit., at 24 (emphasis in original).
76Ibid., at 25.
77Ibid. (emphasis added).

including properties and end-uses. Because of this common ground, many of the points Canada has
made in the context of like products, and how the concept has to be adapted to reflect the special nature
of cultural products, are also relevant here.
3.115 Canada noted the United States' unsubstantiated assertion that split-runs and other magazines
clearly compete witheach other. Theydoof course compete for the advertisingdollarbecause a split-run
recycling foreign content offers a far cheaper vehicle. But competition for advertising is not the issue
and is not subject to GATT 1994 disciplines. The only legitimate focus is competition in the consumer
marketplace. And the United States has not demonstrated, as it is required to do, that the products
at issue are competitive or substitutable, or that they meet the threshold test implied by the word
"directly". Substitution implies interchangeability. Once content is accepted as relevant it seems obvious
that magazines created for different markets are not interchangeable. They are not substitutes, and
certainly not direct substitutes. They serve different end-uses. Canadian periodical consumers have
a demand for periodicals containing information that specifically addresses their interests. Canadian
magazines contain information developed for and directed to the interests of Canadian consumers over
a broad range of genres. Split-runs and magazines with editorial material developed for the Canadian
market cannot be considered direct substitutes as information vehicles; and for the same reason they
are not in direct competition. Ultimately, of course, there may be some degree of competition for
disposable income between all cultural products and all luxury products – for everything beyond the
necessities of life – but this is far too remote. It is not direct competition and it does not therefore
fall within the rule. There would not be 1440 different magazine titles produced in Canada alone if
the products were directly substitutable, or directly competitive, in the sense contemplated by the
Ad Article to Article III:2.
3.116 Without embarking on an exercise in economic analysis, there are important respects in which
price and demand comparisonsare more complicatedinthe caseof magazinesand otherculturalproducts
than in the case of ordinary commodities. It is not the same as comparing consumer behaviour in
response to price changes on a bottle of shochu and a bottle of vodka. There are too many qualitative
differences in the case of magazines. To give one example, if the ratio of editorial content to
advertisements decreases this can be the same as a price increase. That is a fairly objective, measurable
variation, but other qualitative differences of equal importance can also have an effect tantamount to
a price change – the quality of the content, the attractiveness of the graphics, the intrinsic interest of
the articles.
3.117 The United States considered that the very existence of the tax was itself proof of competition
of split-runsand non-split-runsinthe market. Canada wouldnothave gone tosuchextraordinarylengths
to keep split-runs out of its market if they did not compete with other magazines in the Canadian market.
As Canada itself has acknowledged, split-runs compete with wholly, domestically produced magazines
for advertising revenue, which demonstrates that they compete for the same readers. The only reason
firms place advertisements in magazines is to reach readers. A firm would consider split-runs to be
an acceptable advertising alternative to non-split-runs only if that firm had some reason to believe that
the split-run products themselves would be an acceptable alternative to non-split-runs in the eyes of
readers. According to the United States, Canada acknowledges that "[r]eaders attract advertisers",
and that: "The Canadian publishers are ready to compete with magazines published all over the world
in order to keep their readers, but the competition is fierce".
3.118 The Report of the Task Force on the Canadian Magazine Industry provides further
acknowledgment of the substitutability of magazines produced for the Canadian market and other
magazines:
"[Canadian publishers'] English-language consumer magazines face significant competition
for sales from imported consumer magazines. In large measure, this is because the majority

of the magazines are from the United States and are a close substitute. ...It is reasonable to
expect that the content of American magazines will be of interest to Canadians...".
Thisreportalso observesthat"there isconsiderable price competition"onnewsstands between domestic
and imported magazines",78 and that:
"the initial effect of the entry of Canadian regional editions of foreign magazines into the
Canadian advertising market would be a loss of advertising pages in Canadian publications
offering advertisers a readership with similar demographics".79
Minister of Canadian Heritage the Honourable Michel Dupuy described the situation as follows:
"Canadians are much more interested in American daily life, be it political or sports life or
any other kind, than vice versa. Therefore, the reality of the situation is that we must protect
ourselves against split-runs coming from foreign countries and, in particular, from the United
States".80
Canadian Government officials have repeatedly acknowledged outside this proceeding the close
substitutability and competitiveness of split-run and non-split-run magazines. Canada affirmed this
fact where it refers to domestic and imported magazines competing for readers. Furthermore, Canada
admits that split-run and non-split-run magazines compete for advertising; this itself demonstrates that
the two are directly competitive and substitutable, since carrying advertising is a principal to which
magazines are put.
3.119 Canada argued that the US reference to the Task Force in the preceding paragraph does not
look into the supporting evidence. The evidence before the Task Force, on which its conclusions were
at least partially based, was a study by the economist Leigh Anderson81 which states:
"US magazines can probably provide a reasonable substitute for Canadian magazines in their
capacity as an advertising medium, although some advertisers may be better served by a
Canadian vehicle. In many instances however, they would provide a very poor substitute as
an entertainment and communication medium".
The report went on to characterize the relationship as one of "imperfect substitutability" - far from
the direct substitutability required by this provision. The market share of imported and domestic
magazines in Canada has remained remarkably constant over the 30-plus years between the O'Leary
Report and the Task Force. If competitive forces had been in play to the degree necessary to meet
the standard of "directly competitive" goods, one would have expected some variations. All this casts
serious doubt on whether the competition or substitutability is sufficiently "direct" to meet the standard
of Ad Article III.
78Task Force Report at 40 and 42.
79Ibid., at 53.
80Statement of Minister of Canadian Heritage Michel Dupuy before Canada's Standing Senate Committee on Banking,
Trade and Commerce, 5 December 1995, Issue No. 50 at 14.
81Anderson, Leigh, An Analysis of Advertising Revenues to the Canadian Magazine Industry: the effect of foreign
split-run magazines (19 January 1994). Prepared by Leigh Anderson for the Task Force on the Canadian Magazine Industry.

So as to afford protection to domestic production
3.120 The United States argued that the excise tax is applied so as to afford protection to Canadian
magazine publishers. In Japan - Alcoholic Beverages, the Appellate Body indicated that proof of
protective intent is not required in order to establish a violation of the second sentence of Article III:2,
and that the issue is "how the measure in question is applied":
"Although it is true that the aim of a measure may not be easily discerned, nevertheless
its protective application can most often be discerned from the design, the architecture,
and the revealing structure of a measure. The very magnitude of the dissimilar taxation
in a particular case may be evidence of such a protectiveapplication, as the panel rightly
concluded in this case. Most often, there will be other factors to be considered as
well ...".82
3.121 The Canadian excise tax clearly affords protectiontodomestic production of magazines directed
at the Canadian market. It applies in a manner that effectively eliminates from the Canadian market
split-run magazines, which compete directly with and are close substitutes for magazines produced
solely for the Canadian market. The "very magnitude of the dissimilar taxation" - an 80 per cent tax
on the former and no tax on the latter - is proof of the protective application of the Canadian excise
tax, as it applies only to split-runs and is set at a prohibitive level. The structure and design of the
excise tax are clear: the tax makes it uneconomical to sell any magazines that advertise to Canadians
and that are produced for another market or for both Canada and another market. The measure thereby
insulates the domestic Canadian magazine industry from competition from imported split-runs. The
terms of the tax were crafted deliberately to target Sports Illustrated magazine, to direct advertising
revenues solely to domestically-produced magazines, and to eliminate the competitive advantages
conferred on split-runs by virtue of their economies of scale. Sports Illustrated Canada ceased publication
in Canada with the issue dated 12 December 1995. Time Warner continues to sell subscriptions of
the US national edition of Sports Illustrated in Canada and also sells the US edition of Sports Illustrated
on the newsstands in Canada. These copies are printed in the United States and exported to Canada.
3.122 Canada argued that it is not applying the excise tax to imported periodicals so as to afford
protection to the Canadian production of periodicals. Part V.I of the Excise Tax Act has no effect
on the ability of foreign periodicals to enter Canada and to hold a very large share of the Canadian
market. The Excise Tax Act applies to all split-run periodicals – wherever produced – in the same
way. Contrary to the US contention, the purpose of Part V.I of the Excise Tax Act is not to protect
the production of periodicals in Canada, but to prevent the diversion of advertising revenues to magazines
based on content produced for foreign markets, and thus to ensure the production of editorial content
for Canadians.
3.123 The purpose of Article III is to protect the competitive relationship between domestic and
imported goods. As stated in the report on United States - Taxes on Petroleum and Certain Imported
Substances:
"... 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 the competitive relationship
between their products and those of the other contracting parties".83
82Appellate Body Report on Japan - Taxes on Alcoholic Beverages, op. cit., at 28, 29.
83Panel Report on United States - Taxes on Petroleum and Certain Imported Substances, op. cit., at 160, para. 5.2.2.

Therefore, when Article III:1 specifies that a contracting party must not adopt measures "so as to afford
protection to domestic production", the object is to prevent the adoption or maintenance of measures
that protect domestic products to the disadvantage of products imported from the territory of another
party.
3.124 Part V.I of the Excise Tax Act is not a protectionist measure adopted "so as to afford protection
to domestic production" for the following reasons:
(a) It does not affect the competitive relationship between imported and domestically-
produced periodicals;
(b) it is not based on the physical origin of periodicals, which is what is contemplated by
the reference to "domestic production"; and
(c) far from having a protectionist aim, it is a legitimate response to an anti-competitive
abuse in the advertising field, with the ultimate object of ensuring the survival of a
distinct Canadian culture.
3.125 Because GATT 1994, including Article III, applies to trade in goods, the expression "domestic
production" must refer to the physical production of the good. This refers to its manufacturing,
cultivation, extraction, etc. Article III of GATT 1994 cannot address the competitive relationship between
service-providers such as the authors and artists contributing to the intellectual material contained in
periodicals. Nor does it protect the competitive relationship between publishers in their capacity as
sellers of advertising space. In terms of physical production, the sole perspective that is relevant to
Article III, Part V.I of the Excise Tax Act is entirely neutral. It does not have the effect of protecting
the production of periodicals in Canada; indeed its principal target was the production in Canada of
split-run magazines as defined in the Act.
3.126 The measure has valid policy objectives that fit within what the US - Malt Beverages decision
called a "public policy purpose" that is consistent with Article III. The immediate objective of Parliament
was directed against the aggressive marketing of advertising services in Canada by publishers who
were recycling in Canada editorial material whose production costs had already been covered in a larger
market. The net result of this practice was to cut into the small share of the advertising market available
to Canadian publishers, who were producing editorial content specific to Canadians. Part V.I of the
Excise Tax Act was drafted in such a way as to curtail this advertising practice and not so as to prevent
the entry into Canada of foreign periodicals or in such a way as to disadvantage foreign periodicals
in the Canadian market.
3.127 Canada noted that it had never intended to decrease the level of competition between imported
and domestic magazines. On the contrary, the members of the Task Force on the Canadian Magazine
Industry wrote: "We are convinced that what is being proposed interferes as little as possible with
freedom of expression or choice. Indeed, in the final analysis, we are seeking to expand choice by
ensuring the continued availability of magazines with original content".84 These measures did not prevent
and were not intended to prevent foreign periodicals from competing in the Canadian market on an
equal footing with Canadian periodicals.
3.128 Further, the United States has completely misrepresented the true trade position. There is an
enormous penetration of American magazines in Canada, and nothing in the Canadian tax measure
would change this or is designed to change this. Nor are there any significant trade effects to the
84Task Force Report at 64.

measure. This tax concerns a very narrow segment of the total number of American periodicals
streamingacross the border daily. This very narrow segment was affected inthe same way that a narrow
segment of Canadian periodicals was affected. And this narrow segment of both the Canadian and
the US industrywas affected because the Parliament of Canada believed that a certain practice, a services
practice, had to be discouraged.
3.129 Protectionismmeansprotectionagainstimportedproducts. Thereisnoprotectionistapplication
to be found in a measure that is not aimed at imported products as such, and that does not in fact have
a disproportionate impact on imported products. The excise tax is not aimed at imported split-runs
and – more important – it has (or would have) no greater effect on imported split-runs than it does
on domestically produced magazines of the same kind. There is no doubt that the tax insulates Canadian
magazines from a certain form of competition in the advertising sector. It does not, however, insulate
Canadian producersfrom competitionresultingspecificallyfrom importedsplit-runs. The UnitedStates
has fundamentally mischaracterized the situation when it says "the measure...insulates the domestic
Canadian magazine industry from competition from imported split-runs". This is not the effect of the
tax. It affects split-runs in general, not just imported products. It is wrong to think of split-runs as
an inherently or a presumptively imported product. The actual effect of the tax in practice has so far
been very clear. It caused Sports Illustrated to move its production for the Canadian market out of
Canada and back to the United States. The effect was to substitute imported products for domestic
products. This is exactly the opposite of what is understood by protectionism. Even apart from what
happened in the case of Sports Illustrated, the local production of a split-run – a regional edition –
makes eminent business sense.
3.130 The United States considered the protectionist nature of the tax is evident from its confiscatory
character, the statements of the Canadian Government regarding the tax both before and after its
enactment, and from the manner in which it applies. The effective date of the tax was deliberately
set to eliminate the split-run edition of Sports Illustrated magazine. The tax applies only to those split-
runs that began publication after 26 March 1993, a few weeks before Sports Illustrated launched its
Canadian split-run edition, but more than two years prior to enactment of the tax. The excise tax applies
in a manner that inherently favours Canadian-based producers, who are much more likely than foreign
producers to publish magazines directed solely at Canadian readers. Foreign-based producers who
wish to expand operations by entering the Canadian market must create a new magazine for distribution
exclusively in Canada (or sell their foreign editions in identical form in Canada). The Canadian magazine
tax is designed to ensure that foreign-based publishers forego the commercially attractive option of
publishing a split-run edition of an existing magazine for the Canadian market. In introducing the
excise tax bill to the House of Commons, Minister of Canadian Heritage Michel Dupuy asked, "Why
is this tax necessary?", and answered: "Canadian publishers would be at a grave disadvantage if they
were forced to compete for advertising revenues with magazines that have recovered their editorial
costs in markets which are much larger than the Canadian market".
3.131 Mr. Dupuy’ s reference to "markets which are much larger than the Canadian market" was
undoubtedly a reference to the United States, whose production of Canadian-edition split-runs was
significant prior to the 1965 import ban, and whose potential for re-establishing split-run editions in
the Canadian market was the basis for the imposition of the excise tax in 1995. The 1961 O’ Leary
Report, which preceded the import ban, noted that there were 76 US magazines offering split run or
regionaleditionsinCanada.85 In 1994the Government-appointedTaskForce onthe Canadian Magazine
Industry concluded that it in the absence of additional legislation it was highly likely that a significant
number of US split-runs would be sold inCanada. The Task Force estimated thatthere were 53potential
US consumer magazine entrants into the Canadian market, and 70 potential US business and trade
85Report, Royal Commission on Publications, May 1961 ("O’ Leary Report") at 36.

magazine entrants, and that the majority of these would actually enter the Canadian market.86 (By
contrast, although the Task Force report describes in some detail the structure of the Canadian magazine
industry, it makes no mention of the existence of split-run editions of Canadian publications.) The
effect of the 80 percent excise tax is to keep the potential US entrants out of the Canadian market,
whether they choose to transmit their magazines electronically for printing in Canada or - should
Canada’ s GATT-illegal import prohibition be removed - to import them. By its terms, the tax applies
to all split-runs, whether imported or domestically-produced. The tax makes it unprofitable for split-runs
to be sold in Canada. Indeed, this is the whole - and the stated - purpose of the tax. As Minister
Dupuy stated: "[The tax] could be designed and implemented in order to avoid split run editions".87
3.132 The Canadian argument that the tax is not applied so as to afford protection because it is
reasonable to assume that, in the absence of the import ban, split-runs would be published in Canada
as much as inthe United States was dubious as a factual matter. More importantly, it is legallyirrelevant
because the tax protects domestic non-split-runs from competition from imported split-runs. The
appropriate comparison is between the treatment of imported split-runs and domestic non-split-runs,
not between domestic and imported split-runs. "Article III...requires treatment of imported products
no less favourable than that accorded to the most-favoured domestic products"88, not the least-favoured.
Further, regardless of what Canada's legislators may have intended, the tax does apply, by its terms,
to imported split-run magazines. If the import ban were lifted, it would have an immediate and
exclusionary effect on imported split-runs.
3.133 In itsargument thatits excise tax on split-runmagazines ismeant to addressan "anti-competitive
abuse in the advertising field", Canada has completely failed to indicate in what way split-run magazines
constitute such an abuse, why it has concluded that all, as opposed to some such magazines represent
such an abuse, and why its has chosen to apply a tax measure to address such abuses. It is apparent
that the "anti-competitive abuse" Canada is concerned about in connection with split-run magazines
is competition itself. Canada’ s real quarrel with split-runs is that they are produced in a manner that
takes advantage of economies of scale, in which costs are spread out over a greater number of units
produced. This means simply that split-run producers may have a lower cost structure than other
producers, which may put them at a competitive advantage.
3.134 Competitive advantage is not competitive abuse, however. Canada has well-developed
competition laws to address any such abuses. If Canada were truly interested in remedying competitive
abuses, it would have employed those laws. Those laws do not permit application of remedies in a
vacuum, however. They require a detailed analysis of the conduct of particular actors and their position
in the market, and do not have as their goal the removal of entire product categories from the market.
Indeed, it would be difficult to imagine a less pro-competitive remedy than one that effectively removes
competing products from the marketplace.
3.135 Further, Canada’ s claim that marketing split-runs in Canada is akin to dumping is equally
untenable. Dumping is generally understood to mean pricing products in a foreign market below the
sales price in the home market, or selling products below cost. Canada has not alleged either such
practice in this case. There are well-developed WTO procedures for conducting anti-dumping
investigations and for determining dumping margins. These procedures do not allow for imposition
of duties in arbitrary amounts (e.g., 80 per cent) across the entire range of imported products on the
basis of legislative fiat.
86Task Force Report at 50-52.
87Commons Debates at 14790
88Panel Report on United States - MeasuresAffecting Alcoholic and MaltBeverages, op. cit. para. 5.17 (emphasis added).

3.136 Canada argued that protection is afforded to domestic production for the purpose of Article
III:2, second sentence, if there is a "discriminatory or protective effect against imported products".
"Imported products" means products physically transported into the territory of a Member. The United
States concedes that the Sports Illustrated innovation that led to the legislation involved a domestic
product,wheretheonlything"imported" wasthe electronically-transmittedforeigncontent. The United
States has thus conceded, in the case of Sports Illustrated Canada, that there was no discrimination
orprotectiveeffect againstimportedproducts. It followsthat"foreign based" split-runsare notimported
products if they are printed and published in Canada.
3.137 The Excise Tax Act thus applies to domestic and imported products without distinction, and
it is primarily aimed at a form of domestic product. While the tax secures advertising revenues for
Canadian publishers, protection in the sense of Article III:1 as read into III:2 means protection against
imported products. As the preceding paragraph has shown, split-runs are not intrinsically imported
products. Even if there were no import prohibition, given the economies of local production and
distribution and the ease of electronic transmission, it is likely that most split-runs would be locally
produced. It is highly significant, moreover, that, as the United States noted in response to a question
at the hearing, the effect of the tax was to induce Sports Illustrated to cease its Canadian production
and to resume direct imports from the United States. The substitution of imports for domestic products,
as the result of a public policy measure, is the direct opposite of what almost everyone understands
by protectionism. It suffices by itself to refute the contention that the Excise Tax Act operates to "afford
protection to domestic production".
3.138 The excise tax measure is designed to prevent the diversion of advertising to low-cost publications
reproducing recycled editorial content, at the expense of publications created for Canadians. It does
not guarantee the survival of Canadian magazines that the public does not want. What it targets, very
simply put, is the combination of recycled editorial content plus Canadian advertisements. This
combination, because the crucial input of content comes with minimal cost, is destructive of fair
competition in the market place and consumer choice. It eliminates any possibility of a "level playing
field". It would lead ultimately to a reduction of material dealing with the Canadian scene and in turn
to a Canadian public that is less well-informed on Canadian affairs. These are not only legitimate
legislative concerns; they are far removed from the idea of protecting domestic production which is
referred to in Article III. Ultimately, of course, the concern behind this legislation is with the
preservation of Canadian culture in the face of an extraordinary challenge from across the border.
It is not Canadian public policy to restrict the importation or circulation of imported magazines. It
does, however, reinforce the validity of the distinction Canada makes between original content and
domestic production as one that is based upon a public policy purpose that has nothing to do with trade
protectionism. Split-run editions of magazines compete unfairly for advertising revenues with regular
magazines, since their editorial costs are largely paid for in their original market.
3.139 As to the United States' inquiry why Canada failed to apply the WTO dumping procedures,
thoseprocedures, and the Canadian domestic legislation thatimplements them, have never been applied,
and would probably not even be applicable, to advertising as a service sector not covered by GATT.
The United States also asks, in effect, why Canada has not used the Canadian Competition Act. There
is no reason why specially-tailored measures cannot be adopted for specific sectors of the economy
that have their own unique characteristics. Competition issues in Canada have never been reserved
exclusively to the Competition Act. They are addressed, in the context of specific sectors, through
a variety of regulatory statutes. Split-runs and the magazine advertising market are unique. There
is no reason why their problems should not be addressed through special legislation. And there is
no reason why that legislation should not take the form of a tax. Fiscal incentives and disincentives
that have little or nothing to do with raising revenue – ranging from child tax credits to super-depletion
allowances – are familiar techniques in Canadian legislative practice.

3.140 The United States asserted that,inadditiontocharacterizations byCanadian officials, Canada's
submissions to the Panel themselves confirm that the excise tax was structured to protect domestic
production. A statement in Canada's submission is instructive:
"The object of the excise tax is not to discourage readership of foreign magazines, but to
maintain an environment in which Canadian magazines can exist in Canada alongside with
imported magazines. It is also intended to foster conditions in which indigenous magazines
can be published, distributed and sold in Canada on a commercial basis..."(emphasis added).
Although couched in the best possible light, this statement does not disguise the fact that the purpose
of the excise tax is to protect Canadian magazines from import competition. It appeared to be Canada's
position that because it does not completely restrict imports of magazines, it should be free to impose
certain import barriers to benefit its domestic industry. There is absolutely no basis in GATT for this
position. Canada's contractual obligations under GATT Article III are not limited to affording a certain
amount of national treatment to imports; Canada must provide full national treatment, comparative
tradeadvantages(i.e.toprotectdomesticproducersfromlegitimateimportcompetition). Tariffs (within
bound rates) and certain types of domestic subsidies are among the permitted measures. Internal taxes
imposed at rates higher for imported products than domestic like products are not. Moreover, Canada's
submissions consistently imply an import penetration much higher than it actually is. Canada's Task
Force Report states that , in reality, "Canadian publications account for 67.6 per cent of the magazines
sold in Canada in a year".
3.141 Canada asserts repeatedly that the excise tax is designed to encourage "original content", as
though such a purpose would justify imposition of a discriminatory excise tax. In fact, the whole notion
of "original content" is protectionist in nature. Permitting a Member to require that a product be sold
in its territory be a different product than that sold abroad would open up the WTO system to serious
abuses. For example, a Member concerned about the ability of a local industry to compete with foreign
manufacturers of the same product (automobiles, footwear, jewellery, etc.) could impose a prohibitive
tax - on the pretext of ensuring that local consumers can purchase products designed exclusively for
them - on "non-original" product designs, in order to keep foreign producers from exporting their best-
selling products to the Member's market. In order to sell into such a market, the foreign manufacturer
would be required to design products and set up new production lines exclusively for that market.
That would erase any scale efficiencies the foreign manufacturer might otherwise have gained from
sales in its domestic market and to other countries.
3.142 Canada considered that the US reliance on the concept of economies of scale is misplaced.
The concept is normally associated with large production runs, typically for an international market.
A local production run for a single regional market is by definition a relatively low volume production
run that does not fit the definition. What the legislation is against is not economies of scale but the
clearly unfair competitive advantage that comes from prepaid costs, providing what amounts to a free
ride in the Canadian advertising market. The US industry gets tremendous economies of scale through
its ordinary operations of publishing large runs in the United States for the international export market.
The US publisher is free to produce and then to promote and sell as many copies of the magazine in
Canada as possible. None of this is touched by the legislation. The tax does not insulate the domestic
Canadian magazine industry from competition for readers. Harper’ s, Sports Illustrated, and Vanity
Fair can all benefit fully from economies of scale of which a Canadian publisher, and in fact most
publishers outside the United States, could never dream.
3.143 The United States submits further that the "whole notion of original content" is protectionist
in nature, and that the policy has the same protectionist characteristics as if local product designs were
to be required. The argument is revealing, because it amounts to a blanket denial that cultural products
have any specificity that distinguishes them from ordinary items of trade. Content distinguishes one

magazine from another. Original content created for a specific national community differentiates
magazines in a way that product design seldom if ever does. The United States has raised a spectre
that is not only far-fetched; it is based on a false analogy, and a failure to recognize the distinctive
characteristics of cultural products, and of magazines above all. "Original content" does not have
to be domestically-produced. Canadian content, in terms of subject matter, does not have to be content
produced by Canadians or in Canada. Most often it will, but the assertion that "original content" is
inherently protectionist is incorrect.
(c) Article III:4
3.144 The United States argued that if the Panel decides that the excise tax does not fall within the
scope of Article III:2, the tax should then be viewed as a measure affecting the sale or use of split-run
magazines within the meaning of GATT Article III:4. The excise tax provides less favourable treatment
to imported split-runs than to like domestic non-split-runs and therefore violates Article III:4. The
excise tax clearly affects the sale of split-run magazines. In fact, it is set at a level so high as to prevent
any sales of split-runs in the Canadian market. Indeed, Canadian officials have repeatedly stated that
to be the purpose of the tax. An 80 per cent excise tax is obviously not intended to generate tax revenue.
The excise tax also affects the use of split-run magazines, by applying a prohibitive tax whenever they
are used to convey advertising to the Canadian public. Moreover split-run magazines and non-split-run
magazines are "likeproducts"for purposesof ArticleIII:2 and shouldthus be considered"like products"
for purposes of Article III:4 as well. The panel in US - Standards for Gasoline considered that similar
factors were relevant to like product analyses under paragraphs III:2 and III:4.89
3.145 Finally, the excise tax accords less favourable treatment to imported split-run magazines than
to other domestically-produced magazines. As discussed above, by its terms the tax applies to imported
split-runs. The excise tax treats imported split-runs less favourably than other purely domestic magazines
because it effectively prevents split-runs from being sold profitably in the Canadian magazine market,
and makes it effectively impossible for split-runs to be used to carry domestic advertising. Thus, if
the excise tax is not covered by Article III:2, it falls within the scope of, and is inconsistent with,
Article III:4.
C. Funded and Commercial Postal Rates
(i) Article III:4
"Regulations and requirements affecting the internal sale, offering for sale,
purchase, transportation, distribution or use"
3.146 The United States argued that Canada’ s postal rates for magazines are openly discriminatory
and in contravention of III:4 of GATT 1994. Canada Post is a Canadian Government entity that charges
domestic magazines lower rates (either "commercial" or "funded" depending on the magazine) than
it charges imported magazines that are mailed in Canada. Canada Post also offers certain discounts
(such as for "palletization" and "pre-sort") only to domestic magazines. These measures amount to
"regulations"or "requirements" that affect the internalsale, transportation, ordistribution of magazines
in Canada, and provide less favourable treatment to imported magazines than to like domestic magazines,
in violation of GATT Article III:4.
3.147 In the report on EEC - Parts and Components, the panel recognized that requirements that
an enterprise voluntarily accepts to gain government-provided advantages are nonetheless "requirements":
89Panel Report on United States - Standards for Reformulated and Conventional Gasoline, op.cit., para. 6.8.

"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
consideredthat the comprehensive coverage of "alllaws, regulationsor 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. . . ."90
Magazine publishers that sought to make use of the Canadian mails have to agree to pay the postal
fees charged by Canada Post. Those charges are requirements - or regulations - within the meaning
of Article III:4.
3.148 Canada Post’ s postal rates also clearly "affect" the sale, transportation and distribution of
imported magazines, because they specify the cost of using the services of Canada Post to transport
or distribute magazines to subscribers in Canada. A publisher seeking to have Canada Post transport
and distribute its magazines to subscribers in Canada - and virtually all subscription magazines sold
in Canada were distributed in this manner - would have to pay the postal fees prescribed by Canada
Post. The postalfees directlyaffected the competitiveconditionsunderwhichthe productistransported,
distributed, and sold to subscribers. These rates therefore "affect" the sale, transportation, and
distribution of magazines in Canada.91
3.149 Canada’ s discriminatorypostal rates have a particularimpact onthe transportation of magazines
inCanada. The drafters of GATTclearly intendedto include the rates charged for government-provided
transportation services under the disciplines of Article III. Canada Post’ s divergent postal rates are
not based on neutral economic considerations, but explicitly discriminatory criteria - namely, whether
the magazine is Canadian or foreign in origin.92
3.150 Canada underscored the importance of the distinction between the subsidized rates, those rates
available as a result of a subsidy granted exclusively to domestic publishers by Canadian Heritage,
and commercial publications rates, those rates available to all publishers (Canadian or otherwise) that
do not qualify for the subsidy granted by Canadian Heritage. Whereas the subsidized rates are the
result of an expressed intention on the part of the Government to assist domestic publishers (as
specifically permitted by GATT Article III:8(b)), the commercial publications rates are the result of
generally accepted commercial and marketing practices and are not influenced by government policy.
Unfortunately, the United States has failed to make this important distinction.
3.151 Canada Post is a corporation in its own right, with a legal personality distinct from that of
the Government, and considerable autonomy in the conduct of its operation; far more than would ever
be accorded to a government department. Canada Post is a Crown corporation and its objectives are
set out in the CPC Act. In addition, under the FA Act, as a Schedule III, Part II Crown Corporation,
Canada Post is expected to: operate in a competitive environment; earn a return on equity; not depend
on government appropriation; and finally, provide a reasonable expectation that it would pay dividends.
Both the CPC Act and the FA Act essentially establish a commercial mandate for Canada Post comparable
to a private sector interest.
90Panel Report on European Economic Community - Regulations on Parts and Components, op.cit., at 132, 197, para.
5.21, Italics in original. See also, “ Canada - Administration of the Foreign Investment Review Act” , adopted on 7 February
1984, BISD 30S/140, 158 para. 5.4.
91 Panel Report on Italian Discrimination Against Agricultural Machinery, adopted on 23 October 1958, BISD 7S/64
para. 12.
92The United States recommended the Panel to see also, U.S. - Malt Beverages (panel found that restrictions on private
delivery of imported, but not domestic beer, was inconsistent with Article III:4).

3.152 This legislative framework provides Canada Post with the legal and operational flexibility to
implement its commercially-oriented mandate. With respect to publications, i.e., newspapers and
periodicals, Canada Post is not a government monopoly and does not have the exclusive right of delivery.
Canada Post does not have the power of a monopoly when it sets commercial rates for the delivery
of publications.93 It competes in an open competitive market for its share of the publications delivery
market. Any publisher, foreign or domestic, is free to arrange for the delivery of his newspaper or
periodical via Canada Post or with any other distributor. Section 14(2) of the CPC Act states that
"[n]othing in this Act shall be construed as requiring any person to transmit by post any newspaper,
magazine, book, catalogue or goods". Pursuant to Section 2 of the Act,"post" means to leave in a
postoffice orwitha personauthorizedbythe Corporation toreceive mailablematter. Foreignpublishers
have the additional option of mailing their copies addressed to Canadian addresses with their own postal
administration at the applicable international printed matter rates.
3.153 The principle of national treatment of Article III:4 of GATT 1994 does not apply to the
commercial postal rates charged by Canada Post. The United States contends that commercial rates
set by Canada Post are "regulations" or "requirements" affecting the internal sale of imported
publications. The term "regulation" in the context of GATT 1994 means the rules or orders having
the force of law that are issued by executive or administrative authorities of government. The rates
for the delivery of letters in Canada are set by regulations.94 However, the commercial rates for
publications are set by market forces and fluctuate with commercial imperatives – not to mention that
in many cases they are the result of negotiations with both domestic and international large volume
customers pursuant to specific agreements. The responsibility for setting those rates rests exclusively
with senior management of the Corporation who exercise their discretion based on commercial principles
without government intervention.
3.154 The term "requirement" in the context of GATT also implies a demand or direction proclaimed
by an authority within government. Again, commercial imperatives and market forces dictate the
commercial rates for publications charged by the Corporation to its customers. The government has
never issued a directive to the Corporation regarding publications mail. The Corporation's prices are
set to meet market demands and opportunities (as in the case of any private sector company), and are
clearly not the product of "laws, regulations or requirements" of Canada. It is incorrect to suggest,
as does the United States, that the differential between the commercial rate provided to Canadian
publishers and the commercial rate provided to non-Canadian publishers is calculated to place non-
Canadian publishers at a competitive disadvantage. Canada Post has no policy of giving a competitive
advantage to one segment of its customers over another, and has no interest in pursuing any such practice.
For their part, customers have access to competing delivery channels and, as in all open markets, have
the ability to negotiate rates in a manner reflecting their purchasing power.
3.155 The international commercial rates reflect the reality that suppliers in any competitive market
would attempt to obtain the best possible price. Pricing is set to maximize contribution while remaining
competitive. Factors such as the availability and cost to customers of competing distribution channels,
currency exchange rates, service standards, etc., are all taken into consideration by Canada Post (as
would any company in a competitive market) when setting its pricing. As a Crown corporation with
a commercial mandate, Canada Post operates on the same basis as a private sector interest. The
commercial postage rate applicable to non-Canadian publications is set on the basis of the commercial
93Canada added that Canada Post does have a limited exclusive privilege with respect to the collection, transmission
and delivery of "letters" in Canada, including addressed advertising mail. This exclusive privilege represents in aggregate
approximately 50 per cent of total corporate revenues. Canada Post has no statutory protection for the remainder of its business
and must compete with existing or potential competitors, as the case may be. The Corporation's exclusive privilege is defined
in Section 14 and 15 of the Canada Post Corporation Act.
94Letter Mail Regulations, SOR/88-430 as amended to April 30, 1996.

business reality that the next-best option faced by mailers of publications that are printed outside Canada
is the much higher international rate charged by the postal administration in the country of publication.
In the case of publications from the United States, this means a rate for deposit in Canada with Canada
Post that is about half of what they would have to pay the United States Postal Service (USPS) for
delivery of the same items to Canada. The commercial mandate given to Canada Post requires it to
obtain the best possible rate in order to maximize its returns.
3.156 Almost half the direct-deposit foreign periodicals business Canada Post receives is contracted
throughspecific agreements, negotiatedona case-by-case basissubjecttocustomer- and market-specific
needs and opportunities as opposed to generic pricing policies. Canada Post's commercial pricing
policies are determined by the demands of the markets in which it operates and not by governmental
directives or public policy considerations. In the case of commercial publications, there is no direction,
instruction or any other obligation to provide this service or to provide this service at certain rates.
This means that the management of Canada Post is free to establish commercial services and rates for
publications purely on commercial principles and market realities so as to maximize the financial
advantage to Canada Post providing such commercial publication services. The decision to maintain
a separate, higher rate for international as opposed to Canadian commercial publications is made purely
by Canada Post management for commercial reasons and in no way reflects any explicit or implicit
request by government that Canada Post use its rate structure to disadvantage foreign commercial
publications relative to Canadian commercial publications. The Canadian Government could express
its views on commercial and international rates much in the same way it might choose to comment
on pricing of a private sector firm. However, to compel change, the Government would have to instruct
Canada Post under the directive power in Section 22 of the CPC Act. Indeed, Canada Post has received
noinstructionoradvice – implicitorexplicit– to setinternationalcommercial rates in excess of domestic
commercial rates for periodicals. This action is of Canada Post's own creation based on its perception
of market opportunity.
3.157 The United States argued that the Government of Canada is responsible for Canada Post's
activities, including its so-called commercial postal rates. Canada's argument implicitly concedes that
Canada Post is a governmental entity, and exercises a governmental function, when it applies "funded"
(subsidized) postal rates to, and provides for the delivery of, certain domestically produced magazines.
Canada seeks to convince the Panel that Canada Post sheds its governmental character when it applies
its so-called "commercial" rates and provides for the delivery of magazines subject to those rates.
3.158 Canada Post is a wholly, government-owned, government-created chartered body, subject to
the controlof a boardof directorsappointed bythe Minister responsible for Canada Post. (The existence
of a Government Minister responsible for Canada Post is further proof that Canada Post is an arm
of the Canadian Federal Government.) The Chairman of the Board and the President of Canada Post
are both appointed by the Governor-in-Council. Section 5(2)(e) of the CPC Act provides explicitly
that Canada Post is "an institution of the Government of Canada". The Canadian Parliament created
Canada Post and fixed its operating mandate. Moreover, Canada Post’ s mandate to operate, in part,
on a "commercial" basis is itself set by the Government. An important oversight role is played by
the Minister responsible for Canada Post. In "The Mandate of Canada Post Corporation and its
Development", Canada acknowledged that: "Section 22 of the CPC Act provides that Canada Post
is required to comply with directions issued by the Minister responsible for the corporation. This gives
the Minister powers analogous to those exercisable by shareholders of other privately held corporations
through unanimous shareholders agreements".95 Thus, Canada Post is entirely a creature of the Canadian
Government, subject to its direct supervision and control.
95"The Mandate of Canada Post Corporation and its Development".

3.159 Recent events confirm that the Canadian Government considers Canada Post tobe a government
entity fully subject to Canadian Government direction, and a vehicle for the expression of Government
policy- includingthroughCanada Post’ s"commercial" operations. On 8 October 1996,Diane Marleau,
the Minister responsible for Canada Post Corporation, presented the Canadian Government's reaction
to a report issued by an independent task force chaired by Mr. George Radwanski (the "Radwanski
Report"). The report addressed financial and policy issues related to the future of Canada Post.
3.160 The Radwanski Report was highly critical of Canada Post and, inter alia, charged Canada Post
with engaging in unfair competition with its private sector competitors in the delivery of commercial
services, such as courier and advertising mail services.96 In her press conference responding to the
report, Ms. Marleau stated:
"I want to emphasize that the government regards Canada Post as a significant federal
institution, and that it sees Canada Post continuing to carry out a public policy role based
on the provision of mail to all Canadians, no matter where they live...The federal government
is expected to embody certain values and principles in how it carries out its affairs, in particular:
fairness, transparency, openness and accountability. Canada Post is part of the federal
government and must live up to these standards. As Minister Responsible for Canada Post,
I expect immediate corrective action wherever these values and principles have been
compromised. To this end, I have asked Mr. Ouellet, as Chair of Canada Post Corporation,
to develop an action plan for improving the transparency of Canada Post's activities, and
addressing these issues...The government will consider the rest of the recommendations of
the report of the Mandate Review, recognizing that there are certain basic principles which
must guide our deliberations:...
* Canada Post is a valuable federal institution. Canadians have invested in it, and the
government must protect this value.
* Canada Post will remain a Crown corporation and not be privatized, as long as it
continues to fulfil a public policy role."...97
3.161 With respect to Canada Post’ s commercial courier service activities, Minister Marleau stated
that:
"[A]s long as Canada Post remains in this line of business, it must compete on a level
playing field. As I noted earlier, Canada Post’ s operations must be conducted under
the tenets of fairness, transparency, openness, and accountability".98
These excerpts confirm that the Canadian Government considers Canada Post to be a Canadian federal
government institution and that the Government is fully responsible for Canada Post’ s activities - even
those carried out in commercial sectors.
3.162 Canada Post’ s so-called "commercial" (non-subsidized) postage rates reflect an overlay of
Canadian government policy having nothing to do with marketplace considerations. Notwithstanding
Canada’ s statement that commercial publications rates "are available to all publishers (Canadian or
otherwise) that do not qualify for the subsidy granted by Canadian Heritage", in fact only certain types
of publications qualify for commercial mail rates. Among the eligibility criteria are: the content of
the publication (e.g., devoted to religion, the sciences, social or literary criticism), the amount of space
96The report did not specifically discuss Canada Post’ s publications mail activities.
97Speaking Notes for the Honourable Diane Marleau, Minister Responsible for Canada Post Corporation, Release of
the Canada Post Mandate Review Report, 8 October 1996, at 1-3 (emphasis added).
98Ibid., at 3.

it devoted to advertising, and whether the publisher is a person whose principal business is publishing.
These criteria are all irrelevant as commercial considerations, but are indicative of types of publications
which a government might wish to support as a matter of public policy. This suggests that Canada
Postcontinuestooperateas an instrumentof theCanadian Government initscommercial mail operations
and does not operate according to purely commercial considerations.
3.163 Finally, the United States considered that Canada's claim that the disparity in "commercial"
rates between imports and domestic magazines reflects the lack of commercially feasible alternative
delivery options for imports as compared to domestic magazines is dubious as a factual matter. Also,
Canada's explanation that the disparity in rates does not reflect Government policy is suspect in light
of the existence of a whole set of Canadian Government policy measures whose explicit goal is to benefit
domestic magazines. Even if true, Canada's explanation would not remove this measure from the scope
of Article III:4. Article III:4 is precise - a Member must accord "treatment no less favourable" to
imports as compared to domestic products - regardless of whether imports have fewer commercial
alternatives as compared with domestic magazines. It is in the nature of imported products that they
often are in an inferior economic and political bargaining position. Article III was included in the
GATT because imports are vulnerable to discrimination.
3.164 Canada argued that government ownership is not in itself sufficient to qualify the practices
of an enterprise as regulations for the purposes of Article III:4 of GATT 1994. The independent nature
of Canada Post's commercial operations for the distribution of publications and the competitive
environment within which it operates and sets its rates removes such rates from the provisions of Article
III:4. Although at one time the Post Office was an integral part of the Government of Canada and
its rates were set by statute and regulation, that relationship was changed in a fundamental way in 1981.
Concerned with issues relating to service, management, labour relations and the financial performance
of the Post Office Department, the Government decided to turn over the postal administration to a
Crown corporation with a commercial orientation and an independent management charged with attaining
financial self-sufficiency. TheCPC Act gave the Corporation thepowersof a naturalperson,an attribute
more typical of a private sector corporation than of traditional Crown corporations. The FA Act later
confirmed the Corporation's status as an entity expected to operate in a competitive environment, not
to be dependent on appropriations, earn a return on equity and pay dividends to its shareholder.
3.165 At the time of the creation of Canada Post, there were those who suggested that it should remain
under the direct control of the Government. It was proposed that its activities be overseen by the
Postmaster General assisted by a Secretariat. However, what had happened was that supervision of
the Corporation had been entrusted to a board of directors composed of independent outside directors
and officers of the Corporation (none of whom are civil servants). The Board, like traditional private
sector boards of directors, is empowered to establish the general policy of the Corporation, including
the makingofdecisionsconcerningfinance,personnelmanagementandcommercialorientation,without
the restrictions inherent in government departments. The Board has, since incorporation, pursued the
goal of financial self-sufficiency by allowing management the latitude, in commercial operations, to
generate revenues through rate and product management and to manage the Corporation's expenditures
in a manner consistent with any competitive enterprise, essentially free of government intervention.
3.166 Crown corporations are distinct legal entities wholly owned by the Crown with boards of directors
that oversee the management of the corporation and hold management accountable for the company’ s
performance. The board of directors, through the chair, is accountable to the responsible minister
and the responsible minister functions as the link between the corporation and both the Cabinet and
Parliament. It isthe dutyof the boardof directors tooversee the management of theirCrown corporation
with a view to the best interests of both the corporation and the long-term interests of the shareholder.
This concept is similar to that of private sector corporations. Boards of directors of Crown corporations
are expected to exercise judgement in the broad areas of: the establishment of a corporation’ s strategic

direction; the safeguarding of the corporation’ s resources; the monitoring of corporate performance;
and reporting to the Crown. Each Crown corporation is accountable to Parliament for the conduct
of its affairs through a minister who represents the Crown. It is through the minister that the Crown
corporation reports on its plans and its performance to the Government and to Parliament.
3.167 Canadian and international commercial categories of rates had been set by Canada Post outside
of the regulations since March 1994 and March 1992, respectively. Non-subsidized publications formerly
subjected to the rates set out in the Newspapers and Periodicals Regulations are now subject to
commercial Canadian Publications Mail and International Publications Mail rates, respectively, which
are established and approved by Canada Post senior management. They are not established byCanadian
Government regulations.
3.168 Canada Post is a corporation with a distinct legal personality. It can contract separately from
the Government. It contracts with the Government for the supply of postal and other services. The
Corporation is obligated to pay corporate income tax to the Government on its revenues.99 Contrary
to US assertions, employees of the Corporation are not employees of the Government. Indeed, Section
12 of the CPC Act authorizes Canada Post to hire employees, fix the terms and conditions of their
employment and pay them their remuneration. The statutory regime100 applicable to employees of the
Government does not apply to employees of Canada Post, whose employment conditions and labour
relations are governed by the same provisions of the Canada Labour Code that apply to the federal
privatesector.101 Furthermore, if Canada Postemployees had government employee status, there would
have been no need to include a special "deeming" provision in the Act in order to preserve employees'
pension rights at the time of the creation of Canada Post. The above attributes are certainly not those
of a corporation over which the Canadian Government maintains a "hands-on level of administrative
control" as the United States would like the Panel to believe.
3.169 The degree of control that the Government exercises over Canada Post's commercial operations
is one dictated by the Government shareholder's interests. The Government requires sound financial
administration of the Corporation's business and a fair return on its equity investments. To achieve
this goal, the Corporation must offer satisfactory services to customers at a competitive price that will
maximize profits. In a competitive environment, pricing policies of Canada Post must take into account
basic economic principles of supply and demand. It must consequently consider the effects that its
commercial postal rates will have on current or potential competition.
3.170 Canada Post does not have a monopoly with respect to the delivery of publications (newspapers
and periodicals) in Canada. Canada Post, through the CPC Act, does have a limited exclusive privilege
with respect to the collection, transmission and delivery of "letters" in Canada including addressed
advertising mail, but the Corporation has no statutory protection for the remainder of its business and
has to compete with existing or potential competition, as the case may be.
3.171 Almost 50 per cent of foreign publications mailed in Canada are accorded special rates negotiated
by major foreign publishers pursuant to long-term agreements with Canada Post. Those rates are
substantially less than the commercial International Publications Mail rate and relatively close to the
99Income Tax Regulations, amendment, SOR/94-405.
100Canada states that employees of the Government are appointed by the Public Service Commission under the unique
provisions of the Public Service Employment Act. Employment conditions and labour relations are governed by the Public
Service Staff Relations Act and the Public Service Employment Act.
101Canada notes that the federal private sector includes such industries as banks, interprovincial trucking, radio, television,
railways, ports and the aeronautics industry.

commercial Canadian Publications Mail rate102. The willingness of the Corporation to enter into such
special-rate agreements reflects the reality that large foreign publishers have the resources and purchasing
powertocrediblythreaten fullorpartialdeliveryinCanada via current and potentialprivatedistributors.
Smaller foreign publishers have neither the volume nor the density of mailings to warrant their effort
to access private distribution (often organised on a city by city basis) in Canada. Canadian commercial
publishers have credibly threatened to move to private distribution in the past103. This motivated the
Corporation todevelopcommercial PublicationsMailratesthatare financiallyattractivewhencompared
to that of current or potential private distributors.
3.172 Canada Postcurrentlyfaces competitionfor deliveryof addressed publications.104 The principal
form of competition for the delivery of addressed subscriber copies of daily and weekly newspapers
(those not eligible for subsidized postal rates) is delivery by the publishers themselves. In general,
almost all such newspapers choose to deliver theirown publications wherever volume densitieswarrant,
with the residual volumes being mailed to subscribers via Canada Post's commercial Publications Mail
rates. There is somewhat less competition for the delivery of addressed periodicals, where competition
exists mainly in the dense urban areas. Competition for the delivery of addressed periodicals is limited
because commercial publications rates are designed to attract the delivery of addressed periodicals not
eligible for subsidized rates. It is also limited due to Canada Post's successful bid to Canadian Heritage
for the delivery of publications eligible for funded rates. Canada Post's competitors cannot enter into
the same arrangement with Canadian Heritage because all available program dollars have been committed
to the arrangement signed with Canada Post.
3.173 Canadian Heritage agreed to a fixed price contract with Canada Post, taking into account the
fact that this would be an exclusive contract for the delivery of eligible publishers' publications at
subsidized rates, and therefore committing all of its funding available for distribution assistance of
these publications. Obviously, this precludes any alternative supplier of delivery services from signing
a similar agreement with Canadian Heritage during the three-year term of the current agreement.
However, Canada Post won the exclusive three-year arrangement in the context of a real possibility
of a direct-to-publishers funding program without exclusive suppliers. Such an option or an option
of awarding an exclusive supply contract to a supplier or suppliers other than Canada Post is again
a possibility at the expiry of the current three-year contract. It should be noted that Canada Post is
obliged under the current agreement to provide service without limitation at the agreed funded rates
to all existing and new publications that are deemed by Canadian Heritage to meet the agreed eligibility
conditions. If the publisher of an eligible publication chooses to deliver the publication via another
carrier, the publisher would not have access to special rates given that Canadian Heritage has chosen
to negotiate an exclusive supplier contract with Canada Post for the term of the contract.
3.174 With respect to the use of the Radwanski Report by the United States, the mandate review
was partiallya review of the appropriatenessof the monopolythatthe Government has grantedtoCanada
Post on letter delivery. The Report recommends, among other things: (1) that providing universality
of service and uniformity of price for lettermail be regarded as integral elements of the mandate of
Canada Post; and (2) that the exclusive privilege of Canada Post with regard to lettermail be maintained
in its current form. Secondly, the mandate review was a review by the shareholder of the validity
102Canada asserts that contrary to what the United States contends, several large foreign publishers enjoy discounts,
pursuant to long-term agreements, similar to the mail preparation discounts offered to Canadian publishers.
103Canada notes that those threats are substantiated by certain factors such as the proximity of the Canadian publications
to their markets, generally greater density of those markets (typically commercial trade publications oriented towards businesses
in urban areas) and concentration of ownership in the industry.
104Examples of such competitors are Globe and Mail Distribution Services Ltd., A1Tours Ltd. (bundle distribution of
magazines to business/professional offices), C.D. Woods Ltd., (Vancouver B.C.), Roltek Ltd., Insurance Courier Services
Ltd. and an emerging co-operative delivery venture of Canadian trade publications.

of the strategic, operational and financial direction of Canada Post and in this regard the mandate review
is similar in nature to periodic reviews conducted in the private sector by shareholders of both publicly
and privately held corporations. The recommendations contained in the Report, in whole or in part,
are not government policy but rather recommendations to the government for consideration. The
government has rejected certain of the recommendations, adopted others and taken the balance under
advisement. The Radwanski ReportdidnotaddressCanada Post'sdistributionservicesfor publications.
3.175 The United States asserted that the fact that the Government has to date not intervened to put
a stop to Canada Post's discriminatory postal rates does not mean that it is not responsible for them.
A WTO Member cannot create a government institution, allow it to take actions inconsistent with the
Member's WTO obligations, and then claim it has no responsibility for the actions of the institution.
The market access concessions that WTO Members have negotiated over the years would not be secure
if governments could escape their obligation to provide national treatment to imported products by
creating government corporations and then claiming that they are not responsible for the discrimination
imposed by the entities they themselves created. Intervention by the Government to ensure that Canada
Post complies with Canada's international obligations under the GATT is within the power of the
Canadian Government. It is especially important that the Canadian Government take remedial action
because publishersof importedmagazines have only limited alternativesto usingCanada Post'sservices
for delivery and transportation of magazines to Canadian subscribers. Indeed, Canada Post itself boasts
that, "We are the only national distribution service that reaches every single address in Canada. No
one does this - no other competitor comes close".105 Canada acknowledges that Canada Post faces
only limited competition for the delivery of addressed magazines. Magazines seeking to reach
destinations other than business addresses in major cities have no practical alternative to using the delivery
services of Canada Post.
3.176 Because of Canada Post's status as a Canadian Government institution that delivers and transports
magazines and other mail, its actions - including the rates it applies - in respect of these activities are
necessarily regulations or requirements affecting the internal sale, distribution or transportation of
magazines within the meaning of Article III:4. If the Canadian Government told private Canadian
delivery services to charge more for delivering imported goods than for delivering domestic goods,
it would be in clear violation of Article III:4. If the Canadian Government accomplishes this same
result through rate discrimination in its own delivery services, Article III:4 should apply with equal
force. With respect to Canada’ s arguments concerning the Radwanski report, the United States responded
that although that report did not refer to publications mail, it was primarily concerned with advertising
mail and courier services, which are both commercial services. Thus, the statements made by Minister
Marleau with respect to these services as commercial services are equally applicable to publications
mail.
Like product issue
3.177 The United States argued that imported magazines are "like" domestic magazines for the
purposes of Article III:4. Canada Post’ s rates distinguish between magazines based on whether they
are imported or produced in Canada. In particular, Canada established two rate classes for magazines
that are printed and published in Canada (the "commercial" and "funded" rates) and a third rate class
for imported magazines (the "international" rate). Magazines eligible for "funded" rates are not only
printed and published in Canada, but have to meet other requirements, namely: (a) the periodical must
be typeset and edited in Canada; (b) the exclusive right to produce and publish the periodical must
be held by a Canadian citizen, or a corporation controlled by Canadian citizens; and (c) the issue can
105Canada Post, Publications Mail, Product Guide at B-1 (bold in original).

not be published under license from a foreign publisher, or contain editorial content substantially the
same as an issue printed outside Canada that was not first edited in Canada.106
3.178 However, all of these categories of magazines are "like products" for purposes of Article III:4
and the distinction that Canada has drawn between them is solely, indeed openly, intended to favour
domestic production. Domestic and imported magazines share the same physical characteristics and
commercial uses. Neither the location of production, nor the ownership of the right to publish, nor
whether editorial content appeared in an issue printed outside Canada, make imported magazines unlike
domestically-produced magazines in terms of physical characteristics or end uses. The rates established
by Canada Post for imported and domestically-produced magazines draw an impermissible distinction
based on the origin of the magazine, a distinction that, on its face, is applied "so as to afford protection
to domestic production".
Treatment of imported and domestic magazines
3.179 The United States statedthatthe rates established byCanada Postdiscriminate againstimported
magazines. Canada Post charges rates for domestically-produced magazines that are either 10 or 80
per cent loweronaverage thanthe rates applicable toimportedmagazines. These rates accord manifestly
less favourable treatment to imported magazines by comparison to their domestically-produced
counterparts. Moreover, Canada Post routinely makes discounts (such as "palletization" and "bypass"
options) available to domestic magazines but not to imported magazines that increase the degree of
discrimination still further. The higher postal rates for imported magazines are calculated to place
them at a competitive disadvantage by comparison to competing domestically-produced magazines
by creating a disparity between the distribution and transportation costs for imported and domestic
magazines. Article III:4, second sentence, confirms that discrimination with respect to transportation
based on the "nationality of a product" is not consistent with Article III:4. Canada has made no secret
of the fact that the explicit purpose for its varying postal rates is to protect the Canadian publishing
industry from import competition. Canada’ s discriminatory magazine postal rates represent precisely
the kind of protectionist regulatory measure that GATT Article III:4 condemns.
3.180 It is no answer for Canada to assert that Canada Post enters into special lower-rate arrangements
withcertain larger foreignmagazines. Canada Post'sstandardcommercial rates for importedmagazines
are higher than for domestic magazines. Smaller foreign publishers, who cannot enter into special
arrangements, are subject to the standard discriminatory rates. Moreover, negotiations for special
rates between Canada Post and larger publishers (both foreign and domestic) presumably use the standard
discriminatory commercial rates as the starting point. Thus, the resulting negotiated rates are in all
likelihood discriminatoryas well. Indeed, Canada statesthat the negotiatedrates offered tolarge foreign
publishers are only "relatively" close to the standard commercial rates are offered to Canadian publishers.
3.181 Canada argued that the economic factors applicable to foreign and domestic periodicals are
not the same which is why their respective rates are different. Those rates are a reflection of competitive
situations, not the result of discriminatory practices as was argued by the United States. Canada Post
has no policy of giving a competitive advantage to one segment of its customers over another, and
would have no interest in pursuing any such practice. Given appropriate competitive factors, it might
very well be that certain foreign periodicals would enjoy better rates than non-subsidized Canadian
magazines. This is exactly the type of scenario that Article III of GATT 1994 is intended to preserve.
If foreign magazines are in better competitive situations, they should be able to take advantage of it.
If on the contrary, they are not in such a position, Article III should notbe there to grant them advantages
106Regulations Respecting Newspapers and Periodicals, Section 3(2) (definition of "Canadian Periodical"), S.O.R./91-179,
28 February, 1991.

that market forces do not provide. In the commercial and competitive environment in which Canada
Post operates, it is under no obligation by virtue of Article III:4 to subsidize US publications by setting
a better postal rate then what their specific market conditions require.
(ii) Article III:8(b)
3.182 The United States argued that Canada Post’ s discriminatory postal rates do not constitute the
payment of subsidies exclusively to domestic producers within the meaning of Article III:8(b), because
domestic producers receive no subsidy payments. Under their 1 May 1996 Agreement, Canadian
Heritage provides Canada Post with fixed annual payments to support Canada Post’ s below-cost "funded"
postal rates for certain magazines produced in Canada. Those payments are not distributed to domestic
magazine producers; instead Canada Post uses the funds to underwrite the lower postage rates it charges
domestically-produced magazines. Thus, Canada’ s discriminatory postal rates are not direct payments
to Canadian producers; rather, they modify the conditions of competition between domestic and imported
products in contravention of Article III:4.
3.183 A series of GATT 1947 panel reports had interpreted Article III:8(b) very narrowly to hold
that the only subsidies subject to exclusion from the national treatment provisions of Article III are
those subsidies that are paid directly to domestic producers. So, for example, credit facilities provided
to purchasers, and not producers,107 and payments whose benefits could be partially retained by
processors,108 have been found not to qualify under Article III:8(b). Nor does the annual payment
that Canadian Heritage makes to Canada Post constitute a subsidy to domestic producers under
Article III:8(b). Canadian Heritage does not provide its funds to domestic producers. The low-priced
"funded" postal rate that Canada applies to certain favoured periodicals produced in Canada do not
fall within the terms of Article III:8(b). Rather, these rates, together with the "commercial" rate and
variousdiscountsapplicable onlytoCanadian-produced magazines, arepartofan overtlydiscriminatory
postal rate scheme designed to create further protection for Canada’ s domestic magazine industry.
3.184 Canada argued that the funds paid by Canadian Heritage to Canada Post to enable it to grant
Canadian publishers of publications reduced postal rates are allowable subsidies under GATT
Article III:8(b), which explicitly recognizes that subsidies to domestic producers are not subject to
the national treatment rules of Article III. Paragraph 8(b) applies with respect to all provisions of
Article III, including Article III:4. Public policy has been developed to ensure that Canadians, regardless
of where they live, have access ona reasonable basis to periodicals. Subsidized postal rates are provided
tomaximize the opportunityfordistribution,particularlyinlightof Canada'srelativelysmall and widely
dispersed population. This measure is critical, since Canadian magazines have only limited access
tonewsstandsand relymainlyonpaidsubscriptionsfor circulation. Subsidizedpostalrates haveenabled
Canadian magazines to reach a widely dispersed readership. The provision of reduced postal rates
is a way of paying subsidies that is compatible with GATT 1994. These payments are made to Canada
Post four times a year in return for its undertaking to deliver eligible publications at the agreed reduced
rates. The benefit of the subsidies flows directly to eligible Canadian magazine publishers. The Canadian
publication industry isthe exclusive beneficiary of these subsidies and has to qualify for these subsidized
rates in accordance with criteria set by Canadian Heritage before being found to be eligible.
3.185 The decision of the panel in US - Malt Beverages lends no support to the US position. This
panel held that the expression "payment of subsidies" applies only to direct subsidies and not to other
107Panel Report on Italian Discrimination Against Agricultural Machinery, op. cit., at 60, 64, para. 14.
108Panel Report on EuropeanEconomicCommunity- PaymentsandSubsidiesPaidto ProcessorsandProducersofOilseeds
and Related Animal-Feed Proteins, adopted on 25 January 1990, 37S/86, 124, para 137.

kinds of subsidies such as tax credits or tax abatements.109 The panel was concerned solely with the
distinction between subsidies, tax remissions and differential taxation rates, because a failure to make
that distinction would destroy the effect of Article III:2. The formal distinction between taxation
measures – benefits not involving direct expenditures by government – and subsidies is vital to the
operation of the Article as a whole. Canada's postal subsidy meets the requirement of directness, in
the sense in which that concept is used in the US - Malt Beverages decision, because a payment by
government for the exclusivebenefit of the producers is beingmade. It is onlythe mechanics of payment
that were indirect.
3.186 The position held by the United States is therefore based on a difference of form, not substance.
The specific form in which the subsidy is paid is irrelevant to the operation of Article III:8(b), provided
that a payment is made by the government for the exclusive benefit of domestic producers.110 Before
being granted the privilege of posting using funded postal rates, a publisher has to sign a service
agreement with Canada Post. This simple fact is evidence that publishers are direct beneficiaries.
Canada Post is an intermediary, not the beneficiary. Whether the subsidy is paid to Canada Post or
paid directly to the publishers, the economic effect is the same, namely that the eligible publishers
are the beneficiaries of the subsidy.
3.187 In practical terms, payments to individual publishers would be a cumbersome and ineffective
method of delivering this subsidy. The administrative and financial burden of such a process would
erode the benefits of the program. If an eligible Canadian publisher of a monthly magazine were to
receive the payment, the advantages this publisher enjoys relative to foreign competition would be
essentially unchanged. Canadian publishers would find themselves in the same position as they are
in now, namely with an advantage over their foreign competitors. Therefore, Canadian Heritage provides
Canada Post withan agreed-upon payment on a quarterly basis. The current process is far more efficient
in minimizing the administrative overhead related to the program.
3.188 Based on the panel report on the EEC – Payments and Subsidies Paid to Processors and
Producers ofOilseeds and RelatedAnimal-feed Proteins111 ("EEC - Oilseeds"), the United States argued
that subsidies not paid directly to producers are not paid to them "exclusively" within the meaning
of Article III:8(b). The word "exclusively" as used in this provision is concerned with the distinction
between "domestic" as opposed to "non-domestic" producers, not whether third parties benefit from
the subsidies. Whether an incidental benefit might be conferred upon Canada Post from the subsidy
payment is irrelevant. Under the interpretation of this clause suggested by the United States, virtually
any subsidypayment thatwouldconfer a thirdpartybenefit, howeverminimal, wouldbe non-compliant.
This is surely not the intended application of the exemption. Subsidies have an economic impact on
third parties in almost all circumstances. The definition of the term "exclusive" proposed by the United
States would lead, in practical terms, to the nullification of the Article III:8(b) exemption.
3.189 The United States argued that were Canada to provide payments directly (and exclusively)
to domestic producers of magazines, the United States agreed that such payments would be protected
by Article III:8(b). Under Canada’ s postal rate scheme for periodicals, however, domestic magazine
producers receive no government payments. The only "payments" are made from one government
109Panel Report on United States - Measures Affecting Alcoholic and Malt Beverages, op. cit.
110Canada noted that the US-Malt Beverages panel read subparagraph 8(b) having regard to the context of the whole
of Article III but, except in the context of taxation measures, it was never stated that for every subsidy to qualify, the payment
must be made directly to domestic producers. The panel simply said that the words "payment of subsidies" refer only to
direct subsidies involving a payment, not to other subsidies such as tax credits or tax reductions (ibid. at 271, para. 5.8).
111Panel Report on European Economic Community - Payments and Subsidies Paid to Processors and Producers of Oilseeds
and Related Animal-Feed Proteins, op. cit., at 124-125, paras. 137-141.

entity (Canadian Heritage) to another (Canada Post).112 Thus Canada's postal scheme simply does
not comply with the requirement of Article III:8(b) that there be "payment . . . to domestic producers".
3.190 With regard to Canada's argument that its funded-rates system satisfied Article III:8(b) because
it includes "payments" (to Canada Post), and because the resulting lower postal rates on domestic
magazines have the same "economic effect" on domestic producers as payments made directly to them,
the United States stated that the mere existence of "payments" (from one government entity to another,
in this case) is not enough. The payments have to go to domestic producers. Under Canada’ s postal
rate scheme, domestic periodicals are provided lower postal rates than imported magazines; domestic
periodical producers receive no payments. Instead, so-called "funded publications" are charged lower
postal rates. Because imported magazines do not qualify for these rates, they are placed at a commercial
disadvantage in terms of the transportation and delivery of their magazines in Canada. This is precisely
the type of discrimination that Article III:4 is meant to prohibit. Canada Post's discriminatory postal
rates clearly confer an economic benefit on domestic products, but a benefit of that sort is not within
the scope of Article III:8(b). That Article applies only to "the payment of subsidies exclusively to
domestic producers" (emphasis added).
3.191 GATT panels have consistently applied Article III:8(b) strictly according to its terms. They
have rejected appeals to ignore its actual language in favour of what Canada claims to be "an economic
perspective". They have uniformly denied the protection of Article III:8(b) to measures that provided
no direct payments to domestic producers, including measures that may have conferred economic benefits
indirectly on domestic producers by favouring the purchase or use of domestic products. Indeed, the
"economic benefits" argument was explicitly rejected by the panel onUnited States - MeasuresAffecting
the Importation, Internal Sale and Use of Tobacco ("US - Tobacco").113
3.192 If Canada’ s view - that Article III:8(b) encompasses the indirect provision of economic benefits
to domestic producers through government advantages conferred on their goods - is accepted, it would
dramatically expand the types of measures exempted from discipline under Article III. That is because
virtually any form of more-favourable treatment accorded by a government to domestic products could
be characterized as providing economic benefits similar to the payment of subsidies to domestic
producers. Past panelshave uniformlyinterpretedArticleIII:8(b)torequireactual paymentstodomestic
producers. In the panel on Italian Discrimination Against Agricultural Machinery, that panel
"agreed with the contention of the United Kingdom delegation that in any case the provisions
of paragraph 8(b) would not be applicable to this particular case since the credit facilities
provided under the Law were granted to the purchasers or agricultural machinery and could
not be considered as subsidies accorded to the producers of agricultural machinery".114
3.193 In that case it could have been argued that even though a subsidy was granted to purchasers
of agricultural machinery, economic benefits also flowed directly or indirectly to the domestic producer
of the machinery, since the availability of inexpensive credit limited to the purchase of domestic goods
would stimulate the sales of such goods. However, the panel had correctly interpreted the words
"exclusively to domestic producers" according to their plain meaning and found that the Italian credit
scheme did not qualify for the Article III:8(b) exemption.
112Memorandum of Agreement.
113Panel report on United States - Measures Affecting the Importation, Internal Sale and Use of Tobacco, adopted 4
October 1994, DS44/R.
114Panel Report on Italian Discrimination Against Agricultural Machinery, op. cit.para. 14.

3.194 The panel report on US - Malt Beverages, cited by Canada in its submissions, does not deal
with the issue of payments to third parties. The panel rejected a US argument that tax credits for small
domestic producers of beer and wine constituted a domestic subsidy permitted under Article III:8(b),
and holding that
"Article III:8(b) . . . clarifies that the product-related rules in paragraphs 1 through 7 of Article
III ‘ shall not prevent the payment of subsidies exclusively to domestic producers’ (emphasis
added [in original text]). The words 'payment of subsidies' refer only to direct subsidies
involving a payment. . ."115
The panel thus continued the practice of past panels of invoking a narrow and literal interpretation
of that provision. In this case, the only "payment" goes from Canadian Heritage to Canada Post, not
to magazine producers. In fact, this "payment" is more akin to an internal transfer of government
funds than a true economic "payment" to an unrelated entity.
3.195 In US - Tobacco,116 the panel found that price support payments made to domestic tobacco
farmers out of the proceeds of the No Net Cost Assessment ("NNCA") were within the scope of
Article III:8(b). The panel rejected an interpretation of Article III:8(b) based on a measure’ s economic
impact:
"The Panel was cognizant of the fact that a remission of a tax on a product and the payment
of a producer subsidy out of the proceeds of such a tax could have the same economic effects.
However, the panel noted that the distinction in Article III:8(b) is a formal one, not related
to the economic impact of a measure. Thus, in view of the explicit language of Article III:8(b),
which recognizes that the product-related rules of Article III "shall not prevent the payment
of subsidies exclusively to domestic producers," the Panel did not consider, as argued by the
complainants, that the payment of a subsidy to tobacco producers out of the proceeds of the
NNCA resulted in a form of tax remission inconsistent with Article III:2".117
3.196 Finally, the EEC - Oilseeds118 panel examined EEC legislation that, like the payments by the
Department of Canadian Heritage toCanada Post,includedgovernment payments toa middleman rather
than to the domestic producer itself, on the theory that the payments would induce the middleman to
provide preferential treatment to the domestic producer. The EEC legislation provided for the payment
of subsidies to processors of oilseeds whenever they established by documentary evidence that they
had transformed oilseeds of Community origin. In that decision:
"The Panel noted that Article III:8(b) applies only to payments made exclusively to domestic
producers and considered that it can reasonably be assumed that a payment not made directly
to producers is not made "exclusively" to them. It noted moreover that if the economic benefits
generated by the payments granted by the Community can at least partly be retained by the
processors of Community oilseeds, the payments generate a benefit conditional upon the purchase
of oilseeds of domestic origin inconsistently with Article III:4. Under these circumstances
Article III:8(b) would not be applicable because in that case the payments would not be made
exclusively to domestic producers but to processors as well".119
115Panel Report on United States - Measures Affecting Alcoholic and Malt Beverages, op. cit.
116Panel Report on United States - Measures Affecting the Importation, Internal Sale and Use of Tobacco, op. cit.
117Ibid., para. 109 (emphasis added).
118Panel Report on European Economic Community - Payments and Subsidies Paid to Processors and Producers of Oilseeds
and Related Animal-Feed Proteins, op. cit.,, para. 137.
119Ibid., para. 137 (emphasis added).

3.197 Canada mischaracterizes the EEC - Oilseeds decision as standing for the proposition that the
phrase "exclusively to domestic producer," as used in Article III:8(b), is intended only to distinguish
between "domestic" as opposed to "non-domestic" producers. The emphasized language makes it clear
that the distinction is between "direct payments to producers" and "payments to ... processors" (who
might in turn provide an indirect benefit to producers). So, too, in this case, the only "payments"
are to an entity other than the domestic producers (and this "payment" is an internal transfer of
government funds).
3.198 Canada considered it paradoxical if not contradictory for the United States to challenge Canada
Post's international commercial rates on the grounds that Canada Post and the Government are one
and the same, and to object to subsidized rates on the grounds that the same Corporation is obtaining,
as a third party, a share of the benefits which the postal subsidy extends to Canadian periodical
publishers. The argument that the Corporation is obtaining a benefit presupposes that it is an entirely
separate entity from the Government: were it an organ of the Government, it would make little difference
if it benefitted in any way from the payments, for in this case it would not be a government subsidy
but simply a transfer of funds. The United States cannot maintain that the commercial rates and
subsidized rates are discriminatory because Canada Post is part of the Government in the first case
but not part of the Government in the second case. This is a clear contradiction.
3.199 The United States concedes that the protection provided by Article III:8(b) would extend to
direct payments made exclusively to domestic periodical producers. At the same time, the United States
takes a highly formalistic approach based on a very narrow interpretation of Article III:8(b). However,
the formalism which the United States is asking the Panel to enshrine is supported neither by the text
of Article III:8(b) nor by GATT practice. The method of subsidy payment is not in and of itself
conclusive in determining whether Article III:8(b) applies. The essential factor is that the payment
be made by the government for the benefit of domestic producers.
3.200 The panel reports quoted by the United States do not support the conclusion that the subsidy
must always be paid directly and exclusively to domestic producers. For example, it cannot seriously
be argued that the panel on Italian Discrimination against Agricultural Machinery determined that the
subsidy had to be paid to domestic producers through actual payments. The panel found that
Article III:8(b) did not apply in that case because the credit facilities provided by the legislation were
extended to the purchasers of agricultural machinery and could not be considered to be subsidies paid
to the producers of agricultural machinery. In the case of the Italian legislation, government support
in the form of credit facilities for the purchase of Italian agricultural machinery was granted to the
purchasers of agricultural machinery, and in the view of the panel the provisions of Article III:8(b)
do not apply in these circumstances. The postal subsidy program involves no similar circumstances,
since the Canadian Government's assistance in the form of reduced postal rates does not go to Canada
Post Corporation.
3.201 It would appear that the formalism advocated by the United States stems from the report of
the US – Malt Beverages panel, which dealt with a lower excise tax levied on domestic beer than on
imported beer. The United States argued that the clear purpose of the lower tax was to subsidize small
producers, and that reducing the excise tax was a way of granting such a subsidy which was compatible
with the GATT. The panel concluded that "the words ‘ payment of subsidies' refer only to direct
subsidies involving a payment, not to other subsidies such as tax credits or tax reductions". In the
opinion of the panel, the prohibition on discriminatory internal taxes in Article III:2 would be rendered
inoperative were it possible to offer a general justification for such taxes on imported goods on the
grounds that these were subsidies paid to competing domestic producers in accordance with
Article III:8(b).

3.202 The US – Malt Beverages report must be read and understood within the full context of
Article III:2 and with considerationtotax credits and reductions. In thatspecific case, the tax reductions
and exemptions could not be deemed equivalent to the subsidies provided for by Article III:8(b). The
panel did not make a determination on all other forms of subsidies. The Canadian postal subsidy,
which has nothing in common with a tax abatement, exemption, credit or reduction, is consistent with
the provisions of Article III:8(b) and is in no way incompatible with the US - Malt Beverages decision.
In the present case, payments are made four times a year for the exclusive benefit of periodical producers.
Only the mechanics of payment are indirect.
3.203 This interpretation is supported by the US – Tobacco report, which the United States quotes
and to which it attributes an unwarranted scope in light of Article III:8(b). Without entering into the
details, the issue in this case was whether the net self-financing levy on imported tobacco was higher
than the self-financing levy on domestic tobacco, since the latter received a de facto tax remission by
virtueof the operationof the tobacco price supportprogram. The panel did notconsiderthatthe payment
of a subsidy to tobacco producers out of the proceeds of the self-financing levy resulted in a form of
tax remission inconsistent with Article III:2. The panel noted the formal distinction between a tax
remission on the one hand and the payment of a subsidy on the other, even if they could have the same
economic effect. The economic impact in the case of tax remission is irrelevant to the application
of Article III:8(b). The formal distinction between taxation measures and subsidies is vital to the
operation of Article III:2. It cannot be concluded from this panel report, as the United States did,
that in the case of a producer subsidy, the examination of the measure's economic impact is irrelevant
to determine whether the measure is consistent with the provisions of Article III:8(b).
3.204 Lastly, the United States suggests that Article III:8(b) is inapplicable in light of the EEC –
Oilseeds report, in which the panel provides an unusual interpretation of the word "exclusively".
Contrary to the US contention, Canada has not misinterpreted this report. It simply supports a more
common interpretation of the word "exclusively". The general thrust of Article III is against
discriminationbetween imported and domestic products. In thiscontext,grantinga government subsidy
"exclusively" to domestic producers can only mean granting a subsidy only to the producers of domestic
products, in the sense that it is paid to them alone and not to foreign producers.
3.205 In the case under study, the payments to processors were an incentive for them to buy oilseeds
of EEC origin instead of imported oilseeds. The incentive derived from the fact that the payments
made to processors could be greater than the difference between the price processors actually paid
to EEC producers and the price that processors would have had to pay for imported oilseeds. This
excess compensation created an incentive to buy products of EEC origin instead of imports. It is for
this reason that Article III:8(b) was not applicable, for in this case the payments were not made to
domestic EEC producers exclusively, but to processors as well.
3.206 The panel demonstrated that the payments could constitute benefits granted to EEC processors
if the latter purchased EEC products. There is no parallel between the postal subsidy and the flaws
in the EEC system. The United States has failed to demonstrate such a parallel. Moreover, the United
States claim that the panel developed a general principle of interpretation by which Article III:8(b)
does not apply if there is an intermediary between the government and the beneficiary is groundless.
The panel would not have taken the trouble to perform such a complex analysis of the various prices
(in paragraphs 136 through 141) were it only a matter of putting forward a general principle. The
United States has not presented any analysis comparable to the one performed by the panel.
3.207 Moreover, there is no parallel with the postal subsidy because Canada Post does not receive
"bonus payments" for handling and distributing periodicals from Canadian publishers rather than from
foreign publishers. The Corporation receives an amount that is stipulated in a memorandum of
understanding or contract in exchange for the provision of reduced postal rates. This amount is based

on estimates of expected eligible Canadian periodical volumes at the negotiated reduced rates, which
estimates are developed independently by each of Canada Post and Canadian Heritage in the course
of negotiating the contract. There is no incentive to handle the periodicals of Canadian publishers
rather than those of foreign publishers, since delivering a larger number of Canadian magazines than
that originally estimated by Canada Post would not increase the Corporation's net income. The postal
subsidy does not grant the Corporation any particular benefit. The EEC system provided incentives
favouring EEC processors whereas there are no such measures favouring Canada Post in the
memorandum of understanding with Canadian Heritage.
3.208 The agreement between Canadian Heritage and Canada Post expressly stipulates the rates paid
by eligible Canadian periodical publishers. The terms of the agreement ensure that the payments to
the Corporation secure the price it must charge publishers who mail their periodicals at subsidized
rates. The contract for the provision of delivery services for eligible publications is at a fixed rate.
Canada Post receives a lump sum in exchange for providing delivery services at the reduced rate.
It should be noted that the predetermined annual payment to Canada Post from Canadian Heritage is
a negotiated value for service in the spirit of any fixed price contract; that is, Canada Post must provide
delivery at the agreed reduced rates to all eligible publications in return for the fixed amount. Both
parties are aware that variances up or down in a given year relative to each's view of expected volume
are to be expected. However, it is each party's studied view that in spite of these risks, it has an equal
chance to gain or lose relative to those expectations of volumes. In view of the fixed price nature of
the agreement, there is no relevance to arguments of payments in excess of value of service provided.
The value provided is by definition exactly what was contracted to be provided in return for the pre-
determined fixed payment.
3.209 The United States has conceded that were the payments made directly and exclusively to Canadian
periodical publishers, these payments would qualify for protection under Article III:8(b). The question
the Panel must consider is whether such a change in the method of subsidy payment would place foreign
periodical publishers in a more favourable competitive position in relation to Canadian publishers in
respect of the postal subsidy. There is no reason to believe that this would be the case. The method
of payment is merely the subsidy's technical, administrative aspect. It does not reveal who benefits
from the subsidy. If payments were made directly to publishers, Canada Post would increase its rates
for the delivery and distribution of the magazines that had previously enjoyed reduced rates, in
accordance with its practice for commercial services and its profit maximization objectives. Eligible
Canadian publishers would continue to buy periodical delivery services from the Corporation at a cost
"lower" than the commercial rate, in view of the compensatory payments they would receive. As for
foreignpublishers,theywouldcontinuetobuyperiodicaldeliveryanddistributionservices fromCanada
Post at the same rates as before.
3.210 If the subsidy were paid directly to publishers rather than to Canada Post, the effects would
be the same. Eligible publishers would be the beneficiaries of the subsidy. Only administrative costs
would increase substantially. There is no valid reason in this case, such as for example a concern
that provisions of the 1994 GATT would be rendered inoperative, which demand that the Panel uphold
an interpretation which would have the effect of replacing the relatively simple and economical existing
system with a costly and complicated system. Lastly, there are no grounds for claiming, as the United
States has done, that our interpretation of Article III:8(b) would have the effect of encouraging the
governments of member states to introduce a host of discriminatory measures in favour of domestic
goods for the sole reason that these would economically benefit domestic producers. Canada is not
proposing the abolition of the disciplines in the 1994 GATT but only a reading of Article III:8(b) that
respects its terms.
3.211 The United States concluded that over the years GATT panels had been very careful to apply
the precise language of Article III:8(b) and to avoid expanding the scope of that Article to encompass

measures other than the direct payment of subsidies that convey economic benefits on the domestic
producers. This caution was completely justified because the liberal reading Canada suggests for
Article III:8(b) would permit governments to employ a wide variety of discriminatory measures in
favour of domestic products that could be justified on the ground of conferring economic benefits on
domestic producers. Such a result could dramatically alter the competitive environment in the markets
of Members around the world. Canada’ s "funded" postage rate scheme for domestically-produced
periodicals was a very good example of a product transportation and distribution regime that may well
confer economic benefits on domestic producers but that plainly altered the competitive relationship
between imported and domestic products.120
IV. INTERIM REVIEW
4.1 On 23 January 1997, the United States requested the Panel to review, in accordance with
Article 15.2 of the DSU, precise aspects of the interim report that had been issued to the parties on
16 January 1997. Canada did not request a review, but wished to reserve its right to respond to the
US comments. The Panel ruled that, given the circumstances in this particular case, Canada could
submit its response by 31 January 1997. Canada submitted its response to the US comments on
31 January 1997, urging the Panel to disregard a large part of the US comments. Neither the United
States nor Canada requested the Panel to hold a meeting. The Panel reviewed the entire range of
arguments presented bythe partiesin theirwrittensubmissions,and finalized itsfindings as inSection V
below, taking into account the specific aspects it considered to be relevant.
4.2 Regarding Tariff Code 9958, the interim report had focused on the "split-run" rule, which
the Panel found to be the principal issue, and had not mentioned the second part of the Code, namely
the five-per-cent rule. The United States requested the inclusion of this part in the findings. Canada
did not object to this request. The Panel agreed to the inclusion and introduced some drafting
modifications in the final report at paragraphs 5.1 and 5.4.
4.3 The interim report had, in a part corresponding to paragraph 5.24 of the final report, stated
that the definition of a "split-run" edition relied solely on factors external to the Canadian market.
The United States suggested that the Panel change this word to decisively. Canada objected to this
change. However, the Panel considered the US suggestion to be a useful one to improve the accuracy
of the findings, and accordingly modified the expression in the way it now appears in paragraph 5.24.
4.4 Regarding paragraph 5.25 of the final report, the United States suggested that the Panel add
that "(1) any number of additional hypothetical examples could be devised that would further show
that split-run and non-split-run periodicals need not be any different, and that (2) this is to be expected
because the definition of split-run periodicals provides that two virtually identical products can be taxed
differently depending on whether or not a similar product is sold outside Canada". While the Panel
did not disagree with this observation, it was not persuaded that such an addition would enhance the
clarity of the logicin the final report. The Panel therefore decided notto introducethe suggestedchange.
120The United States argued that even if it were concluded that the payments made by Canadian Heritage to Canada
Post to support the "funded" postal rates somehow gave rise to payments to domestic producers within the meaning of
Article III:8(b), because domestic producers ultimately received an economic benefit, such a benefit would not be provided
"exclusively" to domestic producers. Canada Post itself might well be a beneficiary. This is because Canada Post's pre-
determined annual payment from Canadian Heritage might exceed Canada Post's cost of delivering all eligible periodicals
in a given year. Moreover, Canada Post could further benefit economically from having a captive set of customers who
must use its services in order to obtain the "funded" rates. For these reasons, according to the United States, it cannot be
said that the benefits of Canada's Publications Assistance Program are provided "exclusively to domestic producers".

4.5 Regarding the directness of the taxation (paragraphs 5.28 and 5.29 of the final report), the
United States argued that this was a case of direct taxation because the excise tax was focused on a
particular type of good. The Panel rejected this argument. However, in this connection, the United
States pointed outthat a certain citation of pastcases inthe interimreportcould be somewhat misleading.
The Panel accepted this point, and modified the paragraphs accordingly.
4.6 Regarding the differences between "commercial Canadian" and "international" rates applied
by Canada Post to periodicals, the United States commented that the interim report failed to mention
certain additional discount options which were available only to Canadian periodicals. The Panel accepted
this comment and introduced some drafting modifications in the final report at paragraphs 5.1, 5.39
and 6.1. The UnitedStatesfurtherrequested thatthe finalreportrefer tothe long-termdiscountcontracts
between Canada Postand large-circulationmagazine publishers(see paragraph 3.171). Canada objected
to this request on the grounds that these agreements or contracts had "never been one of the objects
of this dispute". The Panel considered that this particular issue was not presented by the United States
in a coherent manner during the proceedings, and that it was too late for the United States to raise
this issue as an additional claim at the interim review stage. Accordingly, the Panel did not accept
the US request on this point.
4.7 The United States suggested that the Panel restructure paragraph 5.36 of the final report as
an alternative argument because, according to the United States, the fact that Canada Post is an entity
of the Canadian Government was a sufficient reason to find a violation of Article III:4 of GATT 1994
in this instance. However, the Panel considered such a change unnecessary. In the Panel's view, it
was clear that the Semi-Conductor case was cited here as supporting evidence, not as decisive reason
for finding the violation.
4.8 The UnitedStates questionedthe appropriatenessof paragraphs 5.37and 5.38ofthe finalreport,
suggesting that the examination of Article III:1 of GATT 1994 was unnecessary in this case. Canada
did not object to this comment. However, in the Panel's view, the Appellate Body Report on Japan
- Taxes on Alcoholic Beverages clearly mandates it to engage in such an examination. The Panel
therefore decided to retain these paragraphs unchanged from the way in which they appeared in the
interim report.
4.9 Regarding paragraphs 5.42 to 5.44 of the final report, the United States considered that the
Panel erroneously concluded that the "funded" rate scheme constituted a payment of subsidies permitted
by Article III:8 of GATT 1994. The Panel disagreed for reasons elaborated in its final report. The
Panel accordingly did not introduce modifications to the final report in this respect.
4.10 The United States also made other drafting suggestions concerning the descriptive part, some
of which the Panel accepted and introduced in its final report.
V. FINDINGS
A. Introduction
5.1 This dispute essentially arises from the following facts: (a) Canada prohibits imports of "split-run"
periodicals(periodicalswiththe same orsimilareditorialcontentas thosepublishedinforeigncountries,
which contain an advertisement directed to the Canadian market) through Tariff Code 9958. Tariff
Code 9958 further prohibits imports of periodicals in which more than five per cent of the advertising
content consists of advertisements directed to the Canadian market, whether or not an edition with
similar editorial content is sold outside Canada; (b) Canada, through Part V.1 of the Excise Tax Act,
imposes an excise tax of 80 per cent on the value of advertisements in "split-run" periodicals distributed

in Canada on a per issue basis; and (c) Canada Post Corporation ("Canada Post") applies reduced
("funded") postal rates, funded by the Department of Canadian Heritage ("Canadian Heritage"), to
certain periodicals published in Canada. Postal rates applied to Canadian periodicals not eligible for
the "funded" rates ("commercial Canadian" rates) are lower than those applied to imported periodicals
("international" rates). Certain additional discount options (such as for "palletization" and "pre-sort")
are available to Canadian periodicals but are not generally available to imported periodicals.
5.2 The United States claims that (a) Tariff Code 9958 is inconsistent with Article XI of the General
Agreement on Tariffs and Trade 1994 ("GATT 1994"); (b) Part V.1 of the ExciseTax Act is inconsistent
with Article III:2 of GATT 1994, or in the alternative, is inconsistent with Article III:4 of GATT 1994;
and (c) the application by Canada Post of lower postal rates to domestically-produced periodicals than
to imported periodicals is inconsistent with Article III:4 of GATT 1994, and the "funded" rate scheme
is not a domestic subsidy within the meaning of Article III:8 of GATT 1994. The United States requests
that the Panel recommend that Canada bring its measures into conformity with its obligations under
GATT 1994.
5.3 Canada requests the Panel to dismiss the US claims on the grounds that (a) Tariff Code 9958
is justifiable under Article XX(d) of GATT 1994; (b) Article III of GATT 1994 does not apply to
Part V.1 of the Excise Tax Act; even if the Panel decides that Article III of GATT 1994 applies to
these provisions, they do not violate Article III of the GATT 1994; and (c) Article III:4 of GATT 1994
does not apply to the "commercial" rates charged by Canada Post because they are the result of a
commercial and marketing policy and not influenced by government policy and the "funded" rate
scheme is a payment of subsidies allowable under Article III:8(b) of GATT 1994.
B. Tariff Code 9958
5.4 Tariff Code 9958 prohibits the importation into Canada of the following:
"1. Issues of a periodical, one of the four immediately preceding issues of which has, under
regulations that the Governor in Council may make, been found to be an issue of special edition,
including a split-run or a regional edition, that contained an advertisement that was primarily
directed to a market in Canada, and that did not appear in identical form in all editions of that
issue of that periodical that were distributed in the country of origin.
"2. Issues of a periodical, one of the four immediately preceding issues of which has, under
regulations that the Governor in Council may make, been found to be an issue of more than
five per cent of the advertising space in which consisted of space used for advertisements that
indicated specific sources of availability in Canada, or specific terms or conditions relating
to the sale of provision in Canada, of any goods or services except where the indication of
suchsourcesof availabilityorsuchterms orconditionswas primarilydirected at personsoutside
Canada".121
5.5 Since the importation of certain foreign products into Canada is completely denied under Tariff
Code 9958, it appears that this provision by its terms is inconsistent with Article XI:1 of GATT 1994.
Article XI:1 reads in relevant part as follows:
"No prohibitions or restrictions other than duties, taxes or other charges ... shall be instituted
or maintained by any [Member] on the importation of any product of the territory of any other
[Member] ...".
121Paragraphs 2.2-2.3 supra.

5.6 The question presented here is whether the import prohibition under Tariff Code 9958 may
be justified under other provisions of the WTO Agreement. Canada claims that the measure is justified
under Article XX(d) of GATT 1994. The relevant part of Article XX of GATT 1994 reads as follows:
"Subject to the requirement that such measures are not applied in a manner which would
constitutea means of arbitraryor unjustifiablediscrimination between countries where the same
conditions prevail, or a disguised restriction on international trade, nothing in this Agreement
shall be construed to prevent the adoption or enforcement by any [Member] of measures: ...
(d) necessary to secure compliance with laws or regulations which are not inconsistent with
the provisions of this Agreement, including those relating to customs enforcement, the
enforcement of monopolies operated under paragraph 4 of Article II and Article XVII, the
protection of patents, trade marks and copyrights, and the prevention of deceptive practices;
...".
5.7 Thepanel onUnitedStates- StandardsforReformulatedandConventionalGasolineapproached
this provision in the following fashion. Having stated that the party invoking an exception under
Article XX bore the burden of proving that the inconsistent measures came within its scope, the panel
observed that the complainant had to demonstrate the following elements:
"(1) that the measures for which the exception were being invoked - that is, the particular
trade measures inconsistent with the General Agreement - secure compliance with laws
or regulations themselves not inconsistent with the General Agreement;
"(2) that the inconsistent measures for which the exception was being invoked were necessary
to secure compliance with those laws or regulations; and
"(3) that the measures were applied in conformity with the requirements of the introductory
clause of Article XX".122
In order to justify the application of Article XX(d), according to the panel, all the above elements had
to be satisfied. We will follow the same approach in the present case.123
5.8 First, as to whether the import prohibition under Tariff Code 9958 secures compliance with
a law or regulation not inconsistent with GATT 1994, Canada argues that Tariff Code 9958 is a measure
intended to secure the attainment of the objectives of Section 19 of the Income Tax Act, which allows
for the deduction of expenses for advertising directed to the Canadian market on condition that the
advertisements appear in Canadian editions of Canadian periodicals. Since the United States is not
challenging the GATT consistency of Section 19 of the Income Tax Act in this proceeding, the issue
of GATT consistency is not before the Panel. However, the United States claims that Tariff Code
9958 is not a measure to "secure compliance" with the Income Tax Act.
5.9 The interpretative issue here is what is meant by "to secure compliance with laws and regulations"
in Article XX(d) of GATT 1994. In this connection, the panel on European Economic Community
- Regulations on Imports of Parts and Components found this phrase to mean "to enforce obligations
122Panel Report on United States - Standards for Reformulated and Conventional Gasoline, adopted on 20 May 1996,
WT/DS2/R, para. 6.31 (emphasis in original). The relevant part of the panel report was not modified by the Appellate Body.
123We note that the Appellate Body in a recent report stated as follows: "[Adopted panel reports] create legitimate
expectations among WTO Members, and, therefore, should be taken into account where they are relevant to any dispute".
Appellate Body Report on Japan - Taxes on Alcoholic Beverages, WT/DS8/AB/R, WT/DS10/AB/R and WT/DS11/AB/R,
p. 14.

under laws and obligations", not "to ensure the attainment of the objectives of the laws and
regulations".124 Canada suggests that this precedent should not be rigidly followed in the case of fiscal
or economic incentives in general, and particularly in the present case, because Tariff Code 9958 and
the income tax provision have always been considered part of a single, indivisible package. We are
not persuaded by this argument. Canada's view will inherently lead to a situation where "[w]henever
the objective of a law consistent with the General Agreement cannot be attained by enforcing the
obligationsunderthatlaw,the impositionof furtherobligationsinconsistentwiththe GeneralAgreement
could then be justified under Article XX(d) on the grounds that this secures compliance with the
objectives of that law", as was pointed out by the aforementioned panel.125 We fail to see any differences
thatwouldobviatethisproblem in the case of fiscal oreconomic incentives. It shouldbe noted,however,
that we are neither examining nor passing judgment on the policy objectives of the Canadian measure
regarding periodicals; we are nevertheless called upon to examine the instruments chosen by the Canadian
Government for the attainment of such policy objectives.
5.10 Tariff Code 9958 cannot be regarded as an enforcement measure for Section 19 of the Income
Tax Act. It is true that if a government bans imports of foreign periodicals with advertisements directed
at the domestic market, as does Canada in the present case, the possibility of non-compliance with
a tax provision granting tax deductions for expenses incurred for advertisements in domestic periodicals
will be greatly reduced. It would seem almost impossible for an enterprise to place an advertisement
in a foreign periodical because there would be virtually no foreign periodical available in which to
place it. Thus, there would be no way for the enterprise legally to claim a tax deduction therefor.
However, that is an incidental effect of a separate measure distinct (even though it may share the same
policyobjective)from the taxprovisionwhichisdesignedtogivean incentivefor placingadvertisements
in Canadian, as opposed to foreign, periodicals.126 We thus find that Tariff Code 9958 does not "secure
compliance" with Section 19 of the Income Tax Act.
5.11 In view of the above finding that Tariff Code 9958 does not secure compliance with Section 19
of the Income Tax Act, we need not consider whether the import prohibition under the Code is
"necessary" to secure compliance with the tax provision or whether the measure meets the conditions
in the introductory clause (or "chapeau") to Article XX. Canada has failed to satisfy at least one of
the conditions identifiedin paragraph 5.7 above. Thuswe conclude that Tariff Code 9958isinconsistent
with Article XI:1 of GATT 1994 and cannot be justified under Article XX(d).
C. The Excise Tax Act
5.12 We now turn to the examination of whether the 80 per cent excise tax on advertisements in
split-run periodicals under Part V.1 of the Excise Tax Act is compatible with Canada's obligations
under Article III of GATT 1994. The United States claims that Part V.1 of the Excise Tax Act is
inconsistent with Article III:2 of GATT 1994, or in the alternative, is inconsistent with Article III:4.
(i) Applicability of GATT 1994
5.13 Since Canada challenges the applicability of GATT 1994 to this part of the Excise Tax Act,
we address this issue first. Canada claims that Article III of GATT 1994 does not apply to Part V.1
124Panel Report on European Economic Community - Regulations on Imports of Parts and Components, adopted on
16 May 1990, BISD 37S/132, paras. 5.14-5.18.
125Ibid., para. 5.17.
126An import ban under these circumstances is rather likely to be an enforcement measure in respect of a ban on possession
or sale of a product. An import ban on alcoholic beverages might share the same objective as a criminal statute against
drunk driving, but if alcoholic drinks are not banned or their sale prohibited domestically, the import ban could not be considered
as an enforcement measure of the criminal statute.

of the Excise Tax Act because the latter is a measure pertaining to advertising services, which is within
the purview of the General Agreement on Trade in Services ("GATS"). Canada further claims that
the examination of Part V.1 of the Excise Tax Act in light of GATS is not covered by the terms of
reference of this Panel.
5.14 Canada's argument is essentially that since Canada has made no specific commitments for
advertising services under GATS, the United States should not be allowed to "obtain benefits under
a covered agreement that have been expressly precluded under another covered agreement".127 Put
another way, Canada seems to argue that if a Member has not undertaken market-access commitments
in a specific service sector, that non-commitment should preclude all the obligations or commitments
undertaken in the goods sector to the extent that there is an overlap between the non-commitment in
services and the obligations or commitments in the goods sector. Canada claims that because of the
existence of the two instruments - GATT 1994 and GATS - both of which may apply to a given measure,
"it is necessary to interpret the scope of application of each such as to avoid any overlap".128
5.15 We are notfullyconvinced byCanada's characterization of the ExciseTax as a measure intended
to regulate trade in advertising services, in view of the fact that there is no comparable regulation on
advertisements through othermedia and the fact thatthe tax is imposed ona "per issue"basis. However,
assuming that Canada intended to carve out Part V.1 of the Excise Tax Act from the coverage of its
GATS commitmentsbynotinscribingadvertisingservicesinitsSchedule129, doesthatexonerate Canada
from the Panel's scrutiny regarding the alleged violation of its obligations and commitments under
GATT 1994?
5.16 In order to answer this question, we need to examine the structure of the WTO Agreement
including its annexes. Article II:2 of the WTO Agreement is the relevant provision, which reads as
follows:
"The agreements and associated legal instruments included in Annexes 1, 2 and 3 ... are integral
parts of this Agreement, binding on all Members".130
5.17 According to Article 31(1) of the 1969 Vienna Convention on the Law of Treaties ("Vienna
Convention"), a treaty must 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.
Furthermore, as the Appellate Body has repeatedly pointed out, "one of the corollaries of the 'general
rule of interpretation' in the Vienna Convention is that interpretation must give meaning and effect
to all the terms of the treaty. An interpreter is not free to adopt a reading that would result in reducing
whole clauses or paragraphs of a treaty to redundancy or inutility".131 The ordinary meaning of the
texts of GATT 1994 and GATS as well as Article II:2 of the WTO Agreement, taken together, indicates
that obligations under GATT 1994 and GATS can co-exist and that one does not override the other.
If the consequences suggested by Canada were intended, there would have been provisions similar
to Article XVI:3 of the WTO Agreement or the General Interpretative Note to Annex 1A in order to
establish hierarchical order between GATT 1994 and GATS. The absence of such provisions between
127Paragraph 3.35 supra.
128Paragraph 3.38 supra.
129We note in this connection that Part V.1 of the Excise Tax Act was enacted in 1995, after Canada's acceptance of
the WTO Agreement.
130GATT 1994 is included in Annex 1A. GATS is included in Annex 1B.
131Appellate Body Report on United States - Standards for Reformulated and Conventional Gasoline, adopted on 20
May 1996, WT/DS2/AB/R, p. 23. Also cited in the Appellate Body Report on Japan - Taxes on Alcoholic Beverages, op.
cit., p.12.

the two instruments implies that GATT 1994 and GATS are standing on the same plain in the WTO
Agreement, without any hierarchical order between the two.
5.18 In this connection, Canada also argues that overlaps between GATT 1994 and GATS should
be avoided.132 We disagree. Overlaps between the subject matter of disciplines in GATT 1994 and
in GATS are inevitable, and will further increase with the progress of technology and the globalization
of economic activities. We do not consider that such overlaps will undermine the coherence of the
WTO system. In fact, certain types of services such as transportation and distribution are recognized
as a subject-matter of disciplines under Article III:4 of GATT 1994. It is also noteworthy in this respect
that advertising services have long been associated with the disciplines under GATT Article III. As
early as 1970, the Working Party on Border Tax Adjustment made the following observation:
"The Working Party noted that there was a divergence of views with regard to the eligibility
for adjustment of certain categories of tax and that these could be sub-divided into
(a) "Taxes occultes" which the OECD defined as consumption taxes on capital equipment,
auxiliarymaterials and services usedinthe transportationand productionofothertaxable goods.
Taxes on advertising, energy, machinery and transport were among the more important taxes
which might be involved. ... ;
(b) Certain other taxes, ...".133
We also note that there are several adopted panel reports that examined the issue of services in the
context of GATT Article III. For instance, the panel on Canada - Import, Distribution and Sale of
Certain Alcoholic Drinks by Provincial Marketing Agencies addressed the issues of access to points
of sale and restrictions on private delivery of beer.134 The panel on United States - Measures Affecting
Alcoholic and Malt Beverages also dealt with the issues of distribution of wine and beer.135 More to
the point, the panel on Thailand - Restrictions on Importation of and Internal Taxes on Cigarettes
specifically addressed the question of advertising.136
5.19 In any event, since Canada admits that in the present case there is no conflict between its
obligations under GATS and under GATT 1994137, there is no reason why both GATT and GATS
obligations should not apply to the Excise Tax Act. Thus, we conclude that Article III of GATT 1994
is applicable to Part V.1 of the Excise Tax Act.
(ii) GATT Article III:2
5.20 The next issue to be examined is whether there is a violation of Article III. The principal claim
of the United States is that Part V.1 of the Excise Tax is inconsistent with Article III:2 of GATT 1994.
The relevant parts of Article III read as follows:
132Paragraphs 3.38 and 5.14 supra.
133"Border Tax Adjustments", Report of the Working Party adopted on 2 December 1970 (L/3464), BISD 18S/97, para.
15 (emphasis added).
134Panel Report on Canada - Import, Distribution andSale ofCertain Alcoholic Drinksby ProvincialMarketing Agencies,
adopted on 18 February 1992, BISD 39S/27.
135Panel Report on United States - Measures Affecting Alcoholic and Malt Beverages, adopted on 19 June 1992, BISD
39S/206.
136Panel Report on Thailand - Restrictions on Importation of and Internal Taxes on Cigarettes, adopted on 7 November
1990, BISD 37S/200, para. 78.
137Paragraph 3.38 supra.

"1. The [Members] recognize that internal taxes and other internal charges, and laws,
regulations and requirements affecting the internal sale, offering for sale, purchase,
transportation, distribution or use of products, and internal quantitative regulations requiring
the mixture, processing or use of products in specified amounts or proportions, should not
be applied to imported or domestic products so as to afford protection to domestic production.
"2. The products of the territory of any [Member] imported into the territory of any other
[Member] shall not be subject, directly or indirectly, to internal taxes or other internal charges
of any kind in excess of those applied, directly or indirectly, to like domestic products.
Moreover, no [Member] shall otherwise apply internal taxes or other internal charges to imported
or domestic products in a manner contrary to the principles set forth in paragraph 1".
Furthermore, the Interpretative Note ad Article III reads in part as follows:
"A tax conforming to the requirements of the first sentence of paragraph 2 would be
considered to be inconsistent with the provisions of the second sentence only in cases where
competition was involved between, on the one hand, the taxed product and, on the other hand,
a directly competitive or substitutable product which was not similarly taxed".
5.21 In the present case, the following two questions need to be answered to determine whether
there is a violation of Article III:2 of GATT 1994: (a) Are imported "split-run" periodicals and domestic
non "split-run" periodicals like products?; and (b) Are imported "split-run" periodicals subject to an
internal tax in excess of that applied to domestic non "split-run" periodicals? If the answers to both
questions are affirmative, there is a violation of Article III:2, first sentence.138 If the answer to the
first question is negative, we need to examine further whether there is a violation of Article III:2, second
sentence.
(iii) Like product issue
5.22 As the Appellate Body confirmed in its report on Japan - Taxes on Alcoholic Beverages, the
definition of "like products" in Article III:2, first sentence, should be construed narrowly, on a case-by-
case basis, in light of such factors as the product's end uses in a given market, consumer's tastes and
habits, and the product's properties, nature and quality.139 In applying these criteria to the present
case, it should be noted that our mandate under the terms of reference of this Panel is not to discuss
the likeness of periodicals in general. The question before us, as presented by the United States in
itsrequestfor the establishmentof a panel (WT/DS31/2) and subsequentlyelaborated140, isa comparison
between imported "split-run" periodicals and domestic non "split-run" periodicals.
5.23 This comparison, at first glance, might seem impossible in view of the fact that there are no
imported "split-run" periodicals marketed in Canada due to the import prohibition under Tariff Code
9958. However, as the panel on "United States - Taxes on Petroleum and Certain Imported Substances"
observed, the rationale for the national treatment obligation of Article III is to protect expectations
138In this context, we need not examine the applicability of Article III:1 separately, because, as the Appellate Body
noted in its recent report, the first sentence of Article III:2 is, in effect, an application of the general principle embodied
in Article III:1. Therefore, if the imported and domestic products are "like products", and if the taxes applied to the imported
products are "in excess of" those applied to the like domestic products, then the measure is inconsistent with Article III:2,
first sentence. Appellate Body Report on Japan - Taxes on Alcoholic Beverages, op. cit., pp. 18-9.
139Ibid., p.20. According to the Appellate Body, the narrow construction of the term was necessary in Article III:2,
first sentence, "so as not to condemn measures that its strict terms are not meant to condemn".
140See paragraphs 3.104-3.108 supra.

of the Members as to the competitiverelationship between their productsand those of otherMembers.141
In so far as imported "split-run" periodicals are subject to the relevant provisions of the Excise Tax
Act (as Canada admits to be the case)142, the comparison can be made on the basis of a hypothetical
import.
5.24 We note in this regard that the Excise Tax Act defines a "split-run" edition of a periodical
in terms of its editorial content (whether more than 20 per cent of the editorial material is the same
or substantially the same as editorial material that appears in editions that are primarily distributed
outside Canada) and advertising content (whether it contains an advertisement that does not appear
in identical form in other editions distributed outside Canada). Despite the Canadian claim that the
purpose of the legislation is to promote publications of original Canadian content, this definition
essentially relies on factors external to the Canadian market - whether the same editorial content is
included in a foreign edition and whether the periodical carries different advertisements in foreign
editions.
5.25 Putting these external factors aside, imported "split-run" periodicals and domestic non "split-run"
periodicals can be extremely similar. In the course of the Panel process, Canada made the following
statement:
"Harrowsmith Country Life is a Canadian-owned magazine. Before the adoption of Part V.1
of the Excise Tax Act, Harrowsmith Country Life had two editions - A Canadian edition and
a US edition. The Canadian and the US editions had different advertisements and a certain
amount of common editorial content. Because more than 20 per cent of the editorial content
in the Canadian edition was the same as that in the US edition, the tax would have applied
to the Canadian edition (even if the editorial content was entirely produced in Canada). As
a result of the excise tax, Harrowsmith Country Life stopped publishing its US edition".143
In the case of this particular periodical, if all the volumes of Harrowsmith Country Life had been printed
in the United States (including its Canadian edition) and the Canadian edition had been exported to
Canada because they were somehow exempted from the coverage of Tariff Code 9958, and if the
publisher decided to publish the final issue of the US edition after the introduction of the excise tax,
the publisher would have been subject to the tax for the imported Canadian edition. If this publisher
thereafter discontinued the publication of the US edition, it would no longer be subject to the excise
tax. Now, let us compare the two issues of this hypothetical Harrowsmith Country Life (Canadian
edition) before and after the discontinuation of the US edition. These two editions would have common
end uses, very similar physical properties, nature and qualities. It is most likely that the two volumes
would have been designed for the same readership with the same tastes and habits. In all respects,
these two volumes are "like", and yet one is subject to the Excise Tax, while the other is not.
5.26 Thus, we conclude that imported "split-run" periodicals and domestic non "split-run" periodicals
can be like products within the meaning of Article III:2 of GATT 1994. In our view, this provides
sufficient grounds to answer in the affirmative the question as to whether the two products at issue
are like because, as stated earlier, the purpose of Article III is to protect expectations of the Members
as to the competitive relationship between their products and those of other Members, not to protect
141Panel Report on United States - Taxes on Petroleum and Certain Imported Substances, adopted on 17 June 1987,
BISD 34S/136, para. 5.2.2. See also the Panel Reports on Italian Discrimination against Imported Agricultural Machinery,
adopted on 23 October 1958, BISD 7S/60, para. 18, and on United States - Section 337 of the Tariff Act of 1930, adopted
on 7 November 1989, BISD 36S/345, para. 5.13.
142Paragraphs 3.58 and 3.98 supra.
143See paragraph 3.99 supra.

actual trade volumes. If Tariff Code 9958 were lifted, a wide variety of "split-run" periodicals ranging
from general news magazines to specialty journals dedicated to specific areas of business or profession
could be imported into Canada. This situation can hardly be called an "isolated instance of differential
taxation" as Canada describes.144
5.27 Having found that imported "split-run" periodicals and domestic non "split-run" periodicals
are likeproducts,we need not considerthe second sentence of ArticleIII:2. The onlyremaining question
is whether imported "split-run" periodicals are subject to an internal tax in excess of that applied to
domestic non "split-run" periodicals.
(iv) Taxation in excess: "directly or indirectly"
5.28 In light of the fact that the excise tax is applied only with respect to "split-run" periodicals,
it would seem evident that imported "split-run" periodicals are subject to an internal tax in excess of
one that is applied to domestic non "split-run" periodicals. However, Canada argues that the excise
tax does not apply "indirectly" to a good within the meaning of Article III:2. According to Canada,
the drafting history of this paragraph suggests that the expression "indirectly" was intended to capture
taxes that apply to inputs that contribute to the production of a good, and not to end products in their
own right. Canada also claims that the panel on Japan - Customs Duties, Taxes and Labelling Practices
on Imported Wines and Alcoholic Beverages interpreted the term in a manner consistent with Canada's
position.145
5.29 We note that the excise tax is not "directly" applied to periodicals in that it is levied on the
value of advertisements, not on the value of periodicals per se. However, it is clear that the tax is
applied in respect of each split-run edition of a periodical on a "per issue" basis. Therefore, the tax
is applied "indirectly" to periodicals within the ordinary meaning of the terms of Article III:2. Canada's
narrow reading of the term "indirectly" is supported only by Canada's own interpretation of the drafting
history, which is contested by the United States.146 Since, according to Article 32 of the Vienna
Convention, the preparatory work of a treaty is merely a supplementary means of interpretation to
be relied upon in cases where the terms of the treaty, taken in their context and in light of its object
and purpose, are ambiguous or obscure, or lead to a manifestly absurd or unreasonable result, we need
not take the drafting history into account on this particular point. Furthermore, the panel report cited
by Canada in support of its argument referred to taxation on raw materials by way of example. It
did not conclude that the scope of the term "indirectly" is limited to taxation on inputs.147 We thus
conclude that imported "split-run" periodicals are subject to an internal tax in excess of that applied
to domestic non "split-run" periodicals.
5.30 Having found that Part V.1 of the Excise Tax Act to be in violation of Article III:2, first
sentence, we need not examine whether it is inconsistent with Article III:2, second sentence or with
Article III:4.
D. Postal Rates
5.31 Now we proceed to examine whether the postal rates scheme applied by Canada Post
discriminates against foreign periodicals in contravention of Article III of GATT 1994, as argued by
the United States. There are two separate issues involved here: (a) whether the fact that Canada Post
144Paragraph 3.101 supra.
145Paragraph 3.49 supra.
146Paragraph 3.56 supra.
147Paragraph 3.49 supra.

applies the "commercial Canadian" rates or the "funded" rates to Canadian periodicals, which are lower
than the "international" rates applied to imported periodicals, constitute a violation of Article III:4148;
and (b) whether the "funded" rate scheme for certain periodicals is allowed as a subsidy within the
meaning of Article III:8(b).
(i) "International" versus "commercial Canadian" and "funded" rates
5.32 The United States claims that Canada Post's practice of charging domestic periodicals lower
postal rates than imported periodicals is in violation of Article III:4 of GATT 1994. The relevant part
of the Article reads as follows:
"4. 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 or use. The provisions of this
paragraph shall not prevent the application of differential internal transportation charges which
are based exclusively on the economic operation of the means of transport and not on the
nationality of the product".
In examining the relevance of this provision in the present dispute, we also need take into account
the first paragraph of Article III, which reads:
"1. The [Members] recognize that internal taxes and other internal charges, and laws,
regulations and requirements affecting the internal sale, offering for sale, purchase,
transportation, distribution or use of products, and internal quantitative regulations requiring
the mixture, processing or use of products in specified amounts or proportions, should not
be applied to imported or domestic products so as to afford protection to domestic production".
5.33 There isnodisagreement between the partiestothe disputethat,inrespect of thisissue,domestic
and imported periodicals are like products. We, too, so find. Nor does Canada contest the fact that
Canada Post applies higher postal rates to imported periodicals than to domestic periodicals, which
clearly affects the sale, transportation and distribution of imported periodicals. Canada's argument
is essentiallythat since Canada Postis a privatized agency (a Crown corporation)witha legal personality
distinct from the Canadian Government, the "commercial Canadian" or "international" rates it charges
for the delivery of periodicals are out of the Government's control and do not qualify as "regulations"
or "requirements" within the meaning of Article III:4.
5.34 The United States argues that Canada Post is a government entity fully subject to Canadian
Government direction because it is a wholly-government-owned, government-created chartered body,
managed by a board of directors appointed by the Canadian Government. Canada argues that the
different rates charged by Canada Post are a reflection of competitive situations and that the degree
of control the Government exercises over Canada Post's commercial operations (including delivery
of periodicals) is one dictated by the Government shareholder's interests. In other words, Canada
argues here that Canada Post's pricing policy is not a governmental measure subject to Article III:4.
The essential question then is whether Canada Post is implementing Canadian Government policy in
148We are aware that "international" rates applied to foreign periodicals belong to a subcategory of the "commercial"
rate scheme in a broader sense. See paragraphs 2.17-2.19 supra. However, in so far as different rates are applied between
"international" periodicals and "commercial Canadian" periodicals, it is necessary to draw the distinction. We are also aware,
as described in paragraph 5.1, that there are additional discounts for Canadian periodicals which are not generally available
to imported periodicals. In our view, these additional discounts constitute part of the "commercial Canadian" rate scheme.

such a manner that its postal rates on periodicals may be viewed as governmental regulations or
requirements for the purposes of Article III:4.
5.35 First, it is clear that Canada Post generally operates under governmental instructions. Canada
Post has a mandate to operate on a "commercial" basis in this particular sector of periodical delivery:
a mandate that was set by the Canadian Government.149 Second, Canada admits that if the Canadian
Government considers Canada Post's pricing policy to be inappropriate, it can instruct Canada Post
to change the rates under its directive power based on Section 22 of the Canada Post Corporation Act.150
Thus, the Canadian Government can effectively regulate the rates charged on the delivery of periodicals.
5.36 This analysis is unaffected by the fact that Canada Post has a legal personality distinct from
the Canadian Government. The panel on Japan - Trade in Semi-Conductors faced a similar question
withrespecttotheinterpretationofthestatusof"administrativeguidance"giventoprivate-sectorentities
in interpreting the term "measures" in Article XI:1. The panel stated as follows:
"In order to determine [whether the measures taken in this case would be such as to constitute
a contravention of ArticleXI], the Panel considered thatit needed to be satisfied on twoessential
criteria. First, there were reasonable grounds to believe that sufficient incentives or disincentives
existed for non-mandatory measures to take effect. Second, the operation of the measures ...
was essentially dependent on Government action or intervention. The Panel considered each
of these two criteria in turn. The Panel considered that if these two criteria were met, the
measures would be operating in a manner equivalent to mandatory requirements such that the
difference between the measures and mandatory requirements was only one of form and not
of substance, and that there could be therefore no doubt that they fell within the range of
measures covered by Article XI:1".151
Applying this two-pronged test, mutatis mutandis, to the present case, we conclude that the pricing
policyof Canada Postis a governmental measure. First,inview of the control exercised bythe Canadian
Government on "non-commercial" activities of Canada Post, we can reasonably assume that sufficient
incentives exist for Canada Post to maintain the existing pricing policy on periodicals. Second, as
analyzed in the previous paragraph, Canada Post's operation is generally dependent on Government
action. This leads us to the conclusion that Canada Post's pricing policy on periodicals can be regarded
as governmental regulations or requirements within the meaning of Article III:4 of GATT 1994.
5.37 Given that imported and domestic periodicals are like products and that Canada Post charges
lower rates on domestic periodicals than imported ones, this conclusion might seem sufficient to
determine that a less favourable treatment is accorded to imported products in violation of Article III:4.
However, before reaching that determination, as the Appellate Body has stated, we need to turn to
Article III:1 as a general principle that informs the rest of Article III.152 Article III:1 constitutes part
of the context of Article III:4, which is to be taken into account in our interpretation of the latter, under
Article 31(1) of the Vienna Convention.
149From the entirety of Canada's submissions, we take it that the Canadian Government considers Canada Post's pricing
policy on periodicals to be driven by "commercial" considerations, although we fail to understand why any document delivery
operation aiming at profit maximization would want to make artificial distinctions based on the origin of documents.
150Paragraph 3.156 supra.
151Panel Report on Japan - Trade in Semi-Conductors, adopted on 4 May 1988, BISD 35S/116, para. 109.
152Appellate Body Report on Japan - Taxes on Alcoholic Beverages, op. cit., p. 18. The Report states: "The purpose
of Article III:1 is to establish this general principle as a guide to understanding and interpreting the specific obligations contained
in Article III:2 and in the other paragraphs of Article III, while respecting, and not diminishing in any way, the meaning
of words actually used in the texts of those other paragraphs".

5.38 Article III:1 articulates a general principle that internal measures should not be applied so as
to afford protection to domestic production.153 The protective application of a measure can most often
be discerned from the design, the architecture, and the revealing structure of the measure.154 We find
that the design, architecture and structure of Canada Post's different pricing policy on domestic and
imported periodicals all point to the effect that the measure is applied so as to afford protection to the
domestic production of periodicals. In the case of "funded" rates, the scheme is clearly designed to
promote domestic production of periodicals with Canadian content under the supervision of Canadian
Heritage. In the case of "commercial Canadian" rates, the very fact that they are lower than
"international" rates which are applied to imported products strongly suggests that the scheme is operated
so as to afford protection to domestic production.
5.39 In light of the above, we find that Canada Post's application of the "commercial Canadian"
and "funded" rates to Canadian periodicals, which are lower than the "international" rates applied to
imported periodicals (including the availability of additional discounts only to Canadian periodicals),
is inconsistent with Article III:4 of GATT 1994.
(ii) Applicability of Article III:8(b) to the "funded" rate scheme
5.40 Having found that the "funded" rate scheme violates Article III:4 of GATT 1994, we next
examine whether this scheme is justified under Article III:8(b) of GATT 1994, as argued by Canada.
The relevant part of Article III:8 reads as follows:
"(b) The provisions of this Article shall not prevent the payment of subsidies exclusively
to domestic producers, including payments to domestic producers derived from the proceeds
of internal taxes or charges applied consistently with the provisions of this Article and subsidies
effected through governmental purchases of domestic products".
5.41 The United States claims that this provision is not applicable in the present case because the
payment of subsidies by Canadian Heritage is not made directly to Canadian publishers, but rather
to Canada Post. The United States argues that past panels have interpreted the term "exclusively"
narrowly, to mean only direct payments to domestic producers.155 To support its argument, the United
States quotes the following paragraph from the panel report on European Economic Community -
Payments and Subsidies Paid to Processors and Producers of Oilseeds and Related Animal-Feed Proteins
(the "Oilseeds" case):
"The Panel noted that Article III:8(b) applies only to payments made exclusively to domestic
producers and considered that it can reasonably be assumed that a payment not made directly
to producers is not made "exclusively" to them. It noted moreover that, if the economic benefits
generated by the payments granted by the Community can at least partly be retained by the
processors of Community oilseeds, the payments generate a benefit conditional upon the purchase
of oilseeds of domestic origin inconsistently with Article III:4. Under these circumstances
Article III:8(b) would not be applicable because in that case the payments would not be made
exclusively to domestic producers but to processors as well".156
153Ibid., p. 18.
154Ibid., p. 29.
155Paragraphs 3.191-3.197 supra.
156Panel Report on European Economic Community - Payments and Subsidies Paid to Processors and Producers of Oilseeds
and Related Animal-Feed Proteins, adopted on 25 January 1990, BISD 37S/86, para. 137 (emphasis in original).

5.42 We do not disagree with this panel report. However, the United States has failed to show that
the factual situation in the present case is similar to that in the Oilseeds case. Particularly, the United
States has not submittedany evidence toindicatethatthe economic benefitsare partlyretained byCanada
Post. Furthermore, this argument by the United States is inconsistent with its position regarding
Article III:4, where it maintains that Canada Post is a government agency. If Canada Post is a
government agency, the payment of funds from Canadian Heritage to Canada Post is merely an internal
transfer of resources, and the payment of the subsidy is made directly to Canadian publishers.
5.43 Canada, on the other hand, explains that the payment of the funds from Canadian Heritage
to Canada Post is made based on negotiations between the two agencies, taking into account the fact
that Canada Post gets an exclusive contract for the delivery of periodicals at subsidized rates.157
Following the logic of the Oilseeds panel cited above, one could argue that there is a reasonable
assumption that the "funded" rate scheme is not an exclusive payment of subsidies because the payment
isnot made directly tothe beneficiary. However, inour view, Canada has presented an effective rebuttal
to this assumption.
5.44 Thus, we do not find that Canada Post retains any economic benefits from the "funded" rate
scheme it applies to certain Canadian periodicals. The payment of the subsidy is made "exclusively"
to Canadian publishers that qualify for the scheme. Since Article III:8(b) explicitly recognizes that
subsidies exclusively paid to domestic producers are not subject to the national treatment rules of
Article III, including those under Article III:4, we find that Canada's "funded" rate scheme on periodicals
can be justified under this provision.
E. Concluding Remarks
5.45 Before concluding, in order to avoid any misunderstandings as to the scope and implications
of the findings above, we would like to stress that the ability of any Member to take measures to protect
its cultural identity was not at issue in the present case. The only task entrusted to this Panel was to
examine whether the treatment accorded to imported periodicals under specific measures identified
in the complainant's claim is compatible with the rules of GATT 1994.
VI. CONCLUSIONS
6.1 On the basis of the findings set out in paragraphs 5.1 to 5.44 above, the Panel concludes that
(a) Tariff Code 9958 is inconsistent with Article XI:1 of GATT 1994 and cannot be justified under
Article XX(d) of GATT 1994; (b) Part V.1 of the Excise Tax Act is inconsistent with Article III:2,
first sentence, of GATT 1994; (c) the application by Canada Post of lower "commercial Canadian"
postal rates to domestically-produced periodicals than to imported periodicals, including additional
discount options available only todomestic periodicals, isinconsistent with ArticleIII:4 of GATT1994;
but (d) the maintenance of the "funded" rate scheme is justified under Article III:8(b) of GATT 1994.
6.2 The Panel recommends that the Dispute Settlement Body request Canada to bring the measures
that are found to be inconsistent with GATT 1994 into conformity with its obligations thereunder.
157Paragraph 3.173 supra.