Canada - Certain Measures Affecting

the Automotive Industry

(Canada Autos)
 PARTIES
Complainant: Japan & European Communities
Respondent: Canada
Establishment of Panel: November 1998
 PRODUCT AT ISSUE
Motor vehicle imports and imported motor vehicle parts and
materials.
 SUMMARY OF THE CASE
Japan and the European Community (EC) requested that the Dispute
Settlement Body establish a panel to examine a complaint against the
operation of the Auto Pact as implemented by Canada in 1965 as a
bilateral agreement between the US and Canada.

Japan and the EC argued that certain measures under the Auto Pact were
contrary to Canada's obligations to the WTO.

In particular, the complaints were focused on the provisions allowing only

certain motor-vehicle manufacturers operating in Canada to import
vehicles into Canada duty-free and to distribute them in Canada at the
wholesale and retail levels.
 This duty-free treatment was contingent on two requirements:
1. A Canadian value-added (CVA) content requirement that applied to both goods
and services.
2. Certain performance requirements based on production-to-sales ratios.

In other words, the United States allowed qualified manufacturers to import

automobiles and parts that originated from Canada duty-free and Canada allowed
qualified manufactures to import automobiles and parts from around the world
duty-free provided they maintained a certain production presence within Canada.

The Panel struck down the Auto Pact on the grounds that it violated Art I:1.
 Subsequently, Canada appealed against the conclusions of the Panel.

More specifically, Canada requested the Appellate Body (AB) to reverse

the Panel findings concerning the alleged incompatibility of the Auto Pact
with the Most Favoured Nation (MFN) clause in the GATT and GATS
agreements.

The AB, however, affirmed the decision of the Panel, confirming that the
import duty exemption violates the MFN clause and that the scheme
constitutes an export subsidy.
 CONTENTIONS OF THE PARTIES
1. Japans Argument:

Japans core argument was that the Auto Pact was designed to be discriminatory in nature and that this
discrimination was exacerbated by the implementation of the Canada-US Free Trade Agreement
(CUFTA) and the North American Free Trade Agreement (NAFTA).

Japan argued that the eligibility limitation to qualify for duty-free status under the Auto Pact violated
Article I: 1 of GATT because it had the effect of de facto discrimination in favour of certain countries.

Since 1989, the Auto Pact Member list was closed, blocking new companies from being eligible for
import duty-free. After 1989, the only way a company that was not on the list could qualify for duty free
treatment afforded under the Auto Pact was through affiliation with a company that was already on the
list. Therefore, not allowing any new companies to achieve duty-free status, Canada discriminated
against companies based on their origin.
2. ECs Argument:

The EC claimed that the Auto Pact discriminates based on origin of the
manufacturer, explicitly naming the Big Three American manufacturers:
General Motors Corp., Ford Motor Co., and Chrysler Corp.

The EC argued that local content requirements, including those that compel a
manufacturer to use domestically produced goods in order to obtain an
advantage, are prohibited by the GATT Agreement.

Finally, the EC asserted that the tariff exemption constitutes a subsidy within the
meaning of Article 1.1 of the SCM Agreement because revenue that would
otherwise be due to the Canadian Government is foregone, thereby conferring a
benefit to the beneficiaries.
3. Canadas Argument:

Canada argued that the Auto Pact does not discriminate based on national origin, nor do
the conditions contained in the CVA requirements constitute a subsidy. The tariff regime
under the Auto Pact is fully consistent with Article I of GATT.

Also, Canada maintained that the mere limitation of the number of eligible beneficiaries to
the Auto Pact did not violate Article I: 1 as it forbids only discrimination based on origin of
the product. A WTO Member may therefore treat products differently so long as the
distinction in treatment is not national origin. Canada maintained that the Auto Pact does
not make distinction based on imports based on origin.

In addition, Canada argued that even if there was a de facto advantage toward its North
American Free Trade Agreement (NAFTA) partners, that advantage would be legitimate for
NAFTA is a free trade zone and as such, exempted from the disputed provisions of Article I:
1.
 REASON BEHIND DECISION OF THE PANELS
GATT Art. I (most-favoured-nation treatment): Duty exemption was inconsistent with the most-favoured-nation treatment
obligation under Art. I:1 on the ground that it covers de jure but & de facto discrimination and that the duty exemption at
issue in reality was given only to the imports from a small number of countries in which an exporter was affiliated with
eligible Canadian manufacturers/importers. The Panel rejected Canada's defence that Art. XXIV allows the duty exemption
for NAFTA members (Mexico and the United States), because it found that the exemption was provided to countries other
than the United States and Mexico and because the exemption did not apply to all manufacturers from these countries.

GATT Art. III:4 (national treatment domestic laws and regulations): CVA requirements forcing the use of domestic
materials to be eligible for tax exemption resulted in less favourable treatment to imports under Art. III:4 by adversely
affecting the conditions of competition for imports

GATS Arts. I:1 (scope of measures affecting trade in services) and II:1 (most-favoured-nation treatment): Reversing the
Panel, AB found that (i) determination of whether a measure is covered by the GATS must be made before the assessment
of that measure's consistency with any substantive obligation of the GATS; (ii) the Panel failed to examine whether the
measure affected trade in services within the meaning of Art. I:1; and (iii) the Panel failed to assess properly the relevant
facts and to interpret Art. II:1.

Thus, the Panel's conclusion that the measure was inconsistent with Art. II:1 was reversed
 APPLICATION OF THE PRINCIPLE
2 main arguments have been advanced with respect to the alleged inconsistency of this
import duty exemption with Article I:1 :-

1) Japan argues that the import duty exemption is inconsistent with Article I:1 because, by
conditioning the exemption on criteria which are unrelated to the imported product itself,
Canada fails to accord the exemption immediately and unconditionally to like products originating
in the territories of all WTO Members.

2) Both the European Communities and Japan argue that the limitation of the eligibility for
the import duty exemption to certain motor vehicle manufacturers is inconsistent with Article I:1
on the grounds that it entails de facto discrimination in favour of products of certain countries.
Whether the import duty exemption is awarded "immediately and unconditionally?

Interpretation of Japan does not accord with the ordinary meaning of the term
unconditionally in Article I:1 in its context and in light of the object and purpose of Article
I:1. In applying, whether an advantage within the meaning of Article I:1 is accorded
"unconditionally" cannot be determined independently of an examination of whether it
involves discrimination between like products of different countries.

The word "unconditionally" in Article I:1 does not pertain to the granting of an advantage per
se, but to the obligation to accord to the like products of all Members an advantage which
has been granted to any product originating in any country. The purpose of Article I:1 is to
ensure unconditional MFN treatment. In this context, the obligation to accord
"unconditionally" to third countries which are WTO Members an advantage which has been
granted to any other country means that the extension of that advantage may not be made
subject to conditions with respect to the situation or conduct of those countries. This means
that an advantage granted to the product of any country must be accorded to the like
product of all WTO Members without discrimination as to origin.
 Japan's argument has been rejected, by making the import duty exemption on motor vehicles
conditional on criteria that are not related to the imported products themselves, Canada fails
to accord the exemption immediately and unconditionally to the like product originating in
the territories of all WTO Members. Canada's import duty exemption cannot be held to be
inconsistent with Article I:1 simply on the grounds that it is granted on conditions that are
not related to the imported products themselves. Rather, it should be determined whether
these conditions amount to discrimination between like products of different origins.
Whether the import duty exemption discriminates in favour of motor vehicles of certain
countries?

GATT and WTO dispute settlement cases demonstrate that to prove a de facto violation of
Article I:1 it must be shown that a criterion that is neutral on its face is in fact able to be met
only by products of a particular origin or origins such that national origin determines the
tariff treatment the product receives. In the case at hand, there are no such criteria that
determine the origin of the products which may be imported under the import duty
exemption. In the view of Canada, the mere limitation of the number of eligible importers is
not inconsistent with Article I:1 given that there are no conditions restricting the origin of
products imported by the beneficiaries. In this connection, Canada submits that there is no
basis in GATT and WTO case law for the view that a de facto violation of Article I:1 can be
established on the basis of the commercial decisions of importers with respect to their
sources of supply.
 GATT/WTO jurisprudence has established that Article I:1 encompasses both de jure and de
facto forms of discrimination. The instant case differs from situations addressed in some of
the Panel Reports referred to by the parties with respect to the issue of de facto
discrimination under Article I:1 in that in the present case such discrimination is alleged to
arise from conditions with regard to the importers eligible for the import duty exemption
rather than from conditions applied with respect to the products imported by such
importers: the complainants essentially argue that there is de facto discrimination as a result
of the fact that only certain importers in Canada qualify for the import duty exemption. In
their view, this effectively limits the benefit of that exemption to the products of certain
Members in whose territories are located companies related to those importers.
By reserving the import duty exemption provided for in the MVTO 1998 and the SROs to
certain importers, Canada accords an advantage to products originating in certain countries
which advantage is not accorded immediately and unconditionally to like products originating
in the territories of all other WTO Members. Hence, the application of this measure is found
to be inconsistent with Canada's obligations under Article I:1 of the GATT.