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BP-380E
REDUCTION OF
TARIFFS ON SUPPLY MANAGED
COMMODITIES UNDER THE GATT AND THE NAFTA
Prepared by Anthony
Chapman
Economics Division
Margaret Smith
Law and Government Division
February 1994
TABLE
OF CONTENTS
INTRODUCTION
TARIFFICATION
UNDER THE URUGUAY ROUND
PRECEDENCE
OF THE NAFTA OR THE GATT WITH RESPECT TO
THE
GATT TARIFFICATION MEASURES
A. Canada-U.S. Trade
B. Canada-Mexico Trade
C. Dispute Settlement
CONCLUSION
REDUCTION OF
TARIFFS ON SUPPLY MANAGED
COMMODITIES UNDER THE GATT AND THE NAFTA
INTRODUCTION
Currently, Canada strictly
limits the quantities of dairy products, poultry and eggs that can be
imported. Without such import quotas, domestic supply management programs
for these products would be ineffective in raising prices since imports
would be drawn in to satisfy domestic demand.
Authorization for these
quotas is provided under Article XI:2(c)(i) of the General Agreement on
Tariffs and Trade ("GATT"), which permits import restrictions
on agricultural and fisheries products "necessary to the enforcement
of governmental measures which operate: (i) to restrict the quantities
of the like domestic product" to be marketed or produced.
Under the terms of the GATT
Uruguay Round agreement reached in December 1993, quotas on agricultural
imports must be converted into their tariff equivalents by 1 July 1995
and reduced over a six-year period commencing in 1995 by a minimum rate
of 15% per product. Overall, tariffs on agricultural goods, including
tariff equivalents, must be decreased by 36% over the six years. To fulfil
its obligations under the GATT agreement, the Canadian government is proposing
to replace its system of import quotas for poultry, eggs and dairy products
with tariffs.
Under the terms of the North
American Free Trade Agreement ("NAFTA"), however, the Parties
are required to eliminate duties on each other's goods. Canada-U.S. trade
is governed by the tariff phase-out schedule of the Canada-United States
Free Trade Agreement ("CUSTA"). Under the CUSTA, tariffs are
to be eliminated according to three arrangements: a) immediately; b) over
five years; or c) over ten years.
The conflict between the
GATT tariff reduction provisions (15% per tariff item over six years -
36% overall) and the NAFTA/CUSTA requirement for the complete elimination
of all Canada-U.S. tariffs by 1998 raises questions as to which agreement
takes precedence.
The Canadian and U.S. governments
have differing views on the matter. Canada takes the position that the
GATT tariff reduction provisions prevail, while the U.S. contends that
the tariffs imposed under the GATT will have to be reduced and eventually
eliminated in accordance with the NAFTA. The following discussion reviews
the relevant GATT and NAFTA articles and raises some of the possible arguments
on both sides of the issue.
TARIFFICATION UNDER
THE URUGUAY ROUND
In the Agreement on Agriculture
concluded in the Uruguay Round multilateral trade negotiations, Parties
agreed among other things, to convert all non-tariff barriers to tariffs
by 1 July 1995. Article 4(2) of this Agreement provides that:
Members shall not maintain,
resort to, or revert to any measures of the kind which have been required
to be converted into ordinary customs duties, except as otherwise provided
for in Article 5 and Annex 5 hereof.(1)
A footnote accompanying
Article 4 notes that measures that must be converted into customs duties
include quantitative import restrictions. Other documentation flowing
from the Uruguay Round clearly states that import quotas are to be transformed
into tariff equivalents.(2)
The Canadian government
proposes that the tariff equivalent of existing quotas should amount to
283.8% for milk, 351.4% for butter, 289% for cheddar cheese, 280.4% for
chicken and 192.3% for eggs.
PRECEDENCE
OF THE NAFTA OR THE GATT WITH RESPECT TO
THE
GATT TARIFFICATION MEASURES
A.
Canada-U.S. Trade
Throughout the NAFTA, there
are numerous references to the GATT. Article 103(2) of the NAFTA establishes
the principle that the NAFTA takes precedence over the GATT and other
agreements to which Canada, Mexico and the United States are signatories,
except where the NAFTA provides otherwise. Thus, for the GATT tariffication
requirement and consequent reduction schedule to prevail over the NAFTA
tariff elimination provisions, the NAFTA must recognize the GATT requirements
as an exception to the general NAFTA provisions.
As mentioned earlier, under
the GATT, import tariffs are to replace non-tariff barriers on agricultural
products, and all tariffs, including those imposed as a result of tariffication,
are to be reduced over a period of six years from 1995 to 2001 by a minimum
of 15% per product or 36% overall. The NAFTA, on the other hand, prohibits
Canada and the United States from increasing any existing customs duty
or adopting any new customs duty unless the Agreement otherwise provides
and requires tariffs on agricultural products to be eliminated by 1 January
1998 (Articles 302(1) and (2)).
However, the scope and coverage
of Article 302, indeed all of Chapter 3 of the NAFTA, is restricted explicitly
by the Chapter's first provision, which allows for exceptions to the NAFTA's
market access and tariff elimination provisions. Article 300 provides
that:
This Chapter applies to
trade in goods of a Party, including: ...
(c) goods covered by another Chapter in this Part,
except as provided in such ... Chapter.
The NAFTA chapter governing
trade in agricultural goods is Chapter 7. At the outset, Article 701(2)
establishes the primacy of the sections dealing with agriculture over
other provisions of the NAFTA in the event of inconsistencies.
The specifics of agricultural
trade between the Parties are set out in Annexes to the Chapter. Annex
702.1 incorporates into the NAFTA a series of CUSTA provisions dealing
with agricultural trade between Canada and the United States, including
CUSTA Article 710. This article refers to Canada's rights and obligations
under the GATT and states:
Unless otherwise specifically
provided in this Chapter, the Parties retain their rights and obligations
with respect to agricultural, food, beverage and certain related goods
under the General Agreement on Tariffs and Trade (GATT) and agreements
negotiated under the GATT,(3) including their rights and
obligations under GATT Article XI.
Paragraph 4 of Annex 702.1
amplifies this provision by stating that Canada and the U.S. understand
that CUSTA Article 710 incorporates their GATT rights and obligations
with respect to agricultural trade. Thus, by incorporating CUSTA Article
710 into its provisions, the NAFTA makes Canada's obligations respecting
agricultural trade under the GATT and agreements negotiated under the
GATT a component of the NAFTA.
But what if these GATT obligations
conflict with the market access and tariff elimination provisions of Chapter
3 of NAFTA? As previously noted, Article 300 of NAFTA permits Article
302 to be circumscribed by the provisions of other Chapters of the NAFTA
and Article 701(2) makes Chapter 7 paramount where there is an inconsistency
with other NAFTA provisions. Moreover, international treaty law provides
that when one treaty, in this case the NAFTA, explicitly states that it
is subject to the provisions another treaty, as the NAFTA does with the
GATT, the other treaty prevails in the event of a conflict.(4)
As a result, it would appear that the GATT rights and obligations maintained
under CUSTA Article 710 could override both the NAFTA prohibition on the
creation of new customs duties and its tariff elimination schedule.
While it can be argued that
Canada's GATT rights and obligations are incorporated into the NAFTA and
may prevail in the event of a conflict with the NAFTA, an important remaining
question is what particular GATT rights and obligations are incorporated:
are they those in existence before the NAFTA came into force or those
that might arise after the NAFTA became operative? In other words, does
the recent Uruguay Round Agreement on Agriculture, even though it comes
into effect after NAFTA, qualify as an agreement negotiated under the
GATT that would be incorporated into NAFTA by virtue of CUSTA Article
710? This involves a determination of whether the phrase "agreements
negotiated under the GATT" referred to in CUSTA Article 710 covers
prospective as well as existing GATT agreements.
In this regard, Article
103(1) of NAFTA is instructive. Under this Article, the Parties affirm
their "existing" GATT rights and obligations, that is, their
rights and obligations in effect on 1 January 1994.(5) However, neither CUSTA Article
710 nor Annex 702.1(4), which incorporate into the NAFTA the GATT rights
and obligations of Canada and the United States, is qualified by the word
"existing." Thus, it could be argued that the GATT rights and
obligations incorporated into the NAFTA are prospective and therefore
include those agreed to at the Uruguay Round.
Article 309(1) of NAFTA,
which deals with quantitative restrictions on imports and exports, could
also lend support for the argument that future GATT rights and obligations
are incorporated into the NAFTA. It provides as follows:
Except as otherwise provided
in this Agreement, no Party may adopt or maintain any prohibition or
restriction on the importation of any good of another Party or on the
exportation or sale for export of any good destined for the territory
of another Party, except in accordance with Article XI of the GATT,
including its interpretative notes, and to this end Article XI of the
GATT and its interpretative notes, or any equivalent provision of a
successor agreement to which all Parties are Party, are incorporated
into and made part of this Agreement.
Since Article 309 provides
for the incorporation into the NAFTA of successor agreements to GATT Article
XI, it could be argued that the provisions of the Uruguay Round agreement
on the tariffication of import quotas and the accompanying tariff reductions
are equivalent provisions of a successor agreement to Article XI and are
therefore incorporated into the NAFTA. More generally, it could be argued
that because Article 309 and other NAFTA articles clearly contemplate
future GATT agreements, it would not be logical for the NAFTA agriculture
provisions to apply only to GATT obligations in force prior to 1 January
1994.
On the other hand, these
same provisions might be used to support a position favouring the precedence
of the NAFTA tariff reduction schedule. Contrary to the argument presented
above, it could be asserted that Article 309 was intended to govern trade
barriers of a quantitative nature rather than customs tariffs. Article
309 is similar in language to GATT Article XI, which is entitled "General
Elimination of Quantitative Restrictions." Furthermore, Article 309
is found in the Chapter 3 of the NAFTA under, "Section C - Non-Tariff
Measures." It is not clear from the text of the Article that the
negotiators intended to sanction successor agreements to GATT Article
XI other than those of a quantitative nature. Article 309 proscribes import
and export restrictions unless they accord with Article XI of the GATT
and it is "to this end"(6)
that the NAFTA incorporates Article XI or any equivalent provision of
a successor agreement. The "end" or purpose to which Article
309 refers is that of limiting the use of quantitative restrictions to
the special cases provided for in GATT Article XI and successor agreements.
As a result, it could be argued that Article 309 would not support the
imposition and maintenance of customs duties under the Canadian tariffication
proposal.
The fact that some provisions
of the NAFTA, such as Article 309, specifically refer to future GATT agreements
might be used to support arguments against the position that NAFTA incorporates
the tariffication and tariff elimination provisions of the Uruguay Round.
It might be contended that the absence of any specific reference to future
or successor agreements in Annex 702.1, when such references are included
in other NAFTA Articles, could be interpreted to mean that the NAFTA contemplates
only current GATT obligations.
B.
Canada-Mexico Trade
The elimination of tariffs
with Mexico is covered under Article 302 and Annex 302.2 of NAFTA, which
provide for a maximum phase-out period of 15 years. In fact, all Canadian
tariffs against Mexican goods will be eliminated by 1 January 2003. Duties
on poultry, egg and dairy products, however, are exempt from the general
tariff elimination provisions (Article 703(2) and Annex 703.2).
Under Annex 703.2, Canada
and Mexico have agreed to incorporate into NAFTA their rights and obligations
with respect to agricultural goods under the GATT and agreements negotiated
under the GATT, including their rights and obligations under GATT Article
XI. The Annex also provides that either Canada or Mexico may adopt or
maintain a prohibition or restriction or a customs duty on the importation
of poultry, egg and dairy products originating from the other.
C.
Dispute Settlement
Unless Canada and the United
States can agree to settle any disagreement over tariff reductions on
supply managed goods, formal dispute settlement procedures are likely
to be initiated. Chapter 20 of the NAFTA establishes a dispute settlement
procedure in connection with disputes that may arise over the interpretation
or application of the Agreement or when a Party considers a measure to
be inconsistent with the obligations of the Agreement or to cause nullification
or impairment (Article 2004).
A dispute over the introduction
or reduction of tariffs on supply managed goods would likely fall under
the Chapter 20 dispute settlement provisions, since it relates to the
interpretation or application of the NAFTA. The U.S. might also claim
that Canada's refusal to eliminate tariffs on these goods is inconsistent
with the obligations of the NAFTA and thus causes nullification or impairment
of the benefits the U.S. expected to receive under the Agreement.
The NAFTA, however, does
not preclude dispute settlement under the GATT. Generally, disputes that
may arise under both the NAFTA and the GATT may be settled in either forum
at the discretion of the complaining Party, which, if it wishes to initiate
a GATT dispute settlement proceeding, must notify any third Party of its
intention. Should the third Party wish to have recourse to the dispute
settlement procedure regarding the matter, it and the complaining Party
must decide on a single forum. If they are unable to agree, the dispute
must normally be decided under the NAFTA (Article 2005(2)). Once dispute
settlement procedures have been initiated under the GATT or Chapter 20
of NAFTA, however, the forum cannot be changed.
CONCLUSION
Unless the NAFTA provides
otherwise, it takes precedence over the GATT. The NAFTA does not specifically
provide Canada with the right to maintain or adopt customs duties on dairy,
poultry and egg products imported from the U.S. Thus, to support its position
on tariffication and the reduction of tariffs according to the GATT Uruguay
Round Agreement, Canada must rely on certain provisions of the NAFTA (e.g.,
Article 309) and the CUSTA (e.g., Article 710) as well as general principles
of international law.
A case can be made to support
the view that Canada has the right to apply tariffs in accordance with
the Uruguay Round Agreement on Agriculture. Nevertheless, the U.S. position
that the NAFTA takes precedence over the GATT in the matter of tariff
reductions cannot be discounted.
(1) Agreement on Agriculture, MTN/FA II-A1A-3,
Article 4.
(2) Modalities for the Establishment of Specific
Binding Commitments under the Reform Programme, MTN.GNG/MA/W/24, Annex
3.
(3) Emphasis added.
(4) Vienna Convention on the Law of Treaties
Between States and International Organizations or Between International
Organizations, Article 30(2).
(5) According to Article 201(1) of the NAFTA,
"existing" rights and obligations are those in effect when the
NAFTA comes into force.
(6) Emphasis added.
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