An analysis of the ruling on article III:2 of the GATT on Canada – Periodicals


In analysing any dispute settlement submitted to the World Trade Organization, one is bound to encounter ample discussion the precise meaning of each meaningful fraction of the applicable rules. The way by which the meaning is delimited is by an interpretative effort of the Panels and, in some instances, the Appellate Body. In this manner, arguments presented by participating countries can very well be effective in determining the rules of fringe cases, either by including or excluding some fact of the incidence of the rule. It then becomes very important for anyone trying to understand the meaning of a rule to study cases in which the Dispute Settlement Body settled a hard case, effectively creating the meaning of the text. One such case is that of Canada – Periodicals (DS31), in which the Appellate Body effectively overturned the Panel’s findings on a matter of Law concerning the interpretation of Article III:2 of the GATT 1994.

Briefly and for our purposes, the United States of America claimed that Canada’s Tariff Code 9958, Part V.1 of the Excise Tax Act was in violation of Article III:2 of the GATT in that it did not afford national treatment to American split-run periodicals; Canada refuted this claim in various points as will be analysed opportunely. It is necessary at this moment to define what are split-run and non split-run periodicals. For our purposes it suffices to say that split-run periodicals are those that are produced in a region and are reprinted when distributed in another region. The periodical would then have two separate runs (therefore the split part), for two different consumer markets, which would allow advertisers to market specifically for one market over another.

Paragraphs 1 and 2 of Article III read:

1. The contracting parties 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 contracting party imported into the territory of any other contracting party 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 contracting party 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.

Both the Panel and the Appellate Body broke the analysis of article III:2 by first and second sentences and then further. The analysis of the first sentence hinges on the answers to two questions: “(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 of that applied to domestic non “split-run” periodicals”?

The interpretation of the first question is both a matter of Law and economics. As such, the discussion is dislocated from a hypothetical argument of Law to a practical definition of fact. The Appellate Body opined consonant to the Panel in that the construction of the meaning of “like products” was to be narrow and on a case by case basis, taking into account not only properties intrinsic to the products but the actual habits of consumers and it’s end uses on a given market. What is of key note is that despite being in agreement of how a test  was to be constructed, the Appellate Body disagreed with the Panel on the specifics the actual test. Interestingly, there was no direct way of performing the tests, as Canada prohibited the import of some periodicals, including split-run. Then Panel, then decided to rule that these periodicals “can be like products”, based on a hypothetical comparison of two editions of the same magazine, both imported, which couldn’t be in the Canadian market at the same time. The overruling came close to a interpretation of facts, although the Appellate Body’s argument that it was limited to the “process by which legal rules are applied to facts” is indeed persuasive. This overturn shows the necessity of a strong methodology in the technical analysis. The Appellate Body’s opinion was that there was no logical grounds for the Panel’s conclusion and the rule couldn’t be applied.

Fortunately, for our academic needs, there was a need to assess the application of the second sentence of article III:2. Firstly, we identify a direct reference to paragraph one of the same article (III:1), which embodies the principle of domestic treatment. To analyse this sentence, the Appellate Body makes reference to a previous opinion on the case of Japan – Alcoholic Beverages (DS8), in which for the application of Article III:2, second sentence, three issues were to be resolved. This is a direct example of meaning being constructed with basis on previous decisions.

The three issues are:

(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 domestic products is “applied … so as to afford protection to domestic production”.

On the first issue, the Appellate Body ruled that it’s not required for there to be perfect substitutability, as that would fall within the hypothesis of the first sentence; therefore, a case of imperfect substitutability does suffice in this case. Again, we must interpret the rule within the parameters of economics. It was also relevant that there needn’t be that all periodicals have the same relevant market, irrespective of editorial content, but that periodicals with similar editorial content were, in fact, competitors. Furthermore, the relationship between imported split-run periodicals and domestic non split-run periodicals is even closer than that of domestic non split-run periodicals to imported non split-run periodicals.

Once overcome the first issue, it’s to be analysed if both products, in direct competition, were “not similarly taxed”. It’s the Appellate Body’s opinion that even “dissimilar taxation of even some imported products as compared to directly competitive or substitutable domestic products is inconsistent with the provisions of the second sentence of Article III:2”. In the same context, it must be the case that such taxation is above the de minimis threshold, which was defined in Japan – Alcoholic Beverages. In the case of Canada – Periodicals, the taxation was enough to make import prohibitive.

The final issue is one of intent; as was the opinion in the case of Japan – Alcoholic Beverages; although precisely ascertaining the aim of a measure can be difficult, the protective application of such measure can often be discerned by it’s design and other relevant factors. It’s the case that the sheer magnitude of the dissimilar taxation was compelling evidence for it’s intent as to afford protection to domestic periodicals. The Appellate Body, however, wasn’t yet unencumbered of it’s duty to give full consideration to all relevant facts and circumstances in this case, proceeding to cite many official statements issued by Canadian authorities claiming, directly, that those measures were protective of domestic periodicals. Another such relevant fact is that an actual split-run American periodical, Sports Illustrated, moved its production for the Canadian market out of Canada and back to the United States. It was the opinion of the Appellate Body that the measure was incompatible with Article III:2, second sentence, of the GATT.

The analysis conducted on this hard case shows us the extent in which Dispute Settlements in the WTO can hinge on the interpretation of a handful of words. It also shows how this interpretation is achieved in a very rigorous manner and offers an insight as to what kind of argumentation is effective in shaping the interpretation, and therefore the meaning, of significant terms in the rules, potentially changing an outcome. Of particular note was the interpretation of how it’s possible to ascertain the likeness of a product, in which the Appellate Body was only discordant of the Panel’s methodology and reasoning following the results, not the de jure interpretation of the term “like products”.

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