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Canada: November 1996

“ Members noted the improvement in Canada's macro-economic performance in the past two years. Economic growth had essentially been driven by exports, inflation was kept low, and fiscal policy aimed at bringing the federal budget into medium-term balance.”

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  > Summary of Government report

19 November 1996

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The Trade Policy Review Body of the World Trade Organization (WTO) conducted its fourth review of Canada's trade policies on 18 and 19 November 1996. The text of the Chairperson's concluding remarks is attached as a summary of the salient points which emerged during the two-day discussion.

The review enables the TPRB to conduct a collective examination of the full range of trade policies and practices of each WTO member country at regular periodic intervals to monitor significant trends and developments which may have an impact on the global trading system.

The review is based on two reports which are prepared respectively by the WTO Secretariat and the government under review and which cover all aspects of the country's trade policies, including: its domestic laws and regulations; the institutional framework; bilateral, regional and other preferential agreements; the wider economic needs and the external environment.

A record of the discussions and the Chairperson's summing-up, together with these two reports, will be published in due course as the complete trade policy review of Canada and will be available from the WTO Secretariat, Centre William Rappard, 154 rue de Lausanne, 1211 Geneva 21.

Since December 1989, the following reports have been completed: Argentina (1992), Australia (1989 & 1994), Austria (1992), Bangladesh (1992), Bolivia (1993), Brazil (1992 & 1996), Cameroon (1995), Canada (1990, 1992, 1994 & 1996), Chile (1991), Colombia (1990 & 1996), Costa Rica (1995), Côte d'Ivoire (1995), the Czech Republic (1996), the Dominican Republic (1996), Egypt (1992), the European Communities (1991, 1993 & 1995), Finland (1992), Ghana (1992), Hong Kong (1990 & 1994), Hungary (1991), Iceland (1994), India (1993), Indonesia (1991 and 1994), Israel (1994), Japan (1990, 1992 & 1995), Kenya (1993), Korea, Rep. of (1992 & 1996), Macau (1994), Malaysia (1993), Mauritius (1995), Mexico (1993), Morocco (1989 & 1996), New Zealand (1990 & 1996), Nigeria (1991), Norway (1991 & 1996), Pakistan (1995), Peru (1994), the Philippines (1993), Poland (1993), Romania (1992), Senegal (1994), Singapore (1992 & 1996), Slovak Republic (1995), South Africa (1993), Sri Lanka (1995), Sweden (1990 & 1994), Switzerland (1991 & 1996), Thailand (1991 & 1995), Tunisia (1994), Turkey (1994), the United States (1989, 1992, 1994 & 1996), Uganda (1995), Uruguay (1992), Venezuela (1996), Zambia (1996) and Zimbabwe (1994).

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Over the past two days, the Trade Policy Review Body has conducted the fourth review - the first under WTO provisions - of Canada's trade policies and practices. These remarks, made on my own responsibility, are intended to summarize the salient points of the discussion; they do not substitute for the Body's collective evaluation and appreciation, which will be reflected in the minutes of the meeting.

The discussion developed under four main themes: (i) the general economic situation and the process of deregulation and liberalization; (ii) regional and multilateral trade relations; (iii) trade and investment policies; and (iv) sectoral issues.

In addition to the discussion, participants raised a large number of questions in writing. The representative of Canada provided comprehensive written replies in the context of the meeting and undertook to provide further details as necessary.

General economic situation and the process of deregulation and liberalization

Members noted the improvement in Canada's macro-economic performance in the past two years. Economic growth had essentially been driven by exports, inflation was kept low, and fiscal policy aimed at bringing the federal budget into medium-term balance. Unemployment remained high, despite some recent improvement; Members asked whether this might lead to protectionist pressures.

Members noted that the strength of exports benefited both from strong demand in the United States and from the structural effects of trade liberalization under the WTO and the NAFTA. Reflecting strong economic expansion in the United States, economic integration deepened, with the U.S. share of Canada's trade rising to four-fifths of merchandise exports and two-thirds of imports. While acknowledging that this reflected Canadian firms' ability to operate in a highly competitive market, several Members stressed the cyclical vulnerability inherent in such dependence on one destination. Some Members asked whether Canada's participation in regional and bilateral trade initiatives, comprising the FTAA, APEC and free-trade agreements with Israel and Chile, could be seen as a response to this trend.

Members recognized that Canada's efforts towards trade liberalization, complemented by domestic reforms, had created a stronger basis for long-term economic expansion. Most sectors of the economy and a wide range of policy areas had been affected.

Members noted a continuing duality in Canada's trade policy between the federal competence for the negotiation of international agreements and the provinces' responsibility for the implementation of such agreements in certain areas. In this connection, Members stressed the need for closer co-ordination between the federal Government and provinces and expressed concerns about remaining provincial restrictions in areas such as government procurement, investment, local content requirements and subsidies. The simultaneous entry into force of the NAFTA, the WTO Agreements and the Agreement on Internal Trade (AIT) showed the possibilities of synergy among the different levels of government action; Members thus encouraged Canada to complete and implement the AIT in order to address such restrictions.

The representative of Canada replied that his country was greatly dependent on international trade and investment flows; further trade liberalization and internal deregulation, complemented by prudent and balanced fiscal policies, were seen as the path to maximizing economic growth. There were no signs of protectionist pressures resulting from the employment situation.

Challenges inherent in Canada's federal system were being met by constant and close co-operation between federal and provincial authorities. Under the AIT, work was in progress to streamline and harmonize regulations in many areas of goods, services and factor movements; negotiations were underway to extend its scope and coverage, including in areas such as labour mobility, procurement and energy. He cited instances where provincial practices had been brought into line with Canada's international obligations.

The representative did not believe that the softwood lumber agreement with the United States would lead to challenges by trading partners in the WTO.

Regional and multilateral trade relations

Members recognized Canada's strong support for the multilateral trading system and its contribution to preparations for the WTO Ministerial Conference in Singapore. They noted Canada's progress in implementing and consolidating WTO Agreements, which had contributed to a more liberal trade régime in several areas. While showing appreciation for Canada's propensity to use WTO procedures to solve bilateral disputes with the United States, some Members sought clarification on the basis for choosing between WTO and NAFTA procedures.

Members generally saw Canada's participation in regional initiatives through APEC, the FTAA and the newly concluded free-trade agreement with Chile as complementing its actions at the multilateral level. They also viewed Canada's parallel implementation of the NAFTA and WTO agreement as complementary in general. However, some Members expressed concerns about possible trade diversion stemming from bilateral or regional preferences; in this connection, they linked the expansion of bilateral trade in textiles and clothing and in motor vehicles to the strengthening of NAFTA rules of origin and the growing gap between NAFTA and m.f.n. tariffs.

The representative of Canada responded that the GATT, and now the WTO, was the "bedrock" of his country's trade policy, and the framework for Canada's other bilateral or regional initiatives. Although Canada was obliged to place emphasis on managing its relationship with its largest trade partner, and implement the NAFTA, it continued to work for the complementarity of regional and multilateral rules. In this connection, he clarified the distinctions between WTO and NAFTA dispute settlement provisions, which had differing objectives and procedures.

Trade and investment policies

Members welcomed the continued reductions in tariffs under the NAFTA and WTO agreements and the further autonomous cuts being made in m.f.n. and preferential rates. Average m.f.n. tariffs on manufactures were low; however, there were still significant peaks in textiles and clothing. By contrast, out-of-quota tariffs in agriculture were often prohibitive. Some Members called attention to the "graduation" proposals for Canada's GPT.

Members recognized that new anti-dumping initiations by Canada had declined in the last two years, continuing a trend established in the mid-1980s, and sought information regarding the current review of Canada's Special Import Measures Act. However, they noted that high duties had been imposed in certain cases and that some measures had persisted over long periods of time in areas where few imports had occurred.

Several Members asked when Canada intended to include sub-federal entities in its coverage under the Government Procurement Agreement. Questions were also raised about buy-Canada provisions at the sub-federal level, and on set-aside programmes.

Members noted that conditions for foreign investors were steadily improving through the removal of ownership restrictions in financial services at the federal level, and the application of lower investment review thresholds for WTO Members, in parallel to those applied under NAFTA. While access for investment in manufacturing was recognized as generally free, concern was expressed about remaining restrictions in some services sectors at the federal and provincial levels.

Some Members called for stricter application by Canada of intellectual property rights, particularly in the fields of copyright protection and geographical indications for wines and spirits. Several Members asked for clarification of Canada's export promotion initiatives, in particular the Export Development Corporation, Canada's new International Business Strategy, and provincial incentives.

In return, the representative of Canada stressed that Canada's performance in the tariff area was better than indicated in the TPR Report; across all imports, the trade-weighted applied tariff averaged only 1.6 per cent. Referring to the gap between m.f.n. and preferential rates, he noted that movement towards global free trade would reduce such gaps; Canada remained ready to support further multilateral tariff liberalization. The ongoing three-year tariff review was intended to make the tariff system simpler, more transparent and predictable, and to reduce regulatory costs. Consultations with the business sector were underway with a view to introducing a new customs tariff on 1 January 1998. Canada was also reducing its tariff on textile and clothing items; unilateral cuts made prior to the conclusion of the Uruguay Round were covered by the Uruguay Round reduction commitments and would narrow the gap vis-à-vis NAFTA rates. There were no plans to introduce a "graduation" element into Canada's GPT scheme.

The recent decline in anti-dumping initiations was attributable to more favourable economic conditions and strengthened competitiveness. Canada's view was that in a free-trade environment domestic competition laws could replace anti-dumping provisions; anti-dumping procedures had therefore been eliminated under the bilateral agreement with Chile, and Canada continued to push for their abolition in the NAFTA context. The representative stressed that under Canada's prospective duty enforcement system, goods priced above their normal values did not incur anti-dumping duties. Canada had long had a "sunset" clause providing for regular reviews of measures in force.

In the procurement area, Canada had undertaken in 1994 to provide a final list of provincial entities to be included in the WTO Agreement, on the basis of commitments obtained from provincial governments. In October 1995, referring to access limitations to important markets, primarily the United States, Canada had made this inclusion subject to reciprocal offers on sectors of priority interest as well as to the introduction of limits on the use of small business and other set-asides so as to provide an acceptable security of access. Should circumstances change, the Canadian provinces were prepared to proceed with offers. Additional information would be given in reply to questions.

The representative stressed the openness of the Canadian investment scheme. Companies might incorporate at the federal, provincial or territorial levels or they might operate by registering in the province of operation as foreign corporations. The question of "sensitive" sectors needed further multilateral consideration.

Sectoral issues

Members recognized that Canada had taken several initiatives aimed at revitalizing the economy by reducing State involvement. Public expenditure on agriculture had been reduced by 20 per cent, due essentially to the elimination of grain transport subsidies. However, supply management regimes for dairy, poultry and egg products retained various restrictions on foreign access. Members expressed concerns about high import barriers on these products, now in the form of restrictive tariff quotas, and questioned the system of quota allocation, which relied on traditional importers and left limited scope for improvement in market access. Concerns regarding specific products such as cheese or wheat were raised. Members sought clarification from Canada on future steps towards liberalization in agriculture.

Members recognized the rapid growth of the energy sector in recent years, but highlighted the contrast between the performance of the largely deregulated oil and gas industry and the electricity sector which remained impeded by the persistence of interprovincial barriers to trade.

Members recognized that the recent strong performance of manufacturing exports had benefited from greater economic integration with the United States. Several Members questioned Canada's high m.f.n. tariffs in textiles and clothing; while recognizing that Canada was one of the few importing countries that had integrated under the WTO Agreement on Textiles and Clothing (ATC) any items previously subject to quantitative restrictions, they noted the limited impact of such an initiative. They hoped that more items will be integrated under the second and third phase of the Agreement. Some Members expressed concern about possible trade diversion in this sector resulting from stricter rules of origin under the NAFTA and the widening tariff gap vis-à-vis m.f.n. rates, despite certain compensatory quotas for non-originating products. In the motor vehicles industry, Members stressed Canada's attractiveness as an assembly and part production location. Some Members appreciated the elimination of m.f.n. tariffs on auto part imports, but noted significant differences between Auto-Pact and non Auto-Pact Members for tariffs on assembled cars. They regretted that the Canada-U.S. Free-Trade Agreement did not allow companies from non-member States to join the Auto-Pact.

Members also noted that, due to the rapid expansion of Canada's modern, technology-based industries, the structure of production and trade had gradually shifted from resource-based to "knowledge-based" industries. With a few exceptions, advanced-technology activities were concentrated in Canadian subsidiaries of multinational enterprises, surrounded by a network of smaller, innovative domestic firms. However, some Members noted that, overall, research and development spending in Canada remained low by OECD standards.

Finally, Members showed their appreciation for recent deregulation in some of the largest, and previously most protected, services sectors of the Canadian economy. They noted that competition had been introduced into large segments of the financial services, telecommunication and air transport industry and that, since reforms had been accompanied by new international commitments, foreign suppliers had generally benefited. However, several Members pointed to remaining restrictions on foreign investment in areas such as telecommunications and transport and encouraged Canada to remove these in the context of GATS negotiations. Some Members felt that market access in banking was still severely restricted by the impossibility to branch directly into Canada from the home country. Other Members questioned "routing" obligations applying to international telecommunications services.

The representative of Canada responded that Canada's current tariff quota system reflected its Uruguay Round concessions on agriculture. With regard to further WTO discussions on agriculture, he said that Canada fully supported a programme of analysis and information exchange within the WTO on agricultural trade-policy matters, not limited to market-access questions, with a view to preparing for the eventual resumption of negotiations foreseen in the Agreement on Agriculture.

The representative stated that Canada had fully implemented its commitments in the first phase of integration under the Agreement on Textiles and Clothing and, despite a difficult adjustment process, was the only WTO Member to include a restrained product in its list. The Government of Canada had been consulting with stakeholders concerning Canada's notification of products to be integrated in the second phase of the ATC, which would be notified to the WTO by the end of 1996.

The representative of Canada recalled that Canada had long pursued liberalization in financial services, transportation and telecommunication services. He mentioned in particular Canada's commitments to remove the 10/25 investment limit in federally incorporated financial institutions under the GATS, except for schedule I banks for which the 10 per cent limit remained. The Government of Canada had no plans to revise this latter provision. He said that the Government was carefully considering the implications of two recent Parliamentary Committees' recommendations to allow direct branching from abroad. Canada had also offered to bind its current policies regarding foreign investment and traffic routing in the ongoing WTO negotiations, but was reviewing its approach to such negotiations to help achieve an acceptable mutual agreement by the deadline of February 1997.

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Members fully acknowledged the export-driven growth in the Canadian economy over the past two years, the liberalization in certain sectors and the various initiatives to review and update trade policy mechanisms. However, a number of concerns that had been expressed at earlier reviews remain. These include continuing high levels of protection in the agricultural sector, the large number of anti-dumping measures still in force, and the problems of ensuring that policies shaped at federal level were fully carried through at sub-federal level. Other issues that received emphasis were remaining restrictions in the services sector and the manner of implementation of the Agreement on Textiles and Clothing.

Developments in relation to NAFTA were of particular interest to Members, both in the wider context of interaction between regional and multilateral arrangements and also in terms of Canada's heavy dependence on the U.S. market. Members thus encouraged Canada to maintain its strong commitment to multilateralism and to continue to give close attention to ensuring complementarity between regional and multilateral initiatives.