In 1995, the United States trade deficit with Canada was $18.2 billion, $3.5
billion greater than in 1994. Canada continues to be the United States' foremost
export market. U.S. merchandise exports to Canada were $127 billion, up $12.7
billion or more than 11 percent from 1994. At the same time, U.S. merchandise
imports from Canada totaled $145.1 billion in 1995, a 12.5 percent increase over
imports in 1994.
The stock of U.S. foreign direct investment in Canada was $72.8 billion in
1994, 4.6 percent more than that in 1993. U.S. direct investment in Canada is
concentrated largely in the manufacturing, finance and petroleum sectors.
The U.S.-Canada Free Trade Agreement and the North American Free Trade
On January 1, 1989, the U.S. and Canada began to implement the U.S.-Canada
Free Trade Agreement (CFTA), designed to eliminate over a ten year period
virtually all tariff and non-tariff barriers to trade between the two countries.
The CFTA was suspended on January 1, 1994 with the inauguration of the North
American Free Trade Agreement (NAFTA), which expands the free trade area to
Mexico. The NAFTA extends the CFTA to important sectors such as trade in
services, investment and government procurement.
The U.S. government successfully challenged Canadian beer practices before
the GATT in 1991. A series of negotiations led to a Memorandum of Understanding
(MOU) in 1993 and an annex to the MOU in April 1994 which significantly improved
access to the Canadian market for U.S. beer. However, U.S. exporters remain
concerned about provincial minimum import price policies and taxes, ostensibly
for environmental purposes, on beer cans.
Wine and Spirits
Market access barriers in many provinces continue to hamper exports of U.S.
wines and spirits to Canada. These market access barriers include cost of
service mark ups, listings, reference prices, and discriminatory distribution
and warehousing policies.
The United States will continue to pursue removal of these barriers in
Supply Managed Products and Barley
In July 1995, the United States asked the North American Free Trade
Commission to establish an arbitral
panel to consider a U.S. complaint regarding tariffs which Canada has applied
to the United States, in derogation of its NAFTA tariff commitments, on supply
managed dairy, poultry, and egg products, margarine, barley and barley
Under its WTO implementation, Canada had replaced its import quotas on
certain supply managed commodities (dairy, poultry and eggs) with tariff rate
quotas (TRQ's). Under the TRQ system, small amounts of imports can enter at low
rates of duty, but imports above those limits are subject to prohibitively high
duties ranging from 100 to 350 percent. Canada also imposed tariffs on U.S.
barley and barley products as well as additional dairy products beginning August
1, 1995. Barley imports from the United States were previously subject to import
A panel under NAFTA chapter 20 dispute settlement procedures held its first
hearing in March 1996, and its report is expected in 1996.
Horticultural Import Restrictions
Canada continues to restrict international and interprovincial trade of bulk
produce. Importers may request waivers, but Canadian authorities will deny such
requests if an equivalent local product is available. This has posed particular
difficulties for shipments of potatoes from the United States. In addition,
Canadian regulations on fresh fruit and vegetable imports prohibit consignment
sales of fresh fruit and vegetables without a prearranged buyer.
Restrictions on U.S. Publications
On March 11, 1996, The United States Government announced it would use U.S.
trade laws (section 301) and the dispute settlement procedures of the World
Trade Organization to challenge discriminatory practices by the Government of
Canada that unfairly protect Canada's domestic magazine industry. On March 11,
USTR officially opened a section 301 investigation and requested WTO
consultations with the Government of Canada regarding certain measures
concerning periodicals, including: measures prohibiting or restricting the
importation into Canada of certain periodicals; tax treatment of so-called
"split-run" periodicals; and the application of favorable postage rates to
certain Canadian periodicals.
Canadian tax law prohibits Canadian advertisers from deducting the cost of
advertising in foreign newspapers and periodicals if such advertising is
directed primarily at the Canadian market. Canada prohibits magazine imports if
they are special "split-run" or regional editions which include Canadian
market-oriented advertising. Magazines are also prohibited from entering Canada
if more than five percent of total advertising space contains ads that give
Canadian sources of availability or specific conditions relating the sale or
provision of any goods or services in Canada. Moreover, since 1979, Canada Post
Corporation (CPC) has applied higher postal rates to foreign publications mailed
in Canada than to Canadian publications.
During 1994, in response to the launch of a Canadian edition of Sports
Illustrated, which is electronically transmitted to and printed in Canada,
the Canadian Government "clarified" this policy. New magazine titles are now
defined as "investments" subject to review under the investment Canada act. In
1995, the Government enacted an excise tax on split-run magazine editions such
As Sports Illustrated on a per-issue basis at a rate of 80 percent of the
amount charged for all advertising appearing in that issue.
These practices restrict U.S. access to the Canadian market for publications
and media advertising. The nondeductibility of Canadian advertising in U.S.
publications and restrictions on advertising in U.S. publications exported to
Canada sharply limit a significant source of revenue for U.S. magazines sold in
NAFTA and the CFTA significantly increased the value of the Canadian
procurement market open to U.S. suppliers. Goods contracts valued at between
$25,000 and $190,000 (the WTO procurement threshold) are open to U.S. suppliers
on a non-discriminatory basis. NAFTA also opens up services contracts and goods
and services contracts by the Canadian Federal Government valued at more than
$50,000 ($250,000 for covered crown corporations) and federal government
construction services contracts valued at more than $6.5 million ($8 million for
covered crown corporations). In addition, NAFTA extends coverage to a number of
federal entities and some government-owned enterprises ("crown corporations")
not covered by the CFTA. NAFTA also builds on the CFTA's effective bid-challenge
system and greater transparency.
However, federal and provincial "buy national" or "buy local" policies are
still applied to some of Canada's government procurement. Where WTO Government
Procurement Code or NAFTA requirements do not apply, some Canadian government
entities favor Canadian-based firms. Bids are solicited from vendors on source
lists which favor Canadian over foreign-based firms. Generally, if there is
sufficient competition from Canadian-based sources, foreign-based firms are not
invited to bid.
Sole-source procurements are also used to favor Canadian firms. Canada's
industrial benefits policy is also administered through a "procurement review
mechanism," which may require a supplier to invest, purchase, and/or hire in
Canada as a condition of receiving a large contract.
Duty Remission Schemes
Canada has terminated all export-based duty remission schemes for automotive
products. Canada also terminated its production-based duty remission program for
foreign automobile firms at the start of 1996.
LACK OF INTELLECTUAL PROPERTY PROTECTION
In December 1994, the Canadian government announced that it will seek
legislation to establish a public performance right for record producers and
performers and a levy on the sale of blank audio tapes. The revenues collected
from these programs are intended to compensate performers and producers for the
performance and unauthorized home-taping of their works in Canada. Indications
are that the legislation may be drafted so that the revenues attributable to the
performance and unauthorized home taping of U.S. works are distributed to
Canadian performers and producers to subsidize their operations. The U.S.
Government and U.S. industry would be extremely concerned if U.S. performers and
producers were denied national
treatment under the proposed legislation, which is expected to be introduced
to Parliament in 1996.
The broadcasting act sets out the broadcasting policy for Canada, which lists
among its objectives, "to safeguard, enrich and strengthen the cultural,
political, social and economic fabric of Canada." The federal broadcasting
regulator, the Canadian Radio-television and Telecommunications Commission
(CRTC), is charged with implementing this policy. Under current CRTC policy, in
cases where a Canadian service is licensed in a format competitive with that of
an authorized non-Canadian service, the commission can drop the non-Canadian
service, if the new Canadian applicant requests it to do so. This policy has
already led to one "de-listing" and deterred potential new entrants from
attempting to enter the Canadian market.
Country Music Television
In June 1994, the CRTC de-listed a U.S. country music cable service, Country
Music Television (CMT), when it licensed a new Canadian specialty channel, New
Country Network (NCN). CMT subsequently filed a section 301 petition with USTR
seeking relief from the CRTC decision, but U.S. action was averted when the
commercial parties reached a resolution on March 6, 1996.
On March 7, USTR announced the commercial agreement but noted that while this
particular dispute had been resolved, the Clinton Administration remains
concerned about Canada's discriminatory broadcasting policies which remain in
place. Under section 301 authority, USTR will closely monitor, not only the
Canadian government's implementation of the CMT agreement, but will also closely
monitor Canada's actions regarding other U.S.-owned television programming
services that have, or may seek authorization for distribution in Canada.
Direct-to-Home Satellite Broadcasting
In August 1994, the CRTC issued an order that discriminated against U.S.
associated providers of Direct-to-Home (DTH) satellite broadcasting services
seeking to offer such service to Canadian consumers. The CRTC order exempted
Canadian DTH providers from licensing requirements but subjected U.S. associated
DTH providers to lengthy licensing procedures which effectively would have
precluded entry into the Canadian market even where U.S. associated providers
complied with existing CRTC ownership and content requirements.
In July 1995, the federal cabinet overturned the CRTC's DTH policy and
ordered that all services be licensed under the same rules. On December 20,
1995, the CRTC issued two national DTH satellite tv licenses, one of which went
to U.S.-associated Power DirecTV. Power DirecTV has since abandoned its plans to
launch a Canadian service because of technological issues, some of which were
associated with CRTC regulations.
Simultaneously with the licensing of the two DTH systems, a number of DTH
Pay-Per-View (PPV) services were also licensed. The DTH licenses specify that
the only PPV services the two DTH licensees may offer are those services
licensed by the CRTC. The PPV licenses are further conditioned in two
First, it is a condition of license that feature film rights must be acquired
from Canadian distributors except where the film is offered by a foreign
distributor who owns worldwide rights or who has provided not less than half of
the cost of producing the film. The United States Government and the U.S.
industry are concerned that this condition of license, in effect, gives Canadian
companies monopoly distribution rights with respect to certain films. U.S.
industry sources report that it is common practice for film distribution rights
to be purchased by different companies for different parts of the world. Under
this condition, only Canadian distributors will be allowed to license these
films to the Canadian PPV services.
Second, it is a condition of license that 100% of revenues earned from the
exhibition of Canadian feature films be paid to the producer/distributor.
However, revenues earned from the exhibition of all non-Canadian feature films
offered on English language services must be split, on a title by title basis,
1/3 to the DTH service, 1/3 to the programming undertaking, and 1/3 to the
producer/distributor. U.S. industry sources report that the likely effect of
this restriction will be to restrain competition.
The United States Government raised concerns with these apparently
discriminatory conditions of license during a meeting between Ambassador Kantor
and Trade Minister Art Eggleton in Washington on March 4, 1996. USTR will
closely monitor the effect of these policies on U.S. interests.
In 1976, Canada adopted a tax provision denying Canadian enterprises tax
deductions for the cost of advertising in foreign print and broadcast media when
the advertising is directed primarily at Canadians. The main targets of this
legislation were ads placed on U.S. border television stations beaming programs
into Canada, but the provision also applies to U.S. periodicals.
Government-to-government and industry-to-industry consultations have failed
to provide a compromise solution to this problem. As a result of a 1980 section
301 determination that the Canadian law both injured and discriminated against
U.S. commerce, the United States enacted mirror legislation in the 1984 trade
act against Canada's broadcast media. However, U.S. legislation was never
enacted against Canada's print media.
Temporary Entry of Goods
Under the temporary importation regulations, Revenue Canada allows the
temporary entry, at free or reduced rates, of certain specialized equipment
needed to perform short-term service contracts, if such equipment is not
available from Canadian sources. Under the NAFTA, Canada has broadened the range
of professional equipment allowed temporary duty-free entry, but it has not
provided unrestricted access. In the context of a comprehensive review by the
Canadian Government of ways to simplify the Canadian tariff system, it has been
proposed that a single tariff item be introduced to replace a number of current
provisions covering temporarily-imported goods. Essentially, the new item would
provide conditional free entry, on a most-favored-nation basis, for
temporarily-entered goods without regard for whether the goods are available
from Canadian sources. Movement by the Canadian Government toward this tariff
system revision is expected in 1997.
Banking and Insurance
The national treatment study published by the U.S. Department of the Treasury
on December 1, 1994 provides recent, detailed information on the treatment of
U.S. banks and securities dealers in Canada. U.S. banks and securities firms
have a clear right of establishment and a guarantee of national treatment. The
principal barrier of which U.S. banks complain is Canada's prohibition on the
establishment of foreign bank branches; foreign banks can only enter Canada as
separately organized and capitalized subsidiaries. Canada has agreed under
Article 1403 of the NAFTA to review this restriction when Canadian banks are
allowed to expand through subsidiaries or direct branches "into substantially
all of the United States." The United States will be pressing Canada to honor
this commitment as more states opt in to interstate branch banking under the
provisions of the Interstate Banking Efficiency Act of 1994. U.S. insurance
companies may enter Canada as branches, but some provinces bar foreign companies
from buying provincially-chartered insurance companies.
General Entry Restrictions
Under the Investment Canada Act and Canadian policies in the energy,
publishing, telecommunications, transportation, film, music, broadcasting, and
cable television sectors, Canada maintains laws and policies which interfere
with new or expanded foreign investment.
Investment Canada Act
The Investment Canada Act requires the federal government to review proposed
acquisitions by U.S. and other foreign investors to ensure "net benefit to
Canada." Foreign investments in new businesses, direct acquisitions worth less
than c$5 million, and indirect acquisitions worth less than c$50 million do not
require prior government approval. Under the CFTA, Canada raised the threshold
level for review of direct acquisitions by U.S. investors to c$150 million.
Under NAFTA, this threshold will continue to be increased in line with the
growth of nominal GDP. Screening of indirect acquisitions by U.S. investors has
However, these exemptions do not apply to foreign investments in "culturally
sensitive sectors" such as publishing, film, video and music. Any foreign
investment in these sectors is potentially subject to review.
Prior to 1992, when ownership of a firm engaged in the publication, sale, or
distribution of books, magazines, periodicals or newspapers in Canada passed to
foreign investors as a result of mergers and acquisitions of parent firms
outside of Canada ("indirect acquisition,") Canada required divestiture of
control to Canadian investors.
Since January 1992, Canadian book publishing and distribution firms that fall
into foreign hands through indirect acquisition need not be divested to Canadian
control, but the foreign investor must negotiate specific commitments to promote
Canadian publishing. Foreign investors may directly acquire Canadian book firms
under limited circumstances. Also, since 1993, Canada treats the publication of
any new magazine title by foreign-owned firms as a new investment subject to
review. Under current policy guidelines, approval for a new magazine title would
not be granted. The United States is monitoring the effect of these new policies
on U.S. interests.
Film Industry Investment
Canadian policies prohibit foreign takeovers of Canadian-owned film
distribution firms. They allow investment to establish new distribution firms
for proprietary products only. Indirect or direct takeovers of foreign
distribution firms operating in Canada are only allowed if the investor
undertakes to reinvest a portion of its Canadian earnings in a manner specified
by the Canadian Government.
Reviews of prospective foreign investments involve an examination of the
investor's business plan by investment Canada. Approval of the investment
creates a legal obligation on the part of the investor to fulfill the business
plan, which may include commitments in areas such as research and development or
the promotion of Canadian authors. In 1984, the United States successfully
concluded a GATT case requiring Canada to stop extracting commitments from
foreign investors to favor Canadian suppliers. The CFTA made major progress
toward ending the imposition of performance requirements on U.S. investors, and
on third country investors when U.S. trade interests would be affected. The
United States will continue to pursue the elimination of investment
restrictions, including performance requirements, both bilaterally and
Canada restricts the direct export of Pacific salmon and herring by requiring
that a portion of the Canadian catch be landed in Canada before being exported.
An interim agreement reached following CFTA dispute settlement permits direct
export (i.e., sale at sea) of a portion of the catch by Canadian licensees. The
level of direct exports, however, has been disappointing. Following a mid-term
review, technical changes were made in the requirements for licensees. The
United States Government will continue to monitor developments.
Canadian Wheat Board
The Canadian Wheat Board (CWB) has exclusive authority to market western
Canadian wheat, durum wheat and barley for export. It also controls milling
wheat and malting barley sales domestically. As a state trading enterprise its
pricing and sales practices do no fall under the disciplines on export subsidies
under the new WTO provisions. However, the United States has been working to
have the export activities of state trading enterprises, such as the CWB,
addressed in the WTO Committee on Agriculture. In the recently completed report
of the private, binational "Joint Commission on Grains" (JCG), the JCG also
recommended that both countries "eliminate the excessive discretionary pricing
practices of their institutions" which for Canada would mean "placing the CWB at
risk of profit or loss in the marketplace, or conducting itself in an equivalent