USTR - 1996 National Trade Estimate-Canada
Office of the United States Trade Representative

 

1996 National Trade Estimate-Canada

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 Agreement

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.

IMPORT POLICIES

Beer

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 appropriate fora.

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 products.

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 licensing requirements.

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 Canada.

GOVERNMENT PROCUREMENT

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.

EXPORT SUBSIDIES

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.

SERVICES BARRIERS

Broadcasting Act

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 significant respects.

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.

Border Broadcasting

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.

INVESTMENT BARRIERS

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 been eliminated.

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.

Publishing Policy

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.

Performance Requirements

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 multilaterally.

OTHER BARRIERS

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 manner."

 
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