Sometimes when you just can't get enough international trade law, you have to look to domestic trade law. I've talked about the U.S. dormant commerce clause jurisprudence before. Now I see an opportunity to move North, with some discussion of the Canadian Agreement on Internal Trade (AIT), which has some parallels. The AIT is "an intergovernmental trade agreement signed by Canadian First Ministers that came into force in 1995." Its purpose is "to reduce and eliminate, to the extent possible, barriers to the free movement of persons, goods, services, and investment within Canada and to establish an open, efficient, and stable domestic market." I was vaguely aware of this Agreement previously, but didn't know much about the case law. Recently, though, a Canadian friend of mine mentioned a panel decision from last year regarding Ontario measures that restrict the manufacture and sale of certain dairy products. Reading over the decision, it quickly became clear that the AIT rules and the panel's reasoning have a lot in common with WTO rules and decisions on non-discrimination and trade restrictions. It's always interesting to see the variations in how different jurisdictions approach these issues.
Here are the basics of the case.
The measures at issue were Ontario regulations that "make the following classes of products illegal to be manufactured or sold in Ontario":
● Dairy Blends – Fluids – (i) fluid milk products, such as milk, cream or whipping cream containing any vegetable oil or fats; and (ii) milk beverages that contain 51% or more (by volume) of milk and contain vegetable oil or fats; and
● Dairy Blends – Spreads – any product that combines vegetable oil ingredients with less than 50% milk fat that is a substitute for butter
The primary measure was Regulation 753, which establishes compositional standards for milk products. The effect of the compositional standards and other provisions of the Regulation is that "many dairy blends, specifically filled milk, are banned." Similarly, "dairy edible-oil spreads that compete with butter and with vegetable oil as the primary fat or oil component are also prohibited." In a nutshell, roughly speaking, "pure" dairy products are permited, but certain blended dairy products (combining milk and vegetable oils/fats) are banned. (I'm assuming that Ontario production focuses on milk rather than vegetable oils/fats, thus causing the trade conflict.)
(A few years prior, there had been a similar AIT case brought against an earlier version of these regulations. A panel in that case found the measures to be in violation.)
As to the legal claims, in very general terms, the complainant (Alberta, supported by several other Canadian provinces) contended that the purpose of regulating Dairy Blends "is not related to health or protection of consumers because the national food regulations system is effective in protecting consumers from misrepresentation and fraud by vegetable oil dairy alternatives." Alberta argued that the panel dealing with the prior regulations "found injury in the loss of opportunity: (1) for packagers and manufacturers of Dairy Blends to sell their products in Ontario, and (2) for oilseed producers and processors to sell their products to manufacturers of Dairy Blends across Canada because of the lack of market in Ontario, and that this denial of opportunity continues under the Regulations."
In response, Ontario argued that the measures are non-discriminatory, in that "all filled milk products and dairy edible oils spreads are treated in a uniform manner under the Regulations, irrespective of the province of origin." Furthermore, if a violation is found, Ontario contended that the measures "can be maintained as [pursuing] legitimate objectives, in particular consumer protection and the protection of health.
Now we get into the specific provisions, which are similar to WTO rules, but differ in important ways.
The first claim was under Article 401 of the AIT, "Reciprocal Non-Discrimination." Paragraph 1 of this provision states:
1. Subject to Article 404, each Party shall accord to goods of any other Party treatment no less favourable than the best treatment it accords to:
(a) its own like, directly competitive or substitutable goods; and
(b) like, directly competitive or substitutable goods of any other Party or non-Party.
As the Panel explained, previous panels have held that two factors must be considered with respect to Article 401(1):
1. Does the measure discriminate against the goods of one Party to the benefit of the goods of another Party?
2. Are the goods discriminated against "like, directly competitive or substitutable" with the goods of another Party?
With respect to the second question, the Panel referred to the prior panel that examined the previous Ontario measure, which had found that Dairy Blends are "like" or "directly competitive" goods to dairy products. This Panel said it agreed with that conclusion.
As to the first question, the Panel said that "by prohibiting filled milk and certain types of spreads from being sold in the province, Ontario fails to accord these goods produced in other provinces the best treatment it provides to dairy products in Ontario." Therefore, the Panel found that the measures are inconsistent with Article 401.
On the "best treatment" point, I've made clear my views on best treatment before (see here and here), so I won't go through all of that again. The AIT provision is different from certain international trade law provisions in the sense that it actually uses the phrase "best treatment" (although that could be considered to mean the "best" as between "national" and that provided to other countries). But let me also note that given the broad scope of the next two provisions, I'm not sure it matters much how the non-discrimination provision is interpreted. Even if non-discrimination is based on a discriminatory effect determined through a nationality comparison, and thus is more narrow, it is likely that violations of other provisions would be found, as seen below.
Next up, we have Article 402, which deals with the "Right of Entry and Exit." This provision states: "Subject to Article 404, no Party shall adopt or maintain any measure that restricts or prevents the movement of persons, goods, services or investments across provincial boundaries." Interpreting this provision, the Panel said it agreed with "the majority of the other Panels that the meaning of Article 402 includes a restriction on entry of a good into a province." Applied here, the Panel concluded that Ontario Regulation 753 "prohibits filled milk and many types of spreads from being sold in Ontario" and thus "bars entry of these products from other provinces into the Ontario market." Therefore, the measures are inconsistent with Article 402.
There is also Article 403, titled "No Obstacles." This provision states: "Subject to Article 404, each Party shall ensure that any measure it adopts or maintains does not operate to create an obstacle to internal trade." Applying this provision to the Ontario measures, the Panel noted that "[t]he prohibition on the sale of Dairy Blends, specifically filled milk and certain types of dairy edible-oil spreads, has a direct negative impact on both the sale of existing products that are competitive to dairy products and the development of new products of this nature." It also stated, "[b]y restricting the sale and manufacture of competitive products (i.e. dairy blends) through the Regulations, an obstacle is created not only to the sale of such products manufactured in other provinces, but also to the development of new competitive products in other provinces and in Ontario." Finally, "[w]ith respect to the ban on the manufacture of dairy blends in Ontario, the Regulations create an obstacle to trade in vegetable oils from other provinces that Ontario plants would utilize in their production." On this basis, the Panel found that the measures are not consistent with Article 403.
With obligations this broad, it seems likely that the key to many AIT cases will be the defense. Here, Ontario invoked Article 404, titled "Legitimate Objectives." This provision states:
"Where it is established that a measure is inconsistent with Article 401, 402 or 403, that measure is still permissible under this Agreement where it can be demonstrated that:
(a) the purpose of the measure is to achieve a legitimate objective;
(b) the measure does not operate to impair unduly the access of persons, goods, services or investments of a Party that meet that legitimate objective;
(c) the measure is not more trade restrictive than necessary to achieve that legitimate objective; and
(d) the measure does not create a disguised restriction on trade."
The definition of a legitimate objective is found in Article 200 as follows:
legitimate objective means any of the following objectives pursued within the territory of a Party:
(a) public security and safety;
(b) public order;
(c) protection of human, animal or plant life or health;
(d) protection of the environment;
(e) consumer protection;
(f) protection of the health, safety and well-being of workers; or
(g) affirmative action programs for disadvantaged groups;
Ontario pointed to (c) protection of human health and (e) consumer protection, as legitimate objectives that are pursued by the Regulations. The Panel considered this defense as follows.
In reviewing Ontario's arguments and evidence, the Panel "found little to support a claim that the measures under dispute support a legitimate objective." With respect to protection of human health, it noted, "the record does not explain the need for a prohibition on dairy blends when dairy products themselves can be produced, distributed and sold lawfully." In this regard, it observed that "Ontario’s submissions on the health and consumer safety issues do not include expert evidence, scientific or technical literature, or reasoned explanations by regulatory authorities that support the contested prohibitions and restrictions," and "[t]here is no indication of how health or consumer safety problems have actually arisen in the provinces that have permitted the manufacture and sale of the contested products." The Panel emphasized that Ontario has the burden of proof, and stated that "Ontario’s evidence before the … Panel does not establish that bona fide and significant concerns about quality were the objective of the Commission in adopting the contested regulations, rather than promoting the economic interests of producers."
Furthermore, "[e]ven if Ontario had been able to identify objectives compatible with the Agreement for its measures, such as health or consumer protection, it would have to demonstrate that the measures it adopted do not restrict trade 'unduly' and that they are not 'more trade restrictive than necessary.'" On the latter point, the Panel said that "Ontario has not shown that the only measure available to protect human health and consumers are the prohibitions and restrictions contained in the Regulations," and that "[i]t would appear that there are many avenues that could be explored to achieve legitimate objectives in a less trade distorting manner."
On this basis, the Panel found that the measures are inconsistent with Articles 401, 402 and 403 and are not permissible under Article 404 as "necessary to achieve a legitimate objective."
As I understand it, there are now monetary penalties for violations of the AIT rules, so perhaps we will see more of these cases in the future. The reasoning of this Panel was fairly brief, but if the case load increases, there may be more detailed findings. For those of us who enjoy these issues, this will provide another avenue for the development of jurisprudence on issues such as "non-discrimination" and "trade restrictions."
