Ontario Beer Taxes

CASE NUMBER: 5
CASE MNEMONIC: ONTARIO
CASE NAME: US-Canada Beer Tax Dispute

1. Issue

In April 1992, after several years of negotiations and two GATT panel decisions against Canada, the United States and Canada finally reached agreement over Canadian policies determined to discriminate against U.S. imported beer. Five days later, the Ontario government placed an "environmental tax" of $0.10 per can on aluminum beer containers. In addition to the environmental tax, the Ontario liquor board imposed a $2.53-per-case warehouse charge on foreign beers, mostly American, a charge Canadian brewers do not have to pay. The United States claimed this tax was merely economic protection because it did not apply to any other aluminum beverage containers except beer. This method would naturally by the choice of foreign beer exporters.

The United States responded by placing a $3 per case tax (50 percent ad valorem) on beer imported from Ontario. The Ontario government responded equally with an additional tax of $3 per case on U.S. beer. Although Ontario offered to settle the dispute through the GATT, the United States refused. Bilateral negotiations have been going on since late 1992, but no agreement has yet been reached. It is suspected that breweries in Ontario were trans-shipping beer through other provinces, such as Quebec, for export to the United States, thereby avoiding the import penalties.

2. Measure: Import Tax

Canada's provincial alcohol policies have been a matter of dispute before. The EC began dispute settlement procedures with Canada in 1984, charging discriminatory provincial restrictions on alcoholic beverages including beer.1 This case involves a tax on U.S. beer of $0.10 per can and several rounds of retaliation.2

3. Exporters and Importers: USA and CANADA

4. Trade Impacts

The beer trade between Canada and the United States shows two entirely different patterns. U.S. beer exports show clear cyclical patterns over the 1980-1994 period. These cycles have a duration of about five years. Peaks in U.S. exports to Canada came in 1980, 1985, 1989, and 1994 and immediately dropped in the years thereafter (see Figure 6). For the 1980-94 period, U.S. exports rose about 30 percent in non-adjusted data. The range of exports was from a low of $6.2 million in 1984 to a high of $34.3 million in 1989. With respect to the current case, U.S. exports dropped from $26.9 million in 1991 to $20.7 million the following year and $12.9 million in 1993.

Canadian beer exports to the United States show no cyclical pattern. To the contrary, Canada's exports show a consistent and continued rise over the period with relatively few drops from prior year totals. For the 1980-94 period, Canada's exports rose from $90.1 million to $197.8 million, easily doubling in value (see Figure 7). During the period of dispute, Canada's exports surged by about one-third.

U.S. beer exports to Ontario totaled $30 million, while its imports from there equaled $170 million. The leading U.S. exporters are Stroh Breweries and Heileman Breweries and the leading Canadian exporters are Molson Breweries and Labatt's Breweries. However, some believe the domestic market impact may be larger than impact on the trade market.3 The United States imposed an ad valorem tariff of 50 percent on beer imports from Ontario province only. Therefore, prices for American beer from province-to-province in Canada differed markedly.

Geoff Walker, assistant general counsel for Stroh in Detroit, said the price of its Old Milwaukee brand rose in Ontario from $21.60 a case in July 1990 to $28 a case in 1991, in part due to the new tax. USTR announced the retail price for a case of American beer sold in Ontario is $24.35, compared with $20.65 for a case of Canadian beer, suggesting a difference of about 15-20 percent in price.

5. Other Economic Impacts

U.S. officials contend Ontario's practices cost American brewers $59 million.4 Julius L. Katz, the deputy U.S. Trade Representative, was even more pessimistic: he said discriminatory taxes and handling charges cost American brewers $80 million per-year.

Some Canadians claimed losses as well. Expected price increases for Canadian beer and the absence of lower priced brands could lead to slower sales of beer and the potential loss of 200 jobs.5

6. Environmental Impacts

This case bears some relationship to the Danish Beer bottle case, in which Germany complained to the EC about Danish bottle recycling laws.6 Having lost the case, the Germans adopted the Danish standards. The link here is that U.S. beer exporters now complain that Germany unfairly excludes their beer products for this same reason.

In both instances, special regulations were applied to beer in order to encourage recycling, in both cases favoring glass over aluminum. But why the focus on beer? Beer was seemingly singled out in both cases because it is thought of as a "sin" product -- in Canada, such a regulation did not apply to soft drinks. In domestic markets, alcohol and tobacco have higher taxes because of their sin stature. Canada, for example, argued in its case that the measure would keep beer prices high. This would keep down teenage alcoholism rate, so they extrapolated.

The Canadian province of Ontario does in fact have one of the highest aluminum recycling rates efforts in the world. Thus, the measure seems on face value to be consistent with general province recycling policy. However, this rate probably exceeds the rate for other Canadian provinces. After all, it was Canada, the country, that signed the GATT agreement, not the province of Ontario.

As a general proposition, recycling is a fundamental idea to sustainability. However, the proposition seems lost not only in the social value in the act, but the actual impact. No doubt some landfill space was saved, but whose environment was really being protected. Many noted that Canada imports bauxite for aluminum from Jamaica and therefore the actual environmental benefits -- and lost jobs -- will be most felt in Jamaica. Some suggest that Canada should give Jamaica adjustment assistance to solve the problem and leave aside the issue of beer trade with United States.

7. References

1. "Stating the Case for the American Beer," Toronto Globe and Mail (August 6, 1992).

2. "Canada Ends Beer Fight," Los Angeles Times, April 27, 1992, D-2.

3. Leo Ryan, "Ontario's Can Tax Angers Aluminum, Beer Industries," Journal of Commerce (May 26, 1992).

4. The Washington Times, July 25, 1992.

5. Bob Pape, "Alcan mounts Attack on Beer-Can Levy," Toronto Star (November 12, 1992).

6. This case is available on the noted World Wide Web site, under "Europe."