CASE NUMBER: 350

CASE MNEMONIC: BEERCAN

CASE NAME: Canada Beer Can Tax

• IDENTIFICATION
• LEGAL CLUSTERS
• GEOGRAPHIC CLUSTERS
• TRADE CLUSTERS
• ENVIRONMENT CLUSTERS
• OTHER FACTORS

I. Identification

1. The Issue

In Canada, provincial liquor boards have control over the import, distribution, and sale of all alcoholic beverages in the province. The regulations implemented by the provincial liquor boards in Canada place restrictions and fees on imported beer. As a result of complaints about access to the Canadian market filed by U.S. beer producers, the U.S. Government successfully challenged Canadian provincial liquor board practices before GATT. A series of negotiations between the U.S. and Canada resulted in a "Memorandum of Understanding" (MOU) that improved access to the Canadian market for U.S. beer producers. However, the U.S. Government is still concerned about provincial pricing and tax policies that inhibit the ability of U.S. producers to compete in the Canadian market.

2. Description

In 1993, the U.S. beer industry was a $17.7 billion enterprise. It consisted of 435 brewing companies which owned a total of 465 breweries and employed 38,900 people. "In 1989, Canada was the top export market for U.S. beer, receiving nearly a third of total U.S. beer exports. During 1989-93, however, exports to Canada fell by 54 percent to 25 million liters and represented only 7 percent of the total quantity of U.S. exports in 1993." In 1992, U.S. brewers held approximately 3 percent of the Canadian beer market, with sales worth about $30 million.

The reduction of U.S. exports to Canada in the late 1980's resulted from licensing and production agreements between Anhueser-Busch and Labatt. Miller and Coors followed by obtaining similar agreements with Molson. Anhueser-Busch, Miller, and Coors found the licensing and production agreements the only practical way to market their beer in Canada with the existing government restrictions. These arrangements increased the production of U.S. beer in Canada. The Canadian Government also increased the general tax on beer reducing overall consumption and levied a retaliatory import duty against Heileman, Pabst, and Strohs in June of 1991.

"During 1989-91, the quantity of U.S. beer imports from Canada fell gradually (by about 5 percent). Between 1991 and 1993, however, imports from Canada grew by 23 percent to 297 million liters, representing 28 percent of the total quantity of U.S. imports in 1993." In 1992, Canadian beer accounted for 1 percent of the U.S. market, with sales of approximately $200 million. The same licensing and production arrangements between U.S. and Canadian brewers that accounted for the decline in U.S. exports to Canada precipitated an increase in Canadian exports to the U.S.

The 1928 Importation of Intoxicating Liquors Act dictates that no foreign brewer is permitted to sell beer in a Canadian province except through the provincial liquor board. The provincial liquor board is responsible for arranging delivery of the foreign product to its own central distribution center in the province. The foreign beer must then be listed for sale in the province by the liquor board before it can be forwarded to the point of sale. Producers of imported beer are prohibited from arranging for private delivery of their product and do not have direct access to the point of sale.

The Canadian government enlists regulations that increase the price of imported beer. The provincial liquor boards employ minimum price requirements, arbitrary price markups, and taxes on beer containers that make imported beer prohibitively expensive. The container taxes, imposed on aluminum beer cans by the Province of Ontario, were justified on environmental grounds. 80 percent of Canadian beer is sold in bottles which are recycled at a rate of 97 percent. Beer imported from the U.S. is primarily sold in cans to reduce shipping costs. The U.S. beer producers claim that the environmental container tax is discriminatory because it is not applied to all aluminum beverage cans. They further claim that the weight of bottle caps that end up in landfills was in excess of 12 percent of aluminum that is not recycled.

As a result of the policies of the provincial liquor boards, G. Heileman Brewing Company filed a petition under Section 302 of the 1974 Trade Act on May 15, 1990. The petition cited Canadian provincial listing requirements, discriminatory markups, and restrictive distribution of beer as reasons for the complaint. Heileman asserted that the practices violated GATT and the recently enacted Canadian Free Trade Agreement (CFTA) and requested that the U.S. Government take action under Section 301 of the 1974 Trade Act. The U.S. Government initiated an investigation of the Canadian beer market and requested consultations with the Canadian Government under Article XXIII:1 of GATT. On September 14, 1990, Strohs Brewing Company filed a petition under Section 302 citing the same Canadian practices with respect to imported beer. The U.S. Government incorporated the Strohs petition with the Heileman investigation.

On February 6, 1991, the U.S. requested the establishment of a GATT panel (BEER I Panel) to examine the extent to which Canada is meeting its GATT obligations. The panel focused on Canadian practices that include: listing, container size requirements, access to points of sale, restrictions on private delivery, differential price markups, minimum pricing, taxation, and notification procedures for new practices. On September 18, 1991, the GATT panel ruled that several Canadian practices with respect to the sale and distribution of beer were inconsistent with the GATT. The Canadian practices included: listing practices in Ontario, beer container size requirements in Ontario, restricted access to points of sale in most provinces, restrictions on private delivery in most provinces, and minimum prices for beer in some provinces. The Beer I panel also concluded that, "Canada's failure to make serious, persistent, and convincing efforts to assure observance of the provisions of the General Agreement by the liquor boards...constituted a violation of Canada's obligations under Article XXIV:12 and consequently a prima facia nullification or impairment of benefits accruing to the United States under the General Agreement." Canada was given until March, 1992 to change its practices with respect to differential markups and access to points of sale. They were given until July, 1992 to remedy the other practices found inconsistent with GATT.

As a result of the GATT ruling, the U.S. Government indicated that it would impose substantially increased duties on Canadian beer on April 10, 1992 unless a satisfactory resolution was found. Canada submitted two proposals to the GATT panel to address the findings with respect to its beer market. The U.S. rejected the proposals claiming that they did not go far enough in correcting the problem and they were implemented over an extended period of time. The U.S. and Canada subsequently entered into bilateral negotiations on the issue. In recognition of the negotiations, the U.S. announced it would delay implementation of duties on Canadian beer until July 24, 1992, the statutory deadline for sanctions under Section 301.

On April 25, 1992, the U.S. and Canada concluded an "Agreement in Principle" to settle the beer dispute. Canada agreed to provide U.S. beer producers greater direct access to provincial retail outlets no later than October 1, 1993. They also agreed to dismantle inter-provincial marketing barriers, allow imported beer to be sold in greater quantities, and lower mandatory markups by July, 1, 1992. However, the Canadian Provinces, particularly Ontario, were reluctant to implement the terms of the agreement. In fact, Ontario doubled its environmental tax on non-refillable beer containers and increased its pricing formula. As a result of the failure of the Canadian Government to enact meaningful reform of its market for imported beer, the U.S. Government imposed a duty of 50 percent ad valorem on beer brewed and bottled in Ontario on July 24, 1992.

Negotiations between the U.S. and Canada resumed shortly after the U.S. imposed the 50 percent duty. On August 5, 1993, the U.S. terminated the duty under Section 307 of the 1974 Trade Act. The action was taken after the U.S. and Canada signed a MOU that required Canada to immediately implement the terms of the earlier "Agreement in Principle". The terms included: eliminating duties on U.S. beer pursuant to the CFTA, providing immediate access to retail stores, eliminating the fees charged by retailers for carrying U.S. beer, reducing the minimum prices, reducing fees charged by the Ontario liquor board, and establishing procedures for action against individual Provinces that do not comply with the terms of the MOU. Shortly after the MOU was signed the Province of Quebec imposed a significant minimum beer price. The United States Trade Representative notified Canada that this was grounds for termination of the MOU and threatened to impose duties on beer produced and bottled in Quebec. On May 4, 1994, an Annex was added to the MOU that provided U.S. beer producers with special access privileges in the Quebec beer market to offset the new minimum prices.

As a result of the U.S. efforts to obtain access to the Canadian beer market, Canada retaliated against the U.S. and convened a GATT panel (Beer II Panel) to review U.S. state tax and distribution laws. The GATT panel found that the U.S. laws were inconsistent with GATT and Canada eventually imposed a 50 percent duty on imported beer produced by Heileman, Strohs and Pabst. Heileman and Strohs were the U.S. producers that originally filed the complaint against Canada and Pabst did not have a licensing and distribution arrangement with any Canadian brewery. Anhueser-Busch, Miller, and Coors were exempt from the duty and had licensing and distribution agreements with major Canadian breweries. The Canadian duties were rescinded after the final MOU was concluded.

3. Related Cases

ONTARIO Case

USRECYC

GERMPACK

DANISH

GERMAUTO

Keyword Clusters

(1): Forum = Canada

(2): Bio-geography = TEMPerate

(3): Environmental Problem = Waste Land

4. Draft Author:

II. Legal Clusters

5. Discourse and Status:

The MOU signed on May 4, 1994 has settled the dispute. However, it is possible that changes in provincial or state laws and practices will reignite the dispute.

6. Forum and Scope:

U.S. Government procedures under Section 301 initiated the dispute. GATT provided an international forum to mediate the dispute. The Canadian Government took unilateral action in retaliation and the U.S. and Canada negotiated a bilateral settlement.

7. Decision Breadth:

The case also effects the 12 countries that were members of the European Union when the EU convened its GATT panel to consider access to the Canadian beer market. It also effects the parties to the agreement, U.S. and Canada.

8. Legal Standing:

Dumping duties were imposed against Canada in accordance with Section 301 of the 1974 Trade Act. Canada was also found to be in violation of GATT.

III. Geographic Clusters

9. Geographic Locations

a. Geographic Domain: North America

b. Geographic Site: Northern North America

c. Geographic Impact: Canada

10. Sub-National Factors:

The U.S. cited Canadian provincial tax laws and practices of the provincial liquor boards as discriminatory against foreign beer producers. The Canadian retaliation cited U.S. state tax subsidies and distribution laws as discriminatory against foreign beer producers. The U.S. and Canadian federal governments agreed to work with the state and provincial governments to reform the sub-national practices. Because each Canadian province establishes its own beer import laws, the U.S. was required to investigate the practices of each individual province. Ontario and Quebec were found to employ the most egregious trade restrictions. The independence of the provinces with respect to liquor imports also allowed Canadian producers to tranship their beer through provinces that were not cited by the U.S. in the trade action. Beer producers in Ontario took particular advantage of this loophole.

11. Type of Habitat:

IV. Trade Clusters

12. Type of Measure:

The U.S. imposed a 50 percent ad valorem tax on beer imported from Ontario.

13. Direct v. Indirect Impacts:

Dumping duty collected by U.S. Customs Agency at border.

14. Relation of Trade Measure to Environmental Impact

a. Directly Related to Product: Yes, Beer

b. Indirectly Related to Product: Yes, Containers

c. Not Related to Product: No

d. Related to Process: Yes, Wasteland

15. Trade Product Identification:

In 1990, the year the U.S. initiated its investigation of the Canadian beer market, the U.S. exported 56,733,000 liters of beer to Canada. The U.S. imported 244,152 liters of beer from Canada in that same year.

16. Economic Data

The beginning of the description section of the case study provides the relevant economic data. Information is given for the U.S. and Canadian beer markets for the relevant years.

17. Impact of Trade Restriction:

The U.S. Department of Commerce imposed a 50 percent ad valorem duty on beer imported from Ontario.

18. Industry Sector:

19. Exporters and Importers:

Prior to the enactment of the MOU, the provincial liquor boards had monopoly control of beer imports in Canada. Anhueser- Busch, Miller, and Coors established agreements with Canadian brewers to produce their beers in Canada in order to circumvent the provincial liquor boards. Canadian beer is imported by several U.S. importers. They are generally established on a regional basis to facilitate distribution.

V. Environment Clusters

20. Environmental Problem Type:

The Canadian provincial governments placed a tax on aluminum beer containers. The Canadian provincial governments claimed that the tax was imposed as a disincentive to use aluminum beer containers which they claimed to be more difficult to recycle than glass containers exacerbating waste disposal problems. The Canadian Government also stated that the tax was protecting the Jamaican environment. Jamaica supplies a significant amount of bauxite used to produce aluminum cans. The majority of U.S. beer exported to Canada is packaged in aluminum cans. The tax became a focus of the U.S. discrimination complaint. The GATT ruled that there was not a justified scientific basis for the Canadian environmental tax.

21. Name, Type, and Diversity of Species

22. Resource Impact and Effect:

23. Urgency of Problem:

24. Substitutes:

Recycling of aluminum beer cans is easy and cost effective. Ontario, Canada has an 88 percent aluminum recycling rate, among the highest in the world. The GATT panel cited successful Canadian efforts to recycle other beverage containers made from aluminum as a reason to rule against the can tax. There are many alcoholic beverages that can be substituted for beer. However, they present many of the same package disposal problems that are inherent with beer.

VI. Other Factors