Trade agreements

A review of trade articles and agreements, and their implications for local/sustainable supply chains (adapted from MacRae, 2014)

Introduction
GATT articles
WTO Agreements
NAFTA (and USMCA)
CETA
The Comprehensive and Progressive Agreement for Trans-Pacific Partnership
Introduction

As of 2021, Canada had 14 trade agreements covering 51 countries, and has also been an active participant in the multilateral World Trade Organization.  The trade agreements have reduced instrument choice, though not consistently and coherently (Guthman, 2008; Hatanaka et al., 2012). In Canada, many pre-AoA programmes directly associated with increased production intensity have been altered in part because of trade agreements (Skogstad, 2008). These include income stabilization schemes that were deemed production distorting, such as the Western Grain Stabilization Program and provincial meat stabilization programmes (Schmitz, 2008),  regional production supports and development schemes, and subsidies to specific production sectors that were deemed underdeveloped or prime export opportunities (Wiebe and Wipf, 2011). Associated with these programme changes have been overall reductions in support to producers (as defined by the Producer Support Equivalent) since the mid-80s (AAFC, 2013).  These instruments were part of the state assistance paradigm that somewhat protected agriculture from market forces and indirectly supported local food systems.  Such instruments, if they still existed, would now likely be categorized as red or amber box by the WTO Agreement on Agriculture (AoA) and restricted (see below). Instead, the favoured tools for the federal and provincial governments are tripartite-funded business risk management programmes, sectoral contribution agreements and information programmes to drive market development.  The contribution agreements are not typically framed around very specific programme parameters, but rather serve multiple purposes.  These measures typically qualify as blue, green and amber box (see below) and are therefore more acceptable to AoA signatories.  As measured by two indices, Canadian policies are only very modestly trade-distorting compared to most other industrialized countries (Anderson and Croser, 2010), again reflecting the reconstruction of state interventions to comply with trade agreements.

Given the instrument choice focus of this analysis, this section provides a review of key trade articles and multilateral agreements of the GATT, NAFTA, and WTO  viewed through a local/sustainable lens.  The focus is on currently favoured instruments, and those proposed by local/sustainable proponents, including public procurement, private and government voluntary eco-labeling schemes, government-funded programmes and direct payments to farmers. For example, a government might wish to impose local/sustainable food purchasing targets in food service contracts.  A government/NGO partnership might certify local/sustainable farmers and processors and have a label that alerts buyers to the different attributes of the products to differentiate them from conventional products.  Governments might construct direct payment schemes for farmers to encourage them to shift to sustainable production practices and sell their products to local purchasers.  Such instruments generally fall into the WTO categories of market access and domestic support / subsidies (see below), though numerous complications arise for this analysis from having many instruments affected by multiple trade provisions.  This will be highlighted through the rest of this section.

Note that Canada has recently signed a number of bilateral agreements, in part because of the failure of the WTO process (see Hedley, 2017 for some history). These agreements are not addressed here.

GATT Articles (and associated WTO agreements and disciplines)

Many GATT rules remain the foundation of trade agreements. They are given “discipline” by many subsequent agreements developed under the aegis of the WTO. Although many rules were first enacted when agriculture was de facto exempt, they were applied to agriculture with the GATT Uruguay Round Agreement on Agriculture, then institutionalized within the WTO when that body was created in 1995.  Two GATT articles are particularly pertinent to this discussion.

GATT 1947 Article III (and the WTO Technical Barriers to Trade (TBT) agreement)

Article III of the GATT is based on the idea that “like products” have to be treated similarly, regardless of source. This article is referenced in many WTO documents to support its provisions.

The contracting parties recognize that internal taxes and other internal charges, and laws, regulations and requirements affecting the internal sale, offering for sale, purchase, transportation, distribution or use of products, and internal quantitative regulations requiring the mixture, processing or use of products in specified amounts or proportions, should not be applied to imported or domestic products so as to afford protection to domestic production. (Article III (1)) (GATT, 1947)

Governments cannot apply a wide range of instruments, including taxes, charges, or non-tariff trade barriers (NTBs), to imported products to support their domestic industry.  Historically, country disputes regarding this rule have been triggered when such tariffs, charges and NTBs are involved.  They include those measures currently used and proposed to support local/sustainable foods.  However, it would be permitted to use border adjustments (tariffs, etc) to treated imported goods the same as domestic goods.  If an environmental charge is placed on domestic food, then an equivalent charge could be placed on the "like" imported goods.  Article II:2(a) provides the exemption (specifically to Article II:1(b)):

2. Nothing in this Article shall prevent any contracting party from imposing at any time on the importation of any product:
(a) a charge equivalent to an internal tax imposed consistently with the provisions of paragraph 2 of Article III* in respect of the like domestic product or in respect of an article from which the imported product has been manufactured or produced in whole or in part;

But are local/sustainable products “like” with imported conventional products?[1] Neither GATT articles nor WTO agreements explicitly define “like” (Vranes, 2011). Extending Swinbank’s (2006) discussion of like products and animal welfare, when products have ecological and ethical values embedded as credence characteristics in the minds of consumers, then GATT’s concept of “like” is not so clear.

Vranes (2011:11), a trade legal scholar, stated: “Article III should be understood as being primarily concerned with products that are in ... a competitive relationship” and further added that other articles and notes focus on those products that are also substitutable.  Swinbank (2006:697-8) recounted that a 1970 GATT working party proposed four criteria for case-by-case assessment of like: “the product's end-uses in a given market; consumers' tastes and habits, which change from country to country; the product's properties, nature and quality; and the tariff classification of the product”.  By these measures, the first three criteria would have different expression for local/sustainable compared to conventional product. As well, these criteria suggest that consumer perceptions of likeness are important, much more so than regulator ones (Vranes, 2011). Vranes (2011:10) also argued that the relevant provisions of the WTO Technical Barriers to Trade (TBT) agreement (which gives discipline to Article III) reflect the same purpose as the GATT articles. It can be argued that local/sustainable products are not closely competitive with imported conventional and therefore not actually ‘like’. They appeal to different market segments, often have different supply chains, and serve different economic and environmental purposes.  They are also not substitutable.

Trade experts have named at least four WTO disputes (WTO, undated) as somewhat pertinent to these questions, although none of them address local/sustainable production and distribution directly.  The absence of pertinent disputes suggests some latitude for governments.  In the dolphin-safe tuna dispute between Mexico and the US (ds381) and then later the EU, an example of how instruments can be affected by multiple provisions, the dispute panel did not rule on Mexico’s claims of violation under Article III, but this dispute ultimately left open the possibility that Article XX(b) and (g) (see below)  could be used to craft a WTO compliant measure (Swinbank, 2006)[2].  In the Canada – EU dispute over the approval and marketing of biotech products (ds292), most of the dispute centred on articles of the Sanitary and Phytosanitary (SPS) agreement.  This dispute was resolved among the parties so Article III was also not addressed by the dispute panel. A trade market dispute between the EU and Australia on geographic indications (ds290) did find that the procedures of establishing such indicators did not accord national treatment to countries outside the EU and was therefore a violation of GATT III:4.  However, the panel concluded that overall there was no substantial violation of WTO obligations. The EU agreed to make some amendments to their legislation and such designations remain permitted. In the Country of Origin Labeling (COOL) dispute (DS384,386) between the US and Mexico and Canada (with others as participants), the original panel and subsequently the appeal panel, concluded that US COOL legislation was according less favourable treatment to imported livestock (beef and pork) than to like domestic livestock and required that the US alter COOL.  This dispute continues to be active as the US has failed, in the eyes of the complainants, to comply with the WTO decision.  This case only addresses local, not local/sustainable, but would appear to support the view that bundling local with sustainable affords protections that are not available when measures are just designed to support local production and processing.

Additionally, paragraph 8 of Article III allows for exemptions for government procurement of products for government purposes without resale.  This might cover, for example, food purchased for hospitals, prisons and in some cases government employees.  However, dispute panel rulings on Ontario’s Green Energy Act, suggest a close reading might be required to determine how to structure the language of provisions in these cases so as not to trigger a complaint (Bell-Pasht, 2013).

Another arena under discussion that is potentially pertinent to the question of “like” is process and production measures that are non-product related (npr-PPMs).   Much of the architecture of “like” revolves around physically similar products and product-related process and production measures (PPMs). Some analysts argue that non-product related PPMs, for example sustainable production practices that do not affect a product in obviously material ways, are grounds for discriminating between products, i.e, using npr-PPMs  as a way to distinguish products in the market place would not violate Article III (Vranes, 2011; see also Daughbjerg, 2012).  However, this issue remains largely unresolved in both trade and academic circles[3] (see the next section for additional dimensions of this debate).

If not deemed “like”, then Article III would not be broadly applicable to instruments supporting local/sustainable foods, however the argument would not apply in cases where governments might be favouring domestic sustainably produced foods over international sustainably produced ones.  Currently, that scenario might only arise around certified organic foods.

GATT 1947 Article XX (and the Sanitary and Phytosanitary (SPS) and Technical Barriers to Trade (TBT) agreements)

This article sets out exemptions from the GATT, including measures “relating to the conservation of exhaustible natural resources if such measures are made effective in conjunction with restrictions on domestic production or consumption.”   Such measures must not be applied in a way that ‘would constitute a means of arbitrary or unjustifiable discrimination between countries where the same conditions prevail, or a disguised restriction on international trade’ (Article XX, GATT, 1947).  This exemption is a basis for imposing environmental requirements that must be met by both domestic and international producers.

Article XX is enforced through the SPS agreement, but it only deals with process and product measures (PPM), not npr-PPM (Daughjberg, 2012).   Consequently, the SPS agreement is unlikely to address issues of sustainability, including organic trade, since these are generally viewed to be npr-PPMs.  Similarly, the TBT agreement is intended to cover technical standards, and it is clear that it does cover PPMs, but less clear that it was designed to address npr-PPMs. Vranes (2011) argues that it does, but that the TBT agreement does not per se find them discriminatory.  Canada has argued similarly, but many countries do not agree and there is also debate in the academic literature.  An additional interpretative complication is that the TBT does not specifically name the exception provided by Article XX, though Vranes (2011) believes it is in effect. This situation suggest that using Article XX to justify supports for local/sustainable food is permissible.

The SPS and TBT agreements use international standards, many set by Codex Alimentarius, to bring rigour to their articles.  For example, Article 2.4 of the TBT Agreement states:

Where technical regulations are required and relevant international standards exist or their completion is imminent, Members shall use them, or the relevant parts of them, as a basis for their technical regulations except when such international standards or relevant parts would be an ineffective or inappropriate means for the fulfilment of the legitimate objectives pursued, for instance because of fundamental climatic or geographical factors or fundamental technological problems.

According to Daughberg (2012), however, it remains unclear how WTO rules relate to private standards, especially when they are not under consideration by Codex. Codex is not apparently developing standards for sustainable production and processing systems other than organic. In Canada, other than certified organic standards and regulations, sustainability standards are largely private, with limited state facilitation and enforcement.   The implication is that private standards for local/sustainable, given the lack of attention from Codex, are in a grey zone (Swinbank, 2006). Programs with standards often also have eco-labels and according to Swinbank (2006), labeling for quality attributes, including npr-PPMs, is highly contentious within the WTO and currently unresolved.

WTO Agreements

Under the WTO, several agreements have been adopted that affect local/sustainable food development.  This section focuses on two, the Agreement on Agriculture and the Agreement on Government Procurement.

Agreement on Agriculture

With the Agreement on Agriculture (AoA), governments are supposed to remove barriers to trade.  The agreement emerged out of GATT rules and agreements, including the Subsidies and Countervailing Measures (SCM) Agreement, and the Commodity Agreements (e.g., wheat, sugar, coffee).  The SCM was a component of GATT 1947 rules, and defined a subsidy as a transfer of funds to private firms and beneficial to that firm.  In cases, however, where the benefits are society-wide, as with subsidies for environmental improvements beyond the farm, and where the subsidy only covers part of the farms costs associated with implementing environmental improvements, there is a legitimate question about whether it would be considered a farm subsidy. These questions appear to have coloured the structure of the domestic support provisions in the AoA (see below).  The SCM agreement also prohibited export and import substitution subsidies, but interestingly, the WTO AoA, which further developed rules against export subsidies (see below), does not explicitly mention import-substitution subsidies.

The Agreement has a somewhat tortuous negotiating history. The Doha Round that commenced in 2001 to update the original rules has never actually been completed.  Negotiations were stalled until very recently[4], and the AoA is still operating largely under rules agreed upon in 1995.  The three guiding pillars of the AoA are:

  • Market access: elimination of import quotas and non-tariff trade barriers (NTBs), replaced with tariffs that are progressively reduced. Of particular significance, Canada reduced tariffs on supply managed commodities by 36% in the 1995-2000 period.
  • Export subsidy (red box) reductions: each country had different reduction targets depending on volume or value. The original intent was to eliminate the red box, but this has yet to happen, even though the US and EU have proposed it at the negotiating table since 2004.  An agreement in principle to eliminate was adopted in 2015 (the Nairobi Agreement) but implementation, to be completed no later than 2020, has been hobbled by the absence of a comprehensive agreement, and on-going contestation  about the WTO by the USA.
  • Domestic support reductions (sorted into three categories: Amber, Blue and Green).

Regarding market access, much of the focus of the agreement is on import quota and tariff reduction, which could affect supply managed commodities, but many currently proposed supports for local/sustainable food systems would likely be considered NTBs. However, the structure of the AoA appears to offer numerous opportunities to exempt such supports or position them as non-distorting. The agreement does not specifically apply to the Municipal Agencies, Schools and Hospitals (MASH) sector.  Nor does it say anything about non-governmental organizations.  Multi-actor programmes, a common feature of current development efforts (as described above), might not then be covered by the agreement, even if the state was part of the partnership.  However, as Vranes (2011) cautions, under GATT rules, the activities of non-state actors can be attributed to the state, when influenced by state incentives and disincentives.

Export subsidies are not directly applicable to this discussion (although Canada has had some very contested export subsidies for dairy products, see for example its export subsidy notification for 2018-19), but domestic supports are very pertinent.  Under the agreement, green box (or environmental measure) support is permitted, so it is feasible to design local/sustainable programming for this category, since if properly constructed, such measures can also generate significant environmental improvements.

Canada does have considerable General Service subsidies, report to the WTO AoA under the green box category.  It does not appear to report any environmental programming as Blue box, which suggests that none of Canada's agri-environmental programs can be considered extensification, a significant weakness in Canada's approach.

Even if local/sustainable provisions fall into the amber box, governments are allowed to provide a considerable amount of subsidy, but not exceed the limits imposed by the AoA. The federal government’s spending on amber box programmes through the early 2000s was substantially below the agreed upon limit  (Holden, 2005). Canada’s  domestic support notification to the WTO (deposited in 2012 and covering 2009) revealed that spending was only about 32% of its yellow box commitment level for the period in question (WTO Committee on Agriculture, 2012).  In part, this is because when a specific programme costs less than 5% of total farm income in the targeted commodity area, it is not counted, known as the de minimus provision (Brink, 2009).  Many small support programmes are, thus, not counted as part of the commitment. It's notification for 2016, apparently the most recent and deposited in 2019, showed that Canada was using even a lower level of its yellow box commitment than 2009.

All this means that Canada has significant opportunity within  amber, blue and green box programs to support the shift to sustainable / local.

There remains as well the larger question of whether the Agreement on Agriculture is effective. "The consensus shared by both critics and champions of WTO alike has been that in practice the Agreement on Agriculture has neither created a liberal global market nor has it benefited poorer countries, whose economies depend on the agricultural sector. It has instead protected powerful countries and large corporations." (UN Special Rapporteur on the Right to Food, 2020:7).

WTO Agreement on Government Procurement (AGP)

Canada is one of a limited number of signatories to this agreement that applies to central agencies and provincial governments and their affiliated agencies.  It is in effect for central government contracts valued at over CAD$204,750 (Sept. 23 2013 SDR/CAD$ exchange rates) and sometimes higher for sub-central agencies.  This agreement is primarily about tendering procedures, supplier qualification and selection, and awarding of contracts, and may limit the choice of supplier for a contract, but the AGP does permit proposals with technical specifications regarding performance (as opposed to design or descriptive characteristics), particularly when based on international standards, national technical regulations, or recognized national standards (Bell-Pasht, 2013).

The AGP, as with many agreements, has a general exception for public interest measures to protect human, animal or plant life or health and Canada has exempted procurements with set-asides for small and minority businesses or contracts for agricultural products that further agricultural support programs or human feeding programs. Some sub-central agencies are also exempt if the procurement relates to regional development and environmental quality objectives. The provisions cover many provincial departments, but equally many MASH entities and NGOs are exempt, depending on the province.

NAFTA (and USMCA)

A deal between Canada, the USA and Mexico, NAFTA was actually the first free trade agreement to apply GATT-like rules to the agriculture sector (Doern and MacDonald, 1999).  Its provisions for food and agriculture are generally aligned with GATT and WTO requirements (tariff reduction, elimination of export subsidies), except that it is largely silent on the kinds of domestic support measure restrictions set out in the AoA (Konforti, 2010). It did, however, largely protect the supply managed industries. The agreement also regulates government procurement (Chapter 10), largely also aligned with GATT non-discriminatory rules. The procurement rules between Canada and the US, however, are still only applicable at the federal level for goods valued at more than USD$25,000. Provisions were originally non-binding at the municipal and provincial levels (Carter-Whitney, 2008) but provinces are now subject to the rules of the WTO AGP.  Municipal procurement remains excluded under NAFTA.

The USMCA , sometimes referred to as NAFTA 2.0, is still being ratified (the implementation bill is in debate in the Canadian parliament, the other partners have ratified).  It contains a few changes that are significant relative to NAFTA:

  • there may be stronger protections against subsidies that contribute to overfishing , prohibiting shark finning and killing great whales, and for reducing marine litter (Chapter 24)
  • Canada agrees to U.S. dairy farmer tariff-free access to 3.6% of the Canadian dairy market (an increase from 1%) and to eliminate Class 6 and 7 pricing provisions (related to milk proteins) on certain dairy products and permit tariff free US imports up to a specified level.  This is significant because it allows US dairy farmers to exploit a loophole in the rules that will result in more US milk proteins in the Canadian market and more complications aligning supply with demand, a key element of supply management system.
  • Canada agrees to allow Canadian cross border shoppers a higher duty-free limit on purchases from the U.S. to $150 from the previous $20 level
The Canada – EU Comprehensive Economic and Trade Agreement (CETA)

This agreement has been provisionally ratified (some complicated approval processes remain in the EU), with most of its features being implemented.  Some elements of import related to previous agreements:

  • Progressive reduction of duties on a range of Canadian agricultural goods
    Subsidies left primarily to WTO rules and negotiations
    More erosion on IPR that negatively affects seed saving
  • Further erosion of supply management by allowing  products in tariff – free (2%), phased-in
  • Procurement rules apply more fully to provincial and local governments than previous agreements, but not full coverage and still also financial thresholds that are significant before rules apply
  • There are rural development exemptions for some provinces and territories
  • Has provisions that appear to be stronger related to environmental protection, sustainable development and trade

Since most of the agreement was brought into force, trade statistics reveal that Canadian agrifood exporters in pork, beef, grains and oilseeds are not yet receiving the claimed benefits of the deal, while European food imports have increased significantly. Canadian exports have actually declined by 10% while European exports have increased by the same amount.  The EU has been blocking Canadian imports because of perceived less stringent sanitary and phytosanitary practices in Canada (Arnason, 2019), perceptions of weak sustainablity in Canadian production, very low pesticide tolerances that Canadian farmers can't meet, and some states such as Italy not following the new rules on country of origin labeling (White, 2020).  This speaks to the way the application of rules that are not necessarily addressed in the agreements can result in trade flows that were not anticipated.  It also speaks o be belief in many trade circles that Canada is a laggard on agri-environmental  performance. The Canadian government continues to celebrate the deal despite evidence that it isn't working.

As a result, and with implementation of the Comprehensive and Progressive Agreement for Trans Pacific Partnership (see below), the 2019 federal budget announced $3.9 billion in compensatory funding to supply managed farmers, with $2.4 billion  to sustain incomes (0.25 billion already committed for CETA), and $1.5 billion as a Quota Value Guarantee.  The payments are slowly being rolled out, first to the dairy sector, and subsequently to poultry producers.  How the WTO might interpret these compensatory payments remains unclear, but they have generated significant questions to Canada in WTO meetings.

The procurement provisions are perhaps the most significant. Gerry Ritz, then minister of agriculture, had indicated earlier in the negotiations that he saw nothing that would jeopardize buy local programmes (CBC News, 2011) and news reports prior to the announcement implied that some protections would continue to exist for local purchasing (Clark et al., 2013). Because the EU has used exemptions provided by the AGP on which to base Fair Trade and regional development initiatives (Rourke, 2011; Bell-Pasht, 2013), and has a 20-year history of supporting in more substantial ways than Canada adoption of sustainable food production and distribution measures,  final language that compromises current initiatives, leaving Canada also freer to support local/sustainable food systems development.

The Comprehensive and Progressive Agreement for Trans-Pacific Partnership (also known as Trans-Pacific Partnership-11)

This agreement, signed in principle as the TPP under former President Obama, was altered after President Trump withdrew from it.  The remaining 11 countries went forward with the CPATPP, keeping many of the provisions agreed to in principle and eliminating those the USA was pressing for but were controversial among other members.  The agreement came into force in late 2018.  Canada has passed an implementation bill.  However, Malaysia has yet to sign, and there are reports that Vietnam is refusing to permit access to certain goods and markets under the arrangement (Pratt, 2020). With President Biden in office, the US may now rejoin.

This deal continues the trend of allowing access to the supply managed sectors, with a further 3.25% of total access provided to deal signatories.  In sum about 10% of the dairy sector is now subject to tariff-free imports, somewhat less for the other supply managed sectors.

Endnotes:

[1] Note that the arguments that follow do not apply when comparing local vs. imported sustainable products.

[2] Swinbank (2006) also reported in the shrimp and sea turtles case that Article XX(g) might also be invoked if the environmental legislation was suitably constructed.

[3] Note that Vranes (2011) has concluded from a legal interpretation of the pertinent texts that PPMs, whether npr or not, do not per se represent discriminatory treatment.

[4] The Bali mini-deal of December 2013 has some significant features, but does not affect  the arguments presented here (http://wto.org/english/thewto_e/minist_e/mc9_e/tempdocs_e.htm).