## Facts

- Canada imposed a 6.1% MFN customs duty on imported motor vehicles but granted duty-free importation of certain vehicles and parts to a small set of “qualifying” manufacturers.
- The duty-free treatment operated through the Motor Vehicle Tariff Order, 1998 and Special Remission Orders, implemented in part through firm-specific administrative instruments (including Letters of Undertaking).
- Eligibility and benefits depended on meeting conditions tied to (i) manufacturing in Canada and (ii) Canadian value-added and sales/export ratios that linked import privileges to specified domestic production and export performance.
- Eligibility was effectively closed to new entrants, so manufacturers outside the historical beneficiary group could not obtain comparable duty-free access.
- Japan and the European Communities challenged the measures as discriminatory and as imposing local-content and export-performance conditions inconsistent with multiple WTO agreements.
- A WTO panel found violations under GATT 1994, the TRIMs Agreement, the SCM Agreement, and the GATS; Canada and the complainants appealed aspects of the reasoning and findings.

## Issues

1. Whether granting duty-free treatment to qualifying manufacturers, without extending it “immediately and unconditionally” to like products from all Members, violated GATT 1994 Article I:1 (MFN).
2. Whether the Canadian value-added and manufacturing conditions altered competitive conditions against imported products in violation of GATT 1994 Article III:4 (national treatment on internal regulation).
3. Whether the Canadian value-added and related requirements constituted prohibited TRIMs under TRIMs Agreement Article 2 (read with the Illustrative List).
4. Whether duty exemptions/remissions were “subsidies” contingent upon export performance (SCM Agreement Article 3.1(a)) or contingent upon the use of domestic over imported goods (SCM Agreement Article 3.1(b)).
5. Whether, and to what extent, the measures affected covered distribution/wholesale services and breached GATS MFN (Article II) and national treatment (Article XVII).

## Decision

- The Appellate Body upheld that the duty-free import scheme conferred an “advantage” and that limiting eligibility meant the advantage was not extended “unconditionally” to like products of all Members, breaching GATT Article I:1.
- The Appellate Body upheld that the Canadian value-added and manufacturing requirements modified conditions of competition to the detriment of imported products, breaching GATT Article III:4.
- The Appellate Body upheld that the Canadian value-added requirement functioned as a local-content measure inconsistent with GATT Article III and therefore violated TRIMs Agreement Article 2.
- The Appellate Body upheld findings that key elements constituted prohibited export-contingent subsidies under SCM Agreement Article 3.1(a) (including de facto contingency tied to export performance), while clarifying and narrowing parts of the analysis regarding local-content contingency under SCM Agreement Article 3.1(b).
- On GATS, the Appellate Body narrowed parts of the panel’s approach by distinguishing goods-related aspects from measures affecting trade in services, but affirmed violations to the extent the scheme accorded preferential treatment affecting covered services contrary to MFN and, where commitments existed, national treatment.
- The Dispute Settlement Body adopted the reports as modified and recommended Canada bring the measures into conformity; Canada ended the challenged preferential regime and applied the MFN tariff uniformly.

## Legal Principles

- An import duty exemption or remission is an “advantage” under GATT Article I:1, and it must be extended immediately and unconditionally to like products of all WTO Members; a closed eligibility list that restricts access to the advantage breaches MFN.
- Conditions requiring specified domestic production activity or domestic value-added can breach GATT Article III:4 when they disadvantage imported products by altering competitive conditions in the domestic market.
- A domestic value-added requirement that effectively compels local sourcing is a prohibited local-content measure under the TRIMs Illustrative List and violates TRIMs Agreement Article 2 when inconsistent with GATT Articles III or XI.
- Foregone government revenue through duty waivers/remissions can constitute a financial contribution conferring a benefit under SCM Agreement Article 1; confining benefits to a limited set of firms supports specificity.
- Export-subsidy prohibition under SCM Agreement Article 3.1(a) covers both de jure and de facto export contingency; the design and structure of a measure may establish that the benefit is tied to export performance.
- For SCM Agreement Article 3.1(b), a finding that a subsidy is “contingent upon” using domestic over imported goods requires a demonstrated legal or factual contingency, not merely a policy tendency toward local sourcing.
- A measure affecting goods producers may also be a measure “affecting trade in services” under GATS, but only where the challenged elements relate to covered services and to the responding Member’s specific commitments.

## Conclusion

The Appellate Body held that Canada’s Auto Pact-related duty waivers and remissions violated MFN and national treatment disciplines, operated as prohibited local-content TRIMs, and included prohibited export-contingent subsidies, while limiting GATS findings to those parts that genuinely affected covered services and commitments; Canada was required to withdraw or modify the measures and subsequently applied the MFN tariff uniformly.


Canada—Certain Measures Affecting the Automotive Industry, WT/DS139, WT/DS142, AB-2000-2 (WTO App. Body May 31, 2000), adopted June 19, 2000