JÓN RAGNAR JOHNSON HONORARY CONSUL GENERAL OF ICELAND TORONTO, CANADA

Transcription

1 ANALYSIS OF THE FREE TRADE AGREEMENT BETWEEN CANADA AND THE STATES OF THE EUROPEAN FREE TRADE ASSOCIATION (ICELAND, LIECHTENSTEIN, NORWAY AND SWITZERLAND) BY JÓN RAGNAR JOHNSON HONORARY CONSUL GENERAL OF ICELAND TORONTO, CANADA

2 INDEX EXECUTIVE SUMMARY...1 OVERVIEW...2 ESTABLISHMENT OF BILATERAL RELATIONSHIP...3 TRADE IN GOODS...4 A. ESTABLISHMENT OF A FREE TRADE AREA...4 B. HARMONIZED COMMODITY DESCRIPTION AND CODING SYSTEM...5 C. ELIMINATION OF CUSTOMS DUTIES ON PRODUCTS WITHIN CHAPTERS 25 THROUGH 97 OF THE HARMONIZED SYSTEM...6 D. ELIMINATION OF CUSTOMS DUTIES ON PRODUCTS WITHIN CHAPTERS 1 THROUGH 24 OF THE HARMONIZED SYSTEM International Trade and Agricultural Products Tariff Elimination on Primary and Processed Food Products (Except Marine Products)... 8 (a) Processed Agricultural Products under CEFTA Annex G... 8 (i) Products Imported By EFTA States From Canada... 8 (ii) Products Imported by Canada from EFTA States... 9 (iii) Export Subsidies... 9 (b) Agreement on Agriculture between Canada and the Republic of Iceland... 9 (i) Products Imported Into Iceland From Canada (ii) Products Imported Into Canada From Iceland (iii) Export Subsidies (iv) Other Provisions Elimination of Customs Duties on Fish and Other Marine Products E. RULES OF ORIGIN AND ADMINISTRATIVE CO-OPERATION Approaches to Determining Origin Approaches to Establishing Preferential Rules of Origin Rules of Origin Terminology CEFTA Rules of Origin and Administrative Co-Operation Establishing That a Good is Originating under the CEFTA Rules Wholly Obtained Products Sufficient Production (a) Product Specific Rules in Appendix I (i) Change in Tariff Classification (ii) Packaging and packing materials and containers (iii) Accessories, spare parts and tools (iv) Value Content Requirement (v) Process Requirements (vi) Tolerance (i)

3 (b) Where No Change in Tariff Classification (c) Non-Originating Materials that do not have to be taken into account (i) Non-Originating Materials Incorporated into Originating Products (the Roll-up Rule) (ii) Neutral Elements (d) Insufficient Production Other Provisions (a) Accounting Segregation of Fungible Materials (b) Sets 24 (c) Transport through a Non-Party (d) Exhibitions Administration (a) Origin Declarations (b) Importation Requirements (c) Preservation of Records (d) Administrative Co-operation and Origin Verifications (e) Other Provisions (i) Approved Exporter Program (ii) Importation by Instalment (iii) Confidentiality (iv) Penalties Sub-Committee on Rules of Origin and Trade in Goods Observations on the CEFTA Rules of Origin F. NATIONAL TREATMENT AND IMPORT AND EXPORT RESTRICTIONS...30 (i) Controls on Log Exports (ii) Controls on the Export of Unprocessed Fish (iii) Importation of Goods under certain Canadian Tariff Items (iv) Prohibition on the use of foreign or non-duty paid ships (v) Measures concerning the internal sale and distribution of wine and distilled spirits G. HOW ICELANDIC GOODS CAN BENEFIT FROM IMPROVED ACCESS TO THE CANADIAN MARKET Top 25 Products by HS Subheading Codes Imported from Iceland into Canada Five Case Studies (a) Lambmeat (Classified under HS Heading 02.04) (b) Skyr (Classified Under HS Subheading ) (c) Bottled Water (Classified Under HS Subheading ) (d) Vodka (Classified under HS Subheading ) (e) Outerwear (Classified Under HS Heading 62.01) H. SANITARY AND PHYTOSANITARY MEASURES AND TECHNICAL REGULATIONS39 1. CEFTA and the WTO TBT Agreement CEFTA and the WTO Agreement on the Application of Sanitary and Phytosanitary Measures Observations (ii)

4 I. SUBSIDIES AND ANTIDUMPING...42 J. TRADE FACILITATION...43 K. EXCEPTIONS AND SAFEGUARDS Article XX of GATT Cultural Exemption National Security Exception Emergency Action SERVICES AND INVESTMENT...46 TEMPORARY ENTRY...46 COMPETITION LAW AND POLICY...47 STATE TRADING ENTERPRISES AND PUBLIC PROCUREMENT...47 INSTITUTIONAL PROVISIONS...47 DISPUTE RESOLUTION...48 A. WTO OR CEFTA PROCEDURES...48 B. NON-APPLICATION OF CEFTA DISPUTE RESOLUTION PROCEDURES...49 C. CONSULTATIONS...50 D. ARBITRATION...50 E. IMPLEMENTATION OF THE AWARD...51 F. OBSERVATIONS...51 OTHER PROVISIONS...51 A. ENTRY INTO FORCE...51 B. AMENDMENTS...52 C. ADDITIONAL PARTIES...52 D. COMPLIANCE BY SUB-NATIONAL ENTITIES...52 E. WITHDRAWAL AND TERMINATION...52 CONCLUDING REMARKS...53 (iii)

5 ANALYSIS OF THE FREE TRADE AGREEMENT BETWEEN CANADA AND THE STATES OF THE EUROPEAN FREE TRADE ASSOCIATION (ICELAND, LIECHTENSTEIN, NORWAY AND SWITZERLAND) BY JÓN RAGNAR JOHNSON HONORARY CONSUL GENERAL OF ICELAND TORONTO, CANADA EXECUTIVE SUMMARY The Free Trade Agreement Between Canada and the States of the European Free Trade Association (Iceland, Liechtenstein, Norway and Switzerland) ( CEFTA ) creates significant opportunities for the Icelandic Government and for Icelandic businesses not only to expand trade with Canada but also to inform the Canadian business community as to the opportunities that Icelandic business has to offer. Iceland will now have a special business relationship with Canada that did not previously exist. CEFTA is first and foremost an agreement respecting trade in goods. Canadian tariffs will be eliminated on virtually all industrial goods and on most primary goods which Iceland produces. Tariff elimination opens up opportunities for Icelandic producers and exporters. The current penetration by Icelandic products of the huge Canadian import market is very low and there is significant room for improvement. Opportunities differ from product to product and Icelandic producers and exporters will have to do their homework to determine whether their products can benefit from CEFTA. CEFTA will have no effect on products that already enter Canada duty free. However, Canada maintains significant tariffs on many products. The elimination of tariffs will create advantages for Icelandic products over exporters from countries whose products are subject to the tariffs and will place Icelandic products in the same competitive position as products from countries that enjoy duty free access to the Canadian market under free trade agreements and other preferential arrangements. Tariff elimination will only apply to qualifying goods. CEFTA sets out rules of origin for determining whether goods are qualifying. The CEFTA Rules of Origin are complex when viewed in their entirety but Icelandic exporters must not lose sight of the forest for the trees because the only rule of origin with which an exporter must be concerned is the specific rule that applies to its product. That rule is frequently very simple and easy to comply with. CEFTA does not eliminate any of the import restrictions that Canada maintains on certain products. However, the restrictions such as Canada s supply management regime for dairy products have minimal effect on products in which Iceland has a strong export interest.

6 The other CEFTA trade-in-goods provisions are mainly a re-affirmation of the mutual obligations that Canada and Iceland have under the WTO. However, their inclusion in CEFTA creates an opportunity for the Icelandic Government to raise concerns and negotiate the elimination of irritants informally through the CEFTA Joint Committee rather than having to rely solely on WTO procedures. CEFTA sets out emergency action procedures that permit the temporary reinstatement of duties if imports from a CEFTA Party are causing or threatening serious injury. Canada has never resorted to the use of emergency action procedures in any of the free trade agreements to which Canada is a party. Like all free trade agreements, CEFTA contains exceptions. Some are standard such as an exception for national security. Others are unique such as the exception for cultural industries that is a peculiar Canadian concern dating from Canada s original free trade negotiations with the United States. As between Canada and Iceland, the CEFTA cultural exception should have minimal impact. CEFTA contains useful provisions respecting temporary entry and co-operation in competition matters. There are tentative provisions respecting services, investment and government procurement. The CEFTA institutional structure is minimal but this is usual in free trade agreements. The CEFTA Joint Committee will provide a very useful means for Icelandic businesses, through the Icelandic Government, to raise concerns about trade irritants with the Canadian Government. Depending on how it is used, the Joint Committee should provide a useful vehicle for the informal resolution of disputes and the elimination or reduction of irritants. CEFTA also makes provision for an effective and binding dispute settlement procedure should a dispute not be capable of being resolved through negotiation. While this dispute settlement procedure will likely be used very seldom, if at all, its inclusion adds creditability to the agreement. CEFTA will become effective when Canada and at least two other EFTA States have ratified it. The Canadian Government introduced its implementing legislation on May 5, 2008 and, barring an election being called, the Canadian legislation should be passed in the latter part of CEFTA should come into effect early in OVERVIEW The Free Trade Agreement Between Canada and the States of the European Free Trade Association (Iceland, Liechtenstein, Norway and Switzerland) ( CEFTA ) 1 is a significant step forward for Canada in its trading relationships and should provide benefits to each of its four EFTA trading partners. 2 1 The CEFTA text can be accessed on the website for International Trade Canada website at: The CEFTA provisions and the CEFTA Annexes referred to in this Analysis, as well as the Agreement on Agriculture between Canada and the Republic of Iceland, can all be accessed through this website.

7 CEFTA is the first free trade agreement that Canada has entered into with European countries. This by itself is significant. However, Iceland, Liechtenstein, Norway and Switzerland are among the most advanced countries in Europe under any number of measurements. The per capita GDP of each of these countries is among the highest in the world and each of these countries is a leader in a number of fields. Norway and Switzerland both have diversified and highly successful economies. Iceland, with a population of just over 300,000 may be a small country but its economy, its business community and its expertise in a number of fields are much more significant than its small population would suggest. By entering into CEFTA, Canada has entered into an enhanced trading relationship with four of the most successful countries in Europe. Free trade agreements create opportunities for exportation and importation through the elimination of tariffs and the reduction of other trade barriers. A free trade agreement also opens up an opportunity for each member country to educate the governments and business communities of the other member countries as to their capabilities, areas of specialized knowledge and degree of business sophistication. The Icelandic Government and business community should use CEFTA not only to exploit business opportunities specifically arising from the elimination of tariffs but also to inform Canadian governments and the Canadian business community of the full range of opportunities Iceland presents. It is unlikely that many Canadian government or business leaders are aware of how far Icelandic economic interests extend beyond the fishery into banking, metal production, sophisticated technology and significant overseas investment in a number of countries including Canada. CEFTA is a major breakthrough in Canadian trade negotiations. Canada achieved a single major success twenty years ago with the signing of the Canada-United States Free Trade Agreement ( CUFTA ). The North American Free Trade Agreement ( NAFTA ) began as a U.S./Mexican initiative that Canada joined for defensive reasons. Canada entered into the Canada-Israel Free Trade Agreement more for political reasons than economic reasons. The only other free trade agreements that Canada has successfully negotiated have been with developing countries, namely Chile, Costa Rica and Peru. Canada has been engaged in protracted free trade negotiations with South Korea but so far no agreement has materialized. 2 The successful conclusion of CEFTA should be viewed as a major achievement by Canada s Minister of International Trade. ESTABLISHMENT OF BILATERAL RELATIONSHIP CEFTA establishes a bilateral trading relationship between Canada and each of the four EFTA countries ( EFTA States ). Trading relations among the EFTA States will not be affected by CEFTA 3 but will continue to be governed by the Convention Establishing the European Free Trade Association (now known as the Vaduz Convention ) and, in the case of Iceland, Norway and Liechtenstein, the European Economic Area. 3 2 Canada s NAFTA trading partners, the United States and Mexico, have been much more successful than Canada in negotiating free trade agreements with other countries. This is particularly the case with Mexico, whose free trade agreements include agreements with the EFTA countries, the European Union, and a number of other countries. 3 CEFTA Article 33

8 Canada and each EFTA State are members of the World Trade Organization ( WTO ) and are bound by the Agreement Establishing the World Trade Organization ( WTO Agreement ) and the agreements set out in its annexes. TRADE IN GOODS A. ESTABLISHMENT OF A FREE TRADE AREA CEFTA is first and foremost an agreement respecting trade in goods. CEFTA creates a new free trade area comprised of Canada and the four EFTA States. The coverage of goods is virtually complete for all goods except for primary products classified under Chapters 1 through 24 of the Harmonized System set out in the Appendix to this Analysis. Goods classified under Chapters 1 through 24 of the Harmonized System are covered in part by specific CEFTA provisions and in part by individual bilateral agreements between Canada and each of Iceland, Norway and Switzerland. The free trade area is the most basic preferential trading arrangement that is sanctioned under WTO rules. 4 The more comprehensive preferential arrangement is the customs union. Members of free trade areas must eliminate tariffs and other restrictions of commerce on substantially all of the trade among them. However, each member country remains free to maintain its individual trade policies in respect of non-member countries. In addition to eliminating tariffs and restrictions of commerce on trade among themselves, members of customs unions must also harmonize their trade policies respecting non-member countries. Free trade areas are much more flexible arrangements than customs unions. The EFTA countries are free to maintain their arrangements with the European Union to which Canada is not a party. Similarly, Canada has its own trading arrangements with the United States and Mexico under NAFTA. The EFTA countries have their free trade agreement with Mexico but do not have any special trading arrangement with the United States. Individual member countries of a customs union such as the European Union do not have this flexibility. The disadvantage of the free trade area trading arrangement is the necessity of establishing rules of origin for the purpose of determining eligibility for preferential tariff treatment. This is because the members of a free trade area do not harmonize their border policies. Canada allows preferential tariff treatment to U.S. goods under NAFTA but the EFTA States do not have any basis for allowing preferential tariff treatment for U.S. goods. Just as an EFTA State would not grant preferential treatment to a U.S.-produced good imported directly from the United States, there is no reason for the EFTA State to allow preferential treatment to that good just because it has been transhipped through Canada. The U.S. good must be transformed into a different good or have value added to it in Canada in order for it to be eligible for preferential treatment when 4 4 See Article XXIV of the General Agreement on Tariffs and Trade 1994 ( GATT 1994 ) set out in Annex IA of the WTO Agreement. Without the cover provided by Article XXIV, the establishment of a preferential trading arrangement such as a free trade area or a customs union would be inconsistent with the most-favoured-nation ( MFN ) provision in Article I of GATT 1994, which requires that an advantage granted to the goods of any country be immediately and unconditionally granted to goods of all WTO members.

9 exported from Canada to an EFTA State. The extent of the transformation or the value added that is required is determined by rules of origin. The requirement that goods satisfy rules of origin in order to receive preferential treatment adds a level of complication to border procedures and an additional cost to producers. The cost of compliance can range from being minimal to substantial, depending on the complexity of the rule. While the free trade area trading arrangement is criticized for not encouraging deeper economic integration among the member countries, the harmonization of trade and other policies regarding third countries is a difficult process among sovereign countries and entails a surrender of degrees of sovereignty that many countries find unacceptable. 5 B. HARMONIZED COMMODITY DESCRIPTION AND CODING SYSTEM The Harmonized Commodity Description and Coding System ( Harmonized System or HS ) has been adopted by all WTO countries, including Canada and each of the EFTA States, as the basis for the classification of goods for tariff and statistical purposes. The Harmonized System is a numerical classification system that classifies goods under 97 chapters grouped under Sections I through XXI. The 97 chapter titles are set out in the Appendix to this Analysis. Each chapter is broken down into headings and each heading is further broken down into subheadings. The numerical code for a product is broken down as follows: First two digits - chapter number. First four digits heading number First six digits subheading number. The first six digits of the numerical code for any product will be identical in the tariff schedules of all countries that have adopted the Harmonized System. Each country develops its own tariff code for individual products by adding two or more digits to subheading number. These additional digits will vary from country to country. Example: Chapter 3 of the Harmonized System is Fish and crustaceans, molluscs and other aquatic invertebrates. The first two digits of the tariff code of any product classified under Chapter 3 are 03. Heading of the Harmonized System is Fish, dried, salted or in brine; smoked fish; whether or not cooked during the smoking process; flours, meals and pellets of 5 5 Proponents of deeper integration between Canada and the United States propose that NAFTA become a customs union. While this would doubtless confer economic benefits, the harmonization of trade policies among the three NAFTA countries would be very difficult. For example, the highly restrictive U.S. policies regarding Cuba are very different from those of Canada and Mexico, both of whom treat Cuba as just another developing country.

10 fish, fit for human consumption. The first four digits of the tariff code of any product classified under this heading are Subheading of the Harmonized System is Livers and roes, dried, smoked, salted or in brine. The first six digits of the tariff code of any product classified under this heading are Livers and roes, dried, smoked, salted or in brine are classified under subheading in the tariff schedules of Canada, Iceland, each other EFTA State and every member of the WTO. The Harmonized System provides a common language for the description of products. Each country applying the Harmonized System establishes its tariff items for specific goods by adding two or more digits to the HS subheading numbers. For example, the tariff items under Subheading in the Canadian Customs tariff are: Tariff item livers Tariff item roes The tariff items under Subheading in the Customs Tariff of Iceland 6 are: Tariff item Lumpfish roes, salted Tariff item Cod roes, salted Tariff item Other roes, sugar salted Tariff item Cod roes, roughly salted Tariff item Capelin roes, roughly salted Tariff item Other roes, roughly salted Tariff item Other Correct tariff classification is critical to working with CEFTA, both for determining tariff treatment and for the correct application of the rules of origin. The Harmonized System is accompanied by General Rules of Interpretation, as well as Section Notes and Chapter Notes. The Harmonized System Explanatory Notes published by the World Customs Organization provides authoritative guidance to the application of the Harmonized System. C. ELIMINATION OF CUSTOMS DUTIES ON PRODUCTS WITHIN CHAPTERS 25 THROUGH 97 OF THE HARMONIZED SYSTEM Chapters 25 through 97 of the Harmonized System include cover all products except primary products (i.e. Chapters 1 through 24). Chapters 25 through 97 are listed in the Appendix to this Analysis. With very few exceptions, customs duties will be completely eliminated on all products classified within Chapters 25 through 97 of the Harmonized System traded between Canada and Iceland. 7 With the exception of certain boats and ships imported into Canada, 6 6 I have used the Customs Tariff of Iceland 2006 published in The International Customs Journal, Journal No 111 (10 th Edition) September CEFTA Annex F lists a few products to which the elimination of duties will not apply. In the case of Canada Iceland trade, Canadian duties will not be eliminated on certain albumins classified under HS heading 35.02,

11 CEFTA Article 10 provides the elimination of duties shall take place immediately upon CEFTA coming into effect. Canadian duties on cruise and excursion ships under a certain size, tankers and vessels for transporting goods (except refrigerated vessels), fishing vessels and factory ships, dredgers, floating or submersible drilling or production platforms, warships under a certain size and open boats such as lifeboats will be phased out in eight or thirteen equal annual reductions with complete elimination in ten or fifteen years, depending on the classification. 8 The CEFTA arrangement respecting boats and ships reflects the desire on the part of the Canadian Government to continue to protect the small and relatively insignificant Canadian shipbuilding industry. Duty elimination only applies to qualifying products. A product must satisfy the Rules of Origin described below in order to be a qualifying product. D. ELIMINATION OF CUSTOMS DUTIES ON PRODUCTS WITHIN CHAPTERS 1 THROUGH 24 OF THE HARMONIZED SYSTEM The products covered by Chapters 1 through 24 of the Harmonized System are set out in the Appendix to this Analysis. The products covered by these chapters include many primary food products as well as a number of processed food products. 1. International Trade and Agricultural Products Trade rules respecting agricultural products are more restrictive than rules respecting other sectors for a variety of reasons. Food production, at least historically, is seen to be essential and deserving of special protection. Farm lobby groups frequently have political influence that far outweighs their numbers. Many countries wish to preserve rural traditions at the expense of trade liberalization. The Canadian position respecting agricultural products is highly ambivalent. Canada is a free trader with respect to products such as wheat, oats and barley 9 but highly protective with respect to dairy and poultry products. The Canadian Government and the provincial governments jointly administer supply management programs covering diary and poultry products that provide price support to farmers by limiting supply through a combination of domestic production quotas and import restrictions. The import restrictions originally took the form of import quotas. With the 7 peptones and their derivatives classified under HS heading and dextrins and other modified starches under HS subheading See CEFTA Annex E for details. 9 While Canada is an efficient producer of grains and has a strong interest in opening markets and reducing subsidy programs maintained by other countries, Canada still maintains the Canadian Wheat Board ( CWB ) as the exclusive marketing agency for wheat, oats and barley grown in western Canada. The practices of the CWB have been a source of constant friction between Canada and the United States, with the United States complaining about unfair marketing practices. The current Canadian Government would like to dismantle the CWB but cannot do so with its current minority position in the House of Commons.

12 entry into force of the WTO Agreement on Agriculture, Canada converted its import quotas on dairy and poultry products into tariff quotas. The effect of the tariff quotas is the same as the quotas because the over-access tariff rates are vary high. For example, milk classified under HS subheading (Of a fat content, by weight, exceeding 1% but not exceeding 6%), Canada s within access MFN tariff rate is 7.5%; the over-access tariff rate is 241% but not less than CDN$34.50/hl. 2. Tariff Elimination on Primary and Processed Food Products (Except Marine Products) Tariff elimination as between Iceland and Canada for products covered by Chapters 1 through 24 of the Harmonized System is provided for in part by CEFTA Annex G, which lists certain processed agricultural products, and in part by the bilateral Agreement on Agriculture between Canada and the Republic of Iceland, which applies only as between Canada and Iceland. There are separate bilateral agreements on agriculture between Canada and each of Norway and Switzerland (a) Processed Agricultural Products under CEFTA Annex G CEFTA Annex G applies among all the CEFTA Parties. (i) Products Imported By EFTA States From Canada Table 1 to Annex G lists specific products, by reference to Harmonized System headings, in respect of which the EFTA countries have granted tariff concessions. The treatment accorded by each EFTA country respecting imports from Canada is listed in that countries column in the table. The designation FREE indicates that no customs duty will be levied. The majority of products listed are subject to such designation. The designation with an asterisk * indicates that the product will be treated in accordance with Article 1(1) of Annex G. Article 1 of Annex G permits each EFTA country to levy a duty to take into account the difference between the domestic price and the world price of raw materials. Each EFTA State, including Iceland, is required to notify Canada of such duties before CEFTA becomes effective. Article 2(1) of Annex G requires that the treatment accorded to Canada for the listed products be no less favourable that the treatment accorded to corresponding products of the European Union. This provision is relevant only for products which are not designated FREE. The provision is not free from ambiguity but appears to mean that 10 The NAFTA agricultural provisions set out in Section A of NAFTA Chapter 7 comprise, in fact, three separate bilateral agreements on agriculture. The Canada-U.S. bilateral agreement simply carried over the provisions of the Canada-U.S. Free Trade Agreement which, while eliminating tariffs, left Canada s supply management system with its quotas intact. The Canada-Mexico bilateral agreement also left quota regimes intact. However, the U.S.-Mexico regime provided for the conversion of all quotas to tariff quotas and, unlike the WTO Agreement on Agriculture, provided for the tariff quotas to be phased out over ten or fifteen years, depending on the product. The phase-out period for these tariff quotas is now complete or almost complete.

13 duty levied on a particular product under Article 1 to account for cost differences in raw materials cannot exceed the duty, if any, which is levied on that product when imported into Iceland from the European Union. 9 (ii) Products Imported by Canada from EFTA States Table 2 to Annex G lists specific products, by reference to Harmonized System headings, in respect of which Canada has granted tariff concessions when such products are imported from EFTA countries. With a few exceptions, Canada s offered rate of duty is FREE. With a few products, duty will still apply but at a reduced rate. For example, the Canadian rate of duty on chewing gum, whether or not sugar-coated classified under HS subheading will be reduced from the MFN Applied Rate of 9.5% to 4.5%. As mentioned above, diary and poultry products are subject to Canadian supply management programs that limited imports through the imposition of tariff quotas. The only product listed on Table 2 that is subject to a tariff quota is yogurt classified under HS subheading Canada s within access commitment rate is reduced from the MFN Applied Rate of 6.5% to FREE. However, Canada s over access commitment rate for imports from EFTA countries remains at Canada s MFN rate of 237.5% but not less than 46.6 /kg. (iii) Export Subsidies While export subsidies are generally prohibited under WTO rules, 11 export subsidies are permitted under the WTO Agreement on Agriculture, subject to reduction commitments. 12 The WTO Agreement on Agriculture covers products classified under HS Chapters 1 to 24, fish and fish products, 13 together with some additional products. Article 4 of Annex G prohibits export subsidies on products subject to tariff concessions in accordance with Annex G (i.e. the products listed in Tables 1 and 2.) (b) Agreement on Agriculture between Canada and the Republic of Iceland The Agreement on Agriculture between Canada and the Republic of Iceland ( Canada-Iceland Agriculture Agreement ) is a bilateral arrangement between Canada and Iceland that provides for tariff concessions to be made by each of Canada and Iceland on specifically identified products. The Canada-Iceland Agriculture Agreement will come into effect at the same time as CEFTA. 11 WTO Agreement on Subsidies and Countervailing Measures (SCM Agreement), Article WTO Agreement on Agriculture Article See Annex I of the WTO Agreement on Agriculture. The exclusion of fish products from the WTO Agreement on Agriculture means that the prohibition of export subsidies in Article 3 of the SCM Agreement applies to these products.

14 10 (i) Products Imported Into Iceland From Canada The products in respect of which Iceland has granted reductions of customs duties on products imported from Canada are listed in Annex 1 of Canada-Iceland Agriculture Agreement. In all cases, the duty for imports of these products from Canada will be FREE. (ii) Products Imported Into Canada From Iceland The products in respect of which Canada has granted reductions of customs duties on products imported from Iceland are listed in Annex 2 of Canada-Iceland Agriculture Agreement. For all products listed, the Canadian offered rate of duty is FREE. The only product included on the list that is subject to Canadian supply management rules is fresh (unripened or uncured) cheese, including whey cheese, and curd classified under HS subheading Icelandic skyr falls within this tariff classification. The within access commitment MFN rate on the tariff item including skyr is reduced from 3.32 cents per kilogram to FREE. However, the over access commitment rate of duty remains at 245.5% but not less than CDN$4.52/kg. 14 (iii) Export Subsidies Unlike Annex G, the Canada-Iceland Agriculture Agreement does not prohibit export subsidies on the listed products. Canada and Iceland confirm that the products listed do not benefit from export subsidies. If either Canada or Iceland reintroduces an export subsidy on a product subject to a tariff concession, the other of them can increase its duty on that product back up to the MFN rate. (iv) Other Provisions The Canada-Iceland Agriculture Agreement incorporates a number of provisions from CEFTA, most notably the procedures for dispute resolution. 3. Elimination of Customs Duties on Fish and Other Marine Products CEFTA Annex H lists specific marine products that are covered by the tariff elimination provision of Canada EFTA Article 10. The list includes all products in HS Chapter 3 (Fish and 14 The Canadian Customs Tariff splits HS subheading into two 8-digit tariff items. The first tariff item is , being the within access commitment that applies to products that are imported within the quota established under the tariff quota that applies to these products. Tariff item is further split into , which is cream cheese (excluding whey and buttermilk cheese) and , which is Other. Skyr would fall under The second 8-digit tariff item is , being the over access commitment that applies to products that are imported outside the quota established under the tariff quota. This tariff item is not further broken down. Given the over access commitment rate of duty of 245.5%, it is unlikely that this tariff item is ever used.

15 crustaceans, molluscs and other aquatic invertebrates), whale meat, 15 and various processed products derived from fish, crustaceans, molluscs and other marine animals. It should be noted that Canadian MFN rates of duty on most tariff items in HS Chapter 3 are already FREE. The only exceptions are: Livers and roes - 3% Livers and roes (frozen) - 3% Livers and roes of fish, dried, smoked, salted or in brine - 3% Rock lobster and other sea crawfish (frozen) - 5% Crabs Other (than king or snow crabs for processing) (frozen) -5% Other (crustaceans), including flours, meals and pellets of crustaceans, fit for human consumption (frozen) 5% Rock lobster and other sea crawfish (not frozen) 5% Crabs (not frozen) 5% Other, including flours, meals and pellets of crustaceans, fit for human consumption (not frozen) 5% Oysters in shell 3% Scallops dried, salted or in brine 4% Canadian duties on all the foregoing products will be eliminated upon CEFTA coming into effect. The elimination of these tariffs will benefit some Icelandic exports to Canada. In 2007, the value of products exported from Iceland to Canada under HS subheading (Livers and roes frozen) was CDN$2,757,219. The Canadian 3% duty on these products will be eliminated. In 2007, value of products exported from Iceland to Canada under HS subheading (frozen crustaceans) was CDN$2,278,290. The Canadian 5% duty on these products will be eliminated. However, the largest single export from Iceland to Canada in 2007 in terms of HS subheading classification was under HS subheading (Other fish, slated or in brine, not dried or smoked), with a value of CDN$5,460,507. The Canadian MFN duty on these products is FREE so CEFTA will not have an impact on these exports. 16 E. RULES OF ORIGIN AND ADMINISTRATIVE CO-OPERATION As mentioned above, the price that the members of a free trade area pay for the flexibility of being able to maintain independent trade policies with non-member countries is the necessity of having to establish rules of origin to establish the eligibility of imported products for preferential tariff treatment. The need to comply with rules of origin adds cost. One cost that is invariably incurred is the cost of bookkeeping and record keeping to ensure that the rules are complied with. Rules of origin can also add cost by requiring that materials be obtained from sources other than the most economic source, such as an apparel rule that requires that fabric be sourced within the preferential trading area rather than from another country where the fabric is cheaper Note 1 to Annex H notes the import ban for whale products applied by Canada, Liechtenstein and Switzerland based on the Convention on International Trade in Endangered Species of Wild Fauna and Flora. 16 See the tables below under G. HOW ICELANDIC GOODS CAN BENEFIT FROM IMPROVED ACCESS TO THE CANADIAN MARKET.

16 A company may also have to maintain different production runs for the same product destined for different export markets. If the cost of complying with rules of origin exceeds the benefit achieved through preferential duty treatment, businesses will forego the preferential treatment, which defeats the purpose of establishing the free trade area. 1. Approaches to Determining Origin There are two broad categories of rules of origin. The first is preferential rules of origin and the second is non-preferential rules of origin. Preferential rules of origin are used to determine the eligibility of a product for preferential treatment, such as eligibility for preferential tariff treatment under a free trade agreement. Non-preferential rules of origin are used to establish a country of origin for a variety of purposes. Uses of non-preferential rules of origin include the administration of country of origin marking requirements and country-specific quotas, as well as the application of antidumping and countervailing duties. It is not necessary with a preferential rule of origin to identify the country of origin of the product. A product either satisfies the requirement or it does not. Non-preferential rules are more complicated because their application must result in the identification of a specific country. The only rules of origin provided for in CEFTA are preferential rules of origin for the purpose of determining eligibility for preferential tariff treatment. Canada and each EFTA State will continue to apply its own non-preferential rules of origin, such as rules for the marking of goods, unaffected by CEFTA. 2. Approaches to Establishing Preferential Rules of Origin Establishing a preferential rule of origin for goods such as crops grown and harvested, trees cut, animals raised, fish caught and so on is relatively straight forward. These goods are wholly obtained in the preferential trading area. For example, lumber cut from white pine grown in Canada or lamb meat from a lamb born and raised on a farm in Iceland is wholly obtained. The more difficult origin determination arises with the good containing inputs ("third country materials") from outside the preferential trading area. A rule of origin that treated all goods containing third country materials as non-originating would be far too restrictive and would defeat the purposes of creating a preferential trading area. On the other hand, to treat goods made entirely from third country materials and subject only to final assembly or finishing processes within the preferential trading area as eligible for preferential treatment would confer unintended benefits on producers in third countries. Rules of origin define the point at which third country materials have been sufficiently processed within the preferential trading area so that the good into which they are incorporated can be considered as "originating" and eligible for preferential tariff treatment. This point can be defined in terms of "substantial transformation", which occurs when the third country materials have been transformed within the preferential trading area into a new and different good. This approach compares the imported materials with the finished good and ascertains whether the materials have been sufficiently changed within the preferential trading area so that the resulting good is something new and different. This point can also be defined in terms of value added within the preferential trading area. When the value of the third country 12

17 materials has been counterbalanced by sufficient value imparted to the good through processing within the preferential trading area, the good is considered to be "originating". 3. Rules of Origin Terminology In rules of origin terminology, an "originating" good is one that satisfies the rules of origin and a "non-originating" good is one that does not. A "material" is any good used in the production of another good. A "material" that qualifies as an originating product under the rules of origin that apply to it is an "originating" material and a material that does not so qualify is a "nonoriginating" material. A material must be produced within the preferential trading area to be originating. In the case of CEFTA, the preferential trading area is the area comprised of the territories of Canada and each EFTA State. Any material imported from outside the preferential trading area is a non-originating material. A material produced within the preferential trading area can also be non-originating if it contains imported materials that have not been sufficiently processed to satisfy the rules of origin that apply to the material. 4. CEFTA Rules of Origin and Administrative Co-Operation The CEFTA Rules of Origin are set out in CEFTA Annex C. Articles 1 through 15 of Annex C set out the rules of origin and Articles 16 through 29 set out rules respecting the application of the rules of origin. Appendix I of Annex C sets out the Product-Specific Rules of Origin that will be described below. Appendix II of Appendix C sets out a simple form of origin declaration that must be completed by an exporter for the importer to be able to claim CEFTA preferential treatment. The CEFTA rules are only relevant for goods produced in an EFTA State and exported to Canada and for goods produced in Canada and exported to and EFTA State. Goods produced in Iceland and exported to another EFTA State will have to satisfy whatever rules of origin apply as between Iceland and that EFTA State in order to be eligible for preferential tariff treatment. A good produced in Iceland and exported to Mexico, a country with which the EFTA countries have a free trade agreement, will have to satisfy the rules of origin in the Mexico-EFTA Free Trade Agreement in order to be eligible for preferential duty treatment when entering Mexico. For the purposes of the CEFTA Rules of Origin, the Swiss Confederation and Liechtenstein are considered as a single Party by reason of a customs union between them. 5. Establishing That a Good is Originating under the CEFTA Rules The CEFTA Rules of Origin provide that it can be established that a good is originating in one of the following ways. 17 A. A product is originating if it is wholly obtained in the territories of the Parties as described below under Wholly Obtained Products B. A product is originating if it is produced exclusively from originating materials Paragraph 1 of Article 2 of Annex C.

18 C. A product is originating if it has undergone sufficient production according to the rules set out in Appendix I to Annex C or as otherwise provided in Article 4 of Annex C. The conditions for acquiring originating status must be fulfilled without interruption in the territories of the Parties. 18 This means that a product cannot undergo processing in one Party (e.g. Canada), further processing in a non-party (e.g. the United States) and yet further processing in a Party (e.g. Canada) and still be considered as originating. The intervening step of processing in the United States in this example destroys the originating status of the product. 6. Wholly Obtained Products Categories of wholly obtained products are set out in Article 3 of CEFTA Annex C. Most of the categories are straight-forward. For example, the categories include a mineral good extracted, a vegetable or other good harvested, a live animal born and raised and a good obtained from hunting, trapping or fishing. Fish, shellfish and marine life taken from the sea, seabed or subsoil outside the territories of the Parties by a vessel registered, recorded or listed with a Party and flying its flag or by a vessel not exceeding 15 tons gross tonnage that is licensed by a Party will be considered as wholly obtained and, therefore, originating. Products produced from such products on a factory ship registered, licensed or recorded with a Party will also be considered as wholly obtained. If, however, such a factory ship produces products using fish, shellfish or other marine life taken by a vessel of a non-party, the resulting products will be originating only if the applicable rule in Appendix I to Annex C has been satisfied. The production on the factory ship can take place outside the territories of the Parties without impairing the originating status of the product Sufficient Production 14 (a) Product Specific Rules in Appendix I As provided in of Article 4(1) of CEFTA Annex C, a product shall be considered to have undergone when the conditions set out for that product in Appendix I to Annex C are fulfilled. Appendix I is entitled Product Specific Rules and sets out rules for groups of products organized in accordance with the Harmonized System. In order to determine which rule applies to a particular product, one must first know the correct tariff classification of the product and then one must look up the rule in Appendix I. The tariff classifications in the Product Specific Rules only go down to the subheading level so correct classification under the tariff schedule of any Party would yield the correct tariff classification for the purposes of applying these rules. 18 Paragraph 2 of Article 2 of Annex C. There is one exception to this respecting marine products processed in factory ships that is described below. 19 Paragraph 3 of Article 4 of Annex C. This is the exception referred to in footnote 16.

19 15 (i) Change in Tariff Classification Most of the product-specific rules are based on a change in tariff classification. The change referred to is the change in tariff classification that occurs to each non-originating material incorporated into the end product that occurs in the production process. 20 In order to apply a change in tariff classification rule, it is necessary to know not only the correct tariff classification of the end product but also the correct tariff classification of each non-originating material incorporated into the end product. The tariff classification of the end product is then compared to the tariff classification of each non-originating material. If the change in tariff classification stipulated by the rule is satisfied by each non-originating product, the product is originating. If the change in tariff classification stipulated by the rule is not satisfied by one or more non-originating materials, the product is not originating unless the tolerance rule described below under Tolerance applies. A change in tariff classification rule is sometimes referred to in English as a tariff shift rule. For example, the product specific rule for products classified under HS subheading (Crustaceans other than lobsters or shrimps and prawns or crabs, including flours, meals and pellets of crustaceans, fit for human consumption Frozen) 21 is: A change from any other subheading, except from HS subheading HS subheading is crustaceans other than lobsters or shrimps and prawns or crabs, including flours, meals and pellets of crustaceans, fit for human consumption, unfrozen. What the rule says in effect that if material classified under HS subheading used to produce the end product is non-originating (which would be the case if it were imported from a non-party), the mere process of freezing is not sufficient processing to confer originating status. (ii) Packaging and packing materials and containers Packaging and packing materials and containers are disregarded in applying a change in tariff classification requirement but, as noted below, are taken into account in applying a value content requirement if they are non-originating. 22 (iii) Accessories, spare parts and tools Accessories, spare parts and tools are considered as originating if the product is considered originating and are disregarded in applying a change in tariff classification 20 For detailed rules on how to apply the change rules, see paragraphs 1(d) through (f) of the General Interpreateive Notes set out at the beginning of Appendix I to Annex C. 21 As noted in the table set out below under G. HOW ICELANDIC GOODS CAN BENEFIT FROM IMPROVED ACCESS TO THE CANADIAN MARKET, products imported during 2007 into Canada from Iceland under HS subheading ranked #4 in terms of value, subject to Canadian duty of 5%. 22 Article 8 of Annex C

20 requirement provided that they are not invoiced separately and are in quantities and values customary for the product. However, such items that are non-originating are taken into account in applying a value content requirement (iv) Value Content Requirement Some of the Product Specific Rules include a value content requirement. In a few cases, the value content requirement is in addition to a change in tariff classification requirement. 24 The much more common structure provides for a choice between a more stringent change in tariff classification rule (such as a rule that does not permit the use of non-originating parts) and a less stringent change in tariff classification (such as a rule that does permit the use of non-originating parts) coupled with a value content requirement. In some product-specific rules, such as those that apply to automobiles, the rule consists solely of a value content requirement. The value content requirement is expressed in each Product Specific Rule where it appears as follows: provided that the value of the non-originating materials of [specified subheading or subheadings] does not exceed [specified percentage] of the transaction value or ex-works price of the product. This can be expressed as a formula as follows: value of non-originating materials under specified HS subheadings must not exceed X%. transaction value or ex-works price of the product Note that this rule is negatively rather than positively expressed. This means the higher the percentage, the easier the rule is to satisfy and the lower the percentage, the harder the rule is to satisfy. The application of this formula depends on three definitions set out in Article 1 of Annex C. 23 Article 10 of Annex C 24 See for example, the Product Specific Rules that apply to all the products classified under HS Chapter 39 Plastics and articles thereof. All of these rules require a change in tariff classification from any other heading and a value content requirement.