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.

21 17 The first definition is of customs value, which reads as follows: customs value means the value as determined in accordance with the Agreement on Implementation of Article VII of the General Agreement on Tariffs and Trade 1994 (WTO Agreement on Customs Valuation) The Agreement on Implementation of Article VII of the General Agreement on Tariffs and Trade 1994 ( WTO Agreement on Customs Valuation ) establishes rules for establishing the customs value of a product. The idea of using the principles of the WTO Agreement on Customs Valuation as a basis for valuation when applying value content requirements first appeared in the rules of origin under the CUFTA and was carried forward into NAFTA. 25 The rationale was that the WTO Agreement on Customs Valuation is a code for disciplining inter-company pricing common to the Parties to these agreements. 26 The basis for customs value in the WTO Agreement on Customs Valuation is price paid or payable unless unacceptable for reasons such as the buyer and seller being related and the relationship affecting the price. The WTO Agreement on Customs Valuation sets out various alternative methods for calculating customs value if price paid or payable is unacceptable The second definition is transaction value, which reads as follows: transaction value means the price actually paid or payable for a product or material with respect to a transaction of the producer of the product, adjusted in accordance with the principles of paragraphs 1, 3 and 4 of Article 8 of the WTO Agreement on Customs Valuation to include, inter alia, such costs as commissions, production assists, royalties or license fees Note that this definition only incorporates certain specified provisions of the WTO Agreement on Customs Valuation. Paragraph 1 of Article 8 of requires the addition to price paid or payable of commissions and brokerage and the cost of containers and the cost of packing (if not included in price paid or payable), the value of assists (i.e., materials or tools and dies or engineering work etc provided to the supplier by the purchaser), royalties and licence fees, etc. Unlike the definition of customs value, the definition of transaction value does not incorporate the alternative methods of determining a value if price paid or payable is unacceptable as described above. It is not clear what the drafters intended by these different definitions or exactly how they are supposed to fit together. 25 CUFTA and NAFTA both referred to the Tokyo Round predecessor of the WTO Agreement on Customs Valuation. 26 Income tax codes also set out rules for addressing inter-company pricing situations but these rules differ from country to country.

22 The third and fourth definitions described below incorporate the definitions of both customs value and transaction value just described. The third definition is value of non-originating materials. This definition comprises the numerator of the calculation and reads as follows: value of non-originating materials includes for purposes of this definition non-originating packaging materials and containers referred to in Article 8, non-originating accessories, spare parts and tools referred to in Article 10, non-originating component products referred to in Article and in Appendix I, and non-originating hulls referred to in Appendix I 28, and means: (i) the transaction value or the customs value of the materials at the time of their importation into a Party, adjusted, if necessary, to include freight, insurance, packing and all other costs incurred in transporting the materials to the place of importation; or (ii) in the case of domestic transactions, the value of the materials determined in accordance with the principles of the WTO Agreement on Customs Valuation in the same manner as international transactions, with such modifications as may be required by the circumstances. As noted above, materials can be non-originating because they have been imported from a non-party or because they have been produced in the territory of a Party but have not qualified as originating under the rule of origin applicable to the material in question. If the producer has imported the material, the value is the customs value subject to adjustments referred to in clause (i) of the definition. If the producer has purchased the non-originating material in a domestic transaction, clause (ii) requires that the value of the materials determined in accordance with the principles of the WTO Agreement on Customs Valuation modified to account for the fact that the transaction is domestic. The conceptual difficulty in clause (ii) of this definition is that the WTO Agreement on Customs Valuation, dealing as it does with importation of products, is not designed for the purpose of evaluating purely domestic transactions. The customs authorities of the Parties will have to develop methodology for dealing with this Article 11 of Annex C sets out rules relating to sets. 28 See the Product-Specific Rule for HS Heading 89.03, which is Yachts and other vessels for pleasure or sports; rowing boats and canoes. 29 The NAFTA negotiators went far beyond establishing rules of origin in NAFTA and actually harmonized the regulations in Uniform Regulations in each of the three NAFTA countries that are applied by customs authorities in making origin determinations. The reason that the NAFTA negotiators established Uniform Regulations was to avoid the host of interpretation problems that had arisen between Canada and the United States under the CUFTA in applying the CUFTA rules. The Uniform Regulations rewrote the relevant provisions of the WTO Agreement on Customs Valuation so as to be applicable to domestic as well as international transactions. See Schedule VIII Value

23 The fourth definition is transaction value or ex-works price of the product. This definition comprises the denominator of the calculation and reads as follows: transaction value or ex-works price of the product includes for purposes of this definition sets of Article 11 and of Appendix I, and means: (i) the transaction value of a product when sold by the producer at the place of production; or (ii) the customs value of that product; adjusted, if necessary, to exclude any costs incurred subsequent to the product leaving the place of production such as freight and insurance The value in clause (i) would apply if the producer sold the product at its place of production to someone who subsequently exported it. The denominator would be equal to the price paid or payable as provided in the definition of transaction value, subject to the adjustments in that definition. Otherwise the denominator would be equal to the customs value subject the adjustments in clause (ii). 30 Consider the product specific rule of origin for HS Heading 84.38, Machinery for the Industrial Preparation of Food or drink, other than machinery for the extraction or preparation of animal or fixed vegetable fats or oils and HS Subheading is Parts for such machinery. 31 The product specific rule of origin for products classified under HS Subheading as follows: A change from any other heading; or A change from within that subheading, whether or not there is also a change from any other heading, provided that the value of the non-originating materials of that subheading does not exceed 50 % of the transaction value or ex-works price of the product. 19 of Materials in the NAFTA Rules of Origin Regulations which can be found in Canadian Customs Memorandum D11-5-1, which can be found on the website for the Canada Border Services Agency. There is no provision in CEFTA for the establishment of Uniform Regulations. 30 Note that if clause (i) applies, the relevant definition is transaction value, which does not cover the circumstance where the producer and the buyer are related parties and the relationship has affected the price. If clause (ii) applies, the circumstance where the producer and the buyer are related parties and the relationship has affected the price because the WTO Agreement on Customs Valuation applies in its entirety. This seems a definitional mismatch and it is not clear what the drafters intended. 31 As noted in the table set out below under G. HOW ICELANDIC GOODS CAN BENEFIT FROM IMPROVED ACCESS TO THE CANADIAN MARKET, products classified under HS ranked #6 in terms of value of products imported into Canada from Iceland in 2007.

24 This product specific rule of origin offers a choice to the producer between a change in tariff classification requirement without a value content requirement and a change in tariff classification requirement coupled with a value content requirement. In order to qualify under the change in tariff classification requirement without a value content requirement, the producer cannot use any material classified under HS heading 84.38, such as a part, that is not originating. Any other material can be used in the production of the end product and the change in tariff classification requirement will be satisfied, regardless of its origin. If the producer uses non-originating parts imported from a non- CEFTA country, the producer must satisfy the value content requirement. In this particular case, the value of non-originating parts (classified under subheading ) cannot exceed 50% of the transaction value or ex-works price of the product. 20 (v) Process Requirements Some of the product specific rules specify certain processing requirements. For example, the specific rule of origin for products classified under HS Subheading , which includes HS subheading (Livers and roes dried, smoked, salted or in brine), reads as follows: A change from any other subheading, provided that products of subheading through which have undergone only salting have a minimum salt content of 18 %. In addition to satisfying the change in tariff classification requirement, these products must also satisfy the minimum salt content requirement in order to be originating. (vi) Tolerance Article 5 of Annex C sets out a tolerance rule designed to eliminate the possibility of a product being considered non-originating under a product-specific rule because a small amount of non-originating material fails to satisfy a change in tariff classification requirement or some other requirement in the product specific rule. The rule provides that a product will be originating if the value of all non-originating materials failing to satisfy the requirement does not exceed 10% of the transaction value or ex-works price of the product. This rule also appears in the NAFTA text as the de minimis rule, with a 7% rather than a 10% threshold. As with the NAFTA de minimis rule, the CEFTA tolerance rule does not apply to products falling classified under HS Chapters 50 through 63 (various textile products including fibre, yarn and fabric of various compositions, carpets and other textile floor coverings, apparel items and textile made-up articles, worn clothing and worn textile 32 As noted in the table set out below under G. HOW ICELANDIC GOODS CAN BENEFIT FROM IMPROVED ACCESS TO THE CANADIAN MARKET, products classified under HS ranked #15 in terms of value of products imported into Canada from Iceland in 2007.

25 articles.) 33 The rules of origin for some of these products prohibit tariff classification changes from HS headings describing yarn or fabric. For example, the specific product rule of origin for products classified under H.S Twine, cordage, ropes and cables, whether or not plaited or braided and whether or not impregnated, coated, covered or sheathed with rubber or plastics is A change from any other heading except from yarn of heading through 52.07, through or through Headings through describe various types of cotton thread and yarn. Headings through describe various threads and yarns of man-made filaments. Headings through describe various threads and yarns of various man-made staple fibres. If this product produced in a CEFTA country contains yarns of any of these H.S. headings that is non-originating (e.g. because it was imported from a non-cefta country) the product is non-originating, regardless of the value of the non-originating material. 34 However, for products of Chapters 50 through 60 and for certain products under H.S. Chapter 63, there is a special tolerance rule that provides that the product will be originating if the weight of the non-originating yarn or fabric does not exceed 10% (b) Where No Change in Tariff Classification Paragraph 2 of Article 4 of CEFTA Annex C provides that except for products under H.S. Chapter 39 and for products classified under Chapters 50 through 63 (various textile products including fibre, yarn and fabric of various compositions, carpets and other textile floor coverings, apparel items and textile made-up articles, worn clothing and worn textile articles), where a product and non-originating materials from which it is produced are classified under the same HS heading or subheading so that a requirement set out in Appendix I cannot be applied, the product will be originating if the value of non-originating materials classified as or with the product does not exceed 40% of the transaction value or ex-works price of the product. A similar rule is set out in the NAFTA Rules of Origin 36 and the reason given was that the Harmonized System does not always create separate headings for parts of products. For 33 See Appendix I to this Analysis 34 This rule is not typical of the CEFTA product-specific rules of origin respecting textile and apparel products in prohibiting the use of non-originating yarn. The CEFTA product-specific rules of origin are much more lenient than their NAFTA counterparts, most of which are fabric-forward (fabric must be originating), yarn forward (yarn and fabric must be originating) or, in some instances, fibre-forward (fibre, yarn and fabric must all be originating.) The NAFTA textile and apparel product-specific rules were drafted for the benefit of the U.S. textile industry. For a discussion generally of rules of origin as applied to textile and apparel goods see Jon R. Johnson, Rules of Origin in Canadian and U.S. Preferential Trade Arrangements at page 43 Rules of Origin: Textiles and Clothing Sector edited by Dr. Roman Grynberg, Cameron May, London, Paragraph 2 of Article 5 of CEFTA Annex C. 36 NAFTA Article 401(d). The value content rule is the NAFTA regional content rule which is somewhat different. NAFTA Article 401(d) also covers the situation where no change in tariff classification takes place because the product was imported in unassembled of dissembled form (such as a completely knocked-down kit) and is classified

26 example, H.S. subheading is Baby carriages and parts thereof. The NAFTA product specific rule is: A change to heading from any other heading. Under the NAFTA rule, a change in tariff classification could not occur if the producer of the baby carriage used imported baby carriage parts and if the NAFTA de minimis rule did not apply, the producer could establish that its product was originating through applying the NAFTA regional content requirement. Interestingly, the CEFTA product specific rule of origin for baby carriages sets out the same change in tariff classification as the NAFTA rule but then adds the following alternative rule: A change from within that heading [i.e ], whether or not there is also a change from any other heading, provided that the value of the non-originating materials of heading does not exceed 50% of the transaction value or ex-works price of the product. The CEFTA product specific rule for baby carriages expressly contemplates that a change in tariff classification cannot occur, just as does paragraph 2 of Article 4 of CEFTA Annex C described above. However, the threshold set out in the product specific rule is 50% rather than the more restrictive 40% threshold provided in the rule in paragraph 2 of Article 4 of CEFTA Annex C. This is a common pattern in the CEFTA product specific rules of origin, as there are many HS headings and subheadings that include the parts for a product or materials of which a product is made. In some instances the alternative product specific rule sets out a process requirement rather than a value content requirement. For example, HS subheading describes nonmonetary gold in unwrought forms other than powder. There is a specific alternative specific rule of origin for this HS subheading as follows: A change to subheading from within that subheading, whether or not there is also a change from another subheading, provided that the non-originating materials undergo electrolytic, thermal or chemical separation or alloying. If a producer s product contains any non-originating materials, the starting point in applying the CEFTA rules of origin is to look up the product-specific rule. If the product-specific rule expressly addresses the circumstance of there being no change in tariff classification, the 22 together with the finished good under H.S. General Rule of Interpretation 2(a). The CEFTA rule does not cover this situation.

27 product-specific rule is the rule that applies. Only if the product-specific rule does not apply can the producer have recourse to the rule in paragraph 2 of Article 4 of CEFTA Annex C (c) Non-Originating Materials that do not have to be taken into account There are two important rules describing circumstances in which non-originating materials do not have to be taken into account when determining whether a product is originating. The first is respecting non-originating materials incorporated into a product determined to be originating. The second is respecting materials used in producing a product that are not incorporated into the product. (i) Non-Originating Materials Incorporated into Originating Products (the Roll-up Rule) Article 4(4) of CEFTA Annex C provides that if a non-originating material undergoes sufficient production, the resulting product shall be considered as originating and no account shall be taken of non-originating material contained therein when that product is used in the subsequent production of another product. What this means is that if a producer acquires a product that is originating to use in producing another product, the producer can disregard any non-originating materials that have been incorporated into that material. Those non-originating materials have been rolled up into the resulting originating product and have lost their non-originating status. 38 Unlike the NAFTA rules of origin, the CEFTA text does not specifically address the subject of intermediate materials, which are materials that a producer produces itself as opposed to purchasing from a supplier. 39 Presumably in the example just give the producer could acquire the originating product by producing the product itself rather than buying it from a supplier and the rule in paragraph 4 of Article 4 of CEFTA Annex C would apply. 37 I reach this conclusion on the basis of paragraph 1 of Article 4 of CEFTA Annex C, which provides that a product has undergone sufficient production when the conditions set out for that product in Appendix I are fulfilled. If the product-specific rule expressly addresses the circumstance that a change in tariff classification cannot occur, that rule is the one that should apply. Article 1(4) of the General Interpretative Notes at the beginning of Appendix I of CEFTA Annex C set out some guides to applying the rule in paragraph 2 of Article 4 of CEFTA Annex C. 38 The alternative approach is tracing, which requires that the value of non-originating materials be traced through supply chains. The Big Three automobile producers (General Motors, Ford and Chrysler) insisted that the NAFTA regional value content requirements be based, for light duty vehicles, on tracing the value of imported parts, regardless of which tier of supplier had done the importing. An even more complex concept applied to heavy-duty vehicles. The ostensible purpose of these rules was to prevent the abuse by Japanese transplant assemblers in Canada of the concept of roll-up that had allegedly occurred under the CUFTA rules. Rather than providing a benefit, these rules have proven an immense burden to administer. The Big Three would like to get rid of them but cannot because the prospect of renegotiating NAFTA is so politically charged. 39 See the definition of intermediate materials in NAFTA Article 415 and the method for determining their value in NAFTA Article 402(11).

28 24 (ii) Neutral Elements Article 12 of CEFTA Annex C is entitled Neutral Elements and provides that it is not necessary to determine the origin of what are termed neutral elements used in the production, testing or inspection of the product that do not enter into the final composition of the product or that have been used in the maintenance of equipment or buildings. A non-exclusive list of neutral elements is set out that includes such items as: energy and fuel; machines, tools; dies and moulds; spare parts used in maintenance; such items as lubricants used to operate equipment, etc; gloves, glasses; safety equipment, etc; testing and inspection equipment; and catalysts and solvents. A similar approach is taken in the NAFTA rules of origin. (d) Insufficient Production Article 6 of CEFTA Annex C identifies a number of circumstances in which a product will not be considered to have undergone sufficient production despite the fact that a change in tariff classification may have taken place. The most significant of these is disassembly of a product into its parts. As noted above, the Harmonized System frequently provides for separate headings or subheadings to cover the parts of a particular product. Absent the rule in Article 6, a change in tariff classification could be achieved not only by using a part classified in a different heading or subheading in producing a finished product but also by taking the finished product and disassembling it into its parts. The rule in Article 6 provides that if disassembly of a nonoriginating product has taken place, the resulting parts will not be considered originating even though the specific-rule of origin applicable to the parts resulting from the disassembly may have been satisfied. 8. Other Provisions (a) Accounting Segregation of Fungible Materials Article 9 of CEFTA Annex C sets out rules that should be useful to any producer that is dual sourcing a particular material, with some of the materials being originating and other materials being non-originating. Non-originating materials are a concern if they do not satisfy a change in tariff classification requirement in a product-specific rule or if their value is required to be included when applying a value content requirement. Article 9 of CEFTA Annex C permits the determination of which finished products contain the originating materials and which contain the non-originating materials through inventory management methods rather than through physical separation. (b) Sets Article 11 of CEFTA Annex C establishes special rules relating to sets, as referred to in General Rule 3 of the Harmonized System. Unless all the compound products, including packaging materials and containers are originating, at least one of the component products or all of the packaging and containers must be originating and the value of non-originating components, packaging materials and containers cannot exceed 25% of the transaction value or ex-works price of the set.

29 25 (c) Transport through a Non-Party Article 14 of CEFTA Annex C establishes strict limitations on transport of an originating product through a non-party. The product cannot undergo any further production or other operation other than loading, unloading, splitting of loads or operations necessary for preservation. The product must also remain under customs control while in the non-party, such as in a bonded warehouse. The CEFTA rules of origin, like their counterparts in many other free trade agreements including NAFTA, are based on the assumption that while materials may be imported for incorporation into a product, the process of producing the product takes place entirely within the free trade area. The production of products in today s environment is frequently much more complex, with value chains that include multiple countries. If a value chain for a product includes one or more CEFTA countries but a non-cefta country as well, the partially finished product will lose its originating status once it is subjected to further processing in a non-cefta country and the resulting product will be considered as wholly non-originating once it re-enters the CEFTA country where the final processing is to take place. Unless that final processing amounts to sufficient production within the meaning of Article 4 of CEFTA Annex C, the end product will be non-originating. (d) Exhibitions Article 15 of CEFTA Annex C sets out stringent rules for determining when an originating product sold at an exhibition outside the territories of the Parties and imported into a Party can still be considered as originating. 9. Administration As noted above, Articles 16 through 29 of CEFTA Annex C set out rules respecting the application of the rules of origin, which include the imposition of certain requirements on exporters, importers and customs administrations. 40 Articles 16 through 29 of CEFTA Annex C may be briefly summarized as follows: 40 It should be kept in mind, in Canada at least, that treaties and trade agreements are not self-executing but, rather, must be implemented through legislation to have any force or effect under Canadian domestic law. In Canada, the obligations of exporters and importers and the customs administration will only have effect through the legislation that the Parliament of Canada will adopt to implement CEFTA through amendments to the Canadian Customs Tariff and the Canadian Customs Act. See Bill C-55, An Act to implement the Free Trade Agreement between Canada and the States of the European Free Trade Association (Iceland, Liechtenstein, Norway, Switzerland), the Agreement on Agriculture between Canada and the Republic of Iceland, the Agreement on Agriculture between Canada and the Kingdom of Norway and the Agreement on Agriculture between Canada and the Swiss Confederation. The full text of Bill C-55 can be accessed through:

30 26 (a) Origin Declarations Article 16 of CEFTA Annex C sets out rules respecting origin declarations. CEFTA, like NAFTA and the other free trade agreements to which Canada is a party, employs a system of self certification, as distinct from a system where the origin of goods is certified by a government official. The origin declaration is completed by the exporter 41 of the product and must conform to the simple form that is set out in Appendix II of CEFTA Annex C. The text of this simple form reads as follows: The exporter of the products covered by this document [customs authorization No. ] 42 declares that, except as otherwise clearly indicated, these products are of Canada/EFTA preferential origin. 43 Article 16 contains provisions requiring that exporters use due diligence in completing origin declarations and promptly notify importers of any incorrect information. There are provisions respecting transmission of origin declarations electronically. Article 16 makes no mention of blanket origin declarations. Under NAFTA, a producer or an exporter can execute a blanket certificate of origin that will be in effect for as long as a year. Under CEFTA, origin declarations must be issued on a shipment by shipment basis. (b) Importation Requirements Article 17 of CEFTA Annex C sets out rules respecting importation requirements. Preferential tariff treatment must be granted to originating products of other Parties based on origin declarations. The importer must be in possession of the origin declaration at the time that the request for preferential duty treatment is made, and must produce the declaration or a copy of it if the customs administration so requests. Article 17 sets out several technical requirements and provides that importers must inform the customs administration of the importing country if they become aware of incorrect information affecting originating status. (c) Preservation of Records Article 22 of CEFTA Annex C sets out requirements respecting the preservation of records by exporters, importers and customs authorities. Exporters must maintain records for at least three years or such longer period as a Party may specify. Documents include documents relating to: production processes and materials, the purchase, cost and value of and payment for the product; the origin, purchase and value of and payment for materials (including neutral elements) used in 41 Note that Article 16(9) provides that exporter does not include persons or entities such as forwarding agents or customs brokers unless such person or entity has been authorized in writing to complete the origin declaration. 42 A customs authorization number is required only when the exporter is an approved exporter. See Article 17 of CEFTA Annex C briefly described below. 43 If the product is being imported under the Canada-Iceland Agriculture Agreement, the words Canada/EFTA preferential origin are replaced with Canada/Iceland preferential origin.

31 producing the product; and shipment of the product. Origin declarations must be kept for three years by importers and by customs authorities to whom origin declarations have been provided. 27 (d) Administrative Co-operation and Origin Verifications Article 24 of CEFTA Annex C sets out procedures for verifying whether products are originating. The customs administration of a Party of import makes a request to the customs administration of the party of export to conduct a verification. The customs administration of the Party of export conducts the verification and the customs administration of the Party of import may be present as an observer. Article 25 of CEFTA Annex C sets out rules governing the conduct of observers. The balance of Article 24 establishes time limits for conducting verifications and providing clarifications. Notwithstanding the verification by the customs administration of the country of export, the customs administration of the country of import may take a different decision from that of the customs administration of the country of export. Differences are to be resolved through negotiation and, failing that, resolution can be through the CEFTA institutional framework. These procedures differ quite markedly from the NAFTA origin verification procedures. Under the NAFTA procedures, the customs administration of the Party of import sends questionnaires to the exporter or producer of the product in question and these questionnaires can be followed up with onsite verification visits, at which the exporter or producer is entitled to have two observers present. If the exporter or producer does not consent to the visit, the customs administration of the Party of import can deny preferential tariff treatment. (e) Other Provisions (i) Approved Exporter Program Article 17 of CEFTA Annex C sets out provisions that apply if a Party has established an approved exporter program. (ii) Importation by Instalment Article 19 of CEFTA Annex C covers importation by instalment, which applies to unassembled or disassembled products (such as a completely knocked down kit) within the meaning of General Rule 2(a) of the General Rules of Interpretation and in certain other situations. Essentially, the product may benefit from CEFTA if the complete or finished product qualifies as originating and certain other requirements are fulfilled. (iii) Confidentiality Article 26 of CEFTA Annex C sets out rules respecting the protection of confidential business information. (iv) Penalties Article 27 of CEFTA Annex C requires the Parties to provide for the imposition of criminal, civil or administrative penalties for violations of its legislation related to Annex C. The instruments of choice under Canadian customs law are criminal and

32 administrative penalties as opposed to civil penalties. The choice of penalties is left to the discretion of each Party. 10. Sub-Committee on Rules of Origin and Trade in Goods CEFTA Article 8 provides for the establishment of a Sub-Committee on Rules of Origin and Trade in Goods. The Sub-Committee should prove to be useful in identifying issues and resolving them quickly. Also, rules of origin need periodic updating because the Harmonized System evolves over time. 11. Observations on the CEFTA Rules of Origin The CEFTA rules of origin are based on the template that is followed in many free trade agreements, with heavy emphasis on changes in tariff classification as the preferred means of establishing substantial transformation. Some rules impose mandatory value content requirements and many rules provide value content requirements as an option. A few rules are based on process requirements. Rules of origin can be highly manipulative and excessively complicated. The NAFTA textile and apparel rules were clearly designed for the benefit of the U.S. textile industry and are excessively stringent. The NAFTA automotive rules were designed to address the perception of North American automotive producers that their Japanese counterparts with transplant plants in Canada were somehow subverting the CUFTA rules. The end result was an excessively complex regime which no-one likes living with. The CEFTA rules have avoided these pitfalls. The change in tariff classification requirements seem reasonable. The CEFTA drafters, following the approach in a number of more recent free trade agreements, have based value content requirements on selling prices rather than net cost, which should simplify calculations. However, the adjustments based on the WTO Customs Valuation Agreement could be troublesome, depending on how zealously customs officials choose to apply them Individual exporters applying the rules of origin to the products that they are exporting must not lose sight of the forest for the trees, because while the rules of origin in their entirety may be formidable, the rules of origin that apply to an individual product are frequently very simple. The following points should be kept in mind. The wholly obtained products rule must be relied upon with caution. If any material incorporated into the product does not fall within the specific items set out in Article 3 of CEFTA Annex C, the rule does not apply, no matter how insignificant the amount of value of that material is. The tolerance rule in Article 5 of CEFTA Annex C does not apply to the wholly obtained products rule. The producer must know the tariff classification of its finished product and of every material that is incorporated into the product. Correct tariff classification is critical because the product-specific rule applicable to the product depends on its tariff classification. Change in tariff classification requirements cannot be properly applied 28

33 unless the producer knows the tariff classification of each material incorporated into the product. The producer must determine the product-specific rule that applies to its product. The rule may be a simple two-line change in tariff classification requirement. If a material satisfies the change in tariff classification requirement, its origin does not matter. Origin matters only with materials that do not satisfy the change in tariff classification requirement. If a non-originating material does not satisfy a change in tariff classification requirement, the producer should first determine whether the tolerance rule can be applied. If the tolerance rule applies, the origin of the material can be disregarded. If the tolerance rule does not apply, the producer must try to obtain evidence from its supplier that the material is originating. A letter from the supplier will suffice. However, the producer should make sure that the supplier understands the CEFTA rules of origin and is correctly applying them to the material. If possible, the supply contract should contain a representation from the supplier that the material qualifies as originating under the CEFTA Rules of Origin and an indemnification provision. If evidence of originating status cannot be obtained, the material should be treated as non-originating. Producers should avoid value content requirements if possible. If the application of the value content requirement cannot be avoided, the producer should thoroughly understand the requirement, particularly what category of materials must be counted in the numerator if they are non-originating. The producer should attempt to obtain evidence of originating status for a sufficient value of these materials to bring the result of the calculation for non-originating materials below the threshold in the rule. Value content requirements are based on selling prices, which are easy enough to apply if suppliers of materials and buyers of the end product are unrelated and the prices both of materials and the finished goods are arms length prices. Value content requirements are more difficult to apply if suppliers or buyers are related because customs officials may apply the various alternatives to selling prices available under the WTO Agreement on Valuation, with uncertain results. Producers applying value content requirements should leave themselves a reasonable margin of error, to account for differences of opinion that may arise as to how the various adjustments provided for in the value content formulations should be applied. Source switching can present problems for producers. The procurement department of a producer may change the source of supply for a particular input without advising the department responsible for monitoring rules of origin compliance. Producers should make sure that these lines of communication remain open so that products thought to be originating are not subsequently found to be non-originating because of an unreported change in sourcing. Producers should carefully document the basis for determination of originating status respecting every origin declaration that is issued. 29

34 Any decision to comply with rules of origin must be accompanied by an analysis of the cost of complying (record keeping, accounting, possible cost of having to procure more costly inputs) compared with the amount of duty saved. In some instances, complying with the rule may not be worth the expense of complying, as could occur through having to purchase materials from a more expensive source in order to comply with the rule. F. NATIONAL TREATMENT AND IMPORT AND EXPORT RESTRICTIONS CEFTA incorporates the provisions of GATT 1994 respecting national treatment 44 and import and export restrictions 45 but, as with all of the free trade agreements into which Canada has entered, lists certain derogations from these obligations in CEFTA Annex B. Some of the derogations are interesting because they provide an insight into Canadian trade practices. 30 (i) Controls on Log Exports. Canada requires export permits to be obtained for the export of logs but as a practical matter, this requirement only amounts to a restriction on logs exported from British Columbia. British Columbian rules require that only logs surplus to the needs of the domestic industry can be exported. The restriction cannot be justified under any of the exceptions to GATT (ii) Controls on the Export of Unprocessed Fish The provinces of New Brunswick, Newfoundland, Nova Scotia, Prince Edward Island and Quebec all maintain controls on the export of unprocessed fish to encourage further domestic processing. None of these restrictions can be justified under any of the exceptions to GATT (iii) Importation of Goods under certain Canadian Tariff Items Tariff items , and set out a number of import restrictions. Tariff item covers a variety of goods, including certain animals (mongoose), certain birds (e.g. starlings), certain feathers, base or counterfeit coins, goods produced through prison labour, certain copyrighted materials and most used cars and used aircraft. Some of these restrictions clearly can be justified under GATT Article III of GATT See CEFTA Article Article XI of GATT See CEFTA Article The United States has frequently objected to British Columbian log export restrictions on the grounds that such restrictions depress the price of logs in British Columbia and give lumber producers an unfair advantage. However, The United States has never initiated a GATT or WTO complaint respecting the log export restrictions, because the United States maintains its own restrictions on the export of logs. 47 Canada has already lost one GATT case involving export restrictions involving fish. See Canada Measures Affecting Exports of Unprocessed Herring and Salmon, Adopted 22 March 1988, BISD 35S/98, which involved measures affecting the export of unprocessed fish from British Columbia.

35 31 (e.g. goods produced by prison labour) 48 justified. 49 while others (e.g. used cars) cannot be Tariff item covers firearms and various weapons and tariff item covers obscene material and hate propaganda. These restrictions clearly can be justified under GATT 1994 and under other international conventions. (iv) Prohibition on the use of foreign or non-duty paid ships Canada maintains a variety of measures designed to protect the domestic shipbuilding industry, such rules prohibiting foreign vessels from transporting cargoes between Canadian ports. (v) Measures concerning the internal sale and distribution of wine and distilled spirits All provinces except Alberta require that at least some alcoholic beverages be marketed through provincially owned and operated liquor monopolies. For example, in Ontario, the Liquor Control Board of Ontario (LCBO) maintains a monopoly in Ontario over the importation of all alcoholic beverages 50 and over the sale of wine and distilled spirits. Beer is sold either through LCBO outlets or through a privately owned monopoly known as The Beer Store. All distilled spirits and all non-ontario wine is sold through LCBO outlets. Wine produced in Ontario is sold through LCBO outlets or through wine stores operated by Ontario wineries. The provincial regimes for controlling alcoholic beverages, particularly that of Ontario, have been the subject of several GATT challenges. 51 The outcome of these cases has had the beneficial effect of forcing the LCBO and other provincial liquor monopolies to cease the practice of discriminatory mark-ups. Before Canada lost these cases, the mark-up applied by the LCBO and other provincial monopolies on out-of-province beverages was 48 See Article XX(e) of GATT Canada has phased out the used car embargo respecting used cars imported from the United States and, under NAFTA, the embargo is being phased out for used cars imported from Mexico over a protracted period. Canada has not made any concessions in respect of the used car embargo in its free trade agreements with Israel, Chile, Costa Rica or Peru. 50 While individuals and companies may import alcoholic beverages, they can only do so through the LCBO. The LCBO is the largest single purchaser of alcoholic beverages in the world. 51 See Canada Import, Distribution and Sale of Certain Alcoholic Drinks by Provincial Marketing Agencies (1988 Case), Adopted 22, March 1988, BISD 35S/37 and Canada Import, Distribution and Sale of Certain Alcoholic Drinks by Provincial Marketing Agencies (1992 Case), Adopted 18 February 1992, BISD 39/S27-91.

36 much higher than beverage produced within the province. There were also product listing issues with the LCBO that have been largely resolved. A product such as Icelandic vodka can only be sold in Ontario through an LCBO outlet. However, the LCBO sells many imported products. Vodka is included in Canada s tariff concessions in Table 2 to Annex G, and when CEFTA becomes effective, the duty on this product will be reduced from cents per litre of absolute ethyl alcohol to FREE. The Beer Store in Ontario originally sold only beer produced in Ontario, with non- Ontario beer (whether imported or from another province) being sold only through LCBO outlets. The Beer Store now sells a wide range of beer brands from all over the world. Icelandic beer could be sold through the Beer Store as well as the LCBO. Ontario continues to permit only Ontario wineries to operate private stores. While violating Article III:4 of GATT 1994, the likely reason that this practice has not been challenged in a WTO complaint is because foreign wineries have no interest in operating wine stores in Ontario. In any event, this practice has no impact on Iceland as Iceland is not a wine producer. The derogations listed in Annex B only provide cover for the listed measures under CEFTA. As will be described below under DISPUTE RESOLUTION, an EFTA State may choose either CEFTA dispute resolution procedures or WTO dispute settlement procedures. A WTO panel will not be bound by any provision of CEFTA. G. HOW ICELANDIC GOODS CAN BENEFIT FROM IMPROVED ACCESS TO THE CANADIAN MARKET As the following table shows, exports from Iceland to Canada have been very modest. 52 In 2007, imports from Iceland amounted to just over CDN$29 million in an import market exceeding CDN$400 billion. Total Canadian Imports from Iceland Value in Thousands of Canadian Dollars 32 Imports from Iceland Imports from All Countries CDN$34,169 CDN$30,999 CDN$55,650 CDN$30,977 CDN$29,224 CDN$336,141,294 CDN$355,886,202 CDN$380,859,183 CDN$396,645,341 CDN$406,620, The figures in this table were derived from

37 There is clearly room for substantial improvement for Icelandic products in the Canadian market and CEFTA provides a means for improvement if Icelandic producers take full advantage of it. Overall, CEFTA improves access to the Canadian market by eliminating Canadian tariffs on almost all products that Iceland produces. However, the benefit varies from product to product because each product has its own unique situation. The factors relevant to determining whether a particular product will benefit from tariff elimination under CEFTA are the following: What is the existing Canadian MFN rate of duty on the product? If the existing duty is FREE, CEFTA provides no benefit. If the existing duty is low, the benefit is minimal. If, however, the existing duty is substantial, the benefit could be considerable. Are imports of the product from other countries subject to the Canadian MFN tariff or to one of Canada s preferential tariffs? In either case, the product will benefit from tariff elimination under CEFTA. The product will have an advantage over products subject to the Canadian MFN rate and will cease to be at a disadvantage respecting products subject to a preferential Canadian rate. What is the rule of origin that applies to the product? If it can be satisfied with little or no modification to existing operations, the product can benefit from tariff elimination even if the tariff is low. If, however, satisfying the rule of origin requires substantial modification to existing operations, tariff elimination provides a benefit only if the cost of compliance is offset by the removal of the tariff. What Canadian import restrictions impede access to the Canadian market for the product and are there special internal Canadian marketing rules that apply to the product? 1. Top 25 Products by HS Subheading Codes Imported from Iceland into Canada 2007 The following table shows the import value for each of the top 25 products by HS subheading codes imported from Iceland into Canada during 2007, together with the Canadian MFN Rate of Duty in 2007 and the duty that will apply once CEFTA comes into effect: HS Subheading and ranking in terms of value #1) through #25 Value of Imports into Canada CDN$ Canadian MFN Duty 2007 CEFTA Duty (Qualifying Products) #1) Other Fish NS Salted or in Brine not dried or smoked CDN$5,460,507 FREE FREE #2) Sodium Triphosphate (Sodium Tripolyphosphate) CDN$2,804,324 FREE for use in manufacture of food products; otherwise 5.5% FREE 53 The import values in this table were derived from

38 34 HS Subheading and ranking in terms of value #1) through #25 #3) Livers and Roes Frozen #4) Crustaceans Frozen #5) Lobsters, (Homarus SPP) Frozen Value of Imports into CEFTA Duty Canada Canadian MFN (Qualifying CDN$ Duty 2007 Products) CDN$2,757,219 3% FREE CDN$2,278,290 5% FREE CDN$1,921,757 FREE FREE #6) Parts of Machinery for the Industrial Preparation of Food and Beverages CDN$1,469,485 FREE for some uses; 2.5% for other uses FREE #7) Other Machinery for the Industrial Preparation of Food and Beverages (incl. fish preparation) #8) Products of Fish, Crustaceans, Molluscs and other Aquatic invertebrates #9) Other Artificial parts of the body CDN$1,374,493 FREE FREE CDN$1,305,510 FREE FREE CDN$1,201,522 FREE FREE #10) Fish Fats and Oils (excluding from liver) and their fractions not chemically modified CDN$670,419 FREE if rough for use in manufacture of soaps & oils; otherwise 4.5% FREE #11) Diamonds nonindustrial - worked - not mounted or set #12) Herring, salted or in brine not dried or smoked CDN$393,842 FREE FREE CDN$382,733 FREE FREE #13) Other refrigerating or freezing equipment heat pumps and absorption liquid chilling units CDN$369,703 6% for batch freezers, certain ice making equipment, ice rink systems, instant quick freeze systems for food products, selfcontained plate freezers for seafood below certain capacity, tunnel or spiral freezers, otherwise FREE FREE #14) Chemical products and preparations of the chemical or allied industries CDN$309,614 FREE or 3% or 3.5% or 6% depending on product FREE

39 35 HS Subheading and ranking in terms of value #1) through #25 #15) Livers and roes dried, smoked, salted or in brine Value of Imports into CEFTA Duty Canada Canadian MFN (Qualifying CDN$ Duty 2007 Products) CDN$301,231 3% FREE #16) Surveying, hydrographic, oceanographic, meteorological or geophysical instruments CDN$282,949 FREE or 3.5% or 6.5% depending on the instrument FREE #17) Herrings prepared or preserved, whole or in pieces but not minced #18) Machines for reception, conversion and transmission or regeneration of voice, images or data, incl. switching and routing app CDN$265,762 FREE if pickled; otherwise 5% FREE CDN$247,659 FREE FREE #19) Machines and mechanical appliances, having individual functions CDN$247,571 FREE or 4.5% or 6% or 7.5% depending on the product FREE #20) Instruments and apparatus for measuring or checking semiconductor wafers or devices #21) Instruments and apparatus for physical or chemical analysis #22) Fish fillets and other fish meat, w/n minced, fresh or chilled CDN$246,246 FREE FREE CDN$242,532 FREE FREE CDN$208,345 FREE FREE #23) Fish fillets, frozen CDN$197,178 FREE FREE #24) Scales for continuous weighing of goods on conveyors #25) Ferro-Silicon more than 55% of silicon TOTAL CDN$189, % FREE CDN$189,456 FREE FREE CDN$25,318,342 The products listed in the table comprise about 86% of all products imported from Iceland into Canada in As indicated in the table, many of these products already enter Canada duty

40 free so CEFTA will not have any effect. However, a number of these products are subject to Canadian duties and some of these duties are relatively high. For example, the duty on #5 on the list, frozen lobsters classified under HS subheading , is 5%. Assuming that the lobsters are harvested in Icelandic coastal waters or by Icelandic flagged vessels, Icelandic producers of this product should have no difficulty in satisfying the rule of origin and will clearly benefit from the elimination of duties under CEFTA. 2. Five Case Studies I have selected five products which are produced in Iceland and for which import penetration into Canada is low or non-existent. I have applied the criteria outlined above to each of the products to determine whether the product will benefit from CEFTA. The products are: lambmeat; skyr; bottled water; vodka; and outerwear. The table set out below shows for each of these products the value of imports into Canada from Iceland in 2007, 54 total imports into Canada from all countries in 2007, the Canadian MFN Duty on the product in 2007 and the rate of duty that will apply when CEFTA comes into effect: Product (HS Code) HS Meat of Lamb, Sheep and Goats Fresh, Chilled or Frozen HS Fresh Cheese (including whey cheese) and curd (includes skyr) Value of Imports from Iceland (CDN$) Value of Imports all Countries (CDN$) Canadian MFN Duty 2007 nil CDN$119,296,188 FREE for lamb meat, 2% to 2.5% for mutton nil CDN$3,244,000 Within access commitment 3.23cents/kg; over access commitment 245.5% but not less thancdn$4.52/kg HS CDN$280 CDN$6,369, % FREE Water (other than Mineral and Aerated Waters) Without Sugar, Sweetening or Flavoring HS Vodka CDN$89,885 CDN$119,774, cents/litre of absolute ethyl alcohol FREE HS Men s/boy s Coats, Rainwear and Outerwear - Woven CDN$115 CDN$191,114,079 17% or 18%, depending on the fabric CEFTA Duty (qualifying products) FREE 36 Within access commitment FREE for skyr; over access commitment 245.5% but not less thancdn$4.52/kg FREE 54 The import values in this table were derived from

41 37 (a) Lambmeat (Classified under HS Heading 02.04) There were no imports of lambmeat from Iceland to Canada in Lambmeat already enters Canada duty free so this product will not benefit from tariff elimination under CEFTA. Mutton is subject to a Canadian MFN duty of 2% or 2.5%, depending on the product, so there will be a modest benefit for mutton products. Meat from sheep born and raised in Iceland will clearly satisfy rules of origin requirements. Imports of any meat into Canada are tightly controlled by the Canadian Department of Agriculture. The Department of Agriculture must be satisfied that the meat processing facilities in an exporting country satisfy safety requirements. These requirements fall under the category of sanitary and phytosanitary requirements and, as described below, CEFTA simply affirms the mutual WTO obligations that Canada and Iceland already have to each other. CEFTA does not change the status quo as regards Icelandic lambmeat. (b) Skyr (Classified Under HS Subheading ) Skyr is a popular Icelandic dairy product that is classified under HS subheading (Fresh Cheese (including whey cheese) and curd). As noted in the table above, there were no imports into Canada from Iceland of any products under HS subheading in Unlike the other products listed in the table, imports from all countries into Canada under this HS subheading were small. As described above, dairy products, including products classified under HS subheading , are subject to Canada s supply management regime, with modest within access tariffs but prohibitive over access tariffs. The within access tariff on skyr of 3.23cents/kg will be eliminated but the prohibitive over access tariff of 245.5% but not less than CDN$4.52/kg remains. CEFTA therefore opens an opportunity for skyr but the opportunity is limited because the tariff elimination only applies to within access imports. Skyr can only be imported under the within access commitment by an importer who has an allocation of quota to import products under HS subheading (c) Bottled Water (Classified Under HS Subheading ) Pure bottled water is classified under HS subheading (Waters Other than Mineral and Aerated Waters Without Sugar, Sweetening or Flavouring). As noted in the table above, imports under this HS subheading in 2007 amounted to less than CDN$280 into an import market in excess of over CDN$6 million. The Canadian MFN duty on mineral and aerated water is FREE but the Canadian MFN duty on other water is a substantial 6.5%. 55 Iceland has several producers of high quality bottled water with good marketing skills. The removal of a 6.5% tariff should provide a substantial advantage to Icelandic water producers over foreign competitors, other than the United States, which exports this product duty free to Canada under NAFTA Note that the Canadian MFN Duty on Mineral and Aerated Waters Without Sugar, Sweetening or Flavouring (i.e. sparkling water) classified under HS subheading is FREE. 56 The United States is by far the biggest exporter of these products to Canada.

42 Icelandic producers of bottled water should no difficulty in satisfying the applicable rule of origin 57 (d) Vodka (Classified under HS Subheading ) Iceland has become a significant producer of vodka. In 2007, the value of exports of vodka from Iceland to Canada amounted to only CDN$89,885 in a total Canadian import market for vodka of almost CDN$120 million. The Canadian duty on vodka of cents/litre of absolute ethyl alcohol, while not excessive, is sufficiently high for its elimination to provide a significant benefit. The three largest exporters of vodka to Canada in 2007 were Russia (CDN$52 million), Sweden (about CDN$21 million) and the United States (about CDN$18 million). The U.S. vodka enters Canada duty free under NAFTA but the Russian and Swedish vodka is subject to the duty. Vodka is subject to an excise tax, but the excise tax applies equally to domestic as well as imported vodka. With the exception of Alberta, liquor in Canada is imported and sold by provincial liquor monopolies. As mentioned above, the provincial liquor monopoly is the LCBO. Icelandic vodka can only be imported into Ontario and sold at retail by the LCBO. However, the LCBO sells large volumes of alcoholic beverages from all over the world so obtaining a listing is feasible. Satisfying the applicable rule of origin should not be difficult for Icelandic vodka producers. 58 (e) Outerwear (Classified Under HS Heading 62.01) Icelandic firms market a variety of apparel products, some of which are designed and produced in Iceland while others are designed in Iceland but produced elsewhere. For the purpose of this test case, I have chosen outerwear, which is classified under HS subheading (Men s/boy s Coats, Rainwear and Outerwear Woven). As the import figures indicate, imports of products classified under HS subheading amounted to a little over CDN$100 in a Canadian import market in 2007 of over CDN$191 million. In 2007, the three largest exporters of these products to Canada were China (CDN$113 million), Bangladesh (CDN$20 million) and Vietnam (CDN$11 million). The imports from China and Vietnam were dutiable at full rates but the imports from Bangladesh were duty free. 59 Imports from Mexico amounted to CDN$11 million and imports from the United States amounted to CDN$4 million. The imports from Mexico and the United States would have been duty free if they satisfied the applicable NAFTA rules of origin The applicable rule requires a heading change and bottles would be classified under a heading different from HS 22.01, which is waters. Therefore, if the water is Icelandic, the plastic containers can be imported from any source and the product will still be considered as qualifying. 58 The only vodka that would not be originating is vodka produced from other alcoholic beverages that have been imported into Iceland. 59 While products of China and Vietnam are eligible for Canada s General Preferential tariff, this program does not apply to products classified under HS Heading Products of Bangladesh are eligible for Canada s Least Developed Country Tariff, which is FREE for all products.

43 Canadian duties on apparel products are generally very high, and for products classified under HS subheading 62.01, Canadian MFN duties amount to 17% or 18%, depending on the product. The elimination of these high tariffs should provide a substantial benefit to Icelandic companies in a position to take advantage of it. The product-specific rule of origin for any apparel item classified under Chapter 61 or 62 of the Harmonized System is a chapter change, meaning that the fabric from which the product is made, as well as all accessories such as buttons can be imported. However, the product must be cut to shape and sewn in Iceland. It is not sufficient for an apparel item such as outerwear to be designed in Iceland. If it is cut to shape and sewn outside the EFTA States, it will not qualify for CEFTA treatment. Icelandic apparel producers should look carefully at the Canadian MFN tariffs for all apparel products. For those already producing such products in Iceland, CEFTA should provide a substantial and immediate benefit with the elimination of very high tariffs. Producers who are designing in Iceland and contracting out production to non-cefta countries should consider whether the cost of moving production to Iceland would be more than offset by the elimination of the high tariffs, H. SANITARY AND PHYTOSANITARY MEASURES AND TECHNICAL REGULATIONS Since the Tokyo Round of GATT negotiations, trade negotiators have tackled the problem of trade barriers created through technical regulations and standards. 60 A country can create barriers to imports through establishing technical requirements that domestic producers can readily comply with but with which foreign producers can only comply with difficulty, if at all. Trade barriers can also be created through discriminatory conformity assessment procedures, with foreign products being subject to different and more stringent procedures to determine that a product conforms to the requirements of a technical regulation. Differing technical regulations comprise barriers to trade even though the drafters did not intend to create trade barriers. One of the many criticisms of NAFTA has been the failure of the NAFTA Parties to make any significant progress in harmonizing the many technical regulations and standards maintained by the three NAFTA countries and their states and provinces. Differing technical regulations and standards means different production runs with increased cost. Many differences are minor, leading to the expression, the tyranny of small differences. Disciplining the use of technical regulations, standards and various other measures adopted by countries respecting potentially harmful products is a balancing act. The balance is between not preventing or inhibiting member countries from adopting measures that they consider necessary A technical regulation is a document that lays down various requirements in respect of a product, compliance with which is mandatory. A standard is a document adopted by a recognized body that lays down requirements in respect of a product, compliance with which is not mandatory. See Annex 1 of the WTO Agreement on Technical Barriers to Trade. While compliance with a standard may not be mandatory, failure to comply with a standard established by a standards setting body may render a product unmarketable.

44 to protect their citizens and the environment against ensuring that such measures are not in reality disguised restrictions on trade. 1. CEFTA and the WTO TBT Agreement The Uruguay Round negotiators carried forward the Tokyo Round agreement on technical barriers with a new and expanded Agreement on Technical Barriers to Trade ( WTO TBT Agreement ). This agreement embodies principles such as national treatment in the application of technical regulations and not preparing, adopting or applying technical regulations with a view to creating unnecessary obstacles to international trade. The WTO TBT Agreement encourages the use of international standards where they exist and sets out requirements to be applied in conformity assessment. The CEFTA Parties are all bound by the WTO TBT Agreement. CEFTA Article 7(1) provides that the WTO TBT Agreement shall govern the rights and obligations of the Parties as regards technical regulations, standards and conformity assessment procedures. CEFTA Article 7(2)(b) provides that notwithstanding Article 7(1), the rights and obligations of Iceland, Norway and Liechtenstein respecting conformity assessment shall be governed by the Agreement on Mutual Recognition in Relation to Conformity Assessment of July 4, Canada has entered into similar agreements with Switzerland, 61 the European Union and Australia and the EEA EFTA countries have entered into similar agreements with other countries. 62 The Agreement on Mutual Recognition in Relation to Conformity Assessment sets out fairly extensive provisions respecting conformity assessment, which is defined as systematic examination to determine the extent to which a product, process or service fulfils specific requirements, and sets out sectoral annexes respecting Telecommunications Terminal Equipment, Electro-Magnetic Compatibility, Electrical Safety, Recreational Craft and Medicinal Drugs Good Manufacturing Practices. CEFTA Article 7(4) provides that where Canada or one of more EFTA States considers that one or more EFTA States or Canada has taken a measure that creates or is likely to create an obstacle to trade, the parties concerned shall hold consultations under the framework of the Joint Committee with a view to finding a solution in conformity with the WTO TBT Agreement. As discussed below, the Joint Committee is the one institution established by CEFTA and amongst CEFTA Article 7(2)(a) contains a similar provision to that in Article 7(2)(b) in reference to the conformity assessment agreement between Switzerland and Canada. Switzerland is dealt with separately because Switzerland is not a member of the EEA. 62 EEA Agreement Protocol 12 on Conformity Assessment Agreements with Third Countries provides as follows: Mutual Recognition Agreements with third countries concerning conformity assessment for products where the use of a mark is provided for in EC legislation will be negotiated on the initiative of the Community. The Community will negotiate on the basis that the third countries concerned will conclude with the EFTA States parallel Mutual Recognition Agreements equivalent to those to be concluded with the Community. The Contracting Parties shall cooperate in accordance with the general information and consultation procedures set out in the EEA Agreement. Should a difference arise in relations with third countries, it will be dealt with in accordance with the relevant provisions of the EEA Agreement.

45 other functions it has the task of endeavouring to resolve disputes. 63 CEFTA Article 7(4) adds specificity to this function of the Joint Committee as regards technical regulations. CEFTA Article 7(4) does not apply to disputes to which the Agreement on Mutual Recognition in Relation to Conformity Assessment applies. 2. CEFTA and the WTO Agreement on the Application of Sanitary and Phytosanitary Measures The Uruguay Round negotiators also created an entirely new agreement known as the Agreement on Sanitary and Phytosanitary Measures ( WTO SPS Agreement ) that covers what are called sanitary and phytosanitary measures. These are measures adopted for the purpose of protecting human, animal or plant life or health. 64 Amongst other things, the WTO SPS Agreement requires that SPS measures be based on scientific principles. 65 The WTO SPS Agreement is highly relevant to any country that is exporting food products such as fish or meat. Canada won a complaint against Australia in respect of measures maintained by Australia to protect its wild salmon that had the effect of prohibiting imports of salmon products from Canada. 66 Canada and the United States have won a series of decisions by WTO panels and the Appellate Body against the European Community in respect of beef from animals treated with hormones. 67 Canadian rules respecting the importation of lamb meat from Iceland would be subject to the requirements of the WTO SPS Agreement CEFTA Article 6 provides that the rights and obligations of the Parties respecting sanitary and phytosanitary measures will be governed by the WTO SPS Agreement. 3. Observations While the CEFTA provisions respecting sanitary and phytosanitary measures and technical regulations do not create obligations beyond what already exists under the WTO, the fact that disputes respecting technical regulations are addressed in CEFTA Article 7(4) means that concerns respecting Canadian practices can legitimately be raised by Iceland s representatives at meetings of the Joint Committee. The Joint Committee could prove a very useful vehicle for the informal resolution of concerns by Iceland respecting the application by Canada of technical regulations that otherwise could only be resolved through invoking the WTO dispute resolution CEFTA Article 26(2)(g). 64 There is a lengthy definition of sanitary and phytosanitary measure set out in Annex A of the WTO SPS Agreement. 65 WTO SPS Agreement Article 2(2). 66 Australia Measures Affecting the Importation of Salmon, Panel Report WT/DS18/R 12 June 1998, Appellate Body Report WT/DS 18/AB/R 20 October 1998 (Adopted 6 November 1998); Arbitration WT/DS18/9 23 February European Communities - Measures Concerning Meat and Meat Products ( EC-Hormones ) Panel Report WT/DS48/R/CAN 18 August 1997, Appellate Body Report WT/DS26/AB/R, WT/DS48/AB/R 5 January 1998.

46 procedures. While there is no counterpart to CEFTA Article 7(4) for sanitary and phytosanitary measures, the Icelandic representatives on the Joint Committee should have no hesitation in raising any concerns about the application by Canada of sanitary and phytosanitary measures in meetings of the Joint Committee. I. SUBSIDIES AND ANTIDUMPING CEFTA Articles 17 and 18 set out provisions respecting subsidies and antidumping that confirm obligations that, as WTO members, Canada and each of the EFTA countries has already assumed under the General Agreement on Tariffs and Trade 1994, the WTO Agreement on Subsidies and Countervailing Measures and the WTO Agreement on Implementation of Article VI of the General Agreement on Tariffs and Trade Before initiating a subsidy investigation, CEFTA Article 17(3) requires that the competent investigating authority of Canada or an EFTA State notify a Party whose goods will be subject to the investigation and allow such party 25 days for consultations with a view to finding a mutually acceptable solution. This provision is similar to Article 13 of the WTO Agreement on Subsidies and Countervailing Measures, except that it prescribes a specific time frame for consultations. Antidumping and countervailing duty actions in Canada are governed by the Special Import Measures Act ( SIMA ). Dumping and subsidy investigations are conducted by the Antidumping and Countervailing Directorate of the Canada Border Services Agency ( CBSA ) and injury investigations are conducted by a quasi-judicial tribunal known as the Canadian International Trade Tribunal ( CITT ), CBSA investigations have become increasingly transparent in recent years. Exporters counsel who have filed confidentiality undertakings have full access to documents filed in the course of a dumping or subsidy investigation. The CITT conducts a ninety day investigation into injury allegations, followed by a full hearing. Unlike the practice of its U.S. counterpart, the International Trade Commission ( USITC ), CITT hearings are frequently lengthy with witnesses testifying both on behalf of complainants and respondents. Unlike the U.S. process, Canadian antidumping and countervailing duty investigations are free from political influence. 68 There have been very few antidumping and countervailing duty actions brought in Canada against products of the EFTA countries. 69 Dumping and subsidy complaints are now brought U.S. investigations are usually free of political interference unless they are high profile cases initiated by petitioners with influence in Congress, such as the Coalition for Fair Trade in Lumber. Under these circumstances, such cases can become highly politicized. 69 I made a search of the CBSA website of dumping and subsidy investigations initiated since The only investigation that I found against products of an EFTA country was an antidumping complaint initiated in 2000 against products of Norway. See Pulp-Dewatering Screw Presses, Assembled or Unassembled, Originating in or Exporter from Norway and Produced by or on Behalf of Kvaerner Pulping A.S., its Affiliates, Successors and

47 primarily against developing countries that are large exporters of products to Canada, with China being at the top of the list. 70 J. TRADE FACILITATION CEFTA Article 21 sets out obligations respecting trade facilitation, which in general terms means the simplification and streamlining of customs procedures and the adoption of other measures to facilitate the movement of goods across borders. CEFTA Annex I identifies a number of principles that are the basis for the development and administration by competent authorities of trade facilitation measures, such as the promotion of international standards. While useful, Article 21 and Annex I are essentially agreements to negotiate and to co-operate on the issue of trade facilitation and do not impose hard obligations. Trade Facilitation is one of the topics being negotiated by the WTO Trade Negotiations Committee. Once the Doha Round is completed, the Parties as WTO members will likely be bound by more fulsome requirements than those set out in Article 21 and Annex I of Canada EFTA. However, the CEFTA trade facilitation provisions are useful and it may be some time before the Doha Round is completed. K. EXCEPTIONS AND SAFEGUARDS 1. Article XX of GATT 1994 CEFTA Article 22 incorporates the exceptions in Article XX of GATT 1994 by reference. These exceptions include such matters as protection of human, animal and plant life and health (Article XX(b) of GATT 1994), conservation of exhaustible natural resources (Article XX(g) of GATT 1994) and products in general or local short supply (Article XX(j) of GATT 1994). The application of the exceptions under Article XX of GATT 1994 is been the subject of extensive jurisprudence under both the GATT and the WTO that must be considered if a Party intends to rely on an Article XX exception justify a measure that does not conform to CEFTA requirements. CEFTA Article 22 provides that the human, animal and plant life and health exception includes environmental measures and that the exhaustible natural resources includes living and non-living natural resources. These clarifications first appeared in the NAFTA text in response to concerns of environmentalists, and were valid concerns at the time that NAFTA was negotiated. However, subsequent WTO jurisprudence establishes that that the human, animal and plant life 43 Assigns.I AD/1251. The investigation was terminated because it was determined that the goods that were sold or exported to Canada by Kvaerner during the period of investigation did not originate in Norway. 70 The CBSA treats China as a market economy unless the particular industry under investigation is clearly under state control. This means that in dumping cases, dumping margins are based on Chinese prices and costs and not those of a surrogate country. Subsidy cases against goods of China proceed in the same manner as against other market economies. Results in subsidy cases have depended largely on the amount of effort that the Chinese Government has put into defending. In cases such as Laminate Flooring, the Chinese Government co-operated fully in the CBSA s investigation and the resulting countervailing duty rates were low and in some instances below the 1% threshold for countervailing duties.

48 and health exception includes environmental measures and that the exhaustible natural resources exception includes living as well as non-living natural resources. 2. Cultural Exemption As is standard in free trade agreements to which Canada is a party, there is a cultural exemption. The cultural exemption originated with the CUFTA and was carried forward into NAFTA. Cultural issues were a matter of great contention between Canada and the United States and the cultural provisions of NAFTA as between Canada and the United States can only be described as bizarre. 71 Unlike with NAFTA, the CEFTA cultural exemption in CEFTA Article 23 and Annex J is relatively straight forward. Cultural industries are defined as persons engaged in any of the following activities: 44 (a) (b) (c) (d) (e) the publication, distribution, or sale of books, magazines, periodicals or newspapers in print or machine readable form but not including the sole activity of printing or typesetting any of the foregoing; the production, distribution, sale or exhibition of film or video recordings; the production, distribution, sale or exhibition of audio or video music recordings; the publication, distribution or sale of music in print or machine readable form; or radiocommunications in which the transmissions are intended for direct reception by the general public, and all radio, television and cable broadcasting undertakings and all satellite programming and broadcast network services. 72 The cultural exemption provides that nothing in CEFTA shall be construed to apply to measures adopted or maintained by a Party with respect to cultural industries except as provided in CEFTA Article 10, CEFTA Article 26(1)(e), and CEFTA Article 37. CEFTA Article 10 provides for tariff elimination so tariffs will be eliminated on cultural goods, such as books, just as with other goods. CEFTA Article 26(2)(e) provides that the Joint Committee shall discuss, upon request by a Party, measures with respect to cultural industries. This provision makes possible the informal resolution of concerns over such measures. CEFTA Article 37 is the CEFTA transparency provision, which applies to all measures, including measures respecting cultural industries. 71 NAFTA Annex 2106 provides that measures respecting cultural industries shall be governed exclusively by CUFTA. The CUFTA exempts many cultural activities simply by not including them. CUFTA Article 2005 also contains an exemption for measures affecting cultural industries. However, if a measure would be inconsistent with CUFTA but for the exemption in CUFTA Article 2005, the other Party may retaliate with measures of equivalent economic effect. 72 This is the standard definition of cultural industries that appears in all of Canada s free trade agreements.

49 The NAFTA cultural exemption has not insulated Canada from U.S. challenges respecting Canadian cultural measures because there are no exemptions for cultural industries under the WTO Agreement. Canada and the United States had a long-standing dispute over Canadian measures respecting periodicals (which fall within paragraph (a) of the definition of cultural industries). The United States ultimately initiated a complaint under the WTO dispute settlement process and won. As a result of the U.S. victory, the Canadian measures were eliminated or modified to conform to U.S. demands National Security Exception CEFTA Article 24 contains a standard national security exception that is virtually the same as the security exception in NAFTA Article 2102 and is modelled after the exception set out in GATT While exceptions for national security can be of major concern when trading with countries such as the United States, the national security exception is unlikely to be of much practical significance as regards trade between Canada and Iceland. 4. Emergency Action CEFTA Article 25 also sets out a bilateral emergency action procedure that applies for a transition period of five years from the entry into force of CEFTA, or ten or fifteen years in the case of the vessels described in Annex E. 74 If an originating product is being imported in such increased quantities and under such conditions as to constitute a substantial cause of serious injury or a threat of serious injury to the domestic industry of like or directly competitive products, a Party may take emergency action. The emergency action consists of being permitted to raise tariffs back to the lesser of the MFN rate of duty in effect at the time the action is taken or the time immediately prior to CEFTA coming into force. The emergency action may only remain in effect for a period of three years or until the end of the transition period applicable to the product in question. Investigations must confirm to the requirements of the WTO Agreement on Safeguards. Emergency or safeguard actions are different from dumping or subsidy complaints because the action is not based on an unfair trade practice of the exporting party. The importing party who invokes the emergency action must provide mutually agreed compensation or be subject to compensatory action by the exporting Party. The Joint Committee must be notified and endeavour to resolve issues respecting compensation. Unlike with dumping and subsidy complaints, where duties are automatically imposed if dumping or subsidization has been found to cause injury, the application of emergency action or safeguards is at the discretion of the government of the importing country. In Canada, injury determinations in safeguard actions are made by the CITT, but the decision to impose remedies is at the discretion of the Canadian Minister of Finance. There have been a number of instances See Canada Certain Measures Concerning Periodicals (Canada Periodicals), Panel Report WT/DS31/R 14 March 1997, Appellate Body WT/DS31/AB/R 30 June CEFTA Article 25(9).

50 recently in safeguard actions where affirmative injury findings have been made by the CITT and the Minister of Finance has declined to take action. 75 NAFTA and the other free trade agreements to which Canada is a party provide for bilateral emergency action upon the lines set out in CEFTA Article 25. To my knowledge, none of these provisions has ever been invoked either by or against Canada. SERVICES AND INVESTMENT Article 12 of CEFTA is entitled Services and Investment but does not impose any substantive obligations respecting either services or investment. Canada and each of the EFTA States is a member the World Trade Organization ( WTO ) and, as such, is bound by the provisions of the General Agreement on Trade in Services ( GATS ). The GATS sets out a variety of obligations respecting trade in services and may be viewed as an investment agreement in that its coverage extends to the provision of services through a commercial presence, such as a subsidiary, established in another member country. Canada is party to a number of bilateral investment treaties known as Foreign Investment Protection and Promotion Agreements ( FIPAs ) but none of these agreements is with an EFTA State. Article 12(4) contemplates future consideration to be given by Canada and the EFTA States to adopt liberalization measures as regards trade in services. A review of issues related to liberalization is to be completed within three years of the entry into force of CEFTA. Article 12(4) refers to GATS Article V. The reason for this reference is because GATS Article II sets out a most-favoured-nation obligation that requires that each WTO Member must accord to services and service suppliers of other WTO Members treatment no less favourable than the treatment accorded to the services and service suppliers of any other country. Notwithstanding GATS Article II, GATS Article V permits WTO Members to enter into agreements liberalizing trade in services amongst themselves without having to comply with GATS Article II. However, the agreement must provide for substantial sectoral sector coverage, eliminate virtually all discrimination in the sectors covered and not raise barriers to services and service providers of WTO Members not party to the agreement. This means that any agreement among the CEFTA Parties to liberalize trade in services amongst them arising from Article 12(4) would have to be sufficiently broad to satisfy the requirements of GATS Article V. Otherwise, benefits negotiated under such an agreement would have to be extended to all WTO Members. TEMPORARY ENTRY Facilitation of entry of business persons and professionals is a necessary corollary of the liberalization of trade in services and investment because people must provide services and manage investments. CEFTA Article 13 requires each Party to facilitate temporary entry 76 for nationals 77 of another Party who are intra-corporate transferees (managers, executives, and Steel, bicycles, and barbeques in a China-specific safeguard 76 Defined as the right to enter and remain for the period authorized. See CEFTA Article 13(4)(a). Note that temporary entry is quite different from immigration. Immigration rules are not affected by CEFTA. 77 A national is a natural person who is a citizen or a permanent resident of a Party. See CEFTA Article 13(4)(c).

51 specialists), business visitors and persons providing services directly related to the exportation of goods by an exporter of that Party. COMPETITION LAW AND POLICY CEFTA Articles 14 through 16 set out tentative provisions respecting competition law and policy that consist primarily of obligations to consult and to co-operate. As under NAFTA Chapter Fifteen, dispute resolution does not apply to matters involving competition law and policy. STATE TRADING ENTERPRISES AND PUBLIC PROCUREMENT CEFTA Article 19 affirms the obligations of Canada and the EFTA countries under Article XVII of GATT 1994 and the WTO understanding respecting the interpretation of that article that covers state trading enterprises. CEFTA imposes no obligations beyond what is provided in GATT 1994 as regards state trading enterprises. CEFTA Article 20 affirms the obligations of Canada and the EFTA countries under the WTO Agreement on Government Procurement. 78 Article 20 also provides that if, after CEFTA enters into force, a Party (Canada or an EFTA State) enters into a procurement agreement providing for greater transparency or market access than the Agreement on Government Procurement, that Party will enter into negotiations with the other Parties to achieve that level of transparency or market access. While this is only an agreement to negotiate MFN treatment, it should be noted that Article III:1(b) of the WTO Agreement on Government Procurement contains an MFN provision. Procurement agreements enhancing procurement opportunities with individual countries will trigger this MFN provision meaning that the benefits accorded would have to be extended to all signatories of the Agreement on Government Procurement. 79 INSTITUTIONAL PROVISIONS CEFTA Article 26 establishes the Canada-EFTA Joint Committee which is to be comprised of representatives of the Parties. The Joint Committee shall normally convene once a year and will Unlike most WTO agreements, the Agreement on Government Procurement is a plurilateral as opposed to a multilateral agreement and is not binding on all WTO members. However, Canada and all the EFTA States are bound by the Agreement on Government Procurement. Canada, Norway and Switzerland acceded on January 1, Liechtenstein acceded on September 18, 1997 and Iceland acceded on April 28, CEFTA Article 20 is clearly prospective so it does not apply to the one other procurement agreement into which Canada has entered, namely that set out in NAFTA Chapter Ten. While NAFTA came into effect before the WTO Agreement, a number of NAFTA chapters, including NAFTA Chapter Ten, are based on the Dunkel Draft that was circulated in 1991 and contained drafts of what ultimately became the agreements set out in the annexes of the WTO Agreement. NAFTA Chapter Ten closely resembles the Agreement on Government Procurement but there are some differences. Canada and the United States are bound to each other by both the Agreement on Government Procurement and NAFTA Chapter Ten. Mexico and Canada are bound by NAFTA Chapter Ten but Mexico is not a party to the Agreement on Government Procurement. None of the other free trade agreements to which Canada is a party includes provisions respecting government procurement.

52 be chaired jointly by Canada and one of the EFTA States. A Party can also request that a special meeting be held on 30 days notice. Decisions of the Joint Committee are to be made by consensus. The functions of the Joint Committee are as follows: supervise the implementation of CEFTA and oversee the further elaboration; keep under review the possibility of further removal of barriers to trade and other restrictive regulations of commerce between Canada and the EFTA States; supervise the work of all sub-committees and working groups established under CEFTA; as described above, discuss if requested measures with respect to cultural industries maintained or adopted under Annex J and the application of an emergency action taken under Article 25; endeavour to resolve disputes that may arise regarding the interpretation or application of CEFTA; and consider any other matter that may affect the operation of CEFTA. While the Joint Committee does not have legal powers, it should serve as a very useful vehicle for communication and for the informal resolution of trade irritants. An expeditious informal resolution of a dispute through diplomatic means using the Joint Committee is preferable to a legally binding resolution through the WTO dispute settlement procedure which, while an effective process, may take years and is adversarial by its nature, with clear winners and losers. Iceland should take full advantage of the opportunity presented by the creation of the Joint Committee to deepen its trading relationship with Canada. DISPUTE RESOLUTION The CEFTA dispute resolution procedures are set out in CEFTA Articles 27 through 31 and in CEFTA Annex K. Disputes are to be resolved through consultation and if the dispute is not resolved through consultation, the dispute is submitted to arbitration. The CEFTA dispute settlement procedures shall apply between Canada and one or more EFTA States. As noted at the beginning of this Analysis, CEFTA establishes a bilateral relationship between Canada and each EFTA State. As relations among EFTA States are governed by the existing agreements among them, disputes between EFTA States will continue to be resolved in accordance with those agreements and not under the CEFTA procedures. A. WTO OR CEFTA PROCEDURES There are a number of CEFTA provisions that incorporate provisions of the WTO Agreement by reference. For example the CEFTA national treatment provision in CEFTA Article 4(1) 48

53 incorporates Article III of GATT 1994 by reference, and the CEFTA provision respecting import and export restrictions incorporates Article XI of GATT 1994 by reference. Article 27 provides that a dispute that arises both under CEFTA and under the WTO Agreement, as would be the case of a national treatment violation or a dispute involving an import or an export restriction, may be settled in either forum at the discretion of the complaining Party. 80 However, once the complaining Party has chosen a forum for the resolution of its dispute, that forum must be used to the exclusion of the other. This is a standard provision that has appeared in all the free trade agreements to which Canada is a party. 81 As a practical matter, a complaining Party will choose the forum in which it considers that it has the best chance of winning. Thus the derogations in CEFTA Annex B from Canada s obligations respecting national treatment and import and export restrictions are somewhat illusory. A complaint could be brought against Canada through WTO procedures in respect of any of those derogations that cannot be justified under an exception in Article XX of GATT The controls maintained by New Brunswick, Newfoundland, Nova Scotia, Prince Edward Island and Quebec on the export of fish described above is an example because the purpose of these regulations is to encourage further processing within the province and not to conserve exhaustible natural resources. The only disputes that have been resolved among NAFTA parties using the NAFTA dispute settlement procedures in NAFTA Chapter Twenty have been disputes involving provisions specific to NAFTA. 82 The NAFTA Parties have invariably taken their other disputes to the WTO. The dispute resolution procedures under the other free trade agreements to which Canada is a party have never been invoked. B. NON-APPLICATION OF CEFTA DISPUTE RESOLUTION PROCEDURES The CEFTA dispute resolution procedures do not apply to disputes concerning: sanitary and phytosanitary measures (CEFTA Article 6); technical regulations, standards and conformity assessment procedures (CEFTA Articles 7(1) and (2)); any aspect of competition law or policy (CEFTA Chapter IV); subsidies (CEFTA Article 17(1)); anti-dumping (CEFTA Article 18(1)); state trading enterprises (CEFTA Article 19): procurement (CEFTA Article 20(1): or the rights retained by the Parties under Article XIX of GATT 1994 and the WTO Agreement on CEFTA Article 27(1). 81 Disputes involving several environmental matters must be resolved through the NAFTA procedures. See NAFTA Articles 2005(3) and (4). None of these matters has resulted in a proceeding under NAFTA. 82 There have only been three Chapter Twenty cases during the 14 years of NAFTA s existence. The issue in Tariffs Applied By Canada To Certain U.S.-Origin Agricultural Products (CDA ), a complaint brought by the United States against Canada, was whether the tariff elimination provisions of NAFTA applied to Canada s prohibitive over-access tariff rates on dairy and poultry products. The other two complaints were both brought by Mexico against the United States. Cross-Border Trucking Services And Investment (USA ) involved market access commitments that the United States to admit Mexican trucking services. U.S. Safeguard Action Taken On Broomcorn Brooms from Mexico (USA ) involved actions taken by the United States under the NAFTA bilateral emergency action procedures.

54 Safeguards (CEFTA Article 25(11). 83 Disputes arising in respect of all these matters except competition law or policy may be settled using WTO procedures because there is a WTO agreement covering each of these topics. Certain matters respecting conformity assessment will be resolved pursuant to the Agreement on Mutual Recognition in Relation to Conformity Assessment of July 4, 2000 referred to in CEFTA Article 7(2). C. CONSULTATIONS CEFTA Article 28 provides that a complaint begins with a request for consultations. Canada may request consultations with any EFTA State and any EFTA State may request consultations with Canada. If one EFTA State requests consultations any other EFTA State may join in such request as a co-complainant. The consultations must begin within 30 days of the request. D. ARBITRATION If the dispute has not been resolved within 90 days of the request for consultation, CEFTA Article 29 provides that the dispute may be referred to arbitration. Arbitration tribunals are comprised of three members chosen through the procedures set out in CEFTA Annex K. The Party or Parties referring the dispute to arbitration chose one member and the respondent Party or Parties chose one member. Members chosen can be nationals of the Party or Parties doing the choosing. The disputing Parties must then agree on the third member, who will be the President of the tribunal and who may not be a national of any Party or reside permanently in any Party. If the disputing Parties cannot agree, the third member shall be chosen by the Secretary-General (or in some instances the Deputy Secretary-General) of the Permanent Court of Arbitration. The arbitration is conducted in accordance with the rules of the Permanent Court of Arbitration Optional Rules for Arbitrating Disputes between Two States, effective October 20, Decisions are made by majority vote. The award must be rendered within six months of the appointment of the President of the arbitral tribunal, but this can be extended by a further three months if the disputing Parties agree. Expenses of the arbitration are borne in equal shares. The terms of reference are set out in CEFTA Article 29(3) and (4). The arbitral tribunal must interpret CEFTA in accordance with the customary rules of interpretation of public international law, which are set out in the Vienna Convention on the Law of Treaties. 84 The award must set out the tribunal s findings with reasons and its recommendations for resolution. 85 The findings are binding See CEFTA Article 27(5). 84 Particularly Articles 31 and 32. There is extensive WTO jurisprudence respecting the application of the interpretative principles of the Vienna Convention on the Las of Treaties that would be highly relevant in any CEFTA arbitration. 85 Parties may in certain instances also allege that certain benefits are being nullified or impaired by measures not inconsistent with CEFTA. The terms of reference must so state and the tribunal must make a determination on this matter, if applicable. Non-violation nullification and impairment is one of the more arcane concepts in GATT and WTO law, and will not be elaborated upon here.

55 51 E. IMPLEMENTATION OF THE AWARD CEFTA Article 30 requires that upon the receipt of the arbitral award, the disputing Parties shall seek to agree on the implementation of the award. Article 30 provides that the settlement will conform with the recommendations of the arbitral tribunal but leaves the Parties free to agree on some other resolution. Article 30(2) states that the preferred resolution is the nonimplementation or the removal of the offending measure. CEFTA Article 31 covers non-implementation. If the disputing Parties disagree on whether the measures taken by the losing Party to implement the arbitral award are consistent with the requirements of the award, the dispute shall be resolved by the same arbitral tribunal that issued the arbitral award. 86 This arbitration may not be initiated by the complaining Party until 12 months have elapsed from the rendering of the award. The arbitral tribunal is required to render its ward within three months. If the arbitral tribunal finds that the award has not been implemented, the complaining Party can seek compensation from the Party complained against or withdraw CEFTA benefits of equivalent effect. The question of whether benefits withdrawn are of equivalent effect can be submitted to arbitration. 87 F. OBSERVATIONS An effective dispute settlement mechanism adds credibility to an international agreement. The procedures set out in CEFTA should function effectively should they ever need to be used. However, if Canada s experience under its other free trade agreements is a guide, it is likely that these procedures will be used infrequently, if at all. OTHER PROVISIONS A. ENTRY INTO FORCE CEFTA Article 42(2) provides that CEFTA shall enter into force on the first day of the third month following the deposit by Canada and at least two of the EFTA States of their respective instruments of ratification, acceptance or approval with the CEFTA Depositary, which is the Kingdom of Norway. CEFTA shall enter into force for the other EFTA States on the date of deposit of their respective instruments. 86 This provision is similar in concept to Article 21:5 of the WTO Understanding on rules and procedures governing the settlement of disputes( WTO Dispute Settlement Understanding ), 87 This differs from the procedure set out in the WTO Dispute Settlement Understanding. Under Article 22 of the WTO Dispute Settlement Understanding, compensation or withdrawal of benefits must conform to what has been authorized by the WTO Dispute Settlement Body following an arbitration process. Under CEFTA Article 31, the complaining Party can suspend benefits unilaterally and the question as to whether the benefits suspended are of equivalent effect is determined by subsequent arbitration.

56 Canada s implementing legislation received first reading in the House of Commons on May 5, The legislation is not contentious and should pass sometime before the end of B. AMENDMENTS An amendment may be based on a draft decision proposed by the Joint Committee but each Party must deposit its instrument of ratification, acceptance or approval with the Depositary (Norway). The amendment becomes effective on the first day of the third month following the deposit of the last instrument of ratification, acceptance or approval. C. ADDITIONAL PARTIES CEFTA Article 39 permits the Parties to invite any State to become a Party. D. COMPLIANCE BY SUB-NATIONAL ENTITIES CEFTA Article 35 provides that each Party is fully responsible for the observance of all CEFTA provisions by regional and local governments. This provision is significant for Canada and Switzerland, both of which are federal states with provinces in the case of Canada and cantons in the case of Switzerland that have substantial autonomy. The legal authority of the federal government of Canada to force a provincial government to comply with an international trade agreement is uncertain as regards a matter that is clearly with an area of exclusive provincial jurisdiction. However, provincial governments have not made a practice of forcing this issue. While provincial measures have sometimes been found by GATT panels to be inconsistent with GATT provisions, the responsible provincial governments have brought their measures into conformity without federal government intervention. E. WITHDRAWAL AND TERMINATION CEFTA does not have any time limit and will exist in perpetuity. However, CEFTA Article 40 provides that any party may withdraw by written notice to the Depositary (Norway) and the withdrawal will take place on the first day of the sixth month after the date of receipt of the notification. If Canada withdraws, CEFTA expires, which logically followed given that CEFTA creates a bilateral relationship between Canada and each EFTA State but does not apply to the trade relations among the EFTA States. If an EFTA State withdraws, the remaining Parties must meet and discuss the continued existence of CEFTA. The one circumstance that could occur that would cause an EFTA State to withdraw is if that EFTA State decided to join the European Union Bill C-55, An Act to implement the Free Trade Agreement between Canada and the States of the European Free Trade Association (Iceland, Liechtenstein, Norway, Switzerland), the Agreement on Agriculture between Canada and the Republic of Iceland, the Agreement on Agriculture between Canada and the Kingdom of Norway and the Agreement on Agriculture between Canada and the Swiss Confederation. The full text of Bill C-55 can be accessed through: 89 The only possible delay would occur if an election is called. The Harper Government is a minority government and could be brought down by the combined vote of the three opposition parties.

57 53 CONCLUDING REMARKS CEFTA creates significant opportunities for Icelandic businesses by improving market access to the huge Canadian market for imported products through the elimination of tariffs. CEFTA also creates a special trading and business relationship between Canada and Iceland and deepens the already significant bonds between the two countries.

58 APPENDIX CHAPTERS 1 THROUGH 24 OF THE HARMONIZED SYSTEM Chapter 1 - Live animals Chapter 2 - Meat and edible meat offal Chapter 3 - Fish and crustaceans, molluscs and other aquatic invertebrates Chapter 4 - Dairy produce; birds eggs; natural honey; edible products of animal origin, not elsewhere specified or included Chapter 5 - Products of animal origin, not elsewhere specified or included Chapter 6 - Live trees and other plants; bulbs, roots and the like; cut flowers and ornamental foliage Chapter 7 - Edible vegetables and certain roots and tubers Chapter 8 - Edible fruit and nuts; peel of citrus fruit or melons Chapter 9 - Coffee, tea, maté and spices Chapter 10 - Cereals Chapter 11 - Products of the milling industry; malt; starches; inulin; wheat gluten Chapter 12 - Oil seeds and oleaginous fruits; miscellaneous grains, seeds and fruit; industrial or medicinal plants; straw and fodder Chapter 13 - Lac; gums, resins and other vegetable saps and extracts Chapter 14 - Vegetable plaiting materials; vegetable products not elsewhere specified or included Chapter 15 - Animal or vegetable fats and oils and their cleavage products; prepared edible fats; animal or vegetable waxes Chapter 16 - Preparations of meat, of fish or of crustaceans, molluscs or other aquatic invertebrates Chapter 17 - Sugars and sugar confectionery Chapter 18 - Cocoa and cocoa preparations Chapter 19 - Preparations of cereals, flour, starch or milk; pastrycooks products Chapter 20 - Preparations of vegetables, fruit, nuts or other parts of plants Chapter 21 - Miscellaneous edible preparations

59 Appendix - 2 Chapter 22 - Beverages, spirits and vinegar Chapter 23 - Residues and waste from the food industries; prepared animal fodder Chapter 24 - Tobacco and manufactured tobacco substitutes CHAPTERS 25 THROUGH 97 OF THE HARMONIZED SYSTEM Chapter 25 - Salt; sulphur; earths and stone; plastering materials, lime and cement Chapter 26 - Ores, slag and ash Chapter 27 - Mineral fuels, mineral oils and products of their distillation; bituminous substances; mineral waxes Chapter 28 - Inorganic chemicals; organic or inorganic compounds of precious metals, of rareearth metals, of radioactive elements or of isotopes: I. Chemical elements II. III. IV. Inorganic acids and inorganic oxygen compounds of non-metals Halogen or sulphur compounds of non-metals Inorganic bases and oxides, hydroxides and peroxides of metals V. Salts and peroxysalts, of inorganic acids and metals VI. Miscellaneous Chapter 29 - Organic chemicals I. - Hydrocarbons and their halogenated, sulphonated, nitrated or nitrosated derivatives II. III. IV. - Alcohols and their halogenated, sulphonated, nitrated or nitrosated derivatives - Phenols, phenol-alcohols and their halogenated, sulphonated, nitrated or nitrosated derivatives - Ethers, alcohol peroxides, ether peroxides, ketone peroxides, epoxides with a three-membered ring, acetals and hemiacetals, and their halogenated, sulphonated, nitrated or nitrosated derivatives V. - Aldehyde-function compounds VI. VII. - Ketone-function compounds and quinone-function compounds - Carboxylic acids and their anhydrides, halides, peroxides and peroxyacids and their halogenated, sulphonated, nitrated or nitrosated derivatives

60 Appendix - 3 VIII. IX. - Esters of inorganic acids of non-metals and their salts, and their halogenated, sulphonated, nitrated or nitrosated derivatives - Nitrogen-function compounds X. - Organo-inorganic compounds, heterocyclic compounds, nucleic acids and their salts, and sulphonamides XI. XII. XIII. - Provitamins, vitamins and hormones - Glycosides and vegetable alkaloids, natural or reproduced by synthesis, and their salts, ethers, esters and other derivatives - Other organic compounds Chapter 30 - Pharmaceutical products Chapter 31 - Fertilizers Chapter 32 - Tanning or dyeing extracts; tannins and their derivatives; dyes, pigments and other colouring matter; paints and varnishes; putty and other mastics; inks Chapter 33 - Essential oils and resinoids; perfumery, cosmetic or toilet preparations Chapter 34 - Soap, organic surface-active agents, washing preparations, lubricating preparations, artificial waxes, prepared waxes, polishing or scouring preparations, candles and similar articles, modelling pastes, dental waxes and dental preparations with a basis of plaster Chapter 35 - Albuminoidal substances; modified starches; glues; enzymes Chapter 36 - Explosives; pyrotechnic products; matches; pyrophoric alloys; certain combustible preparations Chapter 37 - Photographic or cinematographic goods Chapter 38 - Miscellaneous chemical products Chapter 39 - Plastics and articles thereof I. - Primary forms II. - Waste, parings and scrap; semi-manufactures; articles Chapter 40 - Rubber and articles thereof Chapter 41 - Raw hides and skins (other than furskins) and leather Chapter 42 - Articles of leather; saddlery and harness; travel goods, handbags and similar containers; articles of animal gut (other than silkworm gut)

61 Appendix - 4 Chapter 43 - Furskins and artificial fur; manufactures thereof Chapter 44 - Wood and articles of wood; wood charcoal Chapter 45 - Cork and articles of cork Chapter 46 - Manufactures of straw, of esparto or of other plaiting materials; basketware and wickerwork Chapter 47 - Pulp of wood or of other fibrous cellulosic material; recovered (waste and scrap) paper or paperboard Chapter 48 - Paper and paperboard; articles of paper pulp, of paper or of paperboard Chapter 49 - Printed books, newspapers, pictures and other products of the printing industry; manuscripts, typescripts and plans Chapter 50 - Silk Chapter 51 - Wool, fine or coarse animal hair; horsehair yarn and woven fabric Chapter 52 - Cotton Chapter 53 - Other vegetable textile fibres; paper yarn and woven fabrics of paper yarn Chapter 54 - Man-made filaments; strip and the like of man-made textile materials Chapter 55 - Man-made staple fibres Chapter 56 - Wadding, felt and nonwovens; special yarns; twine, cordage, ropes and cables and articles thereof Chapter 57 - Carpets and other textile floor coverings Chapter 58 - Special woven fabrics; tufted textile fabrics; lace; tapestries; trimmings; embroidery Chapter 59 - Impregnated, coated, covered or laminated textile fabrics; textile articles of a kind suitable for industrial use Chapter 60 - Knitted or crocheted fabrics Chapter 61 - Articles of apparel and clothing accessories, knitted or crocheted Chapter 62 Articles of apparel and clothing accessories, not knitted or crocheted Chapter 63 - Other made up textile articles; sets; worn clothing and worn textile articles; rags I. - Other made up textile articles II. - Sets

62 Appendix - 5 III. - Worn clothing and worn textile articles; rags Chapter 64 - Footwear, gaiters and the like; parts of such articles Chapter 65 - Headgear and parts thereof Chapter 66 - Umbrellas, sun umbrellas, walking-sticks, seat-sticks, whips, riding-crops and parts thereof Chapter 67 - Prepared feathers and down and articles made of feathers or of down; artificial flowers; articles of human hair Chapter 68 - Articles of stone, plaster, cement, asbestos, mica or similar materials Chapter 69 - Ceramic products I. - Goods of siliceous fossil meals or of similar siliceous earths, and refractory goods II. - Other ceramic products Chapter 70 - Glass and glassware Chapter 71 - Natural or cultured pearls, precious or semi-precious stones, precious metals, metals clad with precious metal and articles thereof; imitation jewellery; coin I. - Natural or cultured pearls and precious or semi-precious stones II. III. - Precious metals and metals clad with precious metal - Jewellery, goldsmiths and silversmiths wares and other articles Chapter 72 - Iron and steel I. - Primary materials; products in granular or powder form II. III. IV. - Iron and non-alloy steel - Stainless steel - Other alloy steel; hollow drill bars and rods, of alloy or non-alloy steel Chapter 73 - Articles of iron or steel Chapter 74 - Copper and articles thereof Chapter 75 - Nickel and articles thereof Chapter 76 Aluminum and articles thereof

63 Appendix - 6 Chapter 77 - (Reserved for possible future use in the Harmonized System) Chapter 78 - Lead and articles thereof Chapter 79 - Zinc and articles thereof Chapter 80 - Tin and articles thereof Chapter 81 - Other base metals; cermets; articles thereof Chapter 82 - Tools, implements, cutlery, spoons and forks, of base metal; parts thereof of base metal Chapter 83 - Miscellaneous articles of base metal Chapter 84 Nuclear reactors, boilers, machinery and mechanical appliances; parts thereof Chapter 85 - Electrical machinery and equipment and parts thereof; sound recorders and reproducers, television image and sound recorders and reproducers, and parts and accessories of such articles Chapter 86 - Railway or tramway locomotives, rolling-stock and parts thereof; railway or tramway track fixtures and fittings and parts thereof; mechanical (including electro-mechanical) traffic signalling equipment of all kinds Chapter 87 - Vehicles other than railway or tramway rolling-stock, and parts and accessories thereof Chapter 88 - Aircraft, spacecraft, and parts thereof Chapter 89 - Ships, boats and floating structures Chapter 90 - Optical, photographic, cinematographic, measuring, checking, precision, medical or surgical instruments and apparatus; parts and accessories thereof Chapter 91 - Clocks and watches and parts thereof Chapter 92 - Musical instruments; parts and accessories of such articles Chapter 93 - Arms and ammunition; parts and accessories thereof Chapter 94 - Furniture; bedding, mattresses, mattress supports, cushions and similar stuffed furnishings; lamps and lighting fittings, not elsewhere specified or included; illuminated signs, illuminated name-plates and the like; prefabricated buildings Chapter 95 - Toys, games and sports requisites; parts and accessories thereof Chapter 96 - Miscellaneous manufactured articles Chapter 97 - Works of art, collectors pieces and antiques