Analysis of Canada Efta Fta

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
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 ...............................................................7
1. International Trade and Agricultural Products ............................................................... 7
2. 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 ........................................ 10
(ii) Products Imported Into Canada From Iceland ........................................ 10
(iii) Export Subsidies........................................................................................ 10
(iv) Other Provisions ....................................................................................... 10
3. Elimination of Customs Duties on Fish and Other Marine Products............................ 10
E. RULES OF ORIGIN AND ADMINISTRATIVE CO-OPERATION ....................................11
1. Approaches to Determining Origin............................................................................... 12
2. Approaches to Establishing Preferential Rules of Origin ............................................. 12
3. Rules of Origin Terminology........................................................................................ 13
4. CEFTA Rules of Origin and Administrative Co-Operation ......................................... 13
5. Establishing That a Good is Originating under the CEFTA Rules............................... 13
6. Wholly Obtained Products............................................................................................ 14
7. Sufficient Production .................................................................................................... 14
(a) Product Specific Rules in Appendix I................................................................... 14
(i) Change in Tariff Classification................................................................. 15
(ii) Packaging and packing materials and containers.................................... 15
(iii) Accessories, spare parts and tools............................................................ 15
(iv) Value Content Requirement ...................................................................... 16
(v) Process Requirements............................................................................... 20
(vi) Tolerance .................................................................................................. 20
(i)
(b) Where No Change in Tariff Classification ........................................................... 21
(c) Non-Originating Materials that do not have to be taken into account.................. 23
(i) Non-Originating Materials Incorporated into Originating Products (the
“Roll-up” Rule) ........................................................................................ 23
(ii) Neutral Elements....................................................................................... 24
(d) Insufficient Production.......................................................................................... 24
8. Other Provisions............................................................................................................ 24
(a) Accounting Segregation of Fungible Materials .................................................... 24
(b) Sets 24
(c) Transport through a Non-Party ............................................................................. 25
(d) Exhibitions 25
9. Administration .............................................................................................................. 25
(a) Origin Declarations............................................................................................... 26
(b) Importation Requirements .................................................................................... 26
(c) Preservation of Records ........................................................................................ 26
(d) Administrative Co-operation and Origin Verifications ........................................ 27
(e) Other Provisions.................................................................................................... 27
(i) Approved Exporter Program .................................................................... 27
(ii) Importation by Instalment......................................................................... 27
(iii) Confidentiality........................................................................................... 27
(iv) Penalties.................................................................................................... 27
10. Sub-Committee on Rules of Origin and Trade in Goods...................................... 28
11. Observations on the CEFTA Rules of Origin ....................................................... 28
F. NATIONAL TREATMENT AND IMPORT AND EXPORT RESTRICTIONS ..................30
(i) Controls on Log Exports........................................................................... 30
(ii) Controls on the Export of Unprocessed Fish............................................ 30
(iii) Importation of Goods under certain Canadian Tariff Items..................... 30
(iv) Prohibition on the use of foreign or non-duty paid ships ......................... 31
(v) Measures concerning the internal sale and distribution of wine and
distilled spirits........................................................................................... 31
G. HOW ICELANDIC GOODS CAN BENEFIT FROM IMPROVED ACCESS TO THE
CANADIAN MARKET ..........................................................................................................32
1. Top 25 Products by HS Subheading Codes Imported from Iceland into Canada – 2007
............................................................................................................................... 33
2. Five Case Studies.......................................................................................................... 36
(a) Lambmeat (Classified under HS Heading 02.04) ................................................. 37
(b) Skyr (Classified Under HS Subheading0406.10) ................................................. 37
(c) Bottled Water (Classified Under HS Subheading 2201.90) ................................. 37
(d) Vodka (Classified under HS Subheading 2208.60) .............................................. 38
(e) Outerwear (Classified Under HS Heading 62.01) ................................................ 38
H. SANITARY AND PHYTOSANITARY MEASURES AND TECHNICAL REGULATIONS39
1. CEFTA and the WTO TBT Agreement........................................................................ 40
2. CEFTA and the WTO Agreement on the Application of Sanitary and Phytosanitary
Measures ............................................................................................................... 41
3. Observations ................................................................................................................. 41
(ii)
I. SUBSIDIES AND ANTIDUMPING ......................................................................................42
J. TRADE FACILITATION .......................................................................................................43
K. EXCEPTIONS AND SAFEGUARDS ....................................................................................43
1. Article XX of GATT 1994............................................................................................ 43
2. Cultural Exemption....................................................................................................... 44
3. National Security Exception ......................................................................................... 45
4. Emergency Action ........................................................................................................ 45
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)
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.
2
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 2008.
CEFTA should come into effect early in 2009.
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.
1
The CEFTA text can be accessed on the website for International Trade Canada website at:
http://www.international.gc.ca/trade-agreements-accords-commerciaux/agr-acc/efta-agr-acc.aspx?lang=en. 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.
3
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.
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
4
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
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.
5
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 03.05 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
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.
6
fish, fit for human consumption. The first four digits of the tariff code of any product
classified under this heading are “0305.”
Subheading 0305.20 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 “0305.20.”
Livers and roes, dried, smoked, salted or in brine are classified under subheading 0305.20 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 0305.20 in the Canadian Customs tariff are:
Tariff item 0305.20.10 – livers

Tariff item 0305.20.20 - roes
The tariff items under Subheading 0305.20 in the Customs Tariff of Iceland 6 are:
Tariff item 0305.20.01 – Lumpfish roes, salted

Tariff item 0305.20.02 – Cod roes, salted
Tariff item 0305.20.03 – Other roes, sugar salted
Tariff item 0305.20.04 – Cod roes, roughly salted
Tariff item 0305.20.05 – Capelin roes, roughly salted
Tariff item 0305.20.06 – Other roes, roughly salted
Tariff item 0305.20.09 - 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
I have used the Customs Tariff of Iceland 2006 published in The International Customs Journal, Journal No 111
(10th Edition) September 2006.
7
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,
7
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
peptones and their derivatives classified under HS heading 35.04 and dextrins and other modified starches under HS
subheading 3505.10.
8
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.
8
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 0401.20 (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. 10
(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.
9
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.
(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 1704.10.00 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 0403.10. 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 3.
12
WTO Agreement on Agriculture Article 9.
13
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.
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 0406.10. 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 0406.10 into two 8-digit tariff items. The first tariff item is
0406.10.10, 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 0406.10.10.10, which
is cream cheese (excluding whey and buttermilk cheese) and 0406.10.10.90, which is “Other”. Skyr would fall
under 0406.10.10.90. The second 8-digit tariff item is 0406.10.20, 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.
11
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:
0302.70.00 -Livers and roes - 3%

0303.80.00 -Livers and roes (frozen) - 3%
0305.20.00 -Livers and roes of fish, dried, smoked, salted or in brine - 3%
0306.11.00 -Rock lobster and other sea crawfish (frozen) - 5%
0306.14.90 -Crabs – Other (than king or snow crabs for processing) (frozen) -5%
0306.19.00 -Other (crustaceans), including flours, meals and pellets of crustaceans, fit for
human consumption (frozen) – 5%
0306.21.00 00 -Rock lobster and other sea crawfish (not frozen) – 5%
0306.24.00 00 -Crabs (not frozen) – 5%
0306.29.00 00 -Other, including flours, meals and pellets of crustaceans, fit for human
consumption (not frozen) – 5%
0307.10.10 00 -Oysters in shell – 3%
0307.29.20 00 - 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 0303.80 (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
0306.19 (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 0305.69 (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.
15
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.
12
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
13
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 "non-
originating" 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.
17
Paragraph 1 of Article 2 of Annex C.
14
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. 19
7. Sufficient Production
(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.
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
0306.19 (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 0306.29.
HS subheading 0306.29 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
0306.29 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 0306.19 ranked #4 in terms of value, subject to Canadian duty of 5%.
22
Article 8 of Annex C
16
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. 23
(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.
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.
18
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 11 27 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. 29
27
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
19
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 8438.90 is Parts
for such machinery. 31 The product specific rule of origin for products classified under
HS Subheading 8438.90 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.”
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
IMPROVED ACCESS TO THE CANADIAN MARKET, products classified under HS 8438.90 ranked #6 in
terms of value of products imported into Canada from Iceland in 2007.
20
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 8438.90)
cannot exceed 50% of the transaction value or ex-works price of the product.
(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 0305.10 –
0305.59, which includes HS subheading 0305.20 32 (Livers and roes dried, smoked, salted
or in brine), reads as follows:
“A change from any other subheading, provided that products of

subheading 0305.20 through 0305.30 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
IMPROVED ACCESS TO THE CANADIAN MARKET, products classified under HS 0305.20 ranked #15 in
terms of value of products imported into Canada from Iceland in 2007.
21
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. 56.07
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 52.04 through 52.07,
54.01 through 54.06 or 55.08 through 55.11.
Headings 52.04 through 52.07 describe various types of cotton thread and yarn.
Headings 54.01 through 54.06 describe various threads and yarns of man-made filaments.
Headings 55.08 through 55.11 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%. 35
(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, 2005.
35
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
22
example, H.S. subheading 8715.00 is Baby carriages and parts thereof. The NAFTA product
specific rule is:
A change to heading 87.15 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. 87.15], whether or not

there is also a change from any other heading, provided that the
value of the non-originating materials of heading 87.15 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 7108.12 describes “non-
monetary 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 7108.12 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
together with the finished good under H.S. General Rule of Interpretation 2(a). The CEFTA rule does not cover this
situation.
23
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. 37
(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).
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 non-
originating 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.
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:
http://www2.parl.gc.ca/HousePublications/Publication.aspx?Docid=3465508&file=4.
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.”
27
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.
(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
28
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
29
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.
30
• 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.
(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 1994. 46
(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 1994. 47
(iii) Importation of Goods under certain Canadian Tariff Items
Tariff items 9897.00.00, 9898.00.00 and 9899.00.00 set out a number of import
restrictions. Tariff item 9897.00.00 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 1994
44
Article III of GATT 1994. See CEFTA Article 4.
45
Article XI of GATT 1994. See CEFTA Article 5.
46
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.
31
(e.g. goods produced by prison labour) 48 while others (e.g. used cars) cannot be
justified. 49
Tariff item 9898.00.00 covers firearms and various weapons and tariff item 9899.00.00
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 1994.
49
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.
32
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 12.28 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
2003 2004 2005 2006 2007

Imports from CDN$34,169 CDN$30,999 CDN$55,650 CDN$30,977 CDN$29,224
Iceland
Imports from CDN$336,141,294 CDN$355,886,202 CDN$380,859,183 CDN$396,645,341 CDN$406,620,035
All Countries
52
The figures in this table were derived from http://www.ic.gc.ca/epic/site/tdo-dcd.nsf/en/Home
33
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: 53
Value of Imports into CEFTA Duty

HS Subheading and ranking in Canada Canadian MFN (Qualifying
terms of value #1) through #25 CDN$ Duty 2007 Products)
#1) 0305.69 – Other Fish NS – CDN$5,460,507 FREE FREE

Salted or in Brine – not dried
or smoked
#2) 2835.31 – Sodium CDN$2,804,324 FREE for use in manufacture of FREE

Triphosphate (Sodium food products; otherwise 5.5%
Tripolyphosphate)
53
The import values in this table were derived from http://www.ic.gc.ca/epic/site/tdo-dcd.nsf/en/Home
34

#3) 0303.80 – Livers and Roes – CDN$2,757,219 3% FREE

Frozen
#4) 0306.19 – Crustaceans – CDN$2,278,290 5% FREE

Frozen
#5) 0306.12 – Lobsters, CDN$1,921,757 FREE FREE

(Homarus SPP) – Frozen
#6) 8438.90 – Parts of CDN$1,469,485 FREE for some uses; 2.5% for FREE
Machinery for the Industrial other uses
Preparation of Food and
Beverages
#7) 8438.80 – Other Machinery CDN$1,374,493 FREE FREE

for the Industrial Preparation
of Food and Beverages (incl.
fish preparation)
#8) 0511.91 – Products of Fish, CDN$1,305,510 FREE FREE

Crustaceans, Molluscs and
other Aquatic invertebrates
#9) 9021.39 – Other Artificial CDN$1,201,522 FREE FREE

parts of the body
#10) 1504.20 – Fish Fats and Oils CDN$670,419 FREE if rough for use in FREE
(excluding from liver) and manufacture of soaps & oils;
their fractions – not otherwise 4.5%
chemically modified
#11) 7102.39 – Diamonds – non- CDN$393,842 FREE FREE

industrial - worked - not
mounted or set
#12) 0305.61 – Herring, salted or CDN$382,733 FREE FREE

in brine – not dried or
smoked
#13) 8418.69 – Other refrigerating CDN$369,703 6% for batch freezers, certain FREE
or freezing equipment – heat ice making equipment, ice rink
pumps and absorption liquid systems, instant quick freeze
chilling units systems for food products, self-
contained plate freezers for
seafood below certain capacity,
tunnel or spiral freezers,
otherwise FREE
#14) 3824.90 – Chemical products CDN$309,614 FREE or 3% or 3.5% or 6% FREE

and preparations of the depending on product
chemical or allied industries
35

#15) 0305.20 – Livers and roes CDN$301,231 3% FREE

dried, smoked, salted or in
brine
#16) 9015.80 – Surveying, CDN$282,949 FREE or 3.5% or 6.5% FREE

hydrographic, depending on the instrument
oceanographic,
meteorological or
geophysical instruments
#17) 1604.12 – Herrings – CDN$265,762 FREE if pickled; otherwise 5% FREE

prepared or preserved, whole
or in pieces but not minced
#18) 8517.62 – Machines for CDN$247,659 FREE FREE

reception, conversion and
transmission or regeneration
of voice, images or data,
incl. switching and routing
app
#19) 8479.89 – Machines and CDN$247,571 FREE or 4.5% or 6% or 7.5% FREE

mechanical appliances, depending on the product
having individual functions
#20) 9030.82 – Instruments and CDN$246,246 FREE FREE

apparatus for measuring or
checking semiconductor
wafers or devices
#21) 9027.80 – Instruments and CDN$242,532 FREE FREE

apparatus for physical or
chemical analysis
#22) 0304.19 – Fish fillets and CDN$208,345 FREE FREE

other fish meat, w/n minced,
fresh or chilled
#23) 0304.29 – Fish fillets, frozen CDN$197,178 FREE FREE
#24) 8423.20 – Scales for CDN$189,995 6.5% FREE

continuous weighing of
goods on conveyors
#25) 7202.21 – Ferro-Silicon – CDN$189,456 FREE FREE

more than 55% of silicon
TOTAL CDN$25,318,342
The products listed in the table comprise about 86% of all products imported from Iceland into
Canada in 2007. As indicated in the table, many of these products already enter Canada duty
36
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 0306.19, 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:
Value of Imports Value of Imports all CEFTA Duty

Product from Iceland Countries Canadian MFN (qualifying
(HS Code) (CDN$) (CDN$) Duty 2007 products)
HS 02.04 – Meat of nil CDN$119,296,188 FREE for lamb FREE
Lamb, Sheep and meat, 2% to 2.5%
Goats – Fresh, for mutton
Chilled or Frozen
HS 0406.10 – Fresh nil CDN$3,244,000 Within access Within access
Cheese (including commitment commitment FREE
whey cheese) and 3.23cents/kg; over for skyr; over
curd (includes skyr) access access
commitment commitment
245.5% but not 245.5% but not
less less
thanCDN$4.52/kg thanCDN$4.52/kg
HS 2201.90 – CDN$280 CDN$6,369,527 6.5% FREE
Water (other than
Mineral and
Aerated Waters) –
Without Sugar,
Sweetening or
Flavoring
HS 2208.60 Vodka CDN$89,885 CDN$119,774,581 12.28 cents/litre of FREE
absolute ethyl
alcohol
HS 62.01 – CDN$115 CDN$191,114,079 17% or 18%, FREE
Men’s/Boy’s Coats, depending on the
Rainwear and fabric
Outerwear - Woven
54
The import values in this table were derived from http://www.ic.gc.ca/epic/site/tdo-dcd.nsf/en/Home
37
(a) Lambmeat (Classified under HS Heading 02.04)
There were no imports of lambmeat from Iceland to Canada in 2007. 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 Subheading0406.10)
Skyr is a popular Icelandic dairy product that is classified under HS subheading 0406.10 (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 0406.10 in 2007. 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 0406.10,
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 0406.10.
(c) Bottled Water (Classified Under HS Subheading 2201.90)
Pure bottled water is classified under HS subheading 2201.90 (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. 56
55
Note that the Canadian MFN Duty on Mineral and Aerated Waters – Without Sugar, Sweetening or Flavouring
(i.e. sparkling water) classified under HS subheading 2201.10 is FREE.
56
The United States is by far the biggest exporter of these products to Canada.
38
Icelandic producers of bottled water should no difficulty in satisfying the applicable rule of
origin 57
(d) Vodka (Classified under HS Subheading 2208.60)
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 12.28 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 62.01 (Men’s/Boy’s
Coats, Rainwear and Outerwear – Woven). As the import figures indicate, imports of products
classified under HS subheading 62.01 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.
57
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 62.01. Products of Bangladesh are eligible for Canada’s Least
Developed Country Tariff, which is FREE for all products.
39
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
60
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.
40
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, 2000. 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
61
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.”
41
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
63
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
1998.
67
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.
42
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 1994.
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
68
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 2000. 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
43
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
Assigns.I 4255-82 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.
44
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:
(a) 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;
(b) the production, distribution, sale or exhibition of film or video recordings;
(c) the production, distribution, sale or exhibition of audio or video music recordings;
(d) the publication, distribution or sale of music in print or machine readable form; or
(e) 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.
45
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. 73
3. 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 1994. 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
73
See Canada – Certain Measures Concerning Periodicals (Canada – Periodicals), Panel Report WT/DS31/R 14
March 1997, Appellate Body WT/DS31/AB/R 30 June 1997.
74
CEFTA Article 25(9).
46
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 entry76 for
nationals 77 of another Party who are intra-corporate transferees (managers, executives, and
75
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).
47
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
78
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,
1996. Liechtenstein acceded on September 18, 1997 and Iceland acceded on April 28, 2001.
79
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.
48
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)
49
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 1994. 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
80
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-95-2008-01), 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-98-2008-01) involved
market access commitments that the United States to admit Mexican trucking services. U.S. Safeguard Action
Taken On Broomcorn Brooms from Mexico (USA-97-2008-01) involved actions taken by the United States under
the NAFTA bilateral emergency action procedures.
50
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, 1992.
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.
83
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.
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 non-
implementation 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.
52
Canada’s implementing legislation received first reading in the House of Commons on May 5,
2008. 88 The legislation is not contentious and should pass sometime before the end of 2008. 89
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.
88
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: http://www2.parl.gc.ca/HousePublications/Publication.aspx?Docid=3465508&file=4.
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.
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.
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

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 rare-

earth metals, of radioactive elements or of isotopes:
I. Chemical elements
II. Inorganic acids and inorganic oxygen compounds of non-metals
III. Halogen or sulphur compounds of non-metals
IV. 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. - Alcohols and their halogenated, sulphonated, nitrated or nitrosated derivatives
III. - Phenols, phenol-alcohols and their halogenated, sulphonated, nitrated or

nitrosated derivatives
IV. - 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. - Ketone-function compounds and quinone-function compounds
VII. - Carboxylic acids and their anhydrides, halides, peroxides and peroxyacids and
their halogenated, sulphonated, nitrated or nitrosated derivatives
Appendix - 3
VIII. - Esters of inorganic acids of non-metals and their salts, and their halogenated,
sulphonated, nitrated or nitrosated derivatives
IX. - Nitrogen-function compounds
X. - Organo-inorganic compounds, heterocyclic compounds, nucleic acids and their

salts, and sulphonamides
XI. - Provitamins, vitamins and hormones
XII. - Glycosides and vegetable alkaloids, natural or reproduced by synthesis, and

their salts, ethers, esters and other derivatives
XIII. - 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)
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
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. - Precious metals and metals clad with precious metal
III. - Jewellery, goldsmiths’ and silversmiths’ wares and other articles
Chapter 72 - Iron and steel
I. - Primary materials; products in granular or powder form
II. - Iron and non-alloy steel
III. - Stainless steel
IV. - 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

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

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ANALYSIS OF

THE FREE TRADE AGREEMENT BETWEEN CANADA AND THE

JÓN RAGNAR JOHNSON

ESTABLISHMENT OF BILATERAL RELATIONSHIP ........................................................3

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

OTHER PROVISIONS ...............................................................................................................51

CONCLUDING REMARKS ......................................................................................................53

JÓN RAGNAR JOHNSON

ESTABLISHMENT OF BILATERAL RELATIONSHIP

B. HARMONIZED COMMODITY DESCRIPTION AND CODING SYSTEM

First two digits - chapter number.

First four digits – heading number

First six digits – subheading number.

Tariff item 0305.20.10 – livers

Tariff item 0305.20.01 – Lumpfish roes, salted

C. ELIMINATION OF CUSTOMS DUTIES ON PRODUCTS WITHIN CHAPTERS

D. ELIMINATION OF CUSTOMS DUTIES ON PRODUCTS WITHIN CHAPTERS

1. International Trade and Agricultural Products

2. Tariff Elimination on Primary and Processed Food Products (Except Marine

(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,

(ii) Products Imported by Canada from EFTA States

Table 2 to Annex G lists specific products, by reference to Harmonized System headings,

(iii) Export Subsidies

(b) Agreement on Agriculture between Canada and the Republic of Iceland

(i) Products Imported Into Iceland From Canada

(ii) Products Imported Into Canada From Iceland

(iii) Export Subsidies

(iv) Other Provisions

The Canada-Iceland Agriculture Agreement incorporates a number of provisions from

3. Elimination of Customs Duties on Fish and Other Marine Products

0302.70.00 -Livers and roes - 3%

E. RULES OF ORIGIN AND ADMINISTRATIVE CO-OPERATION

1. Approaches to Determining Origin

2. Approaches to Establishing Preferential Rules of Origin

3. Rules of Origin Terminology

4. CEFTA Rules of Origin and Administrative Co-Operation

5. Establishing That a Good is Originating under the CEFTA Rules

A. A product is originating if it is wholly obtained in the territories of the Parties as

B. A product is originating if it is produced exclusively from originating materials.

C. A product is originating if it has undergone sufficient production according to the rules

6. Wholly Obtained Products

(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

(i) Change in Tariff Classification

A change from any other subheading, except from HS subheading 0306.29.

HS subheading 0306.29 is “crustaceans other than lobsters or shrimps and prawns or

(ii) Packaging and packing materials and containers

(iii) Accessories, spare parts and tools

(iv) Value Content Requirement

provided that the value of the non-originating materials of

This can be expressed as a formula as follows:

_________________________ must not exceed X%.

The first definition is of “customs value”, which reads as follows:

“customs value” means the value as determined in accordance

The second definition is “transaction value”, which reads as follows:

“transaction value” means the price actually paid or payable for a