LAW OFFICES
STEWART AND STEWART

Memorandum

SUMMARY

         This memorandum presents our initial views concerning various international trade remedy actions that members of the U.S. industry could take in response to film and television subsidies provided by the Canadian federal and provincial governments.  It is based on information and data that we have been able to obtain to date and, while it should be considered a preliminary analysis only, we believe there is strong support for one or more of the actions described below.

         We believe that the subsidies provided by the Canadian federal and provincial governments for the purpose of encouraging the production of film and television projects within Canada are actionable both under the Agreement on Subsidies and Countervailing Measures (one of the sub-agreements that establishes the rights and obligations of WTO members) and under the domestic U.S. countervailing duty law. In the former case, an action would be brought under the Dispute Settlement Mechanism (DSM) of the WTO to declare the Canadian subsidies inconsistent with the WTO so that Canada would eliminate the subsidies or provide compensation to the U.S.  The DSM is the body within the WTO that settles disputes between member nations based on allegations of violations of international trade commitments. In the latter case, the U.S. workers and/or management of the U.S. film and television production industry would file a petition for relief in the form of countervailing tariffs that would offset Canadian subsidies on films and television productions entering the United States on any medium (films, disks, tapes, etc.)

         We further believe that members and workers of the U.S. film and television production industry are entitled to pursue relief simultaneously under both the Dispute Settlement Mechanism of the WTO and under the U.S. countervailing duty law. Thus, the U.S. industry may choose to pursue either or both of the remedies.

DISCUSSION OF THE SUBSIDIES

         The Canadian federal government and its provincial governments are granting subsides for the specific purpose of encouraging the production of film and television projects within Canada.  We have conducted a preliminary review of some of these subsidy programs and have concluded that the subsidies are, on their face, inconsistent with Canada’s obligations under the World Trade Organization (WTO), the international body that serves as the central authority on certain matters of international trade including subsidies.

         During the 1999/2000 production year the Government of Canada received applications from more than 1500 television or film productions requesting tax credits under two federal government programs, the Canadian Film or Video Production Tax Credit Program (CPTC) and the Film or Video Production Services Tax Credit Program (PSTC). The Canadian government reported that for 1999/2000 productions totaling an aggregate value of C$1,844,236,443 filed applications for tax credit reimbursement under the CPTC program alone.  The CPTC is a refundable tax credit, which is available at a rate of 25% of eligible salaries and wages incurred during production. Eligible salaries and wages qualifying for the credit may not exceed 48 % of the total cost of the production, net of assistance, as certified by the Minister of Canadian Heritage.  Therefore, the tax credit could potentially provide assistance of up to 12% of the total cost of production, net of assistance. Using this calculation and applying only to the CPTC program alone, it is possible that the Canadian federal government provided tax credits totaling more than C$220 million in 1999/2000 under this single program.

         We emphasize that the CPTC and its sister federal program the PSTC are not the only subsidy programs which are available to productions wishing to locate in Canada. Indeed, the provincial governments of Canada grant additional tax credits totaling millions of dollars more.

REMEDIES

         Where subsidies provided by foreign governments meet certain criteria and have sufficient adverse effects, U.S. workers and industries injured by the subsidies have remedies available both under U.S. domestic law and under the General Agreements on Tariff and Trade.¹ Our preliminary review of the subsidies provided by the Canadian federal provincial governments indicates that these programs meet the criteria that define a subsidy and that the adverse impact on the U.S. film and television industry and its workers is sufficient to make these subsidies actionable.

         First, a subsidy must involve a transfer of funds or government revenue that otherwise is due is foregone or not collected (e.g. fiscal incentives such as tax credits). Clearly, the tax credits that the Canadian government has been providing to film and television productions meet the criterion of a transfer of funds and the criterion of revenue that is foregone by the Canadian governments. 

         Second, a subsidy must confer a benefit. Here the benefit is a financial one to film and television production companies.

         Third, a subsidy must be specific. Because these tax credit programs are available only to the film and television industry (rather than being available to every industry in Canada) the criterion of specificity is met. 

         Fourth, the subsidy must cause harm to a domestic industry in the United States. Our initial research indicates that the U.S. film and television production industry has experienced substantial declines in employment, revenues earned, number of film and television productions, utilization of capacity, and other indicia of harm. Moreover, it appears that there has been a substantial increase in the number of films and television programs, wholly or partially produced in Canada, that are being imported into the United States market for distribution through the normal film and television channels (e.g., theatres, broadcast and cable television, premium pay television, and video rentals).  Because the decline in U.S. production is to a large extent offset by the increase in imports of these films and television productions from Canada, and because other evidence strongly suggests that production companies are making a conscious decision to produce in Canada in order to enjoy the benefits of the subsidies, there appears to be credible evidence that the harm is caused by the subsidies.

         Finally, films and television productions are goods subject to GATT 1994 Agreements on Trade in Goods and within the meaning of U.S. trade law. This issue of whether the films and television productions are goods appears to have been resolved under U.S. law in prior trade remedy actions.² The issue has not, to the best of our knowledge, been addressed by a WTO dispute settlement panel but the very fact that these films and television productions have several specific Harmonized Tariff System numbers under which the film, video tape, and video disks enter the U.S. as imported products strongly suggests that they are goods subject to all the normal rules of importation spelled out in the Agreements on Trade in Goods.

         Based on the foregoing analysis, the domestic film and television production industry and its workers have several remedies available. Each is briefly described below.  

         Section 301(a)

         The U.S. industry and workers may request a Section 301(a)³ investigation by filing a petition with the Office of the United States Trade Representative (USTR). Section 301 is a mechanism used by the USTR to identify what it deems to be unfair trade practices faced by U.S. producers and to request reform -- backed by the threat of sanctions. 

         Under Section 301(A), the United States Trade Representative would determine if the rights of the United States under any trade agreement are being denied or an act policy or practice of a foreign country --

With regard to Canadian film and television tax credits, we would allege a specific violation of the United States’ rights under the WTO’s Agreement on Subsidies and Countervailing Duty Measures.

         If USTR accepts a petition as making the necessary showing, then it proceeds immediately to a dispute settlement proceeding under the WTO Dispute Settlement Mechanism (DSM) aimed at eliminating the WTO inconsistent subsidy.  This process would begin with mandatory consultations regarding the cessation of the subsidy practice but would move to a rapid and binding decision by an arbitral body (called a WTO panel) if the consultations were not successful within 2 to 3 months.  The WTO panel would be established, would accept briefs and presentations by the governments of the U.S. and Canada, and would complete their deliberations and issue a decision quite quickly.  Subsidy cases, such as the instant matter, are subject to an accelerated schedule so panels typically issue their decision within 4 to 7 months (rather than the normal 9 to 11 months).

         Although Canada could appeal a panel decision ruling the subsidies to be inconsistent with its obligations under the WTO, Canada generally has responded to WTO panel and appellate body decisions without undue delay. In the event that Canada does not implement a favorable finding in a timely fashion, the USTR has several options to enforce such a determination.

         Section 301(b)

         The U.S. industry and workers also may request a Section 301(b)⁴ investigation by filing a similar petition with the Office of the USTR.  Section 301(b) also is used by the USTR to identify and eliminate unfair trade practices faced by U.S. producers but it begins with an investigation to determine if “an act, policy, or practice of a foreign country is unreasonable or discriminatory and burdens or restricts United States commerce.”⁵ In addition, USTR must determine whether action to correct the foreign practice is appropriate and feasible.⁶

         Under Section 301(b), the USTR has greater discretion as to how to pursue remedial actions and whether to impose sanctions, even though the remedies are the same. For this reason, if FTAC chooses to pursue a trade remedy action under Section 301, we recommend that FTAC focus on Section 301(a) rather than (b). 

         Countervailing Duty Action

         Members and workers of the domestic film and television production industry also may file a petition with the U.S. Department of Commerce and the U.S. International Trade Commission under U.S. domestic law, requesting the initiation of an investigation that could lead to the imposition of offsetting tariffs on imports of Canadian film and television productions.

         Because FTAC already has experience with this type of action, we omit the details of this process.  However, our initial analysis indicates that the difficulties FTAC encountered in defining the industry for “standing” purposes in its first countervailing duty action can be overcome.  These issues are not trivial, but the law clearly contemplates that management and/or workers in such an industry should have recourse to U.S. countervailing duty remedies. 

         Furthermore, we believe that the Department could find subsidies to be substantial, as the value of the subsidies appears to run into the tens and perhaps hundreds of millions of dollars.

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¹   The latest version of the General Agreements on Tariff and Trade signed in Marrakesh in 1994 is also referred to as GATT 1994 or the WTO Agreement. In fact, the WTO Agreement is actually a series of agreements that collectively describe the rights and obligations of the WTO member countries.  One of the GATT 1994 Agreements on Trade in Goods is the Agreement on Subsidies and Countervailing Measures.
²   See, Department of Commerce, Preliminary Affirmative Countervailing Duty Determination Certain Computer Aided Software Engineering Products from Singapore, 55 Fed. Reg. 1596 (Jan. 17, 1990).
³   See, 19 USC § 2411(a).
⁴   See, 19 USC § 2411(b).
⁵   See, 19 USC § 2411(b)(1)
⁶   Id.