(A) the ratio of the net sales value 1/
of which to the net sales value of all
vehicles of that class sold for consumption
in Canada by the manufacturer in that period
is equal to or higher than the ratio of the
net sales value of all vehicles of that
class produced in Canada by the manufacturer
in the base year to the net sales value of
all vehicles of that class sold for consump-
tion in Canada by the manufacturer in the
base year, and is not in any case lower than
seventy-five to one hundred, and

(B) the Canadian value added 1/ of which
is equal to or greater than the Canadian
value added of all vehicles of that class
produced in Canada by the manufacturer in
the base year."

Under the Agreement (Annex A, 3), the Canadian Government may designate a manufacturer not within the foregoing definition as being entitled to the benefits of the duty-free treatment provided for.

So far as the Tariff Commission is aware, the Canadian Government has thus far made no such designations.

1/ Under the provisions of the Agreement, the meanings to be ascribed to the terms "net sales value" and "Canadian value added" are left wholly within the discretion of the Governor-in-Council of Canada acting under the broad authority granted to him by section 273 of the Customs Act. The definitions of such terms were promulgated by Order-in-Council P.C. 1965-100 effective January 18, 1965, and are very long and complex (see Appendix E). However, simply stated, "net sales value" is approximately equivalent to the manufacturer's selling price; and "Canadian value added" is intended to measure the value of Canadian materials, services, labor, and capital . in any article, and is approximately equivalent to the manufacturer's selling price less the cost of imported materials and parts contained therein.

Imports into the United States.--Section 201 of the bill would authorize the President to proclaim the modifications of the TSUS provided for in title IV of the bill and such other modifications as he may subsequently determine to be required to carry out the Canadian automotive agreement.

The Tariff Commission furnished technical assistance to the negotiators in drafting the provisions of Annex B of the agreement which sets forth a description of the products of Canada to be accorded preferential duty-free treatment by the United States, and in drafting the provisions of title IV of the bill setting forth the requisite modifications of the TSUS to carry out the agreement. The tariff structures of Canada and the United States are different, and the objective of the negotiators was to provide in the respective Annexes A and B parallel product coverage except with respect to variations in certain of the conditions which were to be prerequisite to duty-free Thus, the products described in Annex B are approximately 1/

treatment.

the same as the products described in Annex A. The vehicles covered by Annex B are included in items 692.05 and 692.10 of the TSUS and the fabricated components intended for use as original motor-vehicle equipment are provided for in numerous tariff items of the TSUS.

1/ On further examination of the Canadian description in Annex A, the Commission is of the view that the U.S. obligations in Annex B are somewhat broader in that, unlike the obligations of the Canadian Government, they would include certain amphibious vehicles, half- and full-tracked vehicles, and other nonwheeled vehicles such as skimobiles.

A motor vehicle--if a "Canadian article" as defined In Annex B of the agreement--would be entitled to free admission into the United States regardless of who imported it and whether it was new or used, whereas, as previously noted, motor vehicles the product of the United States can be imported into Canada free of duty under Annex A only by a "manufacturer" of the particular class of vehicles involved.

Enforcement of the agreement.

The free entry arrangements for both Canada and the United States involve the "actual use" concept of tariff classification which imposes considerable procedural burdens on customs officers, manufacturers, and other interested persons. Under this concept, customs officers in Canada are required to follow the vehicles and "original" components into consumption in Canada, and customs officers in the United States will be required to follow the "original" components into consumption in the United States. In addition, the duty-free arrangements in Canada require Canadian manufacturers to maintain elaborate records and to

furnish reports to the Canadian Government with respect to their production and sales.

The United States has never previously undertaken the administration of a tariff program of this magnitude involving the "actual use" General headnote 10(e) of the TSUS provides in part as

concept.

follows:

(e) in the absence of special language or context which otherwise requires-

(ii) a tariff classification controlled by the
actual use to which an imported article is put in
the United States is satisfied only if such use is
intended at the time of importation, the article
is so used, and proof thereof is furnished within
3 years after the date the article is entered.

In an effort to avoid the large volume of paperwork which is involved in proving actual use, one of the proposed provisions in title IV of the bill sets forth a variation of this concept which would not require motor-vehicle manufacturers to furnish proof of actual use in the case of each article imported. As a substitute for proof, an enforcement provision is included which would provide for forfeiture of the articles if the articles were diverted from their intended use as original motor-vehicle equipment.. This forfeiture provision is included in section 404 of the bill as proposed headnote 2(d) to subpart B of part 6 of the TSUS.

The Commission is concerned about the inclusion of the words "letter of intent" in the proposed headnote 2(a) (Section 404 of the bill). As the Commission understands it, a letter of intent does not have the status of a contract and imposes no legal obligations on the manufacturers. Thus, it apparently would permit U.S. parts producers

to inventory an article, speculating that such article will subsequently be purchased by the motor-vehicle manufacturer for use as original equipment. It is the Tariff Commission's view that, if this is the correct interpretation of the term "letter of intent", the inclusion of this term in the proposed headnote is not compatible with the doctrine of actual use as embodied in Annex B of the agreement and in domestic tariff law.

In any event, the objectives underlying the adoption of the "actual use" tariff classification concept (or the variation thereof provided for in the bill) cannot be achieved unless the motor-vehicle

and parts producers, foreign shippers, importers, subcontractors,

and all other persons involved in the particular transactions fully understand their obligations thereunder and work in good faith to achieve the desired ends.

Other provisions of the agreement

Unlike other bilateral agreements and the GATT to which the United States has been or is a party, the agreement with Canada contains no specific provisions in the form of a national security clause, or clause providing for the imposition of special dumping or countervailing duties or for the imposition of a duty equivalent to the internal tax imposed on a like domestic article.

1/

The automotive agreement with Canada apparently seeks by way of reference to Part II of the GATT to incorporate in effect such provi

sions.

Article III of the Canadian agreement provides that the-

commitments made by the two Governments in this
Agreement shall not preclude action by either
Government consistent with its obligations under
Part II of the General Agreement on Tariffs and
Trade.

Since Part II of the GATT contains a national security provision
(Article XXI), a provision relating to national treatment with regard
to taxes (Article III), and countervailing and dumping duty provisions
(Article VI), it would appear that as much leeway, if not more, is
permitted the United States with regard to such matters as is permitted

1/ Likewise, the Canadian automotive agreement contains no specific escape clause, such as Article XIX of the GATT. For a discussion of this question, see pages 50-52.