REDACTED PUBLIC VERSION IN THE MATTER OF AN ARBITRATION UNDER CHAPTER ELEVEN OF THE NORTH AMERICAN FREE TRADE AGREEMENT AND THE UNCITRAL ARBITRATION RULES BETWEEN: UNITED PARCEL SERVICE OF AMERICA, INC. Investor AND THE GOVERNMENT OF CANADA Party INVESTOR'S REPLY (MERITS PHASE) ) REDACTED UPS Reply PUBLIC VERSION (Merits Phase) TABLE OF CONTENTS PART ONE: OVERVIEW ............................................... Page -1- PART TWO: STATEMENT OF FACTS .................................. Page-11- I. THE CLAIMANT OWNS UPS CANADA ........................... Page -14- II. CANADA POST'S COMPETITION WITH UPS CANADA ............ Page -18- A. Canada Post's Own Documents Demonstrate Its Focus on Courier Services ......................................................... Page -18- B. Canada Post's Courier Services Are the Same As UPS Canada's ...... Page -22- C. Canada Has Admitted Purolator Is in Like Circumstances ........... Page -25- D. Economic Analysis of Competition Between Canada Post and UPS Canada ......................................................... Page -28- E. Competition for Import Services ............................... Page -31- 1. Canada Post's Partnership with the US Postal Service ........ Page -31- 2. Canada Post Divisions Dedicated to Postal Imports .......... Page -33- 3. Canada Post Marketing Initiatives and Partnerships with US Shippers ................................................... Page -35- 4. Canada Post Competes with UPS Canada for Delivery of US Imports ................................................... Page -37- III. THE USO DOES NOT JUSTIFY UNFAIR TREATMENT OF COMPETITORS ............................................................... Page -39- A. Canada Has Delegated Governmental Authority to Canada Post ...... Page -40- B. Canada's Reliance on the Universal Postal Union Is Misplaced ....... Page -43- C. The Universal Postal Union Does Not Define the USO ............. Page -46- REDACTED UPS Reply ) PUBLIC VERSION (Merits Phase) ) D. Canadian Law Does Not Implement the Universal Postal Convention or Otherwise Define the USO ................................... Page -51- E. The Content of Canada Post's USO, If Any, Is Meaningless Compared to Other Industrialized Countries ...................................... Page -52- F. Canada Post's USO, If Any, Is Not Burdensome .................. Page -54- G. The Burden of the USO, If Any, Does Not Justify Preferential Treatment of Courier Services ............................................ Page -54- IV. THE COMPETITIVE ADV ANT AGES OF CANADA POST'S NETWORK ............................................................... Page -58- A. Canada Post's Infrastructure Derives from Its Monopoly ............ Page -58- B. Canada Post's Competitive Services Benefit from the Monopoly Infrastructure ......................................................... Page -59- C. The Operation of Canada Post's Monopoly Infrastructure ........... Page -60- D. Purolator's Discriminatory Access to the Monopoly Infrastructure ......................................................... Page -62- E. Canada Post's Discriminatory Offer of Access to Interlining ......... Page -69- V. CANADA POST'S DISCRIMINATORY LEVERAGING OF THE NETWORK ............................................................... Page -71- A. The Issue Is Equal Treatment Not Cross-Subsidization ............. Page -73- B. Equal Treatment Reflects Widely-Accepted Economic Theory ....... Page -75- 1. The Economic Rationale for Equal Treatment .............. Page -75- 2. The Assumptions of Canada's Economists Contradict Its Stated Policy Objectives .......................................... Page -77- 3. Canada's Economists Mistakenly Assume Canada Post Maximizes Profit ................................................... Page -80- REDACTED UPS Reply PUBLIC VERSION (Merits Phase) 4. Canada's Economists Mistakenly Assume a Pure Price-Cap Regime ................................................... Page -82- 5. Canada's Economists Mistakenly Assume Canada Post's Network Is Efficient ............................................ Page -83- 6. Canada's Economists Have Repeatedly Mischaracterized Dr. Neels' Report .............................................. Page -84- C. Equal Treatment Is Consistent with Widely-Followed Regulatory Practice ......................................................... Page -84- D. Canada Post Does Not Even Meet Its Own Cross-Subsidy Tests ...... Page -85- 1. Canada Has Not Produced Reasonably Available Information Regarding Its Annual Cost Study ................................. Page -86- 2. The Methodology Used by Canada Post Does Not Accurately Measure Incremental Cost ..................................... Page -89- E. Canada's Failure to Ensure Equal Treatment Has Caused Harm to UPS ......................................................... Page -90- VI. LACK OF SUPERVISION OF CANADA POST'S DISCRIMINATORY CONDUCT ..................................................... Page -93- A. Canada's Lack of Supervision of Canada Post's Discriminatory Conduct Is Not Consistent with International Practices .......................... Page -93- B. Canada Has Repeatedly Ignored Its Own Independent Reviews of Canada Post ......................................................... Page -98- C. Cabinet Approval of Domestic Letter Mail Price Increases Does Not Prevent Unfair Competition ........................................ Page -101- D. The Competition Bureau Does Not Regulate Discriminatory Conduct ........................................................ Page -105- E. The Audit Opinion Is "Meaningless Window Dressing" ............ Page -109- F. Corporate Governance Is Not the Issue ......................... Page -111- REDACTED UPS Reply PUBLIC VDSlON (Merits Phase) VII. PREFERENTIAL CUSTOMS TREATMENT OF POSTAL IMPORTS .............................................................. Page -113- A. Customs Measures Apply To Canada Post and UPS Canada ........ Page -116- B. UPS Canada and Canada Post Are in Like Circumstances .......... Page -119- C. Canada Provides Treatment Less Favorable ..................... Page -122- 1. Canada Customs Charges UPS Canada Fees for Services Supplied to Canada Post for Free ................................. Page -122- 2. Canada Customs Pays Canada Post for "Services" That UPS Canada Must Supply for Free ...................................... Page -126- 3. Canada Customs Fails to Levy Fines, Penalties and Interest Against Canada Post ........................................ Page -128- 4. Canada's Exemption of Canada Post From Brokerage Requirements .................................................. Page -132- D. Canada's Failure to Properly Inspect Postal Imports ............... Page -134- E. The Nelems Study Demonstrates Canada's Systematic Failure To Enforce Customs Laws In The Postal Stream ........................... Page -144- 1. Allegation of Erroneous Application of Statistical Methodology .................................................. Page -144- 2. Alleged Misunderstanding of the Proper Tariff Classification .................................................. Page -146- 3. Alleged Restricted Purpose ofNelems Study .............. Page -147- 4. Alleged Seasonality Issues ............................. Page -148- 5. Alleged Irrelevance of Time Frame ofNelems Study ........ Page -148- VIII. PUBLICATIONS ASSISTANCE PROGRAM REQUIREMENTS FAVOR CANADA POST ................................................ Page -150- REDACTED UPS Reply PUBLIC VERSION (Merits Phase) A. Canada's Discriminatory Application of the Publications Assistance Program Has Harmed UPS ............................................. Page -152- PART THREE: THE LAW ............................................ Page-154- I. OVERVIEW OF LEGAL ARGUMENT ............................ Page -154- II. TREATY INTERPRETATION AND ADVERSE INFERENCES ....... Page-158- A. The Role of Other International Treaties ........................ Page -158- B. Canada's Failure to Provide Documents Permits This Tribunal to Make Adverse Inferences ................................................ Page -160- 1. Annual Cost Study . Page -162- 2. Purolator's Access to Infrastructure ...................... Page -165- 3. Canada Post's Courier Services' Access to Infrastructure ..... Page -166- 4. Supervision ........................................ Page -167- III. CANADA'S PRELIMINARY OBJECTIONS ARE GROUNDLESS .... Page-171- A. UPS Is an Investor from the United States ....................... Page -171- B. The Investor's Claim Is Within NAFTA's Time Limits ............ Page -171- 1. The Investor's Claims Arising from Canada's Continuing Acts Are Within NAFTA's Time Limits ................................ Page-171- 2. The Investor Only Became Aware of Several Breaches Within Three Years of Its Claim ................................... Page -178- a. Canada's Breach ofNAFTA Articles l 502(3)(a) and 1503(2) through its failure to take measures to ensure Canada Post did not act inconsistently with Canada's Chapter 11 obligations ............................................ Page -178- REDACTED UPS Reply PUBUC VERSION (Merits Phase) b. Canada's Breach ofNAFTA Articles 1102 and 1105 in Regard to Customs . ..................................... Page -180- C. The Investor Is Entitled to Bring Its Claim Under Article 1116 . Page -182- D. The Investor Has Established Harm ............................ Page -185- E. The Fritz Starber Claim Is Admissible ......................... Page -186- IV. CANADA BREACHED CHAPTER 11 THROUGH CANADA POST'S ACTIONS ....... _..........