Dispute Settlement
June 24, 2002
WTO Panel Cases to which Canada is a Party
Canada - New Zealand/US - Measures Affecting the Importation of Milk and the Exportation of Dairy Products
WTO Dairy Challenges
The WTO Rulings
The WTO Compliance Panel concluded that Canada, through commercial export milk, has acted inconsistently with its WTO obligations under articles 3.3 and 8 of the Agreement on Agriculture by providing export subsidies within the meaning of Article 9.1(c) of the Agreement on Agriculture in excess of its export subsidies quantity commitment levels. More specifically, the Panel did not accept Canada's argument that producers were selling commercial export milk at prices above their cost of production. The Panel also found that there was government involvement that resulted in the provision of export subsidies.
On December 3, 2001, the WTO Appellate Body reversed the finding of the July 5, 2001 WTO Compliance Panel report that concluded that Canada had acted inconsistently with its WTO obligations. The Appellate Body found that whether there were payments under Article 9.1(c) would require an objective standard or benchmark and that the appropriate standard to use would be the total cost of production. As the Panel did not make factual findings on cost of production, the Appellate Body was unable to find whether Canada had violated its WTO obligations. As a result, the United States and New Zealand requested a further Compliance Panel to pursue this dispute.
In the WTO Compliance Panel report of July 5, 2001, the Panel concluded that Canada had acted inconsistently with its obligations under the Agreement on Agriculture by providing export subsidies within the meaning of Article 9.1(c) for commercial export milk products. In particular, the Panel found that dairy processors in Canada are provided with milk for export at a lower price than the regulated domestic price and that this milk for export would not be available to Canadian processors but for certain federal and provincial regulatory actions.
On the basis of challenges from New Zealand and the United States, the WTO ruled in 1999 that certain Canadian dairy exports benefited from export subsidies under the rules of the WTO Agreement on Agriculture. Thus, they were subject to Canada's WTO export subsidy reduction commitments. Since exports exceeded those commitments, Canada was found to be in breach of its obligations. The milk sales affected by the WTO ruling accounted for about 4 percent of total Canadian production. The WTO ruling did not prevent the export of dairy products as Canada is allowed to use export subsidies for dairy products within specified limits (see table attached).
Canada's Measures to Implement the 1999 WTO Ruling
As a result of the 1999 WTO ruling, Canada changed the way milk destined for exported dairy products is marketed. Based on the ruling, and following consultation with the provinces and industry, governments at both the federal and provincial levels have removed themselves from export activities and this milk for export is now bought and sold in accordance with market demands. Commercial export milk markets in nine provinces were operational on August 1, 2000. Despite these changes, the United States and New Zealand remained of the view that Canada is not in compliance with its WTO obligations and initiated a WTO Compliance Panel.
Arbitration process (retaliation/compensation)
The WTO Dispute Settlement Body has established an Arbitration Panel in response to requests by the United States and New Zealand for authority to retaliate. The arbitration process remains suspended and will only commence should there be a final finding, including an appeal, against Canada.
Consultations
Since the beginning of this WTO challenge, the federal government has closely consulted with the provincial governments and dairy industry stakeholders in the preparation and presentation of Canada's defence. Provincial officials have attended all WTO hearings as observers, as part of the Canadian delegations. Dairy industry representatives were also in Geneva to provide expert advice to the delegation. In addition to several conference calls, special federal/provincial/industry consultation sessions were held in Ottawa in preparation for all of the Geneva hearings. In preparation for the Appellate Body hearing, close consultations were undertaken to ensure provincial and industry input into Canada's defence.
Canada's WTO dairy export subsidy commitment levels
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Commodity
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Quantity Commitments (tonnes)
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Budgetary Outlay Commitments (000$)
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Butter
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3, 500
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11,025
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Cheese
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9, 076
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16,228
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Skim Milk Powder
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44, 953
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31,149
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Other Milk Products
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30,282
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22,505
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Incorporated Products
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20,276
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Base on dairy year (August 1-July 31)
Source: Uruguay Round Schedule of Commitments, Schedule V - Canada, Final Schedule of Agriculture Commitments
Updated on June 26, 2002
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