Canadian Wheat Board

Newsroom

Presentation to the House of Commons Standing Committee on International Trade, Trade Disputes and Investment

Topic: Trade Dispute Settlement for Agriculture
Presentation given by Victor Jarjour, vice president, Strategic Planning and Corporate Policy
Presented to the House of Commons Standing Committee on International Trade, Trade Disputes and Investment
Ottawa, Ontario
Tuesday, December 14, 2004

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Canadian Wheat Board appearance before the House of Commons sub-committee on International Trade, Trade Disputes and Investment

Speech given by Victor Jarjour
Ottawa, Ontario
December 14, 2004

CWB perspective on NAFTA trade dispute settlement and avoidance of future trade disputes with the United States

Introduction

Ladies and Gentlemen:

Thank you for this opportunity to share our views on this important subject.

The United States has been a stable market for about a million tonnes of Canadian spring wheat. American customers also buy 300 to 400 thousand tonnes of durum. This returns about $400 million -- or about 10 per cent of Canadian Wheat Board sales. The U.S. market is important for western Canadian wheat farmers – and it's one worth fighting for.

The U.S. is a premium market. American buyers are interested in top-quality grain, which is what we normally grow on the Prairies. The proximity of this market is also an asset. Transportation costs eat up a lot of farmers' revenues – especially when ocean freight is involved.

We want unfettered access to the American market. We have that right under tree trade. Instead, we've been forced to fight for that access almost every year since the Canada-U.S. trade agreement was implemented. The CWB has faced 13 investigations or studies by various arms of the U.S. government. This harassment has but one purpose – to impede the flow of western Canadian wheat and durum to the U.S. In other words, it is designed to appease U.S. protectionists.

Inappropriate use of anti-dumping rules

In our opinion, a significant obstacle to fair and balanced dispute settlement for agricultural trade lies in the inappropriate use of anti-dumping rules.
I believe our colleagues in other agricultural sectors – most recently the hog industry – can attest to the magnitude of this issue.

• In 2002, the North Dakota Wheat Commission launched anti-dumping and countervailing duty cases against Canadian imports of hard red spring and durum wheat.
• At the conclusion of the case in the fall of 2003, the U.S. Department of Commerce determined that dumping of Canadian spring wheat and durum into the U.S. had occurred. With spring wheat, a "cost-of-production" exercise had been conducted, examining the detailed costs of 25 Prairie wheat farmers. Their average costs were then used to represent all 55,000 wheat farmers.
• In the final analysis, no tariff was imposed on durum, but a tariff of 14.2 per cent was applied against imports of Canadian spring wheat.
• The outcome for spring wheat was largely the result of the cost-of-production exercise. Herein lies the problem.

Our primary point today is that using cost of production as a basis for calculating dumping is completely inappropriate for agriculture.

• Here's why:
  Without getting into details, the general rationale behind a cost-of-production analysis is that if your costs are higher than prices, that equates to dumping. In the case of grain, this is not a reasonable conclusion.
• Prices in the grain trade are set by global market forces, not by individual farmers. These prices can fluctuate widely.
• Costs of producing the grain are sunk before prices can be determined with any certainty. In some years, not all costs will be recovered, while other years yield profits – despite the fact that sellers are always trying to maximize returns.
• Input costs of wheat production do not really vary according to grade, yet the market can put much higher values on certain grades and classes of grain. For the most part, it is weather that determines crop quality and, by extension, the price.
• In addition, low global grain prices may mean that sales are unavoidably made at below cost because the farmer is compelled to sell in order to make a living. This does not translate into "dumping". Certainly, this cannot be the scenario envisioned when anti-dumping rules were created.
• Over and above all of this, it should be pointed out that Canadian wheat and durum almost always sell to U.S. buyers at prices that are HIGHER than for the equivalent U.S. grain. Two studies conducted by the U.S. International Trade Commission have showed this to be the case. You can sell into a market at a consistently higher price than the domestic sellers, and still be successfully accused of dumping, under the current rules. This doesn't make much sense.
• The CWB is currently appealling the spring wheat case to a NAFTA panel. We are confident of having the tariff on spring wheat removed. However, Canadian farmers have lost access to the U.S. market for more than two years. They have also been forced to spend millions of dollars in legal fees on these unjustified challenges.
• Nonsensical trade rules such as the anti-dumping provisions I have just described undermine the spirit and intention under which trade agreements are negotiated. Canada must pursue improved anti-dumping rules in the WTO negotiations that make sense for agriculture and so not unfairly penalize farmers.

Avoiding future trade disputes

I would now like to speak to the second part of your topic today, on the question of avoiding future trade disputes.

• In our experience, these trade issues are rooted in U.S. protectionist sentiment and motivated by political agendas. They reflect a lack of support for the spirit of free trade amongst a certain American constituency – which, in the case of wheat, appears to be centered in North Dakota. Certain politicians in those states have built their political careers on platforms that encourage protectionism and several of those politicians are in influential positions in the federal government.
• Fundamentally, protectionism is aimed at the commodity – whether it's wheat, cattle, hogs, softwood lumber or steel. American producers do not want Canadian commodities competing in their markets. It's as simple as that. Stripped down to its bare issues, this is the driving force behind the trade challenges. No matter what sort of Canadian marketing system is used, the Americans will always find a way to challenge it. There is a political advantage to be gained by champions of this approach.
• This is the climate and, within this climate, fighting American trade challenges is an unfortunate cost of doing business. Despite the high cost of defending against continued challenges, access to the premium U.S. market is worth it. Western Canadian wheat farmers are able to combine their resources to mount these defences and have been relatively successful.
• So how to avoid these challenges? It's a difficult question, given that we don't start these fights. In support of that statement, I would point out that the CWB has repeatedly been upheld as a fair trader. I also remind you of the studies that refute allegations of price undercutting in the U.S. The Americans who oppose Canadian wheat imports are simply grasping at straws. The facts don't seem to matter.
• The CWB has decided that the best approach is tackle the problem at its roots. We have launched an advocacy program to build relations with American farm groups, in hopes that this will lead to a better understanding of our mutual issues.
• Some of the protectionist sentiment is entrenched. But we still believe that building relationships holds out the most hope. American and Canadian farmers have so many issues in common. Both groups are being hammered by high input costs and low commodity prices. They are both facing changes from a new global wheat trading environment that features new players and new dynamics. They are both dealing with fundamental threats to the family-farm lifestyle.
• If there is any hope of avoiding future trade disputes, we believe it will come from the grassroots, from farmers themselves. The other players simply have too large a vested interest in continuing the fight due to their own political and commercial agendas.

Process changes could assist dispute resolution

• As a final point, I would like to make a suggestion with regards to process. Last year, the U.S. launched a WTO case against Canada which focused on the CWB. The U.S. allegations were unequivocally dismissed by both the WTO panel and the Appellate body. The CWB worked very closely with
• Canadian government officials. We were very pleased with their cooperation and with the result.
• However, there were some process concerns. This was a case that posed a serious threat to the CWB. Yet our representatives were not allowed into the hearing at WTO headquarters. Instead, we waited outside the room, available to be consulted by officials. Our understanding is that government policy dictates that only government officials should be present. We believe this policy should be changed.

In conclusion:

• The CWB's experience with ongoing U.S. trade harassment has raised serious concerns about the fairness of trade rules – in particular, the inappropriate application of anti-dumping rules.
• Vested American interests cannot be allowed to succeed in their political and commercial agendas to dictate the way that Canadian commodities are marketed.
• The best hope for the future lies in building healthy, workable relationships with American farmers and farm groups, who represent the source of the political pressure on Canadian wheat and durum imports.

Thank you very much for your time today. We would be happy to address any questions on this subject that you might have.

Two appendices attached

Appendix 1: History of wheat trade disputes with the U.S.

1990 & 1991: ITC investigation: "Durum: Conditions of Competition between the U.S. and Canadian Industries." The increased movement of durum into the U.S., starting in the late-1980s, generated pressure from North Dakota durum farmers, leading to this investigation (pursuant to Section 332 of the U.S. Tariff Act of 1930). North Dakota farmers focused on Canadian freight subsidies and alleged that the CWB was predatorily penetrating the U.S. durum market. The U.S. International Trade Commission (IITC) report concluded that the drought of 1987-89 was the primary cause of increased durum imports from Canada, which could not be attributed to a consistent price difference between US and Canadian durum. In fact, the report noted that, in most months examined, U.S. paid more for the Canadian product.

1992 & 1993: GAO investigation: " Canada and Australia Rely Heavily on Wheat Boards to Market Grain." Prompted by allegations that CWB and AWB operations constituted a form of unfair competition, the U.S. General Accounting investigated Canadian and Australian grain export marketing systems and how they reacted to the U.S. Export Enhancement Program (EEP). The GAO made no finding of unfair trading practices.

1992: CUSTA – Bi-national panel: Investigation of acquisition prices for Canadian what exports to the U.S. The CUSTA panel ruled in favour of Canada, concluding that "…the acquisition price of the goods referred to in Article 701.3 includes only the initial payment; or, in the event of an upward adjustment, the acquisition price for goods sold after the adjustment is the initial payment plus such adjustment." Additionally, CWB durum sales three contracts between 1989 and 1992, the CWB had complied with Article 701.3.

1994 & 1995: ITC investigation under Section 22 of Agricultural Adjustment Act of 1930. A dramatic increase in imports of Canadian wheat was partly responsible for this investigation, which analyzed the impact of Canadian wheat imports on the U.S. farm program for wheat. The six Commissioners rendered a three-three split decision, with differing recommendations differed. On August 1, 1994, Canada and the U.S. agreed to a one-year Tariff Rate Quota on wheat exports to the United States.

1995: Joint Commission on Grains. The Canadian and U.S. governments agreed to a comprehensive examination of government support for wheat in both countries and in third markets. The Joint Commission's recommendations focussed on facilitating trade between the two countries.

1996 & 1997: GAO investigation: "Potential Ability of Agricultural State Trading Enterprises to Distort Trade." The U.S. General Accounting Office investigation was conducted at the request of 18 members of U.S. Congress acting on behalf of concerned U.S. agricultural producers. The report discusses the potential capability of export-oriented agricultural STEs to distort trade and the specific potential capability of the Canadian Wheat Board, the Australian Wheat Board, and the New Zealand Dairy Board to engage in trade-distorting activities, based on their status as STEs.

The principal findings of the report stated that the CWB had "opportunities to potentially distort trade". However, the report makes no allegation that the CWB was in fact doing so. The report acknowledged that the USDA had no evidence that the CWB was violating international trade rules. Regarding transparency, the report concluded that the CWB was no different than a private grain company in protecting transaction price information as commercially sensitive.

1998 & 1999: GAO investigation: "U.S. Agricultural Trade, Canadian Wheat Issues." At the request of Senator Byron Dorgan, a third GAO investigation focused on the level of government support to the CWB, the nature of CWB pricing practices and transparency and the nature of trade remedies available to address the operations of STE's. The report found that existing U.S. and WTO trade remedies could be effectively used to combat the effects of disruptive or trade-distorting imports -- regardless of whether the alleged violator was an STE like the CWB.

1998 & 1999: U.S Department of Commerce(DOC): R-CALF Countervailing Duty Case - Live Cattle From Canada. The DOC countervailing duty investigation of the North American cattle industry examined allegations that the CWB was a subsidy to Canadian cattle producers. The Ranchers-Cattlemen Action Legal Fund (R-CALF) alleged that CWB's role as the sole marketer of export feed barley allowed it to restrict exports, resulting in low domestic feed barley prices and artificially high export feed barley prices. R-CALF argued that this is an indirect subsidy to Canadian cattle production in Canada. The report concluded that the CWB's operations did not constitute a subsidy.

2000 – 2002: U.S. Section 301 and 332 investigations:"Wheat Trading Practices: Competitive Conditions Between U.S. & Canadian Wheat." The North Dakota Wheat Commission (NDWC) filed a petition seeking import restrictions on Canadian wheat. The ITC's report refuted allegations that the CWB unfairly priced Canadian wheat, over-delivered protein and offered more favourable contract terms. It found that Canadian durum was priced higher than U.S. durum in all but one month examined.

However, at the conclusion of the investigation, the U.S. Trade Representative stated his office would: (1) examine taking a dispute settlement case against the CWB to the WTO, (2) assist the NDWC and U.S. wheat industry in filing U.S. countervailing duty and anti-dumping petitions, (3) identify specific impediments to U.S. wheat entering Canada, and (4) pursue reform of STE's in WTO agricultural negotiations.

2002-03: U.S. Countervailing duty and antidumping suits against CWB. The NDWC launched petitions seeking import restrictions on Canadian wheat and durum, alleging government subsidies and "dumping" of product at below market value. The U.S. Department of Commerce assessed dumping margins and determined countervailing duties. The ITC, however, ruled that injury to the U.S. durum industry from Canadian durum imports was not occurring, resulting in no tariffs. On hard red spring wheat, a tariff of 14.2 per cent was imposed after the ITC ruled that injury to the U.S. industry was occurring with that product. The CWB is appealling this decision with a NAFTA panel.

2003-2004: WTO dispute settlement case on the CWB. The U.S. government launched this case, alleging that the CWB, as an export STE, did not operate according to commercial considerations. The WTO wheat panel – and a subsequent Appellate Body ruling – unequivocally dismissed the U.S. allegations. The ruling noted that the CWB has no reason to operate on anything but commercial considerations, since its mandate is to maximize returns to farmers and there is no federal government involvement in its day-to-day operations.

Appendix 2: Background on the CWB

• The CWB markets grain on behalf of 85,000 farmers to more than 70 countries, with annual sales of more than $4 billion.
• Since 1999, the CWB has been governed by a 15-member board of directors, two-thirds comprised of elected farmers.
• There are also four directors appointed by the federal government for their business and financial expertise, as well as the CEO who is appointed based on a recommendation from the board.
• The CWB's sole mission is to maximize returns for western Canadian farmers.
• CWB marketing is based entirely on commercial considerations. All revenue, less marketing costs, is returned to the farmers.