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In brief: CWB wins NAFTA appeal on tariff
In a decision, released June 7, a NAFTA Panel concluded there was not substantial evidence to support a U.S. tariff that has halted imports of Canadian hard red spring wheat. The CWB had appealed to NAFTA to end the unjustified tariff. As a result, the tariff has now been lifted, effective Feb. 24, 2006. Click here (PDF format 318 KB) to view the full decision.
Hard red spring wheat is the largest-volume crop, by far, grown in Western Canada. In a typical year, over 16 million Prairie acres of Canada Western Red Spring (CWRS) wheat (PDF format 211 KB) are harvested, compared with 10 million acres of canola and 9.5 million acres of barley, the next largest crops. CWRS is a premium-quality breadmaking wheat with superior milling attributes that are recognized around the world.
The American market is important for western Canadian farmers. U.S. millers are interested in the highest grades, which bring the highest returns for Prairie farmers. Sales to the U.S. (PDF format 43 KB) were worth about $250 million a year (roughly 10 per cent of the CWRS market) before a prohibitive tariff was imposed in mid-2003. Since then, very little CWRS has been sold into the U.S., compared to prior sales of about a million tonnes a year.
There are 85,000 farmers in Western Canada who grow CWRS or consider it in their rotations. There are many customers for this wheat around the globe, but the proximity and demand of the U.S. makes this market highly desirable. Its ongoing loss could have cost western Canadian farmers roughly $50 million a year, depending on market conditions and crop grade profile.
The losses suffered by western Canadian farmers do not translate into any gains for U.S. farmers. The price of HRS is driven by global supply and demand factors unrelated to Canadian wheat exports to the U.S., which have been miniscule compared to the total volume of wheat traded around the world.
The basis for the tariff is political. Since free trade first began in 1989, protectionist groups in the U.S. have complained about increasing imports of Canadian wheat. Since then, there have been 14 American trade challenges of Canadian wheat. The CWB, as the marketing arm of western Canadian wheat farmers, has consistently been shown to be fully compliant with international trade rules.
However, there continue to be political rewards for elected officials in the U.S. to take a tough stance on Canadian wheat. Many politicians from North Dakota, South Dakota and Montana achieved powerful positions in a system where trade-offs dominate. By 2003, they were successful in convincing Washington to act on the wheat issue, resulting in both domestic and international (World Trade Organization) pressure on the CWB.
The North Dakota Wheat Commission, representing that state's wheat producers, launched a petition in 2002, requesting anti-dumping and countervailing duty cases against Canadian hard red spring and durum wheat imports.
The U.S. Department of Commerce decided Canadian wheat exports were being subsidized and sold at less than fair market value in the United States. The case demonstrated the absurdity of applying anti-dumping rules designed for steel to an agricultural commodity, which has completely different market dynamics.
The ITC then ruled on the question of injury (i.e. did these imports depress prices for U.S. farmers). In the case of durum, the ITC unanimously decided there was no injury. In the case of HRS wheat, its decision was split 2-2 and thus went to the petitioners. A 14.2-per-cent tariff was imposed that has virtually halted Canadian HRS wheat imports to the U.S. The tarif was lowered in August 2005 to 11.4 per cent.
The CWB appealed to NAFTA, along with the Governments of Canada, Saskatchewan and Alberta over the way wheat subsidies had been calculated. NAFTA agreed with the CWB that subsidies related to its financial guarantees for farmers had been wrongly calculated. As a result, the tariff was lowered by 2.75 percentage points.
The CWB and the North American Millers' Association (NAMA) also appealed to NAFTA over the injury determination, arguing it was not based on substantial evidence. The NAFTA panel agreed and has ordered the ITC to respond by October 2005.
Key dates
- Sept. 13, 2002: NDWC files petition with the ITC alleging injury from Canadian HRS and durum imports. Period of inquiry: three marketing years – 2000-01, 2001-02 and 2002-03
- Nov. 25, 2002: ITC reaches preliminary affirmative injury determinations on both products.
- Mar. 4, 2003: Preliminary countervailing duties imposed on Canadian HRS and durum wheat imports to the U.S.
- May 2, 2003: Preliminary anti-dumping tariffs added to U.S. duties on Canadian HRS and durum.
- Aug. 29, 2003: U.S. Department of Commerce decides Canadian durum and HRS wheat are being subsidized and sold at less than fair value in the United States (countervailing duty and anti-dumping cases). Final tariff levels of 13.6 per cent on durum and 14.2 per cent on HRS are imposed.
- Oct. 3, 2003: The ITC unanimously determines that imports of durum wheat from Canada do not injure U.S. durum producers, but is split 2-2 on whether imports of Canadian hard red spring wheat injure the U.S. wheat sector. A split decision favours the plaintiff and, as a result, the 14.2-per-cent tariff continues to apply to imports of hard red spring wheat from Canada, while the tariff on durum is lifted.
- Nov. 24, 2003: CWB files request for NAFTA panel review, on the grounds that the injury determination on HRS wheat is unsupported by substantial evidence.
- Dec. 23, 2003: NAMA files complaints with NAFTA, echoing CWB concerns.
- August 3, 2004: NAFTA panel selected
- Mar. 9, 2005: NAFTA panel appeal hearing held
- June 7, 2005: NAFTA panel decides to remand the injury decision back to the ITC.
- Oct. 5, 2005: The ITC reverses its injury decision.
- Dec. 12, 2005: The NAFTA panel issues its final decision.
- Jan. 2, 2006: Duty liability is removed from Canadian wheat imports to the U.S.
- Feb. 24, 2006: The tariff is lifted.
Arguments of complainants (CWB and NAMA):
- ITC was wrong in saying that the volume of Canadian HRS wheat imports was significant.
- Findings of significant price underselling and price suppressions are unsupported by substantial evidence.
- ITC failed to consider factors other than Canadian HRS wheat imports as the cause of injury to U.S. wheat farmers, including:
- The different level of trade for domestic wheat and Canadian HRS wheat imports (i.e. CWB competes with large transnational grain traders, not U.S. wheat farmers).
- The impact of the prices for HRS wheat on the Minneapolis Grain Exchange (MGE)
- The fact that prices for hard red winter wheat (which is not imported from Canada) move in tandem with prices for HRS wheat.
Role of the NAFTA panel:The Panel had to affirm the ITC injury determination, unless it concluded that the determination was not supported by substantial evidence or is otherwise not in accordance with law.
The NAFTA panel concluded that the ITC determination was not supported by substantial evidence and remanded it back to the ITC for resolution, attaching nine specific conditions of evidence that must be satisfied.
These conditions (see summary below), included explaining how the ITC believes increased volumes of Canadian HRS wheat imports depressed prices for U.S. wheat farmers and explaining how these imports could possibly affect prices for HRS wheat on the Minneapolis futures market.
- Justify how they ignored price data from the period after September 2002 on the basis that the filing of the petition had caused a "price spike".
- Justify how they ignored import volume data after September 2002, on the same basis.
- Explain why they think instances of so-called underselling caused adverse price trends or otherwise affected U.S. wheat farmers.
- Explain why they think increased volumes of Canadian HRS wheat imports caused U.S. wheat farmers to suffer depressed prices.
- Explain their analysis of the importance of HRS wheat yield fluctuations in the U.S. and why yields per acre and farm prices are the most relevant factors in determining the financial state of U.S. wheat farmers.
- Explain which prices they used in their analysis and whether they used prices that were not at the level of sales to domestic milling operations.
- Explain how the effect of imports was passed "upstream" to farmers from the grain traders and elevators.
- Explain why competition in third-party markets through exports of U.S. HRS wheat was not considered a cause for injury to U.S. wheat farmers.
- Explain how average farm prices for HRS wheat are based on the outcome of downstream transactions and how Canadian HRS imports are large enough to impact prices on the MGE futures market.
Pertinent quotes from the ruling
- "The Commission in fact gave no weight to data for the 2002-03 marketing year…thus totally ignoring the effect of the drought when weighting that post-petition data." p. 25
- "The Panel concludes that the ITC's finding that increased volumes of subject imports depressed prices is not supported by substantial evidence…The ITC's analysis fails to appreciate the role that the MGE plays in setting prices. By selectively utilizing some data while not adequately addressing contradictory data, the Commission fails to show a causal connection between the subject imports and material injury." p. 40
- "Crop yields [of U.S. HRS wheat] are an autonomous factor that is largely unmanageable in the farming context. Certainly, there is no obvious causal connection to Canadian imports. The Commission tries to have it both (or indeed many) ways in accounting for yields." p. 44
- "... the Commission does not show a causal relationship between the subject imports and the prices farmers receive, a necessary component of the material adverse impact finding." p. 45
- "The CWB argues that the ITC's analysis is not probative as it fails to articulate a rational connection between the facts found and the determination made. The Panel agrees." p. 51
- "The Commission failed to consider the condition of competition that average farm prices are based on the MGE price and ignored record evidence that Canadian HRS wheat imports have no effect on the MGE price. This amounts to a failure to support with substantial evidence the conclusion that the domestic industry producing HRS wheat is material injured by reason of subject imports from Canada." p. 64