Dispute Settlement
WTO Panel Cases to which Canada is a Party
Canada - Measures Affecting the Importation of Milk and the Exportation of Dairy Products
Status Report - November 2001
The United States and New Zealand alleged that Canada operates, through the Canadian Dairy Commission, a two-priced system that provides export subsidies in excess of Canada's commitments under the WTO Agreement on Agriculture. The United States also argued that Canada's implementation of its tariff-rate quota on fluid milk is inconsistent with its WTO obligations.
Throughout all phases of this proceeding, the federal government worked closely with the industry and provincial governments. Canadian delegations at all hearings and consultations included provincial representatives. Strategy and debriefing sessions were held on a regular basis with national dairy industry representatives (Canadian Dairy Commission, Dairy Farmers of Canada and the National Dairy Council).
WTO Dispute Settlement Panel
A WTO dispute settlement panel was established on March 25, 1998. Australia and Japan reserved their rights to participate in the panel process as third parties. The establishment of the Panel was preceded by two separate GATT Article XXII consultations:
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on November 19, 1997 between Canada and the United States (with Australia and Japan joining); and,
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on January 28, 1998 between Canada and New Zealand (with the United States, Australia and Japan joining). Prior to these Article XXII consultations, several informal consultations were held under the auspices of the Chairman of the WTO Committee on Agriculture with several WTO members regarding the Canadian dairy system.
The first hearing of the WTO panel was held on October 19-20, 1998. Australia and Japan participated in this hearing as third parties. The second hearing was held on November 17-18, 1998. The Interim Panel was released on February 5, 1999. The Final Report of the WTO Panel was released on March 17, 1999.
The Panel found Canada's exports of dairy products under Special Milk Classes 5(d) and 5(e) to be export subsidies. It concluded that the Canadian practice of providing milk (milk components) at a lower price to processors, contingent on use in exports, was a direct subsidy in the form of a "payment-in-kind"as provided by Article 9.1(a) of the Agriculture Agreement. It also concluded that this practice constituted a "payment" by virtue of government action as set out in Article 9.1(c) The Panel went on to find that dairy exports provided through Classes 5(d) and 5(e) are subject to Canada's export subsidy reduction commitments. As the quantity of exports through 5(d) and (e) exceeded reduction commitments, Canada was found to be breaching its obligations. The Panel also found that 5 (d) and 5(e) to an export subsidy within the meaning of Article 10.1.
With regards to the U.S. complaint on the administration of Canada's tariff rate quota (TRQ) on fluid milk, the Panel determined that the restrictions applied by Canada on imports under the TRQ were not supported by the language in Canada's tariff schedule relating to annual cross-border purchases by Canadians, consistent with WTO trading rules (GATT Article II:1.b). The Panel did not challenge Canada's right to limit fluid milk imports through a TRQ. The Panel indicated that the TRQ should be open to both commercial imports and to cross-border shoppers.
The Panel recommended to the DSB that Canada be requested to bring these practices into conformity with its obligations.
On March 25, 1999, it was announced that Canada would appeal. The Final Panel Report was circulated to all WTO Members on May 17, 1999.
WTO Appellate Body
Canada filed its notice of appeal on July 15, 1999. A hearing before the Appellate Body was held in Geneva on September 6, 1999. On October 13, 1999 the WTO Appellate Body Report (Corrigendum) was released.
The Appellate Body upheld Canada's appeal with regards to its administration of Canada's tariff rate quota for fluid milk. It also found that the Panel had ruled correctly when it concluded that Canada's exports of dairy products under Special Milk Classes 5(d) and 5(e) to be export subsidies.
While reversing a number of legal errors, the Appellate Body did confirm the Panel's overall finding that Canada's exports under Special Milk Classes 5(d) and 5(e) were export subsidies pursuant to the WTO Agreement on Agriculture. The Appellate Body concluded that the Canadian practice of providing milk at a lower price to processors, contingent on use in exports, constituted a "payment" by virtue of government action as set out in Article 9.1(c) of the Agreement on Agriculture. Thus, dairy exports provided through Classes 5(d) and 5(e) are subject to Canada's export subsidy reduction commitments. Since the quantity of exports through 5(d) and 5(e) have exceeded those reduction commitments, Canada was found to be in breach of its obligations. At the same time, the Appellate Body set aside the Panel's finding that Classes 5(d) and 5(e) also constituted export subsidies under Article 9.1(a). Having found export subsidies pursuant to Article 9.1(c), the Appellate Body declined to review the Panel's findings with respect to Article 10.1 of the Agreement.
With regards to the U.S. complaint on the administration of the tariff rate quota, the Appellate Body reversed the Panel's ruling that the restrictions applied by Canada on imports of liquid milk were not supported by the language in Canada's WTO tariff schedule relating to cross-border purchases by Canadians. The Appellate Body agreed with Canada that, in the light of the negotiating history submitted by Canada, Canada's entry in that schedule constituted a condition of entry consistent with Canada's rights under Article II:1 of the GATT 1994. The Appellate Body's only qualification was that, while Canada could continue to restrict imports of fluid milk to Canadians for personal use, the additional current restriction of such imports to $20.00 per person was not justified by the entry.
WTO Dispute Settlement Body
On October 27, 1999 the DSB adopted the Appellate Body and Panel Reports. On November 19, 1999 Canada notified the DSB that it intended to fully implement the rulings.
The WTO dispute settlement system provides for a "reasonable period of time" to implement DSB decisions. Consultations between Canada, New Zealand and the United States began on November 16, 1999 and concluded on December 22, 1999 with an agreement outlining a timetable and implementation steps that Canada will follow to bring certain dairy export and import practices into conformity with the WTO Appellate Body and Panel Reports.
The agreement between the Parties was filed with the WTO Dispute Settlement Body Secretariat on December 23, 1999(1). The full text of the agreement is provided below.
(1) On December 12, 2000, the WTO Dispute Settlement Body was notified that the three parties had mutually agreed to extend the reasonable period of time for implementation to January 31, 2001.
Implementation
Canada undertook various initiatives to fulfill its obligations outlined in the December 22 Implementation Agreement:
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regulatory amendments were enacted to remove the provision in General Import Permit No. 1 restricting imports of fluid milk to importations not exceeding C$20.00 in value became effective January 26, 2000. Notice of these changes was published in the Canada Gazette on February 16, 2000.
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the Canadian Dairy Commission instituted a tracking system for Special Classes 5(d) and (e) permits and exports. During the 1999-2000 dairy year (August 1 - July 31), exports were managed to meet export subsidy quantity reduction commitments on butter, skim milk powder and other milk products as well as the special limit of 20,433 tonnes for cheese. In particular, export permits for cheese were no longer issued after March 31, 2000 to ensure this limit was not exceeded. Special Class 5(e) was eliminated as of August 1, 2000. The Canadian Dairy Commission stopped issuing Special Class 5(d) permits for exports of dairy products to the United States as of August 1, 2000. Beginning with the 2000-2001 dairy year, Canada is committed to be in conformity with both its quantitative and budgetary reduction commitments for all dairy products.
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during the year 2000, implementation reports were provide to the WTO Dispute Settlement Body on June 8, July 13, September 14, October 12, November 6, November 30; the final status report was provided on January 19, 2001.
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consultations were held with New Zealand and the United States on February 23, May 18, October 2 and December 7/8. At Canada's invitation, an extra session was held in Geneva on June 22/23. During these consultation, statistical reports were provided on Special Classes 5(d) and 5(e) permits and exports for butter, cheese, skim milk powder and other milk products. Canada also kept New Zealand and the United States updated on the development and implementation of Canada's deregulation. Throughout these consultations, both the United States and New Zealand indicated that there are irreconcilable differences regarding what is necessary for Canada to bring itself into compliance with its WTO obligations.
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On January 3, 2001, federal regulatory amendments (to the Dairy Products Marketing Regulations amendments and to milk delegation orders issued under the Agricultural Products Marketing Act) were published in the Canada Gazette along with a Ministerial Direction to the Canadian Dairy Commission and a regulatory impact. At the provincial level, regulatory amendments and marketing board orders were passed so as to withdrew the various provincial governments and the provincial milk marketing boards from having any role in the supply of commercial export milk for use in products for export.
WTO Compliant Commercial Export Contracts
As of August 1, 2000 in nine provinces (Newfoundland does not export dairy products) commercial export contracts are being negotiated and exports are taking place with no government intervention (including marketing boards) on quantities, prices, products or export markets.
WTO Compliance Panel
The implementation period for Canada to comply with the WTO Panel and Appellate Body decisions ended on January 31, 2001. Consultations with United States and New Zealand in Geneva on February 9 did not resolve the dispute. On February 16, both countries submitted requests to the WTO Dispute Settlement Body for a Compliance Panel. The United States (and New Zealand) contend that the new commercial export contracts are not sufficient to bring Canada into compliance. It is their view that as long as Canada maintains a system of regulated prices in the domestic market, Canada cannot export beyond its export subsidy limits.
On March 1, 2001, the WTO Dispute Settlement Body established a Compliance Panel to review Canada's implementation of the WTO "Dairy" decisions. Australia, the European Community and Mexico reserved third party rights. A sequencing agreement is in place outlining the steps to be followed during the compliance panel/appeal process and the retaliation request. The Compliance Panel was composed of two of the original panellists, Ernst-Ulrich Petersmann (Germany) and Guillermo Aguilar Alvarez (Mexico), and a new panellist, Peter Palecka (Czech Republic). He replaced Tommy Koh (Singapore) who was unavailable. The Panelists selected Mr. Petersmann to be the Chairman.
New Zealand and the United States filed their submissions to the Compliance Panel on May 4, 2001. Canada filed its submission on May 15, 2001. A hearing was held in Geneva on May 29-30, 2001. Officials from Québec, Ontario and British Columbia attended the hearing as "observers" to the Canadian delegation. Dairy industry representatives were in Geneva to provide "expert advice" to the Canadian delegation. On July 5, 2001, the Panel submitted its confidential Report to the Parties. In response to a leak of the Panel's conclusion, the Minister for International Trade and the Minister for Agriculture and Agri-Food announced on July 6, 2001 that Canada would appeal. On July 11, 2001, the Panel's Report was publically circulated.
The Panel concluded that Canada has 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. The Panel found that dairy processors are provided with milk for export at a price lower 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.
WTO Appellate Body (2001)
On September 4, 2001, Canada filed its appeal. The WTO Appellate Body Members who heard the appeal were: Yasuhei Taniguchi (Japan), A.V. Ganesan (India) and Georges Abi-Saab (Egypt). Mr. Taniguchi was the Presiding Member. None of these Members served on the previous 'Dairy' Appellate Body review. Canada's Submission to the WTO Appellate Body was filed on September 14, 2001.
The WTO Appellate Body hearing was held in Geneva on October 26, 2001. Officials from Québec, Ontario, Alberta and British Columbia attended the hearing as "observers" on the Canadian delegation. Dairy industry representatives were in Geneva to provide "expert advice" to the delegation. On December 3, 2001, the WTO Appellate Body issued its report in which it rejected the United States and New Zealand claims that Canada's exports of commercial milk are inconsistent with Canada's WTO obligations.
While it overturned the Compliance Panel findings, the Appellate Body indicated that "...in the light of the factual findings made by the Panel and the uncontested facts in the Panel record, the Appellate Body is unable to complete the analysis of the claims made by New Zealand and the United States...". Trilateral discussions were held regarding various systemic issues raised in the Appellate Body Report and to avoid further litigation. These discussions were not productive which lead Canada to move to protect its WTO rights by seeking the adoption of the Appellate Body Report.
WTO Dispute Settlement Body (2001)
At its meeting on December 18, 2001, the WTO Dispute Settlement Body (DSB) adopted the Appellate Body Report. Given the Appellate Body's statement regarding its ability to complete its analysis, New Zealand and the United States at this meeting sought and received DSB approval for the establishment of a second Article 21.5 Compliance Panel.
WTO Compliance Panel (2002)
Based upon the trilateral agreement between the Parties, reached in December, 2001, the Panel (composed of the previous Compliance Panel Members) commenced its work on February 18, 2002. The submissions from the United States and New Zealand were filed on March 11, 2002. Canada's submission was filed on March 21, 2002 while the Third Parties (Australia, European Communities and Argentina) were filed on March 25, 2002. Rebuttal (second) submissions were submitted on April 8, 2002.
A hearing was held in Geneva on April 22 and 23, 2002. Officials from Québec, Ontario, Alberta and British Columbia attended the hearing as "observers" on the Canadian delegation. Dairy industry representatives were once again in Geneva to provide "expert advice" to the delegation. During the hearing the European Community presented its legal arguments in support of Canada. Australia and Argentina argued against the Canadian position.
On June 24, 2002, the WTO Compliance Panel released its confidential Report. The Panel concluded that Canada, through the various commercial export milk mechanisms and the continued operation of Special Milk Class 5(d), is acting inconsistently with its obligations under the Agreement on Agriculture, by providing export subsidies in excess of its quantity commitment levels. It noted that dairy processors are provided with milk for export at a price lower than producers' total cost of production and that this milk for export would not be available to Canadian processors but for government actions. The Panel also remarked that Canada's regulation of the price and supply of domestic milk is government action which cross-subsidizes export sales. It ruled that Canada has nullified or impaired benefits accruing to New Zealand and the United States. The Panel recommended that the WTO Dispute Settlement Body request Canada to bring its dairy export practices into conformity with its obligations. Ministers Pettigrew and Vanclief announced that day that Canada would appeal. On July 26, 2002, the Panel's Report was circulated to all WTO members.
WTO Appellate Body (2002)
Discussions were held with the United States and New Zealand the regarding the timing of Canada's appeal. Canada filed its appeal on September 23, 2002. Canada submission is due on October 3, 2002 at which time it will be considered to be a public document. The United States and New Zealand submissions are due on October 18, 2002. The Appellate Body hearing is scheduled for October 31, 2002. WTO Dispute Settlement procedures call for an Appellate Body decision within 90 days following an appeal request, in this case September 23. Thus, a report would be issued no later than on December 23. The federal government is working closely with the provinces and industry stakeholders in the preparation and presentation of the appeal.
Concessions/Retaliation
The WTO Dispute Settlement Body has established an arbitration panel in response to United States and New Zealand requests for authority to suspend concessions1 should there be a final finding of non-compliance against Canada. This arbitration process remains suspended pending the outcome of Canada's appeal of the second Compliance Panel findings.
Retaliation (or compensation) could occur only, if and when, there is a final finding of non-compliance against Canada and after the United States and New Zealand would have obtained authorization on the level of retaliation through arbitration (a decision in early 2003). The final retaliation list would only be known at that time.
1. The United States and New Zealand issued lists for potential retaliation outlining the level of retaliation being sought and the products to which retaliation could be applied. Both countries are seeking authorization to suspend trade concessions in an amount not exceeding US$35 million annually (total US$70 million). The United States has targeted agricultural and fish products while New Zealand has selected both agricultural and non-agricultural products. (No specific products have been identified; the lists only contain broad HS codes.)
Agreement Pursuant to Article 21.3(b) of the DSU
This is to confirm that, following consultations, Canada, the United States of America, and New Zealand (the "Parties") have reached an agreement on four discrete periods for the "reasonable period of time" to be accorded to Canada for an implementation process to comply with the recommendations and rulings of the Dispute Settlement Body (DSB) in the matter of Canada - Measures Affecting the Importation of Milk and the Exportation of Dairy Products, pursuant to Article 21.3 of the WTO Understanding on Rules and Procedures Governing the Settlement of Disputes (DSU).
The elements of this agreement are as follows:
Canada shall complete each element of a staged implementation process no later than the applicable date indicated in paragraphs 2 and 3 below. For this purpose, four distinct reasonable periods are established representing the four stages of the implementation process. Implementation will be carried out through the following steps:
Canada will complete by February 1, 2000, all necessary regulatory amendments required to remove the provision in its General Import Permit No. 1 restricting imports of fluid milk to importations not exceeding C$20.00 in value.
In regard to the implementation process with respect to export of dairy products from Canada:
Canada shall be in compliance with its export quantitative reduction commitment levels for butter, skim milk powder and other milk products, as set out in Section II of Part IV of its Schedule, for the marketing year 1999-2000, beginning August 1, 1999 and ending July 31, 2000, consistent with the recommendations and rulings of the DSB in the matter of Canada - Measures Affecting the Importation of Milk and the Exportation of Dairy Products.
Canada shall be in compliance with its reduction commitment levels for butter,cheese, skim milk powder and other milk products as set out in Section II of Part IV of its Schedule, for the marketing year 2000-2001, beginning August 1, 2000 and ending July 31, 2001, and thereafter, consistent with the recommendations and rulings of the DSB in the matter of Canada - Measures Affecting the Importation of Milk and the Exportation of Dairy Products.
Canada undertakes that, with respect to the marketing year 1999-2000, Canada's exports of cheese under Special Classes 5(d) and (e) shall not exceed 20,433 tonnes. Canada also undertakes that the Canadian Dairy Commission shall not issue any permits or enter into any equivalent commitments with respect to Special Classes 5(d) and (e) for the export of cheese in the marketing year 1999-2000 after March 31, 2000. For greater certainty, Canada confirms that, as a result of these commitments, the Canadian Dairy Commission shall not issue permits or enter into any equivalent commitments in the marketing year 1999-2000 for a volume of cheese under Special Classes 5(d) and (e) that, when combined with the volume of cheese exported in the marketing year 1999-2000 pursuant to Special Classes 5(d) and (e) permits issued by the Canadian Dairy Commission in the prior marketing year (1998-1999), exceeds 20,433 tonnes(1).
Any remaining aspects of the implementation process with respect to the export of such dairy products from Canada, including any new measures for the export of these products, will be completed no later than December 31, 2000, and will be fully consistent with Canada's WTO obligations under the Agreement on Agriculture, as reflected in the recommendations and rulings of the DSB in the matter of Canada - Measures Affecting the Importation of Milk and the Exportation of Dairy Products.
(1) This amount (20,433 tonnes) shall be net of any permits that are issued and then subsequently cancelled. Cancelled permits may be re-issued subsequent to March 31, 2000 in the same volume they were originally issued and that volume in the re-issued permit shall apply to the amount (20,433 tonnes).
It is agreed that consultations between all the Parties shall be held on or about February 15, 2000, May 15, 2000, September 15, 2000, December 15, 2000. For the purposes of such consultations, Canada shall report on the quantities for butter, cheese, skim milk powder and other milk products that have been exported under Special Classes 5(d) and (e), or under anynew measures implemented, in whole or in part, in Canada for the export of dairy products during this implementation period, during each quarter of the marketing year to date. For the purposes of the consultations to be held on or about February 15, 2000, Canada will report on quantities of such exportsduring the prior two quarters. For the consultations scheduled for February 15, 2000 and May 15, 2000, Canada shall also report on the level of Special Class 5(d) and(e) permits issued by the Canadian Dairy Commission for the prior quarters of the 1999-2000 marketing year. For the consultations scheduled for December 15, 2000, Canada will also report on budgetary outlays for any exports of butter, cheese, skim milk powder and other milk products under Special Classes 5(d) and (e) after August 1, 2000 during the first quarter of the marketing year commencing on that date. These consultations will be additional to, not in lieu of, surveillance provided in Article 21.6 of the DSU.
For the purposes of providing the other Parties with this quantitative and budgetary outlay data, Canada will institute a tracking system through the Canadian Dairy Commission, working with the Canadian dairy industry, requiring reporting by exporters to the Canadian Dairy Commission of exports under Special Classes 5(d) and (e), including product category and quantity. This system shall be in place to allow for the presentation of relevant information in advance of consultations referred to in paragraph 4.
At each such consultation, Canada will also provide a report on the status of each aspect of the impleme00ntation process.
Canada will provide notice to the other Parties once it has determined that all aspects of the implementation process have been completed.
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For Canada:
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For New Zealand:
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For the United States of America:
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December 22, 1999
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Updated on October 1, 2002
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