DSB adopts second compliance ruling against Canadian milk exports

Geneva, 17 Jan (Chakravarthi Raghavan) - The Dispute Settlement Body on Friday adopted the report of the Appellate Body, holding that Canada’s commercially exported milk (CEM) scheme , provided an illegal export subsidy to milk producers through government regulation of the domestic market that enabled producers to cross-subsidise the exports.

This is the second compliance panel ruling on this issue against Canada in complaints brought by New Zealand and the United States.

While the adoption of the AB ruling is automatic, the remarks of Canada before adoption, and of the EC as third party, showed the problems created by ambiguous wording in agreements (for the sake of an agreement), the problems of the dispute settlement system (in particular the AB) trying to fill in the lacunae and/or close loopholes, and the difficulties these pose for the new negotiations.

Canada said it would comply with the ruling, to ensure that the CEM milk exports did not exceed the volume commitments of subsidised exports of Canada under its Agriculture schedule, Canada and the European Community (a third party) found fault with some of the conclusions of the AB, complaining these imported ‘standards’ not found in the Agreement on Agriculture (AoA).

In the original dispute, Canada was found to be providing through the socalled Special Milk Clauses ‘export subsidies’ within the meaning of Art.9.1.c. of the AoA, and that such subsidised export volumes exceeded the volume commitment levels in the Canadian AoA schedule.

Canada thereupon adopted changes in its scheme, including a new category of milk for export processing, the ‘commercial export milk’ (CEM), with sales of such milk made by producers in accordance with commitments made prior to milk production.

The CEM scheme was successfully challenged before a compliance panel that held that through the CEM Canada provided export subsidies, in terms of Art.9.1.c. ( which takes account of cash and payments-in-kind). The definition of export subsidy itself covers not only payments by government, but also by private parties, as a result of governmental actions. The panel had taken as an appropriate standard to judge, the domestic market price. The AB had reversed this, and said the standard should be the ‘costs of production’, but did not give a ruling on the ground it did not have the necessary facts from the compliance panel. Thereupon New Zealand and US sought a second compliance panel which handed down a ruling, again holding against Canada. Before the second compliance panel, the issues raised were the elements to be taken into account in cost of production, and whether it should be that of each individual producer or an industry-wide average cost.

Before the panel, Canada had argued that each individual producer’s costs had to be the yardstick, and provided some data on that basis, while New Zealand and the US had argued it should be average industry-wide costs. The panel found that either way, the costs exceeded that taken into account to judge the subsidy or absence.

On the costs of production, the AB held that average industry wide costs had to be the standard, and that costs of production should include transportation and marketing costs, as well as costs of family labour and management or owner’s equity. The AB also said that apart from these, the cost of production had to be on production of all milk, whether destined for domestic or export markets, and as such ‘costs of quota’ need to be taken into account. However, there was no evidence before the panel on this, but the panel said that there has to be additions to the cost of production (already found to be above the levels, whether of individual or industry-wide averages) to take account of the ‘costs of quota’.

In the absence of any evidence, the AB gave no determination on “how precisely the cost of quota is to be reflected in the costs of production standard,” but that the COP in terms of Art.9.1.c. includes any costs of transport, marketing and administrative costs, as also costs of acquiring and retaining quotas.

On burden of proof, the AB held that once it had been shown that the Canadian exports in volume exceeded the volume commitments, it was for Canada to show that the subsidies to the exporters were not hit by the AoA.

Canada in its statement at the DSB, complained that the ruling established a new standard for determining the existence of an export subsidy, and had blurred the distinctions between domestic and export subsidies. This would have ‘systemic implications’. The AB had set a “novel ‘cost of production’ standard” to determine subsidy, a standard which had not been set in the AoA. Canada also objected to the ruling that Canada’s supply management system involved federal and provincial government finance payments, and that there was ‘cross-subsidisation’ involved (by high domestic prices set by government regulations, used to subsidise exports by producers).

While Canada would comply with the ruling, and in future limit exports of such supply-managed milk to its WTO subsidy reduction commitment levels (with Canadian exports declining substantially from its current Canadian $415 million annual figure) WTO members must ponder the implications of these systemic issues.

In its intervention, the EC (a third party) complained that the AB had adopted the ‘orthodox’ view about the burden of proof under Art.10.3 of the AoA (agricultural products financed by virtue of governmental actions), and that it was Canada to show that no export subsidisation had occurred as a result. The EC was concerned that “it should be a realistic possibility” for a respondent to meet that burden of proof. The EC also joined Canada in arguing that there was no legal basis for the ‘average cost of production’ standard developed by the AB as to whether any export subsidy payments had been made. It was not ‘recipient-oriented’ so that a measure would be found to be a subsidy even if it had not involved a benefit. The AB developed standards also contained elements which were not appropriate ‘costs’ (the EC did not clarify to which elements it was objecting), and the ‘average cost of production standard’ was ‘fundamentally unworkable and requires too high a standard of proof,” more so when this burden rested on a respondent.

While the AB had “retreated” from its original stand in a previous report that producers were not “obliged or driven” to produce additional milk for export sale, but had a free choice (to produce only for the domestic market, and the supply-management quotas), the AB had not explained why the SCM required a government involvement of some kind of a mandatory character, whereas under the AoA, a mere incentive effect would be sufficient. There was also no explanation why the natural spill-over effects of a perfectly legal domestic support scheme can form the decisive government measure to construct a WTO incompatible measure.

Earlier, the DSB was advised by the US that it intended to implement the ruling and recommendations against it in the complaint about the anti-dumping and countervailing actions in respect of imports of certain corrosion resistant carbon steel flat products from Germany. The US would however need a reasonable period of time.

If the two parties don’t agree, this will go to arbitration.

The EC however noted that the panel and the AB had not been alone in judging the US measure was flawed. The US Court of International Trade, had already given the same view twice during 2002, once in February and again in October, following a remand procedure. As such, the US Department of Commerce had all the time it needed to correct its mistakes. The US should hence promptly implement the ruling by immediately lifting the WTO inconsistent duties on carbon steel from Germany. – SUNS5265

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