WORLD TRADE
ORGANIZATIONWT/DS103/R
WT/DS113/R
17 May 1999
(99-1924)
Original:  English
Canada – Measures Affectin g the Importation of Milk
and the Exportation of Dairy Products
Report of the Panel
The report of the Panel on Canada – Measures Affecting the Importation of Milk and the Exportation
of Dairy Products is being circulated to all Members, pursuant to the DSU.  The report is being
circulated as an unrestricted document from 17 May 1999 pursuant to the Procedures for the
Circulation and Derestriction of WTO Documents (WT/L/160/Rev.1).  Members are reminded that in
accordance with the DSU only parties to the dispute may appeal a panel report.  An appeal shall be
limited to issues of law covered in the Panel report and legal interpretations developed by the Panel.
There shall be no ex parte  communications with the Panel or Appellate Body concerning matters
under consideration by the Panel or Appellate Body.
Note by the Secretariat:  This Panel Report shall be adopted by the Dispute Settlement Body (DSB) within 60 days after the date  of its
circulation unless a party to the dispute decides to appeal or the DSB decides by consensus not to adopt the report.  If the Pa nel Report is
appealed to the Appellate Body, it shall not be considered for adoption by the DSB until after the completion of the appeal.  I nformation on
the current status of the Panel Report is available from the WTO Secretariat.WT/DS103/R
WT/DS113/R
Page i
Table of Contents
I. INTRODUCTION................................................................................................................. .......................1
II. FACTUAL ASPECTS ............................................................................................................. ....................3
A. T HE CANADIAN DAIRY SECTOR .................................................................................................................3
1. General...................................................................................................................... ...............................3
2. Components of the Ca nadian Dairy Policy...................................................................................... ........3
3. The Canadian Dairy Commission (the "CDC") .................................................................................... ...4
4. Provincial Milk Marketing Boards............................................................................................. ..............6
5. The NMMP ..................................................................................................................... ..........................6
6. The CMSMC and the MSQ........................................................................................................ ...............7
B. T HE CANADIAN SPECIAL MILK CLASSES SCHEME .....................................................................................8
1. Backgr ound ................................................................................................................... ...........................8
2. The Special Classes.......................................................................................................... ........................9
3. In-quota milk and over-quota milk............................................................................................ .............11
4. The price of milk to the processor ........................................................................................... ...............11
(a) Other Classes (Classes 1 – 4)............................................................................................... ............................11
(b) Class 5  (Special Classes) .................................................................................................. ..............................11
5. Returns to producers from exports............................................................................................ .............14
(a) General ..................................................................................................................... .......................................14
(b) In-quota exports............................................................................................................ ...................................14
(c) Over-quota exports .......................................................................................................... ................................14
6. Pooling ...................................................................................................................... .............................15
C. C ANADA ’S TARIFF -RATE QUOTA ON FLUID MILK AND CREAM ................................................................17
III. CLAIMS OF THE PART IES...................................................................................................... .........19
A. E XPORTATION OF DAIRY PRODUCTS .........................................................................................................19
1. Product coverage and  period of time .......................................................................................... ...........19
2. Nature of Measure............................................................................................................ ......................19
3. Agreement on Agriculture ..................................................................................................... .................20
(a) Article 1(e)................................................................................................................ .......................................20
(b) Article 9.1(a) and (c) ...................................................................................................... .................................20
(c) Article 3.3 and Article 8 ................................................................................................... ...............................20
(d) Article 10.................................................................................................................. .......................................20
4. Agreement on Subsidies and Countervailing Measures ("SCM Agreement")........................................20
(a) Article 1 and Paragraph (d) of the Illustrative List of Export Subsidies in Annex I ........................................2 0
(b) Article 3................................................................................................................... ........................................21
B. I MPORTATION OF MILK............................................................................................................................21
1. Article II of GATT 1994 and the Agreemen t on Import Licensing Procedures ......................................21
C. R ECOMMENDATIONS REQUESTED BY THE PARTIES ...................................................................................21
IV. ARGUMENTS OF THE PARTIES .................................................................................................... .23
A. E XPORTATION OF DAIRY PRODUCTS ........................................................................................................23
1. Nature of Canada's Special  Milk Classes Scheme ............................................................................... ..23
(a) Outline..................................................................................................................... ........................................23
(b) The Authority and Role of the Canadian Dairy Commission (CDC)............................................................... 23
(c) Government Involvement ...................................................................................................... ..........................34
(d) Producers' Involvement ...................................................................................................... .............................43
(e) In- and Over-quota Milk and the Producers' Choice........................................................................... .............50
2. "Export Subsidy" - the Interpretive Context.................................................................................. .........59
(a) The SCM Agreement and the Agreement on Agriculture.......................................................................... ......59
(b) The Relevance of the Vienna Convention and Negotiating History .............................................................. ..63
3. The Agreement on Agriculture ................................................................................................. ..............69
(a) Outline..................................................................................................................... ........................................69
(b) Article 9.1(a).............................................................................................................. ......................................70
(i) The meaning of "direct subsid ies, including payments-in-kind"............................................................... ..70
(ii) The meaning of the term "direct"........................................................................................... .....................76
(c) Article 9:1(c) .............................................................................................................. .....................................76WT/DS103/R
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(i) The meaning of the term "payment" ........................................................................................... ................76
(ii) Financed by virtue of governmental action.................................................................................. ...............88
(d) Article 10.................................................................................................................. .......................................91
(i) Outline ..................................................................................................................... ...................................91
(ii) "Export subsidy" within the meaning of Article 10 .......................................................................... ..........92
(iii) "Circumvention" ........................................................................................................... ..............................93
(iv) Article 10.3 –  the Burden of Proof........................................................................................ .....................99
(e) Other Relevant Provisions of the Agreement on Agriculture ................................................................... .....101
(i) Article 8 and 3.3 ........................................................................................................... ............................101
4. Agreement on Subsidies and Countervailing Measures ("SCM Agreement")......................................101
(a) Outline..................................................................................................................... ......................................101
(b) Article 1................................................................................................................... ......................................103
(i) Article 1.1(a)(1) – Financial Contribution .................................................................................. ..............103
(ii) Article 1.1(a)(2) – Income or Price Support in the sense of Article XVI of GATT 1994 .........................111(iii) Article 1.1(b) – "Benefit"................................................................................................ ..........................117
(c) Paragraph (d) of the Illustrative List of Export Subsidies.................................................................. ............121
(i) Outline ..................................................................................................................... .................................121
(ii) Government mandated ....................................................................................................... ......................122
(iii) Terms or conditions more favourable ... ................................................................................... ................125
(iv) Terms and conditions more favorable than those commercially available ...............................................125
(d) Article 3................................................................................................................... ......................................136
5. Protected Markets and Export Su bsidies....................................................................................... .......137
B. I MPORTATION OF MILK..........................................................................................................................141
1. Outline...................................................................................................................... ............................141
2. Article II:1 of GATT 1994 .................................................................................................... ................142
3. Article 3 of the Agreement on Import Licencing Procedures ...............................................................155
V. SUMMARY OF THIRD P ARTY SUBMI SSIONS...............................................................................158
A. A USTRALIA ............................................................................................................................... .............158
1. Introduc tion................................................................................................................. .........................158
2. Discussion ................................................................................................................... .........................158
(a) Relationship between the Agreement on Agriculture and the SCM Agreement............................................158
(b) Classes 5(d) and (e) under the Special Milk Classes Scheme constitute export subsidies .............................159
(c) Export Subsidies under Article 9.1 of the Agreement on Agriculture .......................................................... .160
(i) "Provision by governments or their agencies" ................................................................................ ..........160
(ii) "Direct subsidies, in cluding paymen ts-in-kind"............................................................................. ...........160
(d) Article 3 of the Agreement on Agriculture ................................................................................... .................161
(e) Article 10 of the Agreement on Agriculture .................................................................................. ................161
(f) Article 3 of the SCM Agreement.............................................................................................. .....................161
B. J APAN ............................................................................................................................... ......................161
1. Introduc tion................................................................................................................. .........................161
2. Legal Arguments .............................................................................................................. ....................162
(a) Canada’s Special Milk Classes Scheme provided an export subsidy within the meaning of Article 9.1(c) of
the Agreement on Agriculture................................................................................................... ..............................162
(b) By operating the Special Milk Class System, Canada circumvented or threatened to circumvent its export
subsidy commitments............................................................................................................ ..................................163
(c) Canada was requested to bring the measures at issue into conformity with the Agreement on Agriculture. .163
VI. INTERIM REVIEW.............................................................................................................. ..............164
VII. FINDINGS ................................................................................................................... ........................165
A. CLAIMS OF THE PARTIES .........................................................................................................................165
1. The Special Milk Classes Scheme.............................................................................................. ...........165
2. The tariff-rate quota for fluid milk ......................................................................................... ..............166
3. Other claims raised in the requests for this Panel ........................................................................... ....166
B. T HE SPECIAL MILK CLASSES SCHEME ....................................................................................................166
1. Summary of claims and ar guments of the parties............................................................................... ..166
(a) New Zealand and the United States........................................................................................... ....................166
(b) Canada...................................................................................................................... .....................................167
2. The Panel's decision of 16 December 1998..................................................................................... .....168
3. The Agreements referred to and the sequence in which the Panel will address the claims .................169WT/DS103/R
WT/DS113/R
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(a) The Agreement on Agriculture and the SCM Agreement.......................................................................... ....169
(b) The Agreement on Agriculture ................................................................................................ ......................170
(i) General outline............................................................................................................. .............................170
(ii) The specific provisions relied upon by the parties ......................................................................... ...........172
4. Burden of proof as a consequence of Ar ticle 10.3 of the Agreement on Agriculture ...........................172
5. Article 9.1(a) of the Agreement on Agriculture............................................................................... .....173
(a) "direct subsidies, including payments-in-kind" .............................................................................. ...............174
(i) General criteria ............................................................................................................ .............................174
(ii) Milk sales under Special Milk Classes 5(d) and (e):  the provision of milk for the processing of dairy
products for export at a lower price........................................................................................... .........................175
(iii) Milk sales under Special Milk Classes 5(d) and (e):  the provision of milk for the processing of dairyproducts for export by the CDC with an assured margin for the processor ........................................................ 178
(iv) Concluding remarks on the payment in kind offered to processors/exporters...........................................178
(b) provided "by governments or their agencies" ................................................................................. ...............179
(i) The provision of milk under Classes 5(d) and (e) is not financed by governmental funds but by milkproducers either collectively (in-quota) or individually (over-quota).......................................................... .......179
(ii) The degree of government involvement required for there to be a "provision by governments or their
agencies" under Article 9.1(a) ................................................................................................. ...........................180
(iii) How milk for export is made available under Classes 5(d) and (e).......................................................... .180
Sales of milk for export under Class 5(d) ...................................................................................... ................180
Sales of milk for export under Class 5(e) ...................................................................................... ................180
(iv) The extent to which Canada's governments or their agencies are involved in the making available of milk
under Classes 5(d) and (e) ..................................................................................................... .............................181
Canada's governments and their agencies........................................................................................ ..............181
The concrete government involvement in making milk available under Classes 5(d) and (e).......................184
(v) The Panel's finding on whether the milk is provided by governments or their agencies...........................185
(c) The Panel's finding under Article 9.1(a) .................................................................................... ....................185
6. Article 9.1(c) of the Agreement on Agriculture ............................................................................... .....186
(a) "payments on the export of an agricultural product" ......................................................................... ............186
(b) payments "financed by virt ue of governmental action" ........................................................................ .........190
Additional considerations with respect to sales of in-quota milk............................................................... ....191
Additional considerations with respect to sales of over-quota milk............................................................. ..192
(c) The Panel's finding under Article 9.1(c) .................................................................................... ....................193
7. Article 3.3 of the Agreement on Agriculture.................................................................................. .......193
8. Article 10 of the Agreement on Agriculture................................................................................... .......194
(a) The two elements under Article 10.1......................................................................................... ....................196
(b) An "other" export subs idy under Article 10.1................................................................................ ................197
9. Article 8 of the Agreement on Agriculture.................................................................................... ........200
10. Article 3 of the SCM Agreement.............................................................................................. .............201
C. THE TARIFF-RATE QUOTA FOR FLUID MILK .............................................................................202
1. Facts and claims of the parties.............................................................................................. ...............202
2. Article II:1(b ) of GATT 1994................................................................................................. ...............203
3. The Licensing Agreement ...................................................................................................... ...............206
VIII. CONCL USIO NS............................................................................................................... ...................207WT/DS103/R
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I. INTRODUCTION
1.1 This proceeding has been initiated by two comp laining parties, the United States and New
Zealand.
1.2 In a communication dated 8 October 1997 (WT/DS103/1), the United States requested
consultations with Canada in accordance with Article 4 of the Understanding on Rules and ProceduresGoverning the Settlement of Disputes ("DSU"), pursuant to Article XXII:1 of the General Agreement
on Tariffs and Trade 1994 ("GATT 1994"), Article 19 of the Agreement on Agriculture, Article 30 of
the Agreement on Subsidies and Countervailing Duties ("the SCM Agreement") and Article 6 of the
Agreement on Import Licensing Procedures with respect to export subsidies of Canada on dairy
products and the administration by Canada of its tariff-rate quota for fluid milk and cream.  The
United States and Canada held consultations in Geneva on 19 November 1997 but these consultations
did not result in a resolution of the dispute.
1.3 On 29 December 1997 New Zealand requested consultations with Canada pursuant to
Article 4 of the DSU, under Article 19 of the Ag reement on Agriculture and Article XXII:1 of the
GATT 1994 with regard to Canada's Special Milk Classes Scheme.  New Zealand and Canada held
consultations on 28 January 1998 but these consultations did not result in a resolution of the dispute.
1.4 On 2 February 1998, the United States (WT/DS103/4) and on 12 March 1998, New Zealand
(WT/DS113/4), each requested the establishment of a panel with standard terms of reference.
1.5 In its request, the United States claims that:
(a) "The Government of Canada is providing subsidies, and in particular export
subsidies, on dairy products through its national and provincial pricing arrangements
for milk and other dairy products without regard to the export subsidy reduction andother WTO commitments undertaken by Canada.  Specifically, the Government of
Canada established and maintains a system of special milk classes through which it
maintains high domestic prices, promotes import substitution, and provides export
subsidies for dairy products going into world markets.  These practices distort
markets for dairy products and adversely affect US sales of dairy products."
(b) "In addition, although Canada committed under the Marrakesh Agreement
Establishing the World Trade Organization to permit access to an in-quota quantity of
64,500 tonnes (product weight basis) under a tariff-rate quota for imports of fluid
milk and cream, Canada has refused to permit commercial import shipments within
the quota.  Instead, Canada is administering this tariff-rate quota in a manner thatdenies market access."
(c) "These measures appear to be inconsistent with the obligations of Canada under the
General Agreement on Tariffs and Trade 1994 (GATT 1994), the Agreement on
Agriculture, the Agreement on Subsidies and Countervailing Measures, and the
Agreement on Import Licensing Procedures .  The measures in question are the
Canadian Dairy Commission Act, agreemen ts of the Canadian Dairy Commission,
the Interprovincial Comprehensive Agreement on Special Class Pooling (as well asthe P-4, P-6, and P-9 interprovincial pooling agreements), the National Milk
Marketing Plan (and amendments thereto), operations of the Canadian Milk Supply
Management Committee, the Dairy Products Marketing Regulations, and Canada’s
administration of its tariff-rate quota on fluid milk and cream (as reflected in its
implementation of its WTO Schedule of Concessions)."WT/DS103/R
WT/DS113/R
Page 2
(d) "These measures are inconsistent with the obligations of Canada under Articles II, X,
XI, and XIII of the GATT 1994;  Articles 3, 4, 8, 9, and 10 of the Agreement on
Agriculture;  Article 3 of the Agreement on Subsidies and Countervailing Measures;
and Articles 1,  2 and 3 of the Agreement on Import Licensing Procedures."
1.6 In its request, New Zealand claims that:
(a) "The Government of Canada is providing export subsidies on dairy products in
contravention of its export subsidy reduction and other WTO commitments as
encapsulated by the Agreement on Agriculture and the General Agreement on Tariffs
and Trade 1994 (GATT 1994).  The dairy export subsidy scheme in question is
commonly referred to as the "special milk classes" scheme.  The background to, and
details of, the "special milk classes" scheme is contained, though not necessarily
exclusively, in the following documents:
(i) the Canadian Dairy Commission Act;
(ii) the Comprehensive Agreement on Special Class Pooling (the P9 Agreement);(iii) the National Milk Marketing Plan (NMMP);(iv) the Agreement on All Milk Pooling (the P6 Agreement);  and(v) the Western Milk Pooling Agreement (the P4 Agreement)."
(b) "The "special milk classes" scheme referred to above is inconsistent with Canada's
obligations under the following provisions:
(i) Articles 3, 8, 9 and 10 of the Agreement on Agriculture;  and
(ii) Article X:1 of the GATT 1994."
1.7 The Dispute Settlement Body (DSB) agreed to each of these requests for a panel at its
meeting of 25 March 1998 (WT/DSB/M/44).  The DSB further agreed that the two panels be
consolidated as a single panel pursuant to Article 9.1 of the DSU with the following standard terms of
reference:
"To examine, in the light of the relevant provisions of the covered agreements cited by the
United States in document WT/DS103/4 and by New Zealand in document WT/DS113/4, the
matters referred to the DSB respectively by the United States and New Zealand in these
documents, and to make such findings as will assist the DSB in making the recommendations
or in giving the rulings provided for in those agreements".
1.8 On 12 August 1998, the parties to the dispute ag reed on the following composition of the
Panel:
Chairman: Professor Tommy Koh
Members: Mr. Guillermo Aguilar Alvarez
Professor Ernst-Ulrich Petersmann
1.9 Australia and Japan, and the United States in respect of the New Zealand claims, reserved
their rights to participate in the Panel proceedings as third parties.WT/DS103/R
WT/DS113/R
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II. FACTUAL ASPECTS
A. THE CANADIAN DAIRY SECTOR
1. General
2.1 In Canada, milk production is divided into two categories:  fluid milk and industrial milk.  Of
all milk deliveries, approximately 40 per cent is processed into table milk and cream (fluid milk);  theremaining 60 per cent is processed into dairy products such as butter, cheese, milk powders, ice cream
and yoghurt (industrial milk).
1
2.2 Dairy producers are individual farmers who are licensed to produce milk and sell it, through
marketing boards, to dairy processors.  The processors are made up of the dairies that process the raw
milk for fluid or industrial use, as well as further processors who use the basic dairy components as
inputs for other products (such as frozen pizzas, prepared flour mixes, and confectionery).  The
processors then sell the value-added product on the domestic market or export it on internationalmarkets.
2.3 In Canada, there are approximately 23,800 dairy farms which in 1996/97 produced
77.5 million hectolitres of milk, compared to 84,260 dairy farms which produced 75.5 million
hectolitres of milk in 1974/75 following the introduction of supply management.
2  Virtually all
production of milk comes from farms that produce for both fluid and industrial markets.
2.4 While fluid milk in general is produced and consumed locally within each of Canada's
provinces, industrial milk products move in significant volumes across provincial boundaries or are
exported from Canada.
2.5 Quebec and Ontario are the most important dairy-producing provinces in Canada.  Quebec is
the largest producer of industrial milk, retaining close to 50 per cent of the national share of industrialmilk, followed by Ontario with approximately 30 pe r cent.   The dairy processing industry is also
centred primarily in Quebec and Ontario.
2. Components of the Canadian Dairy Policy
2.6 The basic components of Canada's supply management system for industrial milk are:
(a) production quotas;
(b) administered support prices;  and
(c) border protection.
2.7 Regulatory jurisdiction over trade in dairy products is divided between the federal
government and the provinces.  While the federal government has constitutional authority over inter-
provincial and international trade, other aspects of production and sale of milk are under provincialjurisdiction.
                                                     
1 The raw milk provided by the farmer to the processor is usually broken down at the initial stage of processing into its basic
"constituents" (cream and skim milk) or into "components" (such as butterfat, protein and other milk solids). The various types  of fluid milk
(e.g., 3.25 per cent, 2 per cent, 1 per cent) and cream are created by re-blending the cream and skim milk to the desired butte rfat content
level.
2 1996/97 Annual Report of the Canadian Dairy Commission and Agriculture and Agri-Food Canada:  "Long Term Dairy Policy
Consultation Paper" (May 1996).WT/DS103/R
WT/DS113/R
Page 4
2.8 The federal government pays a subsidy of C$3.04 per hectolitre for industrial milk produced
to meet domestic requirements.  To this point in time, this subsidy is being phased out with the
subsidy reduction being passed on to the marketplace through support price adjustments.  The subsidy
is expected to be eliminated by February 2002.
2.9 The federal government maintains tariffs and tariff quotas on imported dairy products.  The
following table summarizes the base and final bound tariffs for selected dairy products as bound in
Canada's WTO Schedule:
Table 1 - Tariff Binding for Selected Dairy Products
Products Base Tariff Final Bound Rate (2000)
Milk 283.8%, minimum $40.6/hl 241.3%, minimum $34.5/hl
Cheddar Cheese 289.0%, minimum $4.15/kg 245.6%, minimum $3.53/kg
Butter 351.4%,  minimum $4.71/kg 298.7%, minimum $4.00/kg
Yoghurt 279.5%, minimum $0.55/kg 237.5%, minimum $0.47/kg
Ice Cream 326.0%, minimum $1.36/kg 277.1%, minimum $1.16/kg
Skim Milk Powder 237.2%, minimum $2.36/kg 201.6%, minimum $2.01/kg
2.10 Low-rate tariff quota commitments are applicable to the following products and quantities:
fluid milk (64,500 tonnes);  cream – not concentrated  (394 tonnes);  concentrated or condensed milk
or cream (11.7 tonnes);  butter (1,964 tonnes incr easing to 3,274 tonnes);  cheese (20,412 tonnes);
yoghurt (332 tonnes);  powdered buttermilk (908 tonn es);  dry whey (3,198 tonnes);  other products of
milk constituents (4,345 tonnes).
2.11 Canada operates an Import for Re-Export Program under the authority of the Export and
Import Permits Act. 3  Under this programme permits to import dairy products on an Import Control
List may be issued by the responsible Minister subject to such conditions as are described in thepermit or in the regulations. There are no specific policy guidelines or administrative instructions with
respect to this programme, which has been in operation for a number of years. Imports under this
programme consist of storable and tradeable components of milk, such as skim and whole milk
powders and butter.  No permits for milk for manufacturing purposes have been requested by
Canadian processors under this program, but fluid milk is imported under the program in retail
packages for use on, or eventual re-export by, cruise ships passing through Canada.
3. The Canadian Dairy Commission (the "CDC")
2.12 The Canadian Dairy Commission  is a Crown corporation established under the Canadian
Dairy Commission Act (the "CDC Act").
4  Its mandate is set out in the following way in the text of
the CDC Act:
                                                     
3 Canada, Exhibit 35.
4 The abbreviation "CDC Act" refers to the CDC Act as amended.WT/DS103/R
WT/DS113/R
Page 5
"The objects of the Commission are to provide efficient producers of
milk and cream with the opportunity of obtaining a fair return for
their labour and investment and to provide consumers of dairy
products with a continuous and adequate supply of dairy products of
high quality."5
2.13 The powers of the CDC are set out in Article 9.(1) of the CDC Act (Box 1).
Box 1
"9. (1) The Commission may
(a) purchase any dairy product and sell, or otherwise dispose of, any dairy product purchased by it;
(b) package, process, store, ship, insure, import or export any dairy product purchased by the
Commission;
(c) make payments for the benefit of producers of milk and cream for the purpose of stabilizing the
price of those products, which payments may be made on the basis of volume, quantity or on
any other basis of volume, quality or on any basis that the Commission deems appropriate;
(d) make investigations into any matter relating to the production, processing or marketing of any
dairy product, including the cost of producing, processing or marketing that product;
(e) undertake and assist in the promotion of the use of dairy products, the improvement of the
quality and variety of and the publication of information in relation to those products;
(f) establish and operate a pool or pools in respec t of the marketing of milk or cream, including
(i)  distributing money to producers of milk or cream received from the marketing on any
quantity of milk or cream, or any component, cl ass, variety or grade of milk or cream from the
pool or pools;
(ii)  deducting from the money distributed under sub-paragraph (i) any necessary and proper
expenses of operating the pool or pools;
(g) establish the price, or minimum or maximum price, paid or to be paid to the Commission, or to
producers of milk or cream, the basis on which that payment is to be made and the terms and
manner of payment that is to be made in resp ect of the marketing of any quantity of milk or
cream, or any component, class, va riety or grade of milk or cream;
(h) collect the price paid or to be paid to the Commission, or to any producer in respect of the
marketing of any quantity of milk or cream, or  any component, class, variety or grade of milk
or cream, or recover that price in a court of competent jurisdiction;
(i) subject to an agreement entered into under section 9.1, establish and operate a programme in
respect of the quantities and prices of milk or cream, or of any component, class, variety or
grade of milk or cream, necessary for the competitive international trade in, and the promotion
and facilitation of the marketing of, dairy products, including:
(i)  distributing money for the purpose of the equalization of returns to producers in respect of
that milk or cream, or that component, class, variety or grade, from which those dairy products
are made, and
(ii)  deducting from the money distributed under sub-paragraph (i) any necessary and proper
expense of operating the programme; and,
(j) do all acts and things necessary or incidental to the exercise of any of its powers or the carrying
out of any of its functions under this Act."
2.14 The CDC receives its funding from the federal government of Canada as well as from
producers and from market transactions.6  Its members (a Chairman, Vice-Chairman and
Commissioner) are appointed by the federal government, and the CDC is accountable to the federalParliament, reporting to the Minister of Agriculture and Agri-Food.
7
2.15 The CDC establishes a national target price for industrial milk, which is an amount deemed to
be adequate for producers to cover their costs and receive a fair return on their labour and
                                                     
5 CDC Act, Section 8.
6 1996/1997 Annual Report of the Canadian Dairy Commission, pp. 26 and 28-29.
7 CDC Act, Section 4, establishes that: The Commission [CDC] is for all purposes of this Act an agent of Her Majesty in right of
Canada.WT/DS103/R
WT/DS113/R
Page 6
investments. Using the target price as a basis, the CDC also establishes support prices8 for butter and
skim milk powder.9
4. Provincial Milk Marketing Boards
2.16 In each province a milk marketing board exists.  The provincial milk marketing boards
operate within a framework established under federal and provincial legislation.  The CDC Actdefines a board as
10:
"'Board' means a body that is constituted under the laws of a province
for the purpose of regulating the production for marketing, or the
marketing, in intraprovincial trade of any dairy product".
2.17 The provincial milk marketing boards have all been given general authority by the federal and
provincial governments in respect of the issuance and administration of quota, the pooling of returns,
pricing, producer records keeping and reporting, in spection, and agreements to cooperate with other
provinces and the CDC.
2.18 The membership of the provincial milk marketing boards is made up mostly or exclusively of
dairy producers.11
2.19 It is prohibited for milk producers to sell any milk individually, without using the provincial
milk marketing boards as an intermediary.
2.20 With the exception of 15 producers in Ontario, a producer must have a minimum quota
holding to market milk on the domestic or international market.
5. The NMMP
2.21 At a national level, the provincial marketing boards cooperate under the National Milk
Marketing Plan (NMMP).  The NMMP is signed by the boards for nine12 of the ten provinces, some
provincial government representatives13, and the CDC.
                                                     
8 Currently, support prices are only used by the CDC for programme s to buffer domestic supplies seasonally and, to a very minor
extent regionally and between processors.  This is done through Plans A and B.  Under Plan A, the CDC maintains butter stocks t o buffer
the domestic market against seasonal supply fluctuations.  Sales from stocks acquired under this programme in 1996-97 amounted to less
than 1 per cent of butter disappearance.  Under Plan B, processors may sell butter to the CDC on condition that they repurchase  it within the
year.  Sales of butter covered by this programme amounted to 18 per cent of domestic disappearance in 1996-97.
9 1996/1997 Annual Report of the Canadian Dairy Commission, under "Price Setting".
10 CDC Act, Section 2 (Definitions).
11 This is true for Ontario and Quebec and all other provinces except Nova Scotia, Alberta and Saskatchewan.  In Nova Scotia,
the board members are appointed by the provincial government with one member of five to be a producer.  In Alberta and Saskatch ewan, the
provincial governments also appoint the members but historically producers are well represented on the boards. Currently, each five-
member board includes two producers, one consumer representative and one processor representative. Nova Scotia, Alberta andSaskatchewan accounted for 1.91 per cent, 4.77 per cent and 2.51 per cent of domestic production in 1997. (Canada, Exhibit 3)
12 Newfoundland is not a party to the NMMP (its producers produce almost exclusively for the local fluid milk market and it has
not traditionally contributed to the industrial milk supply that was the subject of the NMMP).
13 Canada, Exhibit 10 contains a full list of signatories.WT/DS103/R
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2.22 The text of the NMMP states that the
"[p]lan is a federal-provincial agreement in respect of the
establishment of a National Milk Marketing Plan for the purpose of
regulating the marketing of milk and cream products relating to
Canadian domestic requirements and for any additional industrialmilk requirements in Canada."
14
2.23 The NMMP sets out the structure for the calculation of an annual national production target
for industrial milk - the national Market Sharing Quota (MSQ).
2.24 The NMMP is supplemented by:
(a) the Comprehensive Agreement on Special Class Pooling , (the "P9") which deals with
the pooling of revenues from the Special Classes;
(b) the Western Milk Pooling Agreement (the "P4");  and
(c) the Agreement on All Milk Pooling (the "P6").
2.25 The Comprehensive Agreement on Special Class Pooling is an Agreement among the
authorities of nine provinces and provincial producer boards that are signatories of the NMMP in
respect of pooling of revenues from sales of milk components in special classes of milk used to
service domestic and external markets.  The Agreement provides for the adoption of theMemorandum of Understanding on Special Class Pooling (MOU) and an Addendum to that
Memorandum of Understanding.
15
2.26 The powers necessary to create the Special Classes and to administer the Special Milk Classes
Scheme were conferred on the CDC by amendment to federal legislation (the CDC Act).  It is
implemented by the Canadian Milk Supply Management Committee (CMSMC).
6. The CMSMC and the MSQ.
2.27 As noted above, the CMSMC, established under the NMMP16, is the body that oversees the
implementation of the Comprehensive Agreement on Special Class Pooling.17
2.28 It is composed of representatives of each provincial marketing board and the respective
provincial governments.18  Representatives of the Dairy Farmers of Canada (the "DFC"), the National
Dairy Council (the "NDC") representing the dairy processors/exporters, and the Consumers
Association of Canada participate although they do not have voting rights.  The CDC acts as chair of
the CMSMC.
2.29 Based on production and demand forecasts developed by the CMSMC Secretariat
(economists from the CDC, the producer boards, the DFC and the NDC), the CMSMC sets the levelof the MSQ.  The MSQ is monitored and adjusted periodically to reflect changes in demand.  Acting
                                                     
14 NMMP, A. (Introduction).
15 Comprehensive Agreement on Special Class Pooling, Introduction.
16 NMMP, Section H.1.
17 MOU, Schedule I, Section 1.
18 Newfoundland sits on the CMSMC as an observer.WT/DS103/R
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under the provisions of the NMMP19, the CMSMC calculates shares of the MSQ among the
provinces.20
2.30 In setting the MSQ, the CMSMC takes into consideration:
(a) the estimate of domestic demand for industrial milk in the coming year;
(b) the estimated amount of butterfat that will enter the industrial milk system as surplus
from fluid milk production, i.e., the "skim-off";
(c) anticipated imports;
(d) stocks of dairy products;  and
(e) planned exports.
2.31 Once a national MSQ has been agreed upon by the CMSMC, the next step is to allocate the
MSQ between the provinces.  This is done essentially on the basis of historical market shares, with
some limited latitude for adjustment through transfers of quota within regional arrangements.  Since1995 the MSQ has been established at the following levels (million hectolitres):
Marketing Year 1995/96 1996/97
1997/98 1998/99
MSQ Level 44.2 44.2 43.3 44.7
2.32 Subsequently, the provincial milk marketing boa rd allocates quotas to individual farmers.  In
most provinces21, the board makes a single allocation22 to each producer, which represents that
producer's share of the domestic, and traditional ex port, milk market. The individual producer's share
of the provincial quota, the producer's quota, is determined by the permanent quota rights held by that
producer. While quotas were originally allocated on the basis of historic production levels, thesequota rights are commercially tradable and, in many cases, have been acquired on a commercial basis.
2.33 In general, CMSMC decisions are taken by consensus. When votes occur, each province that
is a member of the NMMP (provincial government representative and producer marketing board
representative together) receives one vote. Some votes require a majority while others require
unanimous consent.  The CDC is empowered to take a decision in the event of a failure by membersto agree at two meetings where the question concerns a matter not covered by the Comprehensive
Agreement on Special Class Pooling.  The Comprehensive Agreement on Special Class Poolingrequires unanimity, including on all matters with respect to export trade.
B. THE CANADIAN SPECIAL MILK CLASSES SCHEME
1. Background
2.34 Prior to 1995, the proceeds of levies paid by producers were utilized to fund the CDC’s losses
in exporting dairy surpluses.
                                                     
19 NMMP, Section I, Quota Allocation.
20 1996/1997 Annual Report of the Canadian Dairy Commission, pp. 7-8.
21 In Alberta, producers receive two quotas, one for fluid milk, expressed in litres per day, and one for industrial milk, expres sed
in kilograms of butterfat per annum.
22 This is usually expressed in kilograms of butterfat per day.WT/DS103/R
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2.35 Following the signing of the WTO Agreement in April 1994, the CDC "directed its activities
toward developing alternatives to the use of producer levies".23  With this in mind, a Dairy Industry
Strategic Planning Committee was established.  The CDC chaired this Committee and provided
research and secretariat support for it.  In October 1994, the Committee recommended the
implementation of a "classified pricing system based on the end use of milk, national pooling ofmarket returns, and coordinated milk allocation mechanisms."
24
2.36 A Negotiating Subcommittee of the CMSMC was established, with representation from all
provinces, to resolve how to implement a "special milk classes" scheme.  This subcommittee
presented its recommendations to federal and provincial Ministers of Agriculture in December 1994,
who agreed that "some form of pooling of milk returns was urgently required to enable the dairy
industry to meet Canada’s international obligations and changing market conditions."25  Ministers also
agreed that the CDC Act should be amended to allow the CDC to administer the Special Milk Classespermit and national pooling arrangements.  These amendments were passed in July 1995.
26
2.37 The Special Milk Classes Scheme, which replaced the producer-financed levy system
eliminated in 1995, is embodied in a Comprehensive Agreement on Special Class Pooling.  The CDC,
the provincial producer boards and the provinces that participate in the NMMP are the signatories of
the Comprehensive Agreement on Special Class Pooling which became effective on 1 August 1995.
2. The Special Classes
2.38 The "Special Milk Classes" are the sub-classes of Class 5 milk in the national common
classification system, under which the pricing of milk is based upon the end use to which the milk is
put by processors.  Classes 1 to 4 comprise:
(a) Class 1:  Fluid milk and cream for the domestic market;(b) Class 2:  Industrial milk for the domestic market:  ice cream, yoghurt and sour cream;
(c) Class 3:  Industrial milk for the domestic market:  cheese;
(d) Class 4: Industrial milk for the domestic market:  butter, condensed and evaporated
milk, milk powders and others.
2.39 The definition of the Special Milk Classes under Class 5 as contained in the Comprehensive
Agreement on Special Class Pooling is as follows
27:
(a) Class 5(a) Cheese ingredients for further processing for the domestic and export
markets.
(b) Class 5(b) All other dairy products for further processing for the domestic and
export markets.
(c) Class 5(c) Domestic and export activities of the confectionery sector.
                                                     
23 1994/1995 Annual Report of the Canadian Dairy Commission, page 4.
24 1994/1995 Annual Report of the Canadian Dairy Commission, pages 3-4.
25 Ibid.
26 Ibid.
27 Comprehensive Agreement on Special Class Pooling, Annex A.WT/DS103/R
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(d) Class 5(d) Specific negotiated exports including cheese under quota destined for
United States and United Kingdom markets, evaporated milk, whole
milk powder and niche markets.
(e) Class 5(e) Surplus removal.
2.40 Class 5(e), which is referred to as "surplus removal", is made up of both in-quota and
over-quota milk.  The over-quota portion of Class 5(e) represents the production that is in excess of
the MSQ.  The in-quota portion of Class 5(e) exports represents the milk production that is surplus to
domestic and planned export needs.  This "surplus" may be derived either from the:
(a) "sleeve"28;
(b) structural surplus of solids non-fat29 resulting from setting the MSQ at a level that
meets demand for butterfat;  or
(c) other in-quota surpluses.30
2.41 Table 2 shows Canada's total exports compared  to their export volume commitments under
the WTO. Canada also provided data on the amount of exports generated through Classes 5(d) and (e)
but requested that this data be kept confidential on the ground that the amounts for some entries make
identification of individuals possible.  The figures provided indicate that the total amount of exports
generated through Classes 5(d) and (e) exceeds Canada's export quantity commitment level in respectof all three marketing years and this for all products contained in Table 2 other than skim milk powder
(see also paragraph 7.115).
Table 2
Product Marketing year Export Quantity
commitment levelTotal exports31Total exports
generated through
Classes 5(d) and (e)32
Butter 1995/1996
1996/19971997/19989,464
8,2717,07913,956
10,98710,894
Cheese 1995/1996
1996/1997
1997/199812,448
11,773
11,09913,751
20,409
27,397
Skim milk powder 1995/1996
1996/19971997/199854,910
52,91950,92735,252
24,88829,886
Other milk products 1995/1996
1996/19971997/199836,990
35,64934,30737,573
62,14671,023
                                                     
28 The "sleeve" is a safety margin built into the annual estimate of Canadian domestic requirements – its purpose is to cover for
any unexpected changes in domestic demand in the course of the dairy year.
29 This structural surplus, which consists of skim milk powder, had declined in recent years to about 17,800 tonnes of skim milk
powder.
30 Such surpluses could arise where there is a temporary imbalance in supply and demand, such that milk is available in a
province which is not needed immediately on the domestic market in that province. This can also be described as seasonal variat ion in
demand through the year.
31 Data provided in response to Panel Question:  Source of Total Exports:  Statistics Canada.
32The data provided by Canada in response to Panel questions on exports generated through Classes (d) and (e), which is more
extensive than that reproduced in paragraph 7.114 below, is on record and is available to the Appellate Body as necessary.WT/DS103/R
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3. In-quota milk and over-quota milk
2.42 A national production quota (the national MSQ) for industrial milk is set each year by the
CMSMC (paragraph 2.29 and 2.30).  Each province is allocated a share of the MSQ which is then
allocated among producers within a province by the various provincial milk marketing boards andagencies.
2.43 If a province exceeds its share of the MSQ, the m ilk that is in excess of the province’s share
of the MSQ is referred to as "over-quota" milk (further detail in paragraph 2.57).  If a province does
not exceed its share of the MSQ, all of the province’s milk is referred to as "in-quota" milk.
2.44 Prior to 1995, the percentage of farmers producing in excess of 105 per cent
33 of their
allocated quota was small.  In 1994-95, only 10 per cent of producers were in this group, a figure
consistent with levels observed since 1992.  A year later, under the new system,  25 per cent offarmers produced over 105 per cent of quota.  By 1997-98, 34 per cent of Canadian producers were
producing over 105 per cent of their quota.
2.45 In each of the regional pooling arrangements, fluid milk requirements are estimated on a
regional basis, based on previous years' consumption.  Since fluid milk demand is the highest priority
use for milk supplies in the system, the industrial milk system acts as a buffer for any fluctuations influid milk demand or supply.  In the event of a milk shortage, for instance, milk that would otherwise
have found an industrial use is sent into the fluid milk system to cover the shortfall.
2.46 Each province’s share of the total in-quota milk market is the sum of its share of the MSQ and
the fluid milk market within its regional pooling arrangement.
4. The price of milk to the processor
(a) Other Classes (Classes 1 – 4)
2.47 The prices in Classes 1-4 reflect the target return for sales on the domestic market. Although
the prices for these classes are established independen tly in each province by the provincial marketing
boards, the boards have agreed in the regional pooling arrangements not to have large differences in
these prices.
(b) Class 5  (Special Classes)
2.48 To obtain dairy products under Class 5, the processors/exporters must apply for a permit from
the CDC.  A permit holder then presents the permit to the relevant provincial marketing board or
marketing agency, which upon acceptance of the recommendation contained therein, provides the
milk for export.
                                                     
33 This is based on the assumption that 105 per cent of quota is a level that reflects a deliberate decision to produce for the o ver-
quota market, allowing for other factors such as weather and biological variability in milk production that may cause producers  not to meet
their quotas exactly.WT/DS103/R
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2.49 The CDC issues two types of permit for Class 5 milk:
(a) The first type of permit applies to the activities under Classes 5(a), 5(b), and 5(c) and
is issued to processors/exporters on an annual basis.
(b) The second type of permit applies to Classes 5(d) and (e) and is issued to exporters on
a transaction-by-transaction basis.
2.50 Prices in Classes 5(a) and (b) are set through a formula negotiated in and decided upon by the
CMSMC.  This formula links Class 5(a) and (b) prices to US industrial milk prices.   The CDC
collects the data and does the necessary calculations for the consideration of the CMSMC. The price
of milk in Class 5(c) is negotiated between the CMSMC and the confectionery manufacturers.
2.51 Prices for Classes 5(d) and (e) are negotiated and established on a case-by-case basis with the
processors/exporters.  The CDC conducts these negotiations in accordance with the criteria agreed
upon in the CMSMC.WT/DS103/R
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Table 3 - Average Selected Milk Component Prices by Class and Product
January to June 1997
Component Prices ($/kg.) $/hl
Class Product BF Protein OS Total
1a) Fluid milk 5.46 6.56 3.70 61.61
1b) Table Cream 5.43 5.22 3.58 56.62
2) Yoghurt and Ice Cream 5.43 4.00 3.89 54.37
3a) Specialty Cheeses 5.47 9.04 0.58 51.78
3b) Cheddar Cheese 5.48 8.59 0.58 50.40
4a) Butter, Ingredients 5.4 3.51 3.51 50.82
4b) Condensed Milk 5.44 3.62 3.62 51.71
5a) Specialty Cheeses 2.99 7.01 0.57 36.37
5a) Cheddar Cheese 3.05 7.01 0.57 36.55
5b) Fluid Milk 3.08 2.92 2.92 37.00
5b) Creams 3.05 2.92 2.92 36.89
5b) Yoghurt 3.05 2.92 2.92 36.91
5b) Butter, Ingredients 2.98 2.91 2.94 36.75
5c) Milk products for Confectionery 2.64 2.59 2.59 32.51
5d) Milk 2.18 2.18 2.12 27.28
5d) Cream 2.46 2.46 2.46 30.69
5d) Yoghurt 2.57 2.57 2.57 32.06
5d) Specialty Cheeses 1.94 4.87 0.51 25.37
5d) Cheddar Cheese 3.97 6.72 0.51 38.56
5d) Butter 1.83 1.83 1.83 24.91
5e) Milk 2.15 2.15 2.15 26.87
5e) Cream 2.20 2.20 2.20 27.47
5e) Specialty Cheeses 1.50 4.54 0.51 22.75
5e) Cheddar Cheese 1.86 4.92 0.51 25.23
5e) Butter 1.28 1.28 1.28 15.98
Notes:  BF = butterfat, hl = 100 litres, OS = other solids
One hectolitre of milk = approximately 3.6 kg. of butterfat, 3.2 kg. of protein and 5.7 kg. of other solids.
Source: United States, Exhibit 22, An Inquiry Into the Importation of Dairy Product Blends Outside the
Coverage of Canada's Tariff-Rate Quotas , Report of the Canadian International Trade Tribunal, June 1998 p.
13 (source referred to in United States, Exhibit 22:  Canadian Dairy Commission).WT/DS103/R
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5. Returns to producers from exports
(a) General
2.52 Exports of dairy products from Canada fall within two categories, exports that result from:
(a) milk from in-quota sources such as planned production for exports to traditional
markets and the part of the sleeve not used in domestic markets;
(b) milk that is the result of over-quota production.
(b) In-quota exports
2.53 In-quota milk for export use consists of milk that falls within the annual MSQ but is not used
for the domestic market.  It is sourced from a fixed amount set aside for planned export within
Class 5(d), as well as MSQ milk surplus to domestic requirements (under Class 5(e)).
2.54 The CMSMC specifies the amount of sales under Class 5(d), currently 1.2 million hectolitres.
Exporters with access to these traditional markets approach the CDC with proposals to purchase milk
under Class 5(d).34  Sales of surplus milk (i.e., Class 5(e)) begin with a declaration that milk surplus to
domestic requirements is available.  The determination whether there is in fact milk available in
system surplus to domestic and traditional export market requirements is made by the Surplus
Removal Committee, which is formally known as CDC Advisory Group on Preemptive Surplus
Removal (hereafter the "SRC") of the CMSMC.  If the SRC determines that milk is available35 and
the CDC believes that the proposal should be accepted, it provides a permit to the exporter that is
subject to acceptance by the relevant board.  This permit carries a recommendation to the board that
the required amount of milk should be supplied at the recommended price.
2.55 Once the exporter has agreed on a milk price with the board it may export the resulting
processed products. It keeps the export documentation available for examination by the CDC auditors.To allow the CDC to maintain its monitoring pr ogramme on behalf of the CMSMC, the exporter is
also required to file proof of export with the CDC.   All holders of such permits must provide the CDC
with regular reports on their dairy ingredient purchases and use.
2.56 The returns to the producer for in-quota milk sold for export use are based on world market
conditions, resulting from prices negotiated betw een the processor/exporter and the CDC.  These
returns are subject to pooling with domestic market returns before receipt by the individual producers.
(c) Over-quota exports
2.57 Exports of dairy products produced with over-quota milk may arise in two ways:
(a) Over-quota production:  There are production quotas at the individual farm level and
at the provincial level.  At the provinci al level, over-quota production occurs when
producers in a province produce milk in excess of their individual quotas and as a
result a province as a whole exceeds its share of the national MSQ in a defined period
of time.  Independent of the level of production in a province as a whole, at the farm
level, an individual producer may exceed his individual farm production quota.  It is
                                                     
34 These traditional sales are linked to certain trade opportunities, such as TRQs that are traditionally made available to Canad ian
exporters, as well as sales arising out of long-term trade patterns.  The main markets for Class 5(d) transactions are aged che ddar to the U.K,
cheese to the United States under Canada-specific tariff quotas, cheese to Mexico, mainly evaporated milk to Libya, skim milk p owder and
whole milk powder to Algeria and skim milk powder, whole milk powder and evaporated milk to Cuba.
35 The Comprehensive Agreement on Special Class Pooling states that the CDC will be guided by the decisions of the SRC.WT/DS103/R
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noted that returns to the producer are calculated on the basis of the over-quota
production at the individual level.
(b) Optional Export Program (OEP):  The OEP is a programme whereby milk is
produced in addition to quotas and sold outside of the classification system to meet a
specific marketing need.36 OEP contracts are negotiated between the producer
marketing board and a processor.  The board then offers the agreed terms to the
producers who can voluntarily accept to produce for the OEP contract.
2.58 The returns to the producer from over-quota production is based on a three month average
reflecting actual Class 5(e) prices, as calculated by the CDC.   At year's end, returns during the year
for over-quota milk are adjusted to reflect actual total returns. Over-quota returns through Class 5(e)
sales are not pooled with the domestic market returns before being paid to the individual producer.
Returns from sales under the OEP are likewise, no t pooled with the domestic market returns before
being paid to the individual producer.
6. Pooling
2.59 Pooling calculations are made under the Comprehensive Agreement on Special Milk Classes
(P9).
2.60 Revenues from all in-quota sales of milk are pooled between provinces in two regional pools
(Table 4).
Table 4
P6
Agreement on All Milk PoolingP4
Western Milk Pooling Agreement
Ontario British Columbia
Quebec Alberta
New Brunswick Saskatchewan
Nova Scotia
Prince Edward Island
Manitoba
Note: Manitoba currently belongs to both pools.
It first pools its revenues under the P4, then under the P6.
P9
Comprehensive Agreement on  Special Class Pooling
"National Pool"
(all 9 provinces)
                                                     
36 This is to be contrasted with over-quota production. Over-quota production is also produced over and above quotas but is not
linked to any specific export market need.   Producers are paid for OEP milk on the basis of the prior negotiated price, wherea s the board
pays the producer for over-quota milk on the basis of actual returns on Class 5(e) sales, i.e., returns from sales made in the spot market. The
OEP Agreement is Annex C of the Comprehensive Agreement on Special Milk Classes (P9).WT/DS103/R
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2.61 The pooling process is illustrated by way of an example with the following assumptions:
ASSUMPTIONS
-  ProductionP4 P5 P9
Class 1-4 15 hl 45 hl
Class 5 in-quota 2 hl 5 hl
Total 17 hl* 50 hl 67 hl
-  Actual returns
Class 1-4 $58 / hl $55 / hl
Class 5 $21 / hl $22 / hl
-  Target return:    (Class 1-4):  $54.00 / hl
* Includes 3 hl from Manitoba.
2.62 There are four steps in the pooling process:
STEP 1
Remove from pooling calculations sales from:
-  Over-quota .
-  Optional Export Programme.
STEP 2
Pool Class 5 in-quota: at actual price obtained .
Pool Classes 1-4: at the target price:  $54.00 / hl.
Gives:  Revenue to be pooled by region.
REGIONS: P4 P5 P6 P9
Target Revenue @ $54.00 / hl.
Class 1-4 $810 $2,430
Class 5 (@ $21 and $22 / hl) $42 $110
Total $852 $2,540 $3,392WT/DS103/R
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STEP 3
Class 5 in-quota is pooled with all Classes.  Gives:  Average return, all classes .
Adjustment  between regional pools is calculated
REGIONS: P4 P5 P6 P9
Class 5 is pooled in all Classes
$3,392 / 67 hl $50.63 / hl
Revenue at:
Target return
  total in Step 2 $852 $2,540
Pooled return (all classes)
  @ $50.63 / hl $861 $2,531
Difference (Adjustment) + $9 - $9
STEP 4
Pool the P4 at actual market returns from all milk sales.  Apply the adjustment for P9.
Pool P5 at actual market returns from all milk sales.
Manitoba adds revenues from P4 into the P5.  This becomes the P6 .
Pool the P6 at actual returns from all milk sales.  Apply the adjustment for P9.
REGIONS: P4 P5 P6 P9
Actual revenue
Class 1-4 (@ $58 and $55 / hl) $870 $2,475
Class 5 (@ $21 and 22 / hl) $42 $110
Total $912 $2,585 $3,497
Adjusted revenue + $9 - $9
Total $921 /g212 $2,576
Quantity (P4) 17 hl 50 hl
Average Return (P4) $54.18 / hl
+ Manitoba (3hl @ 54.18) +$162.5
Total Return P6 $2,738.5
Quantity (P6) 53 hl
Average Return P6 $51.67 / hl
2.63 The result is that each provincial board in a regional pooling arrangement receives:
(a) a regional average return for all its Class 1-4 sales;
(b) a national average return for all of its adjusted Class 5 sales derived from in-quota
milk;  and
(c) an average world market return for any over-quota shipments.
C. CANADA ’S TARIFF -RATE QUOTA ON FLUID MILK AND CREAM
2.64 In Canada's WTO Schedule V, the tariff-rate quota for fluid milk (HS 0401.10.10) is
64,500 tonnes (product weight basis). The following text is contained under "other terms andconditions":WT/DS103/R
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"This quantity represents the estimated annual cross-border purchases
imported by Canadian consumers."
2.65 Currently, Canada does not impose any monitoring of cross-border imports of consumer
packaged milk (limited to the value of C$20.00 per entry).
2.66 Canada has applied the over-quota tariff to flui d milk shipments in commercial containers or
in bulk.  As noted above in paragraph 2.11, no permits have been issued for imports of milk
(HS 0401) for industrial use under the Import for Re-Export Program.WT/DS103/R
WT/DS113/R
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III. CLAIMS OF THE PARTIES
A. EXPORTATION OF DAIRY PRODUCTS
1. Product coverage and period of time
3.1 The dairy products and marketing years covered by the claims of New Zealand  and the
United States are set out in Table 1 below.
Table Error! Unknown switch argument.  - Products1 and marketing years2 subject to the
complainants' claims
Butter Cheese Other Milk Products
New Zealand1995/96
1996/971995/96
1996/971996/97
United States 1996/97 1996/97 1996/97
1 Butter consists of products classified in 0405.10 and 0405.90.  Cheese  consists of products provided for in 0406.10,
0406.20, 0406.30, 0406.40, and 0406.90.  Other Milk Products includes milk and cream in 0401.10, 0401.20, 0401.30;
powdered whole milk and cream in 0402.21 and 0402.29; condensed evaporated milk in 0402.91 and 0402.99;
buttermilk and yoghurt in 0403.10 and 0403.90; milk protein concentrate, 0404.90; and ice cream, 2105.00. Although
the United States understood that Canadian exports of Skim Milk Powder were not in excess of Canada's WTO
commitments, the United States considered that all exports under the SMP category that were exported through the
Special Milk Classes Scheme should have been notified as subsidies to the WTO.
2 New Zealand did not refer to the marketing year 1997/98 b ecause official figures for that period were not available.
Nevertheless, if those figures were to indicate that Canada's actual exports also for that period exceeded its reduction
commitments in respect of the products mentioned in the table, New Zealand would consider that Canada had also
breached its WTO obligations in respect of those products for the 1997/98 marketing year.  The United States noted
that although Canada had not yet reported to the WTO its export quantities for the 1997/98 period, based on
preliminary information for that period, the volume of expor ts appeared to remain at levels exceeding the pertinent
reduction commitments.  After our first substantive meeting, the figures for marketing year 1997/1998 b ecame
available and are incorporated above in Table 2 in para.2.41.
2. Nature of Measure
3.2 New Zealand  and the United States  claimed that there was extensive government
involvement in all critical aspects of Canada's Special Milk Classes Scheme, from its initiation
through to its administration and operation.  Canada's Special Milk Classes Scheme was a product of
governmental authority and was operated under the auspices of the federal and provincialgovernments.  This government involvement in th e scheme was sufficient to constitute government
action within the meaning of the jurisprudence developed by GATT and WTO panels.
3.3 Canada  claimed that the Complainants' assumptions of government control, direction or
mandate were without basis in fact and were, therefore unsustainable.  Government involvement was
limited to providing an appropriate regulatory framework and essentially responsive to the initiatives
of the Canadian dairy industry.WT/DS103/R
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3. Agreement on Agriculture
(a) Article 1(e)
3.4 Both New Zealand  and the United States  claimed that the Special Milk Classes Scheme was
an export subsidy in the sense of Article 1(e) of the Agreement on Agriculture.
3.5 Canada  claimed that as the sales of milk at differing prices under Special Classes 5(d) and (e)
did not constitute a "subsidy" pursuant to the defi nition of the SCM Agreement, it followed that these
sales could not constitute a subsidy for the purposes of the Agreement on Agriculture.  Therefore, by
definition, such sales could not constitute an "export subsidy" within the meaning of the definition in
Article 1(e) of the Agreement on Agriculture.
(b) Article 9.1(a) and (c)
3.6 New Zealand  and the United States  claimed that the Special Milk Classes Scheme
constituted export subsidy practices listed in Article 9.1(a) and (c).  As such, these practices weresubject to reduction commitments under the Agreement on Agriculture.  Canada  refuted both these
claims.
(c) Article 3.3 and Article 8
3.7 New Zealand  and the United States  claimed that Canada's provision of export subsidies
under Article 9.1(a) and (c) of the Agreement on Agriculture in excess of its scheduled export subsidycommitments was a violation of Article 3.3 of that Ag reement.  Furthermore, Canada was in violation
of its obligation under Article 8 of the Agreement on Agriculture not to provide export subsidies
otherwise than in conformity with the Agreement on Agriculture.
3.8 Canada  claimed that since the sales of milk at differing prices for domestic and export
markets did not constitute an "export subsidy" as that term was defined in Article 1(e) of Agreementon Agriculture, the practice at issue did not fall within the scope of Article 8;  that article could
therefore not apply.
(d) Article 10
3.9 Alternatively, New Zealand  and the United States  claimed that Special Classes 5(d) and (e)
of the Special Milk Classes Scheme constituted an export subsidy not listed in Article 9.1 that wasbeing applied in a manner which circumvented or threatened to lead to circumvention of Canada’s
export subsidy commitments contrary to Article 10.1 and 10.3 of the Agreement on Agriculture.
3.10 Canada  claimed that Article 10 did not apply in the present case as it could not be established
that there existed "export subsidies", including those export subsidies listed in Article 9.1.  Nor could
it be established that there was actual or threatened circumvention of Canadian export subsidycommitments.
4. Agreement on Subsidies and Countervailing Measures ("SCM Agreement")
(a) Article 1 and Paragraph (d) of the Illustrative List of Export Subsidies in Annex I
3.11 New Zealand  and the United States  claimed that even on the basis of Canada's own
approach to the interpretation of the term "subsidy" Canada had not shown that the Special Milk
Classes Scheme fell outside the definition of subsidy under the SCM Agreement.  The Scheme
constituted a subsidy within the meaning of Article 1 of the SCM Agreement.  In addition, that theWT/DS103/R
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Special Milk Classes Scheme constituted the provision of an export subsidy within the meaning of
Paragraph (d) of the Illustrative List of Export Subsidies in Annex I of the SCM Agreement.
3.12 Canada  claimed that the sale of milk at differing prices did not constitute a "subsidy" within
the meaning of Article 1 of the SCM Agreement.  Further, Canada claimed that the practices at issue
were not "export subsidies" in the sense of Paragraph (d) of the Illustrative List of Export Subsidies inAnnex I of the SCM Agreement.
(b) Article 3
3.13 The United States  claimed that as Canada’s Special Milk Classes Scheme was inconsistent
with Canada’s obligations under the Agreement on Agriculture it was consequently in violation of
Article 3 of the SCM Agreement.
B. I
MPORTATION OF MILK
1. Article II of GATT 1994 and the Agreement on Import Licensing Procedures
3.14 The United States  claimed that Canada’s administration of its tariff-rate quota on fluid milk37
which restricted access to the in-quota quantity of its tariff-rate quota for fluid milk to entries that
were valued at less than C$20 and that were for the personal consumption of Canadian residents, was
inconsistent with its obligations under Article II :1(b) of GATT 1994 and Article 3 of the Agreement
on Import Licensing Procedures.
3.15 Canada  claimed that its current treatment of fluid milk imports was fully consistent with the
terms and conditions of the tariff concession for fluid milk (HS 0401.10.10) in its Schedule.  Canada
further refuted any alleged violation of the Import Licensing Agreement.
C. RECOMMENDATIONS REQUESTED BY THE PARTIES
3.16 New Zealand  requested that the Panel, in accordance with Article 19 of the DSU,
recommend that Canada bring its measures into conformity with the Agreement on Agriculture.
3.17 The United States  requested that the Panel find the Canadian Special Milk Classes Scheme
and the denial of access to imports under the tariff-rate quota on fluid milk and cream to be
inconsistent with Canada’s WTO obligations.  Accordingly, the Panel should recommend that Canada
bring those measures into conformity with its obligations under the GATT 1994, the Agreement onAgriculture, the Agreement on Subsidies and Coun tervailing Measures, and the Agreement on Import
Licensing Procedures.  More specifically, the Panel should recommend (i) that Canada either
withdraw its export subsidies or reduce the level of its subsidized exports of dairy products to a level
commensurate with its reduction commitments and (ii) that such action be taken without delay.  In
this regard, the United States saw no reason why Canada could not bring its export subsidies intocompliance within 30 days of the adoption by the Dispute Settlement Body of recommendations and
rulings.  With respect to market access, the United States respectfully submitted that the Panel should
recommend that Canada not apply its tariff-rate quota  in a manner that denies entry at the in-quota
rate to any fluid milk imports made within the quantitative limit of the tariff-rate quota.
3.18 Canada  requested the Panel to find that (i) Canada’s Special Milk Classes did not provide an
export subsidy and thus did not violate Canada’s obligations under Articles 8, 9 or 10 of the
                                                     
37 The specific products subject to this claim were classified in Canada’s tariff schedule within tariff item numbers 0401.10 and
0401.20.  The US claim relating to Canada’s fluid milk tariff-rate quota related to the last three years (1995-1997) as well as  the current year
(1998).WT/DS103/R
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Agreement on Agriculture nor under Article 3 of the SCM Agreement; and (ii) that Canada’s
administration of its tariff-rate quota on fluid milk and cream was consistent with Canada’s
obligations under Article II:1(b) of the GATT 1994 and Article 3 of the Agreement on Import
Licensing Procedures.  Canada requested the Panel to dismiss all claims brought against Canada in
this case by the United States and New Zealand.WT/DS103/R
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IV. ARGUMENTS OF THE PARTIES
A. EXPORTATION OF DAIRY PRODUCTS
1. Nature of Canada's Special Milk Classes Scheme
(a) Outline
4.1 New Zealand  argued that the government was implicated in all critical aspects of Canada's
Special Milk Classes Scheme, from its initiation through to its administration and operation.
Likewise, the United States  claimed that Canada's Special Milk Classes Scheme was a product of
governmental authority and was operated under the auspices of the federal and provincial
governments.  The Complainants claimed that the government involvement in the scheme was
sufficient to constitute government action within the meaning of the jurisprudence developed by
GATT and WTO panels.
4.2 Canada  claimed that the Complainants’ arguments rested entirely on erroneous descriptions
of the Canadian dairy system.  This was particularly true of the way that they had attempted to miscast
the means by which milk was marketed for export use in Canada.  Exports of milk from Canada were
controlled and directed by Canadian dairy producers , not governments.  As such, the assumptions of
government control, direction or mandate that premised each of the Complainants' arguments was
without basis in fact. Therefore, each of these arguments was unsustainable.   Governments did play arole, but it was limited and essentially responsive to the initiatives of the industry.
4.3 Canada emphasized that the objective behind the institution of the Special Milk Classes
Scheme had been to provide export opportunities that were consistent with Canada’s WTO
commitments, while providing reasonable continuity to dairy producers.   Canada noted that the
current dispute was not about domestic dairy supply management in Canada: it was about themarketing of milk in Special Classes 5(d) and (e).  Even if the Canadian domestic supply management
regime were found to be governmental, in Canada's  view, that would not n ecessarily imply that the
marketing of milk in Special Classes 5(d) and (e) would be governmental as such.
(b) The Authority and Role of the Canadian Dairy Commission (CDC)
4.4 New Zealand  argued that the price that processors paid for milk, both for domestic and
export use, was determined by the exercise of governmental authority through the operation of the
CDC and provincial marketing boards and agencies. The CDC and the provincial marketing agencies
were in effect a part of the executive branch of government.  The fact that they were composed largely
of producers could not be allowed to disguise that fact.   This was evident, in New Zealand's view,
from several Canadian sources.  The Act establishing the CDC granted it authority to "establish theprice, or minimum or maximum price, to be paid ... to producers of milk or cream ... " (paragraph 2.12
and following).
38  The British Columbia Milk Marketing Board, whose members were appointed by
the Lieutenant Governor in Council, was "authorised to regulate the marketing of milk in inter-
provincial and export trade ... ".39  The CDC’s internet website40, describing the relationship between
the federal and provincial authorities in the marke ting of milk stated: "certain marketing activities
related to industrial milk are carried out jointly  between the federal government and participating
provinces".  The Annual Report of the CDC for 1996-97 described the Commission as a "crown
corporation" and referred to the "framework" prov ided by the Commission for "the federal/provincial
                                                     
38 Section 9(1)(g) of the CDC Act,  New Zealand, Annex 13.
39 Section 3 of the British Columbia Milk Order, 1994 (SOR/94-511).
40 http://www.cdc.ca/shared.htmlWT/DS103/R
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participation that is crucial to the success of the dairy sector".41  It referred to the authority of the CDC
"to purchase, store, process or sell dairy products" and "to make payments to milk and cream
producers".42
4.5 New Zealand noted, in respect of a few key f eatures of the operating procedures of the
CMSMC43, that it was noteworthy that the CDC, as Chair of the CMSMC, had a de facto veto power
over almost all aspects of that Committee’s decision-making.44  In other words, if the CDC disagreed
with the rest of the CMSMC, it could then resolv e the disagreement by its own unilateral decision.  In
this and in other respects, the CMSMC was intrinsically linked to the CDC, a Crown agency, and to
the federal government.
4.6 The United States  argued that the Canadian Special Milk Classes Scheme depended for its
existence on legislation enacted by the Government of Canada.   The Canadian Government’s role did
not stop with the planning and enactment of the authorizing federal legislation.  The CMSMCestablished and revised the annual national production quota.  The CDC established the target prices
and Special Milk Class prices.  The CDC issued the permits that were required to initiate surplus
removal, which was then exported.  The CDC, working with the provincial marketing boards (the
powers of which were derived from the provincial and federal governments), calculated the sales
returns received by the provinces, and adjusted those returns to reflect participation in the SpecialMilk Classes.  The CDC had even financed the Special Class distributions by obtaining a line of
credit.
45
4.7 The United States argued that the Canadian federal and provincial governments had
demonstrated the compulsory nature of the dairy regime’s production quotas, administered price
levels, and revenue pooling;  the CDC and the Province of British Columbia, had for over a decade,sought through legal action to prevent producers in  that province from shipping milk without the
benefit of a quota allotment under the federal/provincial MSQ.
46  Those milk producers had contested
the authority of the provincial government to regulate the production and marketing of milk.  The
reaction of the federal and provincial government was instructive regarding the urgency with which
they met this perceived challenge to supply management and the levies which subsidized dairyexports.
47   Following an initial set back in litigation in British Columbia, both the federal government
and provincial governments throughout Canada amended the governing legislative authority to
address the court’s finding that the provincial marketing board in British Columbia possessed only the
power to regulate intra-provincial trade and, therefore, could not either regulate production or impose
the levies necessary to finance the system relating  to industrial milk.  In response to the court’s
decision, the applicable federal legislation was amended to delegate authority to the provinces to
                                                     
41 New Zealand, Annex 7, p.6.
42 Ibid.
43 National Milk Marketing Plan (the document which constitutes and lays down the operating procedures of the CMSMC), New
Zealand, Annex 12.
44 New Zealand referred, in particular, to Section 3 of the Memo randum of Agreement, November 1982, which forms part of the
National Milk Marketing Plan .  Section 3 provides that the CDC shall resolve disagreements in cases where unanimity is not required.  The
only operative requirement for unanimity is in respect of the provincial shares of the production quota (Section 18 of the Memo randum of
Agreement).
45 Canadian Dairy Commission, Annual Report, 1996/97.  (United States, Exhibit 8)
46 British Columbia Milk Marketing Board and Canadian Dairy Commission v.  Luigi Aquilini, et al, Supreme Court of British
Columbia, No. A950636.  (United States, Exhibit 26)
47 The United States noted that when the CDC Act was amended in 1995 to provide powers to the Commission to create the
Special Classes, Canada’s Attorney-General was also given authority to seek injunctive relief in actions on behalf of the Canad ian Dairy
Commission.  (United States, Exhibit 5)WT/DS103/R
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regulate inter-provincial and export trade and the provinces then amended their own authority to
reflect this delegation of administrative powers from the Government of Canada.48
4.8 The United States noted that the Attorney-Gener al for Canada joined the litigation to preserve
the authority to collect levies to finance dairy product exports and to dispute the contentions of the
unlicensed dairy farmers that the exercise of power by the provincial marketing board and theCanadian Dairy Commission was ultra vires .
49  In submissions to the court, the Attorney General
stated that "it was intended by Parliament that the Governor in Council delegate to others the
administration of such a scheme [administration of a quota based regulatory system] and, in the
Federal Regulations  there was a valid delegation of administrative powers to the Commission [the
CDC], the Committee [the CMSMC], and to provincial Boards."50  Later in the same document, the
Attorney General declared that the:
 "Federal Regulations  were passed to provide federal legislative
support to the continued regulation of the dairy industry in Canada.
At its core, regulation of this industry is accomplished by the joint
participation of both federal and provincial authorities.  This is
reflected in the National Plan and in the marketing scheme created by
the Federal Regulations ".51
4.9 The United States noted that the Special Milk Classes Scheme was established through the
collaborative efforts of the federal and provincial governments.  Specifically, the Special Milk Classes
Scheme was created by the Comprehensive Agreement on Special Class Pooling (P9 Agreement, see
also paragraph 2.24).52  That Agreement was an agreement between the federal government in Canada
and the provincial governments.  The powers necessary to create the Special Classes and to administerthe Special Milk Classes Scheme had been conf erred on the Canadian Dairy Commission, a Crown
corporation, by amendment to federal legislation, the Canadian Dairy Commission Act.
53
4.10 The United States emphasized that the powers  of the Canadian Dairy Commission, as set
forth in Section 9 of the CDC Act (paragraph 2.13)54, were numerous and broad.  The Act conferred
the authority to the CDC: (i) to purchase any dairy product and sell, or otherwise dispose of, any dairy
product purchased by it; (ii) to establish and operate a pool or pools in respect of the marketing of
milk and cream; (iii) to establish the price, or minimum or maximum price, paid or to be paid to the
Commission, or to producers of milk or cream; (iv) to collect the price paid or to be paid to the
Commission, or to any producer in respect of the marketing of any quantity of milk or cream;  and (v)
to do all acts and things necessary or incidental to the exercise of any of its powers or the carrying out
                                                     
48 The Governor in Council’s Orders revising the delegation of authority to the provinces of Ontario and Quebec to include
administrative powers respecting inter-provincial and export trade are contained in United States, Exhibit 27.
49  The United States noted that in February 1997, Agriculture Minister Ralph Goodale separately explained the reason for federal
intervention in the litigation as follows: "Right now, some Alberta and British Columbia producers are trying to take advantage  of supply
management by selling milk illegally.  The only way to stop it is to bring them in court, which means a lot of expenses.  We be lieve that
producers shouldn't be the only ones to pay a bill in which the governments have a responsibility."  The Western Producer , 6 February 1997
edition, "Ottawa may share B.C. dairy battle legal costs".  (United States, Exhibit 28)  Notably, one of the regulations that t he British
Columbia Board and the CDC sought to enforce in the B.C. litigation was the imposition of the levies on producers used to suppo rt supply
management and to fund export subsidies.  The government succeeded in this pursuit when the Supreme Court of British Columbia i n a
12 September 1997 opinion ruled that unpaid provincial and federal levies were enforceable debts.  "Oral Reasons for Judgment",Mr. Justice Wong, 12 September 1997, p. 6.
50 "Outline of the Argument of the Attorney General of Canada," filed 24 September 1996, in the Supreme Court of British
Columbia in British Columbia Milk Marketing Board and CDC v.  Luigi Aquilini, p. 8.  (United States, Exhibit 29)
51 United States, Exhibit 29, p.12.
52 United States, Exhibit 5.
53 United States, Exhibit 15.
54 United States, Exhibit 37.WT/DS103/R
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of its functions under the Act.  The power to establish a pool, to establish prices, and to collect the
price to be paid had all been added in 1995 at the time of the creation of the Special Class system.
Furthermore, conspicuous by its absence in the CDC’s enumerated powers was any qualification that
those powers were subject to the decision of milk producers.
4.11 The United States further noted that the Comprehensive Agreement on Special Class Pooling
contained several interrelated elements.  First, the Agreement provided for the adoption of both the
Memorandum of Understanding on Special Class Pooling ("MOU on Special Classes") and also an
Addendum to the Memorandum of Understanding.  The MOU on Special Classes provided that the
provincial governments would enter into a revenue pooling arrangement for milk in the Special
Classes.  The MOU directed the CDC to determine the percentage of total production by special class
utilization in each province. The MOU also contained an agreement to establish and harmonize prices
for Special Classes in the CMSMC.  Significantly, section 11 of the MOU stated that a province couldjoin the MOU only by the action of the individual  provincial governments, not through the action of
the marketing boards, or the decision of milk produ cers, either individually or collectively.  Annex B
of the Comprehensive Agreement addressed the question of surplus removal and confirmed the role of
the CDC in the operation of surplus removal.  Th e Annex provided that there would be both a CDC-
initiated surplus removal plan, as well as provision for processor-initiated surplus removal.Paragraph C(1)(iii) of Annex B provided that the CDC would remove the surplus milk by authorizing
dairy processors to acquire milk under Special Class 5(e) and manufacture dairy products for purchase
by the CDC for export.  Sub-paragraph (vii) stipulated that the processor would receive an assured
margin and that the level of the margin would be  negotiated by the CDC with the processor.  No
mention was made at all in this Annex for a decision-making role for milk producers in any of thesedecisions.  Nor were producers given such a role in connection with a decision of processor-initiated
surplus removal.  While the MOU established an advisory group, consisting of an equal number of
processors and milk producers, their role was to advise the CDC on when the CDC-initiated surplus
removal should be initiated.
4.12 Canada  did not deny that the CDC played an impor tant role in the Canadian dairy system but
it was not the central directing agency that the Complainants alleged.   The CDC acted as a centre of
technical expertise that was available to the dairy industry as a whole and to the producer-dominated
decision-makers at the CMSMC.  It supplied recommendations and data for the consideration of the
CMSMC to assist it in deciding on the annual MSQ.  It also calculated a "Support Price"
55 used by the
producer boards to assist them in negotiating and establishing domestic price levels.  Furthermore, theCDC's role as chair of the CMSMC was one of facilitation.  The role of the CDC for practical, legal,
historical and political reasons, was necessarily that of facilitator and consensus-builder.
4.13 Canada  argued that although the CDC did indeed act as the chair of the CMSMC, the CDC
did not act in the manner suggested by the Complainants:  that of dominant director, telling the
industry how they were going to carry out federal government policy.  Its role was that of facilitator
and technical advisor.  Ultimately, the CDC implemented the policies and programmes agreed upon in
the CMSMC;  it neither dictated nor directed them.   Canada argued that the CDC, in its role as theadministrator of aspects of the dairy system, operated under the direction and control of the CMSMC
and was routinely subject to rigorous scrutiny at each meeting of the CMSMC.   The CMSMC, unlike
the CDC, was not a governmental body.   For exam ple, CDC-initiated surplus removal did not begin
with a decision of the CDC.  It began with a de cision of the Advisory Group on the Surplus Removal
Program (known as the SRC, paragraph 2.54 and footnote thereto refers), a body composed of
                                                     
55 Canada stressed that the CDC did not operate a price support system.  In the past, it set a "support price" which was in fact
applied in operating an open offer to purchase programme. This programme had been terminated, although the CDC still set a misn amed
"support price" which, as noted, was used for reference purposes by the producer boards, as well as certain limited domestic se asonality
programmes.WT/DS103/R
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producers and processors.56  Only when the industry representatives on the SRC had decided that the
domestic market was being satisfactorily supplied, did it instruct the CDC to open such a programme.
Once the CDC-initiated surplus removal programme had been opened, the CDC entertained proposals
from private exporters with whom it negotiated on behalf of the producers as agent.  Canada rejected
the US suggestion that Annex B of the Comprehensive Agreement on Special Class Poolingconfirmed the role of the CDC in surplus removal (paragraph 4.11).  What the Comprehensive
Agreement on Special Class Pooling did was empower the continuation  of  the CDC role at the
direction of the CMSMC.  The difference was important because the role of the CDC had changed
profoundly in 1995.  The old Offer to Purchase Program, under which butter was bought on open
offer by the CDC and then sometimes exported, had been eliminated.  Instead, the CDC was
instructed to be guided by the decisions of the SRC in deciding whether surplus removal activity was
required.  In other words, the empowerment for an y activity was now squarely with the industry, not
the CDC.
4.14 Canada emphasized, in respect of the CDC's role as Chair of the CMSMC and its "de facto
veto power", as alleged by New Zealand (paragraph 4.5), that the Comprehensive Agreement on
Special Class Pooling had now all but superseded the provisions in the NMMP.  Pursuant to Article 1
of Schedule I of the Comprehensive Agreement on Special Class Pooling, all decisions relating tomatters covered by that Agreement required unanimity , including all matters with respect to export
trade.  Given the breadth of coverage of the Comprehensive Agreement on Special Class Pooling,
little of significance was left without a unanimity requirement.  Hence, very little scope had been left
for the CDC to take a decision where no consensus was reached in the CMSMC.  In addition, Canada
noted that the Comprehensive Agreement on Special Class Pooling had a formal dispute settlementprocess to ensure that no "de facto" CDC veto existed.  The Complainants would have been better
informed if they had taken note of the clear direction given in the Comprehensive Agreement on
Special Class Pooling:
"The Canadian Milk Supply Management Committee (CMSMC) will
be the supervisory body which will oversee the implementation ofthis agreement."
57
4.15 Canada further argued that similarly, the process of negotiation with exporters with respect to
the price for Special Class 5(d) and (e) sales was subject to CMSMC control and direction.  Even
more importantly, the CDC was required under the terms of the Comprehensive Agreement on
Special Class Pooling to act in these negotiations as agent.  Section 2 of Schedule II of theAgreement stated that the "CDC shall act as agent in  carrying out the administrative functions in the
operations of the programme".
4.16 Canada emphasized the importance of the character of the Government's participation as it
occurred in practice.  Canada argued that to sugge st that the mere presence of legislative authority
under which an industry operated made that business "governmental" in character was untenable.   All
businesses operated to some degree within legal and regulatory frameworks established by
government to ensure that the public interest was protected.  If it were true that a legislativeframework made business "governmental" then any regulated industry, including banking or utilities,
would be deemed to be "governmental" in nature.  It would even be possible to argue that private
corporations established under corporation law were "governmental".  This would be absurd.
Obviously, to establish that business was "governmental" in nature, significantly more governmental
intervention had to be shown.
                                                     
56 Canada noted that the CDC required under the terms of the Comprehensive Agreement on Special Class Pooling  to form the
SRC, to be composed of producers and processors.  The processors had insisted that they have such a significant role so that th eir interests
would be respected.
57 The Comprehensive Agreement on Special Class Pooling, the ("P9 Agreement"), Schedule I, Section 1. (Canada, Exhibit 7)WT/DS103/R
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4.17 Canada argued that once established, producer boards were provided with the authority they
required to operate their affairs.  This was done through enabling legislation.58 It established the
framework for producer board operations and enabled the board to exercise certain functions when
and as required.  These discretionary functions related to the issuance and administration of quota, the
pooling of returns, prices, producer record-keeping and reporting, inspection and the ability to enterinto co-operative arrangements with other producer boards and the CDC.   The critical point in this
regard was that the authority provided to the producer boards was enabling, not mandatory.  The
producer boards were not directed or obligated by the enabling legislation to carry out certain tasks or
functions, as might be the case with mandatory legislation or regulation.  The result of establishing
producer boards equipped with authority under enabling legislation had to be to allow producers to
join together to run their own affairs, subject to a government oversight function to ensure that this
authority was used in the public interest.  It was absurd to suggest that, where governments had takensteps to enable citizens or industries to govern their own affairs, and withdrawn from or avoided
imposing government direction and control, that the resulting self-governing regime was an arm or
extension of government.
4.18 Canada noted that the authority provided to the producer boards was now essentially
exercised primarily with respect to the domestic market.  Producers had to be licensed to participate inthe industry either with respect to milk for domestic or export sales. One of the criteria for such
licensing was the holding of a minimal amount of marketing quota, quota that could be purchased in
the open market.  Producer boards only used their pricing authority with respect to the domestic and
general use classes (Classes 1 through 5(c)) and, even in those cases, prices were usually the result of
negotiations between the producer boards and the processors.  More particularly, the pricing authoritywas not used with respect to the export classes:  Special Classes 5(d) and (e).  Prices for sale in these
classes were the result of transaction by transaction negotiations between the processor/exporter and
the CDC, acting as agent for the producers.  In addition, the pooling function was not exercised with
respect to over-quota sales under Special Class 5(e).
4.19 Canada acknowledged that the CDC was involved in the negotiation with exporters of prices
to be paid for the milk for export purposes.  However, the CDC was acting under the direction of the
CMSMC, whose policies were driven by the producer-run marketing boards.  Further, in acting as
intermediary with the exporter, the CDC was acting as an agent on behalf of producers and in
furtherance of their interests.  The CDC was expe cted to obtain the best possible price for the
producers based on prevailing returns in the world market.  CDC performance in this regard wascarefully monitored by the CMSMC.  The producers proceeded on the expectation that the CDC
would, in its negotiations, obtain the highest possibl e return for them.  If, on review at the regular
meeting of the CMSMC, there was some question th at the CDC had not maximised producer returns
on the export market, the CMSMC could direct the CDC to abandon the market in question or work to
obtain better prices.
4.20 Furthermore, Canada argued that these negotiations were true commercial negotiations.  The
CDC, acting for the producers, negotiated with competing processors, pressing for the best price forthe producers.  The exporter sought the lowest price.  The competition among exporters coupled with
the forces of the international marketplace drove the negotiations.  The CDC was in no position to
offer, contrary to the interests of the producers, pr ices lower than those dictated by the world market.
Nor could the CDC force an exporter to pay for a particular transaction more than world prices
permitted for it to be profitable.  The issuance of a "permit" by the CDC was merely arecommendation to the respective board that milk be supplied for a particular proposal.  The
                                                     
58 Canada noted that due to the constitutional division of responsibilities in Canada, legislation was required at both the
provincial and federal levels.  In the case of the dairy industry, enabling authority within the provincial sphere was passed d irectly to the
producer boards through provincial legislation.  On the federal side, the required enabling authority was provided initially to  the Canadian
Dairy Commission, which in turn, pursuant to an agreement, conveyed authority to the provincial producer boards.WT/DS103/R
WT/DS113/R
Page 29
producers, through their boards, were under no obligation to accept that recommendation.  Nor was
the permit recipient required to actually carry out the proposed export.  The CDC did not control milk
supply.  Thus, it was evident that the ultimate control over decisions to produce milk for export and to
pursue any particular sale rested with the producers.   It was equally evident that control of production
and sales relating to exports did not rest with government.
4.21 New Zealand  noted that Canada did not seek to deny that the CDC and the provincial milk
marketing boards and agencies derived their authority from statute.  Instead, Canada argued that
reference to the statutory basis of these bodies gave a misleading picture because many of the powers
that existed in legislation were not used in practice (paragraph 4.16).  But this ignored the fact that the
statutory powers of a body gave it a status and character that existed regardless of whether all aspects
of those powers were exercised in fact.  It did not need to exercise every power that it had on every
occasion, or at all, in order to maintain the authority that the government had given it.  Itsgovernmental authority derived just as much from its residual as from its exercised authority.   Thus,
describing legislation as "enabling" did not prove anything.  The fact that the federal and provincial
legislation in question "enabled" the operation of the Special Milk Classes Scheme was not disputed.
The question was whether that scheme entailed su fficient government involvement to meet the
relevant definition of an export subsidy.  In this respect, enabling legislation was an important firststep.  It "enabled" the construction of the market for milk into two separate markets.  It "enabled" the
compelling of producers to ship their milk into one or the other of those markets, and it "enabled" the
provision of lower-priced milk to exporters, the subsidy that was the subject of this case.
4.22 New Zealand argued that the above could be demonstrated by reference to the authority of the
CDC to resolve differences in the Canadian Milk Supply Management Committee (the CMSMC) byits own unilateral decision.
59  The fact that it might not do so in practice, as Canada alleged, was
irrelevant.  The fact that it had the authority to make such decisions would have a significant impact
on the reaching of consensus within the CMSMC.  The process of reaching consensus when one partyhad the ultimate power of decision was fundamentally different from the process of reaching
consensus when no one could individually make that decision.  Moreover, in this case, the power ofdecision rested, not just with a private entity, but  with an agency vested with all the authority of
government.
4.23 Furthermore, Canada had amended the legislation establishing the CDC in order to enable it
to implement the Special Milk Classes Scheme.  Thus, there was no lack of opportunity for legislative
amendment in Canada.   If the Canadian Government’s argument that the regulation and pricing ofmilk was not a matter of governmental authority, New Zealand questioned why then it had been
necessary to amend both provincial and federal legislation to provide such powers;  for example, why
had it been necessary to amend the CDC Act to provide that the CDC may "establish the price, or
minimum or maximum price, paid or to be paid to  the Commission, or to producers of milk or cream
... "
60
4.24 New Zealand noted that the process by which milk was accessed for export implicated federal
and provincial authorities in an integral way.  Exporters had to obtain a permit under Special Class5(d) or 5(e) from the CDC.  That permit was presented to the relevant provincial milk marketing
agency in order to obtain milk at the Special Class 5(d) or (e) price.  Canada claimed that this permit
was "merely a recommendation" (paragraph 4.20).  But that was simply a statement about the
relationship of the CDC to the provincial marketing agencies, reflecting constitutional authority
regarding the setting of prices for milk in a federal system.  The exporter had no choice in the matter.The only way to access milk for export in Classes 5(d) and (e) was with a permit.  The system was
                                                     
59 New Zealand referred to Section 3 of the Memorandum of Agreement, November 1982, which formed part of the National
Milk Marketing Plan (NMMP).  (New Zealand, Annex 12)
60 Section 9(1)(g) of the CDC Act.  (New Zealand, Annex 13)WT/DS103/R
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mandatory and the source of that authority was not producer agreement;  it was derived from the
statutory authority of the CDC and the provincial  marketing agencies to compel such behaviour.
4.25 New Zealand argued that Canada’s assertion that the CDC operated as a collective bargaining
agent for producers, and was controlled by those producers acting through their producer-run
marketing boards, equally did not withstand analysis.  Canada claimed that the CDC’s performance innegotiating prices for exports had to satisfy the boards and the producers or they would require a
re-evaluation of CDC practices through the CMSM C (paragraph 4.15).  The impression sought to be
conveyed was that the CDC was somehow subservient to producers and not exercising government
authority.  New Zealand claimed that the opposite was the case.  The CMSMC could not control the
CDC which ultimately had a veto within the CMSMC, whether or not in practice that veto ever
needed to be exercised.  Naturally, the CDC would wa nt to maximise returns for producers;  that was
part of its statutory mandate.  And, if producers we re unhappy with the CDC, political pressure would
be brought to bear on it.  Yet this was a normal description of how government agencies functioned.
It did not demonstrate that somehow the CDC lost its governmental character through participating in
the administration of the Special Milk Classes Scheme.  New Zealand noted that Canada downplayed
the role of the CDC, arguing that it did not exercise the statutory functions that it had in fact been
given. Yet, in New Zealand's view, the actual functions exercised by the CDC were more thansufficient to show the necessary government involvement in the administration and operation of the
Special Milk Classes Scheme.
4.26 New Zealand noted that Canada also sought to  argue that New Zealand had wrongly focused
on the CDC when it was the CMSMC which was the key decision-maker in respect of special milk
classes.  The CMSMC, Canada argued, was not a governmental body (paragraph 4.13).  Yet the
CMSMC was created under the National Milk Marketing Plan (the NMMP)
61 and the NMMP was
described by Canada as a "contractual agreement", hence the CMSMC "is a contractual body not a
creation of government".62   New Zealand agreed that the NMMP was indeed an agreement.  Its
opening words were "This Plan is a federal-provincial agreement ... ".  It was entered into by the
CDC, a federal Crown Corporation, and the province s.  In some instances the agreement was signed
by the Ministers of Agriculture for the province as well as the representative of the provincial milk
marketing board;  in other instances it was signed by  the milk marketing board for the province.   The
NMMP was an intergovernmental agreement entered into between the representative of the federal
government, the CDC, and the authorised representatives of the provinces who varied province by
province.  As a result, the CMSMC was a creature of intergovernmental agreement.  Thus, tocharacterise it as a "contractual body not a creature of government" was misleading.   The preamble to
the Plan recognised that "the participation of the Federal and Provincial authorities is required to
assure the adoption and implementation of such Plan".
63
4.27 New Zealand noted that although Canada did not deny that the CDC was a Crown agency and
was the representative of the Government of Canada, it argued that its role on the CMSMC, which it
chaired, was not governmental.  Canada said that the CDC’s role was that of "facilitator and technical
adviser," and the CDC "implements the policies and programmes agreed upon in the CMSMC;  itneither dictates nor directs them".  Such a view ignored the ultimate decision-making powers of the
CDC whose influence through research and technical expertise, as well as its authority derived from
the fact that it was the representative of the government of Canada, could not be hidden by focusing
on a collegial decision-making process within CMSMC meetings.  The CDC did not need to "dictate"
or "direct" the policies of the CMSMC.  The fact that at the end of the day it could do so, gave the
                                                     
61 New Zealand, Annex 12.
62 New Zealand referred to p. 21 of the text accompanying Canada’s audio-visual presentation at the first substantive meeting of
the Panel.
63 New Zealand referred to the fourth preambular paragraph of the NMMP.WT/DS103/R
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CDC the central role in the CMSMC.    New Zealand noted that in the Bari case, the British Columbia
Supreme Court had found that the provincial board s and the CMSMC had valid administrative powers
– derived from the CDC Act – "to carry out ... the efficient marketing of milk and milk products".64
4.28 New Zealand noted that Canada denied that the CDC had a veto power within the CMSMC
claiming that the Comprehensive Agreement on Special Class Pooling had "all but superseded" theprovisions of the NMMP which grant such authority to the CDC (paragraph 4.14).   It was notable
that Canada carefully qualified this statement abou t the redundancy of the NMMP.  It was particularly
important to do so because what Canada sought to rely on to support its position simply did not prove
its point.  The "veto power", Canada said, had been replaced by a unanimity rule.  But that made New
Zealand’s point;  it did not contradict it.  Unde r a unanimity rule, the CDC would have a "de facto
veto power".   The Chairman of the CDC, Mr Guy Jacob, when describing the role of the CDC within
the CMSMC to the Canadian House of Commons Standing Committee on Agriculture and Agrifood,
in March of 1998
65, said:
"On occasion, the [CDC] Commissioners may take decisions on
issues when [the CMSMC] Committee members are not unanimous."
4.29 New Zealand pointed out that in its Annual Report for 1996/97, the CDC stated that it "is
largely responsible for the administration of the National Milk Marketing Plan, [and] thefederal/provincial agreement governing industrial milk production and management in Canada ... ".
66
The reality was that the Special Milk Classes Scheme operated through the combined actions of theCDC, a federal government agency, and provincial milk marketing boards.   New Zealand noted that
these institutions, acting individually, or collectively within the CMSMC, exercised governmental
functions that were essential for the operation of the Special Milk Classes Scheme.  They establishedand administered the quota regime on which the Special Milk Classes Scheme was based.  They set
prices and determined whether milk was to be sold in domestic or export markets.  They prohibited
entry by new producers except in accordance with the quota regime.  They exercised enforcement
authority over both quota holders and those outside the system.  In respect of the federal government
agency - the CDC - it had specific authority within the framework of the CMSMC when unanimitywas not reached.  It also issued permits to exporters, which constituted the only way in which access
to lower-priced milk could be obtained.
4.30 New Zealand noted that regardless of the composition  of provincial milk marketing boards,
these boards exercised governmental functions - functions that had been expressly mandated by
government in the boards’ constituent statutes or regulations, or functions that had been delegated tothem by the federal government’s agency, the CDC.  The CDC both functioned independently as a
governmental actor under the Special Milk Classes Scheme and was the source of delegated
governmental authority exercised by the provincial milk marketing agencies.
4.31 The United States  stressed that the Special Milk Classes Scheme could not exist without the
CDC to oversee its operations.  As noted by New Zealand (paragraph 4.23), if this had not been the
case, it would have been unnecessary to amend the Canadian Dairy Commission Act to grant specific
additional powers to the CDC to supervise establishment of the Special Classes, to empower it to poolrevenue from the Special Classes, and to establish the price to be paid.
4.32 In respect of the producers' involvement in the price-setting of milk, the United States argued
that while Canada contended that the MOU on Special Class pooling appointed the CDC to negotiate
                                                     
64 British Columbia Milk Marketing Board and the CDC v. Aquilini et al, (Vancouver Registry, No. A950636).  para. 31.
65 Mr. Guy Jacob, President, CDC, p. 2, United States, Exhibit 45.
66 1996/1997 Annual Report of the Canadian Dairy Commission,  p.5. (New Zealand, Annex 7)WT/DS103/R
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prices with the processors as agent  for the milk producers, Canada had been unable to point to
specific language that established this principal- agent relationship.  Canada failed to identify any
provision that demonstrated that the CDC negotiated prices as agent for the producers.  In fact,
Section 4 of the CDC Act specifically stated that  the CDC was the agent of the Crown for all purposes
of the Act.  Indeed, the facts suggested to the contrary that the CDC was primarily negotiating a pricefor inputs for the exporters that would allow them to be competitive in world markets for processed
dairy products.  Furthermore, the language of the MOU specifically contradicted Canada’s assertion
that the producers negotiated the processors’ assured margin on the latter’s export sales.
Paragraph C(1)(vii) of Annex B to the MOU directed that this was the role of the CDC, not the milk
producers.
67
4.33 The United States argued that an examination of the documents that provided the foundation
for the Special Milk Classes Scheme revealed that the Canadian argument that producers retained theultimate decision-making authority was baseless.  The United States had already detailed the scope of
the powers that Canada’s Parliament granted to the CDC to operate the Special Milk Classes Scheme,
as well as the authority provided to the CDC to delegate some of its newly-created powers to both the
provincial governments and the provincial milk marketing boards – powers which had been provided
mainly through amendment of the CDC Act and the Dairy Product Marketing Regulations(paragraph 4.10 and following).
68   The Memorandum of Understanding establishing the Special
Classes was an agreement between the provinces and the CDC, a Canadian Crown corporation.
Paragraph 11(a) of Schedule I of the MOU stated that "[i]f a Province wishes to become a party to this
agreement, its Provincial Government representative  shall send a note of its intent to the CDC"
(emphasis added).  The MOU did not state that provinces would join the Special Classes Agreementwhen the milk producers or the provincial milk marketing boards so decided.  The MOU very plainly
stated that Provinces joined the Agreement by the action of their Provincial Government
representative.  While milk marketing boards were al so signatories to the Agreement,  the dispositive
fact for each province was whether its Government representative indicated an intent to join.  The
United States did not dispute that most Provin cial governments conferred with their industry
representatives to determine whether the industry supported the Special Classes Agreement.
However, government/industry consultations and a government’s receptivity to citizen’s input did not
alter the essential legal fact that the Comprehensive Agreement on Special Class Pooling was first,
and foremost, between the Provincial governments and the CDC.
4.34 The terms of the National Milk Marketing Plan, which had long been the centre piece of
Canada’s dairy supply management, were similar in effect to the Special Class MOU.  The opening
paragraph of the NMMP stated "[t]his Plan is a federal-provincial agreement in respect of the
establishment of a National Milk Marketing Plan ... ".  The Preamble, in fact, stated that "the
participation of the Federal and Provincial authorities was required to assure the adoption and
implementation of the Plan."  In contrast, the terms of the Plan made it clear that the participation of
milk marketing boards was not essential to the working of either the Plan or the CMSMC.
Paragraph H(3) of the Plan provided:
"In the event that there are no Signatories of a province which are
producer boards, representatives of producer organizations shall be
seated as full participants in the deliberations of the Committee,
except that they shall not have the right to vote ." (Emphasis added.)
                                                     
67 The United States noted that Annex B of the Comprehensive Agreement addressed the question of surplus removal and
confirmed the role of the CDC in the operation of surplus removal.  No mention was made at all in this Annex for a decision-mak ing role for
milk producers in any of these decisions.
68 United States, Exhibit 37.WT/DS103/R
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4.35 Moreover, the United States noted that the Governor in Council had delegated some of his
powers to the CDC.  For example, the Dairy Products Marketing Regulations provided that the CDC
shall cause a federal licence to be issued only to a person to whom a share of the portion of the federal
quota had been allocated.   Moreover, the regulations stipulated that no person should engage in the
marketing in inter-provincial or export trade of a dairy product unless the dairy product was, or wasmade from, milk or cream that was produced by a person who held a federal licence.  The CDC, thus,
could deny any milk producer that did not possess a federal quota the right to market milk.  The
regulations were also important in that they provided specifically for the delegation of federal powers
to the dairy marketing boards which operated in the various provinces.  Thus, when those dairy boards
acted with respect to the Special Classes and inter-provincial or export trade, they functioned under
powers delegated by the federal government.   Hence, the source of the authority for the regulation of
the milk marketing in inter-provincial and export trade was federal law and the Canadian Parliament.The entities that had been tasked with performing the functions necessary to implement the legislated
regime were also federal and provincial govern ments, or marketing boards acting with authority
delegated from the federal government, not from the Canadian dairy industry.   The price the
processors paid for milk, both domestically and for export, was determined by the exercise of
governmental authority through the operation of the CDC and provincial marketing boards andagencies.   The United States noted that Sect ion 3 of Bill C-86, which was the legislation which
amended the CDC Act in 1995
69 gave the CDC the authority, with the approval of the Governor in
Council, to enter into agreements with a province or a marketing board to set prices, establish pools,
and collect prices to be paid.
4.36 The United States noted that Canada had stated that although the CDC issued permits to
processors to enable them to purchase milk at reduced prices, such "permits" did not actually require
that milk be made available to the processors at such discounted prices.  Instead, Canada claimed that
the permits were only recommendations, and that the milk boards were not compelled to provide milk
to the processors according to the terms of the permit.  However, there was no question that the
processors could not obtain the milk at the lower price without the permits.70   In this sense, Canada
minimized two equally, if not more, important practical considerations: (i) the milk producers were
essentially price takers; and (ii) processors could not access the lower priced Class 5(d) and (e) milk
without a permit.  Thus, a CDC issued permit was a condition for receipt by the processor of the
Special Class 5(d) and (e) milk, and boards possessed few options but to accept the price that was
offered.
4.37 Canada  argued that to the extent that authority in respect of the Special Milk Classes Scheme
was conferred on the CDC, this was to assist in the implementation of the decisions taken through the
producer-boards and the CMSMC as reflected in the Comprehensive Agreement on Special Class
Pooling.  Canada stressed that the amendments to the CDC Act were intended to supplement the
existing authority of provincial producer boards with the necessary federal enabling authority so that
the producer boards could fulfil their tasks effectively.  It was not intended by Parliament that the
enabling amendments to the Act would result in the CDC directing the producer boards to conducttheir functions in a particular way.  On the contrary, Section 9.1 of the amended Act contemplated
agreements providing for the performance by those very boards of functions otherwise vested in the
CDC in respect of inter-provincial and export trade.  In the specific case of pricing, Sections 9(1)(g)
and 9.1 of the amended Act were together intended to permit the producer boards’ pricing functions in
respect of Classes 1 – 4 and 5(a), (b) and (c) to be supplemented with the requisite federal authority,thereby filling the legal gap identified in the Bari II  case.  Contrary to what was suggested by the
Complainants, the CDC did not, as a result of the inclusion of Section 9(1)(g) in the Act, exercise
price-setting powers.   Pricing for Classes 1 – 4 and Classes 5(a), (b) and (c) was negotiated and                                                     
69 United States, Exhibit 15.
70 The United States referred to the testimony of Mr. Guy Jacob, President, CDC:  "In other words in order for an exporter to be
able to buy milk at a lower price, he must first obtain a permit from the Canadian Dairy Commission."  (United States, Exhibit 45, p. 2)WT/DS103/R
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decided by the provincial boards either directly or through the CMSMC.  Pricing for Classes 5(d) and
(e) was negotiated on a contract-by-contract basis, with the producer boards exercising ultimate
control over the supply of milk at the negotiated price recommended by the CDC.   Class 5(d) and
Class 5(e) prices were not fixed through the exercise of regulatory powers, whether under
Section 9(1)(g) or otherwise, but were establ ished on a commercial basis based on world market
conditions.
4.38 In respect of the US assertion that Canada had not identified specific language that
established a principle-agent relationship in respect of the CDC's role as agent for the milk producers
in price negotiations with processors (paragraph 4.32), Canada drew the Panel's attention to Section 2,
Schedule II, Addendum of the Comprehensive Agreement on Special Class Pooling, which stated
that: " ...  that the Canadian Diary Commission (CDC) shall act as agent in carrying out administrative
functions in the operation of the program" and, also, in Section 1, Schedule I to the same Agreementwhich stated that the CMSMC "... will be the supervisory body which will oversee the implementation
of the [Comprehensive Agreement on Special Class Pooling] agreement."
4.39 Canada emphasized that the role of the CDC as a technical advisor and consensus builder –
rather than as a decision-maker at the CMSMC – was evident in the setting and allocation of the
MSQ.  In practice, the CMSMC asked the CMSMC Secretariat to develop estimates of marketrequirements for Canadian industrial milk (paragraph 2.27 and following refer).  The CDC presented
the estimates developed by the Secretariat to the CMSMC for consideration in advance of each dairy
year.  The technical estimates prepared by the Secretariat were then actively debated by the CMSMC.
Typically, the market requirements initially calculated by the CMSMC Secretariat were revised on the
basis of directions received from the CMSMC.  Canada stressed that the CMSMC was in no waybound to accept the figures suggested by the Secretariat.  Nor did the CMSMC merely rubber stamp
these suggested market requirements.  Only after the CMSMC was satisfied with the market
requirements estimates was a decision made on the MSQ allocations among the various provinces.
Canada reiterated that it was the CMSMC, not the CDC, that decided on the MSQ allocation.  Such
allocation required unanimity.
4.40 Canada argued that the Complainants had suggested that because many types of discretionary
authority had been conferred on the CDC through th e CDC Act, this somehow indicated that the CDC
carried out all of the things it was empowered to do.  This was insupportable both in principle and in
fact.  First, simply because enabling legislation permitted an entity to carry out certain acts, this did
not mean that they would be exercised.  The entity could be constrained from acting by other legalobligations, or may simply find that certain actions were not needed in a particular circumstance.
Alternatively, it could not be in a political or technical position to undertake the action it was
authorized to do.  The point was: enabling legislation did not compel any action.  In practice, the list
of functions actually carried out by the CDC was much more circumscribed than the list of functions
in the CDC Act.
71  Further, Canada argued that the Complainants' argumentation ignored the
fundamental principle in the WTO and the GATT th at obligations were only attached to what a
Member actually did, not what they could do.  For example, an entity could have all the necessary
power to provide subsidies in excess of a Member’s obligations, but this was of no consequence
unless such subsidies were actually provided.
(c) Government Involvement
4.41 New Zealand  argued that the Special Milk Classes Scheme was a response to the belief that
export subsidies, which existed under the producer levy scheme, would no longer be compatible withCanada’s international trading obligations.  The fact that Canada had chosen to abandon the producer
                                                     
71 Canada noted that a fuller discussion of the actual activities of the CDC, as opposed to the list put forward in United States ,
Exhibit 37, was attached as Annex C to its Second Submission.WT/DS103/R
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levy-based subsidies in favour of an alternative scheme made it clear that the reduction and eventual
elimination of the incentives provided by those subsidies was not an option Canada was prepared to
follow.   The Special Milk Classes Scheme was not, as Canada maintained, a response to the fact that
as a result of the new WTO Agreements Canada no longer had to limit production of milk.  New
Zealand argued that the Special Milk Classes Scheme was a substitute for the old producer levy-basedsubsidy.  Moreover, it was a federal government agency, the CDC, that had spearheaded the process
that led to the development of the Special Milk Classes Scheme.
4.42 New Zealand noted that the question of the degree  of governmental involvement necessary
for measures to be regarded as government measures had arisen on several occasions under both the
GATT 1947 and the WTO.  The 1960 GATT Panel studying the obligation on states to notify
subsidies financed by a non-governmental levy under GATT Article XVI, spoke of schemes "which
are dependent for their enforcement on some form of government action."
72  The Panel on Japan -
Photographic Film  emphasised the fact that where non-binding action of government "creates
incentives or disincentives largely dependent on governmental action for private parties to act in a
particular manner, it may be considered a governmental measure."73
4.43 New Zealand contended that in the present case, an obvious parallel could be drawn with the
decision of the Panel in EEC - Restrictions on Imports of Dessert Apples .74  In deciding whether the
EEC regime relating to the marketing of apples constituted a governmental measure within the
meaning of GATT Article XI:2(c)(i), the Panel noted that:
" … the EEC internal régime for apples was a hybrid one, which
combined elements of public and private responsibility.  Legally
there were two possible systems, direct buying-in of apples byMember State authorities and withdrawal by producer groups.  Under
the system of withdrawals by producer groups, which was the EEC’s
preferred option, the operational involvement by public authorities
was indirect.  However, the  régime as a whole was established by
Community regulations which set out its structure.  Its operationdepended on Community decisions fixing prices, and on public
financing; apples withdrawn were disposed of in ways prescribed by
regulation.  The Panel therefore found that both the buying-in and
withdrawal systems established for apples under EEC Regulation
1035/72 (as amended) could be considered to be governmentalmeasures for the purposes of Article XI:2(c)(i)."
75
4.44 Hence, New Zealand noted that in such a situation, of combined public and private
responsibility, the Panel had considered the EEC regime to be governmental in nature - even although
the involvement by public authorities was indirect.
4.45 New Zealand contended that the Special Milk Classes Scheme had been initiated with direct
government involvement.  The CDC, a federal Crown corporation, had identified the need for changes
                                                     
72 Panel Report on Review Pursuant to Article XVI:5 , adopted 24 May 1960, L/1160, BISD 9S/188, p. 192;  Panel Report on
Japan - Trade in Semi-Conductors , (hereafter " Japan – Semi-Conductors "), adopted 4 May 1988, L/6309, BISD 35S/116, pp.154-155.
73 Panel Report on Japan - Measures Affecting Consumer Photographic Film and Paper , (hereafter " Japan – Photographic
Film "), adopted 22 April 1998, WT/DS44/R, pp. 383-384 (para. 10.45).
74 Panel Report on EEC - Restrictions on Imports of Dessert Apples (Complaint by Chile) , (hereafter " EEC – Dessert Apples "),
adopted 22 June 1989, BISD 36S/93.
75 Ibid, p. 126 (para. 12.9);  Japan - Photographic Film , WT/DS44/R, 31 March 1998 at pp. 383-384 (para. 10.45)WT/DS103/R
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to the programmes it offered as early as 1992.76  It was a participant in the industry Consultation
Committee which concluded that export subsidy reduction commitments would "render the use of
levies ineffective".77  A federal-provincial task force was established to review the matter.  The CDC
chaired the "Dairy Industry Strategic Planning Committee" that recommended a classified pricing
system for milk based on end-use and a national pooling system.  A negotiating sub-committee of theCMSMC brought those recommendations to federal and provincial Ministers of Agriculture in
December 1994.  This was the genesis of the government-initiated Special Milk Classes Scheme.
4.46 New Zealand contended that the Special Milk Classes Scheme was implemented through
government action.  It was embodied in a federal-provincial agreement, the Comprehensive
Agreement on Special Class Pooling.  The CDC ACT was amended to allow the CDC to administer
the Special Milk Class permit system and the pooling arrangements. Under the Comprehensive
Agreement on Special Class Pooling the CDC was to "act as agent [of the federal Government] incarrying out administrative functions in the operation of the programme" (Schedule II).
4.47 New Zealand stressed that the scheme required continued government involvement for its
operation and enforcement.  In order to be effective and to provide the appropriate incentives, the
scheme had to be mandatory and new entrants prohibited.  This was done through the exercise of
statutory authority.  Government involvement was ther efore essential to the scheme’s existence.   The
mandatory character of pooling, the administrative functions of the CDC and of the provincial milk
marketing boards or agencies in the operation of "special milk class" access, pricing and pooling,
were all activities of government.  Indeed, in Canada - Import Restrictions on Ice Cream and
Yoghurt
78, Canada itself had claimed that its milk supply management system constituted
governmental measures within the meaning of GATT Article XI:2(c)(i).
4.48 New Zealand claimed that the centrality of governmental involvement in the Special Milk
Classes Scheme was readily apparent when the question was asked whether the scheme could
continue to operate if the governmental presence were removed.  There would be no legislative basis
for the operation of the scheme.  There would be no NMMP, there would be no Comprehensive
Agreement on Special Class Pooling.  In the absence of government authority, there would be nomechanism to set prices or to compel compliance except through the agreement of the members of the
"producers’ club".  Nothing could prevent those outside the "club" from marketing milk domestically.
There would be no government agency, no CDC, to chair the CMSMC and resolve differences where
unanimity could not be reached, and there would be no delegated governmental powers residing in
provincial marketing boards. Furthermore, to the exte nt that some agency was needed to administer a
permit system under which access to "special class" milk was provided, it would have to be a private
agency established by the producer members themselves.   New Zealand argued that the Special Milk
Classes Scheme would simply not function if everything was left to private producer agreement.
Indeed, any attempt at price setting by private producer agreement would raise questions about
compliance with competition laws.  It did not do so under Canada’s supply management system
because of the very involvement of government in the scheme.   Hence, government involvement was
critical to the functioning of all aspects of the Special Milk Classes Scheme.  Canada’s argument thatthe scheme operated through the private activity of producers with only a government oversight
function simply was not credible.
4.49 New Zealand recalled that Canada had not argued that there had been any real change to the
role of government after the introduction of special milk classes.  At no point had Canada sought to
                                                     
76 1992/1993 Annual Report of the Canadian Dairy Commission,  p.3.  New Zealand recalled that the Dunkel draft was the basis
of the Agreement on Agriculture.
77 Report of the Consultation Committee on the Future of the Dairy Industry, p.12.
78 Panel Report on Canada – Import Restrictions on Ice Cream and Yoghurt  (hereafter " Canada – Yoghurt "), L/6568,
BISD 36S/68, adopted 5 December 1989, p. 73 (paragraph 22).WT/DS103/R
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suggest that special milk classes heralded a shift in the extent of federal and provincial governments’
involvement in the dairy marketing system.  Instead, the picture Canada painted of government
activity within the dairy supply management system was one of continuity.  To Canada, it had
remained a producer-driven and dominated dairy marketing system (paragraph 4.62).  New Zealand
argued that, if this were the case, there would not have been sufficient government involvement
within Canadian terms under the old producer levy scheme to meet the requirement of government
involvement in order to constitute an export subsid y.  It would simply have been a system whereby
producers within their own organisations - milk marketing agencies and the CMSMC - decided to
levy themselves in order to support exports, and government involvement would simply have been to
act as the designated agent of the producers to assist in implementing the system.  Although this was
the consequence of Canada’s position, even Canada had admitted that its old producer levy system
would have constituted a subsidy under Article 9.1(c) of the Agreement on Agriculture.79  I n  N e w
Zealand's view, such an admission undermined Canada ’s portrayal of government involvement in the
Special Milk Classes Scheme.
4.50 New Zealand noted that Canada claimed that the government role was one of oversight only
and provincial and federal governments simply provided a framework for the activities of producer-
run marketing boards;  within the CMSMC, the govern ment's role was to ensure that the system was
operated in accordance with the general public interest (paragraph 4.16).  Canada sought to equate the
role of government in the operation of the Special Milk Classes Scheme, and in dairy supply
management more broadly, to that of its role in society generally - to act in the public interest.
However, the role of government in the Special Milk Classes Scheme was much more intrusive than
the exercise of its general function of oversight in the public interest.  Without the active participationof government in the administration and operation of the scheme, including its residual enforcement
authority, the system could not work.   Instead of describing the nature of the government
involvement, Canada had gone to the other extreme and sought to have the government disappear
altogether from the Special Milk Classes Scheme.
4.51 New Zealand argued that in the case of non-mandatory measures, the determining factor in
deciding whether conduct could be ascribed as re sulting from governmental action had been whether
there were sufficient incentives or disincentives for the measures to take effect.
80  Most recently, a
WTO Panel had noted that "the fact that an action is taken by private parties does not rule out the
possibility that it may be deemed to be government al if there is sufficient government involvement
with it".81  The Panel had gone on to note that it was difficult to establish definitive rules, and that a
case-by-case analysis was required.
4.52 New Zealand maintained that under any of these tests the operation of the Special Milk
Classes Scheme was a government activity.  The scheme derived from the agreement of agencies of
the federal and provincial governments created by statute.  These agencies administered a supply
management scheme that could function only through the interplay of the exercise of federal and
provincial authority.  The Bari litigation demonstrated that provincial authority alone was not
sufficient to give effect to a quota regime affecting inter-provincial and export trade.  There had to bethe joint action of federal and provincial governments to enable the system to function.
4.53 The Special Milk Classes Scheme, as an aspect of Canada’s supply management system, was
compulsory: essentially, the only way that milk could be sold on the export market was through
special milk classes.  Producers did not have the option of selling on the export market independently
of a government-mandated scheme.  The subsidy that exporters received under the Special Milk
                                                     
79 Canada's Second Written Submission, Annex B, pp. 7-9.
80 Panel Report on Japan - Semi-Conductors , op. cit ., p. 155.
81 Panel Report on Japan - Photographic Film , op. cit ., para.10.56.WT/DS103/R
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Classes Scheme was provided through the cooperative activity of the CDC and the provincial milk
marketing agencies.  Exporters had to obtain a permit from the CDC and obtain milk through the
provincial milk marketing agency.  The scheme was thus government-mandated, maintained through
the actions of government agencies, and enforced by government authority.
4.54 The United States  also agreed that milk would not be available to processors of dairy
products for export at the indicated prices absent the structure of the dairy regime established by the
Canadian federal and provincial governments and which was administered and enforced by those
governments.  The pervasiveness of the government ’s role in the Special Milk Classes Scheme was
evident from consideration of the legislatively granted authority that those entities possessed and
exercised (paragraph 4.4 and following).   Despite Canada’s claims to the contrary, government action
and authority was not transformed into private action si mply because private parties, in this case dairy
farmer organizations, could approve in specific instances of the actions taken by their government.  Ifthis were the case, any action by a government to benefit a portion of its citizenry would be converted
into private action.  For example, most anti-dumping measures would be "private actions" by
definition and the WTO Agreement on Anti-Dumping would be nullified.
4.55 The United States argued that it was sufficient to look to the marketing boards’ own
statements about the source of their powers to lay to rest Canada’s contention that the boards receivetheir power from the dairy farmers.  For example,  the British Columbia Milk Marketing Board’s
Consolidated Order of 1 August 1997, described both its purpose and the basis for the Board’s
authority.  The stated purpose of the Order prominently referenced both the provincial and federal
authority that permitted the Board to act.
82  Also, a regulation issued by the Ontario Milk Marketing
Board in June 1995 had a similar effect with respect to the powers delegated to it by the federalgovernment as the authority for its control over the marketing of milk produced in the Province of
Ontario.
83
4.56 The United States argued that both the manner of creation of the Special Classes and the
actions by the provincial and federal governments following the Bari II  litigation also refuted
Canada’s allegations that the Special Milk Classes Scheme represented an agreement between privateparties that was simply pursued within an overall legislative and regulatory framework that was
government created.
84  Indeed, if the Special Milk Classes Scheme were simply an agreement between
the various producer dominated provincial marketing boards, the United States questioned:  (i) why
any government involvement was required; (ii) wh y did the Comprehensive Agreement state that it
applied only to those provinces whose provincial governments had approved it85; (iii) why was it
necessary for the Canadian Parliament to amend the CDC Act to provide specific powers to the CDC
to operate the Special Classes;  and (iv) why such powers could not simply be conferred by the dairy
marketing boards in their capacity as representatives of the dairy farmers.   Canada had not, in the US
view, provided responses to any of these questions.  Its only answer was that the provincial marketing
                                                     
82 "The British Columbia Milk Marketing Board (the "Board") has approved this Consolidated Order for the purpose of
promoting, controlling and regulating the production, transportation, packing, storing and marketing of milk, fluid milk, and m anufactured
milk products within British Columbia under provincial authority, and for the purpose of regulating the production for marketin g, or the
marketing, in inter-provincial trade of milk, fluid milk, and manufactured milk products, under federal authority".  The United  States noted
that then, in the immediately succeeding section of the Order, the Board identified the specific bases for its authority, citin g the Natural
Products Marketing  (B.C.) Act, the British Columbia Milk Marketing Board Regulation, the British Columbia Milk Order - made un der the
Agricultural Products Marketing Act (federal legislation), and the Dairy Products Marketing Regulations - made under the Canadi an Dairy
Commission Act (again federal legislation). (United States, Exhibit 43)
83 "This regulation has been enacted by the Board under its delegated Federal authority to ensure that all milk marketed is
covered by the authority of the Ontario Milk Marketing Board.  This Regulation makes it clear that the same requirements that e xist for
producer licenses, license fees, quota, pooling and transportation that apply to local trade apply to any milk attempted to be marketed in
inter-provincial or export trade." (United States, Exhibit 44)
84 The United States noted that Canada’s Answer to Question 7 of the Panel also confirmed the necessity of the delegation of
additional federal powers to enable the marketing boards to act.
85 REO Paragraph 11 of the Comprehensive Agreement on Special Class pooling.  (United States, Exhibit 5)WT/DS103/R
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boards (which performed most, if not all, of their relevant responsibilities by virtue of powers
delegated to them by both the federal and provincial governments) could not remain in office if they
did not satisfy the desires of their dairy farmer constituency (paragraph 4.19).  The United States
argued that if this were the test for determining whether action was governmental or not, any action
by a popularly-elected government would be deemed not to be governmental action.  Moreover, every
time a government agency or legislature took action which benefited a class of individuals, that action
would no longer be considered to be governmental in character.
4.57 The United States noted that a body of legal authority had developed in the GATT and WTO
that was relevant to the issues before this Panel.  Several GATT and WTO panels had considered,
primarily in the context of Article XI of the GATT, whether actions by a government that did not
impose specific requirements on private parties were, nonetheless, government measures.  While this
analysis had necessarily to be conducted on a case-by-case basis, the consistent conclusion that eachPanel had reached was that action need not be mandated by a government to constitute enforcement of
a government measure.  This issue was first addressed in Japan - Restrictions on Imports of Certain
Agricultural Products  (hereafter " Japan – Certain Agricultural Products") .
86  There the Panel had
wrestled with the question of whether the Japanese system relating to restrictions on domestic
production provided for "enforcement of government measures".  The Panel found that the restrictionsemanated from the government and that "adminis trative guidance" from the Government of Japan
played an important role in the enforcement of those measures.
87  This principle was taken a step
further by the Panel in Japan - Semiconductors .88  In that dispute, the Panel found that "an
administrative structure had been created by the Government of Japan which operated to place
maximum possible pressure on the private sector to cease exporting at prices below company-specificcosts."
89  The Panel concluded that despite the absence of any legally binding obligation, the complex
of measures that Japan had adopted operated in a manner equivalent to mandatory requirements.90
4.58 Also, the United States claimed that the analysis of the panel which examined Japan -
Photographic Film91 demonstrated exactly how schemes such as the Special Milk Classes Scheme
fitted within the body of WTO law.  The Photographic Film panel addressed the related issues of
whether certain governmental actions were "measures" for the purposes of the non-violation
nullification or impairment remedy under GATT Article XXIII:1(b) and were "laws, regulations or
requirements" for the purposes of GATT Article III.  Agricultural trade measures of a hybrid nature
had been the subject of GATT panel findings.  As the Photographic Film panel observed, "a 1989
panel on EEC - Restrictions on Imports of Dessert Apples noted that ‘the EEC internal regime forapples was a hybrid one, which combined elements of public and private responsibility.  Legally there
were two possible systems, direct buying-in of ap ples by Member State authorities and withdrawals
by producer groups’.  That panel found that both the buying-in and withdrawal systems established
for apples under the EEC regulation could be considered to be governmental measures for the
purposes of Article XI:2(c)(i)."
92  The rule formulated by the Photographic Film panel was that
" ... the fact that an action is taken by private parties does not rule out
the possibility that it may be deemed to be governmental if there issufficient government involvement with  it.  It is difficult to establish
                                                     
86 Report adopted 22 March 1988, L/6253, BISD 35/163.
87 Ibid, para. 5.4.1.4.
88 Report on Japan – Semi-Conductors , op. cit.
89 Ibid, para. 117.
90 Ibid.
91 Panel Report on Japan – Photographic Film, op. cit.
92 Panel Report on EEC - Dessert Apples , op. cit ., p. 126.WT/DS103/R
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bright-line rules in this regard, however.  Thus, that possibility will
need to be examined on a case-by-case basis."93
4.59 The United States noted that the Photographic Film panel also examined the Fair Trade
Promotion Council’s 1984 Self-Regulat ing Standards.  Whereas Japan argued that this Council was a
mere private entity, the panel had noted the extensive links between the Council and the Japanesegovernment – "dependence of the Fair Trade Promotion Council on liaison with the JFTC for the
establishment of these standards" – and found that these standards were attributable to the Japanese
government.
94   T h e  Photographic Film panel examined a Retailers Fair Competition Code and its
enforcement body, the Retailers Fair Trade Council.  Japan argued that this Code was only self-
regulation among business entities, and the Council was a voluntary organ to implement this self-
regulation.  The panel rejected Japan’s position:
" ... Viewed in the context of the JFTC having approved the Fair
Competition Code and the Retailers Council, and of Article 10(5)
appearing to give a governmental exemption from certain provisions
of the Antimonopoly Law to actions by the Retailers Council and
code members under the code, it is difficult to conclude that
investigation, enforcement and governmental liaison actions of theRetailers Council under the code are purely private actions of a
private trade association. ... we note that a finding to the contrary
would create a risk that WTO obligations could be evaded through a
Member's delegation of quasi-governmental authority to private
bodies.  In respect of obligations concerning state trading, theprovisions of GATT explicitly recognize this possibility.  In this
regard, an interpretative note to Articles XI, XII, XIII, XIV and
XVIII states:  "Throughout Articles XI, XII, XIII, XIV and XVIII,
the terms "import restrictions" or "export restrictions" include
restrictions made effective through state-trading operations".  Theexistence of this note demonstrates that the drafters of the General
Agreement recognized a need to address explicitly one aspect of the
government-delegation-of-authority problem.  In our view, it
supports our finding that measure for purposes of Article XXIII:1(b)
should be interpreted so as to prevent actions by entities withgovernmental-like powers from nullifying or impairing expected
benefits."
95
4.60 The United States argued that the same dangers that the Photographic Film Panel found, also
existed in the context of Canada’s Special Milk Classes Scheme.  Canada was giving disproportionate
weight to the involvement of private dairy farmer s in the operation of the marketing boards, and
would minimize the greater importance of the boards’ dependence on powers delegated by the federal
and provincial governments in Canada.  The United States argued that if the current Panel found thatthe Special Milk Classes Scheme was outside the WTO Agreements simply because it incorporated
some private elements into an essentially government scheme, other countries, led by the United
States, would be impelled to similarly rearrange their affairs.  The economics of dairy trade provided
overwhelming pressure to imitate Canada’s regime if it was determined to be WTO consistent, a
result which the United States believed would be entirely unjustified.
                                                     
93 Panel Report on Japan – Photographic Film , op. cit ., para. 10.56.
94 Ibid, para. 10.314.
95 Ibid, para. 10.328.WT/DS103/R
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4.61 The United States emphasized that the Special Class prices for exported milk were
determined by the CDC or the provincial marketing boards.  This was essentially achieved by the
CDC negotiating an assured margin for processors, which was then subtracted with other costs to
provide a net return to the milk producers.  In cases of exports by the CDC, this was the end of the
matter.  Where the CDC reached agreement with a processor on a price to be paid to the producers,Canada insisted that the marketing boards then could determine whether to accept the price obtained.
Nonetheless, Canada admitted that the boards rarely failed to accept the price.  But more importantly,
when the boards accepted that price, they were exercising the governmental powers that had been
delegated to them.  Their actions, therefore, were no less governmental than those of the CDC.  It was
not an exaggeration that the boards were essentially extensions of the executive branch of the
Government of Canada for most purposes relating to regulation of milk marketing and the Special
Classes in particular.
 96
4.62 Canada  argued that governments did play a role, in that they had taken the necessary steps to
provide enabling authority to the producers and their organisations to ensure that the system could
fulfill its supply management objectives while retaining an oversight function to ensure that such
enabling authority was not misused and that the public interest was protected.  Subject to this
oversight function, governments in Canada had devolved discretionary authority to the dairy industryso it could run its own affairs.  This function was diametrically opposed to the fanciful image
suggested by the Complainants of coercive government control and direction.
4.63 Canada refuted the US argument that producer boards were essentially extensions of the
executive branch of its government (paragraph 4.61).  The executive branch of the Government of
Canada consisted of officials and departments directed by ministers of the Crown and the principalexecutive body, the Cabinet, headed by the Prime Minister.  Producer-run and producer-controlled
provincial marketing boards could in no way be equated with the executive branch of any
government, merely because they carried out certain activities pursuant to enabling legislation and
were subject to government oversight.    Canada rebutted as equally ill-founded the characterization
by New Zealand of the producer boards as "government agencies".  The hallmark of a government"agency" (referred to in Canadian, and New Zealand, legal parlance as a "Crown agency") was a
"body which was subject at every turn in executing its powers to the control of the Crown".
97  The
producer boards in the Canadian dairy sector had a vastly greater degree of independence, private
accountability and discretion than "government agencies".  Hence, far from being government
agencies, the producer boards had the character of private agents representing dairy producers.  Theboards were collective agents for producers as a group. Producers could revoke the agency at any
time.  However, as was characteristic of a collective agency role performed by trade unions,
revocation decisions were made on a collective not an individual basis.  Canada argued that the
activities carried out by the producer-run boards (the private bodies in question) were necessary for
the proper operations of their affairs.  The authority provided to them by governments, fell short of the
test of being "governmental" in character.
98
4.64 Canada further refuted the US claim that the recent Panel Report in Japan – Photographic
Film provided support for the proposition that the Canadian dairy export measures at issue were to be
                                                     
96 The United States referred to Canada's answers to the Panel’s Questions 9(a), 8(a) and 7(c).
97 Canada noted that one of the leading cases on this point in Canada was the Supreme Court of Canada decision in  Westeel-
Rosco Limited v. Board of Governors of South Saskatchewan Hospital Centre , [1977] 2 S.C.R. 238 which in turn referred to a decision of
the Privy Council, Metropolitan Meat Industry Board v. Sheedy , [1927], A.C. 899 holding that an agricultural board which had government-
appointed members and was subject to a government veto power on certain matters was nonetheless not a Crown agency.
98 Canada noted that except for the producer board in the province of British Columbia, which had been given the capacity of
natural person, the other provincial milk producer boards had the status of private (i.e., non-governmental) bodies corporate.  The
Fédération des producteurs de lait du Québec  was a professional union incorporated under the Professional Syndicates Act (L.R.Q. c. S-40)
as recognized by the Farm Producers Act (L.R.Q. c. P-28) and it grouped together 14 regional unions of milk producers.  It was charged by
producers to act as a marketing board and to administer the collective marketing plan established following a decision of its m embers.WT/DS103/R
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treated as governmental in character (paragraph 4.58).  Canada argued that that panel report did not
provide a rule with respect to determining whether or not a measure is governmental:
"These past GATT cases demonstrate the fact that an action taken by
private parties does not rule out the possibility  that it may be deemed
to be governmental if there is sufficient government involvementwith it.  It is difficult to establish bright line rules in this regard,
however.  Thus, that possibility will need to be examined on a case by
case basis ."
99 (emphasis added)
4.65 Canada argued that an examination of GATT cases showed, if anything, that the opposite
conclusion than that argued by the United States could be drawn.  The Japan – Semi-Conductors
case,100 involved a situation where the Government of Japan had initiated a policy of its own volition
and then sought to impose it on the industry. In the words of the panel in  Japan – Photographic Film ,
this policy was "operated to exert maximum possible pressure on the private sector".101  Thus, this
was a clear case of top-down direction from govern ment, through the private sector. By contrast, it
was clear that in the present case there was no policy being imposed by governments. In particular,
there was no government imposed policy whatsoever on export methods or levels. This was left to the
producers and producer boards to determine.  Involvement by government had been limited to
oversight.   The Complainants had referred to the EEC – Dessert Apples case (paragraphs 4.43 and
4.58) suggesting that the facts in that case were relevant to the current matter. As in the case of  Japan
– Semi-Conductors , Canada pointed out that the fact was that the measures in question in EEC –
Dessert Apples represented top-down government direction in a mixed government/private sector
environment.  In particular, the Panel in EEC – Dessert Apples noted:
"The regime as a whole was established by Community regulations
which set out its structure. Its operation depended on Community
decisions fixing prices, and on public financing; apples withdrawn
were disposed of in ways prescribed by regulation."102
4.66 Canada argued that the distinction between the EEC – Dessert Apples situation, with direct
action by government to implement the policy, and the present case where government provided
enabling discretionary authority without policy dire ction was obvious.   In sum, the theme through all
these cases was one of governments participating in  a top-down, policy-directing and initiating role.
The Complainants had failed to show any evidence  of governments in Canada setting and dictating
policies with respect to the operation of the Canadian dairy system and, in particular, the Special
Class export practices at issue.  Accordingly, this was suggestive that, using the case-by-case
approach, the current case fell outside of the type of situation that could be considered to be
governmental.
4.67 Canada further refuted the significance attributed by both New Zealand and the United States
to the Bari case.  The Bari cases involved a group of non-licensed British Columbia producers and a
processor who were custom processing milk for those producers for marketing in inter-provincialtrade.  The litigation arose well before the Special Milk Classes Scheme was introduced and, more
importantly, had nothing whatsoever to do with export trade in milk or milk products.   In response to
constitutional gaps in the domestic milk marketing regime identified at an earlier stage in the
                                                     
99 Panel Report on Japan –Photographic Film, op. cit ., para. 10.56.
100 Panel Report on Japan - Semi-Conductors , op. cit.
101 Panel Report on Japan – Photographic Film , op. cit ., para. 10.54.
102 Panel Report on EEC –Dessert Apples , op. cit ., p.126, para. 12.9.WT/DS103/R
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litigation, regulations were established in 1994 pursuant to the CDC Act.  The Bari III  case referred to
by New Zealand addressed the validity and applicability of the Regulations in a purely domestic
context. The Bari litigation had little relevance to the export of products made from milk sold under
Special Classes 5(d) and (e).
4.68 Canada also refuted the Complainant's assertion that milk would not be available to producers
of dairy products for export at the indicated prices absent the structure of the dairy regime established
by the Canadian federal and provincial governments (paragraphs 4.48 and 4.54).   Canada argued that
the reality was that export milk was sold to processors at prices negotiated in arms-length transactions
directly responsive to world market conditions.  Canada argued that even if the CDC were to cease to
perform the negotiating activities on behalf of producers that it currently performed, the realities of
the world market which drove those export prices would still be the same.   Indeed, Canada argued
that if the CDC were to exit the export pricing negotiations altogether and producers were to negotiateexport sales through their producer boards, processors might easily succeed in negotiating a slightly
lower price with nine producer boards having less experience than the CDC in world markets.  In this
context, to assert the existence of a "benefit" to  Canadian processors flowing from the negotiating role
performed by the CDC was not only counter-intuitive, it was nonsensical.
4.69 Canada cautioned the Panel in respect of New Zealand's arguments relating to the 1960
Working Party Report regarding the notification of export subsidies under Article XVI of GATT 1947
(paragraph 4.41).  That Working Party Report occurred in a context in which there was no consensus
among GATT Contracting Parties as to what constituted a subsidy.  The entire focus of the report was
to decide what measures were to be notified.  Accordingly, the report advanced the Contracting
Parties trade policy objectives by requiring notification of certain matters so that the ContractingParties could assess the resulting trade impacts.  Given that there now existed binding obligations with
respect to subsidies, the Panel had to be careful in  using that Report for the purpose of reading context
into the definition of "subsidy".
4.70 The United States  noted that Canada argued that the Bari case was irrelevant because it
allegedly did not address the issue of exports.  This was a remarkable statement by Canada in light ofthe fact that the principal issue was the authority of the provincial boards over export and inter-
provincial trade.  In addition, the Canadian court specifically addressed the question of the authority
to impose a levy on production.  That levy, of course , was used to fund exports and to allow exports
of dairy products to be competitive on world markets.  Those issues appeared to the United States to
be relevant to exports despite Canada’s protestations to the contrary.
4.71 In respect of the 1960 Panel Report, the United States noted that Canada's argument that the
1960 Panel Report regarding notification of subsidies should not be given weight because it was
issued at a time when the current consensus on those subsidies under the current Agreements had not
been concluded totally ignored the fact that the vi ew of producer-financed subsidies had not changed
in over 30 years since the Report was issued.  In fact, relevant language to this dispute first appeared
in that Report and now had been incorporated into  the SCM Agreement.  Those considerations argued
for greater not less weight for the 1960 Report.
(d) Producers' Involvement
4.72 New Zealand  noted that the Canadian arguments focused almost exclusively on the role of
producers within the system in order to distract the Panel from the fact that it was exporters, and not
producers, who were being subsidized.  New Zealand recognized that producers operating
individually and collectively were involved  in the export regime for Canadian milk products.  The fact
that a body was composed of producer members did not alter the character it had been granted
through its statutory mandate (paragraph 4.21).  The power "to regulate the marketing of milk in inter-
provincial and export trade" - a power possessed, for example, by the British Columbia MilkWT/DS103/R
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Marketing Board103 - did not cease to be the exercise of a governmental regulatory function in respect
of export trade because the Board happens to be composed of producers.   New Zealand argued that
contrary to the impression conveyed by the Canadian arguments, provincial milk marketing boards
were not producer clubs.  They had regulatory functions, and their authority to regulate was derived
from statute, not from the agreement of producers.  Milk producers had to comply with the decisions
of the provincial boards.  They had no right to produce milk and market it except in accordance with
the systems established through the combined actions of the CDC and the provincial marketing boards
and agencies.  Access to the system could only be gained through the purchase of existing quota.
4.73 New Zealand noted that Canada had also sought to portray the production of milk for export
as the result of the individual decisions of producers relying on their own business sense (as argued by
Canada in paragraph 4.109).  Yet the power of individual producers was largely limited to deciding
upon their level of milk production.  The revenue they received for that milk did not depend onmarket forces.  The revenue a producer received depended on whether the milk produced was
classified as in-quota or over-quota, and whether it  was exported or sold on the domestic market.  And
those decisions were not made by the individual producer.  They were made through the interaction of
the CDC and the provincial milk marketing boards and agencies, under the auspices of the CMSMC
(further argued in paragraph 4.93 and following).
4.74 New Zealand argued that Canada's description of the operation of the Special Milk Classes
Scheme as one that was "developed on a bottom-up  basis by Canadian producers" where
Governments simply implemented what they were directed to do by producers was an implausible
explanation of how governments operated. In any event, it did not prevent the conclusion that there
was an export subsidy.
4.75 The United States  noted that Canada argued that the Special Milk Classes Scheme gave milk
marketing in Canada a market-orientation that it had lacked under the producer levies that were
eliminated during 1995.  In particular, Canada contended that whereas the old system was dependent
largely on supply management, the new Special Milk Classes Scheme allowed Canada’s milk
producers to price to the various markets available for their products.  At the core of Canada’s
argument was its assertion that the over-quota levy that existed under the pre-1995 system served as a
disincentive to production above quota limits.
104  The United States  argued that since the Special
Class prices were set at approximations of the world market prices, there appeared to be
comparatively little difference between the economic treatment of over-quota production under the
levy system as contrasted with the present Special Class 5(e), which was applicable to over-quotaproduction.  Canada’s assertion that the change to the Special Milk Classes Scheme heralded a new
day of producer independence was, in the US view, unfounded.
4.76 The United States stressed that producers could not on their own achieve the national
coordination of prices and production that was essential to the operation of the Special Milk Classes
Scheme.   Canada had, in their view, exaggerated the legal basis for the producers’ role in the system
and particularly their role in decision-making.  The United States claimed that Canada ignored two
important factors.  The part played by producers was permitted by: (i) the delegation of governmentpowers to producer marketing boards;  and (ii) the provincial governments’ designation of producers
as  representatives to the CMSMC.  In both instances the producers’ participation was at the discretion
of the governments involved.
4.77 The United States argued that the omission of several critical facts distorted Canada’s
portrayal of the scope of the legal authority posse ssed by the milk marketing boards in their role as
                                                     
103 Section 3 of the British Columbia Milk Order, 1994, (SOR/94-511).
104 The United States referred to Canada’s First Submission, para. 42.WT/DS103/R
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designated  representatives for the Provinces on the CMSMC.  While Canada contended that most of
the voting representatives participating in the Canadian Milk Supply Management Committee were
from producer marketing boards, Canada neglected to give any weight to the most critical fact.  The
voting representative from each province was selected by the provincial government, the provincial
government commission overseeing the industry, and the provincial marketing board.105  Thus, any
producer  who was a representative of a province at th e CMSMC did so by virtue of  the decision of
three separate entities, two of which were entirely governmental. Therefore, any producer
representative designated to sit at the CMSMC table did so at the discretion of the provincial
governments.  Even were this not the case, the fact that producers sat on the CMSMC, a policy
making committee, again did not alter the fact that the CMSMC itself was a creation of a federal-
provincial government agreement.  Canada, wh ich contended that the CMSMC was run by milk
producers and was the decision-maker for dairy policy, also failed to explain why Canada’s Attorney-General in the Bari litigation described the CMSMC as "a federal body, a federal functionary ...
"In discharging its duties under the Federal Regulations , the
Committee acts as a federal body, a federal functionary concerned
solely with matters related to the federal quota.
This exercise of co-operative federalism, suggested by many judicial
decisions as the only practical and effective way to regulate in
Canada the marketing of agricultural products under divided
jurisdiction, is at the heart of th e Governor in Council’s recognition
of the Committee.  The Committee’s composition includes, inter alia,
representatives appointed  by provincial signatories who are bodies
established under provincial law to exercise statutory powers  in
relation to the marketing of dairy products in intraprovincial trade."
(Emphasis added.)
106
4.78 The United States argued that while Canada’s portrayal of the provincial milk marketing
boards admitted that federal and provincial delega tion of powers were essential to their functioning,
Canada failed to acknowledge the binding decision-making powers of the provincial government
authorities respecting the boards’ operations.  The CDC’s website description of the operation of dairy
management in each of the provinces was enlightening for this purpose.107   In connection with the
province of Nova Scotia, the CDC’s internet site stated: "The Nova Scotia Dairy Commission is a
government agency which controls the province’s marketing."  In Ontario, according to the same
report, "[t]he Farm Products Marketing Commission, a branch of the Ontario Ministry of Agriculture
and Food, acts as a supervisory board for the industry."  With respect to Quebec, the website stated
that: "In all cases of unresolved dispute, the Regie des marches agricoles et alimentaires - a
government organization - has the authority to intervene, and will act as a tribunal and hand down a
final and binding decision."  In New Brunswick, the same report explained that while the milk
marketing board possessed the main responsibility for milk marketing, the Farm Products Marketing
Commission, a government agency, which administered the Farm Products Marketing Act, oversawthe activities of the milk marketing board.  As Canada already admitted that the milk marketing
boards in the provinces of Alberta and Saskatchewan were government operated, there was no need to
examine them further.  Thus, in at least six of the provinces, accounting for an overwhelming majority
of milk production, the provincial governments retained ultimate authority respecting the operation of
the milk marketing boards.  Although the milk producers could choose who sat on the board, it was
                                                     
105 Canada’s Second Written Submission, Annex B, footnote 4.
106 Outline of the Argument of the Attorney General of Canada, paras. 47-48 (United States, Exhibit 29)
107 United States, Exhibit 54.  (This United States Exhibit, in addition to including documents from the CDC’s website, includes a
chart excerpted from the Report identified in United States, Exhibit 25.)WT/DS103/R
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the provincial and federal governments that determined the respective board’s authority, and it was
the provincial government that had the final say on the operation of the boards.
4.79 Hence, the United States argued, regardless of the fact that producers had a role in the Special
Milk Classes Scheme, which was not denied by United States, the fundamental authority, practices,
and operations necessary for the national application of the Special Milk Classes Scheme weregovernmental.  That the governments at both the federal and provincial levels had entrusted certain
powers to the milk marketing boards, and thus indire ctly to producers, did not alter the fact that the
powers exercised by those boards were governmental in origin and that the boards as institutions were
ultimately answerable to the overseeing government authorities.
4.80 The United States argued that the Special Milk Classes Scheme, as outlined in its own and
New Zealand's arguments above, was created under the authority of the federal and provincial
governments, and was administered, maintained, and enforced by them.  Now that it existed, milkproducers did not have a choice in its application.  Milk producers could not market the milk that they
produced without a government assigned quota and a CDC issued license.  Milk producers also did
not have any input into whether their milk was sold into one of the Special Classes or another.  They
could not opt not to participate in the Special Class pool.
4.81 In respect of price, the United States stressed that the dairy farmer had no input in the pricing
of milk for over-quota production.  Canada stated th at all over-quota production received the 3 month
rolling-average Special Class 5(e) price.  The Special Class 5(e) price was approximately 50 per cent
of the price obtained for the same milk components in the domestic market in Canada.  The milk
producer had absolutely no ability to sell over-quota milk at the domestic price levels.  The Special
Milk Classes Scheme closed this alternative to the milk producer.  Although Canada asserted that theCDC, a Crown corporation, only negotiated the Special Class 5(e) price for the farmers and their
boards, Canada had conceded that the price was rarely, if ever, rejected by either.  Yet, for example,
the British Columbia Consolidated Milk Marketing Order provided in Part VIII, paragraph 31, that
"[t]he Board will determine the minimum Producer price for over quota production based upon the
calculated world price published by the Commission."
108  It was noteworthy that this regulation did
not say that the Board could  base the Producer price on the Commission published price, but that it
will base the price on the CDC published price.  Similarly, the Manitoba Milk Producers newsletter
published monthly the CDC Special Class price for ov er-quota production and indicated that this was
the price that would appear on pr oducers’ monthly pool statements.109  Again, this left little question
but that as a practical matter, the CDC calculated  price was the only price available for over-quota
milk.110   In this sense, the United States argued that it would be more accurate to state that the CDC
was negotiating a milk price for the dairy exporter, rather than for the dairy farmers.  This was
because a dairy processor with an opportunity for an export sale approached the CDC with the price
that it could obtain in the international market for the dairy product export, such as butter, or cheese.
The CDC  then  negotiated  with the  processor/exporter  an "assured margin"  which  incorporated  an
                                                     
108 "Commission" was defined elsewhere in the Order to mean the Canadian Dairy Commission.  Part I, paragraph 3 of the Order.
(United States, Exhibit 43)
109 The United States noted that in each month, Milkline,  the Manitoba newsletter reports the over-quota prices in this manner:
"The following is the price for over-quota production (world price) effective September 1, 1996,  as calculated by the Canadian  Dairy
Commission." (Emphasis added.) The world price will be reported regularly in the Milkline and on the monthly pool statement.  ( United
States, Exhibit 47)
110 The United States noted that it was worth considering what alternative the board had if it found the CDC negotiated price to
be unacceptable.  Given that milk was a highly perishable product, the board did not have long to consider its options.  Furthe rmore, since
the Class 5(e) permits were only issued, according to Canada, when the milk in question was surplus to domestic requirements an d could not
be sold in the domestic market at the prices set for that market, what real alternative did the board have except to accept the  CDC
determined price?WT/DS103/R
WT/DS113/R
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amount for profit as well as the processor’s costs.111  This amount was then subtracted from the
processor’s selling price for butter, cheese, or some other dairy export in world markets.  The
international sales price for the dairy export, less the processor’s "assured margin," was the amount
paid to the dairy farmer for his or her milk.
4.82 Thus, the entire calculation procedure was aimed at assuring a price to the processor/exporter
that allowed the export to take place at world market prices.  While presumably the interests of the
dairy producers were considered, the over-riding objective was to ensure that surplus dairy products
were exported.  The major benefit derived by the milk producers from such exports was that they
assisted in administering the supply management of dairy products and producers got some return for
this surplus production. Without such exports, the surplus would be destroyed with obvious political
ramifications.
4.83 Hence, the United States submitted that Canadian exporters of dairy products were provided
with milk priced at the lower Special Class 5(d) and (e) levels only as a result of the Special Milk
Classes Scheme, that had been put into place by the joint action of the federal Government of Canada
and the provincial governments.  Without the government action that required the removal of surplus
in-quota and over-quota production at prices negotia ted or set by the CDC, those producers of dairy
product exports would not receive the lower priced milk necessary for them to compete in
international markets.  It was not normal commercia l practice for a government entity to customize
the price of an input to match particular sales opportunities.
4.84 Canada  maintained that the creation of the Special Milk Classes Scheme was a producer-
initiated process and that contrary to the assertions of the Complainants, the Special Milk ClassesScheme was not imposed by governments.  It was developed on a bottom-up basis by Canadian
producers through their producer organizations and the producer-dominated CMSMC.   Through their
decisions in these bodies, the producers had reached agreement on the principles that would form the
foundations of such a system.  In those resolutions, they called on governments to take the necessary
steps to provide the enabling authority that w ould allow such a system to come into being.
4.85 Canada noted that as early as 1993, proposals were being circulated for a revision of the
Canadian supply management system to include new features such as possible pooling systems and an
optional export programme.  The purpose of these proposals had been to respond to perceived new
market conditions and to introduce added flexibility and competitiveness so as to take advantage of
the new export opportunities that would emerge from the conclusion of the Uruguay Round.  InQuebec, for example, an early initiative in this direction was taken at the 14-15 April 1993 meeting of
the General Assembly of Fédération des producteurs de lait du Québec to begin the process of
renegotiating the terms of the NMMP.  Further decisions in the General Assembly in 1994 and 1995
advanced this process, particularly with respect to regional pooling arrangements.   These decisions
fundamentally modified the basis of the Quebec dairy marketing plan and the conditions that applied
to the marketing negotiations conducted between producers and processors in Quebec.   Parallel
developments were taking place within the industry in other provinces, developments that ultimatelyculminated in the decisions taken at the CMSMC to propose the Special Milk Classes Scheme.   Thus,
Canada argued that governments in Canada had not imposed arrangements on the dairy producers and
processors.  Governments had responded to the initiatives of the industry by providing the
discretionary authority required to implement industry proposals, provided those proposals were in the
public interest.  On the other hand, had the processors and producers rejected the concept of a nationalSpecial Milk Classes Scheme, it was quite certain that such a system would never have been
implemented.
                                                     
111 The United States noted that Sub-paragraph (vii) of Annex B of the Comprehensive Agreement provided that a processor
would receive an assured margin and that the level of the margin would be negotiated by the CDC with the processor.  (United St ates,
Exhibit 5)WT/DS103/R
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4.86 Canada argued that the object of the supply-management system in Canada had been to
provide the Canadian dairy industry with the means by which they could effectively govern their own
affairs, so as to yield a fair return to producers while balancing the interests of processors and
consumers.  The purpose of the supply management system was to take the necessary steps to match,
as closely as possible, the quantity of milk to be marketed for domestic use with Canadian domesticdemand.  This, coupled with border measures to control imports into the domestic market, allowed for
the maintenance of price levels for milk in the domestic market higher than would otherwise be
obtained in the absence of such measures.   In order to provide Canadian dairy producers with the
means to operate such a system, governments in Canada had put in place the legislative and regulatory
framework to allow such a self-governing regime to function.   Provincial governments had passed
enabling legislation to provide for the establishment of producer-run marketing boards.
4.87 It followed that the Canadian dairy marketing system rested on the foundation of the
producers themselves.  Canada noted that the United States conceded that the producer-run boards
were "private entities", "private parties" and "dairy producer organizations".
112  They were organised
throughout Canada, from the local level, including co-operatives, and then up to the provincial113 and
national114 levels. Through these producer organisations, the individual producers maintained close
links with each other and had an effective means for the development of policies and other marketing
initiatives.  At the provincial level, the key producer-controlled institutions were the milk marketing
boards (the "producer boards").  In each province, these boards only came into being through an
affirmative vote of the producers.  In most provinces,115 and in Ontario and Quebec in particular, the
membership of the boards consisted exclusively of producers.  Through on-going consultations at the
district and provincial levels, the producers held these elected representatives responsible for theiractions.  In Quebec, many of the important decisions of the board were the subject of individual
voting at general meetings of the producers.  Thus, without question, the boards were controlled by,
and act on behalf of, the producers.
116
4.88 Canada argued that the heart of the Canadian  dairy system was to be found in the CMSMC
(paragraph 2.27).   The central actors in the CMSMC were the various provincial producer boards.Each province sent a delegation. These delegations were led by "designated representatives" who
were senior executives with the respective producer boards.
117  Provincial government officials
participate in an oversight role, without having voting rights.  It was the producer board
representatives who had the right to vote on and thus directly participate in the CMSMC decisions.
As a result, for seven of the nine provinces, representing 92 per cent of Canada’s dairy producers, thedesignated representative was a dairy producer elected to the producer board by fellow dairy
producers.
118    Canada noted that even a cursory review of the signature pages of the Comprehensive
Agreement on Special Class Pooling showed the signatures of producer boards in addition to the
signature of government officials.  Nevertheless, Canada did not argue that only the producers or the
                                                     
112 Canada referred to the United States' Second Written Submission, paras. 59 and 10.
113 At the provincial level, the key organizations were the producer run boards, e.g. the Dairy Farmers of Ontario , the
Fédération des producteurs de lait du Québec, and the  Manitoba Milk Producers.
114 At the national level, the producer organization was the Dairy Farmers of Canada.
115 Canada noted that this did not include Nova Scotia, Saskatchewan and Alberta.  These three provinces represent less than
10 per cent of Canadian dairy producers.
116 Canada noted that the very names of the producer boards in Ontario and Quebec, in particular, gave testimony to the boards’
own view of themselves: in Ontario, the Dairy Farmers of Ontario and, in Quebec, the Fédération des producteurs de lait du Québ ec.
117 Except in Nova Scotia, where the designated provincial representative was a member of the Board of the Nova Scotia Milk
Producers Federation and the President of the Dairy Farmers of Canada.
118 Canada noted that Annex A (attached to its Second Submission) contained a full list and biographical background to the
designated provincial representatives to the CMSMC.  Canada also referred to comment #2 in Annex 13 with respect to the
mischaracterization of provincial delegation representation in Exhibit 36 of the United States.  The only non-dairy producer de signated
representatives were from Alberta and Saskatchewan, which accounted for less than 8 per cent of Canada’s dairy farmers.WT/DS103/R
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industry were involved.  The Comprehensive Agreement on Special Class Pooling, like the NMMP
and the CMSMC, represented a co-operative arrangement in which all interested parties, the
producers, through the producer boards, and government representatives in their public interest
capacity119 participated.
4.89 Canada argued even a minimal knowledge of Canadian political life would confirm that no
federal government institution could ever begin to dictate to provincial representatives where
provincial jurisdiction and interests were at stake.  Indeed, in this case, the chief provincial speakers
were representatives of the industry, not government, this made the picture of unilateral federal
government action painted by the Complainants even less credible.   The true character of the
CMSMC, based on co-operation and consensus, was representative of the character of the Canadian
dairy system as a whole.  Although the processors did not have voting status in the formal
arrangements for the CMSMC, they had a prominent role at the CMSMC table.  This was because, asa matter of practice, every effort was made to reach a consensus that could be supported by all
provincial producer representatives as well as the other stakeholders in the industry.
4.90 Canada noted that the Complainants, rather than addressing the CMSMC, preferred to stress
the CDC, a federal crown corporation, suggesting that it was the true controller of the Canadian dairy
system.  Their approach was understandable given the true character of the CMSMC, i.e., control inthe hands of the producers in consultation with other concerned parties, and the difficulties that this
presented for the Complainants’ case.   Canada argu ed that whereas the NMMP had provided that the
CDC could take decisions for the CMSMC where no consensus was reached in the CMSMC, the
provisions of the Comprehensive Agreement on Special Class Pooling took that override authority
away with respect to a ll matters covered by that Agreement (paragraph 2.33).  Since the matters
covered by the Comprehensive Agreement on Special Class Pooling were very broad, this had left
very little subject to the original override provision in the NMMP.  This reality fundamentally
undermined the attempt by the Complainants to al lege that it was the CDC that controlled the
Canadian dairy system, not the CMSMC.
4.91 Alternatively, Canada noted that the Complainants  had argued that even to the extent that the
CMSMC ran the system, it was a body composed of government officials.  Canada recalled that for
meetings of the CMSMC, for seven of the nine provinces, it was the representative of the producers
who took the lead in discussions between provincial  delegations.  This producer representative, the
"designated representative", was elected to the respective producer board by fellow dairy producers.
As a result, it was producers who spoke most prominently with respect to the various aspects of theCanadian dairy system as they were brought before the CMSMC and this provided an important
flavour to the nature of those proceedings.   Nonetheless, representatives of provincial governments
did attend and did speak at the meetings of th e CMSMC when matters arose touching on their
responsibility to oversee the public interest.  Thus, through its consensus-based decision making
structure, the CMSMC served to bring together the representatives of industry who took the lead on
operational matters and representatives of government who ensured that the public interest was
respected.
4.92 Canada noted that with respect to the processor margins (paragraph 4.81), transactions
occurred at the highest milk price which the CDC believed it could achieve, subject to the potential
exporter's willingness to participate.  Canada argued that there were no standard mark-ups or margins,
although the CDC used the return for milk producer s that would be generated by making butter and
SMP for export as the baseline in negotiating the milk price.  The processor margin for CDC export
sales was the subject of extensive negotiations between producers and processors following the
completion of the Comprehensive Agreement on Special Class Pooling on how the surplus removal
system would be implemented.
                                                     
119 Canada noted that this public interest included ensuring that the interests of consumers and the processors were respected.WT/DS103/R
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(e) In- and Over-quota Milk and the Producers' Choice
4.93 New Zealand  noted that Canada placed considerable emphasis on the distinction between in-
quota and over-quota milk that was destined for export.  New Zealand maintained that the objective of
the Canadian distinction between in-quota and over-quota milk was to distance over-quota milk even
further from government agencies such as the CDC and the provincial milk marketing agencies.
However, the distinction between in-quota and over- quota milk was an irrelevant distraction.  It was
an artificial distinction created for Canadian regulatory purposes that had no reflection in reality.
Milk was milk in the tank or in Special Class 5(d) or (e).  What Canada had done through the Special
Milk Classes Scheme was to determine that the re venue that producers received for their milk would
be based on one price for a certain quantity of milk and on a different price for another quantity of
milk. Canada had decided that exporters were to pay a different price for milk for products destined
for export than that for products destined for domestic consumption; it had thus provided an exportsubsidy regardless of whether the milk sold to processors for export was classified as in-quota or
over-quota milk.
4.94 New Zealand noted that the distinction betw een in-quota and over-quota milk was not as
clear-cut as Canada described it.  Whether or not an increase in producers’ supply would constitute
over-quota production was a determination made by others, not by the producers.  Each provincemanaged a complex system according to its own rules.  As the Chairman of the CDC had said in April
1998, "there are almost as many ways to manage  provincial quota, ov er-quota production and
payment mechanisms as there are provinces".
120  Most provinces had a complex monthly credit and
debit system according to which producers who did not fill their quota one month could carry over
"quota credits" for future months, or indeed, in the case of Manitoba, for future years.
4.95 New Zealand noted that Canada claimed that over-quota production arose when producers in
a province produced milk in excess of their quotas and as a result the province as a whole exceeded
its share of the national MSQ in a month.  Thus, whether a producer produced what ultimately would
be determined to be over-quota milk might depend on the level of production in the province as a
whole.  Furthermore, it was ultimately the CMSMC which decided what would be sold as in-quotaand what would be sold as over-quota milk.   Hence, a producer could not know whether milk
produced on any particular day, week or month would be treated as in-quota or over-quota, or whether
it would be used for domestic or for export purposes.  A producer could simply decide to produce
more milk.  The consequences of producing more milk were in the hands of the milk marketing
boards and the CMSMC.  Thus, the concept of producers systematically deciding to produce over-quota milk for export purposes after considering current world market prices was far-fetched.
4.96 Nevertheless, New Zealand emphasized that focusing attention on whether a producer
produced in-quota or over-quota milk ig nored what was really at issue in this case.  That was, whether
providing exporters with access to lower-priced milk for products destined for export - as occurred
with Special Class 5(e) in- and over-quota, as well as with Special Class 5(d) - constituted a subsidy
within the meaning of the Agreement on Agriculture.
4.97 New Zealand argued that Canada’s claim that individual producers decided, on market
considerations, whether to produce over-quota milk misrepresented the facts.  Over-quota milk
production was not always a result of a deliberate decision by a producer to produce for export.
121  It
made sense for producers to slightly overshoot th eir quotas to allow for fluctuations in milk
                                                     
120 The Chairman of the CDC’s Address to the Federation des Producteurs de Lait du Quebec.  New Zealand noted that this text
was available on the Canadian Dairy Commission’s Website (http://www.cdc.ca).
121 New Zealand noted that Canada had noted that only those producers who produce in excess of 105 per cent of their quota
were considered to be deliberately producing for the export market.  In fact, Canada had admitted that only one third of produc ers produced
milk in excess of 105 per cent of their quota. (Footnote 37 of Canada's First Submission, para. 47)WT/DS103/R
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production caused by weather or biological factors.  This was not a deliberate decision to produce for
the export market; it was a rational decision to maximise revenue by ensuring they do not underfill
their more lucrative in-quota entitlement.
4.98 The United States  argued that milk was milk; it was not labelled in-quota or over-quota when
it was sold – the distinction was not of concern to processors or exporters. What was of concern toexporters was the ability to access their major input at a low cost, which was precisely what classes
5(d) and (e) set out to achieve.   Like New Zealand, the United States emphasized that there were a
variety of factors, mostly beyond the control of Canadian dairy farmers, that determined whether there
was over-quota production in the first place.  Many factors, including weather, quality of feed, and the
biological condition of the dairy herd, would aff ect the amount of milk produced in any given time
period.  Thus, despite a farmer’s best efforts to confine production to the amount of his/her quota,
doing so was more an art than a science.  Production could not be regulated with precision.Moreover, a farmer had an incentive to try to produce the full amount of his/her quota.  This was
because producing the full amount of quota provided the best opportunity to recover as much of the
applicable fixed costs of production as possible since within-quota production was entitled to receive
the higher domestic prices, or, at least, a blended price that included primarily higher domestic prices.
4.99 The United States argued that several authorities had testified regarding the difficulty of
precisely producing to the level of the quota.  Mr . Rick Phillips, Director of Government Affairs,
Dairy Farmers of Canada, made the following statement regarding the uncertainty of over-quota
production:
"In 1997, Dairy Farmers of Ontario conducted a survey to determine
the extent of producer interest in providing milk for the OptionalExport Program.  Now, as you probably differentiate this milk
supply, which represents a conscious and voluntary exposure to
world markets from over-quota milk - and I wouldn’t want that to be
said in public, as well - producers produced or filled their quota, and
that’s basically a producer behaviour, and the level of over-quotamilk as Mr. Core [President of Dairy Farmers of Ontario] has stated a
bit earlier, is sort of dependent on the biological conditions that they
find on the farm.  In fact, if you happen to be in a state where the
feed is good and the cows are calving properly and there is not a
whole bunch of diseases, these can add together to create a fairlysignificant level of over-quota milk.  When in fact, under normal
chance circumstances, if you didn’t have a lot of good things
happening at the same time, the level of over-quota milk would be
much less."
122
4.100  The United States noted that Mr. Phillips’ views were confirmed by the testimony of Mr. Guy
Jacob, President, Canadian Dairy Commission, before Canada’s Parliamentary Standing Committee
on Agriculture and Agri-Food.
"Last year the quota was cut by 3%.  A farmer had the choice of
reducing his production by 3%.  He could sell one cow out of that
barn and reduce his net revenue.  He had to reduce his production
because the quota was cut last year by 3%.  That’s the choice he has.
He may decide to keep his production at the level of the previousyear and then produce 3% over quota.  Then it may happen that this
year the feed was a little better, the climate was a little better, and it
                                                     
122 Testimony before the Canadian International Trade Tribunal.  (United States, Exhibit 33)WT/DS103/R
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just happens that he’s producing 6% over his quota.  That milk is
being removed by the CDC at the international price."123
4.101  The United States argued that when the level of production by dairy farmers was so greatly
influenced by factors largely beyond the producers’ control, Canada’s assertion that an increase in
over-quota production in a single year evidenced the willingness of its farmers to sell at world price
levels was simply not credible.  Rather, farmers’ willingness to sell milk for use in the OEP124 would
be a far better gauge of interest in selling at the Special Class 5(e) price for export.   Yet testimony
from Mr. Phillips125, indicated that dairy farmers in Ontario had shown very little interest in
participating in the OEP. There had been virtuall y no use of the OEP for the first two years of its
authorized usage. 126  Any increase in usage during the 1997/98 year was most likely attributable to
the unusual level of over-quota production in that year and the fact that farmers had an opportunity to
obtain a higher price for their milk under the OEP than from the CDC dictated price under SpecialClass 5(e).  For example, Manitoba was selling milk for OEP contracts in 1997/98 at $32 per
hectolitre compared to the Special Class 5(e) price of between $23 and $25.
127
4.102  The United States further noted that Mr. Phillips had predicted in hearings before the
Canadian International Trade Tribunal that it was very unlikely that dairy producers would voluntarily
participate in a new special class:
"So, again, I would note that a 5-B, which is a typical Class 5 price,
most of the variable costs are covered.  But when we go down to the
world price, the $23.38 in this instance, look across there, you find
that the cutoff point is around 18 percent of producers whose variable
costs would be covered.  That means that a vast majority ofproducers would definitely not want to produce milk at the world
price."
128
4.103  The United States also observed that Mr. Philli ps had testified that only one-half of one per
cent of producers in Ontario had shown any interest in participating in the OEP that, like the Special
Classes, involved the sale of milk for export at approximations of world market prices.129
4.104  The United States stressed that Canada’s argument that an increase in over-quota production
since the implementation of the Special Milk Classes was evidence that milk producers were
deliberately choosing to export milk at world mark et prices was flawed.  First, over-quota production
actually declined in the first full year, 1996/97, after the implementation of the Special Milk Classes
Scheme.  The annual report of the Dairy Farm ers of Canada showed that over-quota production
actually declined between 1995/96 and 1996/97, both in actual volume and as a percentage of total
                                                     
123 United States, Exhibit 45, pp. 21-22.  The United States noted that it was significant that Mr. Jacob’s testimony had been
given in March 1998, nine months into the 1997/98 marketing year.  Thus, his comments had particular force respecting the reaso ns for
over-production in that year, including the reduction in the quota that was made at the outset of the marketing year.  Mr. Jaco b also made the
following additional observation about the unpredictability of production levels: "If we could manage to put in some kind of a system
instead of having just over-quota production, which is there this year and might not be there next year ... no one can really c ount on it.  A
dairy farmer just happens to be producing over quota.", p. 15.
124 Para. 2.57(b) refers.
125 United States, Exhibit 33.
126 The United States noted that Mr. Phillips' testimony was confirmed by Canada’s answer to the additional questions of the
United States.
127 United States, Exhibit 46.
128 Hearings before the Canadian International Trade Tribunal in its "Inquiry Into the Importation of Dairy Product Blends",
testimony by Mr. Phillips.  (United States, Exhibit 33)
129 Ibid. (United States, Exhibit 33)WT/DS103/R
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production.130  Furthermore, the purported increase in  over-quota production between 1996/97 and
1997/98 appeared to be attributable in large part to a decision to reduce the Market Share Quota
(MSQ) for 1997/98. The United States noted that information contained in Canada’s Exhibit 16
showed that the MSQ had been reduced by one million hectolitres between 1996/97 and 1997/98.
When such a major reduction in MSQ occurred, it all but compelled an increase in over-quotaproduction, as it was difficult, if not impossible, for milk producers to reduce production in such a
precipitous manner.  A one million hectolitre reduction in the MSQ equalled almost one-half of the
total over-quota production in 1996/97, which accor ding to the DFC was 2.21 million hectolitres.
4.105  The United States argued that there was the definitional question of what actually constituted
over-quota production.  Various "flexibility" provisions authorized by several provinces allowed for a
departure from the pre-existing practice of determining whether a particular milk producer was over-
quota based on an analysis of a dairy farmer’s daily or monthly production levels.  Canada had
confirmed the United States understanding that both Alberta and Manitoba permitted such
adjustments.
131 Alberta and Saskatchewan performed a year-end price adjustment which applied
under-delivered quota against over-quota deliveries.  Manitoba currently allowed flexibility for up to
25 days of quota production.  This was characterized as a credit that the dairy farmer could use on a
rolling basis to apply against over-quota production.  The United States understood that otherprovinces had similar provisions.  In addition, Manitoba had introduced a so-called "cover-off" that
provided yet another hedge against over-production.
132  While this "cover-off" mechanism was
originally instituted for only the months of August through November, Manitoba later extended it to
additional months.  To the extent that other provinces had similar arrangements, their existence
undermined Canada’s contention that there existed a consistent definition of over-quota productionthat dairy farmers consider in their daily production plans.
4.106  The United States noted that whether milk was in-quota or over-quota and what Class price it
received was in fact so confusing, that many milk producers apparently did not know whether their
production was over-quota and, if it was, what price they would receive for the over-quota production.
The Manitoba Milk Marketing Board’s newsletter Milkline has responded to milk producersconfusion with a number of articles attempting to explain the mechanics of these various schemes.
133
In the face of such uncertainty, it was difficult to comprehend Canada’s assertion that dairy farmerswere producing over-quota milk in response to price signals from the world market.   Moreover, the
United States stressed that the price earnings information provided to producers was largely, if not
entirely, retrospective.
134  While Canada stated that producers knew that Special Class 5(d) and (e)
prices were set on the basis of negotiated transactions, Canada omitted to mention that the returns that
producers received from Special Class sales were pooled under the Special Class Agreement if they
consisted of in-quota production.  In the case of over-quota production, the producer also received a
weighted average return based instead on all Class 5(e) transactions during the year.  Thus, any
individual negotiated transaction price was of no direct consequence to an individual producer; his
ultimate return from in-quota exports was determined based on the Special Class pooled price and
over-quota sales were based on a weighted average Class 5(e) price.
                                                     
130 United States, Exhibit 38.
131 The United States referred to Canada's replies to the Panel’s Questions 4(b) and 4(d).
132 United States, Exhibit 49.
133 The United States referred to United States, Exhibit 48 as an example.  In addition, it was noted that the British Columbia
Milk Marketing Board reported in its May 1998 newsletter that the increase in over-quota production in the four western provinc es during
1997/98 had been attributable not to over-production of industrial milk, but was the result of decreased fluid milk sales (beve rage milk).
The United States noted that presumably, fluid milk had been diverted into the industrial milk classes as a result and then had  showed up as
over-quota production.  Again, this occurrence had nothing to do with milk producers deliberately deciding to accept world mark et prices
for their milk.
134 The United States referred to Canada's response to the Panel's Question No. 19(g).WT/DS103/R
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4.107  Canada  recalled that milk to be used in exported products under the Special Classes arose
from two sources of milk: in-quota production and over-quota production.
(a) In-quota milk: Producers, acting collectively through their milk marketing boards and
the CMSMC, controlled the quota level and the amount of milk that was likely to be
exported from in-quota production.  If prices obtained for milk used to make productsfor export were not high enough, producers could decide, through their boards, to
reduce the quantity of MSQ.
135
(b) Over-quota milk: Individual producers decided whether to supply milk above their
individual production quota in the full knowledge136 that over-quota shipments would
receive world market returns. In fact, considerable numbers of producers voluntarily,
as a business matter, chose to engage in over-quota production.
4.108  Canada noted that the Complainants suggested that there was no real distinction between
over-quota and in-quota milk: "milk was milk", it was all fungible.  Canada argued that this was
irrelevant: the molecules of milk were not tracked into export or domestic markets. What was relevant
was that the producer was perfectly aware when his milk was picked up at the farm gate that his
shipment was within his marketing quota or was "over-quota".  If it was "over-quota", then the
producer knew that his return for this shipment woul d be in accordance with actual Class 5(e) prices,
world market-based prices.  This was true regardless of where the molecules in that truckload of milk
actually ended up.
4.109  Canada argued that for both in- and over-quota milk, the essence of the Canadian system was
that it exposed milk producers to market signals from the export market and allowed them to make
business decisions based on those signals. In contrast to the allegations of the Complainants, thegovernment did not direct milk to be used for manufacturing products for export.  On the contrary,
while milk sold on the domestic market was subject to marketing quotas and price regulation or
approval, the quantity or price of milk sold for use in products destined for export markets was
determined on a strictly commercial basis.  There was no government involvement whatsoever in
decisions to participate in the export market. That was a choice left entirely to the producers.  Over-quota production for exports did not constitute any sort of pre-condition for a producer’s annual
allocation of quota for milk sales into domestic markets.  In short, the decision to produce for the
export market or not was one that was made by producers alone on the basis of true price signals with
the objective of profit maximization.   The essential feature was that the milk producer was exposed  to
world market-driven prices for dairy products and responded entirely  on a commercial, market-driven
basis.   Canada emphasized that the individual farmers knew their individual quota level and knew
that any production above their individual quota would be paid to them at world market prices.
137
4.110  Canada argued that in the case of in-quota milk, the decision to provide for a certain amount
of milk within the annual Market Sharing Quota (the "MSQ") was taken by the producers collectively.
These decisions were taken at the producer board-dominated Canadian Milk Supply Management
                                                     
135  Canada noted that most in-quota milk was marketed for domestic use.  A limited amount of in-quota milk was marketed for
export use.  The sources of this milk were the planned fixed amount under Class 5(d) and any additional in-quota milk resulting  from the
"sleeve" or other milk intended for, but not required by, the domestic market.  Canada claimed that the amount of this addition al in-quota
milk had significantly diminished in recent years.  On the other hand, all over-quota milk was intended for the export market, with returns
paid to the producer based on Class 5(e) export returns, even if it was required to be re-directed to the domestic market in th e event of in-
quota shortfall.
136 Canada stressed that each producer knew the amount of his individual quota and his production.  This was clearly indicated on
producer cheques.  While a producer might not know whether his province was over-quota, the individual over-quota producer rece ived a
Class 5(e) return whether or not the province's producers taken collectively were in an over-quota position (Alberta, accountin g for 4.77 per
cent of Canadian producers was an exception).
137 Canada noted that this was with the exception of producers in Alberta and Saskatchewan, where under-shipment by some
producers would lead to adjustments of the prices paid for over-quota shipments by others.WT/DS103/R
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Committee (the "CMSMC"), in consultation with the processors.  Producer representatives on the
CMSMC were accountable through a system of producer democracy that began at the district level,
with elected district or regional milk committees.  Generally elected members of these committees
were directors at the provincial level, and provincial boards were the main voice in deciding on
production targets in the CMSMC. Thus, the producers were free to collectively determine whetherand to what extent they wished to provide in-quota milk for export purposes.  There was no evidence
of government control, direction or coercion in this process.
4.111  In the case of over-quota milk, any qualified dairy producer in Canada was free to produce as
much milk as he or she chose.  Specifically, the producer was free to produce any amount of milk
over his or her domestic marketing quota, i.e., over-quota production with the understanding that their
return for over-quota milk would be based on actual world market-based prices, i.e., the prices
realised from Special Class 5(e) sales, taking into account their individual cost structures.  Theindividual over-quota producer received a Special Class 5(e) return whether or not the province’s
producers taken collectively were in an over-quota position.
138  Accordingly, decisions to participate
in over-quota production and to supply milk for export use were market-driven choices made by
individual producers.  As such, the absence of an y government control or direction was clear and
unequivocal.
4.112  In respect of the assertions of the United States with respect to testimony of officials of the
Dairy Farmers of Canada (DFC) before the Canadian International Trade Tribunal (CITT), Canada
argued that the testimony had been taken completely out of context and did not support the US
proposition (paragraph 4.102).  The context of the DFC testimony was an inquiry by the CITT,
initiated at the request of the Canadian government, into issues raised by increased imports of blendsof dairy products, particularly butteroil/sugar blends, into Canada.  Among the various options
considered by the CITT was the possibility that producers may wish to create a Special Class price to
service the domestic  butterfat market at world prices.  The DFC testimony to which the United States
referred was addressing this option, not the question of individual producers deciding to produce milk
at world market prices for the export markets.  This distinction had been made abundantly clear in theDFC's Final Agreement before the CITT:
"7.1.6  There is evidence that some dairy producers produce
quantities in excess of MSQ.  This is done by producers who
voluntarily seek to increase production for participation in world
markets.  Certain low cost producers may also voluntarily decide toactively participate in world markets through the Optional Export
programe.  These producer decisions, however, must not be confused
with a proposal to service the domestic butterfat market using within
quota production at world prices.  The recent decision to reduce MSQ
is clear evidence that dairy producers are not willing to produce
irrespective of domestic market requirements."
139
4.113  In the case of both in-quota and over-quota milk production, the claim of the Complainants
that the Canadian dairy system was government-controlled and directed had to fail.   Particularly with
respect to the marketing of over-quota milk for export purposes, this represented a decision, by the
governments, not to intervene, to avoid the use of  the discretionary authority provided to the boards
                                                     
138 Canada noted that in Alberta, shipments in excess of an individual farm quota could be offset because of under-production on
other farms.  In all other provinces and individual that produced milk in excess of the individual farm quota received the worl d price for that
milk, regardless of the production of other individuals.
139 Canada referred to arguments of the DFC, Dairy Farmers of Ontario, Federation des producteurs de lait du Québec , 20 April
1998 (Canada, Exhibit 52, p.21, para. 7.1.6).WT/DS103/R
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and rely instead on market-driven results.  To suggest that such a restraint from intervention
constituted government action resulting in export subsidies was not logical.
4.114  In respect of pooling, Canada argued that contrary to suggestions from the Complainants,
pooling was not an obligation that had been forced on the producers by coercive governments.
Pooling was a consensus-based arrangement that the producers, through their boards, had agreed to,pursuant to the terms in the Comprehensive Agreem ent on Special Class Pooling (the P9 Agreement)
and the P6 and P4 Agreements (paragraph 2.24).  The producer boards were full signatories of those
agreements, which were co-operative agreements involving all interested stakeholders.  These
agreements were not agreements between governments to impose on the dairy industry and the dairy
producers, in particular, certain arrangements and requirements, as suggested by the Complainants.
Each producer board had joined in pooling freely, and they were equally free to leave the pooling
arrangements.  The provincial producer boards could agree at any time to cease any sharing ofrevenues and markets. Indeed, to give a practical example, the Manitoba producer board had
temporarily opted out of the P6 pool, pending their evaluation of their participation. Under the
enabling legislative framework, such decisions could not be overridden by provincial or federal
governments.
4.115  Canada noted that it was also possible for a provincial producer board to partially withdraw
from the pooling of revenues if it so chose.  For example, as outlined in US Exhibit 39, under an
experimental programme introduced in the province of Manitoba, two per cent of each producer’s
daily quota had become optional and was no longer pooled.  Producers could choose to ship this
quantity of their quota, at a known, non-pooled return, based on realised returns in Class 5.  The
volumes associated with this experimental progra mme approximated the share of in-quota Class 5(d)
and (e) production in Manitoba.  By filling this portion of the provincial MSQ through voluntary
shipments by producers at non-pooled prices, the producer board reduced the exposure of other
producers who did not ship the optional quantity to Class 5 returns. In other words, contrary to US
assertions, this was an example of a provincial producer board giving its members an option to
increase or decrease their participation in Class 5 sales.  Significantly, this was a unilateral decisionby the Manitoba producers acting through their board.  Contrary to the image of government coercion
suggested by the Complainants, no permission was required from the Government of Canada or the
CDC.  No government sanctions followed this decision by producers to reduce their participation in
the pooling of returns.   Canada emphasized that the Special Milk Classes Scheme was producer-
driven and necessarily based on co-operation and consensus.
4.116  Canada noted that the United States had stated that the amount of in-quota milk sold for
export use exceeded that from over-quota sources.  While it was true that in-quota export sales did
exceed over-quota sales in 1995/96, by 1996/97 the two were in balance.  Most recently, in the
1997/98 dairy year, with the growth of over-quota and the full use of the "sleeve" in domestic
markets, over-quota export sales had begun to greatly exceed in-quota export sales.   It was also
suggested that over-quota production was actually in decline. The United States noted that there was a
decline from 1995/96 to 1997/98.  There was indeed a small decline between those two years but itwas misleading to suggest that this was the general trend.
140  In fact, there had been substantial growth
the previous year and an even greater increase in 1 997-98.    It had also been suggested that growth in
over-quota production was the result of the reduction of MSQ.  Yet this was equally invalid.  The
growth in over-quota had greatly exceeded any reduction in MSQ.141
4.117  Canada noted that the Complainants assumed that when products were exported at lower
prices than those same products would command in the home market, there had to be a subsidization
                                                     
140 Canada referred to the graphic attached as Figure 2 of Canada's Annex D.
141 Ibid.WT/DS103/R
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of the lower-priced exported products through profits obtained on the domestic market.   Canada
rejected these arguments. The Complainants had offered no evidence or explanation of why, in the
absence of government direction or without the li nking of domestic sales quota to export performance,
producers would give away their profits from domestic sales in order to make unprofitable export
sales.  Indeed, they had failed to demonstrate any incentive to finance export sales from domestic
profits.  This argument was based on an assumption that milk producers behaved irrationally, or that
governments somehow, in some unexplained way, for ced them to reduce their net profits to engage in
export sales.   Canada argued that as a result of the supply management system and the presence of
border protection, there were two very different markets: (i) a limited domestic market allocated to
producers via quotas;  and (ii) an open international market available to any producer willing to
supply under conditions prevailing in that market.  There was nothing in the Canadian milk marketing
system that forced producers to supply the international market if they did not want to do so.  TheComplainants had failed to provide any evidence  supporting the existence of any such mandatory
performance requirement imposed on Canadian producers that would confer a benefit to exporting
processors.    Hence, Canada argued that the decision to produce or not to produce was one made on
the basis of the same criteria that every commodity producer, indeed, any business person would
make – the enhancement of the producer's net profits. The only reason for Canadian producers to sellproducts for the export market was because they could do so profitably.  The protection of the
domestic market afforded by tariffs did not alter this basic fact.
4.118  In respect of the price difference between OEP sales and Class 5(e) sales, Canada emphasized
that the price difference between OEP sales and Class 5(e) sales stemmed from the commercial terms
of the contract under which producers produced OEP milk.  In OEP transactions, both the volume ofmilk supplied to the processor by the individual produc er and the price paid for that OEP milk by the
processor were contractually negotiated well in advance of the milk production with a view to
fulfilling a pre-planned export contract made by the processor with a foreign buyer.  By way of
contrast, Class 5(e) milk sales were not pre-planned.  Class 5(e) milk was normally used in dairy
products sold on international spot markets.  The pre-planned nature of an OEP transaction providedthe processor with a secure supply of milk, an assured level of plant utilization and a guaranteed
export sale price for a transaction identified in advance for its superior returns.  For this assurance of
supply, processors were willing to pay a premium for OEP milk. Canada argued that these market
characteristics would exist even if producers negotiated Class 5(e) sales prices on their own or
through their producer boards rather than using the CDC as a collective sales agent.   As for the matterof processor margins, OEP processor margins were commercially confidential to the individual
processor and were not made known to the producers, the producer boards or the CDC.
4.119  Canada argued that over-quota and OEP produ ction came down to a matter of individual
producer choice, as was illustrated by the dairy producer leaders who were CMSMC representatives
and members of the Board of Directors of Dair y Farmers of Canada.  Some of those producer
representatives simply aimed to fill their domestic quota and not to participate in export market
opportunities through the production of over-quota or OEP milk.  For example, the DFC Director forSaskatchewan, Leo Bertoin, had been 0.04 per cent over, 0.03 per cent under and 0.004 per cent over
his producer quota for 1995/1996, 1996/1997 and 1997/1998, respectively.  By way of contrast, the
President of DFC, Barron Blois, a producer from Nova  Scotia who was also a provincial spokesperson
at the CMSMC, had actively participated in over-quota export opportunities made possible by
changing his feeding programme to reduce cash costs.  Mr. Blois had consistently been in an over-quota position since the Special Milk Classes Scheme was introduced and was currently producing
20 per cent above his producer quota.  The DFC Director for New Brunswick, Jacques Laforge, whoWT/DS103/R
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was also the provincial spokesperson for New Brunswick at the CMSMC, had only produced to the
level of his domestic quota but had also actively concentrated on available OEP markets.142
4.120  The United States  noted that Canada’s argument that producers collectively decided to
produce for export as part of their determination of MSQ for the year was contradicted by Canada’s
experience in 1997.  In 1997/98, the MSQ was set at the beginning of the year at a level thatpresumably built in a specific amount for planned exports, in the so-called "sleeve".  However,
Canada had stated that almost all of the sleeve had been used last year for the domestic market.
Consequently, any decision to produce for export within in-quota production, based on the MSQ at
the beginning of the year, simply had not been realized when the domestic marketplace required more
milk.  Instead, those producers received primarily domestic prices for almost all of their in-quota
production.  As had been noted, whether milk was cl assified as in-quota or over-quota was subject to
a variety of factors, and especially the fluctuation of MSQ from year to year.
4.121  The United States emphasized the significant increase in MSQ for the 1998/99 year (see table
under paragraph 2.31).  This increase was the clea rest evidence that the CDC/CMSMC had seriously
misjudged domestic requirements in the previous year.  The reduction in MSQ in 1997/98 also was in
large measure responsible for the unusual change in the relative proportion of over-quota versus in-
quota exports in that year.
143  Even if domestic consumption in Canada remained at the high levels
enjoyed in 1997/98, the 1998/99 increase in MSQ would necessarily result in a significantly higher
percentage of in-quota exports in the current marketing year.  The United States submitted that the
1997/98 marketing year was an aberration with respect to the low level of in-quota milk that was used
for planned exports or determined to be surplus.  That situation was primarily a result of a reduction in
MSQ that turned out to be totally unjustified by market circumstances.  In this connection, the UnitedStates noted that this judgment error had been corrected for the 1998/99 marketing year as the MSQ
for the current year had been readjusted to restore the full amount of this reduction and actually
included an increase over the 1996/97 MSQ level.  This should result in a decline in over-quota
production.  The restoration of MSQ to earlier levels no doubt was a result of milk producers’
complaints that they were being compelled to sell milk at Class 5(e) prices by the reduction in MSQin 1997/98 which bore no relationship to market conditions.  The United States argued that this
significant shift of MSQ highlighted the artificiality of the over-quota/in-quota distinction, and the
inability of milk producers to quickly adjust to dramatic swings in the MSQ such as occurred between
1996/97 and 1997/98.  In fact, the reduction in MSQ in 1997/98 of approximately 3 per cent, when
factored with Canada’s statement that only over-quota production by individual producers above the105 per cent level could be considered to be deliberate (see Footnote 121), accounted for at least two
thirds of all over-quota production during the 1997/98 marketing period.  Thus, Canada’s assertion
that over-quota production reflected milk producers' deliberate decisions was belied by the very
information that Canada had submitted.
4.122  Like New Zealand, the United States stressed that  the designation of milk as "surplus" was
essentially an arbitrary one.  The Canadian system was predicated on the assumption that the domestic
population would only consume so much butter, so much cheese, so much ice cream and yoghurt, etc.,at desired price levels in a given year and that this translated into class prices for milk.  However,
many of these dairy products were storable.  Therefore, the decision to designate milk as "surplus"
was really a decision not to build domestic stocks of dairy products for later consumption.  Processors
resisted stock building because as stocks grew they exercised downward pressure on the prices at
which processors could sell their dairy products, and processors' profit margins would be eroded as aresult.  Producers disliked stocks because dairy product stocks represented a quantity of milk that
would not be required at a future date, i.e., milk production would have to be cut while Canadians
                                                     
142 Canada noted that Mr. Laforge filled 100.01 per cent of his quota in 1995-1996 and was currently at almost exactly 100 per
cent of his quota.  Mr. Laforge has participated in an OEP contract for the sale of evaporated milk to the Caribbean.
143 The United States referred to Figure 2 of Canada’s Response to the First Set of Questions from the Panel.WT/DS103/R
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consumed the products in stock.  Canada’s solution was to export the surpluses using subsidies, and
thereby maintain both high domestic price and production levels.
4.123  The United States refuted Canada's comparison of how prices were established under the OEP
versus under Class 5(e) milk (paragraph 4.118).  Canada's own explanation supported the conclusion
that the Special Class prices were particularly low, given the international dairy marketing conditions.Canada was over-simplifying the commercial context of these sales.  While Canada contended that
OEP prices could be higher, in part, because they generally involved advance purchases of milk and,
therefore, established a secure source of milk for the processors – Canada had earlier stated that many
of the export transactions under Special Class 5(e) involved repeat sales involving the same exporters
and international customers.  If that was true, then the distinction that Canada now attempted to draw
between OEP and Class 5(e) sales lacked a factual foundation.
2. "Export Subsidy" - the Interpretive Context
(a) The SCM Agreement and the Agreement on Agriculture
4.124  Canada  argued that the definition of "export subsidies" for the purposes of the Agreement on
Agriculture was found in Article 1(e) of the Agr eement.  This definition contained two components:
(a) the first component was "subsidies contingent on export performance";
(b) the second component included as export subsidies for the purposes of the definition
the export subsidies specifically listed in Article 9 of the Agreement.
4.125  Canada further noted that Article 10.1 of the Agreement on Agriculture made an explicit
reference to "(e)xport subsidies not listed in paragraph 1 of Article 9."  Article 10.3 spoke of "no
export subsidy, whether listed in Article 9 or not."  Thus, Canada submitted that Article 10 in general,
and Article 10.1 in particular, recognised the dual nature of the definition found at Article 1(e) of theAgreement.  Article 10.1 applied only
144 with respect to "export subsidies" as defined in Article 1(e)
other than those export subsidies that were included in the definition by virtue of having been
explicitly listed in Article 9.  What was left of the definition of "export subsidies" was the first
component of the definition (i.e., "subsidies contingent on export performance" without including
export subsidies specifically listed in Article 9 of the Agreement).  Thus, the "other export subsidies"referred to in Article 10.1 meant "subsidies contingent on export performance", excluding the export
subsidies specifically listed in Article 9 of the Agreement.
4.126  The term "subsidies contingent on export performance" itself had two components:
(i) "subsidies" and (ii) "contingent on export performance".  The term "subsidy" was not defined in
the Agreement on Agriculture. Canada's position wa s that the prime contextual interpretative source
for the meaning of the term "subsidy" was the definition of "subsidy" found in the SCM
Agreement.
145  While the potential application of other sources for the interpretation of the term
"subsidy" in the Agreement on Agriculture could not be excluded, the Complainants had not been able
to identify any source having anything like the interpretative force of the definition of "subsidy" found
in the SCM Agreement.  Accordingly, "other export subsidies", as used in Article 10.1 of the
Agreement on Agriculture, included "subsidies" (as interpreted in the context of the SCM Agreement)
that were contingent on export performance, other than the export subsidies specifically listed inArticle 9 of the Agreement on Agriculture.
                                                     
144 Canada noted that the other instance in which Article 10 applied was with respect to non-commercial transactions but this
application was not relevant in the present matter before the Panel (para. 4.258).
145 Canada agreed that the definition of "subsidy" in the SCM Agreement was not the "definition", in the technical sense, of
"subsidy" in the Agreement on Agriculture .WT/DS103/R
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4.127  Canada argued that the list of export subsidy practices found in Article 9.1 served two
purposes in the Agreement on Agriculture .  On one hand, it served as an exhaustive list of export
subsidy practices that were subject to the reducti on requirements set out in the Agreement.  It also
provided an illustrative list of export subsidy practices to be included within the definition of "export
subsidy" in Article 1(e) of the Agreement.  Both as an exhaustive list under Article 9 and as anillustrative list for the definition in Article 1, the text precisely reflected the common agreement by all
Members regarding which practices should be considered "export subsidies" for the purposes of the
Agreement on Agriculture.  By the same token, the text also reflected where there was an absence of
common agreement with respect to whether a particular practice should be considered to be an export
subsidy (paragraphs 4.446 and following).  In resp ect of criteria for export subsidies relating to
differences between export and domestic prices, no reference could be found amongst the items listed
in Article 9.1, with the exception of Article 9.1(b). The fact that a reference to domestic and exportprices was included only with respect to paragraph (b) of Article 9.1 suggested that the negotiators
could agree to such a reference only with respect to Article  9.1(b).
146
4.128  Canada emphasized the importance of the origin and character of the definition of a "subsidy"
in the SCM Agreement.  The SCM Agreement achieved what had not been possible during the life of
the GATT 1947:  a definition for the term "subsidy".  This definition reflected a compromise reachedby the negotiators in the Uruguay Round. As such, it reflected the practical realities of negotiations
and represented a statement of what, by the end of the negotiations, the negotiators had been able to
agree would be a "subsidy" for WTO purposes.  It followed, therefore, that any measure or practice
that did not fall within the terms of the definition could not be considered to be a subsidy for WTO
purposes, regardless of any other conceptions or proposals as to what ought to constitute a "subsidy".Canada argued that it was not suggesting the agreed definitions of "subsidy" and "export subsidy"
were perfect conceptions.  There was no doubt that many WTO Members would prefer amendments
in pursuit of their own policy objectives preferences.  Perhaps proposals would be brought to the
negotiating table for the next round of WTO negotiations.  What the Complainants could not be
allowed to do was to create an effective alteration of the negotiated texts through litigation.
4.129  New Zealand  claimed that sources relevant to the interpretation of the word "subsidy" were:
the Agreement on Agriculture, which provided the immediate context for the interpretation of the
term "subsidy", and subsequently, the broader context of the WTO.  The latter included, in particular,
the SCM Agreement together with its Illustrative List of Export Subsidies, GATT 1994 and
WTO/GATT practice.
4.130  New Zealand argued that in the present case, the question of the meaning of the term
"subsidy" arose on two occasions: in the interpretation of Article 9.1(a) which referred to "direct
subsidies"; and in the interpretation of Article 10 which referred to "export subsidies ... applied in a
manner which results in, or which threatens to lead to, circumvention ... ".  In each case, the question
had to be asked what constituted a subsidy.   New Zealand contended that the answer to this question
had to be sought initially  in the context of the Agreement on Agriculture and then more broadly in the
context of the WTO Agreements as a whole.  In this regard, the particular relationship of theAgreement on Agriculture and the SCM Agreement, recognised by the Appellate Body in Brazil -
Measures Affecting Desiccated Coconut
147, meant that the SCM Agreement was clearly part of the
                                                     
146 Canada noted that the other provision involving domestic and export price differences in the context of export subsidies was
Paragraph (d) in the Illustrative List to the SCM Agreement.  In that instance, the example provided was extremely carefully li mited to very
particular circumstances in recognition of the far-reaching implications of the concept.
147 Appellate Body Report on Brazil – Measures Affecting Desiccated Coconut , (hereafter " Brazil – Desiccated Coconut "),
WT/DS22/AB/R, adopted 20 March 1997, p.14.WT/DS103/R
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context to be referred to within the meaning of Article 31 of the Vienna Convention on the Law of
Treaties (the "Vienna Convention") when interpreting the Agreement on Agriculture.148
4.131  However, referring to the SCM Agreement as part  of the context for the interpretation of the
concept of "subsidy" in the Agreement on Agriculture was not the same as simply fastening onto one
definition from the SCM Agreement and treating it as if it were an overriding definition for thepurposes of all of the WTO Agreements.  In fact, reference to the SCM Agreement could include
reference to the definition in Article 1, or to the Illu strative List of Export Subsidies in Annex I, or to
parts of those definitions and lists.  Reference could also be made within this broader context to what
constituted a subsidy under GATT 1947 and under GATT practice.
4.132  In New Zealand's view Canada’s approach in this case was based on a fundamental
interpretative error.  Rather than addressing the key issue of interpretation in this case - the meaning
of the term "export subsidy" as used in Article 9.1 and Article 10 of the Agreement on Agriculture -Canada instead focussed on the meaning of the term "subsidy", and proceeded to argue that the
exercise of interpretation of this term as used in the Agreement on Agriculture could be largely
confined to a consideration of the definition of subsidy found in Article 1 of the SCM Agreement.
Canada’s failure to locate the interpretation of export subsidies within the Agreement on Agriculture
resulted in its ignoring the rules of interpretation applicable to the WTO Agreements which had beenendorsed by the Appellate Body, and in limiting the scope of the disciplines that were carefully
negotiated in the Agreement on Agriculture.  Canada  was hence inviting the Panel to read into the
WTO Agreements an extravagant interpretative relationship between the Agreement on Agriculture
and the SCM Agreement, and to make broad pronouncements on the scope of the SCM Agreement
that were not necessary for this dispute.
4.133  New Zealand argued that by its very wording Article 1 of the SCM Agreement was limited to
that Agreement.  The opening words of Article 1 were "For the purposes of this Agreement"
(emphasis added).  Article 1 went on to say, "a subsidy shall be deemed  to exist if ..." (emphasis
added).  Hence, New Zealand argued that the drafters did not intend this to be a definition for all
purposes; it was simply a listing of what was deemed to be a subsidy for the purposes of the SCMAgreement.  Canada had, in New Zealand's view, interpreted the terms of Article 1 of the SCM
Agreement in isolation and therefore ignored the specific context of the SCM Agreement itself.  If
Canada had interpreted Article 1 in the context of the SCM Agreement as a whole, it would have been
forced to conclude that, in the context of a disc ussion on export subsidies, the meaning of Article 1
had to be read also in the light of the Illustrative List of Export Subsidies.  Yet, in New Zealand'sview, for Canada, the Illustrative List appeared to stand alone as a separate list of export subsidies
having no necessary relationship to Article 1 of the SCM Agreement.
4.134  New Zealand further argued that there was nothing in the Agreement on Agriculture that
incorporated the SCM Agreement definition.  Indeed, the implication of Article 21 of the Agreement
on Agriculture, which subordinated the provisions of GATT 1994 and the other Multilateral Trade
Agreements in Annex 1A to the WTO Agreement to any contrary provision in the Agreement on
Agriculture, was that if the Agreement on Agricu lture was to be dependent on another Agreement,
that dependency would have to be express.  The fact that at the end of the implementation period
agricultural export subsidies would be subject to the disciplines of the SCM Agreement, as
contemplated in Article 13(c) of the Agreement on Agriculture, did not necessitate that there had to be
a coincidence of definition between the two Agreements on what constituted a subsidy.  New Zealand
argued that the relevance of Article 21 of the Agreement on Agriculture was that it made plain that inthe event of a conflict between the Agreement on Agriculture and another WTO Agreement, the
Agreement on Agriculture was to prevail.  In other wo rds, if an export subsidy were to meet the terms
                                                     
148 New Zealand noted that the SCM Agreement was particularly relevant, as it contained a list of export subsidies which
constituted the background against which the export subsidy provisions of the Agreement on Agriculture were negotiated.WT/DS103/R
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of one of the sub-paragraphs of Article 9.1 (relating to the category of export subsidies subject to
reduction commitments) but yet did not meet the de finition of Article 1 of the SCM Agreement, it
would nonetheless still constitute an export subsidy for the purposes of the Agreement on Agriculture.
4.135  New Zealand argued that to simply transpose the definition provided in Article 1 of the SCM
Agreement made no sense within the context of the Agreement on Agriculture.  Article 1(e) definedthe term "export subsidies" as referring to "subsi dies contingent upon export performance, including
the export subsidies listed in Article 9 of this Agreement."  At the outset, this was potentially a
broader definition than Article 1 of the SCM Agreement because Article 9 subsidies were included
within it whether or not they met the definition of subsidy in Article 1 of the SCM Agreement or any
other definition.  They were export subsidies by virtue of the definition in Article 1(e) of the
Agreement on Agriculture.  It made no sense to re-test them by reference to some other definition of
subsidy.
4.136  New Zealand argued that in effect, the relationship between the export subsidies listed in
Article 9.1 of the Agreement on Agriculture and the definition of export subsidies set out in Article 1
of that Agreement was similar to the relationship that existed in the case of the Illustrative List of
Export Subsidies in Annex I of the SCM Agreement and Article 3.1 of that Agreement.  These were
export subsidies by definition  and they did not need any further testing against a definition of subsidy
or export subsidy set out in the respective provisions of the two Agreements.
4.137  New Zealand further argued that while the export subsidies listed in Article 9 of the
Agreement on Agriculture were exhaustive of the export subsidies for which reduction commitments
had to be entered by Members, they were also, by virtue of their inclusion in the definition of "export
subsidies" in Article 1 of the Agreement on Agriculture, indicative or illustrative of the broadercategory of export subsidies referred to elsewhere in the Agreement.  This, too, argued against an
interpretation of the term "subsidy" in the Agreement that limited it to the specific requirements of
Article 1 of the SCM Agreement.  It also had implications for the determination of what constituted
an "export subsidy" under Article 10 to which the non-circumvention provisions of that Article
applied.
4.138  The United States  argued that the term "export subsidy" was defined in Article 1(e) of the
Agreement on Agriculture, although the term "subsidy" was not.  Article 9 of the Agreement on
Agriculture, however, set forth a non-exhaustive list of  export subsidies.  That list served to inform
the meaning of the term "subsidy" for the purpose of the Agreement on Agriculture.
4.139  The United States stressed that the meaning of the term "subsidy" in the Agreement on
Agriculture had to be determined in its context, including the other WTO Agreements and the
GATT 1994; it was not governed either exclusively or primarily by Article 1 of the SCM Agreement.
The United States maintained that Canada’s argument that the SCM Agreement’s definition of
"subsidy" was the exclusive basis for discerning the meaning of that term for purposes of all the WTO
Agreements, including the Agreement on Agriculture, disregarded the plain meaning of the opening
words of Article 1 of SCM Agreement as well as the views of the Appellate Body.
149  The definition
of "subsidy" in the SCM Agreement was relevant for purposes of interpreting the same term used inthe Agreement on Agriculture, but it was not to be  given more weight, however, than the provisions
of the Agreement on Agriculture.
                                                     
149 The United States noted that the Appellate Body also recognized this relationship when it stated that "with respect to subsidi es
on agricultural products ... [t]he Agreement on Agriculture and the SCM Agreement reflect the latest statement of WTO Members a s to their
rights and obligations concerning agricultural subsidies."  Appellate Body Report on Brazil - Desiccated Coconut, op. cit. , p.13.WT/DS103/R
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(b) The Relevance of the Vienna Convention and Negotiating History
4.140  New Zealand  argued that there was no need to define the term "subsidy" in the abstract.  The
term needed definition when it arose in the context of a particular provision of the Agreement.  What
constituted an export subsidy under Article 10 woul d necessarily differ from what constituted an
export subsidy under Article 9, because Article 10 was concerned with export subsidies that were notlisted in Article 9.  Yet both articles used the term  "subsidy".  The correct approach to interpretation in
the case at issue was to apply the customary principles of interpretation of public international law as
required by Article 3 of the DSU.  This meant applying the principles of interpretation set out in the
Vienna Convention on the Law of Treaties - that is, giving words their ordinary meaning in their
context and in the light of the object and purpose of the treaty as a whole.
4.141  New Zealand argued that there was nothing in the negotiating history of the Agreement on
Agriculture or the SCM Agreement that suggested that the negotiators intended that the definition of"subsidy" in the SCM Agreement would be simply accepted as the definition of subsidy in the
Agreement on Agriculture, or for that matter in other WTO Agreements.  Indeed, the fact that the
negotiations were conducted separately, and that two separate Agreements were concluded, suggested
that, contrary to the Canadian position, there was no understanding reached that the definition of
Article 1 of the SCM Agreement would be the exhaustive or governing definition of subsidy for thepurposes of the Agreement on Agriculture.  Furtherm ore, the negotiators did not purport to work out
all the details of the relationship between the two Agreements.  It was well understood at the end of
the Uruguay Round that the relationship between the Agreement on Agriculture and the SCM
Agreement was to be worked out in practice.
150
4.142  New Zealand argued that the Uruguay Round did not result in a universal definition of the
term "subsidy" for the purposes of all of the WTO Agreements.  There was a definition for the
purposes of the SCM Agreement in Article 1 of that  Agreement, although that definition had also to
be read in the light of the list of export subsidies in the Illustrative List.  The Agreement on
Agriculture did not contain any such definition.  Thus, in interpreting the Agreement on Agriculture
other definitions in the WTO Agreements, in particular the SCM Agreement, were relevant but notdeterminative.
4.143  The United States  noted that although the Agreement on Agriculture did not list all export
subsidies or define the term "subsidy," the Appellate Body had indicated that it was neither necessary
nor appropriate to confine the interpretative analysis of the terms of an Agreement to the text of the
particular treaty provision.
151  In addition, treaty interpreters could look to the customary rules of
interpretation of public international law reflected in the Vienna Convention for assistance in
construing the terms of a treaty provision.  As an additional aid to interpretation the Appellate Body
had emphasized Article XVI:1 of the WTO Agreement152 which provided that:
"Except as otherwise provided under this Agreement or the
Multilateral Trade Agreements, the WTO shall be guided by the
decisions, procedures and customary practices followed by the
                                                     
150 New Zealand noted that commentators had noted that "one of the principal tasks for WTO member countries during the
implementation period will be to sort out the overlap" between the Agreement on Agriculture and the SCM Agreement; Stewart T. P . (ed.),
The World Trade Organisation: The Multilateral Framework for the 21st Century and US Implementing Legislation, Washington, Amer ican
Bar Association, 1996, p. 171.
151 Appellate Body Report on Brazil - Desiccated Coconut, op. cit.
152 Ibid, p. 12.WT/DS103/R
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CONTRACTING PARTIES to GATT 1947 and the bodies
established in the framework of GATT 1947."153
4.144  The United States noted that the reports developed under GATT Article XVI, the Tokyo
Round Agreement on Interpretation and Application of Articles VI, XVI, and XXIII of the GATT
("the Subsidies Code"), and the SCM Agreement were therefore relevant to interpretation of the term"export subsidy" as used in the Agreement on Agriculture.
4.145  The United States noted that a recurring theme appeared in the GATT and WTO discussions
of subsidies.  There had long been a reluctance to provide a specific and exhaustive definition of the
term "subsidy" for fear of inadvertent exclusion of a particular practice or inability to foresee the
development of some new type of subsidy.
154  Thus, a 1960 panel on subsidies noted the longstanding
lack of an explicit definition for the term.155   Another panel "considered that it was neither necessary
or feasible to seek an agreed interpretation of what constituted a subsidy."156  Despite this initial
reluctance to confine the scope of the term subsidy by compiling lists of recognized subsidy practices,
panels had identified various guidelines inherent in the GATT rules on subsidies as to what could be
considered to fall within the term subsidy and what lay outside.157 Article 1 of the SCM Agreement
now provided a definition of subsidy.
4.146  The United States noted that one of the first illustrative lists of subsidies was contained in a
1960 Working Party Report, which was the precursor for the illustrative lists contained in both the
Tokyo Round Subsidies Code and the WTO SCM Agreement.158  That Report set forth a detailed list
of measures that had been considered to be export subsidies by a number of Contracting Parties,
including both the United States and Canada.159  Among the practices determined to be an export
subsidy were the deliveries by government or gove rnmental agencies of production inputs "for export
business on different terms than for domestic business ... "160  This was, in the view of the United
States, the essence of the Special Milk Classes Scheme, which provided for provincial government
dairy boards to deliver discounted milk to manufacturers of dairy products for export.   During the
same year, another panel examined the scope of the export subsidy reporting requirement under
Article XVI of GATT 1947.161  The panel in its review considered whether producer-financed
subsidies were notifiable under Article XVI and determined that they were subject to the reporting
requirement where the "levy/subsidy schemes affecting imports or exports ... are dependent for their
enforcement on some form of government action."162  The panel’s conclusion was that producer-
                                                     
153 The United States noted that the term subsidy had not been expressly defined in either the GATT 1947 or in the Tokyo Round
Subsidies Agreement interpreting GATT Article XVI.  It had not been until the entry into force of the SCM Agreement (under the WTO),
that the term "subsidies" had been defined in either a GATT or WTO Agreement.
154 BISD 10S/201, L/1442, adopted 21 November 1961, para. 23.
155 "Operation of the Provisions of Article XVI", adopted 21 November 1961, BISD 10S/208, para. 23.  The United States noted
that one commentator had noted that in spite of the great care taken by the GATT to establish detailed procedures to regulate t he use of
subsidies, there was no internationally binding definition of what constituted a subsidy for a substantial time period.  Besele r,  Antidumping
and Anti-subsidy Law p.119.
156 J. Jackson, "World Trade and the law of the GATT" (1969), citing GATT, BISD 10S/201, para. 23.
157 The United States referred to, e.g., Working Party Report on Provisions of Article XVI:4 , L/1381, BISD 9S/185, adopted
19 November 1960, para. 5.
158 Ibid.
159 Ibid, p. 188 (the "industrialized countries in Western Europe and North America.").
160 The United States noted that although the example contained in the list referred to inputs consisting of imported raw material s,
the concept of differential prices constituting a subsidy when the preferential prices were extended exclusively to export prod uction had
been recognized, para. 5.  See also, Paragraph (d) of the Illustrative List of Export Subsidies contained in Annex I to the SCM  Agreement.
161 Panel Report on Review Pursuant to Article XVI:5,  op. cit.
162 Ibid, p.192, para. 12.WT/DS103/R
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financed export subsidies that were part of a government-directed system were essentially
indistinguishable from direct government export subsidies.163
"The Panel examined the question whether subsidies financed by anon-governmental levy were notifiable under Article XVI. The
GATT does not concern itself with such action by private personsacting independently of their government except insofar as it allows
importing countries to take action under other provisions of the
Agreement.  In general there was no obligation to notify schemes in
which a group of producers voluntarily taxed themselves in order to
subsidize exports of a product.  The Panel felt that in view of the
many forms which action of this kind could take, it would not be
possible to draw a clear line between types of action which were andthose which were not notifiable.  On the other hand, there was no
doubt that there was an obligation to notify all schemes of
levy/subsidy affecting imports or exports in which the government
took a part either by making payments into the common fund or by
entrusting to a private body the functions of taxation and
subsidization with the result that the practice would in no real sense
differ from those normally followed by governments.  In view of
these considerations the Panel feels that the question of notifying
levy/subsidy arrangements depends upon the source of the funds and
the extent of government action,164 if any, in their collection.
Therefore, rather than attempt to formulate a precisely worded
recommendation designed to cover all contingencies, the Panel feels
that the CONTRACTING PARTIES should ask governments to
notify all levy/subsidy schemes affecting imports or exports which
are dependent for their enforcement on some form of government
action." (Emphasis added) 165
4.147  The United States argued that the analysis of the May 1960 panel was also reflected in work
prepared by the GATT Secretariat in support of the Uruguay Round negotiations on the Subsidies and
Countervailing Measures Agreement.  In a paper prepared by the Secretariat, broadly examining a
variety of issues pertinent to the subsidies negotiations,166 the Secretariat recounted the discussion of
the 1960 Panel Report and its conclusions regarding the lack of a meaningful distinction between the
producer-financed export subsidies that were enforceable by a government and direct government
subsidization of exports.167  The United States noted that the SCM Agreement recognized in
Article 1.1(a)(1)(iv) that entities other than governments could perform functions normally vested in
the government, and that that could also constitute a subsidy (this argument is further developed in
paragraph 4.333 and following).
                                                     
163 The United States noted that the Government of Sweden later reached an identical conclusion as observed in its 1990 WTO
offer, where it stated that:  "In the country list, Sweden has indicated how producer-financed export subsidies in Sweden have had an effect
similar to budget financed export subsidies.  It is consequently Sweden’s opinion that producer-financed export subsidies could  be just as
trade distorting as government funded export subsidies, and should therefore be tightly circumscribed in order not to compromis e reform
efforts on the latter form of subsidies.  This should be reflected in the disciplines to be worked out under the GATT to govern  producer-
financed export subsidies."
164 The United States noted that the high domestic prices which made a levy economically feasible were often, as in the case at
issue, a result of government action in fixing import barriers, production quotas, and price supports, although these factors h ad not been
noted by the panel.
165 Working Party Report on Provisions of Article XVI:4 , op. cit. , para. 12.
166 "Subsidies and Countervailing Measures," MTN.GNG/NG10/W/4 (28 April 1987).
167 Ibid, p.9.WT/DS103/R
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4.148  The United States pointed out that in the Uruguay Round, producer-funded export assistance
with significant government related action continued to be viewed as an export subsidy.  Thus, the
discussions during the Uruguay Round in the Secretariat papers prepared for the Chairman of the
Committee on Agriculture168, as well as the proposed framework agreement developed by Chairman
de Zeeuw169 and the notes prepared by Chairman Dunkel170 all characterized producer-financed export
assistance as export subsidies.    The only issue that surrounded producer-financed export payments
and other producer-financed export assistance was not whether they were export subsidies, but
whether they should be exempted from any discip lines imposed on export subsidies on agricultural
products.  The Agreement on Agriculture resolved this question by including such subsidies in
Article 9.1 of the Agreement.
4.149  The United States argued that producer-financed export subsidies had been treated as export
subsidies because they were likely to have the same distorting effect on trade and competition assubsidies paid from a government treasury. Producer-financed subsidies conferred a benefit on the
exported product and, when substantial government involvement was present, as in Canada’s Special
Milk Classes Scheme, the resulting subsidy could not be distinguished from purely governmental
action.  This fact was recognized in Article 9.1(c) of the Agreement on Agriculture that provided that
producer-financed export payments were an export subsidy subject to the Agreement’s reductioncommitments (further developed in paragraph 4.196 and following).
4.150  In this respect, the United States pointed out that Article 9.1 of the Agreement on Agriculture
referenced six broad classes of export subsidy practices which were subject to reduction
commitments.  There had been no apparent effort in Article 9.1 to specify particular subsidy
programmes.  Instead the intent had been, as initially set forth in Chairman de Zeeuw’s "Framework"and later in Chairman Dunkel’s "Checklist" and "Notes", to develop a list as all-encompassing as
possible to address "direct budgetary assistance to exports, other payments on products exported and
other forms of export assistance."
171  Thus, these export subsidy categories were defined broadly,
similar to the illustrative list in the SCM Agr eement.  In fact, there was substantial commonality
between several paragraphs of Article 9.1 of the Agreement on Agriculture and the Illustrative Listwhich results from the drafters’ initial consideration of the Illustrative List, as well as the SCM
Agreement’s definition of export subsidy, as possible models for the export subsidy disciplines in the
Agreement on Agriculture.  Indeed, the six categories were sufficiently broad that there was potential
(and actual) overlap between the coverage of the subsections.  For example, subsidies used to reduce
the cost of marketing exports of agricultural products that were addressed in subsection (d) ofArticle 9.1 could also be captured under the broader category of direct export subsidies set forth in
Article 9.1(a) of Article 9.1.
4.151  The United States noted that both the SCM Agreement and the Agreement on Agriculture
considered the provision of products or services at a price lower for export than the comparable price
charged for the like product to buyers in the domestic market to be a central feature of many export
subsidies.
172   This principle was also reflected in the language of Article XVI:4 of the GATT 1947,
which provided that:
                                                     
168 Note Prepared By the Secretariat in Consultation with the Chairman, AG/W/9/Rev.3, App. C-IV.
169 MTN.GNG/NG5/W/170.  (United States, Exhibit 30)
170 MTN.GNG/AG/W/1; MTN.GNG/AG/W/1/Add.1.   (United States, Exhibits 31 and 32)
171 MTN.GNG/NG5/W/170, para. 17.  (United States, Exhibit 30)
172 The United States referred to e.g., Paragraph (b) of Article 9.1 of the Agreement on Agriculture and Annex I, Paragraph (d) of
the SCM Agreement.  One recent work commissioned by the Organization of Economic Cooperation and Development (the "OECD"),
found that "Implicit subsidies occur when a government programme or agency provides a subsidy in kind ... In some cases, subsid ies take
the form of below-market input prices ... "  N. Bruce, "Measuring Industrial Subsidies: Some Conceptual Issues",  OECD Dept. Of
Economics and Statistics Working Paper No. 75 (February 1990), p.2.WT/DS103/R
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"Further, as from 1 January 1958 or the earliest practicable date
thereafter, contracting parties shall cease to grant either directly or
indirectly any form of subsidy on the export of any product other
than a primary product which subsidy results in the sale of such
product for export at a price lower than the comparable price chargedfor the like product to buyers in the domestic market."
4.152  The United States submitted that in the unlikely event of a conflict between the definition of
subsidy contained in the SCM Agreement and the non-exhaustive list of export subsidies in the
Agreement on Agriculture, the latter would prevail for purposes of interpretation of a provision in the
latter Agreement.  In other words, if one of the six categories of export subsidies set forth in
Article 9.1 of the Agreement on Agriculture were determined not to be a "subsidy" within the
meaning of Article 1 of the SCM Agreement, the practice would still comprise a "subsidy" for thepurposes of the Agreement on Agriculture.  This result was dictated by Paragraph 1 of Article 21 of
the Agreement on Agriculture which provides that:
"The provisions of GATT 1994 and of the other Multilateral Trade
Agreements in Annex 1A to the WTO Agreement shall apply subject
to the provisions of this Agreement."
4.153  Canada  argued that Article 3.2 of the DSU recognized that the covered agreements were to
be interpreted in accordance with "customary rules of interpretation of public international law." The
Vienna Convention set out some of the applicable rules of international law.  The rights and
obligations of the Parties under the SCM Agreement and the Agreement on Agriculture must
therefore be interpreted in accordance with the Vienna Convention and, in particular, Articles 31 and32.
173   Canada argued that based on these governing provisions, the interpretation of the text of WTO
agreements had to proceed on the following basis:
(a) the starting point was always the actual text and its ordinary meaning;
(b) the ordinary meaning of the terms of the agreement was to be read in their context;
(c) "context" had to comprise the text of the agreement, including other contemporaneous
agreements reached by all the parties, as outlined in Article 31.2 of the Vienna
Convention;  and
(d) recourse could be taken to supplementary means of interpretation, such as negotiating
history, in the event of ambiguity or to confirm a meaning.
4.154  Canada noted that the Appellate Body reiterated in its Report in India - Pharmaceuticals ,
"The legitimate expectations of the parties to a treaty are reflected in
the language of the treaty itself.  The duty of a treaty interpreter is to
examine the words of the treaty to determine the intentions of the
parties.  This should be done in accordance with the principles of
treaty interpretation set out in Article 31 of the Vienna Convention .
But these principles of interpretation neither require nor condone the
importation into a treaty of words that are not there or the
                                                     
 173 Appellate Body Report on United States - Standards for Reformulated and Conventional Gasoline  (Hereafter " US -
Reformulated Gasoline "), WT/DS2/AB/R, adopted on 20 May 1996, pp. 16-17;  Appellate Body Report on  Japan - Taxes on Alcoholic
Beverages  (Hereafter " Japan - Liquor Tax "), WT/DS8/DS10/DS11/AB/R, adopted 1 November 1996, pp. 10-12;   confirmed in the
Appellate Body Report on India - Patent Protection for Pharmaceutical and Agricultural Chemical Products (Hereafter " India -
Pharmaceuticals "), WT/DS50/AB/R, adopted 16 January 1998, paras. 43-48.WT/DS103/R
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importation into a treaty of concepts that were not intended ."174
(emphasis added)
4.155  Canada argued that under Article XVI:1 of the WTO Agreement, the body of adopted pre-
WTO GATT panel reports and other "decisions, procedures and practices" had been given a certain
status as points of non-binding reference.175   It was evident from the views of the Appellate Body in
Japan-Taxes on Alcoholic Beverages176 that pre-WTO GATT materials carried some weight but it was
strictly limited. At best, these materials could be considered as supplementary means of interpretation
in the context of the rules of the Vienna Convention .  Supplementary means of interpretation were, by
definition, supplementary.  They were not to be given primacy over the principles set out in
Article 31.  Nor were they to be treated as having on the same significance as the text or the "context"
of the terms in question.
4.156  Canada argued that the weight to be ascribed to pre-WTO materials was also governed by
relevance.  Where the WTO text in question incorporated a pre-WTO text, then the relevance was
stronger.  However, in those circumstances where new agreements were reached in the negotiations in
the Uruguay Round, materials relating to previous agreements that had been overtaken by the new
regime could be of less interpretative value.
4.157  Therefore, Canada argued that the role of the Vienna Convention was fundamental.  It was the
starting point for any interpretative inquiry and that inquiry had be conducted in accordance with the
principles that were laid out in its provisions.  Canada maintained that the United States and New
Zealand appeared to be reluctant to begin with th e "ordinary meaning" of the term "export subsidies"
in its context in the Agreement on Agriculture or to consider the close relationship between the
provisions of the SCM Agreement and the Agreement on Agriculture respecting "export subsidies".However, this was not an option open to a treaty interpreter.  The starting point under Article 31 of the
Vienna Convention must be ordinary meaning  of the actual words agreed upon by the parties in their
context, which in this case included the SCM Agreement.
4.158  Canada maintained that the Complainants, while acknowledging the application of the Vienna
Convention, had departed from its principles;  they did not appear to give the Vienna Conventionadequate recognition as the primary guide to interpretation of WTO Agreements.  In particular, the
United States appeared to confuse the relationship between Article XVI:1 of the WTO Agreement,
which brought prior GATT practice into the WTO, with the principles of the Vienna Convention.
This led to an analysis that mixed past GATT practice with the treatment of "export subsidies" under
the SCM Agreement.
4.159  Canada reiterated that the Agreement on Agriculture defined an "export subsidy" as a
"subsidy" contingent upon export performance. However, the Agreement on Agriculture did not
provide a definition of the term "subsidy".  Canada recalled that Article 31 of the Vienna Convention
directed that the meaning of a term had to be sought in its ordinary meaning and in its context.  It then
specifically included companion agreements with in "context". While there was no express link
between the definition of "subsidy" in the SCM Ag reement and the definition of the "export subsidy"
in the Agreement in Agriculture, such a link should be inferred since the SCM Agreement was part ofthe "context" of the Agreement on Agriculture.  The definition of "subsidy" in the SCM Agreement
was the only place a definition of "subsidy" appeared in the WTO agreements as a whole.  As was
well established, all of the WTO agreements were to be considered as part of a single integrated
system and there was a particular relationship between the Agreement on Agriculture and the SCM
                                                     
 174 Appellate Body Report on India - Pharmaceuticals , op. cit., para. 45.
175 Appellate Body Report on Japan - Liquor Tax , op. cit., p. 14.
176 Ibid.WT/DS103/R
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Agreement with respect to export subsidies on agricultural products.177  Given the very similar
definitions of "export subsidies" in both the SCM Agreement and the Agreement on Agriculture and
the fact that the definition of "subsidy" in Article 1 of the SCM Agreement formed part of the
definition of "export subsidy" as found in the SC M Agreement, the "subsidy" definition in the SCM
Agreement was also applicable to the Agreement on Agriculture.178  Hence, Canada submitted that the
definition of "subsidy" provided in Article 1 of the SCM Agreement was the applicable definition of
"subsidy" for the purposes of the Agreement on Agriculture. .  This was also consistent with the
comments of the Appellate Body on the relationship of the SCM Agreement and the Agreement on
Agriculture:
"[W]ith respect to subsidies on agricultural products, the Agreement
on Agriculture and the SCM Agreement reflect the latest statement of
the WTO members as to their rights and obligations concerningagricultural subsidies."
179
4.160  Canada further noted that the term "subsidy" was found in both the definition of "export
subsidy" in Article 1 and in several items listed in Article 9.1, such as Article 9.1(a).  The
interpretation of this term had then to be the sa me in all these provisions.  Accordingly, if the
practices at issue did not constitute "subsidies" under the SCM Agreement definition, there could notbe a subsidy for the purposes of either Article 1 or the relevant items in Article 9.1 of the Agreement
on Agriculture.
180
4.161  Moreover, Canada argued that pursuant to the customary principles of treaty interpretation, a
treaty had to be interpreted and applied to reflect the underlying common intention  of the parties.
Parties had therefore to resist seeking through disp ute resolution benefits that were not obtained from
negotiation. A trade agreement, in particular, expressed a delicate and carefully achieved balance of
economic rights and obligations between the parties within a specific historical context.  This had
been repeatedly acknowledged in GATT practice where, given equally plausible alternative
interpretations, GATT panels had applied the interpre tation that best maintained the intended balance
of the agreement.181  That approach, reflecting a longstanding principle of public international law,
had been affirmed by the Appellate Body in its Reports in the United States – Restrictions on Imports
of Cotton and Man-made Fibre Underwear and United States – Measure Affecting Imports of Woven
Wool Shirts and Blouses from India cases.182
3. The Agreement on Agriculture
(a) Outline
4.162  New Zealand  claimed that the case at issue was about subsidies provided to exporters of
dairy products who were granted access to milk for processing into products for export at prices lower
than those charged for milk sold for processing into products destined for the domestic market.  New
Zealand emphasized that the subsidy was financed, not by way of a rebate funded by a direct levy on
                                                     
177 Appellate Body Report on Brazil - Desiccated Coconut, op. cit. , pp. 11-14.
178 Canada noted that further linkage was found through Article 13 of the Agreement on Agriculture.
179 Appellate Body Report on Brazil - Desiccated Coconut, op. cit. , p.14
180 Canada acknowledged that the Agreement on Agriculture would take precedence over the  SCM Agreement in the event of any
conflict between the two.  However, there had been no suggestion by either of the Complainants that the two Agreements were in conflict.
181 Canada referred to United States - Measures Affecting Alcoholic and Malt Beverages  (1992) (hereafter " US – Malt
Beverages "), adopted 19 June 1992, DS17/R, para. 5.79, BISD 39S/206 at 296.
182 Appellate Body Report on United States – Restrictions on Imports of Cotton and Man-made Fibre Underwear  (hereafter " US
- Cotton Underwear "), WT/DS24/AB/R, adopted 25 February 1997, p. 15; Appellate Body Report on  United States – Measure Affecting
Imports of Woven Wool Shirts and Blouses from India (hereafter " US - Wool Shirts "), WT/DS33/AB/R, adopted 23 May 1997, p. 16.WT/DS103/R
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producers, but under a scheme that compelled  milk producers to accept a lower price for milk
designated for that purpose.  Producers were the source of the financing of the subsidy, but the
subsidy itself was provided to exporters.   Both New Zealand and the United States  claimed that the
Special Milk Classes Scheme were export subsidy practices listed in Article 9.1(a) and (c).  As such,
these practices were subject to reduction commitments under the Agreement on Agriculture.183
4.163  The United States  noted that the Agreement on Agriculture, Article 1(e), defined export
subsidies as "subsidies contingent on export performance, including export subsidies listed in
Article 9 of this Agreement."  Thus, two elements ha d to be shown to establish an export subsidy: (i)
that a subsidy existed and (ii) that receipt of that  subsidy was contingent on export performance. The
United States claimed that the Special Milk Classes Scheme was a subsidy because it was a
government mandated and controlled system that provided processors with milk at prices well below
the comparable price for milk destined for the domestic market.  In turn, these low prices allowed theprocessors to make export sales that would otherwise not be made and to earn "assured margins" on
such sales pursuant to the CDC’s calculation of th e net return to the dairy producer.  The subsidy was
contingent on export performance because the lowe r prices could only be obtained for export sales.
4.164  Canada  emphasized that Article 1 of the Agreement on Agriculture  defined "export
subsidies" to be " subsidies  contingent upon export performance, including the export subsidies listed
in Article 9 of this Agreement." (emphasis added)  He nce, if there were either an export subsidy listed
in Article 9 or a subsidy contingent on export performance, there was an export subsidy for the
purposes of the Agreement on Agriculture.   However, as the sales of milk at differing prices for
domestic and export markets, and, in particular, sales of milk under Special Classes 5(d) and (e), did
not constitute a "subsidy" pursuant to the definition of the SCM Agreement, it followed that thesesales could not constitute a subsidy for the purposes of the Agreement on Agriculture.
184  Therefore,
by definition, such sales could not constitute an "export subsidy" within the meaning of the definition
in Article 1 of the Agreement on Agriculture . Canada further claimed that the practices at issue did
not constitute an "export subsidy" within the meaning of any of the export subsidy practices described
in Article 9.1 of the Agreement on Agriculture and, in particular, not within any of the practices citedby the Complainants.
(b) Article 9.1(a)
(i) The meaning of "direct subsidies, including payments-in-kind"
4.165  New Zealand  argued that, interpreted in accordance w ith the ordinary meaning of the terms
of Article 9.1(a), in their context, and in the light of the object and purpose of the Agreement onAgriculture, Classes 5(d) and (e) of the Special Milk Classes Scheme constituted the provision by a
government agency of a direct subsidy to an industry contingent upon export performance.   This
direct subsidy was provided through the foregoing of  revenue or through a payment-in-kind within the
meaning of Article 9.1(a) of the Agreement on Agriculture.
4.166  New Zealand argued that Canada, in focussing on the word "subsidies" in Article 9.1(a) of the
Agreement on Agriculture and interpreting it in isolation, removed it completely from its own context.
The term used in fact in Article 9.1(a) was "direct subsidies, including payments-in-kind".  There wasno justification in the rules of treaty interpretation for taking words individually out of a phrase,
giving them each a meaning and then reconstructing the phrase on the basis of those individual
meanings.  That was divorcing meaning from context completely.
                                                     
183 The United States expressed its total agreement with the arguments presented by New Zealand regarding the applicability of
Article 9 and 10 of the Agreement on Agriculture.
184  Canada noted that Classes 5(a) to (c) were not contingent on export and that no suggestion had been made that they were
contingent on export.WT/DS103/R
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4.167  New Zealand argued that the normal usage of the term "payments-in-kind"  was in respect of a
payment in a form other than money, such as goods or services.185  The provision of a production
input at no charge would clearly be a payment-in-kind.  The provision of a production input (milk) at
a reduced price was no less a payment-in-kind.   New Zealand maintained that Article 9.1(a) referred
specifically to "payments-in-kind" as included with in the ambit of the concept of "direct subsidies".
In the present case, government agencies made milk available to processors for export under
Classes 5(d) and (e) at lower prices.  This was the alternative Canada had chosen to providing a
money sum to compensate processors for export for having to purchase milk at the higher domestic
price.  The benefit of access to lower-priced milk  was provided through the combined actions of the
CDC and the provincial marketing agencies.  Their actions made the provision of milk by producers at
these lower prices mandatory.  Through the operation of Classes 5(d) and (e), the government agency
provided a subsidy through a "payment-in-kind" within the meaning of Article 9.1(a).
4.168  New Zealand argued that the foregoing of revenue was well recognized as a form of
subsidy,186 a common example being the foregoing of revenue through the remission of taxes.  Thus,
the ordinary meaning of the term "subsidy" in Article 9.1(a) included "revenue foregone".
New Zealand noted that this was further illustrated in Article 9.2 which provided that in determining
export subsidy commitment levels in Members’ Schedules "revenue foregone" was to be treated as asubsidy.  Article 9.2 provided in sub-paragraph (a)(i) that the "budgetary outlay reduction
commitments" made by Members in respect of the subsidies listed in Article 9.1 shall in any year
constitute the maximum level of expenditure for such subsidies.  Article 1(c) of the Agreement on
Agriculture defined "budgetary outlays" as includin g revenue foregone.  Since revenue foregone was
to be included in calculating levels of reducti on commitments, it also had to be included in the
concept of a subsidy for which reduction commitments were to be made.  Thus, Article 9.2 made clear
that the concept of "revenue foregone" was included within the scope of the subsidies listed in
Article 9.1.
4.169  New Zealand noted that this conclusion was confirmed by reference to the negotiating history
of the export subsidy provisions of the Agreement on Agriculture.  The de Zeeuw Text contemplatedthat states would table lists of "financial outlays and revenue foregone" in respect of subsidy
practices.
187  Similarly, the Modalities for the Establishment of Specific Binding Commitments under
the Reform Program (the "Modalities document")188 in the context of export subsidy reduction
commitments stated that "the expressions ‘outlays’ or ‘expenditure’ shall, unless the context
otherwise requires, be taken to include ‘revenue foregone’."189  There had therefore been no doubt that
revenue foregone was contemplated as a subsidy that would be subject to export subsidy disciplines.
4.170  New Zealand maintained that its understanding of the interpretation of Article 9.1(a) was
confirmed by reference to the preparatory work in the negotiation of that article.  From the outset it
had been understood that mechanisms to shield exporters from having to pay high domestic prices
would be regarded as export subsidies.  The text of the "Generic Criteria" produced as a basis for
considering export competition issues in the negotiations spoke of any form of subsidy which resulted
"in the sale of such products for export at a price lower than the comparable price charged for likeproducts to buyers in the domestic market."
190  The "Illustrative List of Export Subsidy Practices", set
                                                     
185 New Zealand noted that The Dictionary of Canadian Law  (Toronto, 1991) at p. 755 provided that a  "payment-in-kind" meant
"remuneration in the form of goods or services".
186 New Zealand noted that Article 1 of the SCM Agreement included revenue foregone by a government within the definition of
a subsidy (see Article 1.1(a)(1)(ii) for example).
187 "The Framework Agreement on Agricultural Reform Programme" (MTN.GNG/NG5/W/170).  (New Zealand, Annex 31)
188 MTN.GNG/MA/W/24.
189 The Modalities Document, para.2, Annex 8 (MTN.GNG/MA/W/24).
190 MTN.GNG/AG/W/1/Add.10 at p. 1 (para. 2).WT/DS103/R
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out to give specific content to that Generic Criteria, included what subsequently became
Article 9.1(a).
4.171  New Zealand argued that negotiating history made it clear that providing inputs at a lower
price for export constituted a direct subsidy contingent upon export.  The means by which the
subsidised input was provided was not material.  It could be through a transfer of money or it could bethrough revenue foregone.  It could be viewed simply as the foregoing of revenue or it could be
viewed as a "payment-in-kind".  Regardless of the characterisation given, it constituted a direct
subsidy captured by the terms of Article 9.1(a).
4.172  New Zealand argued that the ordinary meaning of the terms of Article 9.1(a), read in the
particular context of Article 9 as well as in the broader context of the Agreement on Agriculture and
the WTO subsidies regime as a whole, was that a government-mandated scheme whereby milk was
made available by a government agency for the production of dairy products for export at prices thatwere lower than the prices for milk from the same  agency for the production of comparable domestic
products constituted a "direct subsidy" that was "contingent on export performance".  Thus, the
foregoing of revenue or the provision of a "payment-in-kind" by government agencies on milk
provided to processors under Classes 5(d) and (e) was a subsidy within the meaning of Article 9.1(a)
of the Agreement on Agriculture.
4.173  New Zealand argued that it was the lack of choice between supplying the domestic or the
export markets which lead producers to forego revenue (addressed in paragraph 4.93 and following).
The decision to place milk in one "market" rather than the other was not made by the producer.  The
decision that the domestic market was satisfied and that, accordingly, milk had to be classified into
Special Class 5(d) or 5(e) was made by government.  Rational, profit-seeking producers, however,would - if they had the choice - supply their milk to the higher-priced domestic market (even although
the influx of more milk into that market may ultimat ely have the effect of lowering prices).  But the
decision that they may not do so was made for them.  Hence, the distinction between domestic and
export markets was government-created: it was, indeed, a legal fiction created by Canada.  With
regard to in-quota milk, producers collectively forewent revenue by being forced to accept a lower in-quota price by virtue of export sales being pooled with higher-priced domestic sales.  With regard to
over-quota milk, individual producers forewent revenue by having no choice other than to accept the
export price for that portion of their production which was ultimately deemed to be over-quota.
Under the Special Milk Classes Scheme, the government of Canada obliged milk producers to forego
the revenue they would otherwise have received from sales of milk at domestic prices in order tocreate an economic incentive for exporters to export.  Producers were compelled to forego revenue
and the benefit of this revenue foregone was passed on to exporters.  Since both in-quota and over-
quota milk were allocated to Class 5(e), the foregoing of revenue under Class 5(e) applied as much to
over-quota as it did to in-quota milk.
4.174  New Zealand noted that under the old producer levy-based system, producers received the
same gross price for all milk produced (both in-quota and over-quota) but were forced, by government
regulation, to forego revenue by virtue of a levy to subsidise the cost of exports.  The situation waslittle different under the Special Milk Classes Scheme.  Producers were forced to accept a lower price
for milk that was subsequently exported.  In the case of in-quota milk the revenue received by a
producer was reduced by pooling.  In the case of over-quota milk, revenue was not pooled and the
price was determined by the CDC and the provincial milk marketing agency on the basis of world
prices.  New Zealand pointed out that the fact that world prices were the benchmark should notobscure the fact that the decision to place milk in  one "market" rather than the other was not made by
the producer.
4.175  The United States  argued that the Government of Canada, whether through the CDC or
through the provincial governments, played a clear role in the establishment and administration of theWT/DS103/R
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Special Milk Classes Scheme.  It was through the CDC that processors obtained a permit for
preferentially priced milk for dairy products for export.  In the absence of the federal and provincial
government authority and legislation for the Special Classes, the processors would be paying the full
price for milk.191 The processors would not be receiving milk at an artificially reduced price tailor-
made by the CDC to allow them to make export sales.192  Thus the requirement under Article 9.1(a)
that direct subsidies were provided by governments or their agencies was met.
4.176  The United States argued that Canada’s construction of Paragraph 9.1(a) would make the
reference to payments-in-kind meaningless.  The Canadian argument was contrary to the principles of
interpretation under customary international law and, in particular, those that required that the terms
of an agreement be given effect, and that they be interpreted in good faith, in context and in light of
their object and purpose.193  Article 9.1(a) covered "direct subsidies, including payments-in-kind".
The  ordinary meaning of the phrase "payments-in-ki nd" in the context of Article 9.1(a) was that the
provision of artificially low-priced goods was to be regarded in the same way as straight cash.
Accordingly, as Classes 5(d) and (e) provided milk at a reduced price contingent on the export of the
manufactured product, the measure fell within Article 9.1(a) of the Agreement on Agriculture.  It
would be inconsistent with the ordinary meaning of  the phrase "payment-in-kind" to suggest that the
provision of goods without payment would be a subs idy, but that any level of payment, even though
less than adequate remuneration, would not be an export subsidy.  Moreover, the frequent statements
by both industry leaders and Members of Parliament that the Special Classes would allow milk
producers to share the "costs" of exports confirm th at indeed the government was transferring value
from the milk producers to dairy processors.
4.177  The United States argued, in respect of revenue foregone, that the Canadian position was
premised on the idea that under Canada’s milk marketing system producers could not sell milk into
the domestic market that was designated for export as surplus milk.  Yet, this division of markets into
domestic and export segments was an artificial one and completely a construct of Canada.  As
New Zealand had stated, there were separate "mar kets" only because Canada had created a "special
milk class" scheme and assigned the export of dairy products to Class 5.  The United States recalledthat milk was declared surplus to the domestic market in Canada pursuant to the discretion of the
Canadian Dairy Commission.  This was not a determ ination based on the operation of a free market.
For instance, there was no determination of demand elasticities at different price levels.  Instead,
prices were maintained at rigid levels in the domestic market and if the market could not be cleared at
a particular price level, there was not much latitude to reduce price to sell additional productdomestically.  Moreover, the declaration of a milk surplus was generally based on conditions within a
province, usually without consideration of conditions in other provinces despite the fact that there was
considerable movement of milk across provinci al boundaries.  The United States argued that
Canadian consumers would use more milk if domestic prices were lower.  Special Classes 5(a)
through (c), offering lower priced milk to compet e with certain imports, implicitly recognized this
market principle.  Milk sold at those lower Special Class prices allowed Canadian producers to
capture additional sales.  If that milk had instead been exported at the still lower Special Class 5(e)prices, there was no question but that the total revenue received by the milk producer would have
been less, resulting in "revenue foregone".
4.178  The United States noted that the same principle was demonstrated by the controversy over the
substitution of imported butter-oil for butterfat in products such as ice cream.  The high domestic milk
prices in Canada had caused processors to look fo r alternative products for inputs in fat-rich products
                                                     
191 The United States noted that prior to the institution of the Special Milk Classes Scheme, dairy exporters paid full domestic
prices for milk used in export, but were then rebated a portion of the purchase price to enable them to compete in world market s.
192 The United States understood that the CDC determined the price paid to the milk producer under Special Class 5(d) and (e) by
calculating backward from a "world" price, netting out an assured margin, i.e., profit, for the exporting dairy product manufacturer.
193 Appellate Body Report on US - Reformulated Gasoline, op. cit. , p.23.WT/DS103/R
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such as ice cream.  If milk were to be sold at lower prices in Canada, milk would retain such product
markets. It was for this reason that a proposal had been made to create an additional Special Class to
allow Canadian milk producers to be more price competitive with imports of butter-oil.  The Canadian
International Trade Tribunal, in its report relating to butter-oil imports, considered the possibility of
Canadian milk producers simply selling the milk that was displaced by imports of butter-oil intoworld markets.  In conducting an analysis of the impact of such action on Canadian milk producers,
the Canadian Tribunal described the effects in terms of "revenue foregone" by the Canadian
industry.
194 Thus, this concept was not unfamiliar to the CITT, with its considerable knowledge of the
Canadian milk marketing system.
4.179  Canada  reiterated that sales of milk at differing prices did not constitute a "subsidy" as it was
defined in Article 1 of the SCM Agreement. As the Agreement on Agriculture and the SCM
Agreement had to be taken together, the definition of "subsidy" in the SCM Agreement wasapplicable to the term "subsidy" as it was found in Article 9.1(a).
195  It followed that there was no
"subsidy", whether direct or not, for the purposes of   Article 9.1(a).  (Canada's detailed arguments on
the application of the SCM Agreement definition of "subsidy" to the measures in question are
summarized beginning at paragraph 4.309.)
4.180  In respect of the matter of payments-in-kind, Canada noted that the United States argued that
Canada’s interpretation of Paragraph (a) would make the reference to payments-in-kind meaningless
and  New Zealand characterized a sale of dairy inputs at a reduced price as a payment-in-kind.
Canada submitted that the Complainants had not clearly articulated what amounted to a payment-in-
kind.  Canada’s position did not seek to make that expression meaningless but rather to give the
expression its ordinary meaning.  A payment-in-kind arose when a debt was satisfied by the provisionof a good or a service rather than being paid for in money. For example, a government could impose a
5 per cent royalty with respect to a concession to  drill for oil.  If the government permitted that
obligation to be discharged by the delivery to it of one barrel of oil for every twenty barrels extracted,
that would be a payment-in-kind.  In the case of the Canadian dairy system, payment was made for
milk in the ordinary sense of the word.  A market-based differential between payments wasqualitatively different from a payment-in-kind.
196
4.181  Canada noted that the Complainants sought to find a subsidy in Article 9.1(a) by claiming that
there was "revenue foregone" (paragraphs 4.173 and 4.177).  Canada submitted that even if the word
"payments" were held to include "revenue foregone", there was no revenue for the producers to forego
with respect to sales of milk for export use under Special Classes 5(d) and (e).  In the context ofcommercial sales, revenue was foregone when the vendor chose to sell the product at a price lower
than the price at which the vendor could  have otherwise sold it. In other words, if a vendor chose to
forego a sale into a higher-priced market in favour  of a sale into a lower-priced market, then the
vendor had chosen to forego revenue.
 197
4.182  Canada argued that "revenue foregone" implied a choice of markets, a choice foregone. Under
the Canadian milk marketing system, milk  could not be sold in the market for export uses if it was
                                                     
194 United States, Exhibit 42.
195 Canada noted the acknowledgement of the United States that the meaning of the word "subsidy" was substantially the same
for the purposes of the Agreement on Agriculture and the SCM Agreement (paragraph 4.304).
196 Canada noted that this explanation of its interpretation of the expression "payment-in-kind" was without prejudice to its
position that there was no Article 9.1 export subsidy of any kind in this case.
197 Canada noted that the United States had publicly stated that Canadian milk was sold to the international market at world
market prices: FAS Online , "Dairy: World Markets and Trade - January 1998": "The US Challenges Canada's Dairy Export Subsidies and
Import Protection", p. 2; "Dairy Trade by Selected Countries", p. 2.  This was in contrast with the suggestions found in paragr aph 40 of the
United States Submission that Canadian exports were sold at prices "equal to or below world prices".  Further, Canada noted aga in that
since, under the Canadian dairy system, the ultimate decisions to produce for export lay with the dairy producers, they demande d that sales
of such milk be made for the best available prices.   To do otherwise would be irrational. (Canada, Exhibit 33)WT/DS103/R
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required for Canadian domestic requirements.  Thus, sales of milk for export purposes at prices based
on world market prices could not be made until there was no opportunity to sell milk into domestic
markets at the higher  domestic prices.  This was a basic and rational approach in any commercial
operation.  Any milk sold for export uses was additional to the domestic demand.  The sale of milk at
world market prices - not always lower than domestic prices - therefore took place when milkproducers in Canada could no longer place their products on the domestic market, and had therefore to
try to obtain the highest prices possible in the alternative market, i.e., the market in Canada for milk
for use in exports.  Suggestions that Canadi an milk  producers somehow "forewent" revenue
otherwise available to them in the domestic market demonstrated a serious misunderstanding of the
Canadian milk marketing system.
4.183  Canada argued that rather than representing "revenue foregone", such sales represented
revenue enhancement.  Canadian producers could choose not to produce any milk in addition todomestic requirements.  Accordingly, they could choose not to produce milk for use in export sales.
They could choose to limit their revenues to the re turns they would get from the domestic markets.
Instead, by choosing to produce milk in addition to domestic needs, the returns from which would be
based on world market prices, producers chose to try to enhance their total revenues.   As a result, the
only reasonable approach was indeed the approach adopted by the milk producers in Canada;  to finda market in which the highest return was found for milk at any particular time.  Thus, in the sale of
milk at world market prices, revenue was not foregone but rather enhanced.
4.184  Canada argued that the fact that there was a domestic market and an export market was not a
fiction but a fact of life.  Canada rejected New Zealand’s characterization that producers were
"forced" by government to forego their own reve nue.  The record showed that the producers had
collectively and individually chosen to market their product in the manner reflected by the present
regime.  New Zealand failed to explain how producers making these collective and individual
decisions were "foregoing revenue" in the sense understood by Canada and the United States.  In
addition, it remained Canada’s position that there was no revenue foregone, even to producers, when a
person willingly sold a product in a market for the price that the market would bear for that product.
4.185  Canada noted that New Zealand built arguments on the basis of the Uruguay Round
negotiating document entitled: Modalities for the Establishment of Specific Binding Commitments
under the Reform Program (paragraph 4.169).  Canada pointed out that the following injunction was
found on the cover sheet of the document:
"The revised text is being re-issued on the understanding of
participants in the Uruguay Round that these negotiating modalities
shall not be used as a basis for dispute settlement proceedings under
the WTO Agreement".
4.186  New Zealand  argued – in respect of Canada's argument that the Special Milk Classes Scheme
did not constitute a "payment-in-kind" within the meaning Article 9.1(a), because a payment-in-kind
arose when a debt was satisfied by the provision of a good or a service rather than being paid for in
money (paragraph 4.194) – that the suggestion that the existence of a debt was a prerequisite to anynotion of payment-in-kind would render that con cept, in the context of subsidies, completely
redundant.  If a debt was owed, the payment of it, or its discharge through a payment-in-kind, could
not constitute a subsidy.  It would simply be the  re-payment of a debt.  To the extent that Canada was
suggesting that a payment-in-kind could never be a subsidy and could only be used in the context of
the satisfaction of a debt, it was seeking to rewrite Article 9.1(a) to exclude the concept of "payment-in-kind" completely.
4.187  Since Canada’s arguments that the Special Milk Classes Scheme did not meet the definition
of the term "subsidy" and hence could not be a subsidy within the meaning of Article 9.1(a) of theWT/DS103/R
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Agreement on Agriculture were unfounded (par agraph 4.179), New Zealand’s arguments on the
applicability of Article 9.1(a) remained unanswered by Canada.
(ii) The meaning of the term "direct"
4.188  New Zealand  argued that the term "direct" in relation to subsidization was used in a variety
of senses and its meaning in any particular case had to be derived from the context in which it wasused.  In the context of subsidies under the GATT 1947, the word "direct" bore a particular meaning
which was articulated in the negotiation of Article XVI of the GATT 1947.  The term "indirectly" in
Article XVI, it was explained, made it clear that "subsidization" could "not be interpreted as being
confined to subsidies operating directly to affect trade in the production under consideration."
198  In
other words, a "direct" subsidy was one affecting trade in the product directly rather than one
affecting trade incidentally or indirectly.   In the present case, the subsidy provided was clearly
"direct".  Revenue was being foregone for the very purpose of affecting the trade in question - indeedof permitting its very existence.  Without this foregoing of revenue no export trade would exist.
199
The objective of this foregoing of revenue was to secure export performance.  It was not a subsidythat had other objectives with export performance as an incidental effect; it was a subsidy that
provided only for products which were destined for export.  It was a direct subsidy contingent on
export performance, and thus fell within the ordinary meaning of the words of Article 9.1(a).
4.189  New Zealand argued that in Article 9.1(a) the term subsidies had to be interpreted in the light
of the fact that this provision was referring to "d irect" subsidies and in view of the fact that the
category of direct subsidies had to be large enough to include "payments-in-kind."  This alone was
sufficient to demonstrate that a simple reliance on the definition of the term "subsidy" in Article 1 of
the SCM Agreement was inadequate for the interpretation of Article 9.1(a).  As this was ignored byCanada, Canada had failed to interpret Article 9.1(a) properly and thus had failed to show that the
Special Milk Classes Scheme did not constitute an export subsidy within the meaning of
Article 9.1(a).  Accordingly, Canada had not discharged the burden of proof placed on it under
Article 10.3 of the Agreement on Agriculture (paragraphs 4.290 and following refer).
4.190  Canada  refuted the broad interpretation of the term "direct" in Article 9.1(a) given by the
Complainants.  Canada rejected any necessity to ente r into such an exercise and referred the Panel to
Article 1.1(a)(1) of the SCM Agreement  where "direct" was used to qualify a "subsidy" implying a
transfer of funds by a government.  Canada reiterated that no direct export subsidy existed in Canada
for dairy products.
(c) Article 9:1(c)
(i) The meaning of the term "payment"
4.191  New Zealand  noted that the word "payment" was defined in the Oxford English Dictionary
as:  "1. the action, or an act of, paying; the remune ration of a person with money or its equivalent …
2. a sum of money (or other thing) paid; ... ".
200  The Dictionary of Canadian Law  defined "payment"
as "remuneration in any form."201  The term "remunerate" was defined in the Oxford English
                                                     
198 Report of the Drafting Committee of the Preparatory Committee of the UN Conference on Trade and Employment
(20 January - 25 February 1947), E/PC/T/34/Rev.1 (29 May 1947), p. 26.
199 New Zealand noted that Lyle Vanclief, then Parliamentary Secretary to the Minister of Agriculture and Agri-Food had told the
Canadian House of Commons in 1995 that if the legislation which was to allow the CDC to implement "special milk classes" were n ot
implemented by 1 August 1995 "dairy exports to the United States using producer-financed levies [would] be in jeopardy.  Furthe rmore,
while export subsidies by levies to other destinations could continue to grow for now, these subsidized shipments [would] also have to be
reduced over time":  House of Commons Debates, Volume 133 (No. 202), Tuesday 16 May 1995, p. 12668.
200 The Oxford English Dictionary (2nd Edition) - Volume XI, Clarendon Press, Oxford, pp. 379-380.
201 The Dictionary of Canadian Law , p. 755.WT/DS103/R
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Dictionary  as "1. To repay, requite, make some return for (services etc) … 2. To reward (a person) …
to pay (one) for services rendered … 3. to give as compensation ... ".202    New Zealand argued that the
term "payments" covered both payments-in-kind and revenue foregone.  The ordinary meaning of the
term payment included a "payment-in-kind".  A dding "in-kind" to the word "payment" simply
described the form  in which a payment was made.  In respect of Article 9.1(a), the provision to
exporters of lower-priced milk was a "payment-in-kind".  It was the delivery of something of value in
a form other than by way of a money transfer.
4.192  The United States  argued that the common meaning of the word "payment" was "the action,
or an act, of paying; the remuneration of a person with money or its equivalent; the giving of money,
etc. in return for something in discharge of a debt".   The word was also defined as "a sum of money
(or other thing) paid; pay, wages; or price".203  The verb "to pay," from which the noun "payment"
was derived, was variously defined as "to give what is due, as for goods received; remunerate;recompense; to give or return as for goods, or services; to give or offer."  However, "to pay" had also
been construed as meaning "to give money or other equivalent value for; to hand over the price of a
(thing);  to bear the cost of; to be sufficient to buy or defray the cost of".
204  Thus, although the word
payment often connoted an exchange of value for the provision of goods or services, or the provision
of value on the occasion of a particular event or condition, it could also encompass bearing the cost.This latter meaning was perhaps the most consistent with the word’s use in the context of a provision
defining subsidies.  Thus, the term payment could be used in Article 9.1 consistent with the concept of
conferring a benefit through the bearing of a cost.
205
4.193  In respect of the term "payment", Canada  refuted that its ordinary meaning included
"revenue foregone". The ordinary meaning of the term "payments" was straightforward – it meant "asum of money."
206    Canada noted that, pursuant to Article 33 of the Vienna Convention, the French
language version of the text of this provision provided additional support for its interpretation of the
word "payment".  The term used in the French te xt was "versement" which meant literally to remit
money.207
4.194  Canada recalled that while the United States acknowledged that the common meaning of
payment was "the action, or act of paying; the remuneration of a person with money or its equivalent;
the giving of money, etc. in return for something in discharge of a debt" (paragraph 4.192), wishing to
argue that the ordinary meaning of the word payment included "revenue forgone" and realizing that
this "common meaning" was not supportive of their position, the United States had attempted to find
an alternative meaning through the verb "pay", pointing to the eleventh listed definition which
includes the phrase "bear the cost".  This was a frail argument when it was considered that this was
found within the eleventh definition of a related word, and did not appear at all the most recent  New
Shorter Oxford English Dictionary.208  "Payments" had to be interpreted in its "ordinary meaning": i.e.
to reflect an action of paying something of value.
                                                     
202 The Oxford English Dictionary (2nd Edition) - Volume XIII, Clarendon Press, Oxford, p. 604.
203 The Oxford English Dictionary  (2nd Edition), Clarendon Press, 1989, pp. 379-80.
204 Ibid, p. 376, definition no. 11.
205 The United States noted that this would be consistent with the requirement in the SCM Agreement that a subsidy involve a
benefit.
206 Canada noted that the New Shorter Oxford English Dictionary  referred to; "1. an act, or the action or process, of paying.
(Foll. by of the money etc. paid, the debt discharged, the payee;  for the thing bought or recompensed.) ME. 2. (a sum of)  money etc. paid.
LME."  (Canada, Exhibit 26)
207 Canada referred Le Petit Larousse , 1994: "1. Action de verser de l’argent à qqn, à un organisme, sur son compte, etc.; 2.
Somme versée."  (Canada, Exhibit 28)
208 Canada, Exhibit 26.WT/DS103/R
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4.195  Canada noted that New Zealand as well encountered difficulty in establishing that the
"ordinary meaning" of the word "payment" included "revenue forgone".    New Zealand noted that the
Oxford English Dictionary definition of "payment" included "remuneration of a person with money or
its equivalent" and suggested that the reference to "remunerate" indicated that the term was to be read
broadly.  Canada argued that there was a major difference between suggesting that payments could bemade with a wide variety of items of value, i.e ., from actual cash to payment-in-kind, to concluding
that the ordinary meaning of "payment" included an indirect result such as "revenue foregone".
4.196  In New Zealand's view the dictionary definitions referred to above, indicated that the concept
of "payment" had a wide ambit. New Zealand noted that in order to determine how the term payment
was being used in the specific case of Article 9.1(c), reference had be made to the context in which
the term was used and the object and purpose of the Agreement on Agriculture as a whole.
209
New Zealand noted that Article 9.1(c) was contained in a provision that identified the mechanisms
that states had used to provide export subsidies and which were subject to reduction commitments.
One mechanism the negotiators of Article 9.1(c) had in mind was the use of producer levies to fund
payments to exporters to compensate for the high cost of a product purchased at domestic rather than
at world prices.  Such payments were referred to specifically as being included in the definition of
"payments on the export of an agricultural product."  The wording of Article 9.1(c) made clear that ithad not been intended that its provisions be limited only to money paid from the proceeds of a
producer levy.
210  An examination of the context in which the word "payments" in Article 9.1(c)
appeared confirmed that in the light of the object and purpose of the Agreement on Agriculture as a
whole, the term "payments" covered both revenue foregone and payments-in-kind.
4.197  New Zealand emphasized that as Article 9.2 included revenue foregone within the
determination of budgetary outlay commitments to be made with regard to the subsidies listed in
Article 9.1, the concept of "payments", in Article 9.1(c), had to include "revenue foregone" as they
had to be quantified under the heading of "budgetary outlays", and this included, explicitly, revenue
foregone.  There was no need to provide specifically that "payments" included revenue foregone
because the definition of "budgetary outlays" already carried that implication.
4.198  The meaning of the phrase "payments on the export of an agricultural product" in
Article 9.1(c) of the Agreement on Agriculture must, however, be distinguished from the term "the
payment of subsidies exclusively to domestic producers" under Article III:8(b) of the GATT 1994.  In
Canada - Certain Measures Concerning Periodicals  the Appellate Body stated that:
" … an examination of the text, context, and object and purpose of
Article III.8(b) suggested that it was intended to exempt from the
obligations of Article III only the payment of subsidies which
involves the expenditure of revenue by a government."211
4.199  Accordingly, New Zealand noted that the Appell ate Body concluded that a reduction in postal
rates did not constitute a "payment of a subsidy exclusively to a domestic producer" within the
meaning of GATT Article III:8(b).  In reaching  this conclusion the Appellate Body was influenced by
the fact that Article III:8(b) was an exception to the national treatment obligation.  In its view, it was
                                                     
209 New Zealand noted that such an approach had been endorsed by the Appellate Body in  Canada - Certain Measures
Concerning Periodicals (hereafter " Canada – Periodicals "), WT/DS31/AB/R, adopted 30 July 1997, in seeking to interpret the meaning of
the term "the payment of subsidies exclusively to domestic producers" in GATT Article III:8(b):  p.34.
210 New Zealand noted that Article 9.1(c) referred to "payments on the export of an agricultural product ...  including  payments
that are financed through the proceeds of a levy ... "
211 Appellate Body Report on Canada – Periodicals, op. cit., p.34.  New Zealand further noted that similar views were expressed
in the Panels on US - Malt Beverages, op. cit. and Indonesia - Certain Measures Affecting the Automobile Industry , (hereafter " Indonesia –
Automobile Industry "), WT/DS54/DS55/DS59/DS64/R, adopted 23 July 1998, p.340.WT/DS103/R
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never intended that exceptions to national treatment by way of subsidies based on tax reductions or
other forms of revenue foregone were to be permitted under Article III:8(b).
4.200  In fact, New Zealand maintained that the rationale of the Canada - Periodicals  decision
reinforced the conclusion that the term "payments on the export of an agricultural product" in
Article 9.1(c) had to include revenue foregone.  The objective of the list in Article 9.1 was to bringagricultural export subsidies under WTO disciplines.  An interpretation of Article 9.1(c) that narrowed
the scope of the subsidies included therein to direct money transfers would defeat rather than serve the
object and purpose of Article 9.  It would expand the opportunity for Members to avoid their WTO
obligations - precisely what the  Appellate Body in Canada - Periodicals  was seeking to avoid.   Such
a conclusion was strengthened when the object and purpose of the export competition provisions of
the Agreement on Agriculture as a whole were considered.  Revenue foregone, which was simply an
alternative way of securing a benefit that could be obtained through the direct transfer of money, hadto be included in the concept of "payment" under Article 9.1(c) if the progressive reduction of export
subsidies through reduction commitments was to be successful.
4.201  New Zealand noted that under the old producer levy system, the CDC, acting in concert with
provincial milk marketing boards or agencies, tran sferred money to exporters to compensate for the
cost of processors purchasing milk for products for export at domestic rather than at world prices.Under Classes 5(d) and (e) of Special Milk Classes, processors were permitted to purchase milk for
products for export at world rather than at dom estic prices.  The difference between the two
approaches was one of form only.  In each case, the processor for export was being shielded from the
high domestic cost of milk.  In each case, the processor for export was being provided with a subsidy
that was captured by the phrase "payments on the export of an agricultural product" in Article 9.1(c)of the Agreement on Agriculture.   Under Classes 5(d) and (e) revenue was foregone by provincial
milk marketing boards or agencies providing access to milk from producers to processors at "special
class" prices.  The provincial milk marketing board or agency forewent the revenue that it would have
received if the milk had been sold at domestic prices.
4.202  New Zealand contended that although the provincial milk marketing board or agency was the
vehicle for providing the special milk classes subsidy, it was the producer who bore the financial cost.
The role of the provincial board or agency was one of a conduit - to pass on to the producer through
the pooling arrangements the revenue that results from Special Milk Class sales.  In fact, what the
agency passed on to the producer were the losses  that resulted from sales of milk at world market
prices.  It was the producer who forewent the revenue that would have been received if all milk wassold to processors at domestic prices.  The Special Milk Classes Scheme shrouded in complexity the
obvious fact that it was the producer who made the "payments on the export of an agricultural
product" that brought the scheme within Article 9.1(c).
4.203  New Zealand claimed that, in substance, the re venue foregone by producers "on the export of
an agricultural product" was the equivalent of a subsidy provided to such processors by a direct
money transfer financed from the proceeds of a levy on "an agricultural product from which the
exported product is derived" - a form of subsidy th at Article 9.1(c) expressly enjoined.  Hence, the
Special Milk Classes Scheme involved an elaborate structure for a very simple subsidy.  It consisted
of the foregoing of revenue on the export of an agricultural product.  That foregoing of revenue could
be viewed as a foregoing by a provincial milk marke ting board or agency, or it could be viewed as the
foregoing of revenue by producers.  The diff erence between the two was largely a matter of
accounting.  The form could differ, but the substance remains the same.
4.204  As noted under Article 9.1(a), New Zealand argued  that Classes 5(d) and (e) of the Special
Milk Classes Scheme could also be characterised as providing payments-in-kind - something that was
equally encompassed in the ordinary meaning of the term "payment".  A payment-in-kind involved
remuneration through something other than, or some thing equivalent to, money.  The provision ofWT/DS103/R
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goods (milk) at a reduced price, instead of providing a money sum to compensate for the higher price
that would be paid for milk for processing into  products destined for the domestic market, was a
payment-in-kind. It was a direct substitute for a payment by way of money transfer.  And that, of
course, was its intent.  It should be seen as a substitute for the old "money-transfer" subsidies paid by
Canada from producer levies.  It was a "payment-in-kind" that fell within the concept of  "paymentson the export of an agricultural product" under Article 9.1(c).
4.205  The United States  claimed that like the producer levy programme it replaced, the Special
Milk Classes Scheme was an export subsidy within the meaning of Article 9.1(c) of the Agreement on
Agriculture.  By the express terms of that sub-paragraph, there was no requirement that an export
subsidy be a charge on the public account.  By way of example, the Article specified that payments
subject to its coverage may be "financed from proceeds of a levy imposed on the agricultural product
concerned or on an agricultural product from which the export product is derived."   As argued underArticle 9.1(a), the United States claimed that the term "payment" was broad enough to include
instances in which value was given by some other means than the actual transfer of funds
(paragraph 4.192).  If this were the case, then a fortiori "payment" included situations where value
was given to another by means such as a product, in this case milk, at less than the market price.
4.206  The United States noted that the term payment was used twice in Article 9.1(c), but was not
defined there or elsewhere in the Agreement on Agriculture.
212   The United States noted that the
Vienna Convention counselled that the ordinary meaning of a term was to be given in light of its
context, which, in this case, was the Agreement on Agriculture and, more specifically, that
Agreement’s provisions governing export subsidy disciplines.  The meaning of the term "payment"
had also to be fixed by considering the object and purpose of the pertinent treaty.  Article 9.1, as awhole, broadly identified the subsidies, including payments within Article 9.1(c), that were to be
taken into account in calculating the maximum level of expenditure for export subsidies that a
Member could incur in a given year consistent with its Schedule of Concessions and Commitments
and Articles 3 and 8 of the Agreement on Agriculture.  This level constituted the Member’s budgetary
outlay reduction commitment.  The term "budgetary outlays" was defined in Article 1(e) of theAgreement on Agriculture to include "revenue fo regone."  Thus, for example, not only direct
subsidies, such as those described in Article 9.1(a), but also reduced charges, i.e., revenue foregone,
as described in Paragraph 1(c), counted toward the budgetary outlays that were subject to the
reduction commitments, whether or not charged to the public account.
4.207  The United States argued that in this context, and given that the purpose of Part V of the
Agreement was to impose discipline on export subsidies, the term "payment" had to be construed
consistently with the broad meaning given to budg etary outlays.  If such outlays, and thus the
applicable reduction commitments overall were expressly defined to include revenue foregone, then
one consistent construction was to construe "payments" in a similar manner.  Such an interpretation
was consonant with the purpose of the Agreement to bring export subsidies under the transitional
disciplines established by the reduction commitments.  Considered from this perspective, if the total
expenditures subject to reduction commitments were defined as total budgetary outlays and revenueforegone, then the individual expenditures had logically to comprise all payments, including price
reductions that had the same economic effect as an export rebate.  By mandating the sale of industrial
milk at a discount, the Government of Canada was conferring a benefit to milk processors equivalent
in its trade distorting effect to an export rebate.  Moreover, the principle that an export subsidy could
be accorded in the form of sales of products at a loss, or by offering goods or services for export at amore advantageous price than when offered for sales for domestic consumption, was not only inherent
in the Agreement’s definition of budgetary outlays, but was also reflected in the provisions of
                                                     
212 The United States noted that although the word "outlay" was used elsewhere in Article 9, it was defined in Article 1 of the
Agreement to include revenue foregone, no definition of the word "payment" appeared in Article 1 with the other defined terms.WT/DS103/R
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Article 9.1(a), (b) and (e) which defined "payment s-in-kind," sales of non-commercial stocks, and
discounted transport and freight charges as forms of subsidization.213
4.208  In addition, the United States noted that the context of Article 9.1(c) also included the related
subsidy reduction commitments contained in Articles 3, 8, and the remainder of 9 of the Agreement
on Agriculture.  These provisions were collectively intended to impose meaningful disciplines on theuse of export subsidies. The Agreement on Agriculture thus narrowed the universe, and amount, of
potential subsidies in several respects.  First, Article 3 specified that no export subsidies were to be
provided "in respect of any agricultural product not specified" in a Member’s schedule.  A Member
could not introduce subsidies for products that were not identified in its schedule and which had not
been subsidized during the pertinent base period.   Furthermore, Article 9.1 referenced a broad cross-
section of subsidy practices that were intended to capture the agricultural subsidies used by the
Members at the time of negotiation of the Agreement.  Such subsidies were made subject to reductioncommitments pursuant to Articles 3, 8 and 9 of the Agreement, with significant reductions required in
both subsidy outlays and the quantity of exports that benefitted from subsidies to occur during the
transition period.  In addition, Article 10, to protect Article 9 disciplines on export subsidies,
prohibited the introduction of any subsidies not listed in Article 9 that either "results in, or which
threatens to lead, to circumvention of export subsidy commitments ... "  And finally, Article 3 of theSCM Agreement, when read in conjunction with Article 13 of the Agreement on Agriculture,
provided that if a Member did not comply with  the export subsidy disciplines contained in the
Agreement on Agriculture, any offending export subsidy was to be subject to the terms of the SCM
Agreement and its prohibition on export subsidies.
214
4.209  Hence, the United States argued that given the Agreement on Agriculture’s comprehensive
treatment of export subsidies, which revealed the Members’ intent to establish real and effective
disciplines respecting export subsidies, a narrow construction of the term "payment" that would result
in a weakening of the export subsidy reduction commitments and disciplines, would be contrary to the
over-arching objective and purposes of the relevant treaty provisions as a whole.
4.210  In this regard, the United States noted that Professor Tangermann also compared the
pernicious effect of producer-financed export subsidies with price pooling by state export agencies
and concluded that the latter should be subject to the same export competition disciplines:
"Where a state agency sells domestically at a price above the price
charged for exports, while domestic producers are paid the average
price, exports are implicitly subsidized.  To see why, it is best tocompare this policy to one of producer-financed export subsidies.  In
the latter case, a levy is charged on the domestic sales, and the
proceeds are then used to finance export subsidies.  Under a price
pooling regime, the same prices can result, and it is only the technical
nature of financial flows which is different, but not the economic
result.  Hence, price pooling differs from producer-financed export
subsidies only in form, not in substance.  Countries should, therefore,
                                                     
213 The United States noted that the concept that subsidies that resulted in a price lower for export sale than for domestic
consumption were export subsidies was, of course, a fundamental aspect of the export subsidy discipline contained in Article XV I of the
GATT.  Article XVI:4 stated, in relevant part:   "... contracting parties shall cease to grant either directly or indirectly an y form of subsidy on
the export of any product other than a primary product which subsidy results in the sale of such product for export at a price lower than the
comparable price charged for the like product to buyers in the domestic market."
214 Paragraph (c) of Article 13 of the Agreement on Agriculture, the so-called "Peace Clause", provided that export subsidies that
conformed fully to the export subsidy disciplines contained in Part V of the Agreement were "exempt from actions based on Artic le XVI of
GATT 1994 or Articles 3, 5, and 6 of the Subsidies Agreement."  Article 3 of the SCM Agreement, which contained the prohibition  on
export subsidies, stated that the prohibition was inapplicable to the extent provided in the Agreement on Agriculture.WT/DS103/R
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not be allowed to escape their export subsidy commitments by using
a price pooling regime."215
4.211  The United States argued that in construing the text of Article 9.1(c), it was clear that the
reference to the levy financed export rebates was made for purposes of illustration, and did not limit
the scope of Article 9.  Thus, the language in Article 9.1(c) relating to the "payments that are financedfrom the proceeds of a levy" commenced with th e introductory word "including", indicating that
payments so financed constituted only one example of the types of payments which fell within the
scope of the Article 9 subsidy disciplines. There was nothing in the text of the paragraph to provide a
basis for concluding that other types of producer-financed funding for export payments, such as
discounted prices, would be excluded from the subsidy constraints imposed by Article 9.1(c).  To the
contrary, subsidies that were the functional equivalent of producer-financed levies had to be assumed
to be included in Article 9.1(c) disciplines.
4.212  The United States argued that Canada’s Special Milk Classes Scheme differed from the
producer levy programme that preceded it only in form, not substance. Revenue foregone (on export
sales under the Special Classes) by the milk producers, which translated into discounted prices for
dairy product manufacturers, was equivalent to the export rebates paid to such manufacturers under
the levy system.  To exclude such discounted milk from the coverage of Article 9.1(c) because thebenefit or payment received by the dairy product exporter was in the form of a lower milk price,
rather than in the form of an export rebate contingent on export of a product in which the milk had
been used, would elevate form over substance.   Hence, the Special Milk Classes Scheme, like the
producer levy programme that it replaced, qualified as "payments on the export of an agricultural
product" within the meaning of Article 9.1(c).  First, the discounted milk prices provided for inSpecial Milk Classes 5(d) and (e) were available only in connection with the production of dairy
products for export and, thus, were provided "on the export of an agricultural product".  Second, the
lower prices extended to milk processors, contingent on the use of the milk for production of dairy
products for export, were the same both in substance and economic effect as the earlier levy-financed
export rebates and, therefore, were likewise a "payment" within the meaning of that term as used inArticle 9.1(c) of the Agreement.
216
4.213  Canada  submitted that the sales of milk under Special Classes (d) and (e) did not constitute
an export subsidy within the meaning of Article 9.1 (c) as it could not be shown that "payments" were
made on the export of products from Canada.
4.214  Canada  argued that, in accordance with the Vi enna Convention, the interpretation of the text
of WTO agreements had to proceed on the following basis:  (i) the starting point was always the
actual text and its ordinary meaning;  (ii) the ordinary meaning of the terms of the agreement was to
be read in their context;  (iii) "context" had to comprise the text of the agreement, including other
contemporaneous agreements reached by all the parties, as outlined in Article 31.2 of the Vienna
Convention, and (iv) recourse could only be had to supplementary means of interpretation, such as
negotiating history, in the event of ambiguity or to confirm a meaning.
4.215  Canada noted that New Zealand argued that support for the proposition that payment should
include revenue forgone could be found the Canada - Periodicals case (paragraph 4.198 and
                                                     
215 "A Developed Country Perspective of the Agenda for the Next WTO Round of Agricultural Negotiations," Stefan Tangerman,
paper presented at the Graduate Institute of International Studies, p. 22-23.  (United States, Exhibit 24)
216 The United States noted that the Appellate Body considered the subsidy exception contained in Article III:8(b), which
included the phrase "payment of subsidies exclusively to domestic producers," in  Canada – Periodicals, op. cit.   The meaning of that phrase
had received consideration in a number of GATT disputes, e.g., US - Malt Beverages, op. cit., para. 5.8.  The United States, however,
submitted that these decisions gave considerable weight in interpreting the phrase in Article III:8(b) to its context and the p urpose of the
treaty provision.  That context and purpose, involving the construction of an exception to the principle of national treatment,  was
unquestionably different than that presented by Article 9.1(c) of the  Agreement on Agriculture.WT/DS103/R
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following).  In that case, the Appellate Body had ruled that the term "payment" as it appeared in
Article III:8(b) of the GATT 1994 did not include a re duction of postal rates since Article III:8(b) was
an exception and should be interpreted narrowly.  New Zealand suggested that on the basis that
Article 9.1 was a positive obligation the reverse should hold true: its terms should be interpreted
broadly .  Canada submitted that this misconstrued the proper interpretive approach.  The fundamental
rule was that of "ordinary meaning" under Article 31 of the Vienna Convention.  In the case of an
exception, the exceptional approach of a narrow approach was applied. Absent an exception, the
interpreter had to revert to the fundamental rule of "ordinary meaning".
4.216  Canada argued that it was also noteworthy that in Article 1 of the SCM Agreement, the
drafters were careful to add a provision covering "government revenue that is otherwise due is
forgone", they had realized that the ordinary mean ing of the preceding provision relating to "direct
transfers of funds" would not be sufficient to cover "revenue forgone".
4.217  Canada refuted the allegations that the interaction between Article 9.2 and Article 9.1 implied
that the defined meaning of "budgetary outlays", i.e., including "revenue forgone" was applicable to
"payment" in Article 9.1(c).  This would be to se t aside the ordinary meaning of a word based on an
indirect inference and notwithstanding the clea r contextual confirmation provided by Annex 2.
4.218  Canada noted that in United States - Reformulated Gasoline,  the Appellate Body undertook a
comparison of the words used in different paragra phs of Article XX to determine the meaning of the
test set out in Article XX(g).  The Appellate Body noted that different words  were used in the
different paragraphs so as to properly describe the required relationship or degree of connection
between the objectives in question and the measures implemented: "necessary" in certain paragraphs,
"relating to" in certain others, "for the protection of" in another, and so on.  Accordingly, theAppellate Body held that:
"It does not seem reasonable to suppose that the WTO Members
intended to require, in respect of each and every category, the same
kind of degree of connection or relationship between the measure
under appraisal and the state interest or policy sought to be promotedor realised."
217
4.219  Hence, Canada argued that it could be presumed that specific words carried specific meanings
and that the use of different words in a treaty text m eant that the parties to the treaty intended different
meanings to be applied to those differing terms.   The approach to the interpretation of the term
"payments" in Article 9.1(c) in the context of Article 9.1 as a whole should be no less rigorous.Canada argued that the choice of different terminology in each provision of Article 9.1 clearly
indicated that negotiators had very precise and distinct concepts in mind with respect to each
provision.  In the light of the terms used in the other provisions, the selection of the word "payment"
in Article 9.1(c) indicated an intention to apply a precise and limited ambit to the application of
Article 9.1(c).  Accordingly, the term "payment" had to be given its ordinary meaning and not be
construed so as to encompass practices that could be covered by the use of broader terms such as
"subsidies".
4.220  Canada  argued that the negotiating history of Article 9.1 demonstrated that with respect to
Article 9.1(c) in particular, the course of the agriculture negotiations had been to narrow the scope of
that provision. Thus, the essential issue was what the parties agreed to at the end of the negotiations.
In the context of the Agreement on Agriculture, this very point was made in one of the exhibits relied
                                                     
217 Appellate Body Report on US - Reformulated Gasoline, op. cit , p. 18.WT/DS103/R
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upon by the United States (paragraph 4.210).218 Therein, Professor Tangermann identified production
quotas with over-quota output sold at world market prices and price pooling arrangements as matters
not presently covered under the Agreement on Agriculture  and thus were subjects to be pursued in
future negotiations .219  Professor Tangermann recognized that the proper way to reconcile the
divergent economic theories was by multilateral negotiation, not negotiation through litigation.Canada argued that it was apparent that Professor Tangermann viewed the results of the Uruguay
Round in agriculture as having an unsatisfactory economic result. While Professor Tangermann was
entitled to his opinion as to the outcome he would consider to be desirable
220, the Agreement on
Agriculture was not concerned with any particular economic theory but rather with specific legal
obligations that were agreed to by Members.
4.221  Canada argued that if, indeed, the intention of the negotiators had been to stretch the meaning
of "payment" beyond its ordinary meaning, this would have been provided for specifically. For
example, the terms "budgetary outlay" and "outlay" had been defined in Article 1 of the Agreement
on Agriculture as including "revenue foregone".  Payment, however, which did not incorporate
"revenue forgone" in its ordinary meaning, was not similarly defined.   Confirmation of this could be
found in the treatment of the word "payment" as it was used elsewhere in the Agreement on
Agriculture .  "Payment" appeared prominently in Annex 2 with respect to domestic support.  In
Article 5 of Annex 2 the reference was to "payments (or revenue forgone, including payments in
kind)".  Clearly, the drafters were aware that the ordinary meaning of payment did not include
"revenue forgone" and specific provision for its inclusion would be required.  The absence of any
counterpart in Article 9.1 could only lead to the conclusion that in the case of Article 9.1(c) the
drafters intended the ordinary meaning of "payment" to stand.
4.222  Canada further claimed that the negotiating history of the Agreement on Agriculture also
supported Canada's submission that the term "payment" had to be construed precisely.  Article 32 of
the Vienna Convention permitted recourse to supplementary means, including the travaux
préparatoires , to support the interpretation arrived at under Article 31.
4.223  Canada noted that Annex 7 to the Draft Dunkel Working Papers dated 21 November 1991
provided a proposed list of measures that would be deemed to be "export subsidies" for the purposes
of  reduction commitments.221 As such, this list, which reflected earlier draft texts circulated in the
summer of 1991222, was a precursor to the eventual Article 9.1 in the Agreement on Agriculture.  In
particular, Article 3(k) of this draft was an early version of the text that would ultimately become
Article 9.1(c).  This paragraph referred to "subsidi es", not "payments".  The text of Paragraph 1(c)
continued to refer to "subsidies" in the text of the 12 December Dunkel draft.223  O n
                                                     
218 "A Developed Country Perspective on the Agenda for the Next WTO Round of Agriculture Negotiations", paper presented at
the Graduate Institute of International Studies, Stefan Tangermann, contained in United States, Exhibit 24.
219 Ibid, p. 21:  "Much effort was made in the Agreement on Agriculture to define export subsidies as precisely as possible,
through appropriate wording in Article 9.  However, there may be reasons to consider some improvements .  In particular, there are policies
which effectively may result in cross-subsidisation of exports and which may not be clearly enough outlawed by the current word ing.  Two
cases in point are production quotas with above-quota output sold at world market prices, and price pooling arrangement." (emph asis added)
Further at p. 23 Professor Tangermann wrote of the difficulty of getting countries to address this perceived problem and sugges ted two
solutions:  "However, one could seek agreement  that new regimes of this type (ad ( sic) new changes to old regimes resulting in the same
type of effects on exports) established after the Uruguay Round are included in the definition of export subsidies.  Alternativ ely,  one could
agree explicitly  (in some appropriate legal form ) that such regimes fall under Article 10 of the Agreement on Agriculture, i.e., that they
amount to 'circumvention of export subsidy commitments'." (emphasis added)
220 Ibid. p. 21:  "Such exports may, therefore appear not to fall  under the export subsidy commitments under the Agreement on
Agriculture.  From an economic point of view  this situation is not quite satisfactory." (emphasis added)  Further at p. 22-23:  "It is, therefore
somewhat problematic, to say the least, that the Agreement on Agriculture so far does not include such indirect cross-subsidisa tion in its
definition of export subsidies."
221 Canada, Exhibit 29.
222 Canada, Exhibit 30.
223 Canada, Exhibit 53.WT/DS103/R
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17 December 1991, Canada submitted to Arthur Dunkel a number of specific redrafting proposals on
the agriculture text.  Amongst these was an amendment to Paragraph 1(c) so as to substitute the word
"payments" for the word "subsidies".224   The text of Article 9(1) of the "Draft Final Act" of
20 December 1991 reflected this change and referred to "payments".225  This drafting history
confirmed that the term "payments" was specifically and deliberately selected in place of a broaderterm. Accordingly, the word "payment" in Article 9( 1)(c) had to be interpreted strictly in accordance
with its ordinary meaning.
4.224  Moreover, Canada recalled its argument as set out under Article 9.1(a) that even if the word
"payments" were held to include "revenue forgone", there was no revenue for the producers to forego
with respect to sales of milk for export use under Special Classes 5(d) and (e) (paragraph 4.181 and
following).
4.225  New Zealand  noted that in the context of Article 9.1(c), Canada denied that the Special Milk
Classes Scheme fell within the Agreement on Agriculture because (i) the word "payments" in
Article 9.1(c) did not encompass revenue foregone and hence could not encompass what occurredunder special milk classes, and (ii) even if the term "payments" did encompass revenue foregone, in
fact no revenue was foregone under special milk classes.  New Zealand refuted both contentions.
4.226  New Zealand maintained that in arguing for a restrictive meaning of the term "payments",
Canada relied on both a contextual reading of the provision and negotiating history.  In
New Zealand’s view, Canada had misread the context in which the term "payments" appeared and
drawn inadmissible conclusions from the negotiating history.
4.227  New Zealand maintained that Canada sought to draw meaning for the word "payments" from
the broad context of the Agreement on Agriculture, arguing that since in Article 5 of Annex 2 to the
Agreement the terms "revenue foregone" and "payments in kind" were expressly included after theword payments, then the failure to mention either of these in Article 9.1(c) meant that they were
excluded. New Zealand pointed out that Canada conveniently omitted to state that the term in
Article 5 of Annex 2 was "direct payments" which in that context, given its connotation of moneytransfers, would have otherwise excluded "r evenue foregone" or "payments-in-kind".
4.228  Furthermore, New Zealand argued that Canada had opted to explain the term payments by
looking at the broader context of the Agreement on Agriculture, and focusing on domestic support
disciplines, while ignoring the actual context of Article 9 itself. New Zealand emphasized that
Article 9.2 made it clear that export subsidy reduction commitments were to include subsidies in theform of revenue foregone.  It would thus defeat the purpose of Article 9 disciplines to read revenue
foregone and payments-in-kind out of the definitions on which those commitments were based.  The
negotiators of Article 9 could not have intended such a result.
4.229  New Zealand argued that the express reference to revenue foregone and payments-in-kind in
Article 5 of Annex 2, as well as the reference to revenue foregone in Article 9.2 (and other similar
references in Annex 2, Articles 1(a), 2, 3 and 4; and Annex 3, Article 2), confirmed that subsidization
by these particular means was specifically contemplated as being subject to the disciplines of the
Agreement on Agriculture.
4.230  New Zealand noted that Canada further argued that the use of different terms to describe the
export subsidy in question in each of the different sub-paragraphs of Article 9.1 was evidence that
different meanings for each of those terms was intended.  However, the examples used all proved the
opposite of Canada's contention.  Each was an exampl e of a subsidy, and thus it could not seriously be
                                                     
224 Canada, Exhibit 31.
225 Canada, Exhibit 32.WT/DS103/R
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contended that only those sub-paragraphs where the word "subsidies" was used were, in effect, to be
interpreted as referring to a subsidy or, as the Canadians stated, to be interpreted as broadly as express
repetition of the word "subsidy" would require.
4.231  New Zealand noted the inference drawn by Canada from the fact that the word "payments"
had been inserted in Article 9.1(c) of Article 9.1 in place of the word "subsidies" during the drafting
phase - it appeared that Canada was of the view that this was done to limit the scope of the discipline
in Article 9.1(c) so as not to include revenue foregone or payments-in-kind (paragraph 4.223).
However, no negotiating history was cited by Canada to verify this assertion.   In arguing that thechange in wording indicated an intention to narrow the scope of Article 9.1(c), Canada overlooked the
fact that at the same time as the change to the word "subsidies" was made, language was inserted
aimed clearly at broadening the scope of that same sub-paragraph. The text was changed to make
subsidies financed from the proceeds of a producer levy simply an example of the coverage of the
provision rather than its specific referent.
4.232  New Zealand considered Canada’s use of negotiating history in the context of Article 9.1(c)
as problematic.  Article 32 of the Vienna Convention permitted recourse to negotiating history as a
supplementary  means of interpretation to confirm a meaning or to resolve ambiguity or absurdity.
226
Canada claimed that it was using negotiating history simply to confirm a meaning.  However, rather
than showing a pattern of consistency in the use of  the term, Canada was seeking to show that since
the word "payments" differed from the word used in earlier drafts, that this confirmed the meaning
Canada sought to ascribe to it.  This was not using negotiating history to confirm a meaning.  It was
seeking confirmation by the drawing of a negative inference from the negotiating history.  That was
not, in New Zealand's view, what Article 32 contemplated.
4.233  Furthermore, New Zealand argued that given the nature of the negotiations in the Uruguay
Round, the only negotiating history that could be referred to were the successive drafts of provisions.
In the absence of negotiating records reflecting the intentions of the drafters, the meaning of changes
in those successive drafts could be no more than conjecture. In the absence of records of the
negotiators’ discussions, there was no justification for choosing one explanation over another.   New
Zealand argued that in the present case, the use of the word "payments" could well have been
designed to avoid the circularity that the word "subsidies" would have entailed.  Paragraph 9.1(c) was
defining a subsidy; to have called it a subsidy at the outset - especially when no particularcharacterisation, such as "direct" was needed - would have been tautologous.  In short, the Canadian
explanation of the meaning of the term "payments" on the basis of negotiating history proved nothing.
4.234  New Zealand noted that the issue of producer-financed export subsidies was the subject of
considerable discussion in the negotiations on agriculture.  The "conditions governing government
participation in the operation of producer-financed subsidy schemes" was identified in the de ZeeuwText as an issue to be resolved.
227  The negotiating document of 2 August 1991 identified, under the
heading of "General Criteria", differential pricin g arrangements as falling within the concept of an
export subsidy.228  The Illustrative List recognised specifically as an export subsidy, in Paragraph (k):
                                                     
226 New Zealand argued that the WTO Agreements, including the WTO Agreement on Agriculture, were to be interpreted in
accordance with Articles 31 and 32 of the Vienna Convention on the Law of Treaties 1969 (the "Vienna Convention").  New Zealand  noted
that Article 31 of the Vienna Convention required that a treaty be interpreted in accordance with "the ordinary meaning to be g iven to the
terms of a treaty in their context and in the light of its object and purpose".  Article 32 provided that the preparatory work and the
circumstances of the conclusion of a treaty could be referred to as a "supplementary means of interpretation" to confirm a mean ing derived
from the application of Article 31, or where the application of  the approach set out in Article 31 produced a result that was " ambiguous or
obscure," or was "manifestly absurd or unreasonable."
227 MTN.GNG/NG5/W/170, p.6 (para. 22).
228 MTN.GNG/AG/W/1/Add.10,  p.1 (para. 2).WT/DS103/R
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"Subsidies on exports of agricultural products which are financed
from the proceeds of a levy on producers of that product or on
producers of the primary product from which the exported product is
derived, under programmes in whose establishment, operation or
financing governments are directly or indirectly involved."
4.235  New Zealand argued that this provision was clearly the precursor to Article 9.1(c) of the
Agreement on Agriculture.   New Zealand further argued that both the reference in the "General
Criteria" to differential pricing and the terms of Paragraph (k) clearly treated schemes such as that
now found in "special milk classes" as subsidies.  Two changes were, however, made to Paragraph (k)
before it found its way into Paragraph (c) of Article 9.1.  First, the word "payments" was substituted
for the word "subsidies" at the beginning of the sub-paragraph.  Second, the provision was not limited
to subsidies financed by producer levies.  Producer levy-based subsidies became simply an illustrationof producer-financed subsidies.   Both of these changes confirmed the conclusion that Special Classes
5(d) and (e) of the Canadian scheme fell within Article 9.1(c).  The word "payments" carried within it
both the sense of revenue foregone and payment-in-kind.  The change to make clear that producer-
levy-financed subsidies were not the only producer-financed subsidies that were covered by the sub-
paragraph, only reinforced the conclusion that subsidies, such as that provided under "special milkclasses", were to be covered.
4.236  New Zealand noted that following Canada's approach, if the word "subsidies" had been used
in Article 9.1(c), it would have had to have been interpreted in accordance with Article 1 of the SCM
Agreement.  This of itself would have qualified the scope of the subsidy under Article 9.1(c).  Yet, as
Canada had acknowledged (paragraph 4.127) that Article 9.1 provided an "illustrative list" of exportsubsidies and hence broadened the scope of the concept of export subsidies under Article 1 of the
Agreement on Agriculture.  By this analysis, in order to be consistent, Canada should be arguing that
the use of the word "payments" in Article 9.1(c) was designed to expand the scope of the measures
beyond that which would have been covered if the word "subsidies" had been used.
4.237  New Zealand argued that whether it was viewed as revenue foregone by the provincial milk
marketing board or agency, or revenue foregone by the producer – which was, in New Zealand's view,
precisely the type of subsidisation that Article 9.1(c) was designed to capture – or whether it was
viewed as a payment-in-kind, the provision of lower-priced milk to the processors of dairy products
for export, under Special Classes 5(d) and (e), was a "payment on the export of an agricultural
product" within the meaning of Article 9.1(c).
4.238  The United States  claimed that Canada had misrepresented the conclusions of Professor
Tangermann regarding the applicability of the Agreement on Agriculture’s disciplines on export
subsidies to Canada’s Special Milk Classes Scheme (paragraph 4.220). Canada had focussed on a
discussion in the Tangerman article that related to quota systems that involved the export of the actual
product subject to the quota, for example, sugar from the European Communities, a different situation
than was represented by Canada’s Special Milk Classes Scheme, where it was the export processor
who benefitted from the low priced over-quota production.  Canada failed to mention the morepertinent conclusions reached by Professor Tangerman later in his article, which specifically
addressed the Canadian dairy regime:  "Countries should, therefore, not be allowed to escape their
export subsidy commitments by using a price pooling regime.  It should be clear that an effective
constraint on the extent of price pooling is established through the commitments on export
subsidies."(footnotes omitted)  United States, Exhibit 24, at p.33.   In footnote 13 of his paper,Professor Tangerman said:  "This may have serious implications for the new price pooling regime for
milk established in Canada, which substituted for the producer-financed export subsidies used in
Canada prior to the conclusion of the Uruguay Round."WT/DS103/R
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4.239  Canada  noted that New Zealand disputed the precision of "payment" by arguing that the
expression "direct payment" would have been used if that precision had been intended
(paragraph 4.227).  This contradicted New Zealand’ s position on "direct subsidy" – New Zealand had
argued that "… a 'direct' subsidy was one affectin g trade in the product directly rather than one
affecting trade incidentally or indirectly." (paragraph 4.188). In Canada’s view, Article 9.1(c) exportsubsidies were not limited to direct payments (i.e., it did not exclude payments affecting trade
incidentally or indirectly) but they were limited to  "payments" in the ordinary meaning of the word.
Canada argued that the negotiators had felt the need to clarify references to direct payment in Annex 2
by explicitly including the concept of "payment-in-kind."  Had the negotiators intended to include that
concept in Article 9.1(c) they would have explicitly included it in this provision as well.  The fact that
they did not was significant in interpreting the Agreement.
4.240  Canada further noted that the Complainants  had suggested that the term "payment" in
Article 9.1(c) included "revenue foregone".  While "revenue foregone" was part of the definition of
subsidy, it was not part of the ordinary meaning of "payment".  For example, it was common for retail
establishments in Canada to offer price discounts to persons over 60 or 65 years of age.  It was not at
all common for these discounts to be considered "payments" received by these shoppers.  Canada
further noted that the United States had acknowledged that the concept of revenue foregone wasgenerally associated only with circumstances involving a governmental treasury and public funds,
such as where taxes were forgone.
229  Canada reiterated that even if "payment" were to include
revenue foregone, there was no revenue foregone as producers received the best price available in
either the domestic market or the export market (paragraph 4.181 and following).  Moreover, the only
payment was the commercial payment made by the processor to obtain the product.  In addition, therewas no evidence of these payments being financed by virtue of government action.
(ii) Financed by virtue of governmental action
4.241  New Zealand  argued that the requirement of gove rnmental involvement in subsidization
under Article 9.1(c) was clearly met in the present case (see arguments set out in paragraph 4.41 and
following).  The government action concerned did not have to involve the government itself payingmoney or foregoing revenue because immediately after the phrase "financed by virtue of government
action" were the words "whether or not a charge on the public account is involved."  Moreover, the
words "by virtue of" indicated that while the involvement of government had to be present,
government action need not be the sole or exclusive agent in the financing of the subsidy.
4.242  In the specific context of export subsidies under the Agreement on Agriculture, the phrase
"financed by virtue of governmental action" in Article 9.1(c) suggested that the intention of the
drafters of the Agreement on Agriculture was not that there be a high threshold for government
involvement in order to constitute subsidisation.  Canada’s actions in respect of the Special Milk
Classes Scheme met the appropriate threshold.
4.243  New Zealand noted that Canada had admitted that the government involvement in its dairy
supply management system was sufficient to meet  the requirement that any "payments" had been
"financed by virtue of governmental action."  In Annex B to its Second Written Submission, Canadastated:
"Canada does not deny that the previous producer-funded levy/rebate
scheme fell within the deeming provision in Article 9.1(c) of the
Agreement on Agriculture.  That scheme has been replaced."
230
                                                     
229 Canada referred to the US response to the Panel's Question 4 (p.5) to New Zealand and the United States.
230 Annex B of Canada's Second Written Submission, p.7.WT/DS103/R
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4.244  New Zealand maintained that what had been replaced was the way in which exporters were
relieved from the high domestic price of milk; what was not replaced was the nature or level of
government involvement in the system.   According to  the description that Canada had provided of its
system, decisions were made by producers operating through dairy marketing boards and the
CMSMC.  The role of the CDC was simply to implement these producer-made decisions.  That,presumably, was what the CDC was doing when the producer levy/rebate system was in operation,
and that was what the CDC was, according to Canada, doing today.  Hence, even accepting, for
purposes of argument, the Canadian depiction of the role of government in the operation of the
system, then an admission that the producer-levy scheme fell within Article 9.1(c) was an admission
that the existing Special Milk Classes Scheme had to be "financed by virtue of governmental action".
4.245  In view of this admission by Canada, the only issue under Article 9.1(c) was whether the
action of providing lower-priced milk to exporters constituted a "payment" within the meaning of that
provision.   New Zealand argued, in light of the discussion under Section (i) above, that since the term
"payments" in Article 9.1(c) of the Agreement on Agriculture included the foregoing of revenue or
payments-in-kind, the Special Milk Classes Scheme constituted a payment on the export of an
agricultural product financed by virtue of governmental action  within the meaning of Article 9.1(c)
and hence constituted an export subsidy.
4.246  The United States  noted, in respect of the second condition to the applicability of
Article 9.1(c), i.e, that the export payment be "finance d by virtue of governmental action", that as the
term "governmental action" was not defined in the Agreement on Agriculture, resort to the Vienna
Convention for assistance in interpreting that term was appropriate.
4.247  The United States maintained that the ordinary meaning of the phrase "financed by virtue of
governmental action" reasonably included circumstances in which the financial underpinning of an
export payment was fixed by the undertakings of a government entity.  In this context, government
action could include activity either at the federal level or provincial level, or by both, in a federal
system.  By the very terms of Article 9.1(c), its scope was not limited to export subsidies funded by
charges on the public account.  To the contrary, the section explicitly stated that a charge on thepublic account was not a prerequisite to its coverage.  By inference, there had to be financing based
on some form of contribution from private entities that was mandated by a government, whether
national or local in jurisdiction.   Article 9.1(c)’s specific inclusion of  "payments that are financed
from the proceeds of a levy," in this context, made clear that a levy imposed on an agricultural
product to support either its export, or that of a product derived from it, and which was administeredby a government, meant that government action to administer and enforce such producer levies
satisfied the requirement that a payment be "financed by virtue governmental action".  By logical
extension, similar administrative and enforcement actions by a Member government of other forms of
subsidies financed through joint, but not voluntary
231, producer actions had to be included within the
scope of Article 9.1(c) as well.   This construction of the phrase "financed by virtue of governmental
action" was consistent with both the purpose and objective of the reduction commitment provisions of
the Agreement, as well as the historical background against which the treaty was negotiated.   As hadbeen noted earlier, the inclusion of producer-finan ced subsidies within the listing of export subsidies
subject to reduction commitments was the result of the view that such subsidies were no different
from subsidies funded by a government’s treasury in terms of the deleterious effect which they had on
trade (paragraph 4.146).
4.248  The United States maintained that the concerted action of Canada’s federal and provincial
governments in establishing and enforcing the levy system and then introducing and administering the
special milk class price system satisfied the Article 9.1(c) requirement that the export payments be
                                                     
231 The United States noted that, as had been indicated, the participation of dairy farmers in the special milk class price system
was not voluntary, nor was their participation in the predecessor producer levy/rebate programme.WT/DS103/R
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financed by virtue of governmental action. Thus, the actions of the Canadian government pervaded
virtually every aspect of the producer-financed export subsidies, which were now entirely dependent
on the Special Milk Classes Scheme (see the United States' argument under paragraph 4.54 and
following).
4.249  The United States contended that the Canadian government’s involvement in every aspect of
supply management, including the Special Milk Classes, and the pooling arrangements through which
the Special Milk Class prices were made possible, demonstrated that the financing of the milk
discounts, which constitute "payments on the export" of dairy products, was accomplished by virtue
of action by the Government of Canada.  Accordingly, all prerequisites for the applicability of
Article 9.1(c) to the Canadian Special Milk Class system were satisfied, and this producer-financed
export subsidy was, therefore, subject to the export subsidy reduction commitments set forth in Part V
of the Agreement on Agriculture.
4.250  Canada  maintained that the sales of milk under Special Classes 5(d) and (e) did not constitute
an export subsidy within the meaning of Article 9.1(c ).   In order to show that Special Classes 5(d)
and (e) were export subsidy practices within the meaning of Article 9.1(c), the Complainants had to
show that (i) "payments" were made on the export of products from Canada; and (ii) that such
"payments" were "financed by virtue of governmental action".   Canada claimed that this test had not
been met.
4.251  Canada contended, in respect of the differences in the nature of government involvement
between the new Special Milk Classes Scheme and the old levy-based system (paragraph 4.242), that
under the old system, the CDC had made payments directly to processors to rebate the price of milk
already paid by the processors exporting dairy pr oducts.  Such payments would only take place if
exports were taking place.  These payments were financed by levies imposed on all producers for
every hectolitre of milk produced.  The funds were held in an account by the CDC and could be used
by it, at its own discretion, in any amount necessary to make any sale it felt to be appropriate.
Producer boards were aware of CDC actions only as they were reported in accounting to the CMSMC
for the overall cost of the surplus disposal programme.  The boards exercised control by approving alevy rate, after which the operation of the programme passed to CDC.  Individual producers were
aware only of the levy rate on their production, and of the year-end adjustments that sometimes
resulted if not all the levy funds were spent over the course of a dairy year.  Levies were mandatory
payments not unlike taxes.  The payments were issued by the CDC under general direction of the
CMSMC, not unlike government subsidies (although there was no government money involved).  Inaddition, under the old system, over-quota pro duction was discouraged and penalised.  The
discouragement of over-quota production was not merely a policy decision, but was a result of
Canada’s obligation under GATT Article XI:2(c)(i) to limit production and marketing as a condition
of maintaining quantitative import restrictions.
4.252  Canada argued that the current Canadian dairy export arrangements were entirely different.
No levies were imposed on producers any longer.  The CDC did not have any pot of money with
which to make payments to exporters, and in fact, no payments were made to processors.  For eachtransaction under Classes 5(d) and (e), processors and the CDC as the agent of producers
commercially negotiated the price of milk.  The producer boards reviewed each transaction and had
the ultimate authority to reject or accept the CDC recommendation with respect to any particular
Class 5(d) or (e) permit.  The producer boards acted in this system as true commercial representatives
of the producers, seeking to ensure that the terms of each sale were to their benefit. Producers weremade aware on each milk cheque of the returns achieved for Class 5(e) transactions.  They had the
necessary information to make a decision whether to seek, through their producer boards, any
adjustments to quota levels needed to minimise in-quota sales under Class 5(e).  They were also in a
position to assess clearly, on an individual basis, the attractiveness of over-quota production, whichWT/DS103/R
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was no longer penalised.  As Canada had demonstrat ed, significant numbers of them had decided that
such production was worthwhile, and they had pursued it.
4.253  Accordingly, Canada contended that the practices in dispute did not constitute payments that
were "financed by virtue of government action."  The basis for the sale of milk for export purposes
was through arm’s length negotiations involving processors and agents acting for producers. Thisresulted in sales based on world market prices.  Such conditions could not fall within the concept of
"financed by virtue of government action".
(d) Article 10
(i) Outline
4.254  New Zealand  argued that, in the alternative, the Special Milk Classes Scheme constituted an
export subsidy within the meaning of Article 1 of the Agreement on Agriculture that operated to
circumvent Canada’s export subsidy commitments unde r Article 9 of that Agreement.  Hence, Canada
was in breach of its obligations under Article 10 of the Agreement on Agriculture.
4.255  The United States  claimed that even if the Panel determined that neither Article 9.1(a) nor
9.1(c) encompassed the Special Milk Classes Scheme, it was nonetheless an export subsidy within the
meaning of Article 10 of the Agreement on Agriculture. This conclusion followed from the treatment
of producer-financed subsidies as export subsidies in the 1960 Working Party Report relating to thenotification of export subsidies under Article XVI of the GATT 1947.  This conclusion was also
compelled by an analysis of the Special Milk Classes Scheme under the SCM Agreement
(paragraph 4.301 and following).
4.256  The United States further claimed that the object and purpose of Article 10.1 of the
Agreement on Agriculture was to prevent the circumvention of export subsidy commitments.  Thiswas reinforced by Article 10.3 which placed the onus on an exporting Member to demonstrate that
any exports in excess of its scheduled commitments were not subject to export subsidies.  Canada
concurred in this construction of the Article 10.3 obligation.   Hence, the United States claimed that
that Special Milk Classes Scheme resulted in, and threatened to lead to, circumvention of Canada's
WTO subsidy reduction commitments.
4.257  Canada  submitted that Article 10 did not apply in the present case as it could not be
established that there existed export subsidies other than the export subsidies listed in Article 9.1, nor
could it be established that there was actual or threatened circumvention of the export subsidy
commitments.   Canada noted that Article 10.1 consisted of three components.  There had to be either:
(a) an export subsidy other than an export subsidy listed in Paragraph 1 of Article 9  (i.e.,
a subsidy contingent on export performance);
or
(b) a non-commercial transaction;
and
(c) components (a) or (b) or both had to be applied in a manner which resulted in, or
threatened to lead to circumvention of the subsidy reduction commitments found in
Article 9 as elaborated in each Members schedule.WT/DS103/R
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4.258  Canada's position was that neither component (a) or (b) existed in the current case and thus it
was not necessary to consider the application of component (c) in order to resolve the dispute.
Canada claimed that neither the United States nor New Zealand relied upon component (b) in
furtherance of their claims.232  The only remaining possibility for the application of Article 10.1 was if
the practices constituted export subsidies other than an export subsidies listed in Article 9.1.  Canadasubmitted that the analysis applied by Canada demonstrated that no such export subsidy existed.
(ii) "Export subsidy" within the meaning of Article 10
4.259  New Zealand  argued that even if the export subsidy provided under the Special Milk Classes
Scheme was not encompassed by the list of subsidies in Article 9.1, it would still constitute an export
subsidy within the meaning of Article 10.   The basic definition of an export subsidy for the purposes
of the Agreement on Agriculture was found in Article 1(e).  That provision defined "export subsidies"
as "subsidies contingent upon export performance."  There was no doubt that access to lower-pricedmilk under Special Classes 5(d) and (e) was contingent on the milk being used in the production of
products for export and hence was "contingent upon export performance".   Any measure not listed in
Article 9 that came within this definition would thus meet the requirements of Article 10.1.  This
would include, for example, any measures that met the definition of subsidy under Paragraph (d) of
the Illustrative List of Export Subsidies in Annex I to the SCM Agreement.  The question waswhether providing this lower-priced milk was a subsidy.
4.260  New Zealand noted that the Agreement on Agriculture did not define the concept of a
subsidy;  accordingly recourse had to be had to the broader context of the WTO Multilateral Trade
Agreements in Annex IA to the WTO Agreement in or der to determine what fell within the scope of a
"subsidy".  In this regard, guidance could be obtained from the SCM Agreement which provided botha definition of what constituted a "subsidy" for the purposes of that Agreement and an Illustrative List
of Export Subsidies.   New Zealand noted that Canada’s arguments against the application of
Article 10 of the Agreement on Agriculture were simply  an extension of its argument that Article 1 of
the SCM Agreement provided the definition of subsidy for the Agreement on Agriculture.  Since,
Canada argued, the Special Milk Classes Scheme did not provide a subsidy within the meaning ofArticle 1 of the SCM Agreement or of the Illustrative List of Export Subsidies in Annex I of that
Agreement, then there was no export subs idy within the meaning of Article 10.
4.261  New Zealand claimed that the Special Milk Classes Scheme did come within the definition of
Article 1 of the SCM Agreement, and also constituted a subsidy under Paragraph (d) of the Illustrative
List  (Section 4).  Thus, even if the Panel were to conclude that the specific provisions ofArticle 9.1(a) or 9.1(c) had not been met, there woul d still be an export subsidy within the meaning of
Article 10 that circumvented or threatened to lead to circumvention of Canada’s export subsidy
commitments.  New Zealand argued that the scope of the concept of export subsidy under the
Agreement on Agriculture was broader than the definition of subsidy under Article 1 of the SCM
Agreement.  Export subsidies under the Agreement on Agriculture included those subsidies listed in
Article 9.1 of that Agreement.  As Canada had acknowledged (paragraph 4.127) in addition to being
an exhaustive list for the purposes of Article 9.1, the Article 9.1 list was an illustrative list of export
subsidies for the purposes of Article 1 of the Agreement on Agriculture.  Thus, in determining what
constituted an "export subsidy" for the purposes of Article 10 of the Agreement on Agriculture,
guidance could be sought from the types of measures included in Article 9.1.
                                                     
232 In response to a Panel question, the United States noted that it had not relied in its claims on the second part of Article 10 .1,
which directed that non-commercial transactions shall not be used to circumvent export subsidy reduction commitments.  The Unit ed States
argued that to the extent that transactions involving non-commercial dairy products had occurred, those transactions appeared t o be included
within the scope of the subsidies specifically enumerated in Article 9.1 of the Agreement and, therefore, reliance on the secon d part of
Article 10.1, even if applicable, appeared to be unnecessary.  New Zealand stated that it was not making a case in the context of non-
commercial transactions in the context of Article 10.1 of the Agreement on Agriculture.WT/DS103/R
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4.262  New Zealand noted that in the present case, the Canadian scheme differed only from the
previous levy-based system by virtue of a "book-keeping entry" (that is, milk was now being provided
at a reduced price "contingent upon export", instead of being provided previously at full  price with a
rebate being subsequently paid).  New Zealand had argued that such a change in book-keeping did not
remove the scheme from the reach of Article 9.1.  However, in the event that the Panel did not acceptthis, New Zealand believed that the "special milk class" scheme was, nonetheless, precisely the kind
of circumventory measure that the negotiators of Article 10 would have intended to catch.  It was a
measure analogous to an Article 9.1 measure and thus one that fell within the scope of an "export
subsidy" within the meaning of Article 1 of the Agreement on Agriculture and hence was an export
subsidy under Article 10.
4.263  The United States  noted that the Agreement on Agriculture defined export subsidies as
"subsidies contingent on export performance, including subsidies listed in Article 9 of thisAgreement." (Article 1(e))  The reference in Articl e 10.1 to "export subsidies" not listed in Article 9,
was thus intended to capture all export subsidies wi thin the meaning of Article 1(e) of the Agreement
other than those specifically described in Article 9.1 of the Agreement on Agriculture.  Because
neither Article 10, nor any other provision of the Agreement on Agriculture, expressly defined the
term "subsidy", it was necessary, consistent with "customary rules of interpretation of publicinternational law", to consider the context, object and purpose of this particular treaty provision to
give meaning to that term.  The context of Artic le 10 included the remaining provisions of the
Agreement on Agriculture, as well as the provisions of other relevant WTO Agreements, including
the Agreement on Subsidies and Countervailing Measures.  Both the Illustrative List of Export
Subsidies contained in Annex I of the SCM Agreemen t and Article 1 of that Agreement informed the
meaning of  "subsidies" for purposes of the Agreement on Agriculture (Section 4).  Therefore,
measures that satisfied the requirements of either the Illustrative List or Article 1 of the SCM
Agreement also would be subsidies for purposes of Article 10 of the Agreement on Agriculture.
4.264  Canada  argued that it had shown that the sales of milk in question did not constitute an
"export subsidy" under Article 1 of the Agreement on Agriculture .  More specifically, Canada had
shown that there was no "subsidy" as that term was defined in the SCM Agreement and that there was
no practice that fell within the list of "export subsidies" in the Illustrative List attached to that
agreement.  As a result, there was no "export subsidy not listed in Paragraph 1 of Article 9".
Therefore, Article 10.1 could not apply.
(iii) "Circumvention"
4.265  New Zealand  noted that prior to the conclusion of the Uruguay Round, Canada disposed of
its surplus milk through subsidised exports financed by producer levies. New Zealand argued that the
essence of the producer levy-based subsidy scheme had been that exporters of dairy products would
be compensated for the high domestic price of milk.  Producers would pay the cost of this subsidy.
Canada’s new scheme achieved precisely the same result.  In substance, nothing had changed under
the Canadian system.  The financial effects for the producer and the exporter were essentially the
same.  Under the old scheme the exporter of dairy products benefited from a subsidy that providedprotection from the high domestic cost of inputs in the production of those products, and the producer
paid the cost of this subsidy.  Exactly the same situation existed today.
4.266  New Zealand argued that the export competition rules in the Agreement on Agriculture
sought to discipline action by governments that shielded the exporters of dairy products from actual
costs in the production of those products.  Producer  levy-based subsidies were expressly included in
Article 9 for that reason.  A scheme that in substance and effect achieved precisely the same result as
the producer levy-based subsidy was circumvention.   That this was the case was evident from the
introduction of the Special Milk Classes Scheme.  It came into effect on 1 August 1995, the day on
which the export subsidy reduction commitments in Canada’s WTO Schedule became effective.  NewWT/DS103/R
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Zealand noted that the objective of Canada’s Special Milk Classes Scheme of avoiding the
consequences of abolishing the producer levy-based subsidies and replacing them with a system that
would have precisely the same economic effect, had been acknowledged openly by Canadian
government and Canadian dairy industry officials.  Lyle Vanclief, then Parliamentary Secretary to the
Minister of Agriculture and Agri-Food, told the Canadian House of Commons Committee on
Agriculture:
"We’re not changing; we’re not changing anything in the price of the
milk, just the way in which it’s done…  Rather than the levies being
collected, being paid x number of dollars and then having a levy
taken off that for that portion of the milk to meet these demands, the
price is being pooled and the bottom line, the net, is being paid to the
producer in the first place."233
4.267  New Zealand contended that the effect of the Special Milk Classes Scheme was to circumvent
Canada’s export subsidy commitments under the Agreement on Agriculture.  Canada’s export subsidy
commitment for butter by volume for 1995/1996 was 9,464 tonnes.  Its actual exports for that year
were 14,574 tonnes.  For 1996/1997, its commitment in respect of butter was 8,271 tonnes.  Its actual
exports were 15,567 tonnes.  Canada’s export subsidy commitment in respect of cheese by volume for1996/1997 was 11,773 tonnes.  Its actual exports were 20,086 tonnes.  Canada’s export subsidy
commitment for "Other Milk Products" by volume for 1996/1997 was 35,649 tonnes.  Its exports of
whole milk powder alone in 1996/1997 were 36,632 tonn es.  New Zealand concluded that there was a
pattern that showed that Canada’s exports of major dairy products, with the exception of skim milk
powder, had increased dramatically since the introduction of the Special Milk Classes Scheme.  Theseexports of subsidised products completely undermined the export subsidy commitments made by
Canada on becoming a Member of the WTO.  The Special Milk Classes Scheme clearly constituted
circumvention of Canada’s export subsidy co mmitments and given Canada’s rapidly expanding
exports of dairy products on the basis of the incentives provided by "special milk classes", there was a
threat of further circumvention of Canada’s export subsidy commitments.
4.268  The United States  noted that to determine the meanin g of the term "circumvent", it was
necessary to consider the ordinary meaning of the term.
234  The ordinary definition of the verb to
circumvent (from which the noun "circumvention" was derived) was to overreach, outwit, avoid or
evade.235  Thus, Article 10.1's mandate that export subsidies, other than those listed in Article 9.1,
were not to be used in a manner that resulted in, or threatened to lead to, circumvention of the exportsubsidy commitments had be construed to mean that such other export subsidies were not be used to
evade or avoid the export subsidy disciplines contained in Article 9.1.
4.269  The United States argued that a broad construction of the term "export subsidy" was justified
by the object and purpose of Article 10.1.  Article 10.1 of the Agreement on Agriculture was an anti-
circumvention provision.  Its purpose was to en sure that reduction commitments on the export
subsidies listed in Article 9.1 were not undermined.  It recognized that Members might introduce
export subsidies of a kind not listed in Article 9.1, but which would nevertheless achieve the same orsimilar results in practice.  Pursuant to Article 10.1, those "other export subsidies" were subject to the
same export reduction commitments.
                                                     
233 House of Commons Committee on Agriculture Hearing  (30 May 1995) at p.9 of the material downloaded from
www.parl.gc.ca on 27 March 1997.  (New Zealand, Annex 2)
234 Appellate Body Report on Brazil - Desiccated Coconut, op. cit. , p.15.
235 The Oxford English Dictionary , 2nd Edition, Clarendon Press, 1989.WT/DS103/R
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4.270  The United States recalled that the reduction commitments entailed both a reduction in the
amount of the outlays, and also a reduction in the quantity of exports subsidized.236  The commitments
specific to each Member were set forth in Section IV, Part II, of each Member’s schedule.  Thus, an
export subsidy bestowed by a Member which subsidized exports of a specific product in excess of the
quantity set forth in its Schedule for a specific year would constitute a circumvention within the plainmeaning of Article 10.1, of that country’s reduction commitments for that product.
4.271  The United States noted that this construction of the circumvention language in Article 10.1
was consistent with both the object and purpose of the export subsidy disciplines contained in Part V
of the Agreement and the Agreement as a whole.  As stated in the preamble to the Agreement,
237 the
Members’ objective in concluding the Agreement included the goal of establishing a fair and market-
oriented agricultural trading system and specific binding commitments respecting export competition.
Thus, the object and purpose of Article 10.1 required that a Member  not use any export subsidies inconnection with export quantities exceeding the levels to which commitments had been made in the
Member’s respective schedules.
238  To allow otherwise would significantly undermine those subsidy
disciplines, and thereby permit evasion of the reduction commitments which represented a
fundamental aspect of the reform in agricultural trade.   In this connection, the language of
Article 10.3 discussed was highly pertinent (paragraph 4.295 and following).  This provision directedthat if a Member exceeded its reduction commitment relating to the quantity of subsidized exports of
a specific product, it had to demonstrate that no export subsidy had been granted with regard to those
exports that exceed the volume commitment.  The key operative language in this provision was that
no export subsidy, whether or not listed in Article 9 , was permitted with regard to that quantity of
exports that exceeds the reduction commitments.  Any subsidy of a quantity of exports that wasgreater than the reduction levels adopted in the pertinent Member’s schedule was inconsistent with
that Member’s obligations under the Agreement in Agriculture.
4.272  Hence the United States argued that to the extent that a country provided an export subsidy
that fell outside the export subsidy categories set forth in Article 9.1, that export subsidy could not be
used to circumvent the subsidy reduction commitments.  Consequently, an application of an exportsubsidy to a quantity of exports that was greater than that set forth in a Member’s schedule would by
definition constitute a circumvention of its obligations under Articles 3, 8 and 9 of the Agreement.
4.273  The United States maintained that Canada had transformed its producer-financed export
levies by adopting a new subsidy regime in an apparent effort to evade any reduction commitment.
This was precisely the action that Paragraphs 1 and 3 of Article 10 were designed to address.  Thedrafters of Article 9.1 knew that the export subsidy disciplines would be undermined if Members were
free to substitute different export subsidies from those listed in Article 9.  Article 10.1 was simply
intended to preclude such substitution if the export subsidies either resulted in, or threatened,
circumvention of the reduction commitments contained in a Member’s schedule.
4.274  The United States recalled that the officials of the Government of Canada and the Canadian
dairy industry had stated that the special milk class price system was designed to support exports in
the same manner that the pre-WTO levy/export rebate system had subsidized exports.  Moreover, itwas estimated by Canadian officials that the conversion to the special milk class price system would
not alter the economic equation, in terms of revenue received and costs incurred, for either the dairy
farmers or the dairy product producers.
                                                     
236 Article 3.3, 8, Agreement on Agriculture.
237 The United States noted that the panel in United States – Import Prohibition of Certain Shrimp and Shrimp Products
(hereafter " US – Shrimp-Turtle" ), WT/DS58/R, adopted 6 November 1998, para. 7.42, ha d observed that the preamble of an agreement may
assist in determining its object and purpose.
238 The United States noted that Article 3.3 limited the use of export subsidies listed in Article 9.1 to the specific subsidy out lays
and export quantities specified in each Member’s schedule.WT/DS103/R
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4.275  In conclusion, the United States argued that Canada’s special milk class price system was an
export subsidy of dairy products in excess of the limits for Canada under the Agreement on
Agriculture , whether they fall under Article 9 or Article 10 of that Agreement.   As a result, those
subsidies did not benefit from the exemption in Article 13(c)(ii) of that Agreement on Agriculture.
Consequently, these export subsidies were also inconsistent with Canada’s obligations under Article 3of the SCM Agreement.
4.276  Canada argued that the Complainants were basing themselves more on rhetoric than on law,
in arguing that Canada was circumventing the oblig ations of the Agreement on Agriculture because it
was pursuing the same objectives  (preserving the integrity of the Canadian milk supply management
system) as it pursued prior to the entry into force of the WTO Agreement.  The Complainants’
arguments relied on statements made by Canadian officials to the effect that, in bringing Canada's
measures into conformity with the WTO Agreement, Canada would continue to seek the sameobjectives as before.   Yet, Canada argued that Article 10.1 manifestly did not regulate  objectives .  It
simply stated that " export subsidies  not listed in Paragraph 1 of Article 1" were not to be used in a
way that would circumvent the commitments.
4.277  Canada argued that the statement made by the United States was unnecessarily broad in
saying that an export subsidy, irrespective of whether it is covered by Article 9.1, in excess of thequantity set out in its Schedule "would constitute a circumvention within the plain meaning of
Article 10.1" (paragraph 4.270).  It was only "export subsidies" other than those covered by
Article 9.1 that could possibly be subject to Article 10.  An export subsidy covered by Article 9.1 that
exceeded the quantity commitments was not a circumvention of Article 9 but rather a violation of
Article 8.  The United States was mistaken to the extent that they appeared to suggest that the use ofexport subsidies listed in Article 9 in excess of a Member’s subsidy reduction commitments under that
Article gave rise to a separate claim of circumvention under Article 10.  Canada concurred that where
export subsidies, other than those listed in Article 9.1, had been applied to a commodity subject to
subsidy reduction commitments in excess of the reduction commitment level specified in a Member’s
schedule for that commodity, a presumption of circumvention pursuant to Article 10 would arise.  Thecritical issue was whether any such "export subsidies" had been granted.
4.278  Canada stressed the importance of the exact nature of Article 10.1.  It  did not  say that parties
could not use mechanisms other than "export subsidies" in order to attain the general or political
objectives for which "export subsidies" were previously used. To the contrary, it was drafted to have a
very targeted and limited meaning: to limit the use of "export subsidies" defined in Article 1 of theAgreement on Agriculture,  not listed in Article 9.1, to circumvent export subsidy reduction
commitments.   The drafters did not intend it to be used to limit the rights of Members to use
measures that the negotiators of the Agreement on Agriculture did not agree should be restricted.
4.279  Canada argued that bringing measures into conformity with the WTO Agreements while
trying to achieve the same policy objectives did not, in itself, constitute "circumvention" or an
"evasion" of the reduction commitments.  The Canadian statements quoted in the Complainants'
submissions had to be viewed in that light.   Canada did not dispute that following the entry into forceof the WTO Agreement, it intended to preserve the integrity of the Canadian milk supply management
system.  Indeed, the continued preservation of certain domestic agricultural programmes within the
legal framework established by the Agreement on Agriculture was the intention of almost every WTO
Member. The special regime provided for in the Agreement on Agriculture made no sense seen in any
other light.
4.280  Canada argued that the change from a levy system to the present system of individual and
collective producer decisions based on market-based prices for exports was one of the many steps
taken to bring Canadian measures into conform ity with WTO commitments in the implementation
process;    the character and effect of the new system compared to the pre-Uruguay Round levyWT/DS103/R
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system was profoundly different.  With the introdu ction of the Special Milk Classes Scheme, Canada
moved from a  penalty-based system designed to limit production closely to domestic requirements
for GATT 1947 Article XI purposes, to a new ma rket-driven opportunity system that offered
producers the chance to take commercial risks and enter the export market.  Presented with
opportunity, rather than penalties, those producers who wished to enter the new environment could doso with a completely different attitude.  However, since no one was forced to do so, producers also
had the option to rely only on the domestic market.  Hence, it was quite accurate to indicate to
producers that, if they so chose, they could decide not to export and there would be no great impact on
their positions.
4.281  Canada argued that it was inaccurate to suggest that there was circumvention because the
Special Milk Classes Scheme were essentially the same and that in substance, nothing had changed.
Canada noted that there had indeed been a significant increase in exports from Canada under the newSpecial Milk Classes Scheme, reflecting the fact that it was a different system.  Hence, if the old and
new systems were the same, as argued by the Complainants, then they had to explain why the current
system was producing such different results.   Those producers that did not wish to participate in
export markets (beyond the limited amount included in-quota) could remain largely unaffected by the
export market.  Those who wished to do so could have an unlimited commercial opportunity toparticipate in export markets on the basis of actual world price signals.  In practice, therefore,
Canada's new export policies for dairy exports reflected the assurances of continuity provided to
producers by Ministers in 1995, while at the same time opening up new opportunities, consistent with
the new rules negotiated under the WTO.  In summary, Canada submitted that the introduction of the
new Special Milk Classes Scheme demonstrated Canada’s intention  to be consistent with its WTO
obligations and not to circumvent them.
4.282  New Zealand  stressed that the objective of Article 10 was to discipline circumvention.  It was
designed to capture measures which did not meet the particular definitions in Article 9.1, but which
nevertheless had the same economic effect as a subsidy subject to Article 9 reduction commitments.
Measures analogous to those listed in Article 9.1, although not technically meeting the strict letter ofArticle 9, clearly were in the minds of drafters seeking to avoid circumvention of Article 9
commitments.  Hence, the illustrative role of Arti cle 9.1 export subsidies in the definition of export
subsidies under Article 1 of the Agreement on Agriculture.
4.283  New Zealand noted that Canada had also argued th at even if there was an export subsidy there
was still no "circumvention".  The essence of the Canadian position was that there was no prohibitionunder the WTO against adopting measures that achieved the same objectives as were achieved by
previously used export subsidies.  However, New Zealand contended, that was not the issue.  What
was at issue in this case was whether it was permissible under the Agreement on Agriculture to
introduce an export subsidy that had the same effect as an export subsidy for which reduction
commitments have been made.  Article 10 clearly proscribed such subsidies because they
circumvented export subsidy reduction commitments.   New Zealand believed that this was what had
occurred in this case.  Canada had introduced a measure that constituted an export subsidy.  Thatsubsidy achieved precisely the same effect as the export subsidy based on producer levies which
Canada abandoned because it fell within Article 9.1 of the Agreement on Agriculture.  Whether
Canada intended or did not intend that the new measure comply with its WTO obligations was
irrelevant.   Article 10 did not require that there be any proof of intent to circumvent, it only required
that there be actual or threatened circumvention of commitments.
4.284  New Zealand noted that Canada rested its response to the argument that the Special Milk
Classes Scheme contravened Article 10 of the Agreement on Agriculture simply on the basis that the
measure was not a subsidy within the meaning of the SCM Agreement, and hence did not fall within
Article 10 of the Agreement on Agriculture.   This approach to the interpretation of the Agreement on
Agriculture was flawed.  More specifically, in the context of Article 10, it constituted a denial of theWT/DS103/R
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object and purpose of that provision which was to prevent circumvention of export subsidy
commitments.  Interpreting the meaning of "export subsidy" under Article 10 had to involve looking
at the term in its particular context and in the broader context of the Agreement on Agriculture as a
whole.  Thus, the broad scope of the concept of export subsidy under Article 1 of the Agreement on
Agriculture, for which Article 9.1 provided an "illustrative list", and the object of preventingcircumvention which lay at the heart of Article 10, provided an important part of the context for the
interpretation of the meaning of "export subsidy" under Article 10.
4.285  New Zealand argued that the ambit of "circumv enting" or simply of "threatening to lead to
circumvention" was very broad and this gave some insight into the objective of Article 10.  Article 10
was included in the Agreement on Agriculture because Members were concerned that the export
subsidy commitments undertaken under Article 9 could be nullified by subsidies that did not fit the
precise definition of Article 9 but equally had the effect of shielding exporters from the actual cost ofproduction of goods destined for export.  That object and purpose also had to be taken into account in
determining what constituted an export subsidy for the purposes of Article 10.
4.286  New Zealand submitted that the broad scope of the definition of export subsidy in Article 1(e)
of the Agreement on Agriculture, together with the circumvention objective of Article 10, lead to the
conclusion that the Special Milk Classes Scheme was an export subsidy that was being applied in amanner that circumvented, or threatened to lead to circumvention, of Canada’s export subsidy
commitments under Article 10 of the Agreement on Agriculture.
4.287  Moreover, New Zealand argued that in Article 10 the term "export subsidies" was found in a
context that was concerned with the prevention of actual or threatened circumvention of export
subsidy commitments .  The context, and object and purpose, of Article 10 argued for a flexibleconstruction of the term "export subsidy" in order that Article 10 could live up to the intentions of its
drafters.  What would undermine, or threaten to undermine, a Member’s reduction commitments
would naturally vary according to the particular circumstances of each case.  This meant therefore,
that the determination of whether a measure constituted an export subsidy for the purposes of
Article 10, had to be made on a case-by-case basis.
4.288  New Zealand argued that in this regard, an analogy could be drawn between the non-
circumvention objective of Article 10 and the non-circumvention objectives of GATT
Article XXIII:1(b) which was concerned with redressing actions that nullified  or impaired a
Member’s legitimate expectations of benefits from tariff negotiations.  In  Japan - Measures Affecting
Consumer Photographic Film and Paper the Panel took the view that in order to achieve this purpose,
"it is important that the kinds of government actions considered to be measures covered by
Article XXIII:1(b) should not be defined in an unduly restrictive manner."
239   Under the Agreement
on Agriculture, the type of measure to which Article 10 applied had already been prescribed.  It was
an "export subsidy".  Nevertheless, the importance of achieving the purpose of non-circumvention
under Article 10 meant that the term export subsidy should not be interpreted in an "unduly restrictive
manner".  Indeed, seeking to draw a sharp line around the definition of "export subsidy" by means of
an exhaustive and prescriptive definition could well encourage the adoption of measures thatexhibited the same subsidisation effects as Article 9.1 subsidies but which did not fall strictly within
its terms.  This could lead to evasion of the Agreement’s export subsidy disciplines, and thereby
fundamentally undermine Article 10's anti-circumve ntion purpose.  The anti-circumvention provision
itself would be circumvented.
4.289  New Zealand argued that in the present case, if the "special milk class" scheme was found not
to constitute an export subsidy under Article 9.1(c) because the provision of lower-priced milk to
exporters was, for instance, not regarded as a "payment", then the fact that the measure was not
                                                     
239 Panel Report on Japan - Photographic Film , op. cit., para.10.50.WT/DS103/R
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materially different in terms of its subsidization effect from an export subsidy listed in Article 9.1, and
the actual or threatened circumventory nature of the measure, had to be relevant considerations in
determining whether it constituted an export subsid y within the meaning of Article 10.  Similarly, if
the Special Milk Classes Scheme was not found to be an export subsidy under Article 9.1(a), the
scheme could still nonetheless meet the definition of export subsidy in the context of Article 10.  Thecircumventory nature of the scheme would again be a relevant factor to be taken into account.
Taking account of these considerations, it was New Zealand’s view that even if the "special milk
class" regime failed to meet the test of Article 9, it would nevertheless constitute an export subsidy
which circumvented, or threatened to circumvent , Canada’s export subsidy commitments within the
meaning of Article 10.
(iv) Article 10.3 –  the Burden of Proof
4.290  New Zealand  noted that the Agreement on Agriculture contained, in Article 10.3, a provision
which had implications for the burden of proof.
240  Article 10 was concerned with the prevention of
circumvention of export subsidy commitments.  A Member which claimed that quantities exported in
excess of reduction commitment levels were not subsidised "must establish" that no export subsidy
had been granted.  The language was mandatory and unequivocal.   New Zealand maintained that the
fact that this obligation was intended to be a stringent one, and one applicable in the context of disputesettlement, was made clear from the preparatory work relating to Article 10.  The negotiating Draft
Text on Agriculture of 12 December 1991 provided as follows:
" ... a prima facie  case of circumvention of budgetary outlay
commitments shall be deemed to exist where it is established that:
(a) subsidies contingent on exports which are not subject to
reduction have been or are being resorted to at the national or
sub-national level;  and
(b) the volume of subsidized exports of the product concerned
exceeds the volume of exports that could have been
subsidized, or which can reasonably be expected to besubsidized … "
241
4.291  New Zealand argued that the language of a " prima facie  case" was the language used by the
Appellate Body under the rules relating to burden of proof.  In the EC – Hormones , the Appellate
Body paraphrased the approach of the Panel:
"The initial burden lies on the complaining party, which must
establish a prima facie  case of inconsistency with a particular
provision of the SPS Agreement  on the part of the defending party ....
When that prima facie  case is made, the burden of proof moves to the
defending party, which must in turn counter or refute the claimed
inconsistency.  This seems straightforward enough and is in
conformity with our ruling in United States - Shirts and Blouses ,
                                                     
240 Article 10:3 of the Agreement on Agriculture stated:  "Any Member which claims that any quantity exported in excess of a
reduction commitment level is not subsidised must establish that no export subsidy, whether listed in Article 9 or not, has bee n granted in
respect of the quantity of exports in question."
241 New Zealand, Annex 35.WT/DS103/R
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which the Panel invokes and which embodies a rule applicable in any
adversarial proceedings."242
4.292  New Zealand argued that the effect of a rule deeming that a prima facie  case had been made
out, as the earlier drafts of Article 10 provided, was to reverse the burden of proof.  Under such a rule,
the normal obligation on the complaining party to establish a prima facie  case was dispensed with.
The burden started with the responding party.  This was the explicit effect of the language used in the
earlier drafts of Article 10.   Although the wording of Article 10 had changed, and no explicit
reference to a prima facie  case was retained, the earlier draft provided guidance to the thinking of the
negotiators of the rules on circumvention.  The changes made to the wording of what became
Article 10.3 were not incompatible with the express term s of the earlier draft.  They simply stated, in a
more general way, that there was an obligation on a Member whose exports of a product in respect of
which reduction commitments had been made exceeded the volume of those commitments, to"establish" that no subsidy had been granted.  In effect, once it had been "established" that the exports
of a Member were in excess of its reduction commitments, the burden was then on that Member to
"establish" that no subsidy had been granted.  The burden of proof clearly shifted.
4.293  Hence, New  Zealand argued that properly interpreted in its context, Article 10.3 spoke to
dispute settlement situations.  It imposed a specific obligation on Members that would usually ariseonly in a dispute settlement context.  Where a Member was challenged in dispute settlement
proceedings on the ground that the quantities of its exports exceeded its reduction commitment levels,
then that Member "must establish" that no export subsidy had been granted in respect of those
quantities.  Such a rule could only have the effect of placing the burden on the Member against which
the complaint had been made to establish that no subsidisation has occurred.
4.294  New Zealand noted that Article 10.3 had important implications for the case at issue.   Since
the quantities of butter exported by Canada in 1995/1996 and 1996/1997 exceeded the reduction
commitments made by Canada in respect of butter for both of those years, Article 10.3 required that
Canada "must establish" that no export subsidy had been granted in respect of butter.  Since the
quantity of cheese exported by Canada in 1996/1997 was in excess of Canada’s reductioncommitment for cheese for that year, Article 10.3 required that Canada "must establish" that no export
subsidy had been granted in respect of cheese.  And since the quantity of whole milk powder exported
by Canada in 1996/1997 exceeded Canada’s reduction commitments in respect of "Other Milk
Products", Article 10.3 required that Canada "must establish" that no export subsidy has been granted
in respect of whole milk powder.  In each case, the burden of proof lay on Canada.   In this respect,New Zealand noted that Canada had acknowledged that the burden of proof was on Canada to
establish that no export subsidy existed in respect of the Special Milk Classes Scheme.
4.295  The United States  argued that Article 10.3, which complemented the prohibition on
circumvention contained in Article 10.1, required the exporting Member to establish that export
subsidies had not been provided with respect to those quantities of a product exported that were
greater than the annual export quantities set forth in that Member’s schedule for the product in
question.  The imposition of this requirement in Article 10.3, emphasized the seriousness which theAgreement attached to the possibility of circumvention of the export subsidy reduction commitments.
Its application in the context at issue meant that Ca nada had to establish that no export subsidy had
been granted in respect of the quantity of exports that were in excess of its reduction commitments.
As the export quantities for butter, cheese, and dairy products in the "other dairy product" category
exceeded the reduction commitments for those categories in Canada’s Schedule, Canada had to showthat such exports did not benefit from export subsidies.
                                                     
242 Appellate Body Reports on EC – Measures Concerning Meat and Meat Products (Hormones) , (hereafter " EC – Hormones "),
WT/DS26/AB/R, WT/DS48/AB/R, adopted 13 February 1998, paragraph 98.WT/DS103/R
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4.296  The United States submitted that Canada could not meet the requirement of Article 10.3
because the quantities of the identified dairy products that were exported exceeded the reduction
commitments and the special milk class price system was an export subsidy.
4.297  Canada  agreed that the wording of Article 10.3 had the effect of reversing the usual burden
of proof rule as set out above.  Thus, once it had been established that the exporting country hadexported quantities of a product in excess of the level of the reduction commitment for that product,
the burden lay on that exporting country to show a prima facie case that the exports in excess of the
reduction commitment were not subject to export subsidies.  Once such a prima facie case had been
established, the burden of proof moved to the complaining party. Canada claimed that it had clearly
surpassed any prima facie standard in demonstrating that no export subsidies had been granted with
respect to the products in question.
(e) Other Relevant Provisions of the Agreement on Agriculture
(i) Article 8 and 3.3
4.298  New Zealand  argued that Canada's provision of export subsidies under Article 9.1(a) and (c)
of the Agreement of Agriculture in excess of its scheduled export subsidy commitments was a
violation of Article 3.3 of that Agreement.   Furt hermore, Canada was in violation of its obligation
under Article 8 of the Agreement on Agriculture not to provide export subsidies otherwise than inconformity with the Agreement on Agriculture.
4.299  The United States  argued that as the Special Milk Classes Scheme was an export subsidy
within the meaning of Article 9.1 of the Agreement on Agriculture, Canada was in breach of
Article 3.3 of the Agreement on Agriculture not to pr ovide export subsidies in excess of its quantity
commitments levels specified in Section II of Part IV of its Schedule.  Furthermore, Canada was inbreach of Article 8 of the Agreement on Agriculture not to provide export subsidies otherwise than in
conformity with the Agreement and with the commitments specified in its Schedule.
4.300  Canada argued that Error! Bookmark not defined. Article 8 did not apply. As Canada had
shown that sales of milk at differing prices for domestic and export markets did not constitute an
"export subsidy" as that term was defined in Article 1 of Agreement on Agriculture, the practice atissue did not fall within the scope of Article 8.
4. Agreement on Subsidies and Countervailing Measures ("SCM Agreement")
(a) Outline
4.301  New Zealand  claimed that even on the basis of its own approach to the interpretation of the
term "subsidy", under the SCM Agreement, Canada had not shown that the Special Milk ClassesScheme fell outside the definition of subsidy.  New Zealand argued that the scheme constituted a
subsidy within the meaning of Article 1 of the SCM Agreement in the following respects:
(a) it constituted the provision by government of a good within the meaning of
Article 1.1(a)(1)(iii);
(b) or alternatively the government had entrusted a private body to perform the same
function within the meaning of Article 1.1(a)(1)(iv);  and
(c) it constituted a form of income or price support within the meaning of GATT
Article XVI, under Article 1.1(a)(2).WT/DS103/R
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4.302  New Zealand noted that Article 1 of the SCM Agreement provided that a subsidy shall be
deemed to exist when there was a financial contribution by a government or any public body, or any
form of income or price support in the sense of Article XVI of GATT 1994, and a benefit was thereby
conferred.  The Special Milk Classes Scheme consisted of a financial contribution by government.
Alternatively, the Special Milk Classes Scheme migh t be viewed as a form of income or price support
in the sense of Article XVI of GATT 1994.  In either case, a benefit was conferred within the meaning
of Article 1 of the SCM Agreement.
4.303  In addition, the Special Milk Classes Scheme constituted the provision of an export subsidy
within the meaning of Paragraph (d) of the Illustrative List of Export Subsidies in Annex I of the
SCM Agreement.
4.304  The United States  considered that the definition of subsidy was substantially the same for
purposes of the Agreement on Agriculture and the SCM Agreement.  As the SCM Agreement was oneof the other Agreements set forth in Annex 1A of the Marrakesh Agreement, the SCM formed part of
the context of the Agreement on Agriculture.
4.305  The United States claimed that even if it were to be assumed that the SCM Agreement was
dispositive of what constituted an export subsid y, solely for purposes of argument and without
prejudice to the views of the United States concerning the applicability of Articles 9 and 10 of theAgreement on Agriculture, Paragraph (d) of the Illustrative List of Export Subsidies contained in
Annex I lead directly to the conclusion that the Special Milk Classes Scheme was an export subsidy.
Hence, the United States claimed that the Special Milk Classes Scheme, and specifically the provision
of lower priced milk through Special Class 5(d) and (e) to exporters, constituted an export subsidy
within the meaning of the Agreement on Agriculture as well as the SCM Agreement.
4.306  Canada  claimed that the sale of milk for export purposes in Canada did not constitute a
"financial contribution by a government or a public body" pursuant to Article 1.1(a)(1) of the SCM
Agreement.   Nor did it constitute "any form of income or price support in the sense of Article XVI of
GATT 1994" .  Nor did the sale of milk in Canada for export constitute a "benefit" for the purchaser
over and above the normal commercial conditions that applied in such a market;  there could be no"benefit" as the term should be interpreted under Article 1 of the SCM Agreement.
4.307  Hence Canada submitted that the sale of milk at differing prices did not constitute a "subsidy"
within the meaning of Article 1 of the SCM Agreement . As noted, the term "subsidy" as it was used in
the definition of "export subsidy" in the Agreement on Agriculture had to be interpreted in accordance
with the definition of subsidy in Article 1 of the SCM Agreement. Accordingly, since there was no"subsidy", there could not be any "export subsidy" for the purposes of the Agreement on Agriculture.
4.308  Further, Canada claimed that the practices at issue were not "export subsidies" in the sense of
Paragraph (d) of Illustrative List of Export Subsidies attached to the SCM Agreement.  Although
Paragraph (d) was the only item on this list that was in any way relevant to the issue at hand, it was
concerned with differences between internal domestic prices and export prices. Indeed, other than
Article 9.1(b) of the Agreement on Agriculture, it was the only provision in either the Agreement on
Agriculture or the SCM Agreement that touched on such price differentials.  Canada had
demonstrated that its Import for Re-Export Program (paragraph 2.11) provided exactly the conditions
that would exclude a measure from the application of Paragraph (d).  This confirmed that the practices
in question did not fall within the meaning of the term "export subsidy" for SCM Agreement or
Agreement on Agriculture purposes.  Accordingly, Canada claimed that not only was there no subsidy
within the meaning of the Agreement on Agriculture and the SCM Agreement but, in particular, there
was no prohibited export subsidy as set out in the Illustrative List of Export Subsidies found in
Annex I of the SCM Agreement.WT/DS103/R
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(b) Article 1
(i) Article 1.1(a)(1) – Financial Contribution
4.309  Canada  claimed that there was no financial contribution by government pursuant to
Article 1.1(a)(1) and, accordingly, the sale of milk for export purposes in Canada did not constitute a
"financial contribution by a government or a public body" pursuant to Article 1.1(a)(1).
4.310  Canada submitted that under Article 1.1(a)(1), the term "financial contribution by a
government or any public body" was defined exhaustively243 and was limited to the  circumstances
described in the four sub-paragraphs (i) to (iv).  Accordingly, if the practices at issue did not fall
within any of the items in (i) to (iv), then the practices could not be considered to be "financial
contributions by government or any public body".    Moreover, there could be measures or practices
which could arguably fall within the meaning of the term "financial contribution" but did not fall
within one of the various descriptions in sub-paragraphs (i) through (iv).  In such a case, the measureor practice was outside the scope of what was a "financial contribution" for the purposes of the
subsidy definition.
4.311  Canada noted that the plain meaning of the term  "financial contribution" was that something
of value was being contributed to a recipient by the donor.  In this case, "financial contribution by a
government or any public body" meant that there was a transfer of something of value to a recipientfrom a government or other public body. In the absence of any evidence that there was any such
transfer of resources, there could not be a "financial contribution".   Each of the items set out in (i) to
(iv) had to be interpreted as reflecting this basic concept.   Canada submitted that an examination of
each of the items set out in sub-paragraphs (i) to (iv) of Article 1.1(a)(1) demonstrated that none of
them applied to the practices at issue.
Sub-paragraph (i)
4.312  Canada  noted that sub-paragraph (i) included as "a financial contribution by government or
any public body", "a government practice involv[ing] a direct transfer of funds (e.g. grants, loans and
equity infusion), and potential direct transfers of funds or liabilities (e.g., loan guarantees)". Thisprovision covered the most common form of financial contribution made in connection with
subsidies, i.e., the direct payment to a recipient of funds from government treasuries. Canada argued
that it was evident from the facts that the practices in dispute did not involve any direct grants or
transfer of funds from governments to any recipient.  There was nothing in the marketing of milk for
export at world prices analogous to a government grant, loan or equity infusion were anything like apotential direct transfer of funds or liabilities such as a loan guarantee. No evidence or allegation to
the contrary had been offered by the Complainants.
                                                     
243 Canada argued that the use of the term "i.e." indicated that the items that followed were intended to be an exhaustive, rather
than an illustrative list.  In this regard, Canada noted that the Uruguay Round negotiators agreed to replace the term "such as " in the
Cartland I draft of the SCM Agreement, MTN.GNG/NG10/W/38 (18 July, 1990), with "i.e." in Cartland II, MTN.GNG/NG10/W/39/Rev.1
(4 September 1990), thus clearly indicating an intent to move from an illustrative definition to an exhaustive definition. (Can ada, Exhibit 25)
Canada also noted that "e.g." was also used within the subsidy definition in Article 1 to indicate an illustrative list. (Canad a, Exhibit 25)WT/DS103/R
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Sub-paragraph (ii)
4.313  Canada  recalled that sub-paragraph (ii) included as "a financial contribution by government
or any public body" circumstances where "government revenue that is otherwise due is foregone or
not collected (e.g. fiscal incentives such as tax credits)".  This provision referred to any practice underwhich a government chose not to collect tax or other duties owing to it
244 and thus made financial
contribution to the person owing the revenue to the government.   It was clear that the practices at
issue did not involve any such foregoing of government taxes, duties or other government monies
owing.  No evidence to the contrary has been offered by the Complainants.
Sub-paragraph (iii)
4.314  Canada  noted that sub-paragraph (iii) included as "a financial contribution by government or
any public body" a situation where "a government provides goods or services other than general
infrastructure, or purchases goods".  Canada argued that the various levels of government in Canada
did not provide milk to anyone. As demonstrated in Part I, the Canadian dairy industry was composed
entirely of privately-owned farms producing milk for sale to privately owned or co-operative dairy
processors.  While these sales took place within a framework established by legislation, it was theprivate actors that produced and sold the milk. The core of the system was operated on the foundation
of the decisions by producers made on a strictly commercial basis.
4.315  Canada reiterated that the milk marketing boards were "producer-run". They did not
constitute government or government agencies.  To the contrary, they were established pursuant to
referenda of dairy producers in each of the respective provinces and, in most provinces, they werecontrolled by the elected representatives of the dairy producers.   While legislation required that the
boards take into account a broader range of interests than those of the producers alone, the fact
remained that the boards operated as an extension of the commercial operations of the individual dairy
producers of Canada.
4.316  Canada argued that if the conduct of commercial operations by private producers and
processors within a regulatory framework constituted Government provision of the good or service
provided through the commercial transactions, then virtually all activities in a modern economy could
be so characterized.  For example, labour provided through collective agreements established under
government labour laws or determined by minimum wage laws could be considered labour provided
by government.
4.317  Furthermore, Canada argued that sub-paragraph (iii) had to be read in the context of the term
"financial contribution".  Thus, in order for govern ment to be providing goods within the meaning of
the provision, it had to be demonstrated that this provision of goods involved a contribution of a
financial nature from public resources controlled by the government.  The sale of milk to processors
by producers collectively through or with the participation of producer-run marketing boards could in
no way be construed as the provision of goods by government or any public body, nor was it the
provision of goods that entailed a governmental financial contribution.
4.318  Canada contended that the participation of the milk marketing boards in providing milk
sourced from producers to processors did not involve any "financial contribution" from the boards.
The boards acted as agents for the producers in coll ecting and selling milk to the processors.  With
respect to exports, processors purchased the milk through or with the participation of the boards for
prices based on the world market return being obtained by the processors.  Thus, the producers only
                                                     
244 Canada argued that the intent of the negotiators to link the term "government revenue" to taxes or duties was made clear both
by the reference to "tax credits" as the illustrative example provided in the provision and the discussion of "duties" in the f ootnote to the
provision.WT/DS103/R
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received for the milk a market price paid initially to the board as their agent.  This was best illustrated
by a counter-example.  If the boards were purchasing milk at high domestic prices and then reselling
the milk to the processors at low prices and absorbing the difference, then it might be open to argue
that the boards would be making a "financial contribution", albeit of a non-governmental type.
However, in the case of Canadian dairy exports, as agents of the producers the boards paid to theproducers what the boards receive from the processors for the milk.  As Canada had described, the
price paid back to the producers was flowed entirely through the board and there was no "adjustment'
or "contribution" by the boards to this revenue stream.   This reinforced the conclusion that there was
no "financial contribution" to the processors by the boards, and therefore Article 1.1(a)(1) could not
apply.
4.319  New Zealand  argued that the Special Milk Classes Scheme involved a financial contribution
within the meaning of Article 1.1(a)(1)(iii).  The Sp ecial Milk Classes Scheme involved the providing
of goods by the combined action of governmental agencies - the CDC and the provincial milk
marketing boards (Section 1).  Canada’s denial of this was based on its view that the Special Milk
Classes Scheme involved producers operating collectively without significant government
involvement.  However, New Zealand held that role of government in the operation of the Special
Milk Classes Scheme was integral and essential.  The providing of lower-priced milk to exporters -which was the export subsidy in this case - was effected through the joint action of the CDC and the
provincial milk marketing boards.
4.320  New Zealand further noted that Canada argued that in any event there was no financial
contribution because the boards were simply agents of producers; what was passed on to exporters
was the producer’s milk.  New Zealand noted that the boards did not pass milk on to exportersbecause they were acting as agents of producers.  Boards had a right to dispose of milk regardless of
the wishes of producers.  A producer could not deny the board the right to sell its milk - a producer
could not revoke the "agency".  Nor could this, accor ding to New Zealand, be seen just as a matter of
the decision of the provincial milk marketing board.  The system under which milk - a good - was
provided to exporters did not just involve that board.  It was an operation involving both federal andprovincial action.
4.321  The United States  argued that where surplus milk was provided to processors/exporters
under Classes 5(d) and (e), this involved the Canadian Government through its legislative
arrangements providing goods (i.e. milk) at prices below those prevailing in the domestic market.
Hence, the provincial milk marketing boards, on behalf of the milk producers in their respectiveprovinces, provided milk at prices lower than available on the domestic market to processors.  The
processors used that low priced milk in manufacturing dairy products for export.  Those same
marketing boards, moreover, operated under the authority of powers delegated to them by the federal
and provincial governments.  The boards did not receive their authority and powers from the milk
producers.  Thus, their actions, together with those of the Canadian Government, acting through the
CDC, provided goods, here milk, to processors.  The United States claimed that this constituted a
subsidy under Article 1.1(a)(1)(iii) of the SCM Agreement.
Sub-paragraph (iv)
4.322  Canada  noted that the first part of sub-paragraph (iv) included as "a financial contribution by
government or any public body" circumstances where "a government makes payments to a funding
mechanism". This provision was intended to cover a situation where a government, rather thanmaking direct payments from its treasury to the targeted recipients as described in sub-paragraph (i),
provided bulk funding to some other body or m echanism for the subsequent re-distribution of the
financial contributions. As previously noted with respect to sub-paragraph (i), there was no evidence
that any level of government in Canada made any contribution, either directly (i.e., sub-paragraph (i))WT/DS103/R
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or indirectly through a funding mechanism (i.e., sub-paragraph (iv)) of funds with respect to the sale
of milk at differing prices.
4.323  Canada argued that none of the "functions" set out in sub-paragraphs (i) through (iii) in
Article 1.1(a)(1) were carried out by government with  respect to the practices at issue. Similarly, it
could not be said that any government in Canada "entrusts or directs a private body to carry out one ormore of the type of functions illustrated in (i) to  (iii) above which would normally be vested in the
government and the practice, in no real sense, differs from practices normally followed by
governments" as set out in the second part of Article 1.1(a)(1)(iv).  In this regard, Canada stressed that
to show that the practices of a private body fell wi thin the terms of this provision, three elements had
to be proven:  (i) there had to be direction or entrustment of a function to a private body by
government;  (ii) the function had to be one listed in subclauses (i) to (iii);  and (iii) that function had
to be one that was normally  carried out by government and "in no real sense differs from practices
normally  followed by governments".
4.324  Canada argued that its government did not "entrust or direct" any private body to carry out
any of the functions detailed in (i) through (iii) w ith respect to sales of milk for export purposes in
Canada.  In particular, governments in Canada did not so "entrust
245 or direct" the milk marketing
boards in Canada to carry out such functions.   Canada recalled that the boards were not directed bygovernments (Section 1).  Boards had come into existence on a vote of the producers in a province.
They were entrusted by producers  who had elected them and to whom they were responsible to act on
their behalf and to market their products; they were therefore not "entrusted" by governments to
undertake any of the activities referred to in Article 1 of the SCM Agreement.
4.325  Canada argued that there could be no basis fo r suggesting that that the marketing of milk,
whether for domestic or export sale, was one that was normally  carried out by government and that in
no real sense differed from practices normally followed by governments.   A distinction had to be
made between the regulatory functions of the board s and their commercial activities.  In the exercise
of certain regulatory functions, the boards might enga ge in activities that were governmental in nature
and that could be considered "normally follow ed by governments."  The establishment and
enforcement of quality standards for milk delivered from farms and the establishment of quotas for
domestic purposes, for example, could be argued to fa ll within the range of such activities.   However,
the marketing of milk, i.e., arranging the collection of milk from farms and its delivery to processing
plants, negotiating payments with processors and remitting funds to producers, was not a function
normally  carried out by government.  Indeed, the structure and the autonomy of the boards, indicated
that governments had essentially no responsibility, direct or indirect, in this area, except that of
general oversight in support of the public interest.
4.326  Canada noted that this was particularly true with respect to sales of milk for export  purposes .
Governments had not "entrusted" a private body, i.e., the milk marketing boards, with a mandate to
sell inputs for products for export at a price lower than those destined for domestic consumption.  The
sale of milk to processors for export purposes was the result of arm's length bargaining between
willing buyers and willing sellers without any government direction or expectation of the outcome.Thus, there had been no entrustment by government as required under the paragraph.   In addition,
what this provision manifestly did not capture, contrary to the contentions of the Complainants, was
regulatory frameworks, stipulated by law, through which private interests had the opportunity of
maximizing their returns in commercial markets an d in accordance with commercial considerations.
Moreover, since the milk marketing boards were sell ing milk through arm's length sales to processors
                                                     
245 Canada noted that the meaning of "entrust" was related to the companion word "direct": see the  New Shorter Oxford English
Dictionary on Historical Principles , Lesley Brown (ed.), (Oxford: Oxford University Press, 1993) (the " NSOED "): "to invest with a trust;
give the responsibility for a task; commit the… execution of (a task) to a person."  (Canada, Exhibit 26)WT/DS103/R
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at market prices, this practice could not be constructed to be a "financial contribution" to the
processors under any common sense analysis.
4.327  New Zealand  argued that even if the provincial milk marketing board was not a body with
governmental attributes, and was indeed just an agent of producers, there would still be a "financial
contribution" within the meaning of sub-paragraph (iv) of Article 1.1(a)(1) of the SCM Agreement,
which applied to circumstances where a government "entrusts or directs a private body to carry out
one or more of the type of functions" set out inter alia,  in Paragraph (iii) of Article 1.1(a)(1).  In the
present case, what would now be viewed as a priv ate body, the provincial milk marketing agency, had
been entrusted with providing the goods in question.
4.328  New Zealand further noted that sub-paragraph (iv) also stipulated that the practice that was
alleged to constitute a subsidy "in no real sense, differs from practices normally followed by
governments."  On this ground, Canada denied the applicability of sub-paragraph (iv), arguing that nosuch function of providing goods had been entrusted by government to a private body and that the
functions in question were not normally carried out by governments.  The first aspect of this response
was no more than a reiteration of Canada’s denial of government involvement in the Special Milk
Classes Scheme (Section 1, paragraph 4.41 and following).  In respect of the second aspect, Canada
argued that although the regulatory function of m ilk marketing boards could be viewed as functions
normally carried out by governments, the marketing of milk was not.  However, the effect of the
Special Milk Classes Scheme was to reallocate income from producers to exporters, and the
reallocation of income within society was a function normally carried out by government.  Thus,
contrary to Canada’s claims, the Special Milk Classes Scheme did provide a financial contribution
within the meaning of Article 1.1(a)(1) of the SCM Agreement.
4.329  Furthermore, in respect of Article 1.1(a)(1)(iv), and functions that "would normally be vested
in the government and the practice, in no real sense, differs from practices normally followed by
governments", New Zealand drew the Panel's atte ntion to Canada's own implementation of that
provision in its own domestic legislation contained in the Special Import Measures Act .
246
Section 2(1.6) of that Act incorporated the terms of Article 1.1(a)(1)(iv) of the SCM Agreement by
providing that a financial contribution that amounted to a subsidy existed where:
"(d) the government permits or directs a non-governmental body to
do any thing referred to in any of paragraphs (a) to (c) where the right
or obligation to do the thing is normally vested in the government
and the manner in which the non-governmental body does the thingdoes not differ in a meaningful way from the manner in which the
government would do it."
4.330  In New Zealand's view, the language adopted by Canada in this legislative implementation of
the definition of subsidy under the SCM Agreement reflected, presumably, what Canada understood
the provisions of the SCM Agreement to mean.  Thus, it was revealing that Canada used the phrase
"permits  or directs" in its implementing legislation for the phrase " entrusts  or directs" in
Article 1.1(a)(1)(iv).  However, in the case at issue,  Canada took the view that the legislative basis for
the Special Milk Classes Scheme was enabling only.  Canada argued that "enabling legislation" did
not compel any action.  Canada did not, it argued, "entrust or direct" milk marketing boards with any
of the functions listed in sub-paragraphs (i) through (iii) of Article 1.1(a)(1) (paragraph 4.340).
4.331  In New Zealand's view it was clear that the Special Milk Classes Scheme would meet the
requirements of Section 2(1.6)(d) of Canada’s Special Import Measures Act and thus if it were ameasure of another country would constitute a subsidy under Canadian law.  However, Canada
                                                     
246 Special Import Measures Act, S.C. 1984, c.25, s.2.WT/DS103/R
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appeared to want to apply a different standard in this case and deny that the Special Milk Classes
Scheme met the requirements of the provision of the SCM Agreement on which Section 2(1.6)(d) was
based.
4.332  New Zealand argued, moreover, that the Canadian legislative incorporation of sub-
paragraph (iv) precisely reflected the intent of the drafters of Article 1 of the SCM Agreement.  Theorigin of the words that appeared in sub-paragraph (iv) was the 1960 Report of the Panel on Subsidies
on Review Pursuant to Article XVI:
247 where the Panel took the view that the requirements of GATT
Article XVI would be met in schemes where "the gove rnment took a part either by making payments
into a common fund or by entrusting to a private body the functions of taxation and subsidisation with
the result that the practice would in no real sense differ from those normally followed by
government."  These words made clear that the "practice" was the practice of taxation or subsidisation
and that the manner in which it was being performed by the private body was in no real sensedifferent from the way governments undertook such practices.  This was the present day import of
sub-paragraph (iv) and it had been identified correctly in Canada’s Special Import Measures Act.
4.333  The United States  argued, like New Zealand, that the Special Milk Classes Scheme provided
a subsidy under Article 1.1(a)(1)(iv) of the SCM Agreement.  Thus, even if the provincial milk
marketing agencies were not considered to be acting as government bodies, there would still be a"financial contribution" within the meaning of sub-paragraph (iv) of Article 1.1(a)(1) because they
were entrusted with government functions.  The provincial milk marketing boards, together with the
CDC, had been entrusted to price goods to allow thei r export at competitive levels.  Furthermore, this
was a function normally provided by government within the meaning of Paragraph (iv) since the
Special Milk Classes Scheme operated to reallocate income from one group (the milk producers) toanother class (the dairy processors), a common func tion of government.  Indeed, the levy system that
the Special Classes replaced, performed the same governmental function.
4.334  The United States argued that the applicability of Article 1.1(a)(1)(iv) of the SCM Agreement
depended on the fulfilment of three conditions.  More specifically, the existence of the financial
contribution necessary to the finding of a subsidy under Paragraph (iv) required that: (i) a governmententrusted or directs a private body to carry out one or more of the type of functions illustrated in
Paragraphs (i)-(iii) of Paragraph (a)(1) to Article 1.1;  (ii) such functions would normally be vested in
the government; and (iii) the practice, in no real se nse, differed from the practices normally followed
by governments.  The United States contended that Canada incorrectly concluded that none of the
foregoing conditions were met by the Special Milk Classes Scheme.
4.335  In respect of the first factor, the United States argued that the Government of Canada together
with the provincial governments made provisi on for milk producers, through their provincial
marketing boards, to supply milk for export at pric es that were below those available to manufacturers
of dairy products for sale in the domestic market.  By doing so, the government shifted certain costs
from the processors to the milk producers, and also provided a good to the processors.  Thus, a
function provided for under Article 1.1(a)(1), was entrusted to a private entity.  Both the
Comprehensive Agreement and the CDC Act provided specifically for the delegation of certainfederal powers, including powers of  the CDC, to the marketing boards to establish pools, set prices,
and collect payments.   There was no dispute that the boards exercised delegated government powers,
including the power to set prices, to establish quotas, and to pool revenue. Thus, they had been
entrusted with governmental powers.
4.336  The United States further argued, in respect of the first requirement, that Paragraph (d) of the
Illustrative List Export Subsidies in Annex I of the SCM Agreement was relevant as it was part of the
context of Article 1 of that Agreement.  Thus, the language of Article 1 was informed by the practices
                                                     
247 Panel Report on Review Pursuant to Article XVI:5, op. cit.WT/DS103/R
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identified as export subsidies in Annex I.  As set out in further detail below (paragraph 4.385 and
following), Paragraph (d) of the Illustrative List specified that the "provision by governments or their
agencies either directly or indirectly through government-mandated schemes" of goods on more
favorable terms for export was an export subsidy.  Both Paragraphs (iii) and (iv) of Article 1 had to be
interpreted with this in mind.  Otherwise, a funda mental contradiction in meaning would result with
that practice constituting an identified export subsidy for purposes of the Illustrative List, but not
being a subsidy for purposes of Article 1.  Therefore, a government-mandated scheme, such as
Canada’s Special Milk Classes Scheme, that resulted in the provision of goods within the meaning of
the Illustrative List also satisfied the requirement of Paragraph (iii) of Article 1 of the same
Agreement that the provision, directly or indirectly, of goods by a government, constituted a financial
contribution.    Hence, since the provision of a good was a government function specifically listed in
Article1.1(a)(1)(iii) of the Agreement, the first requirement for the application of Article 1 wassatisfied.
4.337  The United States argued that the Special Milk Classes Scheme also satisfied the second
requirement because the subsidized provision of goods and the fixing of prices were functions
normally vested in governments.  Indeed, it was a common practice in the agricultural sector for
governments to influence the price level for agricultural products, especially basic food articles such
as milk.  Whether the Special Milk Classes Scheme was viewed as providing goods at lower prices forexports or as fixing price levels for milk used for the manufacture of export products, the function
involved was one normally vested or performed by governments.  Canada’s argument that there was
no specific order from the federal or provincial government to producers to set prices for milk used in
exports at a particular level was inaccurate and beside the point.   First, over-quota milk could only be
sold for export at the Special Class 5(e) price.  The producer had no choice.  In-quota milk was sold atprices negotiated by the CDC, that were rarely modified.  Second, pursuant to Article 1.1(a)(1)(iv) of
the SCM Agreement it was unnecessary for the government to set the price for the milk if it entrusted
that function to the milk boards, which it had done.  The entire rationale for Paragraph (iv) was that
practices of private parties entrusted with government functions were to be treated as subsidies where
the practice, "in no real sense, differs from practices normally followed by governments" and a benefitwas thereby provided.
4.338  Furthermore, the United States argued the co mmon governmental function of shifting costs
and reallocating income from one private entity to another was the very function previously fulfilledby the levy/rebate system, which Canada had acknowledged was replaced with the Special Milk
Classes Scheme.   Further, the United States argued that the conclusions reached by the 1960 Working
Party that considered, inter alia, whether producer-financed subsidies were to be notified pursuant to
Article XVI:1 of GATT 1947 supported this construction of Paragraph (iv).
248  The United States
emphasized, moreover, that the language in the SCM Agreement that was contained inArticle 1.1(a)(1)(iv) respecting "functions normally vested in the government" and "which in no real
sense, differs from practices normally followed by governments", first appeared in the 1960 Working
Party report.  Furthermore, the Working Party had found that producer-financed levy/rebates satisfiedthose requirements where there was sufficient government involvement in the programme.
4.339  Finally, the United States argued that the Special Milk Classes Scheme operated to establish
prices for milk for export in a manner that was indistinguishable from practices normally followed by
governments. The inclusion of this practice in the Illustrative List certainly supported the conclusion
that it was a recognized, albeit unwelcome, government practice.  That practice, moreover, wasspecifically subject to the export subsidy discipli nes contained in both the Agreement on Agriculture
and the SCM Agreement.  Moreover, producer-financed subsidy schemes, in which governments
performed a substantial function, were treated as export subsidies in the Agreement on Agriculture,
and before that in the 1960 Working Party Report, precisely because they did not differ in any
                                                     
248 Ibid.WT/DS103/R
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practical sense from the practices normally followed by governments.    Thus, contrary to Canada’s
conclusions, each of the prerequisites to the applicability of Article 1.1(a)(1) of the SCM Agreement
was satisfied by the Special Milk Classes Scheme.
4.340  Canada  refuted the US argument that Canada made provision for milk producers, through
their provincial marketing boards, to supply milk for export at prices that were below those available
to manufacturers of dairy products for sale in the domestic market (paragraph 4.335) Canada claimed
that the facts made it clear that there was no governmental requirement placed on milk producers,
through their marketing boards to supply milk for export, let alone a governmental requirement to sellthat milk for export at a prescribed price.  Pe rmitting producers to adopt a course of action did not
amount to entrusting or directing a private body to carry out a government function.
4.341  Furthermore, Canada rebutted the United States claim that the government shifted costs from
processors to producers (paragraph 4.338).  The costs of production were always borne by the
producers.  Processors paid the highest price that producer boards could obtain given the externally-determined economic realities of the markets in which they sold the final products.  Producers were
not forced to provide milk at any given price but rather milk was supplied pursuant to negotiated
agreements.  Thus, there was no shifting of costs.  Moreover, the United States’ explanation also
failed to address why a significant number of producers would choose to produce above their quotas if
the effect was to shift costs to them from processors.  The only rational explanation would be thatproducers were coerced to act against their own best interests but no such coercion existed.   Canada
noted that the United States also claimed that this alleged government action provided a good to the
processors.  This directly contradicted their own statement that producers, through their marketing
boards supplied the milk.
4.342  Moreover, Canada noted in respect to the requirement regarding functions normally vested in
the government, that the United States characterized the government function in this case to be one of
reallocation of wealth within society.  Canada argued that sales of milk by milk producers at market
prices did not "reallocate" income at all.  A will ing buyer purchased a good from a willing seller in an
arm’s length transaction at the market price.  Although obviously money changed hands, the ordinary
language to describe such a transaction was that the seller earned  income, not that the transaction
reallocated income from one party to the other.  Th e redistribution of wealth that occurred through
transactions at market prices was not a practice normally followed by governments when they soughtto redistribute income.  Government actions to reallocate income were generally achieved through
government charges (taxes) and payments (subsidies) in which government forced one group in
society to give up income which it either had or could otherwise obtain, and provided another group
with income that would not be forthcoming in  the market. Canada maintained that the key
characteristic of sales of milk under Special Classes 5(d) and (e) was that governments did not control
the sales prices, and they did not delegate to anyone else the power to control the sales prices. The
implicit assumption in the US arguments was that any transaction at market prices, as opposed to
controlled domestic prices, had to be considered a "reallocation of income." In fact, it was the absence
of control over prices for export use that formed the basis of the Complainants’ case. Canada was a
small country on world dairy markets.  It was a price taker. It would be the purest of nonsense for anyCanadian government to claim to control the pr ice at which Canadian dairy exports took place.
4.343  The drafters of the SCM Agreement in providing for a definition of "subsidy" were careful to
distinguish in Article 1.1(a)(1) between the circumstances where governmental "financial
contributions" referred to a government practice involving a direct transfer of funds, the foregoing of
government revenue or a government making payments to a funding mechanism (sub-paragraphs (i),(ii) and (iii)) and the indirect provision of the governmental financial contribution through a "private
body" (sub-paragraph (iv)).  Accordingly, where the entity in question was a private body, as
conceded in this circumstance (US reference in paragraph 4.335), the applicable provision was sub-
paragraph (iv).    Hence the drafters had carefully circumscribed the circumstances under whichWT/DS103/R
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Paragraph (iv) could apply to a private body.  The government had to "entrust or direct" the private
body and the function must be "one which would normally be vested in the government and the
practice, in no real sense, differs from the practice s normally followed by governments."  Thus, in the
context of "subsidies", the drafters of the SCM Agreement appreciated that where private bodies were
involved, careful limits had to be drawn against the implication of governmental activity.
(ii) Article 1.1(a)(2) – Income or Price Support in the sense of Article XVI of GATT 1994
4.344  Canada  argued that the practices at issue did not fall within the description of "any form of
income or price support in the sense of Articl e XVI of GATT 1994".    Article XVI:1 of GATT 1994
included as a subsidy "any form of price or income support, which operates directly or indirectly to
increase exports from ... its territory". This clearly contemplated a system under which exports were
encouraged independently of market forces. As described above, the practice under which milk was
sold for export purpose in Canada was exclusively linked to market forces.  Dairy producers receiveda return on their sales of milk for export purposes based on actual sales into export markets.  It was in
response to these price signals that milk was produced for the export market.
4.345  Canada noted that it had been long established in GATT practice that supply management
systems which relied on border measures to support domestic price levels were not to be considered
"subsidies" under Article XVI. This view was reflected in the 1960 Report of the Panel on Subsidieson "Review Pursuant to Article XVI:5":
"It was generally agreed that a system under which a government, by
direct or indirect methods, maintains such a price by purchases and
resale at a loss is a subsidy.  Such purchases would need only to
cover part of the production to involve a subsidy and, in determiningloss on resale, such expenses as holding stocks should be taken into
account. The Panel considered, however, that there could be other
cases in which a government maintained a fixed price above the
world price without resort to subsidy. One such case might be that in
which a government fixes by law a minimum price to producerswhich is maintained by quantitative restrictions or flexible tariff or
similar charges. In such a case, there would be no loss to the
government, and the measure would not be governed by Article
XVI."
249(emphasis added)
4.346  Canada argued that it was evident that the supply management system in Canada did not
constitute a subsidy pursuant to the above comments. The exclusion in this passage from the subsidy
concept of any system where higher domestic prices were supported by tariff measures was
particularly noteworthy in the context of this dispute.250
                                                     
249 Ibid, para.11.
250 Canada noted that the fact that the Panel emphasized that their decision was based on the fact that there was "no loss to the
government" had importance for the interpretation of Article 1 of the SCM Agreement as a whole, since the drafters of that Arti cle expressly
linked the definition of "subsidy" to Article XVI of the GATT 1994.  There was an implication in this concept that there had to  be some
transfer of value from public sources to the recipients, resulting in a loss to treasuries in some way.  This was also consiste nt with the
analytical approach adopted by the Working Party Report in Australian Subsidy on Ammonium Sulphate, (GATT/CP.4/39) 3 April 1950  at
paragraph 10: "The working party then examined the question of whether the Australian Government had complied with the terms of
Article XVI on subsidies.  It noted that, although this Article is drafted in very general terms, the type of subsidy which it was intended to
cover was the financial aid given by a government to support its domestic production and to improve its competitive position ei ther on the
domestic market or on foreign markets".WT/DS103/R
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4.347  In respect of GATT 1994 Ad Article XVI:B:3, Canada argued that in the case of systems for
the stabilization of domestic prices for primary products251, an export subsidy was not involved where
two tests were met: (i) the system had resulted in, or was designed to result in, export prices higher
than the domestic prices; and (ii) the system did not stimulate exports unduly or otherwise seriously
prejudice the interests of other contracting parties.  With respect to the first test, Canada contendedthat its system for the sale of milk for export purposes contemplated the possibility of export prices
higher than the domestic price.  Indeed, in recent months as certain domestic milk prices in the United
States had exceeded domestic prices in Canada, price levels in Special Classes 5(a) through (c) (which
were linked to price levels in US markets and could be used either for export or domestic purposes)
had  exceeded price levels in the domestic use classes. In addition, since Canada's system for sales of
milk for export purposes was based on world market conditions, it could not be alleged that it
stimulated exports unduly or otherwise seriously prejudiced the interests of other WTO Members.Thus, Canada's dairy supply management system did not involve an export subsidy pursuant to this
provision.
4.348  Canada argued that the drafters of the SCM Agreement expressly incorporated the concept of
"income and price support", as defined by Article XVI, into Article 1 of the SCM Agreement and that
practices such as those used for the sale of milk in Canada for export purposes were clearly excludedfrom this definition.  This suggested that the intent of the negotiators was that such programmes did
not fall within the concept of "subsidy" in the Article 1 of the SCM Agreement. 
252  Accordingly,
Canada argued that the sale of milk in Canada for export purposes could not constitute "any form of
income or price support in the sense of Article XVI of GATT 1994" as provided for in
Article 1.1(a)(2).   Hence, the practices at issue in this dispute did not correspond with either half ofthe first part of the two-part test in Article 1.1, and consequently, there could be no "subsidy" pursuant
to that definition.
4.349  New Zealand noted that Article 1 of the SCM Agreement included within the definition of a
subsidy "any form of income or price support in the sense of Article XVI of GATT 1994".
Section A.1 of Article XVI of GATT 1994 included within its scope income or price support "which
operates directly or indirectly to increase exports of any product".  Section B.4 of Article XVI of
GATT 1994 included subsidies which resulted "in the sale of such product for export at a price lower
than the comparable price charged for the like product to buyers in the domestic market."  These
definitions clearly encompassed a scheme under which the government ensures that milk was made
available for the production of products for export at a price that was lower than that for milkavailable for the production of equivalent products for domestic consumption.
4.350  New Zealand further noted that Canada denied that the Special Milk Classes Scheme
constituted a form of income or price support within the meaning of Article XVI of GATT 1994.
Article XVI:1, Canada argued, contemplated a system under which exports were encouraged
independently of market forces (paragraph 4.344). Thus, Canada’s reasoning here, too, was based
largely on its argument that dairy exporters responded to market signals and not to any incentives
provided through the Special Milk Classes Scheme.  The reality was, in New Zealand's view,otherwise.  The allocation of milk to domestic or export markets was not the decision of the producer
                                                     
 251 Canada noted that Ad Article XVI:B of GATT 1994 stated in part: "For the purposes of Section B, a "primary product" is
understood to be any product of farm, forest or fishery, or any mineral, in its natural form or which has undergone such proces sing as is
customarily required to prepare it for marketing in substantial volume in international trade."
252 Canada argued that the comments of the Appellate Body in  Brazil - Desiccated Coconut, op. cit. , had to be noted in this
context. At p. 14 they noted that "The Agreement on Agriculture and the SCM Agreement reflect the latest statement of WTO membe rs as
to their rights and obligations concerning agricultural subsidies." They went on to comment that these Agreements "represent a substantial
elaboration of the provisions of the GATT 1994", and recognized that pursuant to Annex 1A, the other goods agreement prevail in  the event
of a conflict with GATT 1994.  However, the Appellate Body cautioned that "this does not mean that the other goods agreements i n
Annex 1A, such as the SCM Agreement, supersede the GATT 1994" and cited with approval the comments of the panel that "Article V I of
the GATT 1994 and the SCM represent an inseparable package of rights and disciplines that must be considered in conjunction."  Canada
argued that similar logic also applied to the relationship of Article XVI and the SCM Agreement and the Agreement on Agricultur e.WT/DS103/R
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(as argued under paragraph 4.93 and following).  Milk was sold for export rather than domestically
not in response to market signals but in response to the determination of federal and provincial
representatives operating through the CMSMC.  Moreover, it was not the incentive for the producer
that was in issue.  It was the exporter  who received the support.  Exporters were encouraged to export
because they were shielded from domestic prices, precisely the incentive to export regardless ofmarket conditions that Canada said  was contemplated by Article XVI.
4.351  New Zealand further noted that Canada argued that its system met the requirements of Ad
Article XVI:B:3 of GATT 1994 (and was not therefor e a subsidy for the purposes of Article XVI of
GATT 1994) because the system contemplated the pos sibility of export prices being higher than
domestic prices.  But Canada’s argumentation in support of this related only to Special Classes 5(a)
through 5(c) and did not deal at all with Special Classes 5(d) and (e), the provisions that were in issue
in this case.  Moreover, it was extremely unlikely that the prices for these latter classes would everrise to such an extent that they would exceed Canadian domestic prices.  World prices would have to
rise over 300 per cent before the Special Class 5(e) price approached the Canadian domestic price.
Thus, in respect of those sub-classes, the requirements of Ad Article XVI:B:3 could, realistically,
never be met.  Further, in New Zealand’s view, the Canadian system did operate to "stimulate exports
unduly" within the terms of Ad Article XVI:B:3 given that, absent special milk classes, Canadiandairy exports would be largely uneconomic and would be severely curtailed.
4.352  New Zealand noted Canada’s attempt to deny the applicability of Article 1.1(a)(2) of the
SCM Agreement which incorporated within the definition of "subsidy" any form of income or price
support in the sense of Article XVI of GATT 1994.  New Zealand noted that Canada cited, in
paragraph 4.345, as authority for this, a passage from the 1960 Report of the Panel on Subsidies
253
where the Panel said that a situation where a government fixed a minimum price to producers and
maintained it simply by "quantitative restrictions or flexible tariff or similar charges" " might " be a
case where there was no subsidy.  Canada then extrapolated from this qualified comment the absolute
proposition that the Panel was of the view that any system where higher domestic prices were
supported by tariff measures would not represent a subsidy.  In New Zealand's view Canada had failedto make any allusion whatsoever to the Panel’s key conclusion
254 regarding producer-funded
subsidies: that the requirements of GATT Article XVI would be met in schemes where "the
government took a part either by making payments into the common fund or by entrusting to a private
body the functions of taxation and subsidisation with the result that the practice would in no real sense
differ from those normally followed by government".  New Zealand’s conclusion that the Canadianscheme did indeed provide price or income support in the sense of GATT Article XVI, and that the
requirements of Ad Article XVI:B:3 could never realistically be discharged by Canada, had not been
rebutted.
4.353  The United States  argued that even if Canada’s supply management regime with its price
classification system were found to be a system of stabilization of domestic prices within the meaning
of Ad Article XVI, the Canadian Special Milk Classes Scheme clearly  resulted in "the sale of the
product for export at a price lower than the comparable price charged for the like product to buyers inthe domestic market." Because the special milk class price system did not result, and was not designed
to result, in "the sale of the product for export at a price higher than the comparable price charged for
the like product to buyers in the domestic market" it did not, and could not, satisfy the exception from
treatment as a subsidy contained in Ad Article XVI.  Thus, when Canada’s special milk class price
system was analyzed within the framework of Ad Article XVI, the result reached was the same asunder the SCM and Agreement on Agricultures: the special milk class price system was an export
subsidy.
                                                     
253 Panel Report on Review Pursuant to Article XVI:5, op. cit.
254 Ibid.WT/DS103/R
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4.354  Canada, in response to a question by the Panel as to why Canada felt there was not "price or
income support in the sense of Article XVI" when Canada had a positive Aggregate Measurement of
Support ("AMS") with respect to dairy products, argued that its domestic support commitments  were
not price or income support in the sense of Article 1.1(a)(2) of the SCM Agreement.  The term
"market price support", as it was used with respect to Domestic Support in Annexes 3 and 4 of theAgreement on Agriculture, was fundamentally differ ent in content and purpose from the term "price
or income support in the sense of Article XVI of GATT 1994".
4.355  Canada argued that Market Price Support"("MPS") was a term chosen to be one of the
elements to be used in calculating a comprehensive measurement of domestic support through the
AMS in the Agreement on Agriculture.  AMS was intended to be a broad measurement of government
support in favour of agricultural producers, for th e purpose of developing reduction commitments.  As
such, it had been, and was, a very ad hoc measure, not a rigorous measurement of  "subsidies" as theymight be otherwise understood or defined. Thus, MPS was a negotiated measuring device adopted for
a specific purpose in the Agreement on Agriculture negotiations.  It bore no linkage or lineage with
any other concept of "price support", and in particular, was quite distinct from the term "price or
income support in the sense of Article XVI of GATT 1994", as it used in the SCM Agreement. In
contrast, the purpose of the use of the term "price or income support in the sense of Article XVI ofGATT 1994" in the SCM Agreement was to bring some price support systems within the ambit of the
disciplines on export subsidies in that Agreement.   This built on the similar purposes captured in the
language of Article XVI of the GATT 1994 itself.  In that case, the term was restricted to the specific
circumstances as set out in Interpretative Note 2 ad Paragraph 3 of Article XVI and as discussed in the
1960 Report of the Panel on Subsidies.  Accordingly, unlike MPS, this term was to be linked directlyto the concept of "subsidies".
4.356  Canada noted that it had indicated (for 1995/96) – with respect to Canada’s notifications of its
AMS under the Agreement on Agriculture – that it had MPS with respect to butter and skim milk
powder.  This notification was based on the gap between the fixed external reference price (the 1986-
88 average export minimum prices agreed under the International Dairy Arrangement) and an"applied administered price" (the CDC support prices, as operated at that time).  Canada emphasized
that although the CDC continued to announce a "Support Price", this had become a misnomer –
whereas the CDC used to use a "Support Price" as the basis for a standing offer to purchase
programme, this had been terminated.  The CDC "Support Price" was now essentially used as a
reference price by the CMSMC and the provincial producer boards as a target in their negotiationswith processors, with the objective that milk prices not be too far out of line in different provinces. As
such, it no longer appeared to constitute an "applied administered price" for the purposes of MPS
calculation.
4.357  Canada stressed that the issue before the panel was whether Special Classes 5(d) and (e)
constituted "export subsidies" for the purposes of the Agreement on Agriculture.  In that regard, the
definition of "export subsidy", in the context of the definition of "subsidy" as it was found in Article 1
of the SCM Agreement, bore no relationship, textually or historically, to the formula used to calculateMPS or APS as a result of the Uruguay Round.
4.358  New Zealand  did not accept the conclusion reached by Canada where it sought to distinguish
the term "market price support", in the Agreement on Agriculture, from the reference to "any form of
income or price support" in Article 1 of the SCM Agreement.  The Aggregate Measurement of
Support (which included specific provision for calculating market price support) as it was defined inArticle 1 of the Agreement on Agriculture, would certainly catch all forms of income and price
support within the meaning of GATT Article XVI.  This was made very clear, for example, in
Paragraph 6 of Annex 2 of the Agreement on Ag riculture which defined the conditions when
(decoupled) " income support " can be exempted from the Aggregate Measurement of Support.
Conversely, in Paragraph 1(b) of the same Annex, " price support  to producers" was specificallyWT/DS103/R
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excluded from the category of exempt domestic sup port and thus must be included in the Aggregate
Measurement of Support.
4.359  In New Zealand's view, the linkage between the two concepts was confirmed by Article 13 of
the Agreement on Agriculture.  That Article, setting out the applicability of certain provisions of other
agreements to measures covered by the Agreement on Agriculture stated, in Paragraph (b), that"domestic support measures ... as reflected in each Member’s Schedule" (i.e., the AMS commitments)
shall be "exempt from actions based on Paragraph 1 of Article XVI of GATT 1994 ... ".
4.360  New Zealand noted that Canada stated that the support price no longer appeared to constitute
an 'applied administered price' for the purposes of "[market price support] calculation"
(paragraph 4.356).  New Zealand disagreed with this on the basis that support prices were still used by
the CDC to buffer domestic supplies seasonally and, to a very minor extent regionally and between
processors
255 and they also assisted producer boards in "establishing domestic price levels.256  Despite
the fact that buffer stocks might represent only a small part of domestic production, the effect of the
CDC, a government agency, purchasing and selling stocks on the basis of support prices meant that
those support prices represented the market clearing level for the products concerned - applied
administered prices remained, as did price and income support in the sense of Article XVI:1 of
GATT 1994.
4.361  Canada  emphasized that the reference in Article 1.1(a)(2) was to Article XVI as a whole and
not just to the Paragraph 1 of Article XVI. The phrase "any form of income or price support" did not
appear in Paragraph 1 of Article XVI; it did as a subset of the term "subsidy": i.e., "any subsidy,
including any form of income or price support".  The plain meaning of this was that the term
"subsidy" was to include "any form of  income or price support" and the notification obligations inParagraph 1 attaching to "subsidies" had necessarily to apply to income or price support systems.
4.362  Canada noted that Paragraph 3 of Article XVI stated that "contracting parties should seek to
avoid the use of subsidies on the export of primary products".  The second sentence then set out
stronger injunctions with respect to the use of "such subsidies" in certain circumstances.  Thus, both
Paragraph 1 and Paragraph 3 were concerned with "subsidies", with Paragraph 3 concerned withcertain kinds of "subsidies": i.e., export subsidies on primary products.   The fundamental principle of
interpretation applicable in this circumstance was that the same term (e.g., "subsidy") should be
interpreted consistently when it was used in the same agreement.  Where the same term was used
within a single article the presumption in favour of consistency in interpretation was all the stronger.
Absent any direction to the contrary, there was no reason to consider the meaning of the term"subsidy" in Paragraph 1 to differ from the use of the term "subsidy" in Paragraph 3.  Paragraph 1
referred to all "subsidies" and Paragraph 3 referred only to some of those "subsidies"; those
"subsidies" that were export subsidies on primary products.  However, any "subsidy" that fell within
the parameters of Paragraph 3 was also a "subsidy" for the purposes of Paragraph 1.
4.363  Canada argued that the term "any form of income or price support" was expressly included in
the term "subsidy" in Paragraph 1.  Although this express inclusion was not repeated in Paragraph 3,
if the term "subsidy" was to have a consistent meaning throughout Article XVI, then the term"subsidy" as it was used in Paragraph 3 had also to include "any form of price or income support",
except to the extent that there was any express direction to the contrary.  There was, in fact, such an
express exclusion. It was found in Interpretative Note 2 to Paragraph 3 in Ad Article XVI.  This note
stated that "a system for the stabilisation of the domestic price or of the return to domestic producers
of a primary product independently of the movement of  export prices", (i.e., price or income support),
                                                     
255 New Zealand referred to paragraph 57 of Canada's First Submission.
256 New Zealand referred to paragraph 45 of Canada's Second Written Submission.WT/DS103/R
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under certain specified conditions, "shall not be considered to involve a subsidy on exports within the
meaning of paragraph 3".  Thus, the term "subsidies on exports" as it appeared in Paragraph 3 shall
not include these particular types of income or price supports.  The carve-out in the Ad Article of
certain kinds of price and income support systems served as confirmation that, as a first step, all
income or price support systems were in fact implic itly included in Paragraph 3, mirroring the express
inclusion in Paragraph 1.
4.364  Canada argued that the presumption had to be that the meaning of the term "subsidy" was
consistent throughout Article XVI.  Since the subsidies referred to in Paragraph 3, export subsidies,
were a subset of all subsidies, any practices which were declared not to be "subsidies" in Paragraph 3
could not be considered to be "subsidies" for the purposes of Paragraph 1 if the principle of
consistency of interpretation was to be upheld.  It was important in this context to note that the Ad
Article referred to "within the meaning of paragraph 3", not "for the purposes of paragraph 3".  Thelatter formulation might suggest that, notwithstanding the usual meaning of "subsidy", the provisions
of Paragraph 3 did not apply to these particular income or price support systems.  The choice of the
word "meaning", however, directed the interpretati ve note to the meaning of the word, as it was used
in Paragraph 3, but without restricting that ap plication to Paragraph 3.  Since the principle of
consistency of interpretation presumed that the meaning that applied in one part of an Article, i.e.,Paragraph 3, also had to apply in the rest of the Article, the application of the Ad Article flowed into
the consistent interpretation of the term "subsidy"  throughout Article XVI.   Accordingly, the term
"subsidy" in Paragraph 1 of the Article XVI had the same meaning as it had in Paragraph 3.  It
included all income or price support systems other than those specifically excluded by the Ad Article.
Similarly, the term "all income or price support" as it was expressly used with respect to "subsidy" inParagraph 1, had to have the same consistent meaning as the implied term "all income or price
support" as it was necessarily implied with respect to "subsidy" in Paragraph 3.
4.365  Canada recalled that the reference in Article 1 of the SCM Agreement was to "any form of
income or price support in the sense of Article XVI of the GATT 1994".  If the application of the Ad
Article was only to Paragraph 3 of Article XVI, a nd did not flow to Paragraph 1, then there would be
a different meaning for "any form of price and income support" for each of the two paragraphs.  The
result would be that the reference in Article 1 of the SCM Agreement to "any form of income or price
support" would be left in a state of confusion and therefore meaningless.  Consequently, in Canada’s
submission, particularly in the context of this case, "any income or price support" as it was used in
Paragraph 1 of Article XVI could not be interp reted without reference to Paragraph 3 or Ad
Article XVI.   In this respect, Canada noted that the GATT Analytical Index, 1995, at p. 445 directed
the reader to "Interpretative Note 2 ad Paragraph 3 of Article XVI" for the interpretation of the phrase
"including any form of income or price support", as it was used in Paragraph 1 of Article XVI.  This
clearly reflected an accepted interpretative approach to the provisions of Article XVI.  The reference
to "Article XVI" in Article 1 of the SCM Agreement, rather than any particular paragraph of the
Article, provided confirmation and endorsement of this approach.
4.366  The United States noted that Canada did not explain why it maintained the obviously
cumbersome and complex arrangements for milk exports, i.e., the Special Milk Classes Scheme, if
sales of surplus production were not a necessary element of its milk price support system.  Although it
might be true that Canada’s domestic support arrangements could survive without export sales, either
its domestic prices would be lower or its domestic production levels would be forced to be lower to
maintain the current price levels.  It was to avoid these results that the levy system existed, and later
was replaced by the Special Milk Classes Scheme when the levy system was explicitly defined to be
an export subsidy.  Even if Canada eliminated its planned export programme, Canada would still have
a structural surplus of skim milk powder that would have to be exported if domestic prices levels were
to be maintained.WT/DS103/R
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4.367  The United States argued that Canada’s analysis of Article XVI reflected a serious omission
with respect to its application of Interpretative Note 2 to Paragraph 3 of Ad Article XVI.  Canada
stressed that the term "subsidy" as it was used in Paragraph 3 had also to include "any form of price or
income support", except to the extent that there was any express direction to the contrary.  Canada had
then noted that such an "express exclusion" exis ted in Interpretative Note 2 to Paragraph 3 in Ad
Article XVI.  It referred to the "system for the stabilization of the domestic price" under certain
specified conditions shall not be considered an export subsidy within the meaning of Paragraph 3.   In
the view of the United States, Canada had completely glossed over with oblique reference to "certain
specified conditions" that Canada’s system did not satisfy the criteria for such conditions.  First, the
system had to result only "at times" in the export sale of the product at a price lower than the
comparable domestic price.  For that reason, the Co ntracting Parties had to also determine "(a) the
system has also resulted, or is so designed as to result, in the sale of the product for export at a pricehigher than the comparable price charged for the like product to buyers in the domestic market; and
(b) the system is so operated, or is designed so to operate ... as not to stimulate exports unduly or
otherwise seriously to prejudice the interests of other contracting parties."  The Canadian regime
failed in all respects. Canada’s contention, moreover , that the rare instance in which Special Class
5(a) through 5(c) prices might be higher than domestic prices satisfied the criteria of the exception setforth in Ad Article XVI ignored the fact that Class 5(a) through 5(c) milk was sold at exactly the same
price in both domestic and export markets.  Canada, indeed, argued that access to Class 5(a) through
(c) were not conditioned on export.   Consequently, by Canada’s own analysis, if the exception was
not available, the system was a subsidy on exports within the meaning of Article XVI.3 and, in turn, a
subsidy within the meaning of Article XVI as a whole.
(iii) Article 1.1(b) – "Benefit"
4.368  Canada  argued that an analysis of whether the sale of milk through negotiated prices
conferred a "benefit" had to begin with an understanding of what was meant by that word.   The word
"benefit" had not been defined in the SCM Agreement or in any of the other covered agreements.  In
the absence of a definition, recourse had to be made to the principles of treaty interpretation incustomary international law, as expressed in Articles 31 and 32 of the  Vienna Convention.
Following this approach, Canada submitted that the word "benefit" as it was found in Article 1.1(b) of
the SCM Agreement, could only be read as m eaning a competitive advantage in trade.  This
conclusion flowed naturally from the ordinary meaning of "benefit", the context in which it was found
and the object and purpose of the SCM Agreement read as a whole.
4.369  Canada argued that to establish ordinary meaning, some guidance could be obtained from
authoritative dictionaries. In this respect, the New Shorter Oxford English Dictionary referred to "an
advantage" or a  "pecuniary profit".
257  Furthermore, Canada noted that WTO agreements were
authentic in English, French and Spanish.258  Under Article 33 of the Vienna Convention , the terms of
each authentic text were presumed to be the same.  If there was a difference of meaning, the meaning
which "best reconciles the texts, having regard to the object and purpose of the treaty, shall be
adopted."259   Canada noted that in the French language text of the SCM Agreement , the word used for
"benefit" was " avantage ".  Canada argued that this lent support to reading "benefit" in the English text
as carrying the meaning of "advantage".
4.370  Canada argued that the SCM Agreement was about the maintenance of fair trade between
producers.  It was intended to discipline government contributions that resulted in a competitive
advantage to certain producers.  In this context, and in the light of the object and purpose of the
                                                     
257 NSOED, Canada, Exhibit 26.
258 Marrakesh Agreement Establishing the World Trade Organisation, signature provisions.
259 Vienna Convention, Article 33.WT/DS103/R
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provision, the expression "benefit" could only be interpreted to mean "competitive advantage".  A
broad reading of the word "benefit" would make governments liable for virtually any financial activity
they undertook, regardless of whether or not that activity had a trade-distorting effect.   In a
commercial context, understanding "benefit" to m ean "an advantage", meant that the transaction in
question provided something to the recipient that would not be available in the ordinary course of
business (for example, goods purchased at above market price or inputs provided at less than
commercially prevalent prices).  In either case, the action by government had provided something to
the recipient over and above what was available in the market.   Moreover, Canada argued that if
"benefit" was to be read as carrying a broader meaning, this would have the effect of rendering the
term meaningless and redundant since nearly any financial contribution could be said to provide a
benefit in some aspect of that wider sense. This would be contrary to the basic rules of treaty
interpretation.260   Canada contended that the above confirmed that the term "benefit", as it was used
in the SCM Agreement, was best understood to mean an "advantage".   Canada contended that no
"benefit" in the sense of some advantage outside of  normal commercial returns can be found in the
sale of milk in Canada at differing prices for domestic and export purposes.
4.371  Canada argued that the Complainants’ submissions were premised on the assumption that
there was only one market for dairy products in Canada.  They argued that there were at least twodistinct markets for the sale of dairy products.  One market was the sale of dairy products for domestic
consumption and the other was the sale of dairy products for export.  In fact, there were sub-markets
within each of these general markets.   To find a "b enefit", it had to be demonstrated that the ability of
processors to obtain dairy products surplus to domestic requirements, on terms and conditions
negotiated at arms length between producers (acting collectively) and processors, at the price thatsuch products commanded in the international marketplace, conferred any assistance or advantage to
the buyer.  Canada failed to see how neutrality with  respect to the purchase and sale of products at the
price that was normal and customary in a particular market, could be said to be a "benefit".
4.372  Canada submitted that the relevant market for any product was the market in which it would
compete.  Since Class 5(d) and (e) milk could not, by  definition, be sold in the domestic consumption
market, the relevant market in which the price of such milk had to be examined was the export market
as this was the only market in which the product can be sold. There could be no "benefit" where
products were sold into a market at prices that the market would bear.   Thus, Canada argued that the
sales of milk in Canada for export use did not in themselves constitute a "benefit" for the purchaser
over and above the normal commercial conditions that applied in such a market. Accordingly, therecould be no "benefit" as that term had to be interpreted under Article 1 of the SCM Agreement.
4.373  Canada argued that even if both a governmental "financial contribution" and a "benefit" were
found, the word "thereby" in Article 1.1(b) required that there was no "subsidy" until a causal link
was established between the two elements. In other wo rds, it was necessary to show that the "benefit"
was conferred from the "financial contribution".
4.374  New Zealand  noted that Canada’s denial that any "benefit" was conferred by the operation of
the Special Milk Classes Scheme was based largely on its view that Special Classes 5(d) and (e) milkwere sold on the basis of arm’s length transactions engaged in by producers or their agents and not by
governments. There could be no "benefit", Canada asserted, because the exporter was simply
obtaining milk at the only price at which it was available.  Milk was exported, Canada claimed, only
when there was no further domestic demand, thus there was no alternative domestic market to which
the price can be compared.  New Zealand contended that such an explanation assumed that there were
                                                     
260 Canada noted that in particular, in the Appellate Body Report on  US - Reformulated Gasoline, op. cit., p.23, the Appellate
Body stated: "One of the corollaries of the ‘general rules of interpretation’ in the Vienna Convention is that interpretation m ust give
meaning and effect to all the terms of a treaty. An interpreter is not free to adopt a reading that would result in reducing wh ole clauses or
paragraphs of a treaty to redundancy or inutility."WT/DS103/R
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two markets, domestic and export, that operate without governmental restraint.  However the
domestic market was only "satisfied", to use Canada’s term, because the government said it was.
Even when the market was "satisfied" it would still be possible to release more product into the
market.  Left to their own devices, producers would do just that.  They would make the rational
commercial decision to sell their product on the domestic market.  While this would ultimately bringprices down, equally, greater quantities would be sol d.   Thus, the decision to provide milk at a lower
price for the "export market" was not the result of the normal operation of the marketplace.  Offering
milk to exporters at a price lower than the domestic price was a conscious decision taken by
government under the Special Milk Classes Scheme.  It was a decision that conferred a benefit
because in the absence of the Special Milk Classes Scheme exporters would have to pay domestic
prices to access milk and would then clearly sell any products on world markets at a loss.  The
recipient was indeed, even in the terms that Canada  used, being provided with something that "would
not be available in the ordinary course of business" (paragraph 4.370)  Thus the requirement that a
benefit be conferred in order to meet the definition of "subsidy" in Article 1 of the SCM Agreement
was met.
4.375  New Zealand maintained that Canada’s contention that the Special Milk Classes Scheme did
not provide a subsidy within the meaning of Articl e 1 of the SCM Agreement could not, therefore, be
supported.
4.376  The United States  argued that for purposes of Article 1 of the SCM Agreement, the Special
Classes provided a benefit to the dairy product export manufacturers.  While the United States did not
necessarily accept Canada’s construction of the term "benefit", the application of the term even as
construed by Canada resulted in the conclusion that export processors received a benefit in the formof lower priced milk.  Since those processors had no other source for such low priced milk
261 and they
could not sell their dairy products into world markets if they were compelled to pay the much higher
domestic prices in Canada for milk262, the processors clearly received a competitive  advantage  that
they would otherwise lack.
4.377  Canada’s argument that there was no benefit, moreover, rested solely on its theory that milk
producers sold for export at approximations of world price levels free of all government compulsion.
This view entirely ignored the fact that milk subjec t to surplus removal had to be sold for export at the
lower prices fixed by the CDC or not be sold at all.  The United States claimed that data (set out in US
Exhibit 57) clearly indicated that over-quota com ponent prices set by the CDC often undercut world
prices for butter and SMP.   Given that milk was a highly perishable product, and the initiation ofsurplus removal meant that no other processors in a province had a need for the milk, the Special
Class price under surplus removal constituted what was essentially a take it or leave it price to the
milk producer.  Mr. Doyle, from the Dairy Farmers of Canada, stated this concept most concisely:
"From the producer standpoint, the revenue generated is what is
reflected in 5-E and that is not a price setting as you use as an
expression; its a price taking.  It’s the result of whatever the market
provided for after costs."
263
4.378  The United States submitted that a recent decision by Revenue Canada in a Canadian
countervailing duty investigation involving refined sugar from the European Union was relevant to
                                                     
261 The United States noted that Canada reported that the Import for Re-Export Program did not provide imported milk to its
processors except in a form of more limited utility, e.g., as milk powder (the Import for Re-Export Program is further addresse d in the
following Section of this report).
262 United States, Exhibit 25.
263 Excerpt from Mr. Doyle’s testimony before the Canadian International Trade Tribunal in its examination of the butter oil
blend issue.WT/DS103/R
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this issue.  One of the subsidies that Revenue Canada examined was the payment of refunds to sugar
processors selling their products onto the world market.  Revenue Canada determined that those
refunds constituted a benefit because the payments covered "the price difference between the EU
price level and the world price level, thereby allowing the exporters to be competitive in export
markets."  Canada’s Special Milk Classes Scheme also resulted in a price difference with lower pricedmilk available only to exporters to allow them to be competitive in world markets.  Revenue Canada’s
conclusion that such price differentials constitute a benefit to exports compelled the conclusion that
the Special Classes also conferred a benefit to Canadian processors.
264
4.379  Canada  refuted the US contention that processors received a benefit in the form of lower
priced milk.  Canada argued that there was no "benefit" conferred where products were sold into a
market at prices that reflected the economic realities of that market.  Likewise, the Canada refuted the
US contention that what Canada called the market price was a "take it or leave it" price negotiated bythe CDC.  This was factually inaccurate.  The CDC negotiated as agent for the producers and, as the
principals, the producers had the right to approve or reject the transaction.  The negotiated price was a
price at which a willing buyer was prepared to purchase from a willing seller.  It was difficult to see
how such commercially-based sales conferred a benefit.
4.380  Canada contested the methodology in which the United States had constructed Canadian dairy
prices as set out in Exhibit 57 (referred to in paragraph 4.377). The United States had converted actual
over-quota returns for the 1995/96 to 1997/98 dairy y ears to US dollars, and compared them to prices
reported for New Zealand and Australia.  The United States then selected milk component prices
under Class 5(e) from different individual provinces and converted these to US dollars after which
conversion factors were assigned to each component to calculate the alleged value of milk reflectedby the component prices.  Canada argued that this procedure was flawed. It was almost impossible to
create an accurate per hectolitre milk price from milk component prices for use in cheese and other
products.  This was because the protein and other solids prices for cheese were very different than for
other products.  For cheese making, protein was more highly valued, while the other solids were
lower-priced. In making skim milk powder, protein and other solids had the same value.  Moreover,different products contained different proportions of  the various components.  Therefore, from month
to month and from province to province, as the composition of production changed, a crude
conversion from component prices to a hectolitre price using fixed coefficients yielded an incorrect
number.  This result was clearly displayed in the "Calculated Milk Price" line (first page of
Exhibit 57) where the United States reported that its estimate of farm level over-quota returns basedon the components conversion methodology were vastly  different than the actual over-quota returns
for each of the dairy years studied.  In other words, the data manipulations had generated incorrect
answers.
4.381  Furthermore, in the following panel of the table in Exhibit 57, the United States took
estimated prices for butter and skim milk powder in Northern European ports, which it used as a
proxy for world dairy prices, and converted these to an estimated world price for milk.  Unfortunately,
it used inappropriate conversion factors. Butter and skim milk powder were joint products produced inmore or less fixed proportions from standard whole milk.  Canadian dairy experts considered these
proportions to be 4.365 kg. of butter and 8.51 kg. of skim milk powder per hectolitre of milk.  The
United States had assumed 4.875 kg. of butter and 8.51 kg. of skim milk powder, thus overstating the
value of a hectolitre of milk, and biasing its world price estimate upward.  In the last line of the table
in Exhibit 57, the United States attempted a comparison between prices of raw milk to processors onone hand with retail-packaged milk on the other. This was a basic analytical error (paragraph 4.439).
                                                     
264 Final Determination of Subsidizing of Refined Sugar from the European Community, Statement of Reasons, Revenue Canada.
See United States, Exhibit 55.WT/DS103/R
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4.382  Canada further argued that the graph in Exhibit 57 suffered from similar methodological
errors as the table.  First, the component prices achieved in sales under Class 5(e) as reported by
"various [unidentified] provincial newsletters" reflected the values of these components in a broad
range of dairy products, for which different components had different values.  A simplistic conversion
from reported component prices to butter and skim milk powder prices produced inaccurate results.Second, the United States appeared to be comparing component values of raw milk as paid for by
processors at their plants, with a survey of prices for finished butter transported to Northern European
ports. Any analysis that failed to make allowances for processor margins, marketing costs and
transportation before comparing these "constructed" plant-gate prices with finished goods prices
obviously lacked credibility.
4.383  Canada noted that New Zealand argued that there was a benefit because the notion of a
domestic market and an export market was an artifi cial construct designed by Canada.  Canada argued
that far from being an artificial construct, the differences between Canadian domestic and
international dairy markets were a basic business reality to which producers and processors had to
respond. Neither the Agreement on Agriculture nor the SCM Agreement required Members to
eliminate all domestic and international pricing differences.  Canadian dairy producers had simply
adjusted themselves to the objective fact that these differences existed.
(c) Paragraph (d) of the Illustrative List of Export Subsidies
(i) Outline
4.384  New Zealand  noted the Illustrative List in Annex I to the SCM Agreement made clear that
the  provision of inputs solely for use in exports on more favourable terms than for domestic
production constituted an export subsidy.   There was no doubt that what occurred under Classes 5(d)and (e) of the Special Milk Classes Scheme w ould constitute a subsidy within the meaning of
Paragraph (d) of the Illustrative List.  Under a government-mandated scheme, lower-priced milk was
being made available to processors contingent upon export.  The terms and conditions under which
such milk was made available were more favourable than those commercially available on world
markets since the existence of tariff restrictions on the importation of milk into Canada meant that thechoice between domestic and imported products was not unrestricted within the meaning of the
footnote to Paragraph (d).   New Zealand claimed that the Special Milk Classes Scheme met the
conditions set out in Paragraph (d) of the Illustrative  List of Export Subsidies in Annex I of the SCM
Agreement which made it clear that such differential pricing schemes fell within its scope.
4.385  The United States  argued that Paragraph (d) of Annex 1 of the SCM Agreement was
particularly germane to consideration of whether Canada’s Special Milk Classes Scheme constituted
an export subsidy as this paragraph specifically addressed the situation where a government provided
inputs to exporters at a price which was below the price at which the same materials were made
available to manufacturers in the domestic market.  This, after all, was precisely the function and
objective of the Special Milk Classes Scheme.   The conclusion that a differential pricing system for
products destined for export fell within the concept of an export subsidy under Article 10 of the
Agreement on Agriculture, as well, was, thus, reinforced by reference to the Illustrative List of ExportSubsidies in the SCM Agreement.   The Illustrative List made clear that the provisions of inputs solely
for use in exports on more favorable terms than for domestic production constituted an export
subsidy.
4.386  The United States argued that there were essentially four conditions that had to be fulfilled to
satisfy Paragraph (d): (1) the provision of goods had to be by governments or mandated by them,either directly or indirectly; (2) the goods had to be used in the production of exported goods; (3) the
goods had to provided on terms or conditions more favorable than for provision of like or competitive
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available on terms or conditions more favorable than those commercially available on world markets
to the exporters.  The United States argued that Canada’s Special Milk Classes Scheme satisfied each
of the requisite factors and, therefore, was an  export subsidy within the meaning of the SCM
Agreement.265
4.387  In conclusion, the United States argued that because the Special Classes had satisfied each of
the criteria identified in Paragraph (d) of the Illu strative List, the Special Classes were deemed to be
an export subsidy for purposes of the SCM Agreemen t.  And as the SCM Agreement was part of the
context of the subsidy provisions of the Agreement on Agriculture, the fact that the Special Classes
comprised a subsidy under the Illustrative List argued for their treatment as a subsidy under the
Agreement on Agriculture as well.
4.388  Canada  argued that the facts demonstrated that the sale of milk in Canada for export use
differed significantly from the practice described in Paragraph (d).  This significant differencebetween the practices at issue and the practices explicitly  described as export subsidy practices raised
a clear implication that the Canadian practices did not fall within the conception of "subsidies" or
"export subsidies" in the SCM Agreement or the Agreement on Agriculture.    In Canada's view there
were three elements that had to be met if a practice or measure relating to goods was to fall within the
description provided in Paragraph (d):
(a) the raw materials for use in the production of exported goods had to be provided by
government or their agencies, either directly, or indirectly through a government-
mandated  scheme;
(b) the raw materials were provided on terms or conditions more favorable that those that
apply to raw material for use in goods for the domestic market;  and
(c) those terms and conditions were also more favorable than those commercially
available on world markets to exporters.
4.389  Canada claimed that none of the three criteria applied to sales of milk under Special
Classes 5(d) and (e) and therefore such sales were not deemed to be an "export subsidy" under this
provision.  Moreover, given the careful delineation of this type of "export subsidy", it was highlysuggestive that a reverse proposition was true: the practices at issue were not to be considered to be
"export subsidies" for the SCM Agreement, or in turn, for the  Agreement on Agriculture .  I t  w a s
Canada’s position that the practices in question did not fall within Paragraph (d) of the illustrative
List.  This raised a strong presumption that the practices in question were not "export subsidies" for
the purposes of the SCM Agreement and, in context, for the Agreement on Agriculture.
(ii) Government mandated ...
4.390  New Zealand  argued that the scheme could be viewed as either the provision by a
government or its agency of products for the use in the production of exported goods, or it could be
viewed as the provision of such products by producers through a government-mandated scheme.  The
role of the CDC and of the provincial milk mark eting boards and agencies in providing lower-priced
milk for the production of dairy products for export was one of implementing a government-mandated
scheme.
4.391  The United States  argued that the provision of milk at the Special Class prices was mandated
by the federal and provincial governments and the Special Class prices were only available for milk
                                                     
265 The United States noted that it had already established that the Special Milk Classes Scheme was an export subsidy because it
satisfied the criteria alternatively of Article 9.1 or 10 of the Agreement on Agriculture.WT/DS103/R
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used in production of export products.  The United States submitted that the Panel consider at least
two relevant factors in analyzing the mandatory nature of Canada's Special Class System:  (i) the
various GATT and WTO cases, including Japan – Photographic Film ,  EEC – Dessert Apples , and
Japan - Semiconductors , which were each pertinent to a determination whether there was a
government measure requiring compliance; and (ii) milk that was determined to be surplus by theCDC had to be sold at the Special Class 5(e) price when sold to processors for export.
4.392  Canada  argued that milk for use in export markets was not provided by governments in
Canada or their agencies.   Nor was milk provided "indirectly" through "government-mandated
schemes".  Paragraph (d) required that the scheme in question be "mandated"
266 by government and
not merely permitted or enabled.  The distinction was critical. The ordinary meaning of the word
"mandated" implied an act by government directing a certain outcome or course of action. This was
confirmed by reference to dictionary definitions of "mandate" which confirmed that the term requireda direction or order by superior body, not a me re empowerment.  The New Shorter Oxford English
Dictionary referred to a "mandate" as being: "a command, an order, an injunction"; "a legal command
from a superior to an inferior"; and "instruction as to policy supposed to be given by the electors to a
parliament".  Canada pointed out that this also appeared to be the understanding of the United States
who carefully distinguished "authorize" and "mandate", equating the latter with "require", withrespect to their Uruguay Round implementing legislation.
267
4.393  New Zealand  refuted Canada's arguments that the requirements of Paragraph (d) of the
Illustrative List of Export Subsidies had not been met because milk was not provided by a
"government-mandated" scheme, and that the terms and conditions on which milk was sold were not
more favourable than those commercially available on world markets to exporters.  Canada derived adefinition of "mandated" by choosing selectively from the dictionary definition of the word "mandate"
in its noun form.  But, the term "government-mandated" used the past participle of the verb "to
mandate".  Included amongst the Oxford English Dictionary definitions of the verb form of mandate
were "to delegate authority to".  The term "mandated" was defined to mean "permitted to act on behalf
of a group".
268  The critical distinction that Canada wished to make dissipated in the face of a more
accurate use of dictionary definitions.
4.394  New Zealand claimed that it had already been demonstrated that the Special Milk Classes
Scheme did involve the provision of goods by government.  Moreover, with regard to the alternative
argument regarding the indirect  provision of goods through government-mandated schemes, Canada’s
attempt to rely on dictionary definitions of th e word "mandate" were not credible in light of
definitions of the verb form of mandate, which was the form in which it was used in the term
"government-mandated", were examined.  The Oxfo rd English Dictionary recorded that the term
"mandated" in this form was frequently used to mean "permitted to act on behalf of a group".269  The
Special Milk Classes Scheme thus met this aspect of Paragraph (d).
4.395  Canada  argued that the first listed definition of the verb form of "mandate" was "to
command."  The definition that New Zealand used was part of the last listed definition of the verb
form of "mandate."  The first part of this last listed definition read "To give a mandate to, to delegateauthority to (a representative, group, organization, etc.)." As this definition began with giving "a
mandate" to someone, an examination of the noun form of the word "mandate" was more than
warranted.  In looking at the noun form in the Oxford English Dictionary: "1. A command, order,
                                                     
266 In defining "mandate", the NSOED  referred to: "a command, an order, an injunction"; "a judicial or legal command from a
superior to an inferior". (Canada, Exhibit 26)
267 Canada, Exhibit 27, p.213.
268 New Zealand referred to the Oxford  English Dictionary , Second Edition, Volume IX, p. 301.
269 Ibid.WT/DS103/R
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injunction; 2.a. A judicial or legal command from a superior to an inferior." Canada maintained that
the ordinary meaning connoted more than merely the sense of "permitted or enabled."   In respect of
"mandate", Canada further argued that the immediate context270 of the words confirmed Canada’s
understanding that "government-mandated" means "government-ordered" or "government
commanded."  Item (c) of the Illustrative List of Export Subsidies of the SCM Agreement (the"Illustrative List") identifies as a subsidy the following:
"(c) Internal transport and freight charges on export shipments,
provided or mandated by governments, on terms more favourable
than for domestic shipment."
4.396  Canada argued that the meaning of "mandated" in Item C of the Illustrative List was that of
"commanded" or "ordered."  That which made such discounted charges on export shipments an
"export subsidy" was the government involvement requiring that they be given.  For example, aprivate transport company that offered better rates for transport to some destination rather than to
others, even if those destinations were foreign, would not be considered an export subsidy for the
purposes of the WTO Agreements.  To hold otherw ise would require all Members to know and take
responsibility for all transport charges on every shipment within their territory. Indeed, the mere fact
that such companies were allowed to charge different rates to different clients, certainly could notmean to say that such private party practices were "government-mandated."  The same logic would
apply to Article 9.1(e) of the Agreement on Agriculture.   Hence, moving to Paragraph (d) of the
Illustrative List then, it seemed natural to re ad "government-mandated" in the same fashion as
"mandated by government."  Truly, such a reading coincided with the very notion of governmental
control with respect to a measure identified as being a "government subsidy."  The measure hadnecessarily to be imposed by the government as this item itself added as a condition "… if (in the case
of products) such terms or conditions are more favourable than those commercially available…".
4.397  Canada further argued that its interpretation was consistent with the object and purpose of
Paragraph (d).  That was, to identify as a governmental export subsidy the provision of inputs for
export purposes at artificially advantageous terms or conditions, whether by government or at theinsistence of government.  Furthermore, the Agreement as a whole did not purport to restrict private
party actions but rather was concerned with constraining governments from providing subsidies or
from entrusting or directing private parties to do so.   Producer boards were private parties who were
not directed by government to carry out subsidy functions and they were entrusted by their members
to act on their behalf, not by government.
4.398  Canada argued that this approach to schemes or actions carried out by non-governmental
entities was also reflected in the text of the definition of "subsidy" in Article 1 of the SCM Agreement
and the use of the word "imposed" in Article 9(1)(c) of the Agreement on Agriculture.  In Canada,
milk producers and the marketing boards that represented producers were completely free to
participate or not participate in export opportunities as they choose.  Moreover, boards were not
required by any government direction to establish or operate the Special Class export practices.  This
was entirely a matter of their own choice. The most that could be said was that governments made itpossible for boards to put special class arrangements into place. The Complainants had provided no
evidence that the goods in question were provided through a government-mandated scheme.
271
                                                     
270 In respect of the term "mandate" Canada argued that the Appellate Body had noted that a treaty interpreter ought not to stop a t
the ordinary meaning of a word.  The analysis had to continue to consider the context in which the word was found, as well as t he object and
purpose of the provision itself, and if necessary, of the agreement as a whole: Appellate Body Report on  United States – Import Prohibition
of Certain Shrimp and Shrimp Products , (hereafter " US – Shrimp-Turtle "), WT/DS58/AB/R, adopted 6 November 1998, pp. 41-42,
para. 114-116.
271 Canada maintained that New Zealand’s arguments with respect to this provision were flawed by their assumption that there
was a "government-mandated scheme".WT/DS103/R
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(iii) Terms or conditions more favourable ...
4.399  New Zealand argued that the terms and conditions on which milk was made available were
more favourable than for the provision of like or directly competitive products for the production of
goods for domestic consumption.  Milk was made available at the lower world price and not at the
higher domestic price.
4.400  The United States  argued that the Special Class 5(d) and (e) prices were uniformly lower
than prices for the same milk components sold in the same market categories in the domestic market.
Although Canada could dispute that the Special Cl ass prices were fixed by the CDC, there was no
question that the provincial marketing boards had to establish a price and that they did so through
powers delegated to them by the federal and provin cial government in their respective jurisdictions
over provincial and inter-provincial trade and exports.
4.401  Canada  noted that while milk could be sold in Canada for export purposes at prices which
were lower than those for milk for use in product s destined for the domestic market, this was not
always so. In fact, as discussed with respect to Article 1.1(a)(2) of the SCM Agreement, recently the
prices of some dairy components under Classes 5(a) and (b), which were linked to US domestic milk
prices, had begun to exceed prices for milk classes in Canada for domestic use.  Therefore, it was not
always true that milk sold for export was sold on terms and conditions more favourable than those thatapply to milk for domestic use.
4.402  The United States  argued, in respect of prices for Special Classes 5(a), (b) and (c), that the
only instances in which such prices could be argued to be higher than domestic prices, according to
the data from the Canadian International Trade Tribunal, would be if prices to different end-use
classes were compared.  For example, by comparing the price of butterfat used in yoghurt withbutterfat used in cheese.  Such a comparison would be entirely inappropriate, however, as the
Canadian system specifically differentiated among product markets in establishing price levels.  Thus,
the only appropriate comparison would be between prices for the same component in the same
product market.  This was the approach which the United States took, and using that approach, the
resulting comparisons uniformly showed the Special Cl ass prices to be lower than domestic prices for
each of the three major milk components, i.e., butterfat, proteins, and other solids.
(iv) Terms and conditions more favorable than those commercially available ...
4.403  New Zealand  further claimed that the requirement that the terms and conditions be more
favourable than those commercially available on world markets were also met.  A footnote to
Paragraph (d) indicated that the term "commercially available" meant "that the choice betweendomestic and imported goods is unrestricted and depends only on commercial considerations."  In the
case of milk for processing into exported products, the choice between domestic and imported
products was not unrestricted.  Canada’s tariff restrictions on the importation of milk meant that the
terms and conditions on which milk was provided for processing into exported products under
"special milk classes" were more favourable than those commercially available to Canadian
processors on world markets.
4.404  The United States  claimed that the terms and conditions for access to Special Class 5(d) and
(e) were more favorable than those commercially available on world markets to Canada’s dairy
product exporters.  The United States noted that Canada conceded that, in fact, "[w]ith respect to milk
of HS 0401, no permits have been issued for milk for manufacturing purposes under the Import for
Re-Export Program".
272  Thus, the record was presently clear that Canadian exporters had no access to
imported fluid milk under the Import for Re-Export Program.  Therefore, its exporters did have access
                                                     
272 Canada's reply to New Zealand’s Question 1(b).WT/DS103/R
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to milk under the Special Milk Classes Scheme on terms and conditions that were more favorable than
those commercially available to them within the meaning of  Paragraph (d) of the Illustrative List.273
4.405  Canada  argued on this point that the requirement was essentially a requirement that inputs
not be provided at prices lower than exporters obtained for similar inputs on world markets.  Sales of
milk for export purposes under Special Classes (d) and (e) were tied directly to sales of the resultingdairy products into world markets and producers sought to obtain the optimum return from such sales
to processors. The result was that milk inputs were not provided to processors at less than world
market levels.  
4.406  Canada noted that the footnote to Paragraph (d) stated that the term "commercially available"
meant that "the choice between domestic and imported products is unrestricted and depends only on
commercial considerations".  Canada claimed that processors seeking to use imported dairy inputs had
unhindered access to inputs on the world market for use in re-exported dairy products from Canada.Canada operated an Import for Re-Export Program under the provisions of the Export and Import
Permits Act  pursuant to which permits were freely issued to processors to access inputs on the world
market, subject only to the condition that imported products met Canadian sanitary requirements and
that all resulting manufactured products be re-e xported from Canada.  Canada argued that inputs
imported under the Import for Re-Export Program were not part of Canada's scheduled tariff quotacommitments.  Such imports entered under supplemental import permits issued by the Department of
Foreign Affairs and International Trade.  As such, these imports were not counted against Canada's
TRQ commitments.  Accordingly, processors had an unrestricted choice between domestic and
imported inputs for exported dairy products that depended only on commercial considerations.
4.407  Canada argued that due to the perishable nature of the product and difficulty in shipping,
there was little trade in fluid milk for manufacturing purposes.  Trade in milk consisted largely of
trade in the storable and tradeable milk derivatives, such as skim milk power, whole milk power and
butter. The commercial availability of these substitutable dairy ingredients, through the Import for
Re-Export Program, provided effective international competition for sales of milk for processing
purposes to Canadian customers.  Canada noted the fact that the programme had been used in notinsignificant quantities and that prices paid for imported dairy products under the Import for
Re-Export Program were negotiated between Canadian buyers and foreign suppliers.  This supported
Canada’s position that processors made their choices based on commercial considerations.
4.408  New Zealand  argued that the granting of permits under an Import for Re-Export Program, to
which Canada referred in passing, did not mean that the choice between imported and domesticproducts was "unrestricted" within the terms of the footnote to Paragraph (d).  Paragraph (d) did not
grant Members the right to provide each input into a product at lower prices for export than for
domestic uses where tariff protection was provided as long as there happened to be a scheme in place
that allowed the temporary import of those inputs for manufacture in bond.  A duty draw-back
mechanism was not sufficient justification for governments to provide car engines, wheels and other
vehicle components at cheap prices solely for export use.  In short, Canada had failed to provide any
evidence that the choice between imported and domestic products was "unrestricted" within themeaning of Paragraph (d) of the Illustrative List.
4.409  New Zealand argued that it was clear that the pr ices of products derived from over-quota milk
would be below domestic market prices in order that exports could be commercially viable from the
                                                     
273 The United States noted that although Canada asserted that exporters had access to other dairy inputs, such as milk powder
and evaporated milk, through the Import for Re-Export Program, the United States in its response to the Panel’s Question 5 had
demonstrated that such products simply were not substitutable in any practical sense for the liquid milk that Canada’s exporter s receive
through the Special Milk Classes Scheme.WT/DS103/R
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exporters’ point of view274.  New Zealand also believes that there was a risk that such prices would
also be below world market prices.  Although Cana da argued that the CDC must negotiate vigorously
with exporters in order to maintain the confidence  of producers and the CMSMC, the reality was that
the alternative to disposing of Class 5(e) milk by way of export was to pour it away.  Accordingly,
when pressure for effective surplus removal was added to the need for exporters to obtain a profitmargin, the result could well be that prices paid by exporters were below world market prices.
4.410  New Zealand maintained that Canada's image of unhindered access was hardly in accord with
the reality that permits were issued on a discretionary basis and goods were imported subject to the
"within access" tariff.  A tariff was a form of restriction.  This in itself would be enough to render the
Program inconsistent with the requirement set out in the footnote to Paragraph (d).  New Zealand also
commented on the careful use of language in the Canadian submissions relating to the Import for
Re-Export Program by virtue of which Canada asserted that processors had unhindered access to"dairy inputs", rather than to "milk" on the world market.  It had become clear that the shift in
language that was used in preceding paragraphs which had referred to "milk" was anything but
stylistic.  It simply would not have been accurate for Canada to have said that processors had
unhindered access to milk on the world market.  Canada had admitted that "no permits have been
issued for milk for manufacturing purposes under the Import for Re-Export Program".
275  But the
other dairy "inputs" to which Canada refered were simply not relevant to the current case, which was
about the provision of lower-priced milk to exporters.  Canada had further sought to ascribe this lack
of trade to the "perishable nature" of milk and "difficulty in shipping", although it did not explain why
shipping milk a short distance across the Canada-United States border was more "difficult" and likely
to lead to a "perishing" of the product, than shipping it potentially much longer distances from withinCanada.
4.411  Hence, New Zealand maintained that in practice, milk was not "commercially available" on
world markets to Canadian processors under the Import for Re-Export Program.  Thus, the terms and
conditions on which "special class" milk was made available were more favourable than those
commercially available on world markets.  Clearly, the requirements of Paragraph (d) of theIllustrative List were met.
4.412  The United States recalled that Canada had admitted in its response to the Panel’s questions
that milk in liquid form was not imported into Canada for use in manufacturing.
276   Thus, such milk
was clearly not commercially available within the meaning of Paragraph (d). Canada sought to imply
that phytosanitary barriers did not exist.  The United States noted that in their argumentation on thiscontext, Canada referred to dairy products , not milk.  This statement did not alter the fact that milk
was not entering Canada. Also Canada sought to argue that the components of milk and milk itself
were the same.  This was not true as the ingredients had a much narrower range of applications, than
the whole milk product.  These other dairy products were not "like or directly competitive" products
within the meaning of Paragraph (d).  In addition, the other dairy products mentioned by Canada
certainly could not be used by Canada’s processors for many end-uses that were served by liquid
milk.  For example, a manufacturer of skim milk powder or butter could not import those sameproducts to replace the milk that he received under the Special Milk Classes Scheme.  This was a
critical consideration because a considerable portion of Canada’s dairy product exports consisted of
butter and skim milk powder.
                                                     
274 For example, Figure 3 of New Zealand's First Submission provided a representation of the price of the butterfat component of
butter manufactured from Class 4(a) milk and that manufactured from Class 5(e) milk.
275 Canada’s responses to New Zealand questions of 20 October 1998.
276 Canada’s Response to Question 1 from New Zealand:  "With respect to milk of HS 0401, no permits have been issued for
milk for manufacturing purposes under the Import for Re-Export Program."WT/DS103/R
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4.413  Furthermore, the United States argued that the very modest level of imports reported by
Canada emphasized their lack of competitiveness with milk available through the Special Classes.
The total volume of such imports, such as milk powder and evaporated milk, comprised less than
5 per cent of Canada’s export volume of dairy products, and significantly less than 1 per cent of
Canada’s domestic consumption of milk.  These volumes indicated that processors had decided thatthe other dairy products to which Canada referred were not available on as favorable terms and
conditions as milk under the Special Milk Classes Scheme.  Such paltry import volumes also provided
unrefuted evidence that Canada’s processors did not find such other dairy products to be directly
competitive with the industrial milk provided by Canada’s Special Milk Classes Scheme.
4.414  Furthermore, the United States claimed that Ca nada had failed to demonstrated that those
other dairy products were available on terms and conditions as favorable as those provided by the
Special Classes.  For example, Canada admitted that milk in Special Class 5(e) was provided at worldprices or an approximation of world prices, and also conceded that milk ingredients imported under
the Re-Export Program had to bear an in-quota duty rate.  Even if the Panel accepted Canada’s
argument regarding the direct competitiveness of  the milk ingredients (which the United States
submitted misstated the competitiveness of such products), the imports had to be higher priced as they
were subject to import tariffs and the underlying purchase price was a world market price.  Thus, bydefinition such imports were available on less favorable terms and conditions than those provided by
the Special Classes.
4.415  Hence, the United States concluded that the application of the Illustrative List of Export
Subsidies resulted in a finding that the Specia l Milk Classes Scheme was an export subsidy.
Consideration of the criteria regarding subsidies contained in Article 1 of the SCM Agreement onlyconfirmed this result.
4.416  Canada  argued, in respect of its sanitary requirements, that under Paragraph 26(1)(a), (b) and
(c) of the Dairy Product Regulations
277, under the Canadian Agricultural Products Act, dairy products
imported into Canada had to originate in a country that had "standards for dairy products that are at
least equivalent to those set out in these regulations", and "a system for inspection for dairy productsand establishments that are at least equivalent to that in Canada".  The product had to also "meet the
standards for a similar dairy product that is produced in Canada" and "has been prepared under
conditions at least that equivalent to those required by these regulations".
278   These standards did not
prevent US dairy products from entering Canada.  As a matter of practice, the Canadian Food
Inspection Agency (CFIA) routinely approved the import of dairy products into Canada from theUnited States on the basis that standards in the United States met the standards set out in the
regulations.  Once imported into a province, raw milk would be subject to the same provincial
standards as milk produced in that province.  These standards would not pose any barrier for milk
sourced in the United States.  Thus, while there were sanitary standards, these were normal routine
matters and did not pose anything like the "effective prohibition" as suggested by the United States.
Canada argued that although it was true that there had not been any imports of raw industrial milk in
recent years under the Import for Re-Export Program, this does not reflect any denial of access to theCanadian market.  There had not been a request  to the CFIA for approval of the import of industrial
milk under their sanitary regulations.  The reasons for no imports of industrial milk into Canada were
commercial, not regulatory.
4.417  Canada noted that the United States had suggested that there was a qualitative difference for
manufacturing purposes between liquid milk and milk components that limited the use of milkcomponents to certain niche products.  Canada argued that milk components were not different
                                                     
277 P.C. 1979 – 3088, as amended.
278 Canada, Exhibit 54.WT/DS103/R
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products – they were simply part of the same product.  The quality of milk components such as skim
milk powder, butter or other milk ingredients had greatly improved in recent years.  This had now
reached the point that it was argued that final product quality was actually enhanced by the use of
specialized whey protein concentrates in place of skim milk in ice cream for example.  Where
components were competitive with liquid milk, quest ions of cost would come into play.  Costs of
transport of a product such as liquid milk were considerable when it was considered that up to 87 per
cent of the product consisted of water. In addition, raw milk could be a less economically efficient
input for a manufacturer than dairy products that supplied the components needed for a particular
manufacturing process.   Hence, Canada argued that the supposed barriers to liquid milk for Canadian
processors from the United States did not exist. There was no commercial basis to suggest that liquid
milk and tradeable milk components could not be used for the same manufacturing processes.
4.418  In sum, Canada argued that processors had unr estricted access to dairy product inputs through
the Import for Re-export Program, and they had access to those products at world market prices.
Inputs sold to processors through Special Classes 5(d) and (e) were sold at world market prices.  The
use of the Import for Re-Export Program indicated that these two sources of supply effectively
competed.  Processors had not shown any overwhelming preference for ingredients sourced under
Special Classes 5(d) and (e).  Hence, it could be  concluded that Special Class prices were not more
favourable than prices commercially available to Canadian exporters on world markets.  Given that
prices of dairy inputs were available to processors at internationally competitive prices, both through
the Import for Re-Export Program and through Special Classes 5(d) and (e), and both avenues were
used, this suggested that Special Classes 5(d) and (e) could not be said to provide a "benefit."
4.419  Canada contended that the imports under the Import for Re-Export Program in recent years
had been of significant quantities.279  Furthermore, these imports of dairy inputs from the United
States entered Canada duty-free.  For all products imported under the Programme in 1998, the average
trade-weighted tariff was less than 1 per cent.
4.420  New Zealand  noted that the Appellate Body had indicated that whether something was a
"like" or a "directly competitive" product was to be determined on a case-by-case basis.280  Applying
the relevant factors, such as the product’s end use, consumer tastes and preferences, and the product’s
properties, nature and quality, to skim and whole milk powder, New Zealand was of the view that
skim milk powder and whole milk powder were not "lik e or directly competitive" products with fluid
milk in the context of the production of the products that are exported from Classes 5(d) and (e).  In
other words, processors would not import skim milk powder or whole milk powder at world prices inorder to export the same products - skim milk powder and whole milk powde r - at the same world
prices.  Skim milk powder and whole milk pow der were two important products exported from
Special Class 5(d) or (e) milk.  For other products (principally butter and cheese) exported from
Special Class 5(d) or (e) milk, while it might be technically possible to substitute skim milk powder or
whole milk powder for milk in their production, it was highly unlikely that this would be an
economically viable approach given the resultant products had to be exported at world prices.  In
general, such a reconstitution of milk only occurred for sales of liquid milk in domestic markets where
domestic production was insufficient to meet demand. As Canada had stated "there have not been any
imports of raw industrial milk in recent years under the Import for Re-Export Program".
281
New Zealand considered that this was further evidence that the choice between domestic andimported milk was not unrestricted and did not depend only on commercial considerations in the
meaning of Paragraph (d) of the Illustrative List of Export Subsidies.
                                                     
279 Statistics on imports under the Import for Re-Export Program in recent years were attached to Canada's Second Oral
Statement of 18 November 1998 ("Comments by Canada on Oral Statement of United States").
280 Appellate Body Report on  Japan – Liquor Tax, op. cit., pp.20-21;  Appellate Body Report on  Canada – Periodicals, op. cit. ,
p.21.
281 Canada's Oral Submission of 17 November 1998, para. 74.WT/DS103/R
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4.421  New Zealand contended that the primary reference of the term "products" in brackets in the
last part of Paragraph (d) was to the term "imported or domestic products" in the second line of the
paragraph. New Zealand understood the paragraph to mean that, in order to constitute a subsidy, the
imported or domestic products in question had to be made available on terms more favourable than
the terms commercially available on world markets for "like or directly competitive" products.  Thebracketed reference to "products" made clear that there was no such limitation in the case of services.
4.422  The United States  argued that the express reference to "like or directly competitive" products
in Paragraph (d) of the Illustrative List was made in connection with the discussion of products
provided "for use in the production of goods for domestic consumption".  However, because
Paragraph (d) contemplated a comparison between the "terms or conditions" applicable to products
used in the production of exported goods and those "commercially available" on world markets to
exporters, that comparison could only be meaningful if the products themselves were comparable.Thus, any products available on the world market used in such comparison had to also be "like or
directly competitive" with the products used in the production of exported goods.  The United States
emphasized that it did not consider milk powders to be "like or directly competitive" with fluid
industrial milk within the meaning of that phrase as used in Paragraph (d) of the Illustrative List of
Export Subsidies.
4.423  The United States argued that the natural starting point for construing the meaning of the
phrase "like or directly competitive products" was the definition of "like product" contained in the
SCM Agreement.  Footnote 46 of that Agreement stated that "[t]hroughout this Agreement the term
‘like product’ shall be interpreted to mean a product wh ich is identical, i.e., like in all respects to the
product under consideration, or in the absence of such a product, another product which, although notalike in all respects, has characteristics closely resembling those of the product under consideration."
Although the definition of like product appeared in Part V of the SCM Agreement, use of the clause
"throughout this Agreement" made clear that this definition was equally applicable to the provisions
of the Illustrative List of Export Subsidies contained in Annex I to the Agreement.  The United States
noted that the definition of "like product" contained in the SCM Agreement had been applied in onlyone WTO proceeding to date: Indonesia - Certain Measures Affecting the Automobile Industry .
282
There the Panel emphasized that the definition required not only that the characteristics of the
products being compared resemble one another, but that the characteristics "closely" resembled one
another.283  The Panel had also found that an important element to be considered were the physical
characteristics of the products involved, although its analysis need not be confined to physicalcharacteristics alone.
284  In addition, the Panel had observed that tariff classification principles might
be useful because they provided "guidance as to which physical characteristics between products were
considered significant by Customs experts."285
4.424  In light of the above, the United States first observed that for customs classification purposes
fluid milk and milk powders were classified in different categories.  Fluid milk was classified in item
0401, whereas milk powders were classified in 0402.  Second, there were obvious differences in the
physical characteristics of fluid and powdered milk, the foremost being that one was in liquid form
                                                     
282 Panel Report on Indonesia – Automobile Industry , op. cit.   The United States further noted that the term "like product"
appeared in various provisions of the GATT 1994, as well as the WTO Agreements, and its meaning had been determined to depend o n its
precise usage in a particular agreement.  Thus, the Appellate Body in  Japan – Liquor Tax, op. cit. , p. 21, stated: "The concept of ‘likeness"
is a relative one that evokes the image of an accordion.  The accordion of "likeness" stretches and squ eezes in different places as different
provisions of the WTO Agreement  are applied.  The width of the accordion in any one of those places must be determined by the particular
provision in which the term "like" is encountered as well as by  the context and the circumstances that prevail in any given cas e to which that
provision may apply."
283 Panel Report on Indonesia – Automobile Industry, op. cit. , para. 14.172.
284 Ibid, 14.172. 14.173.
285 Ibid.  The Appellate Body in Japan – Liquor Tax, op. cit. , also found the tariff classification of a good to be relevant to the
determination of "likeness", p. 21.WT/DS103/R
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while the other has been dried to powdered form.  In addition, fluid industrial milk contained
butterfat, whereas skim milk powder contained no butterfat at all.  These physical differences resulted
in constraints on the use of milk powders in particular end-uses, and/or require additional processing
steps for their use.  Skim milk powder, because it lacked butterfat, could not alone be used for any of
the multitude of dairy end-uses where butterfat was required.  That butterfat had been added in anyformulation using skim milk powder where butterfat was required underscored the lack of
competitiveness of skim milk powder in such end-uses.  Fluid industrial milk because it contained
butterfat was not subject to a similar constraint. This fact, in itself, suggested that skim milk powder
and fluid industrial milk did not "closely resemble" each other in terms of physical characteristics and,
therefore, were not like products.  The United States noted that the same conclusion, i.e., that it was
not a like product, was warranted with respect to whole milk powder.  Again, whole milk powder and
fluid milk were not classified in the same tariff category, and differed in terms of their physical form,one being in a liquid form, the other being a powde r.  Although both fluid industrial milk and whole
milk powder contained butterfat, the fact that a ll liquid had been removed from whole milk powder
meant that in almost all instances before it can be used it had to be rehydrated.  This process was both
time consuming and required additional costs, as well as additional equipment.  The US industry
estimated this cost to be approximately US$70 per hundredweight.
4.425  The United States further noted that whether the powder was produced using high intensity
heat or lower temperatures also would affect the nature of the powder produced and the range of
products in which it could be used without alteration of the final processed dairy product.  For
example, powdered milk produced with high temperatures required a lengthier period, often as much
as 24 hours, for rehydration.  The high temperatures used also frequently imparted a taste to thepowder which altered the flavour of the finished pr oduct from that which would be obtained by using
fluid milk.  In many instances, the powder, once rehydrated, was used only in products where its taste
would be obscured by means of flavouring, such as in ice cream.
4.426  The United States further noted that the differences in physical characteristics also evidenced
itself in the manner in which the respective products were used.  In broad terms, in Canada 40 per centof fluid milk was used for beverage purposes, 40 per cent was used in the production of cheese, and
20 per cent was used in all other dairy products.  In comparison, relatively small amounts of milk
powder were used for beverage purposes in Canada or the United States.  Only comparatively small
amounts of powder milk were used in cheese, and primarily for fortification, i.e., to increase the
protein level.  For example, in two of the primary cheese products, mozzarella and cheddar, milkpowder normally represented no more than 3 per cent of the product by weight.  Powder could be
used to fortify cheese because of its relatively hi gh protein level compared to fluid milk.  Another
physical difference was the high perishability of fluid milk.  Whereas fluid milk would spoil within a
period of days even when refrigerated, milk powder could be stored for lengthy periods of time,
measured in months, if not years.
4.427  The United States noted that two separate GATT Panel reports had concluded that the
differences between fluid milk and various products derived from milk were sufficient that theygenerally did not constitute like products or compete directly within the meaning of Article XI:2 of
the GATT 1947.  In Japan - Restrictions on Imports of  Certain Agricultural Products
286, a Panel
examined a broad variety of dairy products, including processed cheese, prepared whey, skim milk
powder, and whole milk powder and determined that "a product in its original form and a product
processed from it could not be considered to be ‘like products’" for purposes of Article XI:2.287  I n
                                                     
286 Report on Japan – Certain Agricultural Products, op. cit .
287 Ibid, p. 231, para. 5.3.1.4.WT/DS103/R
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Canada - Import Restrictions on Ice Cream and Yoghurt288, another Panel reached a similar
conclusion, finding that neither ice cream nor yoghurt competed directly with raw milk.
"The Panel considered that the term compete directly with ...
‘imposed a more limiting requirement than merely ‘compete with’....
The essence of direct competition was that a buyer was basicallyindifferent if faced with a choice between one product or the other
and viewed them as substitutable in terms of their use.  Only limited
competition existed between raw milk and ice cream and yoghurt."
(emphasis in original)
289
4.428  The United States argued that the conclusions in the cited Panel reports were equally
applicable in the present context.  Although those Panels were interpreting the terms "like product"
and "directly competitive" in the context of Articl e XI:2 of the GATT, the use of those terms in the
SCM Agreement should be given an equally narrow meaning.  In fact, the 1987 Panel Report on
Japan - Customs Duties, Taxes and Labeling Practices on Imported Wines and Alcoholic Beverages
stated that it was aware of the "very narrow definition" for the term "like product" for antidumping
purposes.290  Since the definition of like product in the Antidumping Agreement was identical to that
currently found in the SCM Agreement, the Alcoholic Beverages Panel’s observations regarding the
narrow definition of "like product" were germane to this dispute.  Given all of the foregoing,
including the significant differences in physical characteristics described above, milk powders and
fluid milk were not "like products".
4.429  The United States submitted that, for very similar reasons, milk powders and fluid industrial
milk were not directly competitive products.291  Because the phrase "directly competitive products"
was not defined in the SCM Agreement, the ordinary meaning of the term in light of its context, and
the object and purpose of the provision were our starting point, consistent with Article 31 of the
Vienna Convention. The purpose of the requirements in Paragraph (d) that a product be "like or
directly competitive" and that the product be provided on "terms and conditions" no less favorable
than the product supplied by the government of the country of exportation were to allow adetermination whether a benefit was conferred to an exporter when the government provided for a
product to be received on more favourable terms for export than for production for domestic
consumption.  This determination necessitated a comparison between products that closely resembled
each other, otherwise the risk of an apples to oranges comparison might result.  A determination
whether products were provided on the same favorable "terms and conditions" would be impossibleunless the products closely resembled each other.  Products that were materially different would not
be comparable for purposes of determining the e quivalence of the applicable terms and conditions.
Therefore, to construe the phrase "directly competitive" to encompass products that while
substitutable for certain purposes were not interchangeable for most end-uses, either because of
differences in physical characteristics or other reasons, would appear to undermine the ability to
determine whether the applicable terms or conditions were similar.
                                                     
288 Panel Report on Canada – Yoghurt, op. cit.
289 Ibid, p. 89, para. 73.
290 Panel Report on Japan – Alcoholic Beverages , (hereafter " Japan – Alcoholic Beverages ") L/6216, BISD 34S/83, adopted 10
November 1987, pp. 115-116, para. 5.6.
291 The United States noted that in the different context of Article III:2 of the GATT 1994, the Appellate Body in   Japan –
Liquor Tax, op. cit.,  indicated that the category of "directly competitive or substitutable products" may be broader than the class of "like
products", but stated that this determination was "a matter for the panel to determine based on all relevant facts in that case " and had to be
determined on a case-by-case basis (p.25).  The Appellate Body further observed that consideration of such factors as physicalcharacteristics, common end-uses, and tariff classifications were appropriate for this purpose. Ibid.WT/DS103/R
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4.430  The United States noted that, as indicated above, the Canada - Yoghurt Panel found that to be
"directly competitive" a buyer would have to be indi fferent in its choice between the products in issue.
In the view of the United States, a buyer would not be indifferent to the choice between fluid
industrial milk and milk powders because of the differences in physical characteristics, limited
substitutability in end-uses, and the additional processes associated with reconstituting powders priorto their use in further manufacture of dairy products.  Consequently, milk powders were not "like or
directly competitive" with industrial milk provided through the special class system.
4.431  The United States submitted that cheese imported by Canada in the Import for Re-Export
Program was not like or directly competitive with fluid industrial milk based on the significant and
obvious physical differences between the products, as well as the inability to substitute cheese in most
of the end-uses for milk.   The United States also noted that beyond the question of whether milk
powders were like or directly competitive products, there was the separate question of whether milk
powder imports were available on the same favorable terms or conditions on which fluid milk wasavailable to exporters under the special class system.  The United States submitted that they were not.
Import data supplied by Canada pertaining to the Import for Re-Export Program indicated that
virtually all such imports consist of various manufactured dairy products, not raw milk, as was
available under Special Classes 5(d) and (e).  Moreover, those dairy ingredients were on a "milkequivalent" basis priced higher than industrial milk provided pursuant to Special Classes 5(d) and (e).
4.432  The United States used Canada’s data
292 on quantities and values of selected dairy products
imported under the Import for Re-Export Program to calcu late the equivalent price, or cost, of "milk"
imported for calendar years 1995, 1996, 1997 and 1998 to date.293  The products selected included dry
milk, not containing sweetening matter, with grea ter than 1.5 per cent fat, or whole milk powder
(WMP), cheese of all types, and fluid milk, not concentrated, containing no sweetening matter, with
between 1 and 6 per cent fat.  These three products accounted for approximately 75 per cent of the
total value of 1997 dairy product imports for re-export.294  Unit values of imports for re-export were
computed in a straightforward manner (total value/total quantity), converted to US dollars per metrictonne, with international prices, as reported by the US Department of Agriculture, provided as a
comparison.  These unit values were then converted to a milk equivalent basis, using yield factors and
manufacturing margins based on a combination of data from the CDC and factors used by the US
Department of Agriculture, as shown in the imme diately following table.  Comparative data for
Special Class prices 5(d) and (e) were computed for calendar year 1997 and for 5(e) for marketingyear 1996/97.
295  The 1997 price data for Special Classes 5(d) and (e) were based on statistics from
Agriculture and Agri-Food Canada296, and were weighted-averages based on 71 per cent and 81 per
cent, respectively, of the 1997 volume of milk sold under Special Classes 5(d) and (e) in Canada
(calculations also attached).  The 1996/97 marketing year price data for Special Class 5(d) and (e)
were computed based on Class 5(e) component values for Quebec, which represented 64 per cent oftotal Class 5(e) milk sales in 1997, using milk composition factors of 3.9 per cent for butterfat, 3.3 per
cent for protein, and 5.21 per cent for other milk solids.
4.433  The United States contended that, based on the above-described calculations, contrary to
Canada’s assertion, Canadian processors did not have access to dairy products under the Import for
Re-Export Program at prices comparable to prices for raw milk available under Classes 5(d) and (e).
                                                     
292 The United States referred to the data attached to Canada's comments on the US Oral Statement at the Second Substantive
Meeting of the Panel ("Comments by Canada on Oral Statement of  United States, Second Panel Hearing, November 17-18, 1998").
293 Contained in US Exhibit 65.
294 The United States claimed that imports of skim milk powder under the Import for Re-Export Program were at such extremely
low levels during the last two calendar years that their presence could not be considered to provide an alternative to milk pro vided through
the Special Classes Scheme.
295 The United States noted that the most complete and reliable data available was for 1997 and marketing year 1996/97.
296  Attached to United States, Exhibit 56.WT/DS103/R
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The "milk equivalent" prices for whole milk powder, cheese, and fluid milk imported through the
Import for Re-Export Program were in each instance higher than the corresponding prices for special
class 5(d) and (e) milk.
4.434  Canada  noted that the reference to "products", within brackets, in the last part of
Paragraph (d) of the Illustrative List, included "like or directly competitive products".  Paragraph (d)
referred initially to both "products or services"297 and then subsequently again to both "products and
services"298.  The second reference to "products and services" was modified by the phrase "like or
directly competitive".  The use of the word "p roduct" in the final condition of Paragraph (d)299
followed the reference to "like or directly competitive products and services".  Thus, the word
"product" referred back to the antecedent reference to "like or directly competitive products and
services." Accordingly, the purpose of the use of the word "product" in the bracketed portion in the
final condition in Paragraph (d) was to indicate that this final condition applied only with respect to
"products"; not to both "products and services".  Since the antecedent reference was to "like ordirectly competitive  products and services", then  the qualifying term "like or directly competitive"
similarly applied to "products" in the final condition.
4.435  Canada argued that in the dairy industry in Canada, and abroad, skim milk powder and whole
milk powder were considered to be like or direct ly competitive with whole milk.  In addition, raw
milk could be a less economically efficient input for a manufacturer compared to dairy products thatsupplied the components needed for a particular manufacturing process.  Milk powder was, of course,
much cheaper to transport due to the fact that raw milk is over 80 per cent water.  Milk powders could
be reconstituted for use in the manufacture of some dairy products.  They could also be used to
standardize for protein and butterfat for a variety of products.  Indeed, to the extent that there was a
cost advantage to do so, dairy product manufacturer s would use milk powders instead of raw milk.
Thus, to a certain extent, milk powders competed in the same markets and fulfilled the same needs
and uses as fluid industrial milk.  These products could be used interchangeably in many applications.
The differences between fluid industrial milk and milk powders primarily related to storage and
transportation, not end-use.
4.436  Canada drew the Panel's attention to the US Dairy Export Council website where the US dairy
processing industry claimed:  "U.S. powdered milk  can be easily reconstituted into wholesome
drinking milk or used as an ingredient in baked goods, dairy products, confections and other preparedfoods".
300  Similarly, a study prepared by the United States Department of Agriculture (USDA) had
stated, in respect of SMP that it "can be substituted for fresh skim milk or condensed skim milk in
many manufactured products" and "converted easily back to milk, and with little formulaic
adjustment…[and] can be substituted for condensed skim in many processing operations".301  Canada
further noted that the United States claimed that SMP normally represented no more than 3 per cent of(mozzarella and cheddar cheese products) by weight (paragraph 4.426).  However, the same USDA
study just referred to stated that, on a skim equivalent volume basis, skim milk powder usage had
grown to "25.4% of the dairy ingredients in the manufacture of mozzarella and other Italian-cheeses
in one region of the United States and 16.1% nationally".
302  Perhaps it was for this reason that the US
                                                     
297 " … of imported or domestic products or services for use in the production of exported goods … "
298 " … for provision of like or directly competitive products or services … "
299 " … if (in the case of products) such terms or conditions are more favorable than those commercially available on world
markets to their exporters."
300  http://www.usdec.org/cgi_win/usdec.exe/section24
301 A Review of Class III – A Pricing under Federal Milk Marketing Orders, Dairy Division, Agricultural Marketing Service,
United States Department of Agriculture, March 1995, pp.1–2.
302 Ibid., at pp. 17 and 22, referring to the years 1992 to 1994.WT/DS103/R
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Dairy Export council proudly proclaimed on its website that "the US milk powder industry is capable
of unrestrained growth."303
4.437  Canada argued that the GATT Article XI Panel Reports relied on by the United States
(paragraph 4.427 and following) had little to do with whether, for the purposes of Paragraph (d) of
Annex I of the SCM Agreement, milk powders and fluid industrial milk were "like or directlycompetitive products."  GATT Article XI:2(c)(i) was concerned with restrictions on the importation of
primary products "in any form".  This expression was subject to the definition in Ad Article XI:2(c).
Furthermore, GATT Article 2(c)(i) created an exception to the general prohibition created in
Article XI:1, and thus had been construed narrowly.
304  The "like or directly competitive products"
concept in Paragraph (d) of the Illustrative List of Annex I to the SCM Agreement was a defining part
of that list and thus was to be given its full and ordinary meaning in accordance with the principles of
treaty interpretation.
4.438  Canada argued that the United States had given scant attention to more authoritative and more
relevant Appellate Body jurisprudence on concepts of "directly competitive or substitutable products";
jurisprudence that plainly supported the conclusion that milk powders directly competed with fluid
industrial milk.305  Apart from being of minimal relevance, the Panel Report in Canada – Yoghurt
relied on by the United States was readily distinguishable on its facts.  That Panel had consideredwhether, from the standpoint of the end-use consumer, ice cream and yoghurt competed directly with
fresh milk.  This was an entirely different issue from assessing, from the standpoint of processors,
whether milk powders and fluid industrial milk were "like or directly competitive" products.  In
respect of the other GATT Article XI case cited by the United States ( Japan – Restrictions on Imports
of Certain Agricultural Products ) seemed to lend support to the common-sense proposition that milk
powders competed directly with fl uid milk.  What the United States failed to mention was that the
Panel in that case appeared to accept that milk powders and certain other dried and condensed milk
products "could compete directly with fresh milk for manufacturing use."
306
4.439  Canada refuted the validity of the "milk equivalent" prices calculated by the United States as
provided in US Exhibit 56 (paragraph 4.432).  Canada argued that dividing the total reported tradevalue by the total reported trade volume in trade statistics was an unreliable guide to actual prices.
Thus, the data submitted by the United States (the Dairy Market Review attached to Exhibit 36)
showing the highest Canadian domestic milk pr ice for Class 1 use was C$65.35/hl (US$48/hl),
together with an estimate of import costs of US$116/hl.  Canada argued that it was obvious that either
the estimated unit import value was wrong, or the data was not comparable.  The alternative was toassume that Canadian importers freely chose supplies that were twice as expensive as the most
expensive domestic alternative.  Canada noted that  in the case at issue, much of the fluid milk
imported under the Import for Re-export Program was imported in retail packages for use on cruise
ships.  It was hence, clearly inappropriate to make price comparisons between retail packages on one
hand and milk supplies from farmers to processors on the other.
4.440  Similarly, Canada argued that the United States estimates of unit import value for "cheese of
all types" was simply an average of high and low value cheese of vastly different types.  These were
                                                     
303 A Review of Class III – A Pricing under Federal Milk Marketing Orders, Dairy Division, Agricultural Marketing Service,
United States Department of Agriculture, March 1995, pp.1–2.
304 Panel Report on Japan –Certain Agricultural Products, op. cit. , para. 5.1.3.7;  Panel Report on  Canada –Yoghurt, op. cit. ,
para. 59.
305 Canada referred to the Appellate Body Report on  Japan – Liquor Tax, op. cit.  and the Appellate Body Report of  Canada –
Periodicals, op. cit.
306 Appellate Body Report on Japan – Liquor Tax  op. cit. , para. 5.3.1.4.  Canada noted that the Panel went on to find that milk
powders did not meet the perishability requirements of Ad Article XI:2(c), which had no counterpart in Paragraph (d) of Annex I  to the
SCM Agreement.WT/DS103/R
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average import values, together with unsubstantiated conversion factors were then used to generate a
"milk equivalent cost of cheese imported for re-export".  This approach was invalid because the yield
of cheese from a hectolitre of milk varied widely between varieties of cheese.  As the mix of varieties
imported varied from year to year, a conversion using some "standard" yield of "generic" cheese from
a hectolitre of milk would bear no consistent relationship to the actual value of milk used in theproduction of imported cheeses.  In the case of whole milk powder, which was a much more uniform
commodity product for which it may be valid to use a simple conversion formula, the United States
data showed that, the US estimated average Class 5(e) price was very similar to the estimated "milk
equivalent cost of WMP imported for re-export" in 1997 and 1998.  While the problems noted above
with respect to the use of unit import values remaine d, this gave an indication that, in the one situation
in Exhibit 56 where the construction of milk equivalent prices on the basis of formulae was most
defensible, the resulting data supported Canada’s argument.
4.441  Canada further noted that on page four of Exhibit 56 the United States estimated milk prices
in Classes 5(d) and (e) on the basis of prices estimated for individual provinces (except Ontario). The
resulting estimated prices were incorrect.  The actual Canadian average return for Class 5(d) sales in
the 1997 calendar year was $26.22/hl.  For Class 5(e), the return was $22.98/hl.
307  Canada argued that
the discrepancy between these real figures and the values constructed by the United States was partlyexplained by the fact that the United States included a Class 5(d) price of $11.98/hl for Manitoba,
although it was self-evident that this was a data error in the 1997 Dairy Market Review.  (For the
record, the correct datum should have read $22.01).  This should have been obvious from the fact that
the Class 5(d) prices reported in the Review for all other provinces were between $31.31/hl and
$21.66/hl.  It was questionable statistical practice to simply use what was clearly an anomalous figurewithout verifying from other sources.   In addition, the data set used by the United States did not
include prices from Ontario.  The flaws in the data presented by the United States meant that no
weight can be attached to them.
4.442  The United States  noted that Canada carefully qualified its statement in respect of the "like or
directly competitive" nature of milk powders with  fluid milk (paragraph  4.435).  Canada stated that
milk powders could be used in the manufacture of some  dairy products.  Similarly, Canada stated that
to a certain extent  milk powders competed in the same markets.  The United States argued that direct
competition contemplated more than a certain  degree of competition or the ability to substitute for
fluid milk in some  uses.
(d) Article 3
4.443  The United States  argued that once a violation of Part V of the Agreement on Agriculture
had been found, Canada had to bring the operation of its export subsidies into conformity with its
obligations, particularly those establishing its export reduction commitments respecting the quantity
of subsidized exports. This was true, regardless of whether a separate violation of the SCM
Agreement was also found.
4.444  The United States noted that Article 3 of the SCM Agreement was addressed by Article 13 of
the Agreement on Agriculture. That provision directed that only export subsidies that conformed withPart V of the Agreement on Agriculture were exempt from challenges pursuant to Article 3 of the
SCM Agreement. Furthermore, the United States claimed that Article 3 of the SCM Agreement was
within the Panel’s terms of reference.  Consequently, the United States requested that the Panel make
separate findings respecting the consistency of the Special Class system with the SCM Agreement,
                                                     
307 Canada noted that as dairy farmers in Canada were actually paid based on the butterfat, protein and other solids components
of milk, it was possible to generate differing estimates of the price of a hectolitre of milk depending whether one used the av erage
composition of milk delivered or a standard milk composition.  At the individual farm level, payment was based on the component s
delivered by the farmer, so, while the problem of translating to hectolitres of milk complicated life for analysts, it had no i mpact on the
farm-level economics of the system.WT/DS103/R
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including a finding whether the Special Class system provided a prohibited export subsidy within the
meaning of Article 3.
4.445  The United States claimed that as Canada’s Special Milk Classes Scheme was an export
subsidy of dairy products in excess of the limits for Canada under the Agreement on Agriculture ,
whether they fell under Article 9 or Article 10 of that Agreement, as a result, those subsidies did not
benefit from the exemption in Article 13(c)(ii) of that Agreement on Agriculture.  Consequently, the
United States claimed that these export subsidies were also inconsistent with Canada’s obligations
under Article 3 of the SCM Agreement.
5. Protected Markets and Export Subsidies
4.446  Canada did not deny that its milk production sector enjoyed a level of protection through
tariffs.  That was a right negotiated and set out in its WTO Schedules, Schedules which had been
accepted by the Complainants.  Nor did Canada deny that such protection could lead to higher pricesfor milk which benefited milk producers, but only with respect to the domestic  market. The very
purpose of tariffs was that the targeted domestic industry would enjoy higher domestic prices.  This
was accepted as a basic feature of the WTO system and was true for all WTO Members that
maintained tariffs, including the two Complainants.  Canada argued that the submissions of the
Complainants failed, in particular, to recognize:  (i) that sales of milk for export use in Canada werebased on the commercial practices of producers and their reactions to world market signals;  (ii) that
the logical conclusion of their arguments would be to deem the existence of export subsidies wherever
exported products were subject to tariff protection in their home market, thus prohibiting most such
exports and undermining one of the most fundamental features of the WTO system;  and (iii) that the
selling of products at differing prices for domestic and export markets was a common internationalpractice that had never been treated as an export subsidy for GATT/WTO purposes.
4.447  Canada argued that nothing in the WTO Agreements revealed a common intention to treat
sales of a product in different markets at differing prices as implying the existence of a subsidy for the
lower-priced good.  Canada maintained that if the Complainants’ arguments were to succeed, the
basis of the consensus on the negotiated use of tariff protection for sensitive sectors, as captured in theGATT 1947 and the WTO Agreements, would be undermined.  In character, a tariff was simply a tax
and, as such, represented an incontestable government intervention in support of a domestic industry.
The result of accepting the Complainants’ line of re asoning would be that an export subsidy would be
found every time a product was exported at its world market price from a market protected by tariffs
at any level, since the very point of any tariff was to raise by government intervention the price of a
good from its world market level.  Given the absolute prohibition in the SCM Agreement on export
subsidies, the Complainants' arguments, taken to th eir logical conclusion, would lead to an absolute
prohibition on the exportation of any product at worl d market prices from a domestic market protected
by tariffs.  This could not have been the intention of the drafters of the WTO Agreements.
4.448  Moreover, Canada argued that the right to export while maintaining tariffs was clearly built
into the "tariffication" decision incorporated in the results of the Uruguay Round.  WTO Members
agreed that all non-tariff barriers, including quantitative restrictions maintained under  GATT 1947
Article XI(2)(c)(i), would be converted into equivalent tariffs.  The condition under Article XI for the
maintenance of such quantitative restrictions was that domestic production of the product in question
had to be restricted.  This limited any potential for production for export purposes.  By converting
Article XI quantitative restrictions into tariffs under Article II of the GATT 1994, this condition was
removed.  Thus, WTO Members had agreed that under the new WTO regime, Members maintainingthe new equivalent tariffs would not have to restrict their domestic production.  Canada argued that
this shift clearly contemplated new production in addition to domestic needs, e.g., production for
export while maintaining Article II tariffs.  Thus, the new "tariffied" tariffs were to be treated inWT/DS103/R
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exactly the same way as all other tariffs had been since 1947 – there was a common expectation that
the product subject to the tariff could be exported.
4.449  Canada argued that far from an anomaly, the sale of goods into domestic and export markets
at differing prices was a common practice for many WTO Members.  For example, the peanut market
in the United States had a structure similar to the Canadian milk market.  The United States peanutmarket was protected from external competition by high tariffs (155 per cent ad valorem  on shelled
peanuts and 192.7 per cent ad valorem for peanuts in shell) and domestic competition was limited
through quotas.
308  There was no quota for production for export of peanuts.  Any additional quantity
produced by a farmer above the specified quota had to be "sold for whatever can be obtained on the
international market".309  As a result, the United States had a 25 per cent share of the world peanut
market.  The domestic prices for peanuts for edible use were about twice as high as the world market
price.310
4.450  Canada recalled that the use of differing prices for export sales of dairy products was also part
of the marketing system used in California.  At the November 1997 meeting of the Committee on
Agriculture, Canada had asked the United States whether it could confirm that milk marketing plans
established by the State of California provided lower prices for dairy components to be used in the
manufacture of yoghurt, soft fresh cheese (fromage frais), uncreamed, creamed, or partially creamedcottage cheese, sour cream, sour half-and-half, or light sour cream which was sold for use outside the
boundaries of the United States, than for dairy components to be used for manufacturing similar
products for sale within the United States.  The United States confirmed Canada's understanding of
the matter.
4.451  Canada argued that even if the enabling authority of the producer boards were to be
eliminated, producers would operate on the basis of economic differences between the domestic
market and the world market.  As a matter of very simple economic reality, so long as there was a
level of border protection maintained by Canada, dairy product prices in Canada would continue to
exceed world price levels. Such differences in pricing were linked to the level of border protection
maintained and other general economic conditions in the Canadian market.  In these circumstances,producers would seek to exploit these tariff-generated differentials in their commercial relations with
Canadian processors.  This would occur independently of any legislative framework.
4.452  New Zealand  argued that compliance with export subsidy commitments by a Member whose
domestic market was protected by tariffs did not prohibit it from exporting at world market prices. A
Member that protected its domestic market by high tariffs could export in accordance with its exportsubsidy commitments.  It could also, of course, export without the use of export subsidies. In this
respect, New Zealand noted that Canada’s export data indicated that Canada did export dairy
                                                     
308 American Peanut Coalition (APC) testimony before the Trade Subcommittee of the Ways and Means Committee of the US
House of Representatives, 12 February 1998 p. 3 (Exhibit 23): "Congress moved to decouple farm income support from production
decisions in the Federal Agriculture Improvement and Reform Act of 1996 (the "FAIR" Act). This 'freedom-to-farm' bill eliminate d
deficiency payments and marketing loans and replaced them with transition payments for virtually all farm commodities.  This wa s in
keeping with the concept of 'decoupled income support' in the 'green box' of permitted policies that were exempt from reduction s in the
Uruguay Round.  As a result of the 1996 Farm Bill, farmers now have the freedom to farm almost everything, except peanuts.  Onl y farmers
who own or lease a production quota can legally grow peanuts to be sold for edible use."  The APC further noted at p. 4:  "In s pite of the
peanut programme, the US is a significant exporter of peanuts, having a 25% share of the world market.  This occurs as a result  of the fact
that US peanuts grown outside of the peanut quota are required to be exported or put to non-edible uses."
 309 The United States Government Accounting Office GAO/RCED-93-18,  Making the Peanut Program Responsive to Market
Forces , "Appendix II: GAO's, Technical Economic Analysis of the Peanut Program", p.60. (Canada, Exhibit 24)
 310 Ibid., pp.62-63. In 1989, the quota support price for peanuts was $0.3318 per pound (in 1991 dollars).  The world price for US
peanuts was $0.1853 per pound (in 1991 dollars).  In 1998, those prices were in the order of $0.45 per pound on world markets a nd $0.65 on
US domestic markets.WT/DS103/R
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products: in 1997/98, 4 per cent of cheese and 21 per cent of  "other milk products" exports were
exported from outside Special Classes 5(d) and (e).311
4.453  New Zealand argued that there was no blanket prohibition under the WTO of differential
pricing between domestic and exported agricultural products.  What the WTO required was that any
such difference result from private and not from government action.  The objection of New Zealand in
this case was that through the actions of governments and their agencies Canada was using export
subsidies to bridge the gap between its high domestic prices and lower world market prices in excess
of its scheduled allowance.  The subsidy existed because, in accordance with the relevant definitions
of export subsidy, a government was involved in a scheme which required milk producers to supply
lower priced milk to exporters of dairy products as an incentive for them to undertake exports which
would, in the absence of the export subsidy, be unlikely.  The removal of government from such a
scheme, and not just the pretence of removal of the kind Canada asserted in this case, would meanthat the Agreement on Agriculture would not apply.  Exporters would be free to export without limit
based on commercial considerations rather than export subsidies.
4.454  New Zealand emphasized that it was not indeed suggesting that Canada did not have the right
to export dairy products.  Canada, like any Member, was perfectly free to export dairy products
provided that it did so in accordance with its WTO obligations.  It could export up to its exportsubsidy commitment levels.  And it could export whatever quantity it wanted without the use of
subsidies at all.  What New Zealand was denying was Canada’s claim that it was allowed to use
export subsidies which came within Article 9.1 of the Agreement on Agriculture in excess of its
export subsidy commitments or to use export subsidies not covered by Article 9.1 that had the effect
of circumventing or threatening to circumvent those commitments.
4.455  In respect of Canada's arguments on Article XI (paragraph 4.448), New Zealand noted that it
was not surprising that Canada cited no authority for what it claimed the WTO Agreements
"contemplated" as a result of tariffication, nor could it.  Tariffication was not concerned with whether
a country was an exporter or an importer or both.  Tariffication was not about the right to export.  It
was concerned with market access barriers.  However, it certainly was not within contemplation thathaving liberalised agricultural trade with the conv erting of quotas into tariffs, Members would now be
free to use export subsidies inconsistent with the express requirements of the Agreement on
Agriculture.   New Zealand argued that Article XI  did not in fact prevent producers from producing
any quantity of product and it did not prevent that product from being exported.  What Article XI did
do was to require that in those countries which chose to put in place quantitative restrictions onimports, the proportion of imports could not fall below the level which would have pertained had the
quantitative restrictions not existed.
4.456  The United States  submitted that this broader question, raised by Canada, went beyond the
scope of the case, and need not be addressed by this Panel.  The United States was not contesting in
this dispute either Canada’s right to set tariffs or to pursue supply management in its dairy sector. The
question presented by the Complainants was not only a different one, but was also much narrower,
i.e., whether Canada’s Special Milk Classes Scheme constituted an export subsidy subject to thereduction commitments contained in the Agreement on Agriculture.  The question whether, in the
absence of any other governmental action, exports at prices below tariff protected domestic prices
constituted an export subsidy, was not before the Panel.
4.457  The United States contended that Canada was confusing the issue by suggesting that the
position of Complainants meant that a country with high tariffs and high domestic prices necessarilyengaged in differential pricing and therefore bestowed an export subsidy. Canada asserted that such
price differences were simply a result of existing tariff protection. Although this, in part, could be the
                                                     
311 Canada’s answer to Question No. 1 by the Panel, 20 October 1998.WT/DS103/R
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case, it would be unreasonable to assume that the WTO Members were unaware of protective tariffs
or supply management systems when they concluded the SCM Agreement and the Agreement on
Agriculture or when they adopted GATT 1994.   The United States argued that there could be many
circumstances where a WTO Member could have a lower price for export of agricultural products and
a higher price for domestic use without implicating any of a Member’s WTO obligations.  The answerto this question depended in substantial part on the level and nature of government involvement in the
export of the agricultural products.  Canada was wrong in assuming that the price differential
occasioned by the existence of a tariff barrier necessarily resulted in both a financial contribution and
a benefit to the exporter.  The situation where merely a protective tariff existed stood in sharp contrast
to one where in addition to a tariff, a Member had constructed a scheme, such as the Canadian Special
Milk Classes Scheme, where both the quantities exported and the export prices were determined
largely by the intervention of governments.
4.458  The WTO Agreements on Agriculture and Subsidies imposed specific disciplines on export
subsidies.   What was noteworthy was that none of the relevant Agreements provided an exemption
from the export subsidy disciplines when differential pricing resulted from government action. The
only provision that implicitly addressed this issue was Paragraph (d) of the Illustrative List of Export
Subsidies in the SCM Agreement.  Paragraph (d) pr ovided an exemption from its coverage where any
benefit that would otherwise result from the provision of a good at a lower price by the government
was negated by the availability of such goods on as favorable terms and conditions on the world
market. Canada did not satisfy the requirements of that exemption.  Moreover, even if Canada did
meet those requirements, it would only be exempted from the disciplines of that provision, not the
additional restrictions on export subsidies included in the Agreement on Agriculture and the SCMAgreement.
4.459  If Canada merely maintained tariff protection for its milk producers and the Canadian federal
and provincial governments otherwise were not involved in the regulation of prices and exports of
dairy products, the United States would not have requested the formation of this Panel.  A situation in
which tariff protection alone resulted in differential pricing for domestic and export manufacturersinvolved no financial contribution or benefit in the sense of the SCM Agreement.  The mere
imposition of tariffs, including any price differential that might result, had never been considered to
constitute an export subsidy.  In addition, where only tariffs existed, there was always the possibility
that the world markets into which the goods were sold could reflect either prices at a higher or lower
level than existed domestically. This was because domestic prices were not simply a function of thelevel of tariffs.  The extent of competition within the domestic market, including the number of
producers, the availability of alternative products, the level of production, the elasticity of demand,
and other economic factors also had a direct bearing on domestic price levels.  Thus, the existence of
a price differential could not be assumed to exist and even where a differential existed it could not be
assumed to result solely from the imposition of a tariff on imported goods.
4.460  The United States argued that Canada could not isolate the Special Milk Classes Scheme from
the environment in which it operated, and particularly from the supply management system.  It wasconvenient, but not convincing, for Canada to argue that the Special Classes did not provide for the
establishment of domestic prices at levels higher than those applicable to exports, when the supply
management system clearly established those prices. This was not a particularly pertinent issue. What
was dispositive respecting the existence of the subsidy was that the governments in Canada had set in
place a mechanism through which processors were provided lower priced milk.  Whether the higherprice for domestically-sold milk was fixed under the Special Classes or by some other government
intervention was simply not relevant.WT/DS103/R
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B. IMPORTATION OF MILK
1. Outline
4.461  The United States  recalled that in implementing its Uruguay Round market access
commitments, Canada established a tariff-rate quota for fluid milk and cream (hereinafter "fluid
milk") with an in-quota level of 64,500 tonnes. Part I, Section IB of Canada’s Schedule, provided thatfluid milk encompassed in tariff item number 0401.10.10, which entered within the tariff-rate quota at
the MFN rate of 17.5 per cent, beginning in 1995.
312  The rate of duty applicable to entries within the
tariff-rate quota receiving MFN treatment would decline to 7.53 per cent at the end of the six-year
implementation period.  Fluid milk imports outside of the 64,500 tonne tariff-rate quota bore an initial
rate of duty equal to 283.3 per cent, declining to 241.3 per cent in 2001.  The United States claimed
that for all intents and purposes, the over-quota tariff rate precluded imports of fluid milk outside of
the tariff-rate quota.313
4.462  The United States maintained that Canada, in addition, imposed unjustified constraints on
access to the tariff-rate quota that impeded market access at even the lower, in-quota tariff rate.
Canada only permitted cross-border retail purchases of C$20, or less, by residents of Canada for their
own personal use to qualify for entry within the tariff-rate quota.  By confining the scope of fluid milk
entries that were eligible for the lower in-quota rate, Canada granted imports of fluid milk treatmentless favorable than that provided for in the appropriate Part of Schedule V and, thus, had acted
inconsistently with its obligations under Article II:1 of the GATT 1994.  Because Canada
administered the tariff-rate quota through a general permit restricting any single import entry to a
value of C$20 and subjected such entries to a personal use restriction, Canada’s licensing procedures
introduced additional trade impediments that were inconsistent with its obligations under Article 3 ofthe Agreement on Import Licensing Procedur es ("the Import Licensing Agreement").
4.463  The United States claimed that it was clear that Canada imposed unjustifiable limitations,
including both a dollar value and personal use restriction, on fluid milk imports under its General
Permit for dairy products. The United States submitted that those restrictions were not justified by the
language in Canada’s schedule and were inconsistent with its obligations under Article II:1(b) of theGATT 1994 and Article 3 of the Import Licensing Agreement.
4.464  Canada  claimed that its current treatment of fluid milk imports was fully consistent with the
terms and conditions of the tariff item for fluid milk (HS 0401.10.10) in its Schedule. Canada noted
that the United States did not argue that it had not received the level of access that it had negotiated.
Rather, it was a particular type of access that was now the subject matter of this dispute.  Canadadenied that the continuation of its limited concession on consumer imports of packaged fluid milk ,
granted in respect of its residents who engaged in cross-border shopping, was a general concession on
fluid milk including commercial and bulk trade in fluid milk .
4.465  Canada stressed that the agreed record of negotiations between Canada and the United States
throughout the Uruguay Round of negotiations conclu sively proved that the United States was well
aware of the nature and meaning of Canada's concession and the terms and conditions under which it
had been granted. The claims of the United States were in conflict with the clear and commonunderstanding of the negotiators from both Canada and the United States of Canada’s offer in the
Uruguay Round negotiations with respect to access to fluid milk.
                                                     
312 The United States noted that imports from the United States within the tariff-rate quota received preferential duty rates unde r
terms of the North American Free Trade Agreement.
313 "The Canadian Dairy Industry: Institutional Structure and Demand Trends in the 1990s".  (United States, Exhibit 25)WT/DS103/R
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4.466  Canada further denied that the Import Licensing Agreement required Canada to impose
import controls where none were required.  Such controls would only cause inconvenience to cross-
border shoppers.
4.467  Canada claimed that in making this claim, the United States was seeking to obtain through
dispute settlement a broader and different type of access for trade in fluid milk than that agreed uponin negotiations.
2. Article II:1 of GATT 1994
4.468  The United States  argued that Canada’s administration of its TRQ was inconsistent with
Article II:1 of the GATT 1994.  Article II:1(b) requ ired that a Member provide tariff treatment no less
favorable than was provided for in its Schedule of Concessions to imports from the territories of other
WTO Members and exempt such imports from any customs duty in excess of the rate bound in the
importing Member’s Schedule.  The Appellate Body had recently elaborated on the requirements ofArticle II:1(b) in its Report in Argentina - Footwear :
"In accordance with the general rules of treaty interpretation set out
in Article 31 of the Vienna Convention, Article II:1(b), first sentence,
must be read in its context and in light of the object and purpose of
the GATT 1994.  Article II:1(a) is part of the context ofArticle II:1(b); it requires that a Member must accord to the
commerce of other Member’s "treatment no less favourable than that
provided for" in its Schedule.  It is  evident to us that the application
of customs duties in excess  of those provided for in a Member's
Schedule, inconsistent with the first sentence of Article II:1(b),constitutes "less favourable" treatment under the provisions of
Article II:1(a).  A basic object and purpose of the GATT 1994, as
reflected in Article II, is to preserve the value of tariff concessions
negotiated by a Member with its trading partners, and bound in that
Member’s Schedule, a reduction in its value by the imposition ofduties in excess of the bound tariff rate would upset the balance of
concessions among Members."
314
4.469  The United States noted that Canada allowed only fluid milk entries that were made pursuant
to a general permit by a resident of Canada making retail purchases for the person’s own, or their
household’s, personal use to qualify for the lower rate of duty under the tariff-rate quota. Thelanguage of Canada’s Schedule, however, did not justify that limitation. By denying access for all
other entries under the tariff-rate quota, and thereby imposing duties on those other entries in excess
of those provided for in its Schedule, Canada was granting tariff treatment less favorable than was
provided for in its Schedule of Concessions.
4.470   The United States noted that Canada justified its ban of entries other than small purchases for
the personal use of the Canadian resident from the tariff-rate quota on the language in column seven
of its Schedule, which Canada claimed constituted a "term, condition, or qualification" within themeaning of Article II:1(b).
315  Canada asserted that this language properly limited the scope of
eligibility for the lower in-quota duty rate to imports of fluid milk made in cross-border trade by retail
customers for their own personal use.  However, the text which appeared in Schedule V relating to
tariff  item number 0401.10.10 did not warrant Canada’s interpretation.  The pertinent language was
                                                     
314 Appellate Body Report on Argentina - Measures Affecting Imports of Footwear, Textiles, Apparel, and Other Items  (hereafter
"Argentina – Footwear "), adopted 22 April 1998, WT/DS56/AB/R, para.47.
315 Canada’s answers to questions posed during consultations with the United States.   (United States, Exhibit 34)WT/DS103/R
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as follows "This quantity represents the estimated annual cross border purchases imported by
Canadian consumers".
4.471  The United States argued that for the text relied on by Canada to create a condition on the
applicability of the lower in-quota tariff rate, that language had to clearly establish the limitation that
Canada had imposed on the scope of the concession.316  The language in Schedule V, however, did
not permit the interpretation that Canada had adopted.  First, there was no basis to conclude that the
language on which Canada relied constituted a "term, condition, or qualification."  The language that
the quantity of the tariff-rate quota "represents the estimated annual cross border purchases" simply
described the manner in which the size of the tariff-rate quota was determined. The language in
Canada’s Schedule could not be construed to constitute a limitation on the access under the tariff-rate
quota;  there was no indication from the language contained in the Schedule that any type of
limitation, other than the quantitative limitation to 64,500 tonnes, was provided for.
4.472  Second, the United States maintained that contrary to principles of treaty interpretation,
Canada’s construction of the language in its Schedule imputed words that were not there.317  T h e
words "cross-border purchases" contained in the Schedule could not be construed to limit eligibility to
the in-quota rate to retail purchases valued at C$2 0, or less, for the personal use of the purchaser.  All
imports that were the result of a sales transaction of some type were "cross-border purchases".  Thesewords could not be read to differentiate between retail purchases for personal use and other types of
purchases.  Similarly, the phrase "imported by Canadian consumers" did not limit the scope of
eligibility in the manner suggested by Canada.  The ordinary meaning of the word "consumer" was
"one that consumes" or "a person who acquires goods or services; a buyer."
318  The word "consumer"
did not distinguish between retail purchases for personal use and other types of  transactions.Purchasers who consumed milk in their business endeavours, whether it be manufacturing or some
other pursuit were also  "consumers".  Therefore, Canada lacked any textual support in its Schedule
for the limitations that it had imposed on access to the in-quota rate.  Absent language in its Schedule
that constituted a "term, condition, or qualification" within the meaning of Article II:1 of the GATT
1994, Canada acted in derogation of its obligations under Article II when it provided treatment lessfavorable to any imports than was provided for in its Schedule.
4.473  Furthermore, the United States argued that Canada’s manner of administering the tariff-rate
quota through the use of a general permit also resulted in treatment less favorable than provided for in
its Schedule and, thus, was also inconsistent with its obligations under Article II:1.  More specifically,
Canada conditioned use of the general permit on each import entry of dairy products being valued atless than C$20 and for the personal use of the importer.  Neither of these restrictions appeared as a
"term, condition, or qualification" in Canada’s Schedule of Concessions.  Yet, Canada denied the in-
quota duty rate to any entries which did not meet the requirements of the general permit.  By doing so,
Canada denied all entries which could otherwise qualify for the 64,500 tonne tariff-rate quota the
lower duty rate under the in-quota rate that was provided for in Canada’s Schedule.   As a result such
entries were subjected to duties in excess of those provided for in Canada’s Schedule.
                                                     
316 The United States noted the relevance of the Appellate Body's findings in the Appellate Body Report on  European
Communities, United Kingdom, and Ireland - Customs Classification of Certain Computer Equipment , (hereafter  EC – Computer
Equipment "), WT/DS62/67/68/AB/R, adopted 22 June 1998, "[t]he security and predictability of tariff concessions would be seriously
undermined if the concessions in Member’s Schedules were to be interpreted on the basis of the subjective views of certain expo rting
Members alone."  While this referred to the views of exporting Members, it would be even more true for importing Members, who b y
drafting the text of their tariff concessions were in the best position to specify clearly the scope of the concessions.
317 The United States noted the statement of the Appellate Body noted in  India – Pharmaceuticals, op. cit.,  para. 45:  "The duty
of a treaty interpreter is to examine the words of the language of the treaty itself.  This should be done in accordance with t he principles of
treaty interpretation set out in Article 31 of the Vienna Convention.  But these principles of interpretation neither require n or condone the
imputation into a treaty of words that are not there or the importation into a treaty of concepts that are not intended."
318 Webster’s II, New Riverside University Dictionary, 1994.WT/DS103/R
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4.474  Canada  argued that it had the right, Error! Bookmark not defined. under Article II, to set
terms and conditions on the application of customs duties.    Canada had the obligation, under Article
II of the GATT 1994 , not to impose "ordinary customs duties in excess of those set forth and
provided" in its Schedule.  Article II further provided that such obligation was "subject to the terms,
conditions or qualifications set forth in that Schedule."
4.475  Canada noted that prior to the entry into force of the WTO Agreements, GATT 1947 panel
practice had interpreted this "qualification" provision in two ways.  First, each Contracting Party had
the right to impose conditions on the concessions granted in the form of bound tariffs, so long as those
conditions were not, in themselves, inconsistent with GATT 1947.  Second, each Contracting Party
could, in addition to  making concessions in the form of bound tariffs, set down other concessions
("terms") in its Schedule.   Canada noted that in  European Economic Community - Imports of Beef
from Canada ,319 the Panel held that:
"... the European Economic Community had, by virtue of the
footnote in the Schedule, reserved its right to set conditions for the
entry under the levy-free tariff quota in question.  The Panel further
found that the right to set conditions was presupposed in
Article II:1(b) of the General Agreement. "320 (emphasis added)
4.476  Canada further noted that in United States - Restrictions on Imports of Sugar321 the Panel
noted that Article II:1(b) "permits contracting pa rties to qualify the obligation to exempt products
from customs duties in excess of the levels specified in the Schedule."322  The Panel found, however,
that Contracting Parties could not, in their Schedules, qualify their obligations under  other  Articles of
the GATT.323  In United States - Restrictions on the Importation of Sugar and Sugar Containing
Products Applied under the 1955 Waiver and under the Headnote to the Schedule of Tariff
Concessions  (hereafter " US - Sugar II ")324, the Panel found that "the General Agreement does not
oblige contracting parties to make concessions and specifically allows them in Article II:1(b) to
subject to conditions the concessions they decide to make."
4.477  Canada noted that, in the recent report on Computer Equipment325, the Appellate Body made a
number of observations about the interpretation of tariff schedules and Article II of the GATT 1994
that were relevant to this dispute.   As a first pr inciple, the Appellate Body stated that items in tariff
schedules to the  GATT 1994  were to be considered to be integral parts of a treaty and as such to be
subject to the customary principles of treaty inte rpretation, as set out in the Vienna Convention.  As
such, they were to be interpreted on the basis of the common intention of the parties :
"The security and predictability of tariff concessions would be
seriously undermined if the concessions in Members' Schedules were
                                                     
319 Panel Report on European Economic Community – Imports of Beef from Canada  (hereafter " EEC – Beef "), L/5099,
BISD 28S/92, adopted 10 March 1981.
320 Ibid, para. 4.5(a).
321 Panel Report on United States – Restrictions on Imports of Sugar  (hereafter " US – Sugar "), L/6514 BISD 36/S331, adopted
22 June 1989.
322 Ibid, para. 5.2.  Canada noted that in paragraph 5.3, the Panel concluded that:  "... Article II gives contracting parties the
possibility to incorporate into the legal framework of the General Agreement commitments additional to those already contained in the
General Agreement and to qualify such additional commitments , not however to reduce their commitments under other provisions of that
Agreement." (emphasis added)
323 Ibid, para. 5.3
324 Panel Report on US – Sugar II, L/6631, 37S/228, adopted on 7 November 1990.
325 Appellate Body Report on EC - Computer Equipment, op. cit.WT/DS103/R
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to be interpreted on the basis of the subjective views of certain
exporting Members alone.
(…)
The purpose of treaty interpretation under Article 31 of the Vienna
Convention is to ascertain the common  intentions of the parties.
These common  intentions cannot be ascertained on the basis of the
subjective and unilaterally determined "expectations" of one of the
parties to a treaty.  Tariff concessions provided for in a Member's
Schedule - the interpretation of which is at issue here - are reciprocal
and result from a mutually-advantageous negotiation between
importing and exporting Members.  A Schedule is made an integral
part of the GATT 1994 by Article II:7 of the GATT 1994.  Therefore,the concessions provided for in that Schedule are part of the terms of
the treaty.  As such, the only rules which may be applied in
interpreting the meaning of a concession are the general rules of
treaty interpretation set out in the Vienna Convention. "
326  (emphasis
in the original)
4.478  Canada further noted that to determine that  common understanding, the Appellate Body then
referred to Articles 31 and 32 of the Vienna Convention  :
"Pursuant to Article 31(1) of the Vienna Convention , the meaning of
a term of a treaty is to be determined in accordance with the ordinary
meaning to be given to this term in its context and in the light of theobject and purpose of the treaty"
(…)
"The application of these rules in Article 31 of the Vienna
Convention  will usually allow a treaty interpreter to establish the
meaning of a term. However, if after applying Article 31 the meaningof the term remains ambiguous or obscure, or leads to a result which
is manifestly absurd or unreasonable, Article 32 allows a treaty
interpreter to have recourse to:
... supplementary means of interpretation, including the
preparatory work of the treaty and the circumstances of itsconclusion.
With regard to ‘the circumstances of [the] conclusion’ of a treaty, this
permits, in appropriate cases, the examination of the historical
background against which the treaty was negotiated."
327
4.479  Canada recalled that on the point of the circumstances under which the treaty interpreter
should examine the "historical background against which the treaty was negotiated," the Appellate
Body quoted Sir Ian Sinclair:
                                                     
326 Ibid, paras. 82, 84.
327 Ibid, paras. 85-86.WT/DS103/R
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".. the reference in Article 32 of the Convention to the circumstances
of the conclusion of a treaty may have some value in emphasising the
need for the interpreter to bear constantly in mind the historical
background against which the treaty has been negotiated."328
4.480  Canada noted that the Appellate Body had also specifically rejected the idea, as suggested by
the Panel in the EC - Computer Equipment  case, that the burden of clarifying the scope of a tariff
concession rested solely on the importing Member.  Returning to its view that the key issue in treaty
interpretation was one of determining the common intention, the Appellate Body made the question
one of common burden:
"We consider that any clarification of the scope of tariff concessions
that may be required during the negotiations is a task for all
interested parties."329 (emphasis in original)
4.481  In this context, the Appellate Body commented on the burden this placed on the exporting
member :
"Tariff negotiations are a process of reciprocal demands and
concessions, of "give and take". It is only normal that importing
Members define their offers (and their ensuing obligations) in termswhich suit their needs.  On the other hand, exporting Members have
to ensure that their corresponding rights are described in such a
manner in the Schedules of importing Members that their export
interests, as agreed in the negotiations, are guaranteed. There was a
special arrangement made for this in the Uruguay Round.  For thispurpose, a process of verification of tariff schedules took place from
15 February through 25 March 1994, which allowed Uruguay Round
participants to check and control, through consultations with their
negotiating partners, the scope and definition of tariff concessions.
330
Indeed, the fact that Members' Schedules are an integral part of the
GATT 1994 indicates that, while each Schedule represents the tariff
commitments made by one Member, they represent a common
agreement among all Members."331 (emphasis in original)
4.482  Canada noted that the United States acknowledged the application of the EC - Computer
Equipment dispute. However, the brief quotation selected from the case and accompanying comment
found in the submission of the United States did not reflect the full opinion of the Appellate Body as
set out above.  The United States attempted to suggest that the case stood for the proposition that a
greater burden lay on the importing Member in matters regarding the interpretation of a tariff item.  In
fact, as noted above, the Appellate Body had expressly rejected this idea which had been suggested in
the Panel Report and had pointed emphatically to the determination of the common intention of the
Parties as being the central purpose of treaty interpretation. Moreover, in this context, the Appellate
Body made it clear that if a greater burden lay anywhere, it was with the exporting Member.
                                                     
328 I. Sinclair, the Vienna Convention on the Law of Treaties , 2nd ed., (Manchester University Press, 1984), p.141.
329 Appellate Body Report on EC - Computer Equipment, op. cit., para. 110.
330 Footnote in the original report: "MTN.TNC/W/131, 21 January 1994.  See also  Marrakesh Protocol to the General
Agreement on Tariffs and Trade 1994 , para. 3.".
331 Appellate Body Report on EC - Computer Equipment, op. cit. , para.109.WT/DS103/R
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4.483  Canada argued that it had a right, under Article II of the GATT 1994, to impose such terms
and conditions on its tariffs as set out in its Schedule.  Furthermore, in respect to the level of clarity
and "notice" needed to ensure that other Members were aware of the value and the nature of the
concession they were receiving, terms and conditions were to be treated without distinction from
specific tariff items.
4.484  Canada argued that where, in the course of a new tariff regime, a term or condition was
introduced and, in particular, where that condition had been the specific subject of on-going
negotiations over many months, it was indeed the responsibility of the exporting country to seek
clarification if that country considered that there was any uncertainty or ambiguity in the term or
condition.  Canada had informed the United States at all material times about the terms of access that
it proposed to grant to imports of fluid milk in Canada's tariff Schedule. This condition was not novel
and posed no surprise for US negotiators as it simply represented a continuation in tariffied form ofthe long-standing regime in place for fluid milk imports into Canada. The fact that the US side in the
negotiations had been seeking greater access than that being offered by Canada did not affect the
central question of what had been the nature of Canada’s offer.  The United States were fully aware of
not only the existence of a term or condition, but also the nature of the specific condition on access to
the Canadian fluid milk market.  The United States could therefore not have had any legitimateexpectation that Canada would make any additional concession for the import of commercial
shipments of milk in bulk into Canada and thus, there could be no common understanding between
the parties to the negotiations in that regard.  Indeed, the bilateral negotiating history - the best
evidence of what the parties understood - clearly indicated that this issue had been expressly
negotiated and that the United States had failed to get additional access because of its failure toprovide for practical access with respect to its own fluid milk market.
4.485  Canada recalled that at the conclusion of the Uruguay Round, pursuant to Article 4 of the
Agreement on Agriculture, Canada converted its existing quantitative restrictions on the importation
of fluid milk into a bound tariff on fluid milk.
332 In view of the volume of cross-border trade in
consumer-packaged fluid milk, Canada incorporated an additional concession in its Schedule, subjectto a condition.  The qualified concession, a TRQ for the importation of consumer-packaged fluid milk
by Canadian consumers (64,500 tonnes), was set out in Canada's Schedule V and reflected the
estimated volume of cross-border trade in fluid milk in the period 1989-91.
4.486  Canada noted that since the implementation of the TRQ, Canada had, in accordance with its
qualified concession under Article II, permitted the importation of consumer-packaged fluid milk byCanadian consumers at the lower tariff rate.  Such imports were made under the authority of the
General Import Permit No.1 under the Export and Import Permits Act.
333 General import permits
operated to provide standing authority for imports  made within the parameters of the terms and
conditions set out in the permit. No additional specific permit or other formality was required for
qualifying imports.
4.487  Canada noted that in current circumstances, Canada had not deemed it necessary to impose
any monitoring of quantities being imported at the border.  The result was that the Canadian borderwas now effectively open and unrestricted to cross border imports of consumer packaged milk by
Canadians for personal use.  Canada reserved the right to limit quantities to the 64,500 tonnes
stipulated in its Schedule at some future date if circumstances change.   In accordance with its
qualified concession, Canada had applied the over-quot a tariff to fluid milk shipments in commercial
containers or in bulk.
                                                     
332 Canada, Exhibit 34.
333 R.S.C. 1985, Chap. E-19. (Canada, Exhibit 35)WT/DS103/R
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4.488  Canada noted that the United States claimed that the words appearing in the "other Terms and
Conditions" column had to be read as not stating any term or condition but rather as being no more
than a historical note to indicate the source of the TRQ quantity.  In short, the United States asked this
Panel to ignore or render ineffective a part of Canada's Schedule that Canada had expressly stated to
be a "term and condition" of access.   Canada argued that this was inconsistent with the principles ofinterpretation under customary international law and, in particular, those that required that the terms
of an agreement be given effect, and that they be interpreted in good faith, in context and in the light
of their object and purpose.
4.489  Canada refuted the attempt by the United States to argue that the terms "cross-border
purchases" and "consumer", as they appeared in the terms and conditions to the tariff item, had to be
read as including commercial bulk purchases was not sustainable.  First, it was straining the ordinary
meaning of the language to suggest that the term  "consumer" embraced large commercial enterprises.
A further examination of reference sources did not support such a view.  In ordinary legal usage in
Canada and the United States the word "consumer"  connoted acquisitions by individuals for personal
usage.  This meaning was evident from legal dictionaries
334 and statutory usage in both Canada and
the United States.335     It was also used in the sense of an individual who purchased a good or service
for personal use, as opposed to a purchase made in the course of his trade or profession is also used inseveral international treaties.
336   Canada submitted that its interpretation of the word "consumer" was
the one that was consistent with the ordinary meaning of that word.   In fact, Canada argued that at all
relevant times, throughout Uruguay Round negotiations the United States had been thoroughly
conscious that the distinction between imports for personal use and commercial imports was at the
heart of discussions between Canada and the United States on this issue.  Accordingly, the claims bythe United States in this regard lacked credibility.
4.490  Canada recalled that the Appellate Body had stressed
337, that a treaty had to be read so as not
to render a part of the text redundant or meaningless.  The construction that the United States would
seek to place on the words in the column entitled "Other Terms and Conditions" ("This quantity
represents the estimated annual cross border purchases imported by Canadian consumers.") wouldleave it without purpose or meaning.  The United States argued that the words in question did not
indicate any term or condition but merely constituted a historical note explaining the source of the
64,000 tonnes figure.  Since there was no need for Canada to set out the source for TRQ figure in the
Schedule, the United States suggested that Canada  had thrown in redundant words, without purpose or
need, into its tariff schedule.  This was clearly untenable.   To the contrary, the implication of thewords in the terms and conditions column was that they established a condition of within-quota access
for fluid milk: importation by the consumer in consumer packages.
                                                     
334 Canada, Exhibit 36.  Therein, see Black’s Law Dictionary,  6th ed., (West Publishing Co.: Minneapolis Minn., 1990):
"Consumer Individuals who purchase, use, maintain, and dispose of products and services… Consumers are to be distinguished from
manufacturers (who produce goods) and wholesalers and retailers (who sell goods).  A buyer (other than for the purpose of resal e) of any
consumer product."  See also The Dictionary of Canadian Law,  2nd ed., (Carswell: Toronto, 1995): " Consumer  A natural person.  An
individual.  Consumer Goods   Goods that are used or acquired for use primarily for personal, family or household purposes.
335 Canada, Exhibit 37.  Therein, see Uniform Commercial Code , Article 9-109:  Goods are (1) "consumer goods" if they are used
or bought for use primarily for personal, family or household purposes.
336 Canada, Exhibit 38.  Canada noted that examples of such usage included Article 5.1 of the European Communities
Convention on the Law Applicable to Contractual Obligations (Rome 1980):  "1.  This Article applies to a contract the object of  which is the
supply of goods or services to a person ("the consumer") for a purpose which can be regarded as being outside his trade or prof ession, or a
contract for the provision of credit for that object."
 337 Appellate Body Report on US - Reformulated Gasoline, op. cit., p.23: "one of the corollaries of the ‘general rule of
interpretation’ in the Vienna Convention  is that interpretation must give meaning and effect to all the terms of the treaty.  An interpreter is
not free to adopt a reading that would result in reducing whole cl auses or paragraphs of a treaty to redundancy or inutility." This passage
was repeated by the Appellate Body in Japan – Liquor Tax, op. cit.,  p.12.WT/DS103/R
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4.491  Canada noted that the context of a provision included its place in the agreement and the other
parts of the agreement that may be of relevance.338  The most obvious and fundamental contextual
elements of the words in question had to be the heading under which they appeared, in the case at
issue: "Other Terms and Conditions".  This context clearly indicated that a term or condition affecting
the TRQ was to be found in the words that fell there under. Therefore, contrary to the assertions of the
United States, a premise was established that there was a term or condition in Canada's TRQ entry on
fluid milk beyond mere quantity.  That term and condition was that fluid milk had to be imported by
the consumer in consumer packages to benefit from the lower tariff.  Any other interpretation would
have to explicitly ignore the context in which the words in question appeared and would therefore be
inconsistent with the customary principles of in ternational law, codified in part in the Vienna
Convention.   Canada noted that the legal principle of in  dubio mitius , may also apply with respect to
the interpretation of the terms and conditions in Canada’s Schedule regarding fluid milk.
4.492  Canada argued that to the extent that there was any ambiguity, or that the terms persisted in
remaining obscure, recourse could be had to the negotiating history of the agreement.339  Following
the Report of the Appellate Body in Computer Equipment,  with respect to tariff issues, such recourse
to negotiating history could be particularly appropriate.   To exclude any consideration of negotiating
history from the interpretation of the tariff line at issue, the United States had to establish that the textof the tariff line was, in fact, unambiguous.  Canada was of the view that the meaning of the term and
condition in the tariff line was clear on its face and in context.  If the Panel considered that the
meaning was not entirely clear, then, at the very least, the text was raising some element of
uncertainty.  Accordingly, in accordance with th e rules of interpretation under the Vienna Convention,
there could be reference to the negotiating history to find the common understanding of the Parties.
4.493  Canada recalled that prior to the conclusion of the Uruguay Round, Canada had maintained a
quantitative restriction on fluid milk under the Export and Import Permits Act (the "EIPA") .  Fluid
milk was originally included as "butterfat in any form" for  EIPA  purposes.  Butterfat was listed on
the Import Control List beginning in 1958, pursuant to the EIPA . Accordingly, fluid milk was
permitted to enter Canada only under the authority of import permits issued under the EIPA .  A
general import permit ( General Import Permit No.1 )
340 was issued in 1970 providing authority for the
importation of fluid milk in consumer packaging up to the value of C$10.00 per entry.341  Individual
permits for the commercial importation of milk were not issued. As such, this import regime had been
a long-established feature of Canada-United States  trade, as was well understood by officials on both
sides of the border.   For reasons of geography a nd the perishable nature of the product, imports of
fluid milk into Canada originated almost exclusively in regions of the United States close to the
Canadian border and were described at the time as "cross-border shopping".  Canada argued that at all
times, the United States was well aware  of the details of Canada's pre-Uruguay Round regime for
fluid milk.  It was understood that any successor regime implanted in the context of tariffication at the
conclusion of the Uruguay Round would reflect Canada’s then-existing regime for fluid milk.  Canada
might agree in the process to enhance the access it provided but such enhancement would start with
the premise of the existing regime.  Thus, the United States could not argue that a reference to "cross-border shopping by Canadian consumer" was novel or isolated or that its meaning was obscure to its
officials.   Hence, the circumstances of the Uruguay Round negotiations made it crystal clear that
                                                     
338 Canada recalled that Article 31.1 of the Vienna Convention stated: "The context for the purposes of the interpretation of a
treaty shall comprise, in addition to the text , including its preamble and annexes … " (emphasis added)
339 Canada recalled that Article 32 of the Vienna Convention states:  "Recourse may be had to supplementary means of
interpretation, including preparatory work of the treaty or the circumstances of its conclusion, in order to confirm the meanin g resulting
from the application of article 31, or to determine the meaning when the interpretation according to article 31:  (a) leaves th e meaning
ambiguous  or obscure; or (b) leads to a result which is manifestly absurd or unreasonable."
340 Canada drew the Panel's attention to the attached copy of amendment to  General Import Permit No. 1  C.R.C. 1978, c. 613,
expanding butter to include dairy products. (See Exhibit 39)
341 Canada noted that this had been increased to C$20.00.WT/DS103/R
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United States officials fully understood that it was Canada's intention to limit access to the TRQ for
fluid milk to cross-border purchases.
4.494  Canada argued that its item on fluid milk in its Schedule fully reflected the position that
Canada took through negotiations with the United States and its contents posed no questions for those
US officials that were party to those discussions.  Only after the Uruguay Round negotiations wereover had the United States tried to gain access for what it was unable to negotiate.   Canada argued
that the following points emerged from th e record of the Uruguay Round Negotiations
342:
(a) Canada was prepared to discuss with the United States in the closing days of the
Uruguay Round the possibility of new additional access for fluid milk but Canada had
made it clear throughout these discussions that any such additional access would be
contingent on having effective equivalent access to the US market.  The chief barrier
to access to the US market was, and remained, the non-recognition of Canadiansanitary inspection standards for US purposes, the so-called "equivalency" issue.
(b) Canada had advised the United States that at a minimum it would maintain the then-
existing access to Canada for consumer purchases of fluid milk, i.e., cross-border
shopping.
(c) Canada had made it explicit that the treatment of existing cross-border shopping
access and the creation of additional access of a non-consumer variety were separate
and distinct matters.
(d) It was evident not only in Canada's own records, but more crucially, by  jointly
drafted documents exchanged by Canadian and US officials, US officials were fully
aware that Canada was treating consumer imports of fluid milk as a distinct matterfrom any consideration of additional access for non-consumer imports, and that any
such new non-consumer access was to be contingent on a resolution of the
"equivalency" problem.
(e) The failure of Canada and the US to reach an agreement with respect to a resolution
of the equivalency problem meant that, as Canadian officials had advised throughout,Canada's offer on fluid milk was to maintain access for consumer imports but not to
give any access for non-consumer shipments.
4.495  Canada submitted that its concession of a TRQ for cross-border trade in consumer-packaged
fluid milk was fully consistent with Article II.  Canada asserted that, read in good faith and in context,
and in view of the rich record of negotiations between the two countries, the conditions in question
could not mean anything other than stated at the outset by Canada: that the TRQ remained open to
consumer-packaged fluid milk in cross-border trad e, but not to bulk or commercial fluid milk.
4.496  The United States  noted that in the recent report on Computer Equipment
343, the Appellate
Body had stated that items in tariff schedules to  the GATT 1994 were to be considered to be integral
parts of a treaty and as such to be subject to the customary principles of treaty interpretation, as set out
in the Vienna Convention.  Accordingly, pursuan t to Article 31.1 of the Vienna Convention, the
meaning of a term in a treaty was to be determin ed in accordance with the ordinary meaning to be
given to the term in its context and in the light of  the object and purpose of the treaty.  The language
in Canada’s Schedule stating that the quantity provided for under the tariff-rate quota "represents the
estimated annual cross-border purchases imported by Canadian consumers" failed to limit market
                                                     
342 Canada made reference to Exhibits 40 – 50.
343 Appellate Body Report on EC - Computer Equipment , op. cit.WT/DS103/R
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access in the manner Canada now asserts it intended.  The indicated language did not in its ordinary
meaning allow an interpretation that  permitted the actual constraints imposed by Canada on eligibility
of imports for the in-quota rate.  Because the language did not create the "term, condition, or
qualification" which Canada now claimed it intended to establish at the time of its inclusion, Canada
was providing treatment less favorable to imports of fluid milk than was provided for in its Schedule.
Canada, therefore, was acting inconsistently with its obligations under Article II:1(b) of the GATT
1994.
4.497  The United States noted that Canada raised three arguments in response to the US complaint.
First, Canada contended that the words in its Schedule would be rendered meaningless if they were
not construed to limit the scope of market access as Canada had intended.  Second, Canada argued
that the meaning of the word "consumer" was so clear that its use obviously confined imports under
the in-quota rate to small, retail purchases for the personal use of Canadian residents.  Third, Canadaasserted that the meaning of the words in the Schedule was agreed between the United States and
Canada.  Each  of Canada’s contentions was without merit.
4.498  The United States did not agree that the language in Canada’s Schedule was made
meaningless by denying those words the meaning th at Canada now attributed to them.  While the
United States agreed with the principle of treaty interpretation, articulated by the Appellate Body, that
words were to be given effect, here the question was what was the operative word to which effect was
to be given.  The only operative word in Canada’s Schedule relating to fluid milk was the word
"represents".  However, the schedule statement that the quantity of the tariff-rate quota "represents" an
estimated amount of trade did not operate to limit access in the manner Canada contended.  It was
simply a narrative statement explaining the basis for arriving at the in-quota quantity.  Canada’schoice of language was not at all the same as saying "access is limited to", or "this quantity is
available only for."  Canada attempted to read into the language in its Schedule a meaning and effect
that were not there.  The starting point for any treaty interpretation was the plain text of the treaty,
which was also the best statement of the intent and agreement of the parties.  That text was
unambiguous and, therefore, Canada had failed to demonstrate any basis for examination of thenegotiating history between the United States and Canada respecting market access for milk.  Indeed,
resort to such an examination would contravene the very principles of treaty interpretation which
Canada cited in its argument.
4.499  The United States argued that this language remained from Canada’s efforts to comply with
certain specific modalities for market access set forth in the Agreement on Modalities for theEstablishment of Specific Binding Commitments under the Reform Programme, which were Part B of
the Draft Final Act Embodying the Results of the Uruguay Round of Multilateral Trade
Negotiations.
344  The modalities required "minimum access opportunities" for products for which
there were "no significant imports."  The modalities required that such opportunities would "represent
in the first year of the implementation period not less than 3 per cent of corresponding domestic
consumption in the base period ... and shall be expanded to reach 5 per cent of that base figure by the
end of the implementation period."   Canada had no significant imports of milk during the relevantperiod and was consequently faced with the prospect of a requirement to import milk in volumes
equal to 5 per cent of domestic consumption.  Canada’s trade statistics showed no imports of milk,
because milk was subject to an absolute quantitat ive restriction under its Import Control List.  Faced
with this stark reality, Canada had seized upon th e idea of demonstrating the existence of some
"current access".  The imports that Canada relied on were unrecorded imports entered by returningCanadian shoppers.  Such milk was not subject to formal customs entry.  Consequently, no trade data
was compiled.  In creating a tariff-rate quota for milk as part of the required tariffication process,
Canada sought to dress up this unknown quantity of trade as "current access" within the meaning of
                                                     
344Canada Exhibit 32: MTN.TNC/W/FA, p. L.19 (20 December 1991).WT/DS103/R
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the modalities.  Paragraph 11 of Section B of Part B345 provided that "current access opportunities on
terms at least equivalent to those existing shall be maintained as part of the tariffication process." In
the absence of any official trade statistics to justify a current access concession, rather than the more
onerous minimum access concession, Canada had to place in its schedule an ostensible basis for this
lesser concession.   There had been various estimates concerning the volume of this unreported trade.Estimates ranged as low as approximately 35,000 tonnes and as high as 80,000 tonnes.  When Canada
reported in its Schedule that it would permit access for 64,500 tonnes at in-quota duty rates, it was
appropriate that Canada stated how this level of "current" access was determined.  The explanatory
note in its Schedule that the volume represents the estimated amount of cross-border purchases by
Canadian residents explained the derivation of the quantity adopted for in-quota market access.
Contrary to Canada’s contention, the ordinary meaning of the language served a purpose and was not
meaningless.
4.500  The United States argued that Canada’s attempt to demonstrate that the word "consumer"
could only refer to a retail customer, purchasing small quantities of a product was also flawed.
Canada sought to give a special meaning to that term, but Article 31.4 of the Vienna Convention
permitted a special meaning only when it could be established that the parties so intended.  Canada
had not met this burden.   The United States noted that the facts did not support Canada’s assertionthat language in its Schedule, and Canada’s current interpretation of that language, was agreed to by
the United States and Canada.  At most Canada had shown that it had used the language in the
schedule in its own internal memoranda.  None of the exhibits tendered by Canada showed that the
United States had shared a common understanding of the words or, more importantly, that the United
States had agreed to the limitations that Canada now reads into that language.  Unless Canada coulddemonstrate a common intent of the parties to give a special meaning to the term "consumer", its
ordinary meaning was the only basis for interpretation of Canada’s Schedule under the Vienna
Convention.
4.501  The United States argued that Canada could have clearly established the limitation on access
to the tariff-rate quota that it now claimed to have intended.  For example, Canada could have insteadspecifically stated that the quantity eligible fo r the in-quota rate was limited to purchases by its
residents for their personal use.  Canada could have said that access under the tariff-rate quota was
limited to milk entered under its General Permit No. 1 for dairy products.  Or Canada could have used
the same language which it used in the case of yoghurt and ice cream, and indicated, as it did for each
of those products, that eligible entries were limited to access in "retail sized containers only".
346
Canada did not use the same limiting language that it used for yoghurt and ice cream for fluid milk.
In such circumstances, the United States questioned how could it be understood that Canada sought to
impose the same restriction on fluid milk access.
4.502  The United States noted that the United States used the term "ultimate consumer" in its
Schedule for a related purpose.347  The term there was defined to exclude institutions that could
prepare, but did not consume food articles, such as hospitals, prisons, restaurants, hotels and bakeries.
Furthermore, the US schedule was very precise in identifying equivalent limitations on imports intothe United States.  Thus, the United States schedule specifically stated that the words "prepared for
marketing to the ultimate consumer" means "that the product is imported in packaging of such sizes
and labeling as to be readily identifiable as being intended for retail sale to the ultimate consumer
without any alteration in the form of the product or its packaging".
348   The United States argued that
in light of this very distinct use of a related term by the United States in the US Schedules Canada
                                                     
345Ibid, p.L.26
346 Canada’s Schedule V.  (United States, Exhibit 51)
347 The United States referred to excerpts from Schedule XX.  (United States, Exhibit 52)
348 Ibid.WT/DS103/R
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could not arrive at the conclusion that the United States shared Canada’s intended construction of the
word "consumer".  The US use of the modifying adjective "ultimate" indicated that the United States
believed it necessary in its Schedule to distingu ish between the more narrow category encompassed
by the words "ultimate consumer" and a broader category that includes all consumers.  Indeed, there
was no basis for Canada’s arguments that the United States understood Canada’s poorlycommunicated intent. Yet, despite Canada’s failure to offer any explanation, Canada insisted that the
two countries agreed on a common meaning for the term.
4.503  The United States refuted Canada’s efforts to establish the ordinary meaning of the term
"consumer".  Specifically, Canada relied to a major extent on the meaning given to a phrase, in fact, a
term of art under the Uniform Commercial Code  – "consumer goods" – that did not appear in
Canada’s Schedule and which possessed a connotati on of its own, distinct from the word "consumer".
The attempt to attribute the meanin g of an entirely distinct phrase to the words in the Schedule was
entirely inappropriate.  Furthermore, entirely mi ssing from Canada’s argument regarding the meaning
of the word "consumer" was any reference to the New Shorter Oxford English Dictionary on
Historical Principles,
349 that it regularly cited for a variety of definitions.  The New Shorter Oxford
English Dictionary defined "consumer" to mean "a person who or thing which squanders, destroys, or
uses up; a user of an article or commodity, a buyer of goods or services".  Clearly, this definition wasat odds with the more restricted definition of the term "consumer" offered by Canada.  In fact, there
was nothing in the New Shorter Oxford English Dictionary definition to limit the meaning of the word
"consumer" to individuals purchasing goods for their own personal use in small, retail packages.
4.504  The United States further refuted the Canadian contention that the negotiations between the
United States and Canada at the end of the Uruguay Round regarding market access lent support toCanada’s argument.  Canada’s assertion that its market access offer for dairy was always in the form
of "current" access was entirely unfounded.  Canada was fixated on the idea of modifying Article XI
of the GATT to allow quantitative restrictions on imports  to remain inviolate.  Canada had resisted the
concept of tariffication of quantitative restrictions to the very end of the Uruguay Round.  Thus, to
suggest that Canada had any long-held position regarding any level of market access for fluid milkwas misleading.   Canada’s first offer relating to market access, moreover, had been based on the
Dunkel modalities, with access initially set at 3 per cent of its market, increasing to 5 per cent at the
end of the implementation period.
350  The United States acknowledged that Canada indicated that this
offer would only remain on the table if enhanced access to the US market for dairy products was
provided.  Negotiations between the two countries through the end of 1993 and the beginning of 1994were aimed at reaching agreement on how such improved market access for a variety of products
could be achieved. The negotiations were unsuccessful. Then in February 1994, Canada had
submitted its final schedule to the WTO, including the 64,500 tonne tariff-rate quota for fluid milk.
There had never been any agreement between the United States and Canada relating to either the size
or nature of this tariff-rate quota, or the language used in Canada’s Schedule.
4.505  The United States noted that given that Canada had commenced discussions of tariffication
and market access at such a late date, resolution of the differences in position were not resolved by thetime Canada was compelled to submit its Schedule.  When it did so in February 1994, there certainly
was no agreement between the United States and Canada on either the content of its concessions
respecting fluid milk or the meaning of the terms used to describe the concession.  Thus, Canada’s
selection of 64,500 tonnes as the quantity which represented so-called cross-border trade, was a
number that it reached independently.  Moreover, its choice of language to describe what that64,500 tonnes represented was also made unilaterally.
                                                     
349 Lesley Brown (ed.), (Oxford: Oxford University Press, 1993).
350 United States, Exhibit 53.WT/DS103/R
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4.506  Canada  stressed that it did not claim that the United States agreed with Canada's action –
what it claimed was that the United States' negotiators understood it. The United States had accepted
Canada's Schedule, including the tariff item at issue, in the full knowledge of the meaning and
implications of the terms and conditions placed in that Schedule with respect to fluid milk.   Canada
argued that under the interpretation advanced by the United States, everything but the purelygrammatical sense of the words was ignored.  This rendered an analysis incomplete.  The Appellate
Body, in United States – Import Prohibition of Certain Shrimp and Shrimp Products
351, had recently
reaffirmed the importance of examining each element of Article 31.1 of the Vienna Convention.  In
particular, regarding the interpretation of the chapeau of Article XX of the GATT 1994, the Appellate
Body noted that the Panel "…did not expressly examine the ordinary meaning of the words…",352 that
it had "… failed to scrutinize the immediate  context of the chapeau,"353 and finally, that it "…did not
look into the object and purpose of the chapeau ."354 (emphasis in original).
4.507  Canada noted that in support of its interpretation, the United States asserted that the only
operative word in the Schedule was the word "represents" and claimed that this was merely a narrative
statement explaining the basis for arriving at the in-quota quantity.  However, the United States had
not examined of the meaning of that term.  Canada submitted that even at this initial stage of analysis,
there were two potential meanings of the term "represe nts" as it was used in the Schedule.  First, the
word was defined as meaning to "…bring clearly and distinctly to mind, esp. by description or
imagination."355  Thus, the word operated to more precisely identify the 64,500 tonnes found under
the "Initial Quota" and "Final Quota" columns as being cross-border purchases of fluid milk by
Canadian consumers.   A second definition could be "… of a quantity: indicate or imply another
quantity."  The TRQ dealt with quantities.  The figure of 64,500 tonnes was found in the "InitialQuota" and "Final Quota" columns of the Schedule .  Thus, the word "represents," in its ordinary
meaning, instructed the reader to have in mind cross-border purchases of fluid milk by Canadian
consumers when reading 64,500 tonnes under the initial/final quota columns of Canada’s Schedule.
4.508  Canada noted that a single dictionary meaning did not exhaust the search for ordinary
meaning and that the dictionary meaning of "consu me" also included the concept of "eat up, drink
down, devour".  This definition carried with it the concept of a person actually ingesting the article in
question.  Thus, in the context of an agricultural  product, this definition was part of the ordinary
meaning.
4.509  Canada further argued that, continuing with the analysis expounded by the Appellate Body, it
was evident that the United States had, at the outset, failed to consider the context of the Canadianterms and conditions attached to its TRQ for fluid milk.  The immediate context of these words was
that they were found in the column entitled "Other  Terms and Conditions," which in itself followed
the columns entitled "Initial Quota" and "Final Qu ota."  The inescapably logical conclusion was that
the words found under "Other Terms and Conditions" were just that: terms and conditions that applied
to the quantity described as the initial/final quotas.  Had these words merely represented "a narrative
statement explaining the basis for arriving at the in-quota quantity," they would not have found a
place in the Schedule.    Turning to the object  and purpose of the "Other Terms and Conditions"
column, this was evidenced by the very words describing the function of the column.  This column
had been provided to allow Members to describe the terms and conditions that they had attached to
the TRQ applicable to the product in question, not to  describe how they had arrived at the TRQ itself.
                                                     
351 Appellate Body Report on US – Shrimp-Turtle, op.cit.
352 Ibid,  p. 42, para. 115.
353 Ibid, pp.42-43, para. 116.
354 Ibid, p. 43, para. 116.
355 The New Shorter Oxford English Dictionary on Historical Principles , Lesley Brown  (ed.), (Oxford: Oxford University Press,
1993).WT/DS103/R
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4.510  In respect of the negotiating history, Canada recalled that it had clearly indicated to the
United States, as set out in jointly drafted documents, that it intended to continue its access for US
milk imported by Canadian consumers while non-consumer utilization would continue to be blocked
until equivalency was established.  Canada’s intentions had been clear.  Canada maintained that if the
United States had had any doubt about whether or not Canada’s Schedule provided access consistentwith their interpretation of the negotiations and resulting treaty terms, it would have been their
responsibility to verify the meaning of the term and condition.  It had been their responsibility to
ensure that their interpretation of what access was agreed to in the negotiations was ensured.
356
4.511  Canada did not concede, in respect of the US references to other language used by both
Canada and the United States in their respective schedules, that such other language would necessarily
have any adverse bearing on the language it had chosen with respect to its obligations.  Indeed, the
use of different words with respect to different categories of products merely illustrated that the termsand conditions applicable thereto were formulated in their own differing contexts, and thus had to be
examined accordingly.  Again, this illustrated the importance of heeding the guidance provided by the
Vienna Convention when interpreting the terms of a treaty,
357 particularly when faced with
interpreting tariff schedules.358
3. Article 3 of the Agreement on Import Licencing Procedures
4.512  The United States  argued that Canada administered the tariff-rate quota on fluid milk through
general import permits provided for under Canada’s Export-Import Permit Act.359  By virtue of the
general permit, residents of Canada were confined in any single import entry to C$20 worth of dairy
products, limited to their personal or household use.360  The two limitations, i.e., personal use and a
specific dollar value, were imposed in addition to both the requirement for a general permit and thequantitative limit on the volume of fluid milk eligible for the in-quota rate under Canada’s WTO
Schedule.  These additional constraints on imports were inconsistent with the requirements of Import
Licensing Agreement.   Specifically, Article 3.2 of the Import Licensing Agreement provided that:
"Non-automatic licensing shall not have trade-restrictive or -
distortive effects on imports additional to those caused by theimposition of the restriction."
4.513  The United States argued that the obligation encompassed in Article 3.2 reflected the Import
Licensing Agreement’s objectives that the flow of international trade not be "impeded by the
inappropriate use of import licensing procedures" and that "licensing procedures should be no more
administratively burdensome than absolutely necessary to administer the relevant measure".
361
Hence, the general permit, by imposing two conditions  on entry that were additional to the licensing
requirement itself, added another impediment to fluid milk trade between the United States and
Canada and resulted in procedures that were more administratively burdensome than necessary to
administer the measure.  By limiting entries to the personal use of the importer, the general permit
restricted trade beyond those constraints that would result from the mere act of licensing imports.  By
confining the value of imports, the general permit further impeded trade and was also inconsistent
with Article 3.5(i) of the Agreement, which directed Members to "take into account the desirability of
                                                     
356 Appellate Body Report on EC - Computer Equipment, op. cit. , para. 82, 84.
357 Appellate Body Report on  US - Shrimp-Turtle, op. cit.,  50, p. 42.
358 Appellate Body Report on EC - Computer Equipment, op. cit.,  para. 82, 84.
359 Responses to Questions from the US on Fluid Milk TRQ, Letter, dated 24 November 1997 (Answer to Question 31.  United
States, Exhibit 34)
360 United States,  Exhibit 34.
361 Preamble, WTO Import Licensing Agreement, paras. 8 and 9.WT/DS103/R
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issuing licenses for products in economic quantitie s."  The limitation on imports to C$20 appeared to
eliminate all but individual consumer retail purchases of milk.
4.514  Finally, the United States argued that Canada had failed in its obligation under Article 3.5(iv)
to provide information respecting the value and volume  of fluid milk within the tariff-rate quota.  This
data was requested by the United States during consultations in November 1997, and Canada advisedthat such information had not been developed despite assurances in earlier consultations that the data
would be made available.
362
4.515  Canada  argued that Article 1.1 of the Import Licensing Agreement defined import licensing
as being administrative procedures used for the operation of import licensing regimes requiring the
submission of an application or other documentation to the relevant administrative body as a prior
condition for importation.  Canada did not require Canadian residents to apply for or acquire import
permits for the importation of less than C$20 worth of dairy products.  There were no administrativeprocedures associated with the general import licensing regime in respect of such import.  Therefore,
that Agreement did not apply.
4.516  Error! Bookmark not defined. Canada further argued that its administration of the fluid milk
tariff quota was consistent with the Import Licensing  Agreement.  Imports of fluid milk for personal
use into Canada were freely made by Canadians under the terms of General Import Permit No.1.Individual permits were not required.  Further, in the current circumstances, Canada had not
considered it necessary to monitor the flow of such  milk imports into Canada.  Any such inspection
regime would not be practicable, since it would, in effect, require the stopping of all returning
Canadians at the many Canada-US border crossing points to inspect and record the contents of their
grocery bags.  Moreover, it would introduce an unwanted and unneeded interference in such importtrade. No restrictions were placed on imports that were additional to the terms and conditions
incorporated in Canada’s tariff concession. Accordingly, this regime was in complete compliance
with the requirements of Article 3.2 of the Im port Licensing Agreement.  Since any monitoring
regime for such imports was neither realistic nor practicable, the provisions of Article 3.5(iv), cited by
the United States did not apply.
4.517  The United States  claimed that there could be no dispute that the Import Licensing
Agreement applied to tariff-rate quotas. The Appellate Body in two separate disputes resolved the
question by affirming that the Agreement’s scope includes tariff-rate quotas.
363   Despite this clear
statement by the Appellate Body, Canada argued that the Import Licensing Agreement did not apply
in this instance because Article 1.1 limited the scope of import licensing to "the operation of importlicensing regimes requiring the submission of an application or other documentation to the relevant
administrative body as a prior condition for importation" (paragraph 4.515). Hence, Canada asserted
that because its General Permit for dairy imports did not require any administrative procedures for
imports of less than C$20, the Import Licensing Agreement was inapplicable.
4.518  The United States noted that Canada chose to ignore the fact that under Canada’s Export and
Import Permits Act administrative procedures existed for obtaining import licenses in situations in
which the General Permit was inapplicable, e.g., where the desired dairy imports were valued at morethan C$20.
364  While Canada rarely, if ever, granted licenses under those procedures for fluid milk
imports, it presumably did grant licenses for other dairy products.  For example, the United States
                                                     
362 Consultations on 19 November 1997. Answers to question 24.  (United States, Exhibit 34)
363 In the proceedings involving European Communities - Regime for the Importation, Sale, and Distribution of  Bananas ,
WT/DS27/AB/R, adopted 25 September 1997, para. 194  and European Communities - Measures Affecting the Importation of Certain
Poultry Products , WT/DS69/AB/R, adopted 23 July 1998, paras. 120-122.
364 The United States noted that Canada described the nature of the applicable procedures in its answer to question 5 from the
United States.  Specifically, Canada stated that pursuant to paragraph 8.3(3) of the Act, "where goods have been included on th e Import
Control List and the Minister has determined an import access quantity for the goods pursuant to subsection 6.2(1), the Ministe r may issue
(a) a permit to import those goods in a supplemental quantity to any resident of Canada who applies for the permit ...".WT/DS103/R
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assumed that Canada issued licenses for dairy imports under Canada’s Import for Re-Export
Program.365  More importantly, Canada had administrative procedures in place for licensing such
imports.  The fact that Canada elected not to grant such licenses did not negate the existence of those
licensing procedures.  It would be a most curious result for a country to establish licensing
procedures, but then be able to avoid the disciplines of the Import Licensing Agreement simplybecause it refused to grant any licenses.  Canada’s procedures, thus, remained within the scope of the
Import Licensing Agreement.
4.519  The United States argued that Canada could not be allowed to use GATT inconsistent
measures to argue that the Import Licensing Agreement was inapplicable.  Canada maintained
procedures under its Import-Export Permits Act to permit dairy imports, including fluid milk, that did
not qualify under the General Permit.  Canada’s refusal to grant licences under that authority did not
diminish the reality of those procedures.  Moreover, these procedures were precisely the subject of theImport Licensing Agreement’s disciplines.  Canada  could not deny the Agreement’s applicability by
simply disclaiming the existence of any relevant procedures.
4.520  Canada  recalled its position that the Import Licensing Agreement did not apply to the
General Import Permit system.  The United States understood this statement as being a claim by
Canada that the Agreement did not apply to tariff quotas generally.  Canada could not understand howthe United States could have read its statement in this way and affirmed that the Import Licensing
Agreement applied to any tariff quota administration regime falling in the description of Article 1.1 of
that Agreement.
                                                     
365 The United States noted that Canada stated in its response to the questions from the Panel and from New Zealand that the
Import for Re-Export Program had not allowed the importation of fluid milk classified in tariff item 0401.10.  (Response to Que stion 1(b)
from New Zealand)WT/DS103/R
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V. SUMMARY OF THIRD PARTY SUBMISSIONS
A. AUSTRALIA
1. Introduction
5.1 Australia stated that as an agricultural exporter, and in particular, as a major exporter of dairy
products Australia had a direct commercial interest in the outcome of the dispute at issue.  As theexport subsidy provisions of the Agreement on Agriculture were of major systemic importance to
Australia, Australia's submission focussed on th e question whether the delivery of cheap in-quota
milk to manufacturers for export under Classes 5(d) and (e) provided export subsidies under the
Agreement on Agriculture.
366
5.2 Australia claimed that the Special Milk Classes Scheme delivered export subsidies within the
meaning of the Agreement on Agriculture.   As a result Canada was in breach of its export subsidy
quantity reduction commitments for butter, cheese and other milk products under the Agreement onAgriculture.  It followed that Canada was in breach of its commitments under Articles 3, 8, 9 and 10
of the Agreement on Agriculture and Article 3 of the SCM Agreement.
5.3 Australia disagreed with the United States line of argument regarding the functional
equivalence of Canada's new dairy regime with its former system of producer-financed levies, which
appeared to fall under Article 9.1 of the Agreement on Agriculture.   Australia contended that this was
not a trade impact issue but one of rules and so such a line of argument was not relevant.  The WTO
Agreement did not prevent a Member from bringing itself into conformity with the rules by measures
that could have similar trade and production impact.   In Australia's view the new regime provided
export subsidies under the WTO rules regardless of the status of previous arrangements.
2. Discussion
(a) Relationship between the Agreement on Agriculture and the SCM Agreement
5.4 Australia noted that the Agreement on Agriculture itself did not contain a definition of
"subsidy".  Accordingly, the context of the Agr eement on Agriculture needed to be examined for
guidance, i.e. the WTO Agreement, in particular Annex 1A.   The generic agreement on subsidies in
the goods sector was the SCM Agreement.   In the absence of any other indication, normal rules ofinterpretation suggested that that definition should be taken for other agreements in Annex 1A of the
WTO Agreement.   Moreover, there were explicit legal linkages between the Agreement on
Agriculture and the SCM Agreement.   In particular Article 13 of the Agreement on Agriculture
provided a temporary derogation from aspects of the SCM Agreement provided that the conditions set
out therein were fulfilled.   Article 3.1 of the Agreement on Agriculture specifically referred tocommitments limiting subsidization.   The SCM Agreement was the vehicle by which the subsidy was
defined for goods under the WTO Agreement.   Article 31 of the Vienna Convention underlined that
the Panel needed to interpret the meaning of "subsidy" in its context which included the WTO
Agreement as a whole and the SCM Agreement in particular.
5.5 On the issue of the relationship between Article 1(e) of the Agreement on Agriculture
367
(which provided guidance for what constituted an export subsidy under that agreement) and
                                                     
366 Australia's submission was limited to the issue of measures affecting dairy exports.
367 Article 1(e) of the Agreement on Agriculture:  "'export subsidies' refers to subsidies contingent upon export performance,
including the export subsidies listed in Article 9 of this Agreement;"WT/DS103/R
WT/DS113/R
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Article 3.1(a) of the SCM Agreement368, the ordinary meaning of these terms in the context of
Annex 1A of the WTO Agreement would imply that the definitions were the same.   If there were
measures that fell under Article 3.1(a) of the SCM Agreement but not the definition of export subsidy
under Article 1(e) of the Agreement on Agriculture, then they would not be covered by Article 13(c)
of the Agreement on Agriculture.  That would appear to lead to a result other than the intention ofArticle 13 of the Agreement on Agriculture and so be  ruled out under Articles 31.1 and 32(b) of the
Vienna Convention.
(b) Classes 5(d) and (e) under the Special Milk Classes Scheme constitute export subsidies
5.6 Where in-quota milk was provided to processors/exporters under Classes 5(d) and (e), this
involved the Government, through its legislative arrangements, providing goods (i.e. milk) at prices
below those prevailing in the domestic market.  Thus the measure provided a subsidy under
Article 1.1(a)(iii) of the SCM Agreement.  In  the alternative, this was a subsidy under
Article 1.1(a)(iv) of the SCM Agreement.   The m easure provided a benefit to the processor/exporter
concerned, since it received the raw material (milk) at a price that enabled it to export the processed
product concerned.   This supply of milk was contingent upon the export of the processed dairy
product.   Accordingly, the measure constituted a subsidy that conferred a benefit on the recipient and
was contingent upon export performance.   Thus it fell under Article 3.1(a) of the SCM Agreement.Accordingly, it was an export subsidy within the meaning of the Agreement on Agriculture (as well as
the SCM Agreement) and so came under Canada's obligations under Articles 3, 8, 9 and 10 of the
Agreement on Agriculture.  In the alternative, if the Panel found that this measure fell under
Article 3.1(a) of the SCM Agreement but was not an "export subsidy" within the meaning of the
Agreement on Agriculture, then it would be prohibited under Article 3 of the SCM Agreement, sinceit would not receive cover from Article 13(c) of the Agreement on Agriculture.
5.7 Paragraph (d) of the Illustrative List of Export Subsidies in Annex I of the SCM Agreement
underscored that the provision of low priced inputs could be an export subsidy.   In addition, while the
calculation issue was in respect of countervail, Article 14(d) of the SCM Agreement indicated that
such a measure would be a countervailable subsidy.   Article 9.1(a) of the Agreement on Agriculturethrough its reference to "payments-in-kind" made it clear that cheap inputs in lieu of cash were
regarded as direct subsidies.
5.8 Australia noted that given that Canada's exports exceeded the commitments in its Schedule, it
was irrelevant whether the measure fell under the types of export subsidies listed in Article 9.1 of the
Agreement on Agriculture, since Article 10.3 of the Agreement on Agriculture placed the onus onCanada to show that it had not breached its commitments whether or not it fell under Article 9.1 of the
Agreement on Agriculture.
5.9 Classes 5(d) and (e) of the Special Milk Classes Scheme were designed to make products for
export competitive through the supply of cheap milk based on the export price of the exported
product.  The "world price" of the milk, which was calculated by the CDC (whether product was
exported by the CDC or where there were exporter-initiated proposals for export), was below the
price of the milk that would be commercially available to processors/exporters without the operationof the scheme.  The "world price" was negotiated by the CDC with the processor or exporter.  The
prices in Class 5 were in fact on the individual components of milk (butterfat, protein, other solids).
The CDC was constructing what it termed a "world price", which would appear not to be
commercially available to producers without the operation of the Special Milk Classes Scheme.
Australia noted that while Canada argued that processors/exporters conceptually had access to milk atworld market prices under its Import for Re-Export Program, the price of obtaining and using such
                                                     
368 Article 3.1(a) of the SCM Agreement:  "subsidies contingent, in law or in fact, whether solely or as one of several other
conditions, upon export performance, including those illustrated in Annex I;" [footnote in original omitted]WT/DS103/R
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milk was not taken into account when the price of the Class 5(d) or (e) milk to the processor/exporter
was determined and was more favourable.  There appeared to be no connection between the price of
imported milk conceptually available at the factory under the Import for Re-Export Program and the
prices charged for milk under Classes 5(d) and (e).  Accordingly, the measure provided milk at a price
below an adequate level of remuneration contingent upon the export of the manufactured product andtherefore would constitute an export subsidy, under both the Agreement on Agriculture and the SCM
Agreement.
(c) Export Subsidies under Article 9.1 of the Agreement on Agriculture
(i) "Provision by governments or their agencies"
5.10 The Canadian Government, whether through the CDC or through the provincial marketing
boards, played a clear role in the establishment and administration of the Classes 5(d) and (e) in the
Special Milk Classes Scheme.   The CDC was mandated under the CDC Act
369 to establish and
operate the pooling of revenues from milk sales, to determine the percentage of total production
represented by Classes 5(d) and (e) including in each province, and to calculate the "world price" for
the purposes of Classes 5(d) and (e).   Moreover, it was through the CDC that processors/exporters
obtained a permit for cheap milk for dairy products for export.  The requirement under Article 9.1(a)
that the direct subsidies were provided by governments or their agencies was thereby met.
5.11 Australia did not agree with Canada's argument  that in effect the Canadian dairy export
regime was in some way not governmental.   The regime for exports from in-quota milk under
Classes 5(d) and (e) were an integral part of the Canadian dairy regime, which operated under
legislative authority at both the Federal and Provincial levels.   In the absence of legislative backing
the scheme would not be able to operate.
5.12 In respect of Canada's claim that the permits issued by the CDC were recommendations to the
marketing boards and that the CDC was not mandated to decide whether processors/exporters
obtained product at world prices for export, Australia noted that the processor/exporter could not
receive milk products at world prices without the permit issued by the CDC.
(ii) "Direct subsidies, including payments-in-kind"
5.13 Article 9.1(a) covered "direct subsidies, including payments-in-kind".   The ordinary meaning
of this phrase was that the provision of cheap goods was to be regarded in the same way as straight
cash.   Accordingly, since for Classes 5(d) and (e) the cheap milk was provided by the Government
contingent on the export of the manufactured product, the measure fell under Article 9.1(a) of the
Agreement on Agriculture.  It would be inconsis tent with the ordinary meaning of the phrase to
suggest that the provision of goods without pa yment would be a subsidy but that any level of
payment, even though less than adequate remuneration, would convert the measure from being a
subsidy.
5.14 Processors/exporters accessed cheap milk under Classes 5(d) and (e) for the export of dairy
products, compared with access to milk to produce the same product for the domestic market, and so
the measure met the requirement of Article 9.1(a) that the provision of direct subsidies was "to a firm,
to an industry, to producers of  an agricultural product ...".
5.15 Processors/exporters requested a permit to export product under the Special Milk Classes
Scheme.  Milk destined for Classes 5(d) and (e) for processing into export product had been
                                                     
369 Australia noted that Paragraph 9(1) of the CDC Act indicated the delegation of the CDC powers, by agreement with a
province or a Board, of the Commission's powers under paragraphs 9(1)(f)-(i).WT/DS103/R
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determined by the CDC.  Classes 5(d) and (e) had been established solely for the export of dairy
products and the provision of lower priced industrial milk was related specifically to the export of that
product.  Processors/exporters did not have access to the lower priced industrial milk unless the dairy
product was to be exported.  The subsidy provided through the Classes 5(d) and (e) was therefore
"contingent upon export performance".
5.16 Accordingly, the measure satisfied the definition in Article 9.1(a) of the Agreement on
Agriculture.
(d) Article 3 of the Agreement on Agriculture
5.17 Australia argued that since the Special Milk Classes Scheme was an export subsidy within the
meaning of Article 9.1 of the Agreement on Agriculture, Canada was in breach of Article 3.3 of the
Agreement on Agriculture not to provide export subsidies in excess of its budgetary outlay and
quantity commitments levels specified in Section II of Part IV of its Schedule and in breach ofArticle 8 of the Agreement on Agriculture not to provide export subsidies otherwise than in
conformity with the Agreement and with the commitments specified in its schedule.
(e) Article 10 of the Agreement on Agriculture
5.18 In the alternative, even if it were found that the export subsidies provided under Classes 5(d)
and (e) were not captured within the meaning of Article 9.1 of the Agreement on Agriculture,Australia argued that Canada would appear to be in breach of Article 10.1 of the Agreement on
Agriculture.  The object and purpose of Article 10 .1 of the Agreement on Agriculture was to prevent
the circumvention of export subsidy commitments.   This was reinforced by Article 10.3 which placed
the onus on an exporting Member to demonstrate that any exports in excess of its scheduled
commitments were not subject to export subsidies.   As noted above, in Australia's view the measure
provided an export subsidy and so the onus was on Canada to demonstrate that it was not in breach of
its export subsidy commitments.
(f) Article 3 of the SCM Agreement
5.19 The measure in question fell under Article 3.1(a) of the SCM Agreement.   Since Canada was
in breach of its export subsidy commitments under the Agreement on Agriculture, it did not receivecover through Article 13(c) of the Agreement on Agriculture, and so was in breach of Article 3 of the
SCM Agreement.   In the alternative, if the Panel found that the measure was not an export subsidy
within the meaning of the Agreement on Agriculture but was an export subsidy under Article 3.1(a) of
the SCM Agreement, then again Canada would receive no cover from Article 13(c) of the Agreement
on Agriculture, and so would be in breach of Article 3 of the SCM Agreement.
B. J
APAN
1. Introduction
5.20 Japan, as both a producer and major importer of dairy products370, expressed concern in
respect of the effect of Canada's measures on international prices of dairy products.  Such measures
could give rise to inappropriate competition within the global dairy market, which in turn would bring
about negative effects on the domestic markets.  Hence, Japan considered that it had a substantial
trade interest in the current matter.
                                                     
370 Japan noted that, for example, Japan was the largest importer of trade in cheese:  24 per cent of the total imports in the wor ld
was shared by Japan (as reported in 1996 in the "Dairy Compendium" by the Australian Dairy Corporation) and Japan’s imports of
Canadian cheese amounted to 283 tonnes in FY1995 and 1,236 tonnes in FY1996.WT/DS103/R
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5.21 Japan considered that the export subsidies were highly trade-distortive and had therefore
argued for their termination.  As a result of the Uruguay Round Negotiations, the WTO Agricultural
Agreement provided that the Members had to phase out export subsidies and prevent the
circumvention of such subsidies.
5.22 In Canada, a gap between export prices of dairy products and the domestic prices was created
by the Special Milk Classes Scheme.  Japan noted that the exportation of Canada’s dairy products had
been expanding under this Scheme.  Japan considered that Canada's Special Milk Classes Scheme was
an export subsidy, or, in the alternative, resulted  in or threatened to lead to the circumvention of
Canada's export subsidy reduction commitments.
2. Legal Arguments
(a) Canada’s Special Milk Classes Scheme provided an export subsidy within the meaning of
Article 9.1(c) of the Agreement on Agriculture
5.23 Japan considered that Canada’s Special Milk Classes Scheme fell into the category of an
export subsidy within the meaning of Article 9.1(c) of the Agreement on Agriculture, and that the
actual amount of dairy products exported from Canada exceeded the level set forth in its Schedule.
Consequently, Japan believed that the measures at issue were inconsistent with Articles 3.3 and 8 of
the Agreement on Agriculture.
5.24 Article 9.1(c) provided the following two conditions for export subsidies:  (i) "payments on
the export of an agricultural product";  and (ii) payments that were "financed by virtue of
governmental action".   Concerning the first condition of Article 9.1(c), the price reduction provided
by the Special Class 5(d) was available only for the milk destined for the production of dairy products
for export purposes.  Indeed, this was in practice and economically-speaking nothing else but"payments on the export of an agricultural product".  With regard to the second condition of
Article 9.1(c), the Special Milk Classes Scheme was founded through the Comprehensive Agreement
on Special Class Pooling, which was an Agreement between the federal and provincial governments
and operated by the CDC, whose authority to do  so was given by the CDC Act and which was
amended in 1995.  This meant that the system was operated "by virtue of governmental action".Therefore, Japan considered that the price reduction under the Special Milk Classes Scheme was an
export subsidy within the meaning of Article 9.1(c) of the Agreement on Agriculture, and accordingly
had to be subject to reduction commitments under that Agreement.
5.25 Japan further noted that under Article 3.3 and Article 8 of the Agreement on Agriculture,
Members were obliged not to provide export subsidies on agricultural products in excess of thebudgetary outlay and the quantity commitment levels specified in their Schedule, and not to provide
export subsidies "otherwise than in conformity with " the commitments in their Schedule.  Japan noted
that the volume of Canadian exports had exceeded  the level of its export subsidy commitments under
the Agreement on Agriculture in respect of most of the dairy product categories.
371  Hence, Japan
claimed that the Canadian measure at issue, being an export subsidy provided for in Article 9.1(c),
was not consistent with Article 3.3 and, accordingly,  not consistent with Article 8 of the Agreement
on Agriculture.
                                                     
371 Japan noted that, for example, the volume of exports for butter in 1995/96 was 14,845 tonnes from Canada, the ceiling volume
of which was 9,464 tonnes for the same period.WT/DS103/R
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(b) By operating the Special Milk Class System , Canada circumvented or threatened to
circumvent its export subsidy commitments
5.26 Japan argued that even if the Panel were not to find that the Special Milk Classes Scheme
provided an export subsidy within the meaning of Article 9.1(c) of the Agreement on Agriculture,
Japan still believed that Canada’s Special Milk Classes Scheme was inconsistent with Article 10.1 ofthe Agreement on Agriculture.  Article 10.1 provided that the export subsidies not listed in Article 9.1
were not to be applied in a manner which resulted in, or threatened to lead to, circumvention of export
subsidy commitments.  If the Panel did not find the Scheme was an export subsidy as provided for in
Article 9.1(c), Japan considered that the Scheme c onstituted an export subsidy within the meaning of
Article 1(e) of the Agreement on Agriculture.  This was because access to lower-priced milk under
Class 5(d) was permitted exclusively for the purpos e of processing dairy products for export and was
"contingent upon export performance".
5.27 Under Class 5(d) of the Special Milk Classes Scheme, processors of dairy products benefitted
from the price reduction instead of foregoing revenue by the provincial government agencies.  Such
price reduction, within the meaning of Article 1(e), constituted a "subsidy", the interpretation of
which was supported by the negotiating history on export subsidies.
5.28 Japan noted, in addition, that the apparent purpose of the Special Milk Classes Scheme was to
avoid the consequences caused by the termination of the producer levy-based subsidies and to replace
them with a system that would have precisely the same economic effect.  In this regard, Japan
believed that this system was "applied in a manner which results in, or which threatens to lead to, the
circumvention of their export subsidy commitments" within the meaning of Article 10.1 of the
Agreement on Agriculture.
(c) Canada was requested to bring the measures at issue into conformity with the Agreement on
Agriculture.
5.29 Japan argued that while it was understandable that the Government of Canada needed to
establish certain domestic measures for a stable supply of dairy products through a sound
development of dairy farming, the policy objectives in themselves could not justify the introduction ofexport subsidies which, in the case at issue, were highly trade-distortive and inconsistent with the
Agreement on Agriculture.
5.30 Japan respectfully requested Canada to realize its domestic policy purposes through measures
consistent with the WTO Agreement, and, also requested the Panel to recommend to the DSB that
Canada bring its measure into conformity with its obligations under the Agreement on Agriculture.WT/DS103/R
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VI. INTERIM REVIEW
6.1 On 5 February 1999, the Panel issued its interim report to the parties.  On 18 February,
Canada and the United States requested the Panel to review precise aspects of the interim report, in
accordance with Article 15.2 of the DSU.  New Zealand did not seek review of any aspect of the
interim report.  Neither of the three parties requested the Panel to hold a further meeting.  Wesubsequently allowed the parties to comment on the comments we received on 18 February.  On 26
February, all three parties submitted such comments.
6.2 Canada suggested that certain corrections and additions be made to the descriptive part of our
report.  The complainants did not object to these corrections and additions.  Where appropriate, we
redrafted the relevant sections accordingly.  Canada also noted that Table 2 in paragraph 2.41 of our
report contains confidential data.  We deleted the relevant data from the last column of Table 2,inserted an appropriate footnote regarding the availa bility of this data in any appeal proceedings, and
expressed the indications we derived from this column in paragraph 2.41.  We kept the remaining
columns in Table 2 since the data contained therein was already made public by Canada in its
notifications under the Agreement on Agriculture.
6.3 On the basis of factual comments received by Canada we also redrafted paragraphs 7.54
and 7.59.
6.4. We incorporated certain US suggestions in the descriptive part of our report.  Other
suggestions had already been taken into account as a result of US comments on the descriptive part ofour report.  In the light, inter alia , of Canada's objections to other US requests for review, we did not
add language to paragraphs 7.10, 7.48 and 7.152 of our report.
6.5 The United States further suggested deleting the reference made in the interim report to the
concept of "obiter dicta" in respect of our examination under Article 10 of the Agreement onAgriculture.  We followed this suggestion (to which Canada did not object and with which New
Zealand agreed) in order to clarify the matter.  We stress, however, that our examination and findings
under Article 10 are made in the alternative, i.e., in the event our findings under Article 9.1 should not
be adopted and the DSB decides the dispute based on the alternative claims of violation of Article 10.
Accordingly, we redrafted paragraphs 7.119, 7.136 and 8.1 and footnote 530WT/DS103/R
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VII. FINDINGS
A. CLAIMS OF THE PARTIES
1. The Special Milk Classes Scheme
7.1 New Zealand and the United States claim that th e volume of Canadian exports of certain dairy
products, under a scheme known as "Special Milk Classes", exceeds Canada's export subsidycommitments.  Pursuant to this scheme, milk is classified into five Classes according to its end use
and market destination.  Classes 1 to 4 cover milk for use on the domestic market.  Class 5 - the so-
called "Special Class" – applies to milk intended for export as well as milk for use in products which
face import competition in the domestic market.  Class 5 is further subdivided into five sub-classes.
Classes 5(d) and (e) apply exclusively to milk for use in exported products.  Class 5(d) consists of the
so-called "traditional planned exports".  Class 5(e) covers milk that is to be exported for surplus
removal purposes.
372
7.2 Both complainants focus on Classes 5(d) and (e) of the Special Milk Classes Scheme.373
They consider that these Classes in the context of Canada's supply and price management system
constitute:
(a) an export subsidy in the sense of Article 9.1 of the Agreement on Agriculture
which should be counted against Canada's export subsidy reductioncommitments;  or, in the alternative,
(b) an export subsidy not listed in Article 9.1 which is applied in a manner which
results in, or threatens to lead to, circumvention of Canada's export subsidy
commitments, contrary to Article 10.1 of the Agreement on Agriculture.
The complainants conclude that under both alternatives the scheme results in export subsidies granted
contrary to the Agreement on Agriculture (in particular, Article 3.3, Article 8 and/or Article 10.1
thereof).
7.3 The United States further claims that, to the extent that the scheme is an export subsidy
contrary to the Agreement on Agriculture, it also violates Article 3 of the Agreement on Subsidies andCountervailing Measures ("SCM Agreement") which prohibits export subsidies.
7.4 The dairy products in question are: butter, cheese and "other milk products".  The relevant
marketing years are: 1995/1996 and 1996/1997.
374  Both complainants also refer to marketing year
1997/1998 which ended on 31 July 1998 and for which data only became available - and was
submitted to us - after our first substantive meeting.  However, in doing so neither of the complainantsexplicitly incorporated this marketing year under its claims.  Since, moreover, marketing year
                                                     
372 See paras. 2.38 - 2.40.
373 New Zealand's claims only cover Classes 5(d) and (e).  The United States, on the other hand, submits that subsidized exports
are made under each of the Special Classes but – as it states in its answer to Panel Question 1 to the complainants – "places p articular
emphasis on the subsidized exports occurring as a result of the operation of Special Classes 5(d) and (e)".  Below, the Panel a lso addresses
Classes 5(a) to (c) which cover milk for domestic use as well as milk for export.  See para. 7.41 and footnotes 453 and 496.
374 See Table 1 in para. 3.1 above.  The US claims only cover marketing year 1996/1997 but this for all three products (US
answer to Panel Question 2 to the complainants).  The claims by New Zealand cover both marketing years 1995/1996 and 1996/1997 and
this in both cases for all three products at issue, except that "other milk products" are not included for marketing year 1995/ 1996 (New
Zealand answer to Panel Question 2 to the complainants).WT/DS103/R
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1997/1998 only ended some four months after  the establishment of this Panel (on 25 March 1998), we
are not called upon to make findings in respect of that marketing year.375
7.5 In response Canada argues that the Special Milk Classes Scheme does not constitute an export
subsidy either:
(a) in the general sense covered by the Agreement on Agriculture (in so doing
Canada refers in particular to Article 1 of the SCM Agreement, arguing that
the scheme is not a "subsidy" and can therefore a priori not be an "export
subsidy");  or
(b) in the specific sense stipulated in any of the six sub-paragraphs of Article 9.1
or in Article 10.1 of the Agreement on Agriculture.
Canada submits that since the exports subject to this scheme are, therefore, not generated by export
subsidies, they do not have to be counted against its scheduled reduction commitments, nor can theyconstitute a circumvention of these commitments in the sense of Article 10.1.  Canada concludes,
therefore, that the Special Milk Classes Scheme fully conforms to both the Agreement on Agriculture
and to the SCM Agreement.
2. The tariff-rate quota for fluid milk
7.6 The United States also claims that access to the tariff-rate quota for fluid milk - which Canada
granted in the Uruguay Round negotiations - is being restricted contrary to Canada's obligations under
Article II of GATT 1994 and Article 3 of the Agreement on Import Licensing Procedures.  The
restrictions referred to are as follows:  (i) entr ies are only allowed for consumer packaged milk for
personal use by Canadians;  and (ii) entries are limited to those valued at less than C$20.
7.7 To this claim, Canada responds that in its Schedule it limited access to the tariff-rate quota to
cross border imports of consumer packaged milk by Canadians for personal use.  Canada claims that
this is clear from the "terms and conditions" attached to this concession in its Schedule, as well as
from the negotiating history that led to this concession.
3. Other claims raised in the requests for this Panel
7.8 We note that the requests by the United States and New Zealand for the establishment of this
Panel also alleged violations of Articles X, XI and XIII of GATT 1994.  However, neither the United
States nor New Zealand further pursued any of these claims during the Panel proceedings.
B. T
HE SPECIAL MILK CLASSES SCHEME
1. Summary of claims and arguments of the parties
(a) New Zealand and the United States
7.9 New Zealand and the United States claim that unde r Classes 5(d) and (e), processors of dairy
products for export are given access to milk at prices lower than those applying to milk for the
manufacture of the same products for domestic consumption.  In their view, this is done in order to
                                                     
375 Our terms of reference, set out in document WT/DS103/5 and WT/DS113/5, only mandate us to "examine, in the light of the
relevant provisions of the covered agreements cited by the United States in document WT/DS103/4 and by New Zealand in document
WT/DS113/4, the matters referred to the DSB respectively by the United States and New Zealand in these documents " (emphases added).
These documents, the requests for this Panel, were submitted to the DSB and incorporated in our terms of reference on 25 March 1998.  The
matters referred to therein, and thereby subjected to our review, do not include within their scope marketing year 1997/1998.WT/DS103/R
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remove surpluses of milk in a way that allows Canadian processors/exporters of dairy products to
compete in export markets.
7.10 With respect to milk produced within the limits of the allocated producer quotas ("in-quota
milk"), the Complainants argue that making milk available for use in exports at lower prices - under
either Class 5(d) or (e) - can only be sustained because of the government's involvement, in particularthe governmentally-imposed pooling of the relativel y low returns from these exports with the higher
returns obtained from milk sold for use on the domestic market.  On these grounds, New Zealand and
the United States submit that Classes 5(d) and (e) constitute an export subsidy whereby, as a result of
extensive governmental involvement, producers  are required to share the cost of selling milk at lower
prices for export use and processors/exporters  benefit from the cheaper milk made available to them
to be competitive on export markets.  In their vi ew, the mechanism stimulates the removal of milk
surpluses by way of exports.
7.11 In response to questions put to them by the Panel, the complainants clarified that their claims
also cover exports generated under Class 5(e) from milk produced in excess of  the allocated producer
quotas ("over-quota milk").  This milk, as well, is sold for export at a lower price than the domestic
milk price.  However, as opposed to in-quota milk sold for export, the relatively low revenues from
over-quota milk for export are generally not pooled with the higher revenues from milk used
domestically.  Nevertheless, for the complainants, the extent of federal and provincial governmental
involvement in the arrangements under which milk is made available for export at lower prices –
irrespective of whether the returns are pooled - suffices to conclude that the dairy products produced
with over-quota milk are being exported with th e help of export subsidies.  According to the
complainants, it is irrelevant for the processor producing for export - who can buy the milk at acheaper price - whether the milk was produced in- or over-quota.  The complainants submit that the
competitive benefit thereby granted to processors/exporters could not exist without the
governmentally established and enforced Special Milk Classes Scheme and that this benefit thus
constitutes an export subsidy.
(b) Canada
7.12 Canada argues that the Special Milk Classes Scheme is producer driven and not directed by
the government.  Canada submits that milk producers producing for export follow commercial
considerations and react to world market signals, not to government directions.  According to Canada,
the government does play a role in the scheme but one that is limited and essentially responsive to the
initiatives of the industry.  For Canada, the government only has an oversight function to protect thepublic interest.
7.13 With respect to in-quota milk sold for export, Canada argues that producers are free to
collectively determine whether and to what extent  they wish to provide in-quota milk for export
purposes.  According to Canada, the lack of government control, direction or coercion in exporting
milk at a lower price is even more apparent with respect to over-quota milk.  Canada submits that any
qualified dairy producer in Canada is free to produce as much milk as it chooses.  Milk produced
over-quota is sold for export at a price based on actual world prices.  According to Canada, that is alsothe price the producer receives since the returns from over-quota milk are not pooled with higher
domestic milk returns.
7.14 Canada further argues that under the Agreement on Agriculture it was required to replace
earlier quantitative restrictions on imports of milk with tariffs.  Under the former quantitative
restrictions regime, Canada had an obligation to also impose domestic restrictions on the productionof milk (in accordance with Article XI:2(c)(1) of GATT).  Under the new regime, no such domestic
restrictions are required.  As a result, Canada was free to produce more, including milk for export.
According to Canada, the fact that it imposes tari ffs leads to higher domestic prices.  For exports,WT/DS103/R
WT/DS113/R
Page 168
however, lower prices have to prevail in order to compete on world markets.  A system of sales at
differing prices for domestic and export markets is the consequence.  Upholding the complainants'
claims would, according to Canada, mean that any such two-tiered system would constitute an export
subsidy.  This would, according to Canada, in effect mean that a Member imposing tariffs on imports
of a product (e.g., milk) can no longer export that product (e.g., milk domestically produced) withoutbeing considered to be granting export subsidies.
2. The Panel's decision of 16 December 1998
7.15 We submitted three sets of questions to the parties.  The first set was submitted subsequent to
our first substantive meeting; the second set after our second substantive meeting; and the third set after
receipt of the answers to the second round of ques tions.  We gave ample opportunity to each of the
parties to comment on each others' answers.
7.16 After receipt of the US answers to our second set of questions, Canada raised an objection.  In a
letter dated 8 December 1998, Canada requested us to  disregard US Exhibits  56 and 57 – containing
data comparing milk prices under Classes 5(d) and (e) to milk equivalent prices under the Import for Re-
Export Program (Exhibit 56) and to so-called internat ional prices for milk, butter and skim milk powder
(Exhibit 57) – which had been submitted by the United States together with its answers to the second
round of Panel questions (in particular, Panel Questions 13 and 14 to the complainants
376).  Canada
made this objection on three grounds.  First, Canada  argued, these Exhibits contain substantial new
factual information that is not required to respond to the Panel's questions.  Second, according to
Canada, the Exhibits are not relevant to the Pa nel questions at hand.  Third, Canada submitted, the
figures have been developed using a highly suspect and very opaque methodology that resulted in some
glaring inaccuracies in the numbers.  In respons e, the United States, in a communication dated 14
December 1998, noted that its Exhibits 56 and 57 are di rectly responsive to the Panel's questions and
that, even if the methodology used in these Exhibits  were to be flawed, this would not be a basis to
disregard the data; at most, the weight to be  given to this evidence could be affected.
7.17 Paragraph 7 of our Working Procedures provides as follows:
"Parties shall submit all factual evidence to the panel no later than
during the first substantive meeting, except with respect to evidence
necessary for purposes of rebuttal submissions or answers to
questions.  Exceptions to this procedure will be granted upon a
showing of good cause.  In such cases, the other party shall be
accorded a period of time for comment, as appropriate".
In a letter sent to the parties on 16 December 1998 the Panel decided the following:
"First of all the Panel would like to thank the parties for their
considered and thorough replies to the Panel's questions, which have
helped to clarify both the specific matters in respect of which
questions have been raised as well as related issues before the Panel.
                                                     
376 Question 13 reads:  "The Import for Re-Export Program  -  a)  Does the reference to 'products', within brackets, in the last p art
of Paragraph (d) of the Illustrative List, include 'like or directly competitive products'?  - b) Do you consider that skim or whole milk powder
are 'like or directly competitive' with fluid industrial milk?".  Question 14 reads:  "Please comment on Question 18 to Canada below".
Question 18 to Canada reads:  "If sales of products under special class 5(e) are to be competitive in world markets, the price at which
products derived from out of quota milk are made available to exporters will have to be below market prices, in order for the t ransactions to
be commercially viable from the exporters’ point of view.  Is there a risk or threat of such prices for particular transactions  being below
world market prices?  Please comment in detail on this matter taking into account your replies to question 17 above.  New Zeala nd and the
United States are also invited to comment on this matter".WT/DS103/R
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In the Panel's view the data submitted by the United States is both
relevant and responsive in the general context in which the Panel's
questions were raised, including, in the case of question 13, the
competitive relationship between the products in question.
In these circumstances the Panel, whose responsibility or task it is to
decide what ultimately is or is not relevant and material in this case,
does not consider that it would be appropriate at this stage to exclude
from consideration this or any other generally relevant information or
data that has been submitted to it.
However, the Panel notes the concerns expressed by Canada
regarding the volume and complexity of the data submitted by the
United States and in the circumstances extends to Canada anadditional week (until 23 December) to provide the Panel with more
extensive or additional comments on the United States replies than
was possible within the previously established time limits".
3. The Agreements referred to and the sequence in which the Panel will address the claims
(a) The Agreement on Agriculture and the SCM Agreement
7.18 Both complainants invoke the Agreement on Agriculture.  Article 2 of this agreement
provides that it applies to the agricultural products listed in Annex I.  The "agricultural products" set
out in Annex I include the products at issue in this  dispute (butter, cheese and "other milk products"),
all of which fall under HS Chapter 4.  We thus find that the Agreement on Agriculture applies to the
issue at hand.
7.19 The United States also invokes Article 3 of the SCM Agreement, which contains, inter alia , a
general prohibition on export subsidies.  However, according to its own terms, Article 3 of the SCM
Agreement is qualified in its application to agricultural export subsidies by the provisions of the
Agreement on Agriculture.  Article 3.1 provides as follows:
"Except as provided in the Agreement on Agriculture, the following
subsidies, within the meaning of Article 1, shall be prohibited ...".
In this respect, Article 21 of the Agreement on Agriculture also provides that:
"[t]he provisions of GATT 1994 and of other Multilateral Trade
Agreements in Annex 1A to the WTO Agreement [including theSCM Agreement] shall apply subject to the provisions of this
Agreement".
7.20 The general position under the Agreement on Agriculture is that a Member is permitted to use
export subsidies but only within the limits of the budgetary outlay and quantity commitment levels, if
any, that are specified in that Member's WTO Schedule.  The use of agricultural export subsidies
beyond such scheduled limits is in effect prohibited by Article 3.3, Article 8 and Article 10 of the
Agreement on Agriculture.
7.21 The use of export subsidies beyond such scheduled limits is, in principle, also actionable
under the prohibition in Article 3 of the SCM Agreemen t.  However, by virtue of Article 13 (c) (i) of
the Agreement on Agriculture, export subsidies that conform fully to Part V of the Agreement onWT/DS103/R
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Agriculture are exempt from actions based on Articl e 3 of the SCM Agreement for the duration of the
"implementation period" ( in casu , up to 31 December 2003).
7.22 Accordingly, our conclusion with respect to whether the Special Milk Classes Scheme
constitutes an export subsidy within the meaning of  the Agreement on Agriculture that fully conforms
with Part V of that Agreement (which includes Articles 8 to 11 as well as, by reference, Article 3.3),may be dispositive of the US claim for breach of Article 3 of the SCM Agreement.
7.23 On these grounds
377, the Panel will first examine the claims made under the Agreement on
Agriculture.  At the same time we note that the parties do not disagree that the SCM Agreement is
important to the contextual interpretation of the provisions of the Agreement on Agriculture dealing
with export subsidies.  As stated by the Appellate Body in its report on  Brazil –  Measures Affecting
Desiccated Coconut :
"[W]ith respect to subsidies on agricultural products … [t]he
Agreement on Agriculture  and the SCM Agreement  reflect the latest
statement of WTO Members as to their rights and obligations
concerning agricultural subsidies".378
(b) The Agreement on Agriculture
(i) General outline
7.24 As this is the first case brought before a panel which involves the substantive provisions of
the Agreement on Agriculture relating to export su bsidies, we consider it appropriate to provide an
outline of these provisions.  They form part of the context within which the specific provisions
invoked by the complainants and the related claims must be addressed.  They also reflect the object
and purpose of the Agreement on Agriculture, another element we need to take into account whenexamining the issues before us.
379
7.25  As enunciated in the preamble to the Agreement on Agriculture, the main purpose of the
Agreement is to "establish a basis for initiating  a process of reform of trade in agriculture"380 in line
with, inter alia , the long-term objective of establishing "a fair and market-oriented agricultural trading
system".381  This objective is pursued in order "to provide for substantial progressive reductions in
agricultural support and protection sustained over an agreed period of time, resulting in correcting and
preventing restrictions and distorti ons in world agricultural markets".382
7.26 The general aim of the Uruguay Round negotiations on agriculture was to "achieve greater
liberalisation of trade in agriculture and bring all measures affecting import access and export
competition under strengthened and more operationally effective GATT rules and disciplines".383  In
the case of export competition this was to be achieved by "improving the competitive environment by
increasing discipline on the use of all direct and indirect subsidies and other measures affecting
directly or indirectly agricultural trade, including the phased reduction of their negative effects and
                                                     
377 See paras. 7.19-7.22.
378 Appellate Body Report on Brazil – Desiccated Coconut , op. cit., p. 14.
379 In accordance with the principles of treaty interpretation contained in the Vienna Convention on the Law of Treaties
(Article 31).
380 Preambular paragraph 1.
381 Preambular paragraph 2.
382 Preambular paragraph 3.
383 Punta del Este Declaration, Ministerial Declaration on the Uruguay Round, MIN.DEC, 20 September 1986, p. 6.WT/DS103/R
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dealing with their causes".384  The results of these negotiations take the form of:  (i) the specific
binding reduction commitments on both export subsidies and domestic support which have been
incorporated in Members' Schedules pursuant to Article 3.1 of the Agreement on Agriculture as
constituting "commitments limiting subsidization";  and (ii) the rules set out in the Agreement on
Agriculture itself, which are designed to protect the scheduled commitments and provide a newframework to govern the use of agricultural export subsidies and domestic support.
7.27 The fundamental general provision of the Agreement on Agriculture concerning export
subsidies is Article 8:
"Each Member undertakes not to provide export subsidies otherwise
than in conformity with this Ag reement and with the commitments as
specified in that Member's Schedule".
Article 1(e) of the Agreement defines the term "export subsidies" ("unless the context otherwiserequires") as referring to: "subsidies contingent upon export performance, including the export
subsidies listed  in Article 9 of this Agreement".  This listing of export subsidies and the related base
period for subsidised export quantities and budgetary outlays served as the basis for the establishment
of the scheduled Uruguay Round reduction commitments.  Under Article 9.1 the following export
subsidies are subject to reduction commitments under the Agreement:
"(a) the provision by governments or their agencies of direct subsidies, including
payments-in-kind, to a firm, to an industry, to producers of an agricultural
product, to a cooperative or other association of such producers, or to a
marketing board, contingent on export performance;
(b) the sale or disposal for export by governments or their agencies of non-
commercial stocks of agricultural products at a price lower than the
comparable price charged for the like product to buyers in the domestic
market;
(c) payments on the export of an agricultural product that are financed by virtue
of governmental action, whether or not a charge on the public account is
involved, including payments that are financed from the proceeds of a levy
imposed on the agricultural product concerned or on an agricultural productfrom which the exported product is derived;
(d) the provision of subsidies to reduce the costs of marketing exports of
agricultural products (other than widely available export promotion and
advisory services) including handling, upgrading and other processing costs,
and the costs of international transport and freight;
(e) internal transport and freight charges on export shipments, provided or
mandated by governments, on terms more favourable than for domestic
shipments;
(f) subsidies on agricultural products contingent on their incorporation in
exported products".
7.28 By virtue of Article 3.3 of the Agreement, the list in Article 9.1 lays the foundation for the
core rules of the Agreement relating to export subsidies.  Article 3.3 provides:
                                                     
384 Ibid.WT/DS103/R
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"Subject to the provisions of paragraphs 2(b) and 4 of Article 9, a
Member shall not provide export subsidies listed in paragraph 1 of
Article 9 in respect of the agricultural products or groups of products
specified in Section II of Part IV of its Schedule in excess of the
budgetary outlay and quantity commitment levels specified thereinand shall not provide such subsidies in respect of any agricultural
product not specified in that Section of its Schedule".
7.29 The Article 3.3 prohibition relates exclusively to the export subsidies listed in Article 9.1. All
other subsidies contingent upon export performance as defined in Article 1(e) of the Agreement are
subject to the provisions of Article 10 relating to the prevention of circumvention of export subsidy
commitments.  Article 10.1 provides as follows:
"Export subsidies not listed in paragraph 1 of Article 9 shall not be
applied in a manner which results in, or which threatens to lead to,
circumvention of export subsidy commitments;  nor shall non-
commercial  transactions be used to circumvent such commitments".
Thus, a Member may use export subsidies not listed in Article 9.1 within the limits of its scheduled
reduction commitments.  However,  as stipulated by Article 10.1, such subsidies may not be appliedso as to circumvent these and other export subsidy commitments under the Agreement on Agriculture.
(ii) The specific provisions relied upon by the parties
7.30 Both complainants invoke Articles 3.3, 8, 9.1 and 10 of the Agreement on Agriculture, quoted
above.
7.31 Since Article 9.1 sets out the explicit reduction commitments entered into by Canada, as
opposed to Article 10 which deals with circumvention of those commitments, we shall first examine
whether the Special Milk Classes Scheme involves an export subsidy listed in Article 9.1.  Both
complainants also first address Article 9.1.  We prefer this sequence to Canada's approach of first
examining whether the scheme is a "subsidy" more generally with particular reference to the SCMAgreement.  What needs to be examined here in the first place is whether an "export subsidy" is
provided for quantities of exports of agricultural products in excess of the reduction commitments
made by Canada under the Agreement on Agriculture.  In our view, the most specific and appropriate
language provided to make this determination is found in Article 9.1 of the Agreement on Agriculture
- setting out specific practices as "export subsidies" explicitly made subject to Canada's reductioncommitments -;  not in Article 1 of the SCM Agreement pursuant to which certain practices are
deemed to be a "subsidy" for purposes of the SCM Agreement.
4. Burden of proof as a consequence of Article 10.3 of the Agreement on Agriculture
7.32 We note, prior to our analysis of Article 9.1, that Article 10.3 provides as follows:
"Any Member which claims that any quantity exported in excess of a
reduction commitment level is not subsidized must establish that no
export subsidy, whether listed in Article 9 or not, has been granted inrespect of the quantity of exports in question".
7.33 This provision shifts the burden of proof from the complainant to the defendant.  A defending
party (i.e., the exporting country) alleging that exports in excess of its reduction commitment level are
not subsidized must demonstrate that no export subsidy in respect of this excess has been granted.  AllWT/DS103/R
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parties in dispute agree that the wording of Article 10.3 has this effect of reversing the usual burden of
proof.385
7.34 In this dispute, all parties agree that the actual exports of butter, cheese and "other milk
products" made by Canada, exceed Canada's reduction commitment levels and this for both marketing
years at issue (1995/1996 and 1996/1997).386  Canada claims that these quantities exported in excess
of its reduction commitment levels are not subsidized.  It is thus for Canada to establish that the
quantity of exports exceeding its commitment levels has not been made subject to "export subsidies".
In other words, for purposes of the claims before us, it is for Canada to present evidence sufficient to
establish a presumption that the Special Milk Classes Scheme does not involve an "export subsidy,
whether listed in Article 9 or not".  Once such presumption is established, it is for New Zealand and
the United States to present evidence to rebut this presumption.387  New Zealand and the United States
responded in extenso to the claim that the export quantities in question are not subject to export
subsidies.  Thus, our task is essentially to weigh the evidence and determine whether Canada has met
the burden imposed by Article 10.3.
5. Article 9.1(a) of the Agreement on Agriculture
7.35 The complainants rely on Article 9.1(a) and (c).  Both provisions define a type of export
subsidy that is subject to Canada's reduction commitments.  The parties do not disagree that there maybe some degree of overlap between various sub-paragraphs of Article 9.1.  The complainants submit
that the provision of milk under Classes 5(d) and (e) of the Special Milk Classes Scheme involves
export subsidies under both Article 9.1(a) and Article 9.1(c).
7.36 We first examine whether there is an Article 9.1(a) export subsidy at issue.  Article 9.1(a)
subjects the following type of action to Canada's export subsidy reduction commitments:
"the provision by governments or their agencies of direct subsidies,
including payments-in-kind, to a firm, to an industry, to producers of
an agricultural product, to a cooperative or other association of such
producers, or to a marketing board, contingent on export
performance".
7.37 The complainants submit that in this case Canadian government agencies – in particular, the
Canadian Dairy Commission ("th e CDC") and the provincial milk marketing boards acting under
delegated authority – make milk available to proce ssors/exporters under Classes 5(d) and (e) at prices
lower than the prevailing domestic milk price.  In  their view, this constitutes an export subsidy under
Article 9.1(a).
7.38 Under Article 9.1(a), an export subsidy exists  if the following conditions are fulfilled:
(a) the presence of "direct subsidies, including payments-in-kind";
(b) provided "by governments or their agencies";
(c) "to a firm, to an industry, to producers of an agricultural product, to a
cooperative or other association of such producers, or to a marketing board";
and
                                                     
385 See, in particular, Canada's answer to Panel Question 14 to Canada.
386 See Table 2 in para. 2.41 above.
387 See Appellate Body report on United States – Measures Affecting Imports of Woven Wool Shirts and Blouses from India ,
adopted on 23 May 1997, WT/DS33/AB/R, pp. 13-14.WT/DS103/R
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(d) which are "contingent on export performance".
7.39 The record shows that milk is made available to processors/exporters  under Classes 5(d) and
(e).  We consider that Article 9.1(a) applies to proce ssors and exporters as either "a firm", "an industry"
or "producers of agricultural products".  We note th at no party argued that producers or exporters were
to be excluded from the application of Article 9.1(a).  We thus find that the third condition under
Article 9.1(a) is met in the instant case.
7.40 The record also shows, and Canada does not ar gue otherwise, that lower priced milk under
Classes 5(d) and (e) is only available to processors for the processing of dairy products which will be
exported .  Accordingly, access to milk at a discounted pr ice under Classes 5(d) and (e) is "contingent on
export performance" in the sense of the fourth condition under Article 9.1(a).  Milk for the production of
dairy products to be sold on the Canadian market is only available at a higher price   under one of the
other milk classes (Classes 1 to 5, excluding 5(d) and (e)).   A processor that buys milk under Classes (d)
or (e), but subsequently uses the milk for domestic purposes, has to pay the price differential up to the
level of the domestic milk price, plus interest calc ulated on the price differential starting from the time
of transaction to the date of payment.388
7.41 The United States also makes claims under milk classes other than Classes 5(d) and (e).  In this
regard, we note that milk under such other classes is  also available (often exclusively) to processors
which produce for the domestic market.  Accordingly, access to milk under such other classes is not
"contingent on export performance".  We therefore find that such other milk classes do not involve an
export subsidy under Article 9.1(a).
7.42 The question is then whether the availability of milk under Classes 5(d) and (e) also meets the
first and second conditions of Article 9.1(a):  (i) does it provide "direct subsidies, including payments-in-kind"; and (ii) are such direct subsidies provided "by governments or their agencies"?
(a) "direct subsidies, including payments-in-kind"
(i) General criteria
7.43 The plain language of Article 9.1(a) makes clear that "payments-in-kind" are a form of direct
subsidy.  Hence, a determination in the instant ma tter that "payments-in-kind" exist would also be a
determination of the existence of a direct subsidy.
7.44 We first note that, when referring to subsidies (as Article 9.1(a) does), the ordinary meaning of
the term "payment" cannot reasonably relate to a "p ayment" as the term is understood in contract law
(e.g., pay for labour or the price of a good).  Rather, it connotes a gratuitous act, a bounty or benefit
provided, for example, in pursuit of a policy objective (e.g., in the area of export subsidies, thestimulation of exports to dispose of surpluses in the domestic market).  A reading of Article 9.1(a) to
the effect that a "payment" exists only if a benefit is granted, is further mandated by the general
context of this provision which incl udes Article 1 of the SCM Agreement.
389  That provision explicitly
requires that a "benefit" be conferred for there to be a "subsidy" under the SCM Agreement.390
                                                     
388 See Canada's answer to Panel Question 23 to Canada.  In Quebec, the processor will also have to pay a penalty of $12/hL.
389 See para. 7.23.
390 Article 1.1(b) of the SCM Agreement provides:  "For the purpose of this Agreement, a subsidy shall be deemed to exist if: …
(b)  a benefit is thereby conferred".WT/DS103/R
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7.45 Secondly, the term "payments-in-kind" in Article  9.1(a) must be ordinarily construed to include
payment in goods or labour as opposed to payment of money.391  We agree with the complainants that
both the provision of a good at no price and the provision of a good at a price lower than the normal
price (whatever this normal price may be) can be considered as a payment in kind.
(ii) Milk sales under Special Milk Classes 5(d) and (e):  the provision of milk for the processing
of dairy products for export at a lower price
7.46 In the present case, no money is given gratuitously to processors/exporters.  However, the
complainants submit that under the Special Milk Classes Scheme processors/exporters receive a
payment in kind, namely milk at a price which is lower than that of milk sold for use on the domestic
market .
7.47 We noted above that a benefit must be conferred for a payment in kind to exist in the sense of
Article 9.1(a).392  In this case, the question thus arises whether the provision of milk to
processors/exporters under Classes 5(d) or (e) confers a benefit to these processors/exporters.  This, in
turn, raises the question of what the appropriate benc hmark is for determining whether the provision of a
good at a certain price confers a benefit.393  Does it suffice, as the compla inants argue, that milk for
export use is provided to processors at a price below the  domestic milk price  for there to be a benefit
conferred to these processors (hereafter referred to as "the first benchmark", namely the domestic milk
price)?  Or, does one need to establish that proce ssors/exporters receive milk under Classes 5(d) and (e)
at a price which is not only lower than the domestic milk price, but also lower than the price of milk
these processors/exporters can obtain from any other s ource, in particular the price of milk they can
source from the world market (hereafter referred to as "the second benchmark", namely the lowest milk
price to be obtained from any other source)?
7.48 If milk were provided below the lowest milk price to be obtained from any other source (i.e.,
below the second benchmark), it would a fortiori  be provided below the domestic milk price (i.e., below
the first benchmark).  In other words, if we were  to find that milk is provided below the second
benchmark, there would be no need to further exam ine whether it is also provided below the first
benchmark.  Without making a finding on the issue of the appropriate benchmark we shall, therefore, in
the first instance, proceed on the assumption that the second benchmark, although more favourable to
Canada, is appropriate in the circumstances.  In our view, if the price of milk under Classes 5(d) and (e)
is lower than the price at which processors/exporters can obtain milk from any other source, a  bounty or
benefit – i.e., something they woul d otherwise not have obtained – woul d, indeed, be conferred.  If this
were the case, we consider that processors/exporters would be receiving "payments-in-kind" in the sense
of Article 9.1(a).
7.49 We therefore next examine whether processors/exporters can access milk from any other source
on terms and conditions, in particular prices, as fav ourable as those offered under Classes 5(d) and (e).
7.50 We note, first, that under Classes 5(d) and (e) milk is made available to processors for export at
a significantly lower price than the price of milk for domestic use .394  Canada does not contest this.
Classes 5(d) and (e) thus make available milk at prices that are clearly below the first benchmark we
                                                     
391 The New Shorter Oxford English Dictionary  defines "in kind" as "in goods or labour as opp. to money;  (b)  in a similar form,
likewise" (Ed. Brown, L., Clarendon Press, Oxford, Volume 1, p. 1489).
392 See para. 7.44.
393 We note, in this respect, that Article 1.1(b) of the SCM Agreement – to which we referred when noting the requirement of a
"benefit" being conferred in paragraph 7.44 above – only requires that there be a benefit in the general sense and that the ben efit in fact be
conferred by the measure or arrangement which is alleged to be a subsidy.
394 See Table 3 in para. 2.51.WT/DS103/R
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referred to above.395  Moreover, referring to the second benchmark, it is not disputed that sourcing milk
from any of the other milk classes for use mainly on the domestic market (Classes 1 to 5(c)) would not
offer processors/exporters the same favourable price as that of milk available under Classes 5(d)
or (e).396
7.51 Second, given the high tariffs applied by Canada to imports of fluid milk397 (283.8 per cent,
declining to 241.3 per cent in 2001), the price of milk under Classes 5(d) and (e) is not only
significantly lower than the domestic milk price, it is also significantly  lower than the duty paid price of
imported fluid milk.  Canada does not dispute this nor  does it contest that for all intents and purposes the
over-quota tariff rate it imposes on imports of flui d milk effectively precludes such imports.  For
purposes of the second benchmark, importing fluid m ilk cannot therefore be considered as a source of
milk at the same favourable price as that  of milk offered under Classes 5(d) or (e).
7.52 Canada submits that processors for export can access their milk inputs on equally favourable
terms and conditions as those under Classes 5(d) and (e) under its special Import for Re-Export
Program.398  With respect to imports of fluid milk unde r this Program Canada acknowledges that "there
have not been imports of raw industrial milk in recent years under the Import for Re-Export
Program".399  Canada argues, however, that under the Import for Re-Export Program
processors/exporters can nonetheless import milk deri vatives, such as skim milk powder, whole milk
powder, butter and butter derivatives .  According to Canada, these milk components are not different
from milk, but part of the same product and can be used for the same manufacturing processes as milk.
7.53 We note that under the Import for Re-Export Progra m the decision as to whether fluid milk or
milk derivatives may enter the Canadian market depends, first and foremost, on the discretionary
authority of the Department of Foreign Affairs and International Trade.  The statutory authority for the
Program is contained in paragraph 8 of the Export and Import Permits Act.  Paragraph 8 (1) allows theMinister responsible for the Act to "issue to any resident of Canada applying therefor a permit toimport goods included in an Import Control List, in such quantity and of such quality, by such persons,from such places or persons and subject to such other terms and conditions as are described in the
permit or in the regulations ".
400  Canada states that the authority of the Minister to set these terms and
conditions is not subject to any specified regulations.  Therefore - even if imports of fluid milk andmilk derivatives under the Import for Re-Export Program could in theory be made at an equallyfavourable price to the one offered under Classes 5(d) and (e) - the fact that the Minister has to issue apermit before such imports are allowed and that the Minister disposes of a wide discretion in doing so,is proof that these imports are not effectively available under equally favourable terms and conditionsas those offered under Classes 5(d) and (e).  After all, whether or not processors for export access fluidmilk or milk derivatives under this Program depends, in the first place, not on commercialconsiderations (i.e., price), but on the discretion of Canadian authorities.
7.54 We further note that processors for export have so far never accessed fluid milk  for
commercial use under this Program.
 401  Canada argues that no such imports of fluid milk are made
                                                     
395 See para. 7.47.
396 See Table 3 in para. 2.51.
397 Other than the fluid milk falling under the 64,500 tonnes tariff-rate quota which Canada restricts to cross border imports by
Canadians of consumer packaged milk for personal use, valued at less than C$20 per entry.
398 See para. 2.11.
399 Canada's oral statement at the second substantive meeting, para. 74.  In its comments on US Exhibit 56, Canada clarified that
"much of the fluid milk imported under the Import for Re-export Program is imported in retail packages for use on cruise ships" .
400 Emphasis added.
401 See para. 7.52 and footnote 399.WT/DS103/R
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due to commercial reasons, namely, the high costs of tr ansport of fluid milk.  Canada also refers to the
fact that fluid milk is of a perishable nature and thus of limited tradability.  We note, however, that fluid
milk could be imported from the United States (given its  proximity to Canada).  In view of the US claim
before this Panel to have wider access to the Canadi an market for fluid milk (under Canada's tariff-rate
quota) 402, one can assume that imports of fluid milk ar e, in principle, technically and commercially
viable.  Nonetheless, under the Import for Re-Export Program no such imports are made.  In our view,
this indicates that the specific sales terms and conditions under the Program are clearly not
commercially attractive relative to those offered under Classes 5(d) or (e).
7.55 In addition, with respect to access to milk derivatives  under the Import for Re-Export Program,
we note the Complainants' arguments that there are i nherent differences between fluid milk - available
under Classes 5(d) and (e) - and milk derivatives which can be imported under the Program.  Skim milkpowder, for example, does not contain any butterfat, thus requiring additional processing for its use in
certain dairy products.  Because fluid milk contains butterfat it is not subject to a similar constraint.
Whole milk powder, on the other hand, does contain but terfat but since all liquid has been removed from
it, for most end-uses it has to be rehydrated before it can be used.  The same constraint applies to skim
milk powder, but not to fluid milk.  In both instan ces, additional time and cost are involved when using
milk powder as an input rather than fluid milk.  Th e United States further submits that the use of milk
powder might also alter the flavour of the finished product from that which would be obtained by using
fluid milk.  Canada seems to acknowledge some of these elements when it states that "milk powders can
be reconstituted for use in the manufacture of some  dairy products … Thus, to a certain extent , milk
powders compete in the same markets and fulfil th e same needs and uses as fluid industrial milk".
403
7.56 In our view, even if such milk derivatives were directly competitive with fluid milk, we note
that (i) figures submitted by the United States indicate – albeit in general terms only - that the milk
equivalent prices for the milk derivatives imported under the Import for Re-Export Program were, overthe last four years, higher  than the price of fluid milk provided under Classes 5(d) and (e)
404; and
(ii) processors for export have revealed an overwhelming preference for Classes 5(d) and (e) milk, as
opposed to sourcing inputs from the Program (exports generated with Classes 5(d) and (e) milkaccount for approximately 95 per cent of total actual exports).
405  Indeed, in our view, the fact that
fluid milk and milk derivatives surplus to Canadian domestic requirements are regularly disposed of
(without accumulation of stocks) raises a presumption that the terms and conditions available under
Classes 5(d) and (e) are more favourable than those under the Import for Re-Export Program.  The
elements outlined above indicate that milk derivatives cannot, for all practical purposes, be sourced
under the Program on equally favourable terms and conditions as those under Classes 5(d) or (e).
7.57 For the above reasons406, we find that Canada, in relation to Classes 5(d) and (e), has not met
its burden407 of establishing that the Import for Re-Export Program provides processors for export with
access to milk - or even milk derivatives for that matter - on equally favourable terms and conditions asthose available under Classes 5(d) or (e).
                                                     
402 See paras. 7.142 ff.
403 Canada's answer to Panel Question 28(f) to Canada, emphasis added.
404 See US Exhibit 56.  In our decision of 16 December 1998, outlined above in para. 7.17, we decided that we can take
cognizance of the figures contained in this Exhibit.  We carefully considered Canada's objections to these figures set out in C anada's
comments of 23 December 1998.  Although these figures seem to include certain inaccuracies and can therefore only provide a gen eral
indication, we do not consider that Canada's objections are so serious that no weight at all should be attached to Exhibit 56.  We note,
moreover, that Canada did not provide figures or indications to effectively rebut the general tendency shown by the US figures.   Moreover,
in the view of the Panel, the fact that some of the data supplied by Canada on exports under the Import for Re-Export Program r elated to
imports and re-exports of dairy products by visiting cruise ship s, casts doubt on the relevance of this data and of the Program  itself.
405 See Canada's answers to Panel Questions 1 and 3(b) to Canada.
406 See paras. 7.52-7.56.
407 See para. 7.34.WT/DS103/R
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7.58 More generally - and for all the reasons outlined above408 - we find that the provision of milk to
processors/exporters under Classes 5(d) and (e) at a price significantly lower than the domestic milkprice (i.e., below the first benchmark) and on terms and conditions which are more favourable thanthose under any other alternative source, including under the Import for Re-Export Program (i.e.,below the second benchmark) – confers a "benefit" (in terms of both the first and second benchmarkswe set out earlier
409) to these processors/exporters and, for that reason, constitutes a payment in kind –
namely, the provision of a good at a discounted price - in the sense of Article 9.1(a).
(iii) Milk sales under Special Milk Classes 5(d) and (e):  the provision of milk for the processing
of dairy products for export by the CDC with an assured margin for the processor
7.59 In addition to milk being offered at a discounted price otherwise not available, we note that
with respect to the export sales conducted by the CDC itself – for which the CDC engages a processor
to make dairy products with milk sourced under Classes 5(d) or (e) - there is another element which
indicates that processors for export receive special treatment (i.e., a benefit) under Classes 5(d) and
(e) which is otherwise not granted on commercial grounds.  That is, no matter how low the worldprice is for the dairy product that a processor is requested to produce - and thus no matter how low the
milk price should be in order for the processor to be able to produce the dairy product at such a low
price - a Canadian processor for export is always sure to obtain a certain "margin".
410  This processor
"margin" covers the cost of transforming milk int o, e.g., butter or skim milk powder, and a return on
investment for the processors.411  This margin ensures that, in respect of exports by the CDC,
processors are able to access milk at a price which enables the CDC to sell the processed dairy
products on the world market at a competitive price.  But for the Special Milk Classes Scheme, this
guarantee offered to processors/exporters would not be commercially available.
7.60 In our view, this assured processor margin fo r certain exports generated with milk sourced
under Classes 5(d) and (e) confirms the finding we made in paragraph 7.58, namely that  the provision of
milk to processors/exporters under Classes 5(d) and (e) on the reported favourable terms and conditionsconfers a benefit to these processors/exporters and, for that reason, constitutes a payment in kind in thesense of Article 9.1(a).
(iv) Concluding remarks on the payment in kind offered to processors/exporters
7.61 But for Classes 5(d) and (e), processors for export under the current Canadian milk regime
would have to pay a significantly higher price for milk.  By accessing this milk, theseprocessors/exporters are effectively shielded from the high domestic milk price, the high import tariffs
on fluid milk and – at least in respect of those exports  made by the CDC itself - the risk of having to sell
dairy products for sale on the world market at a reduced margin or at a loss.
7.62 We want to stress, however, that the existence of  this "payment in kind" to processors does not
in and of itself establish the existence of an export  subsidy within the meaning of Article 9.1(a).  In our
view, in particular the existence of parallel market s for domestic use and for export with different prices
does not necessarily constitute an export subsidy.
412  Whether or not the "payments-in-kind" to
                                                     
408 See paras. 7.53-7.56.
409 See para. 7.47.
410 See Section 1 (vii) and 2 (v) of Annex B to the Comprehensive Agreement on Special Class Pooling stating, respectively, "the
processor will receive a reduced margin" and "[p]rocessors will receive full margin for the product sold".
411 See Canadian International Trade Tribunal, Profile of the Canadian Dairy Industry, Staff Report, reference No. GC-97-001,
New Zealand Exhibit 8, p. 36.
412 The price differential may, for example, be a consequence of high – but WTO consistent - import tariffs that can cause domesti c
prices to be higher than the world market price.  In such scenario, efficient producers may take the decision – based on their own profitability - to
also produce and sell milk for export, albeit at a lower price than the domestic price.  If the decision to sell in either the domestic market or theWT/DS103/R
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processors in this dispute constitute an export  subsidy depends on the government's involvement in
providing it.413  This relates to the second condition under Article 9.1(a).
(b) provided "by governments or their agencies"
7.63 Under this condition, we need to examine whethe r the milk made available to processors for
export at a discounted price under Classes 5(d) and (e) – which we found earlier to constitute a paymentin kind – is provided by the Canadian governments or their agencies.
(i) The provision of milk under Classes 5(d) and (e) is not financed by governmental funds but by
milk producers either collectively (in-quota) or individually (over-quota)
7.64 All parties agree that under Classes 5(d) and (e) no governmental funds are directly involved.
414
Neither the Canadian government nor its agencies buy milk at the high domestic price to sell it
subsequently, at a loss, at a lower price for export,  whereby the cost would be covered by governmental
funds.  It is undisputed that only the milk producer s finance the sales of milk for export.  For milk
produced within a producer's quota and subsequently exported, the price differential between the price
for export and the higher domestic price is collectively borne by all Canadian milk producers.  This is so
because all in-quota export revenues are pooled with all other in-quota milk returns.  This pooling
results in an average or pooled milk price – lower th an the domestic price - which is the same for all in-
quota milk produced by a given producer.  Any milk produced over-quota necessarily obtains the lower
price for export.  However, in principle, only th e individual producer who produces the over-quota milk
bears the cost of such lower returns.  This is so because returns of over-quota milk by one producer are
generally not pooled with in-quota returns obtained by other producers.415
7.65 In our view, the fact that the government does not grant governmental funds to finance  the
payment in kind does not prevent this payment in kind from being provided  by the government or its
agencies in the sense of Article 9.1(a).  The ordinary meaning of the word "provide" is not restricted toa financial contribution.  The dictionary meaning of the word "provide" is rather:
"1. foresee. 2. take appropriate measures in view of a possible event;
make adequate preparation … 4. prepare, get ready, or arrange
(something beforehand) 5. equip or fit out with what is necessary for
                                                                                                                                                                    
export market is one made by the individual producer and based on commercial grounds only (e.g., on an allocation of sales to t he two markets
with a view to obtaining a maximised total revenue, taking into account the inherently limited domestic demand for milk and the  lower price for
export) - not a decision by the government or its agencies taken on behalf of the producers - such scenario would, in our view,  not appear to be
an export subsidy in the sense of Article 9.1.
413 In this respect, we note the Panel Report on Review Pursuant to Article XVI:5  (of GATT 1947), addressing the question of
when subsidies are notifiable under Article XVI of GATT.  There, the Panel stated the following:
"The Panel examined the question whether subsidies financed by a non-governmental levy were notifiable under
Article XVI.  The GATT does not concern itself with such action by private persons acting independently of their
governments except insofar as it allows importing countries to take action under other provisions of the Agreement.  Ingeneral terms there was no obligation to notify schemes in which a group of producers voluntarily taxed themselves in
order to subsidize exports of a product … the Panel feels that the question of notifying levy/subsidy arrangements
depends upon the source of the funds and the extent of governme nt action, if any, in their collection.  Therefore … the
Panel feels that CONTRACTING PARTIES should ask governments to notify all levy/subsidy schemes affecting
imports or exports which are dependent for their enforcement on some form of government action" (adopted 24 May
1960, BISD9/188, p. 192).
414 In any event, the complainants did not contest the extent to which the full costs associated with the administration of the
scheme for exporting milk surplus to Canadian domestic requirements, are effectively recovered by the CDC and the provincial
governments or agencies.
415 See, however, para. 7.112.WT/DS103/R
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a certain purpose; furnish or supply with something  6. … make
available; yield, afford".416
(ii) The degree of government involvement required for there to be a "provision by governments
or their agencies" under Article 9.1(a)
7.66 Canada does not argue that governments are not involved in providing milk under Classes 5(d)
and (e).  Rather, its position is that governments only have an implementing and oversight role to playin the establishment  and efficient operation of the system.  According to Canada, such government
intervention does not approach the level required by Article 9.1(a).  The complainants contend that thesystem would not exist without governmental intervention and that none of the provisions at issuerequires that governments dictate every aspect of a measure for an export subsidy to exist.  Thecomplainants conclude that in this case the government involvement in the Special Milk ClassesScheme does meet the level required by Article 9.1(a).
7.67 The question of government involvement required under Article 9.1(a) is one of degree that
must be addressed on a case-by-case basis.  In this dispute, we need to examine first how milk is madeavailable under Classes 5(d) and (e).  Thereafter, we need to assess the extent to which Canadiangovernments or their agencies are involved in this process.  On that basis – and applying the ordinarymeaning of the term "provision by governments or their agencies" referred to above
417, in its context
and in light of the object and purpose of the Agreement on Agriculture418 - we will then decide whether
or not the payment in kind made under Classes 5(d) and (e) can be said to be provided by Canada'sgovernments or their agencies.
(iii) How milk for export is made available under Classes 5(d) and (e)
Sales of milk for export under Class 5(d)
7.68 Class 5(d) covers so-called "traditional" export sales.  These traditional sales – which are
calculated into the national quota and thus constitute in-quota milk - are linked to certain trade
opportunities, such as tariff-rate quotas of third countries that are traditionally made available to
Canadian exporters, as well as sales arising out of longer term trading relationships.  The volume of
Class 5(d) is a set amount annually fixed by the Canadian Milk Supply Management Committee ("theCMSMC").
7.69 Exporters with access to these traditional markets approach the Canadian Dairy Commission
("the CDC") with proposals to purchase milk under Class 5(d).  The CDC negotiates the transaction,
including the milk price, and issues a permit which will allow the exporter to obtain the required milk
for use in the planned exports from one of the provincial marketing boards.  The permits issued by theCDC under Class 5(d) specify the dairy products to be exported.
Sales of milk for export under Class 5(e)
7.70 Both in-quota milk – mainly the so-called "sleeve" or safety margin which is finally not used
in domestic markets419 - and over-quota milk can be exported under Class 5(e).  The removal of
                                                     
416 The New Shorter Oxford English Dictionary , Ed. Brown, L., Clarendon Press, Oxford, Volume 2, p. 2392.
417 See para. 7.65.
418 See paras. 7.24 ff.
419 See para. 2.40.WT/DS103/R
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surplus milk by means of exports under Class 5(e) is composed of two operational elements:  a CDC-
initiated and a processor-initiated surplus removal element.
7.71 A first possibility is that the CDC itself initiates "preemptive surplus removal".  In doing so, it
"will be guided by an advisory group es tablished by the CDC for that purpose".420  This advisory
group, the Surplus Removal Committee ("SRC"), decides whether surplus milk is available in thesystem.  If so, the CDC can activate the preemptive surplus removal program.  To do so, the CDC
does not have to seek further agreement from the provincial marketing boards that milk surplus to
domestic requirements is available.  If the CDC decides to activate the program, it will actively
remove surplus by contracting with processors for the manufacture of products suitable for export.  At
this stage, two possibilities arise:  either (i) the CDC, acting in its own right, purchases the dairy
products and exports them through transactions it negotiates with state importers in other countries, or
(ii) the CDC issues permits to processors which will allow these processors to buy milk underClass 5(e) from one of the provincial marketing boards, whereafter these processors themselves, or
through traders, export the dairy products produced.  The permits issued by the CDC under Class 5(e)
specify the dairy products to be exported.  In both instances, it is the CDC which negotiates the milk
price with the processor.  In the event of expor ts by the CDC itself, it is also the CDC which
negotiates and grants the processor margin.
421
7.72  A second possibility arises during the period in which the CDC initiated surplus removal
program is inactive.  In these circumstances, "access to CDC contracts to dispose of surpluses will be
available when requested by individual processors".422  In practice, a processor wanting to produce for
export first negotiates the terms of a potential sale of dairy products with a foreign buyer.  The
processor then needs to access milk, in order to produce the dairy product, at a price which will allowit to make the transaction.  To do so, the processor has to obtain a permit from the CDC, allowing it to
buy milk under Class 5(e).  This permit also specifies the dairy products to be exported.  The CDC
can only issue such permit "when all demand for milk  by processors in the province in harmonized
Classes 1 to 5(d) is met".  It is the CDC which negotiates the milk price with the processor.  Once the
processor obtains a Class 5(e) permit from the CDC, it approaches the local marketing board which inpractice provides the processor with the milk at the negotiated price.  Under this second possibility,
the CDC itself can also buy the processed dairy products – produced with Class 5(e) milk - and export
them in its own right.  In that event, processo rs receive "full margin for product sold", a margin
negotiated and granted by the CDC.
423
(iv) The extent to which Canada's governments or their agencies are involved in the making
available of milk under Classes 5(d) and (e)
Canada's governments and their agencies
7.73 Canada is a federal state with a federal government and ten provincial governments.
Regulatory jurisdiction over trade in dairy products is divided between the federal government and the
provinces. The federal government has constitutiona l authority over interprovincial and international
trade.  All other aspects of production and sale of milk are under provincial jurisdiction.  Both the
Canadian federal government and provincial governments are "governments" for the purposes ofArticle 9.1(a).
424
                                                     
420 Section 1(i) of Annex B to the Comprehensive Agreement on Special Class Pooling.
421 Section 1 (vii) of Annex B to the Comprehensive Agreement on Special Class Pooling.
422 Section 2 (i) of Annex B to the Comprehensive Agreement on Special Class Pooling.
423 Section 2 (v) of Annex B to the Comprehensive Agreement on Special Class Pooling.
424 Article XXIV:12 of GATT 1994, part of the context of Article 9.1(a), provides as follows:  "Each contracting party shall take
such reasonable measures as may be available to it to ensure observance of the provisions of this Agreement by the regional and  localWT/DS103/R
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7.74 Three bodies play a direct decision-making role under Classes 5(d) and (e):  the CDC, the
provincial marketing boards and the CMSMC.
7.75 First, the CDC is a Canadian Crown Corporation.  That the CDC is an "agency" of Canada's
federal government in the sense of Article 9.1(a) is undisputed.425
7.76 Second, the provincial milk marketing boards are established and operate within a legal
framework set up by federal and provincial legislation.426  These boards exercise powers in respect of
inter-provincial and external trade delegated to th em by the federal government through the CDC, as
well as powers delegated to them by provincial authorities.  Three of these boards (Alberta, Nova
Scotia and Saskatchewan) are, according to Canada, agencies of the provincial government.  Orders or
regulations issued by the provincial marketing boards can be enforced before the Canadian courts.  In
most provinces, individual decisions by the boards are subject to appeal to a provincial supervisory
board or commission (of which Canada recognizes the governmental nature).
7.77 While we acknowledge that producers play an important role in the provincial marketing
boards, we also note that these boards act under the explicit authority delegated to them by either the
federal or a provincial government.  Accordingly, they can be presumed to be an "agency" of one or
more of Canada's governments in the sense of Article 9.1(a).427  In this respect, we refer to
paragraph 2 of the Ad note to Article XVII:1 of GATT 1994428 as well as to Article XXIV:12 of
GATT 1994429, both constituting part of the context of Article 9.1(a).  That the provincial marketing
boards cannot issue orders or regulations without the backing of provincial or federal authority was
confirmed by the Canadian courts in the so-called Bari II  case.430  In that case, it was found that the
                                                                                                                                                                    
governments and authorities within its territory".  The Understa nding on the Interpretation of Article XXIV of GATT 1994, under  Article
XXIV:12, explicitly provides that "[t]he provisions of Articles XXII and XXIII of GATT 1994 as elaborated and applied by the Di spute
Settlement Understanding may be invoked in respect of measures affecting its observance taken by regional or local governments or authorities
within the territory of a Member".   These provisions imply that all GATT provisions apply to "regional and local governments a nd
authorities" within a WTO Member, in accordance with the general principle of public international law that a party to a treaty  "may not
invoke the provisions of its internal law as justification for its failure to perform a treaty" (set out in Article 27 of the V ienna Convention on
the Law of Treaties).  Article XXIV may act to limit the obligation of a WTO Member, which is a federal State, to secure the
implementation  of its GATT obligations.  However, in our view, it does not limit the applicability  of the provisions of GATT 1994 (see
Panel Reports on Canada – Measures Affecting the Sale of Gold Coins , L/5863, unadopted, dated 17 September 1985, paras. 53-54 and 63-
64; Canada – Import, Distribution and Sale of Alcoholic Drinks by Canadian Provincial Marketing Agencies , adopted on 22 March 1988,
35S/37, p. 91, para. 4.33; and Canada – Import, Distribution and Sale of Certain Alcoholic Drinks by Provincial Marketing Agencies ,
adopted on 18 February 1992, 39S/27, p. 86, para. 5.35).
425 See paras. 2.12-2.15.
426 See paras. 2.16-2.20.
427 In this respect, we refer to Article 7:2 of the Draft Articles on State Responsibility of the International Law Commission (IL C)
- which might be considered as reflecting customary international law - which states:  "The conduct of an organ of an entity wh ich is not
part of the formal structure of the State or of a territorial governmental entity, but which is empowered by the internal law o f that State to
exercise elements of the governmental authority, shall also be considered as an act of the State under international law, provi ded that organ
was acting in that capacity in the case in question" (Report of the ILC on the Work of its 48th Session, General Assembly, Official Records,
51st Session, Supplement No. 1 (A/51/10), under Chapter III).
428 Paragraph 2 of the Ad note to Article XVII:1 of GATT 1994 states:  "The activities of Marketing Boards which are established
by contracting parties and which do not purchase or sell but lay down regulations covering private trade are governed by the re levant Articles of
this Agreement".  Since, accordingly, GATT 1994 applies to such activities of "marketing boards" – and the Canadian provincial milk marketing
boards are, in our view, such "marketing boards" – one can assume  that most of the activities of the Canadian milk marketing bo ards are
governmental in nature.
429 Provincial marketing boards acting under the authority explicitly delegated to them by federal or provincial governments are,
in our view, "regional" or "local" authorities in the sense of Article XXIV:12 of GATT 1994, outlined above in footnote  424.  See, in this
respect, the 1988 Panel Report on Canada – Import, Distribution and Sale of Alcoholic Drinks by Canadian Provincial Marketing Agencies :
"The panel noted that there was no dispute that the provincial liquor boards were 'regional authorities' within the meaning of Article
XXIV:12" (adopted on 22 March 1988, 35S/37, p. 91, para. 4.33) and the 1992 Panel Report on  Canada – Import, Distribution and Sale of
Certain Alcoholic Drinks by Provincial Marketing Agencies :  "The Panel noted that the parties to the dispute agreed that the provincial
liquor boards were 'regional authorities' within the meaning of Article XXIV:12 of the General Agreement and that this Article was
therefore applicable to all provincial practices at issue" (adopted on 18 February 1992, 39S/27, p. 86, para. 5.35).
430 B.C. Milk Marketing Board v. Bari Cheese et al.  (11 August 1993), Vancouver C912303 (B.C.S.C.); (14 August 1996),
(B.C.C.A.), unreported.WT/DS103/R
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provincial marketing boards could not act at the inte r-provincial or international level since they did
not have the necessary federal authority.  This shortcoming has now been rectified by amending the
CDC Act.
7.78 In our view, the fact that most of the provincial boards are not formally incorporated as
government agencies and that all or most of them are composed, completely or partially, ofindividuals which are also dairy producers, does not alter our conclusion.  When - and to the extent
that – these boards act under explicit delegated governmental authority, they can be presumed to act
as an agency of the government.
431  Nor is our conclusion altered by the fact that the authority thus
delegated to the boards offers the boards a certain discretion.  It is precisely because  the boards
receive the authority from the governments to regulate certain areas themselves that their actions
become governmental.  What is important though is that Canadian governments maintain the ultimate
control and supervision of most, if not all, of the boards' activities.432  These governments define, and
approve changes to, the boards' mandates and functions.433
7.79 The third body which plays a decision-making role under Classes 5(d) and (e) is the
CMSMC.434  The CMSMC was established by the National Milk Marketing Plan (NMMP) which, in
turn, is "a federal-provincial agreement in respect of the establishment of a National Milk Marketing
Plan for the purposes of regulating the marketing of milk and cream products relating to Canadiandomestic requirements and for any additional industrial milk requirements in Canada".
435  The NMMP
was entered into by nine provinces436 and the CDC.  The bodies signing on behalf of each province
are typically the provincial milk marketing board, the provincial supervisory board (which provides
oversight of the operations of the provincial marketing board and is recognized by Canada as a
provincial authority) and the provincial Minister for Agriculture.  These two entities and theprovincial Minister for Agriculture select a single "designated representative" who casts the vote on
behalf of the province concerned.  The CDC chairs the CMSMC and also has the right to vote.
Decisions by the CMSMC are taken by consensus.  In certain cases, disagreement is resolved by
decision of the CDC.  The CMSMC is also "the supervisory body which will oversee the
implementation"
437 of the Comprehensive Agreement on Special Class Pooling.  This agreement was
concluded by the same bodies that are signatories to the NMMP and prevails over the NMMP.
Decisions by the CMSMC under the Comprehensive Agreement on Special Class Pooling are taken
                                                     
431 If we were to accept Canada's argument – namely, that the provincial marketing boards are not governmental agencies
because they are composed mainly of milk producers and producer-driven - it would mean that also a decision by a government min ister –
being, for example, also a farmer or having his or her electoral base in the agricultural sector – which favoured farmers would , for that
reason, no longer constitute a governmental action but a private action by farmers.
432 In the Bari III  case, for example, the Supreme Court of British Columbia found that the sub-delegation by the Governor in
Council (of certain governmental powers granted to him under the CDC Act) to the CDC, the CMSMC and the provincial boards const itutes
valid sub-delegation.  The Court found that the functions sub-delegated are administrative, not legislative; that the sub-deleg ation was done
out of "administrative necessity"; and that " sufficient direction has been provided … as to how [the CDC, the CMSC and the boards] are to
perform these functions " (British Columbia Milk Marketing Board and Canadian Dairy Commission v.  Luigi Aquilini et al. , Reasons for
Judgment of the Hon. Mr. Justice Wong, 12 September 1997, para. 117).
433 This delegation of governmental authority to the boards should be distinguished from the government's involvement in
creating a legal framework for, e.g., private banks (an example referred to by Canada).  The boards are not only provided with a framework
within which they can operate; they receive the authority to themselves regulate certain aspects of the milk market.  Private b anks, on the
contrary, are legally recognized and subject to certain rules and thus operate within a framework set by the government.  Howev er, they do
not – like the boards -  receive the power to regulate themselves, e.g., the financial markets.
434 See paras. 2.27-2.33.
435 Introduction (A) to the NMMP.  On the NMMP, see paras. 2.21-2.26.
436 All Canadian provinces are parties to the NMMP except for Newfoundland which is, according to Canada, not a party to the
NMMP because its milk producers produce almost exclusively for the local fluid milk market and because Newfoundland has not
traditionally contributed to the industrial milk supply that is the subject of the NMMP.
437 Schedule I, Section 1 of the Comprehensive Agreement on Special Class Pooling.WT/DS103/R
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by consensus.  Instead of the CDC resolving disagreements, under the Comprehensive Agreement on
Special Class Pooling a specific dispute settlement procedure is provided for.438
7.80 We have found that all of the signatories to the NMMP and the Comprehensive Agreement on
Special Class Pooling – i.e., the provincial governments and provincial supervisory boards, the CDC
and the provincial marketing boards – may be considered as "agencies" of Canada's governments orare effectively Canada's provincial governments.  Hence, we must presume that actions taken by these
"agencies" or governments through the CMSMC are, in turn, actions taken by an "agency" of
Canada's governments.  We recognize the influential role played by producers in the CMSMC.  At the
same time, however, and considering the structure,  delegated powers and responsibilities of the
CMSMC as outlined above
439, the concrete government involvement in the CMSMC is more than
obvious.  The NMMP itself states that "the participation of the Federal and Provincial authorities is
required to assure the adoption and implementation" of the NMMP.440  Most decisions by the
CMSMC require the agreement of both the CDC (an agency of the federal government) and the
provincial governments signatories to the NMMP (the provincial government is one of the three
bodies appointing the "designated representative" of  a province).  In some instances, the CDC may
even decide alone when there is a disagreement between the signatories of the NMMP.   
The concrete government involvement in making milk available under Classes 5(d) and (e)
7.81 Given our earlier considerations that the CDC is a government agency and that most of the
actions taken by the provincial milk marketing boards and the CMSMC can also be regarded as taken
by an "agency" of the government, the answer to the question of whether the milk made available
under Classes 5(d) and (e) – which we found earlier to be a payment in kind - is provided by Canada's
governments or their agencies, becomes more apparent.
7.82 Under both Classes 5(d) and (e) processors/exporters can only access milk if they obtain a
permit from the CDC, a government agency.  It is not the individual producer who decides what milk
it thus sells for export.  It is the CDC, acting on the advice of the Surplus Removal Committee
("SRC")441, the CMSMC or the provincial marketing boards, which decides whether domestic
requirements are met and whether, therefore, milk should be considered as "surplus" and be exported.Such exports are made, not necessarily because no more milk could be sold on the domestic market at
a higher price, but mainly in order to maintain the high domestic price.
442  As noted by the current
President of the CDC, Mr. Guy Jacob:
"… the [CDC] is the organization that issues permits whereby
secondary processors or exporters can purchase milk at lower prices.In other words, in order for an exporter to be able to buy milk at a
lower price, he must first obtain a permit from the [CDC].  It is also
the [CDC] that has the ultimate responsibility to ensure that
secondary processors or exporters that purchase milk at a lower price
                                                     
438 Annex D to the Comprehensive Agreement on Special Class Pooling, according to which the CMSMC first acts as the
Supervisory Body in an attempt to resolve the dispute prior to arbitration by an arbitration Panel.  The CDC acts as secretaria t for all dispute
settlement purposes.
439 See para. 7.79.
440 Preamble (B) to the NMMP, fourth paragraph.
441 See para. 7.71.
442 In the Standing Committee on Agriculture and Agri-Food of 17 March 1998, US Exhibit 45, p. 5, one Member of Parliament
(Mr. Jean-Guy Chrétien) argued that many processors are willing and could produce far more dairy products for the domestic mark et but
that they cannot access the required milk;  whereas other processors, producing for export, have a much wider access to milk gi ven that
"there is no danger of flooding the domestic market".  In reply, Mr. Guy Jacob, President of the CDC, stated: "Yes, we are hear ing the same
message from processors and producers … Processors are saying that they would have markets and could process more milk if the r aw
material were available".WT/DS103/R
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do in fact use that milk for the purpose for which the permit was
issued".443
7.83 Under both Classes 5(d) and (e), once a processor/exporter has obtained the required permit
from the CDC, it has to appeal to the provincial marketing board to actually obtain the milk. Although
the board is not under an obligation to provide such milk, Canada submits that in practice it always
does so.  It is, again, not the individual milk producer which independently allocates part of its
production to export sales, but rather the provincial marketing board which makes such milk available
at the request of the CDC.  All milk sales in Canada necessarily have to pass through the provincial
marketing board.  An individual producer only decides how much it produces ; it has no control over
what part of its production will be exported.  Th e producer only knows that for over-quota production,
a lower export return will be obtained.
7.84 It is the CMSMC which sets and periodically adjusts the quota level and thereby decides what
share of a producers' milk production is labelled as over-quota and thus obtains lower export
returns.444  It is also the CMSMC which annually sets the amount of milk allowed for export under
Class 5(d).  For both Classes 5(d) and (e) it is th e CDC which, finally, takes the decision whether milk
actually gets exported by issuing the required permit.  No link exists between what is over-quota for
an individual producer and what actually gets auth orized for export by the CDC.  Indeed, the CDC
can even decide that over-quota milk should in fact not be exported but sold domestically to make up
a shortfall.445
7.85 We recall, in addition, that the CDC negotiates the milk price for transactions under
Classes 5(d) and (e), as well as – for exports made by the CDC itself - the processor margin; that the
large majority of export sales under these Classes are initiated by the CDC446; and that the CDC itself
is a major exporter of processed dairy products.447
(v) The Panel's finding on whether the milk is provided by governments or their agencies
7.86 As outlined above, the CDC, advised by other bodies acting under the authority delegated to
them by governments, decides whether or not any and how much milk can be exported.  The CDC then
– in a very direct way, by providing a permit – makes milk available under Classes 5(d) and (e).Finally, the provincial milk marketing boards, actin g under delegated authority, physically offer the milk
to processors.   We find, therefore, on the basis of th e specific circumstances of this case, that the milk
made available to processors for export under Classes 5(d) and (e) at a discounted price, is provided by
Canada's governments or their agenci es in the sense of Article 9.1(a).
(c) The Panel's finding under Article 9.1(a)
7.87 We found earlier that the provision of lower priced milk to processors for export under
Classes 5(d) and (e) constitutes a payment in kind to processors/exporters contingent on export
                                                     
443 Standing Committee on Agriculture and Agri-Food of 17 March 1998, US Exhibit 45, p. 2.
444 The quota level can vary considerably year by year and can even be adjusted during the year, so that it may be difficult for t he
producer to adjust production to its quota.  In 1995/1996 and 1996/1997 the national quota for industrial milk (Market Sharing Quota or
MSQ) was 44.2 million hL.  In 1997/1998 it was decreased by 3 per cent to 43.3 million hL.  In 1998/1999, on the other hand, it  was
increased by 4 per cent to 44.7 million hL.
445 This over-quota milk then obtains the higher domestic price, the benefit of which does not go directly to the individual
producer (who only gets the lower Class 5(e) return) but is shared among all producers.
446 In 1995/1996, 96.6 per cent of surplus removal was initiated by the CDC; in 1996/1997, 91.49 per cent; in 1997/1998, 70.61
per cent.
447 See statement by Mr. Guy Jacob, President of the CDC, Standing Committee on Agriculture and Agri-Food of
17 March 1998, US Exhibit 45, p. 4:  "The [CDC] remains a major exporter.  Last year [1997] its direct exports totalled some 20 0 million
dollars".WT/DS103/R
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performance.448  We also found that this milk is provided by Canada's governments or its agencies.449
On these grounds450, we find that the making available of milk under Classes 5(d) and (e) constitutes
an export subsidy within the meaning of Article 9.1(a).
6. Article 9.1(c) of the Agreement on Agriculture
7.88 We have found that the Special Milk Classes Scheme involves an export subsidy as listed in
Article 9.1(a).  The complainants submit that this scheme also constitutes an export subsidy as listed
in Article 9.1(c).  This provision subjects the following type of action to Canada's export subsidy
commitments:
"payments on the export of an agricultural product that are financed
by virtue of governmental action, whether or not a charge on the
public account is involved, including payments that are financed
from the proceeds of a levy imposed on the agricultural productconcerned or on an agricultural product from which the exported
product is derived".
7.89 In our view, the first part of Article 9.1(c) – "payments on the export of an agricultural
product that are financed by virtue of governmental action" - includes the core elements of an export
subsidy as listed in that provision.  The subseq uent part provides further clarification – in an
illustrative way - as to the meaning of these core el ements.  We, therefore, consider that there are two
conditions that have to be met for there to be an export subsidy as provided in Article 9.1(c):
(a) the presence of "payments on the export of an agricultural product";
(b) which are "financed by virtue of governmental action".
We next examine whether these two conditions are met in this case.
(a) "payments on the export of an agricultural product"
7.90 We found earlier that the provision of milk at a discounted price under Classes 5(d) and (e)
involves "payments-in-kind" in the sense of Article 9.1(a) to processors/exporters that are "contingent
on export performance".
451  Under Article 9.1(c) we need to examine whether such provision of milk
involves a "payment on the export of an agricultur al product".  In our view, if the word "payment" in
Article 9.1(c) were to include "payments-in-kind", we would have to conclude that the provision of
milk at a discounted price under Classes 5(d) and (e) also constitutes a "payment" in the sense of
Article 9.1(c).  Since, as we saw earlier452, the provision of this cheaper milk is only available in case
the dairy products produced with it are actually exported, we would then also need to conclude that itconstitutes a payment "on the export of an agricultural product".
453  In our view, the term "payment on
the export of an agricultural product" means, indeed, that the payment is conditional or contingent on
the export of such product ( in casu , the processed dairy products that are specified in the CDC permits
                                                     
448 See para. 7.61.
449 See para. 7.86.
450 See also paras 7.39 and 7.40.
451 See paras. 7.40 and 7.58.
452 See para. 7.40.
453 Referring to para. 7.41, to the extent that the US claims also cover any of the milk classes other than Classes 5(d) and (e), we note
that all of these other milk classes can also (often exclusively) be accessed by processors which produce for the domestic mark et.  Nothing
offered under these other milk classes can thus constitute a payment "on the export of" an agricultural product.  We therefore find that these other
milk classes do not involve an export subsidy as listed in Article 9.1(c).WT/DS103/R
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issued under Classes 5(d) or (e)).  Our finding as to whether or not the Special Milk Classes Scheme
also involves "payments on the export of an agricultural product" in the sense of Article 9.1(c) thus
only depends on whether or not the word "payment" in this provision covers not only payments in
money but also "payments-in-kind".  This is the issue we examine next.
7.91 We recall that according to the rules of treaty in terpretation set out in Article 31 of the Vienna
Convention on the Law of Treaties, the meaning of a term is to be determined by reference to its
ordinary meaning, read in its context, and in the light of the object and purpose of the treaty.
7.92 As to the ordinary meaning of the word "payment", we note that the Oxford English
Dictionary  defines "payment" as
"1. the action, or an act of, paying; the remuneration of a person with
money or its equivalent ; the giving of money, etc. in return for
something in discharge of a debt".454
This indicates that the ordinary meaning of the word "payment" includes both the act of remunerating
a person with money and the act of remunerating a person with its equivalent in kind, a so-called
"payment in kind".  Indeed, benefits available under the export rebate system in place before the
Special Milk Classes were introduced455 and the provision of more milk for the same price  under this
scheme are, in our view, both captured by the ordinary meaning of the word "payment".
7.93 The validity of this interpretation is confirmed when taking into account the context of the
word "payment" as it is used in Article 9.1(c).  Th e immediate context to turn to is, in our view, the
second part of Article 9.1(c) which further defines the kind of "payment" required.  It refers to a
"charge" on the public account (an element not required for there to be an Article 9.1(c) export
subsidy).  We consider that a "charge" can arise both as a consequence of a transfer of money and of
the provision of a good at a discounted price.  The second part of Article 9.1(c) also provides an
example of an export subsidy as listed in that provision.  In so doing, it refers to payments " financed
from the proceeds of a levy".  "Financing" a "payment" can, in our view, be done by way of a transfer
of money but also by means of charging a discounted price for a good.  Therefore, the second part ofArticle 9.1(c), in our view, implicitly confirms th at the notion of "payment" in Article 9.1(c) also
covers payments-in-kind, such as the provision of milk at a reduced price.
7.94 We consider that the other provisions of the Agreement on Agriculture also form part of the
context of Article 9.1(c).  Article 9.1 identifies certain practices as export subsidies subject to the
reduction commitments made by WTO Members.  These commitments take the form of a ceilingimposed on "budgetary outlays" and on the quantity of exports for which export subsidies can be
granted.  They are specified for each year of the implementation period in the Schedule of the WTO
Member concerned.  According to Article 9.2(a), the export subsidy commitment levels represent
"with respect to the export subsidies listed in [Article 9.1] :  (i) in the case of budgetary outlay
reduction commitments, the maximum level of expenditure for such subsidies that may be allocated or
incurred in that year in respect of the agricultural product, or group of products, concerned".
456  I n
principle, the ceiling on "budgetary outlays" thus applies to all export subsidies listed in Article 9.1,
including the Article 9.1(c) export subsidies.  The concept of "budgetary outlay", however, is defined
in Article 1(c) as including "revenue foregone".   Since, therefore, the notion of "payment" in
Article 9.1(c) would also include "revenue foregone", it can be implied that "payment" thereby not
                                                     
454 The Oxford English Dictionary  (2nd Edition) – Volume XI, Clarendon Press, Oxford, pp. 379-380 (emphasis added).
455 We note in this respect that Canada, during our proceedings, acknowledged that its previous levy system – where levies were
imposed on all milk producers and pay backs were made to processors/exporters with the proceeds of these levies – involved "pay ments" in
the sense of Article 9.1(c).
456 Emphasis added.WT/DS103/R
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only includes payment in money terms but also payments-in-kind, i.e., "revenue foregone" by
providing milk for use in exports at a discounted price (whereby, in casu , higher returns to be
obtained on the domestic milk market are "foregone" by producers).  In other words, since "revenue
foregone" is to be taken into account in calculating the levels  of reduction commitments – including
the level of export subsidies as listed in Article 9.1(c) – it should, implicitly, also be included in the definition  of the export subsidies for which these reduction commitments are made, including the
definition of export subsidies under Article 9.1(c).  In our view, this consideration confirms our
interpretation that "payment" in the sense of Article 9.1(c) includes "payments-in-kind".
7.95 The idea that the export subsidies identified in Article 9.1 generally, and Article 9.1(c) in
particular, also include payments-in-kind and, specifically, the provision of a good at a reduced price,
is also confirmed in other sub-paragraphs of Article 9.1.  Article 9.1(a) refers to "direct subsidies,
including payments-in-kind ".  Article 9.1(b) mentions the sale or disposal for export of non-
commercial stocks " at a price lower  than the comparable price charged for the like product to buyers
in the domestic market".  Article 9.1(d) refers to a reduction in the costs  of marketing exports.
Finally, Article 9.1(e) is directed at reduced  internal transport and freight charges  on export
shipments.  None of the provisions under Article 9.1 – not even Article 9.1(a) which deals with "direct
subsidies" – seems to be limited to contributions in money terms only; all of them, in one way oranother, explicitly or implicitly, include reference to payments-in-kind such as lower prices or a
reduction in costs or charges.  In our view, this consideration further confirms our interpretation that
"payment" in the sense of Article 9.1(c) includes payment in kind.
7.96 Canada argues that if the drafters of the Agreement on Agriculture had intended the word
"payment" in Article 9.1(c) to include payment in kind they would have explicitly added such
language.  Canada refers to other provisions where such language was added.  It refers, in particular,
to paragraph 5 of Annex 2 of the Agreement on Agriculture which mentions "direct payments (or
revenue foregone, including payments in kind)".  However, in our view, this inclusion of "payments
in kind" does not qualify or add to the meaning of  the word "payment", but to the meaning of the
word " direct  payment".  Moreover, if another provision, part of the context of Article 9.1(c), defines
"direct  payments" as including "payments in kind", we consider that it can be presumed that the more
general word "payments" in Article 9.1(c) a fortiori  includes "payments in kind".  Nowhere in the
Agreement on Agriculture is the word "payment" as such explicitly qualified as excluding or
including payment in kind.  Article 9.1(a), for example, refers to " direct subsidies  [not "payments"],
including payments-in-kind".  As we noted earlier, the ordinary meaning of the word "payment" aswell as the context in which it is used in Article 9.1(c), on the contrary, indicate that "payment"
includes not only payment in money terms but also payment in kind.
 457
7.97 In the same vein, Canada refers to the Appellate Body report on Canada – Periodicals  where
the term "payment of subsidies exclusively to domestic producers, including payments to domestic
producers derived from the proceeds of internal taxes or charges" in Article III:8(b) of GATT 1994
was interpreted as only including "the payment of subsidies which involve the expenditure of revenue
by a government".458  A reduction of postal rates granted by Canada Post for the distribution of certain
publications was thus found to be excluded from the exemption under Article III:8(b).  In our view,
however, one needs to distinguish the term "payment s" as used in Article III:8(b), from that in
Article 9.1(c) and this because of the different context in which it is set and the different object and
purpose it serves.  First, Article III:8(b) only provides a specific exemption  to the national treatment
                                                     
457 We are not convinced either by Canada's argument that the French text of Article  9.1(c) uses the word "versement" which,
according to Canada, connotes only payments in money terms.  We note, in this respect, that the French text of Article 9.1(a), when
addressing "payments-in-kind", uses the term "versements en nature".  This, in our view, confirms that also the meaning of the French term
for "payment", namely "versement", does not exclude payment in kind, i.e., "versement en nature".
458 Appellate Body report on Canada – Certain Measures Concerning Periodicals , adopted on 30 July 1997, WT/DS31/AB/R,
p. 36.WT/DS103/R
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provisions in Article III for the payment of certain  production  subsidies, namely "the payment of
subsidies exclusively to domestic producers".459  It does not in any way provide a general definition of
what a subsidy – let alone an export subsidy – is for purposes of GATT 1994 (and even less so for
purposes of the Agreement on Agriculture).  Article 9.1(c), on the other hand, provides a concrete
example of an export subsidy, not constituting an exemption to any other provision, but part of apositive list of export subsidies made subject to reduction commitments under the Agreement on
Agriculture.
460  Second, Article III:8(b) exempts the "payme nt of subsidies exclusively to domestic
producers" from Article III obligations and provides  certain "payments" as an example of such
subsidies.  In other words Article III:8(b) when giving the example of certain "payments" does not
define or further clarify the broader term "subsidy" or "payments" – the latter term being the only one
provided in Article 9.1(c) and the term we have to interpret here - but the more narrow term "payment
of subsidies exclusively to domestic producers".  Recalling also the textual and contextual elementsproper to Article 9.1(c) set out above
461 – and not to be found under Article III:8(b) - we thus consider
that Canada's reference to Article III:8(b) of GATT 1994 does not alter our interpretation that
"payment" in Article 9.1(c) also includes payment in kind.
7.98 Canada further claims that there is no revenue fo r the producers to forego with respect to sales
of milk for export use under Classes 5(d) and (e) and, therefore, no payment in kind made by theseproducers.  It submits that under the Canadian milk marketing system, such milk cannot  be sold in the
market for export uses if it is required for Canadian domestic requirements.  Thus, sales of milk for
export purposes at prices based on word market prices cannot be made until there is no opportunity to
sell milk into domestic markets at the higher domestic prices.  According to Canada, "revenue
foregone" implies a choice of markets, a choice foregone and in this case producers do not have achoice.
7.99 In response to Canada's argument, we agree that the milk producer - with respect to
Classes 5(d) and (e) milk - does not have a choice to make between selling its milk at a higher price
for domestic use or at a lower price for export.  However, we do so for reasons different from those
put forward by Canada.  As we noted earlier, it is not the milk producer that takes the decision whereto allocate its milk production.
462  It is the CDC (acting on the advice of the SRC), the CMSMC and
the provincial marketing boards, that decide whether domestic requirements are met and whether,
therefore, milk should be considered as "surplus" and be exported.  Such exports are made, not
necessarily because no more milk could be sold on the domestic market at a higher price, but mainly
in order to maintain the high domestic price.463  If it is thus decided - by means of the issuance of a
CDC permit under Classes 5(d) or (e) – that in-quota milk is to be exported, the milk producer has to
accept a lower price.  Through the pooling of all in-quota milk returns, this lower price is reflected in
a lower average pooled price granted to milk producers for all of their in-quota milk.  With respect to
over-quota  milk, it is again because of Canada's governments or their agencies – through the CMSMC
                                                     
459 Article III:8(b) states:  " The provisions of this Article shall not prevent  the payment of subsidies exclusively to domestic
producers …" (emphasis added).
460 In this respect, we note the Panel Report on  Indonesia – Certain Measures Affecting the Automobile Industry , adopted
23July 1998, WT/DS54/R, which highlights the special and different context and object and purpose of Article III and Article II I:8(b) in
particular, when it states in para. 14.33:  "As was the case under GATT 1947, we think that Article III of GATT 1994 and the WT O rules on
subsidies remain focused on different problems.  Article III continues to prohibit discrimination between domestic and imported  products in
respect of internal taxes and other domestic regulations, including local content requirements.  It does not “proscribe” nor do es it “prohibit”
the provision of any subsidy per se "; and in para. 14.43:  "We consider that the purpose of Article  III:8(b) is to confirm that subsidies to
producers do not violate Article III, so long as they do not have any component that introduces discrimination between imported  and
domestic products.  In our view, the wording “payment of subsidies exclusively to domestic producers” exists so as to ensure th at only
subsidies provided to producers, and not tax or other forms of discrimination on products, be considered subsidies for the purp ose of
Article III:8(b) of GATT".
461 See paras. 7.92-7.96.
462 See paras. 7.82 ff.
463 See para. 7.82 and footnote 442.WT/DS103/R
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– that a certain quantity of milk is labelled as over-quota.  Once so labelled, milk necessarily obtains a
lower price based on the world market price.  Therefore, whenever producers produce milk over-
quota, as defined by Canada's governments or their agencies, they have to  se ll  i t a t a lower expo rt
related price.
7.100  Canada is, therefore, correct that producers do not have a choice to make with respect to the
allocation of Classes 5(d) and (e) milk.  However, in our view, this is so (i.e., the producers' choice is
predetermined) not – as Canada implies - because of commercial reasons (e.g., because of a lower
domestic demand the producer - depending on its profitability – decides, in order to maximize its total
revenue, to allocate a certain share of its production to lower priced export markets), but because of
governmental actions.  Under the Canadian system, selling milk for use in the domestic market is no
longer an option (i.e., the choice for a higher return is taken away) mainly because the quotas - set by
Canadian governments or their agencies - are met; not because there is no more domestic demand for
milk.  As noted earlier, producers would likely be able to sell more milk domestically if they were
allowed to do so, albeit probably at a somewhat lower price.464  In conclusion, we consider that
producers do forego a choice or revenue – albeit through governmental action - and, therefore, make a
payment in kind to processors/exporters in the sense of Article 9.1(c).
7.101  In conclusion, a careful examination of the ordinary meaning of the term "payment" in
Article 9.1(c), in its context and in light of the object and purpose of the Agreement on Agriculture,
leads us to the conclusion that it does include payment in kind and thus,  in casu , the provision of milk
at a reduced price.  Recalling our considerations in paragraph 7.90, we thus find that the provision of
milk to processors/exporters under Classes 5(d) and (e) involves a "payment on the export of an
agricultural product" in the sense of Article 9.1(c).
(b) payments "financed by virtue of governmental action"
7.102  We recall that it is not in dispute that the payments-in-kind made under Classes 5(d) and (e)
do not directly involve a charge on the public account.465  The cost of selling milk at a reduced price
for export is not borne by the government. It is borne by the milk producers either collectively  (by
means of pooling the lower in-quota export returns with the higher domestic returns and paying out anaverage pooled price for all in-quota milk to all producers) or, at least in principle,  individually  (with
respect to over-quota milk, revenues of which are generally not pooled with higher returns from other
milk producers).  However, in our view, it is clear from the language of Article 9.1(c) that producer-
financed payments can in principle be covered by this provision.  "[W]hether or not a charge on the
public account is involved" is explicitly stated to be irrelevant for purposes of Article 9.1(c).Moreover, Article 9.1(c) explicitly provides an example of a producer-financed payment, covered by
Article 9.1(c), namely "payments that are financed from the proceeds of a levy imposed on the
agricultural product concerned or on an agricult ural product from which the exported product is
derived".  The word "including" indicates that su ch payments financed from levies on agricultural
products constitute only one example of a producer-financed export subsidy as listed in Article 9.1(c).
In order to decide whether or not the scheme at issue here is another example of such export subsidies,
we need to determine next whether or not this scheme involves payments "financed by virtue ofgovernmental action".
7.103  We found earlier that the type and degree of government involvement in the making available
of milk to processors/exporters under Classes 5(d) an d (e) is such that the payment in kind involved is
"provided by" Canada's governments or their agencies in the sense of Article 9.1(a).
466  We recall, in
                                                     
464 Ibid.
465 See para. 7.64.
466 See para. 7.86.WT/DS103/R
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particular, that Canada's governments or their agencies through the Special Milk Classes Scheme
decide when milk is to be exported, negotiate the price for such milk and actually provide the milk to
processors/exporters.
7.104  We note, in addition, that it is the provincial milk marketing board, assisted by the CDC and
operating under federal and/or provincial authority delegated to it, that (i) calculates the monthly paycheque to be sent to each milk producer according to the relevant pooling arrangements and the
specific rules or regulations the province concerned applies with respect to payments for over-quota
milk; and (ii) eventually pays the milk producers a monthly income based on their production and the
milk returns obtained through the scheme during a certain period.  All milk necessarily passes through
the intermediary of the provincial milk marke ting boards which, together with the CDC and the
CMSMC, arrange all milk sales, cash the returns obtained from processors/exporters for the milk sold
and, finally, re-route these returns – including, in particular, the returns from milk sold underClasses 5(d) and (e) - to the individual milk producers on the basis of complex calculations.
7.105  We further note that, by virtue of the CDC Act, the CDC is, inter alia , authorized to
(i) "distribut[e] money to producers of milk or cream received from the marketing of any quantity of
milk or cream"
467; (ii) "establish the price, or minimum or maximum price, paid or to be paid to the
Commission, or to producers of milk or cream, the basis on which that payment is to be made and theterms and manner of payment that is to be made in respect of the marketing of any quantity of milk or
cream"
468; and (iii) "collect the price paid or to be paid to the Commission, or to any producer in
respect of the marketing of any quantity of milk or cream … or recover that price in a court of
competent jurisdiction".469  The CDC also calculates the returns received by each province for Special
Milk Classes sales, based on data provided by provincial marketing boards, and may audit the booksof processors/exporters to ensure that they have used Classes 5(d) and (e) milk for export purposes.
7.106  On these grounds
470, we find that the payment in kind offered under Classes 5(d) and (e),
namely the provision of milk at a discounted price to processors/exporters, although it is not financed
directly with governmental funds, is, nevertheless, "financed by virtue of governmental action" in the
sense of Article 9.1(c).
Additional considerations with respect to sales of in-quota milk
7.107  We find additional support for our finding in the previous paragraph, in so far as it relates to
in-quota  milk sold under Classes 5(d) or (e), in the fact that the returns of in-quota milk are pooled
with all other in-quota milk returns.471
7.108  At the national level, a system which pools all returns from in-quota milk in Special Class 5
was set up in the Comprehensive Agreement on Special Class Pooling. This agreement was concluded
by the same bodies that established the CMSMC.  Its implementation is overseen by the CMSMC, a
body we considered earlier to be (at least to some extent) an agency of Canada's governments.472
Moreover, in order to allow the CDC to administ er this pooling system, the federal CDC Act was
                                                     
467 CDC Act, Subsection 9(1), paragraph (f), (i).
468 CDC Act, Subsection 9(1), paragraph (g).
469 CDC Act, Subsection 9(1), paragraph (h).
470 See paras. 7.103-7.105.
471 In this respect, we note that New Zealand and the United States have argued that Classes 5(d) and (e) constitute an export
subsidy to milk processors/exporters  financed by milk producers contingent on the export of the processed  dairy product .  Neither
complainant suggested that the pooling of in-quota milk returns represents a payment to some  milk producers  financed by other milk
producers contingent on the export of milk.
472 See para. 7.80.WT/DS103/R
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amended.  Subsection 9(1), paragraph (f) of the Act, as amended, grants federal authority to the CDC
to "establish and operate a pool or pools in respect of the marketing of milk or cream".
7.109  At an inter-provincial level, one pooling agreement was concluded between six eastern
provincial boards ("the P6 Agreement"), another between four western provincial boards ("the P4
Agreement").  Both of these agreements pool all in-quota milk returns other than Special Class 5returns (which are pooled nationally). These agreements were typically concluded by the relevant
provincial governments, marketing boards and supervisory boards, all of which we presumed earlier
to be agencies of Canada's governments.
473  Also the CDC itself is a signatory to both of these
agreements.  An example of how pooling of in-quota milk actually occurs is provided in
paragraphs 2.59 to 2.63 above.
7.110  The authority vested in the provincial marketing boards to conclude, operate and enforce any
of these three pooling agreements was delegated to them either by federal authorities (to the extentinter-provincial and international trade is involved, e.g., by the CDC
474) or by provincial authorities
(which have constitutional authority over all other aspects of production and sale of milk).  The orders
and regulations of the boards in respect of pooling – established pursuant to federal and provincial
enabling legislation – can be enforced by the provincial boards before the normal courts by means of,
e.g., a request for civil injunction or civil damages.
7.111  On these grounds, we consider that each of the three pooling arrangements are imposed on
milk producers by virtue of governmental action.  The pooling agreements are compulsory.
Individual producers cannot opt-out of these pooling systems with respect to their in-quota milk.475  It
is this pooling mechanism that "finances" the pa yment in kind provided by the producers to the
processors/exporters under Classes 5(d) and (e) with respect to in-quota milk.  The pooling ensuresthat the producer which sells in-quota milk for export at a discounted price, does not have to bear the
total cost of the "payment" thus provided to the processor/exporter.  All milk producers share this cost
by putting their higher returns from milk sold for domestic use in the same pool.  The net result is that
all producers obtain one average pooled price for all their in-quota milk.  This pooling system
confirms our finding that the provision of in-quota milk under Classes 5(d) and (e) is a payment inkind "financed by virtue of governmental action".
476
Additional considerations with respect to sales of over-quota milk
7.112  We note, finally, that even though returns of over-quota  milk sold under Class 5(e) are
generally not pooled with other in-quota milk returns, over-quota milk returns are also, at least to some
extent, pooled.  This again occurs, we consider, by virtue of governmental action.  First, any over-
quota milk return is pooled annually with all other over-quota milk returns.  On a monthly basis, the
individual milk producer receives, from its provin cial marketing board, a price for its monthly over-
quota share.  This price is not the actual return for the transaction made, but a three-month moving
average of all returns achieved nationally for over-quota milk.  Moreover, at the end of the dairy year,
an adjustment is made to ensure that the total monthly payments made to individual producers
correspond, on an averaged basis, to the total returns generated nationally that year by all over-quota
milk sales.  Therefore, even though each export transaction may – and mostly does - generate adifferent price (depending on the competitive conditions in the export market concerned, the dairy
                                                     
473 See paras. 7.73 ff.
474 In Schedule II to the Comprehensive Agreement on Special Class Pooling, the CDC, subject to the approval of the Governor
in Council, authorizes the provincial boards "insofar as it is necessary to enable the Boards to fully carry-out the program as  set out in [the
Comprehensive Agreement on Special Class Pooling] and its Annexes, to exercise all the powers of the [CDC] set out in paragraph s 9(1)(f)
to (i) of the [CDC Act]".
475 See Canada's answer to Panel Question 4(d) to Canada.
476 See para. 7.106.WT/DS103/R
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product in question and the delivery terms and timing of the transaction), at the end of the year an
individual milk producer is not affected by this  spectrum of variables, but receives a nationwide
average pooled return for all of its over-quota milk.477  Second, depending on the applicable provincial
regulations, some degree of pooling also takes place between over-quota returns and in-quota returns.
This is achieved, in some provinces, by offset ting over-quota production of some producers against
under-quota production of others.478  These so-called "flexibility" provisions or "fall incentives"
essentially excuse over-quota production in certain m onths.  This variable determination of what is
labelled as over-quota milk in each province by virtue of provincial regulations, not only results in a
shared financing of certain over-quota sales (including by those producers which did not produce
over-quota); it also confirms that it is not the individual producer but Canada's governments or their
agencies that essentially determine when milk receives the lower export return.  In our view, this
pooling of over-quota returns confirms our finding in  paragraph 7.106 that the provision of over-quota
milk under Class 5(e) is  also a payment in kind "financed by virtue of governmental action".
(c) The Panel's finding under Article 9.1(c)
7.113  We found earlier that the provision of lower priced milk to processors for export under
Classes 5(d) and (e) constitutes a "payment" to these processors/exporters "on the export of an
agricultural product".479  We also found that this "payment" is "financed by virtue of governmental
action".480  On these grounds, we find that the making available of milk under Classes 5(d) and (e)
constitutes an export subsidy within the meaning of Article 9.1(c).
7. Article 3.3 of the Agreement on Agriculture
7.114  We have found that the provision of milk to processors/exporters at a reduced price under
Classes 5(d) and (e) constitutes an export subsidy as listed in Article 9.1(a)481 and Article 9.1(c).482
We recall that Article 3.3 provides as follows:
"Subject to the provisions of paragraphs 2(b) and 4 of Article 9, a
Member shall not provide export subsidies listed in paragraph 1 of
Article 9 in respect of the agricultural products or groups of products
specified in Section II of Part IV of its Schedule in excess of thebudgetary outlay and quantity commitment levels specified therein
and shall not provide such subsidies in respect of any agricultural
product not specified in that Section of its Schedule".
7.115  We further note that, according to figures submitted by Canada, the total amount of exports
generated through Classes 5(d) and (e) exceeds Canada's quantity reduction commitment levels as setout in Section II of Part IV of its Schedule and this (i) for all of the dairy products in dispute (butter,
cheese and "other milk products") and (ii) dur ing both marketing years at issue (1995/1996 and
1996/1997).
483  The relevant figures are reflected in the table below:
                                                     
477 See Canada's answer to Panel Question 34 to Canada.
478 For example, in the provinces of Alberta, Manitoba and Saskatchewan, according to Canada's answer to Panel Question 20(b)
to Canada and US Exhibits 39 and 58.
479 See paras. 7.90 and 7.101.
480 See paras. 7.103 ff.
481 See para. 7.87.
482 See para. 7.113.
483 See Table 2 in para.2.41.WT/DS103/R
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Product Marketing
YearCanada's Export
Quantity
commitment levelTotal exports generated
through Classes 5(d)
and 5(e)
Butter 1995/1996
1996/19979,464
8,2719,527
10,312
Cheese 1995/1996
1996/199712,448
11,77313,751
20,409
Other milk products 1995/1996
1996/199736,990
35,64937,358
60,300
7.116  On these grounds484, we find that Canada provides export subsidies as listed in Article 9.1 in
respect of the three dairy products at issue, and this for both marketing years in dispute, in excess of the
quantity commitment levels specified in its Sche dule, contrary to its obligations under Article 3.3.
8. Article 10 of the Agreement on Agriculture
7.117  We have found that the Special Milk Classes Scheme involves an export subsidy as listed
both in Article 9.1(a) and in Article 9.1(c).  In the alternative – i.e., in the event we would have found
that the scheme does not involve an export subsidy as specified in either Article 9.1(a) or
Article 9.1(c) - the Complainants submit that this scheme, nevertheless, constitutes an export subsidy
contrary to Article 10.1 of the Agreement on Agriculture.  This provision reads as follows:
"Export subsidies not listed in paragraph 1 of Article 9 shall not be
applied in a manner which results in, or which threatens to lead to,
circumvention of export subsidy commitments;  nor shall non-commercial  transactions be used to circumvent such commitments".
7.118  The Complainants only invoke the first phrase of Article 10.1.  We note that this phrase only
applies to "export subsidies not listed in paragraph 1 of Article 9".  Export subsidies listed in
Article 9.1 cannot, therefore, be found to contravene Article 10.1.
485  Having found that Canada's
Special Milk Classes 5(d) and (e) involve export subsidies as listed in Article 9.1, we thus decide thisdispute on the basis of Article 9.1.  None of the complainants requested the Panel to make concurrent
findings on both Article 9.1 and Article 10.1.  In our view, the text of Article 10.1 and our findings
based on Article 9.1 exclude such concurrent findings in respect of the same export subsidies.  If our
findings under Article 9.1 are adopted by the DSB, we consider that making additional findings under
Article 10.1 would not be warranted in the light of the mutually exclusive relationship betweenArticle 9.1 and Article 10.1.
7.119  However, in our examination of the claims relating to violations of Article 9.1 or Article 10.1,
we also noted the following elements:
(a) both complainants requested a finding on Article 10.1 in the event that
Article 9.1 were found not to be applicable;
                                                     
484 See paras. 7.114-7.115.
485 However, in our view, the mutual exclusiveness of Article 9.1 and Article 10.1 does not prevent that one element or aspect of
a given scheme may constitute an export subsidy as listed in Article 9.1, while another element or aspect of the same scheme ma y be
covered by Article 10.1 and that, as a result, the factual elements to be considered under both provisions might well be closel y related if not
the same in certain respects.WT/DS103/R
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(b) the complainants and Canada disagree on how Article 10.1 should be
construed and on the consistency of Canada's Special Milk Classes Scheme
with Article 10.1;
(c) both Article 9.1 (referring to Article 3.3) and Article 10.1 prohibit specified
export subsidies and, in so doing, complement each other by focusing ondifferent subsidy elements.  As a result, the precise borderline between
Article 9.1 and Article 10.1 export subsidies may not always be clear-cut.
Indeed, so far this borderline has never been clarified in WTO legal or
dispute settlement practice;
(d) if our findings under Article 9.1 were to be reversed, the Appellate Body
could be called upon to examine the claims made under Article 10.1.  This
examination would require a complex factual assessment and the weighing ofevidence submitted by the parties to this dispute, an exercise which could go
beyond the jurisdiction of the Appellate  Body and make it impossible for the
DSB to provide recommendations and rulings on all legal claims within the
time-frame prescribed by the DSU;
(e) if the DSB adopts our findings on Article 9.1, the DSU's declared objectives
of "prompt settlement" of disputes (Article 3.3 of the DSU), of a "satisfactory
settlement of the matter in accordance with the rights and obligations under
[the DSU] and the covered agreements" (Article 3.4 of the DSU), of "a
positive solution to a dispute" (Article 3.7 of the DSU) and of "effective
resolution of disputes to the benefit of all Members" (Article 21.1), may befacilitated if the parties would have at their disposal the Panel's examination
of the matter under Article 10.
486  On this point, we recall the following
statement by the Appellate Body:
"The principle of judicial economy has to be applied keeping
in mind the aim of the dispute settlement system.   This aimis to resolve the matter at issue and 'to secure a positive
solution to a dispute'.
487  To provide only a partial resolution
of the matter at issue would be false judicial economy.  A
panel has to address those claims on which a finding is
necessary in order to enable the DSB to make sufficientlyprecise recommendations and rulings so as to allow for
prompt compliance by a Member with those
recommendations and rulings 'in order to ensure effective
resolution of disputes to the benefit of all Members'
488".489
On these grounds, and in particular in order to (i) enable the Appellate Body and the DSB to makefindings on Article 10.1 in the event that it considers it necessary
490 and (ii) avoid a continuation of the
                                                     
486 In this respect, we also note Article 19.1 of the DSU providing that a panel "[i]n addition to its recommendations … may
suggest ways in which the Member concerned could implement the recommendations".
487 A footnote refers to DSU, Article 3.7.
488 A footnote refers to DSU, Article 21.1.
489 Appellate Body report on Australia – Measures Affecting Importation of Salmon , WT/DS18/AB/R, adopted 6 November
1998, para. 223.
490 In this respect, we refer to the dispute on Australia – Measures Affecting Importation of Salmon  (WT/DS18/AB/R, adopted 6
November 1998), where the Appellate Body, after having reversed certain Panel findings, was "unable to come to a conclusion on [the claim
under Article 5.6 of the SPS Agreement] due to the insufficiency of the factual findings of the Panel and of facts that are und isputed between
the parties" (para. 213; see also para. 241).  See also the Appellate Body Report on Canada – Certain Measures Concerning PeriodicalsWT/DS103/R
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dispute over Canada's obligation to bring its dairy products marketing regime into conformity with its
obligations under the Agreement on Agriculture, we have decided to proceed with our examination
under Article 10.1 and to include that examination in our report as one on which no recommendation
or ruling by the DSB would be necessary if our findings under Article 9.1 are adopted.  We emphasize
that our examination of Article 10.1 is made in the alternative only, i.e., assuming that Classes 5(d)and (e) do not involve export subsidies as listed in Article 9.1.
(a) The two elements under Article 10.1
7.120  In our view, for there to be a violation of Ar ticle 10.1, two elements need to be established:
(a) the presence of "export subsidies not listed in paragraph 1 of Article 9";
(b) which are "applied in a manner which results in, or which threatens to lead to,
circumvention of export subsidy commitments".
7.121  Article 10.1 - in particular the second condition thereunder - has to be read together with
Article 10.3, which provides:
"Any Member which claims that any quantity exported in excess of a
reduction commitment level is not subsidized must establish that no
export subsidy, whether listed in Article 9 or not, has been granted in
respect of the quantity of exports in question".
7.122  Reading the second element of Article 10.1 together  with Article 10.3, we note that all parties to
this dispute agree that one example of applying expor t subsidies "in a manner which results in, or which
threatens to lead to, circumvention of export subsidy commitments" is a situation where export
subsidies other than Article  9.1 export subsidies are granted to a product subject to subsidy reduction
commitments in excess of the reduction commitment level.
491  We see no reason, in the circumstances of
this case, to disagree with this interpretation of Article 10.  In our view, Article 10.3 does, indeed,
address both (i) the question of who bears the burden of proving whether or not an export subsidy is at
issue in a specific instance492, and (ii) the question of when certain export subsidies can be said to be
applied in a manner which results in, or which threatens to lead to, circumvention of export subsidy
commitments.
7.123  We recall that, in this case, figures submitted by Canada show that for all of the dairy products
in dispute and this during both marketing years at i ssue, the total amount of exports generated through
Classes 5(d) and (e) exceeds Canada's reduction commitment level.493  We also recall our consideration
above that granting export subsidies "other" than th ose listed in Article 9.1 in excess of the relevant
reduction commitment level for the subsidized product concerned, is sufficient to conclude thatArticle 10.1 is violated.
494  Therefore, in the circumstances of th is dispute, whether or not Article 10.1 is
                                                                                                                                                                    
(WT/DS31/AB/R, adopted 30 July 1997, p. 22:  "We note that, due to the absence of adequate analysis in the Panel Report in this  respect, it
is not possible to proceed to a determination of like products [under Article III:2, first sentence, of GATT 1994]").  In this respect, see also
the Panel Report on India – Patent Protection for Pharmaceutical and Agricultural Chemical Products  (WT/DS50/R, adopted 16 January
1998) where the Panel decided to continue its examination under Article 63 of the TRIPS Agreement after it had found a violatio n under
Article 70.8 of that Agreement (para. 7.44:  "Although the United States formulates it [the Article 63 claim] as an alternative  claim in the event
that the Panel were to find that India has a valid mailbox system in place, and we have, as stated above, found that the curren t mailbox system in
India is at variance with Article 70.8(a) of the TRIPS Agreement, we believe it necessary to make our findings clear on the iss ue of transparency
in order to avoid a legal vacuum in the event that, upon appeal, the Appellate Body were to reverse our findings on Article 70. 8").
491 See, in particular, Canada's answer to Panel Question 16 to Canada.
492 See paras. 7.32-7.34.
493 See para. 7.115, referring to Table 2 in para. 2.41.
494 See para. 7.122.WT/DS103/R
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violated depends on whether or not Classes 5(d) and (e) involve an "other" export subsidy in the sense of
Article 10.1.  In other words, in this dispute, we onl y need to further examine whether the first element
of Article 10.1 is met.
(b) An "other" export subsidy under Article 10.1
7.124  The Article 10.1 concept of "[e]xport subsidies not listed in paragraph 1 of Article 9" is not
further defined in Article 10 itself.  Article 1(e) states, however, that:
"[i]n this Agreement, unless the context otherwise requires: …
'export subsidies' refers to subsidies contingent upon export
performance , including the export subsidies listed in Article 9 of this
Agreement".495
For purposes of Article 10.1, we thus need to exam ine whether Classes 5(d) and (e) involve "subsidies
contingent upon export performance" in the sense of Article 1(e) other than those listed in Article 9.1.Since we assumed earlier – in the alternative and for purposes only of our examination under
Article 10.1 - that Classes 5(d) and (e) do not involve export subsidies as listed in Article 9.1, we need
to examine next whether they do, nevertheless, constitute export subsidies in the sense of
Article 1(e).
496
7.125  In our view, Article 1(e) covers a wider range of "export subsidies" than the specific practices
listed in Article 9.1.  Article 1(e) explicitly states that it "includes" – and is thus not limited to – export
subsidies listed in Article 9.1.  We consider, therefore, that any subsidy contingent upon export
performance other than one listed in Article 9.1 is covered by Article 10.1.  Accordingly, measures
which meet some but not all of the definitional el ements of the individual export subsidy practices
listed in Article 9.1 would be covered by Article 10:1, provided that they meet the basic requirement
of Article 1(e) that they are "subsidies contingent upon export performance".  However, neither the
wording of Article 9.1, Article 10 nor Article 1(e) explicitly indicates which of the Article 9.1
limitations are no longer valid under Article 10.1.  The guidance that can be derived from Article 9.1,
as part of the context of Article 1(e) and Article 10.1, is that Article 10.1 must  include certain
payments-in-kind and producer-financed schemes which do not fully meet all elements under,
respectively, Article 9.1(a) or Article 9.1(c).  In this respect, it could, for example, be argued that
where Article 9.1(a) addresses the provision by governments or their agencies of "direct subsidies,
including payments-in-kind" contingent on export performance, Article 10.1 can be presumed to
cover the indirect version of such subsidies.
7.126  We find further guidance to interpret the meaning of a subsidy contingent upon export
performance for the purposes of Article 1(e) and Article 10.1, inter alia , in the SCM Agreement
which is, we consider, part of the general context of Article 1(e) and Article 10.1.  Article 1 of the
SCM Agreement, for example, includes as a subsidy "any form of income or price support in the
sense of Article XVI of GATT 1994" whereby a benefit is conferred.  However, since in this case we
need to interpret the meaning of certain "export su bsidies", we consider it more appropriate, without
prejudice to the scope of Article 10.1, to examine what practices are considered under the SCMAgreement to be "export subsidies", rather than  to examine how that Agreement defines the more
general concept of a "subsidy" in its Article 1.  Annex I to the SCM Agreement - the Illustrative List
of Export Subsidies - identifies practices which are, under Article 3 of the SCM Agreement,
                                                     
495 Emphasis added.
496 With reference to para. 7.41 and footnote 453, to the extent that the US claims also cover any of the milk classes other than
Classes 5(d) and (e), we note that all of these other milk clas ses can also (often exclusively) be accessed by processors which  produce for the
domestic market.  Nothing offered under these other milk classes is thus "contingent upon export performance".  We therefore fi nd that these
other milk classes do not involve an export subsidy in the sense of Article 10.1.WT/DS103/R
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"subsidies contingent, in law or in fact, whether so lely or as one of several other conditions, upon export
performance".  Both complainants invoke Paragraph (d ) of the Illustrative List which provides that the
following action is an "export subsidy" for purposes of the SCM Agreement:
"The provision by governments or their agencies either directly or
indirectly through government-mandated schemes, of imported ordomestic products or services for use in the production of exported
goods, on terms or conditions more favourable than for provision of
like or directly  competitive products or services for use in the
production of goods for domestic consumption, if (in the case of
products) such terms or conditions are more favourable than those
commercially available on world markets to their exporters".
A footnote added to the term "commercially available" states:
"The term 'commercially available' means that the choice between
domestic and imported products is unrestricted and depends only on
commercial considerations".
7.127  Given that Paragraph (d) deals with the provision of products at different prices for, on the
one hand, use in the production of exported goods  and, on the other hand, use in the production of
goods for domestic consumption , we agree with the parties that Paragraph (d) under the Illustrative
List is the most relevant one to this case.  We next examine whether the provision of milk at a lower
price for export under Classes 5(d) and (e) falls within the scope of Paragraph (d).
7.128  In our view, Paragraph (d), applied to the facts of this case, requires the presence of three
elements:
(a) the provision of "imported or domestic products … for use in the production
of exported goods, on terms or conditions more favourable than for provision
of like or directly competitive products … for use in the production of goods
for domestic consumption";
(b) such provision of products for use in the production of exported goods is
provided "by governments or their agencies either directly or indirectly
through government-mandated schemes";  and
(c) the more favourable terms or conditions for such products for use in the
production of exported goods are al so "more favourable than those
commercially available on world markets to their exporters"; these terms or
conditions will only not be more favourable than those commercially available
on world markets when the choice to be made by processors/exporters between
buying either domestic products or imported products "is unrestricted and
depends only on commercial considerations".
7.129  As to the first element under Paragraph (d), it is undisputed that through Classes 5(d) and (e)
domestically produced milk is provided for use in the production of exported goods (processed dairyproducts) on terms and conditions more favourable than for provision of the same domestically
produced milk for use in the production of dairy products for domestic consumption.
497  As we found
                                                     
497 See Table 3 in para. 2.51.WT/DS103/R
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earlier, the price differential between milk for use in exports and milk for use on the domestic market
is significant.498  We thus find that the first element under Paragraph (d) is met.
7.130  Examining the second element under Paragraph (d), we recall our analysis under
Article 9.1(a) on the basis of which we found that under Classes 5(d) and (e) milk for export at a
discounted price is "provided by" Canada's "governments or their agencies".499  E v e n  i f  w e  w o u l d
have found that such lower priced milk is not "provided by" Canada's "governments or their agencies"
– something we could assume here given that our examination under Article 10.1 is one in the
alternative, i.e., on the assumption that the scheme is not an Article 9.1(a) export subsidy - we still
consider that the evidence of record, outlined in paragraphs 7.68 to 7.85, is conclusive for us to find
that such milk is, nevertheless, "provided by" Canada's "governments or their agencies either directly
or indirectly through government-mandated schemes "500 in the sense of Paragraph (d).  Indeed, in the
event milk were not directly provided by Canada's governments or their agencies under Classes 5(d) and
(e), in our view, it is at least indirectly provided through government-mandated schemes.  For there to be
such schemes we do not consider it necessary, as argued by Canada, that the federal or provincial
governments specifically direct a certain outcome or course of action to be achieved or taken by the
CDC, the provincial marketing boards or the CMSMC.   In our view, the ordinary meaning of the term
"government-mandated" scheme – in its immediate context of products being provided " indirectly
through government-mandated schemes" – also includes the delegation of authority by the governmentto its agencies which, in turn, set up a "government-mandated" scheme.
501  We thus find that in this case
the second element under Paragraph (d) is met.
7.131  Finally, referring to the third element under Paragraph (d), we recall our examination of
whether or not the provision of milk to processors/exporters under Classes 5(d) and (e) confers a
benefit to these processors/exporters, in such a way that one can conclude that a payment in kind is
made to them in the sense of Article 9.1(a).502  We recall, in particular, those paragraphs where we
applied the benchmark of whether processors/exporters can access milk, or for that matter milk
derivatives, from any other source - in particular the world market - on terms and conditions equally
favourable to those offered under Classes 5(d) and (e).503  There we found that " the provision of milk
to processors/exporters under Classes 5(d) and (e) at a price significantly lower than the domestic milkprice … and on terms and conditions which are more favourable than those under any other alternative
source, including under the Import for Re-Export Program  … - confers a "benefit" … to these
processors/exporters and, for that reason, constitutes a payment in kind – namely, the provision of agood at a discounted price - in the sense of Article 9.1(a)".
504  Even if we had found that Classes 5(d)
and (e) do not involve the payment in kind referred to in Article 9.1(a) - something we could assume
here given that our examination under Article 10.1 is one in the alternative, i.e., on the assumption
that the scheme is not an Article 9.1(a) export subsidy - we nevertheless consider that the evidence of
record is conclusive for us to find that the provision of milk under Classes 5(d) and (e) is made on
"terms or conditions … more favourable than thos e commercially available on world markets" in the
sense of Paragraph (d).  We refer, in particular, to paragraphs 7.52 to 7.56 which, in our view, provide
sufficient proof that the choice to be made by processors/exporters between accessing milk under
Classes 5(d) or (e) and sourcing milk, or for that matter milk derivatives – in the event these milk
                                                     
498 See para. 7.50.
499 See paras. 7.63-7.86.
500 Emphasis added.
501 The New Shorter Oxford English Dictionary  (Ed. Brown, L., Clarendon Press, Oxford, Volume 1, p. 1683) defines "mandate"
as follows:  "1. Command, require by mandate; necessitate … 4. Give a mandate to, delegate authority to (a representative, grou p,
organization, etc.)".
502 See paras. 7.46 ff.
503 See paras. 7.49-7.58.
504 Para. 7.58, emphasis added.WT/DS103/R
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derivatives could be considered to be directly competitive with fluid milk (an issue which is in
dispute505) and assuming that the availability of a directly competitive product is relevant in cases
where the like product is not available – is not a choice which is "unrestricted and depends only on
commercial considerations" in the sense of the footnote  to Paragraph (d).  We recall, in particular, the
discretion granted to the Minister of Foreign Affairs and International Trade who has to issue a permitfor imports to be allowed
506; the fact that to date commercial imports of fluid milk cannot, for all
practical purposes, enter Canada507;  and the figures submitted to us which indicate – albeit in general
terms only -  that under Classes 5(d) and (e) milk can be sourced on more favourable terms and
conditions than under, e.g., the Import for Re-Export Program, an indication reflected also in theoverwhelming preference of processors/exporters for milk under Classes 5(d) and (e).
508
7.132  For the above reasons509, we find that Classes 5(d) and (e) involve an export subsidy as listed
in Paragraph (d) of the Illustrative List of Export Subsidies annexed to the SCM Agreement.  We do
not consider it necessary in this case to decide whether the fact that a scheme involves an export
subsidy under the SCM Agreement necessarily means that it also constitutes an export subsidy under
Article 1(e) of the Agreement on Agriculture.  We are not called upon – and do not intend here – todecide whether the scope of the concept of export subsidy under the SCM Agreement is the same as,
or different than, that under the Agreement on Agriculture.  We do find, however, that in the
circumstances of this case and on the grounds outlined above
510, Classes 5(d) and (e) – assuming, in
the alternative, that they do not constitute an export subsidy as listed in either Article 9.1(a) or
Article 9.1(c) – nevertheless involve an "other" export subsidy in the sense of Article 10.1.
7.133  Given our finding in the previous paragraph and recalling:  (i) our consideration above that
granting export subsidies "other" than those listed in Article 9.1 in excess of the relevant reduction
commitment level for the subsidized product concerned, is sufficient to conclude that Article 10.1 is
violated511; and (ii) the fact that for all of the dairy products in dispute and this during both marketing
years at issue, the total amount of exports genera ted through Classes 5(d) and (e) does exceed Canada's
reduction commitment levels, we find that Canada – in the alternative, i.e., only in the event Classes 5(d)
and (e) do not involve export subsidies as listed in  either Article 9.1(a) or Article 9.1(c) – has acted
inconsistently with its obligations under Article 10.1 w ith respect to all three dairy products at issue and
during both marketing years in dispute.
9. Article 8 of the Agreement on Agriculture
7.134  Recalling that Article 8 of the Agreement on Agriculture provides that "[e]ach Member
undertakes not to provide export subsidies otherwis e than in conformity with this Agreement", we
also find that as a consequence of the violations of either Article 3.3 (through Article 9.1) or
Article 10.1 we found earlier512, Canada has acted inconsistently with its obligations under Article 8.
                                                     
505 See para. 7.55.
506 See para. 7.53.
507 See para. 7.54.
508 See para. 7.56.
509 See paras. 7.129-7.131.
510 See paras. 7.124-7.131.
511 See para. 7.122.
512 See, respectively, in paras. 7.116 and 7.133.WT/DS103/R
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10. Article 3 of the SCM Agreement
7.135  The United States also claims that the provision of milk under Classes 5(d) and (e) is
inconsistent with Canada's obligations under Article 3 of the SCM Agreement which contains, inter
alia, a general prohibition on export subsidies.
7.136  We have found that the Canadian scheme is inconsistent with:  (i) Canada's obligations under
both Article 3.3 and Article 8 (through Article 9.1(a) and Article 9.1(c))513; or (ii) in the alternative,
Canada's obligations under both Article 10.1 and Article 8514, of the Agreement on Agriculture.
Therefore, the exemption provided for in Article 13(c)(i) of the Agreement on Agriculture from
actions under Article 3 of the SCM Agreement for "export subsidies that conform fully to the
provisions of Part V" of the Agreement on Agriculture , does not apply.  In principle, the scheme could
therefore also be subjected to an examination under Article 3 of the SCM Agreement.
7.137  Article 3 is identified in the US request for this Panel and could thus, in principle, be
presumed to fall within the Panel's terms of reference.515  The question then arises whether we could
and, as the case may be, should apply the principle of judicial economy and decide not to examine the
US claim under Article 3.  We recall the Appellate Body's statement in Australia – Salmon , quoted
earlier516, which provides the most recent statement on when judicial economy can be exercised.
7.138  We note, firstly, that although the United States extensively referred to the SCM Agreement
as context  of its claims under the Agreement on Agriculture, the US arguments on its claim  under
Article 3 of the SCM Agreement are minimal.517  The US' only argument under Article 3 is effectively
that because Canada violated its export subsidy commitments under the Agreement on Agriculture, it
thereby automatically violates its obligations under Article 3 of the SCM Agreement.518
7.139  Secondly, we note that Article 4 of the SCM Agreement (entitled "Remedies") provides for
"special or additional rules and procedures on dispute settlement" (as referred to in Article 1.2 of the
DSU) in respect of claims made under Article 3.  Article 4 sets out rights and obligations which may
benefit either party to a dispute.  It obliges panels to give recommendations that differ from those
generally made under the DSU, a right which may be beneficial to complaining parties. Pursuant to
Article 4.7, a panel has to  recommend to the DSB that the subsidy be withdrawn without delay and
has to  specify the time-period allowed for such withdrawal.  However, Article 4 also requires, in
paragraph 2, that a request for consultations "include a statement of available evidence with regard to
the existence and nature of the subsidy in question", a provision which may work to the advantage of
the defending party.  The same is true, in our view, in respect of Article 4.5 which states that "[u]pon
its establishment, the panel may request the assistance of the Permanent Group of Experts … with
                                                     
513 See paras. 7.116 and 7.134.
514 See paras. 7.133 and 7.134.
515 The question arises, however, whether we can examine the Article 3 claim at all (even though Article  3 is mentioned in the
US Panel request) given that in the US request for consultations and for establishment of this Panel, the United States only in voked - as a
legal basis for consultations and a Panel on its SCM claim - Article 30 of the SCM Agreement, i.e., the general provision on "D ispute
Settlement" (together with Articles 4 and 6 of the DSU), and not the more specific Article 4 of the SCM Agreement which sets out certain
special and additional dispute settlement procedures for cases involving prohibited subsidies.  We note that - given the multip le claims
submitted in this dispute (both under the Agreement on Agriculture and the SCM Agreement) - the United States could, for exampl e, have
invoked Article 4 as a legal basis to obtain recommendations with respect to its Article 3 claim, while at the same time waive its right to,
inter alia , those elements of the accelerated procedure under Article 4 that are at odds with the usual timetable applicable under the DS U.
However, as further discussed below, we do not consider it necessary to answer these questions in this case.
516 See para. 7.119.
517 The only US argument is, indeed:  "Consequently, these export subsidies are also inconsistent with Canada's obligations under
Article 3 of the SCM Agreement" (US first submission, para. 125).
518 In this respect, we note, however, that as opposed to our examination of this dispute under the Agreement on Agriculture
(where Canada was found to bear the burden of proof, see para. 7.34), under Article 3 of the SCM Agreement, the usual rules on burden of
proof apply.WT/DS103/R
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regard to whether the measure in question is a prohibited subsidy".  Article 4 also imposes a time-
frame that is stricter than the usual DSU time-frame for the settlement of disputes.  These shorter time
periods may also be advantageous to defending parties in that their situation will need to be clarified
more rapidly.
7.140  However, in this case the United States never invoked or even referred to the rules and
procedures contained in Article 4.  It did not do so in its request for consultations, in its request for a
panel or in any of its submissions before the Panel, nor did it at any stage in this dispute pursue the
matter within the framework of Article 4.  Given that the United States – and, as a result, also Canada
and the Panel - did not at any point proceed under Article 4, we consider it inappropriate at this stage -
given also our earlier findings of violation of the Agreement on Agriculture - to further pursue the US
claim under Article 3.
7.141  On the grounds set out above519, and in view of the particular circumstances of this case, we
thus conclude that we should apply the principle of judicial economy and, therefore, do not examine
Article 3 of the SCM Agreement.
C. THE TARIFF-RATE QUOTA FOR FLUID MILK
1. Facts and claims of the parties
7.142  In Part I of Canada's Schedule to GATT 1994, Canada established a tariff-rate quota for fluid
milk (HS 0401.10.10 and 0401.20.10) of 64,500 tonnes.  In-quota imports are subject, initially, to a
maximum duty of 17.5 per cent (a rate to be decreased to 7.5 per cent in 2001).  Fluid milk imports
outside of the 64,500 tonnes tariff-rate quota bear an initial rate of duty equal to 283.8 per cent,
declining to 241.3 per cent in 2001.  In its Schedule, Canada specified under "Other terms and
conditions" that "[t]his quantity [64,500 tonnes] represents the estimated annual cross-borderpurchases imported by Canadian consumers".
7.143  Referring to its Schedule, Canada currently restricts access to the tariff-rate quota to cross
border imports by Canadians of consumer packaged milk for personal use, valued at less than C$20
per entry.  Such imports are made under the authority of the General Import Permit No.1 issued under
the Export and Import Permits Act.  For such imports, no individual permits are required and no dutyis being imposed, not even the in-quota duty.  Moreover, the quantity of these imports is not
monitored so that it is not known whether the tariff-rate quota is actually filled or not, or exceeded.
Commercial shipments of milk are not allowed under the tariff-rate quota.
7.144  The United States claims that by confining the scope of fluid milk entries that are eligible
under the tariff-rate quota to cross border imports by Canadians of consumer packaged milk forpersonal use valued at less than C$20 per entry, Canada grants imports of fluid milk treatment less
favourable than that provided for in Canada's Schedule and, thus, acts inconsistently with its
obligations under Article II:1(b) of GATT 1994. The United States further claims that because Canada
administers the tariff-rate quota through a general permit restricting any single import entry to a value
of C$20 and subjects such entries to a personal use restriction, Canada’s licensing procedures
introduce additional trade impediments that are inconsistent with its obligations under Article 3 of the
Agreement on Import Licensing Procedures ("the Licensing Agreement").
7.145  Canada responds that the limited access to the tariff-rate quota is provided for in its Schedule,
read in light of its negotiating history, and that, accordingly, Article II:1(b) of GATT 1994 is
complied with.  Canada argues that since no restrictions are placed on imports that are additional to
                                                     
519 See paras. 7.138-7.140.WT/DS103/R
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the terms and conditions incorporated in Canada's Schedule, Canada's import regime is in complete
compliance with the Licensing Agreement.
2. Article II:1(b) of GATT 1994
7.146  Article II:1(b) of GATT 1994 provides:
"The products described in Part I of the Schedule relating to any
contracting party, which are the products of territories of other
contracting parties, shall, on their importation into the territory to
which the Schedule relates, and subject to the terms, conditions or
qualifications set forth in that Schedule, be exempt from ordinary
customs duties in excess of those set forth and provided therein".520
This provision needs to be read in the context of Article II:1(a) of GATT 1994 which states:
"Each contracting party shall accord to the commerce of the other
contracting parties treatment no less favourable than that provided for
in the appropriate Part of the appropriate Schedule annexed to this
Agreement".521
7.147  The 64,500 tonnes tariff-rate quota established in Part I of Canada's Schedule can thus only be
subject to the 17.5 per cent (in 2001, 7.5 per cent) duty rate set out in Canada's Schedule.  Any other
"terms, conditions or qualifications" with respect to the access to this tariff-rate quota need to be set
forth in Canada's Schedule.  In this dispute, two "conditions" effectively imposed by Canada are at
issue:
(a) the fact that only consumer packaged milk for personal use can fall within the
tariff-rate quota;  and
(b) the fact that only entries valued at less than C$20 qualify for the tariff-rate
quota.
7.148  The only "terms, conditions or qualifications" set forth in Canada's Schedule are contained in
the following phrase, mentioned under "Other term s and conditions", next to the quota quantity of
64,500 tonnes:
"This quantity represents the estimated annual cross-border purchases
imported by Canadian consumers".
If we were to find that this phrase does not include the two conditions currently imposed by Canada,
Canada would be in violation of Article II:1(b).  Our finding on the US claim of violation ofArticle II:1(b) thus depends on the interpretation we give to this phrase.
7.149  On the interpretation of a particular term in a Member's Schedule, the Appellate Body in its
report on European  Communities – Customs Classification of Certain Computer Equipment , stated as
follows:
"84. … Tariff concessions provided for in a Member's Schedule -
the interpretation of which is at issue here - are reciprocal and result
                                                     
520 Underlining added.
521 Underlining added.WT/DS103/R
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from a mutually-advantageous negotiation between importing and
exporting Members.  A Schedule is made an integral part of the
GATT 1994 by Article II:7 of the GATT 1994.  Therefore, the
concessions provided for in that Schedule are part of the terms of the
treaty.  As such, the only rules which may be applied in interpreting
the meaning of a concession are the general rules of treaty
interpretation set out in the Vienna Convention .
85. Pursuant to Article 31(1) of the Vienna Convention , the
meaning of a term of a treaty is to  be determined in accordance with
the ordinary meaning to be given to this term in its context and in the
light of the object and purpose of the treaty [the Appellate Body then
quotes Articles 31(2) to (4)].
86. The application of these rules in Article 31 of the Vienna
Convention  will usually allow a treaty interpreter to establish the
meaning of a term.  However, if after applying Article 31 the
meaning of the term remains ambiguous or obscure, or leads to a
result which is manifestly absurd or unreasonable, Article 32 allows atreaty interpreter to have recourse to:
... supplementary means of interpretation, including
the preparatory work of the treaty and the
circumstances of its conclusion.
With regard to "the circumstances of [the] conclusion" of a treaty,
this permits, in appropriate cases, the examination of the historical
background against which the treaty was negotiated".
522
7.150  Accordingly, we need to examine first the ordina ry meaning to be given to the relevant terms
in Canada's Schedule in their context and in the light of the object and purpose of GATT 1994.
7.151  The phrase "[t]his quantity represents the estimated annual cross-border purchases imported
by Canadian consumers" is mentioned under the h eading "Other terms and conditions", next to the
quota quantity.  Even though one can thus presume that this phrase includes certain "terms and
conditions" related to the tariff-rate quota, we find it difficult to read specific access restrictions into
this phrase.  The words "[t]his quantity  represents  the estimated  annual …"523 are, in our view,
introducing "terms" related to the quantity  of the quota – i.e., describing the way the size of the quota
was determined – rather than setting out "conditions" as to the kind of imports qualified to enter
Canada under this quota.  In particular, the ordinary meaning of the word "represent" in this context
does not, in our view, call to mind the setting out of specific restrictions or conditions.524
7.152  Even if the phrase could be said to include restrictions on access to the tariff-rate quota, we do
not see how the two conditions at issue in this dispute  could be read into this phrase.  First, the
restriction that only entries valued at less than  C$20 qualify for the tariff-rate quota can nowhere be
found in Canada's Schedule.  Nowhere is any reference made to a maximum value per entry.  Second,
                                                     
522 Adopted on 5 June 1998, WT/DS62/AB/R, paras. 84-86, underlining added.
523 Emphasis added.
524 The New Shorter Oxford English Dictionary , for example, defines "represent", as used in this context, as:  "1.  Bring into the
presence of someone or something … 2.  Bring clearly and distinctly to mind, esp. by description or imagination … 5.  … b. Of a  quantity:
indicate or imply (another quantity) …" (Ed. Brown, L., Clarendon Press, Oxford, Volume 2, p. 2552).WT/DS103/R
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the requirement that only consumer packaged milk for personal use can fall within the tariff-rate
quota, could only be referred to in the words "cross-border purchases imported by Canadian
consumers".  One could interpret these terms as restricting access to Canadians only (as opposed to,
e.g., US citizens or residents) who make cross-bor der purchases.  However, in our view, the ordinary
meaning of the words "cross-border purchases" by "c onsumers" in this context does not warrant the
conclusion that only consumer packaged  milk for personal use  can enter under the tariff-rate quota.
An imported good, by definition, crosses a border.  Also, the dictionary meaning of "consumer" is not
restricted to a person buying for personal use in small retail packages .  All dictionary definitions of
"consumer" referred to by the parties include wider definitions without these restrictions.525
7.153  We find support for our view that the two access restrictions at issue here are not set forth in
Canada's Schedule when comparing the phrase in dispute to other "terms and conditions" specified in
Canada's Schedule, in particular those in the field of milk and dairy products which are part of theimmediate context of the phrase we need to interpre t.  With respect to the tariff-rate quota for cream,
under "Other terms and conditions", the far more  precise and mandatory phrase "sterilized cream,
minimum 24 per cent butterfat, in cans of a volume not exceeding 200 ml" is added.  For the tariff-
rate quotas established for yoghurt and ice cream, the following is added:  "access for yoghurt [ice
cream] in retail sized containers only".  No such restrictive language can be found in the phrase atissue here.
7.154  In this respect, we also refer to the object and purpose of Article II of GATT 1994, namely "to
preserve the value of tariff concessions negotiated by a Member with its trading partners, and bound in
that Member's Schedule.  Once a tariff concession is agreed and bound in a Member's Schedule, a
reduction in its value by the imposition of duties in  excess of the bound tariff rate would upset the
balance of concessions among Members"
526; as well as to the object and purpose of the WTO
Agreement, generally, and of GATT 1994, namely "the security and predictability of the reciprocal
and mutually advantageous arrangements directed to the substantial reduction of tariffs and other
barriers to trade".527  We cannot read the access restrictions imposed by Canada in its current
Schedule. The principles of security and predictability, as well as those of treaty interpretation, do not"condone the imputation into a treaty of words that are not there or the importation into a treaty of
concepts that are not intended".
528
7.155  On these grounds, we consider that the meaning of the terms at issue can be established by
examining their ordinary meaning in their context and in the light of the object and purpose of GATT
1994.  In accordance with the rules of treaty interpretation referred to above529, we see no need to also
examine the historical background against which these terms were negotiated.  We do note, however,
that the drafting history of the relevant part of Canada's Schedule is inconclusive, possibly supporting
both the view of Canada and that of the United States.530
                                                     
525 The New Shorter Oxford English Dictionary , for example, defines "consumer" as "1. A person who or thing which squanders,
destroys, or uses up.  2. A user of an article or commodity, a buyer of goods or services.  Opp. producer " (Ed. Brown, L., Clarendon Press,
Oxford, Volume 1, p. 490).  The Black's Law Dictionary , referred to by Canada, defines "consumer" as:  "Individuals who purchase, use,
maintain, and dispose of products and services … Consumers are to be distinguished from manufacturers (who produce goods) andwholesalers and retailers (who sell goods).  A buyer (other than  for the purpose of resale) of any consumer product” (West Publ ishing Co.,
Minneapolis Minn., 1990).
526 Appellate Body report on Argentina – Measures Affecting Imports of Footwear, Textiles, Apparel, and Other Items , adopted
on 27 March 1998, WT/DS56/AB/R, para. 47.
527 Appellate Body report on European Communities – Customs Classification of Certain Computer Equipment , op. cit., para. 82.
528 Appellate Body report on India – Patent Protection for Pharmaceutical and Agricultural Chemicals , adopted on 19 December
1997, WT/DS50/AB/R, para. 45.
529 See para. 7.149.
530 No agreement between Canada and the United States as to whether or not the phrase in dispute includes the two access
restrictions imposed by Canada, can be derived from the drafting history.  Canada argues that during the Uruguay Round negotiat ions itWT/DS103/R
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7.156  We, therefore, find that Canada, by restricting the access to the tariff-rate quota for fluid milk
to (i) consumer packaged milk for personal use and (ii) entries valued at less than C$20, acts
inconsistently with its obligations under Article II:1(b) of GATT 1994.
3. The Licensing Agreement
7.157  Since we have found above that the two access restrictions imposed by Canada with respect to
its tariff-rate quota for fluid milk are contrary to Canada's obligations under Article II:1(b) of GATT
1994, we see no need to examine whether in so doing Canada also violates Article 3 of the Licensing
Agreement.
                                                                                                                                                                    
clearly indicated to the United States that "it intended to continue its access for US milk imported by Canadian consumers whil e non-
consumer utilisation would continue to be blocked until equivalency was established" (Canada's oral statement at our second sub stantive
meeting, para. 129).  The United States, on the other hand, submits that the phrase at issue was added to clarify that the tari ff-rate quota was
a continuation of "current access" opportunities already available before the Uruguay Round negotiations; not a phrase limiting  access to the
quota as such.  In so doing, the United States argues, Canada avoided granting the "minimum access opportunities" for products for which
there are no significant imports (ranging from 3 to 5 per cent of domestic consumption) refered to in the Agreement on Modaliti es for the
Establishment of Specific Binding Commitments under the Reform Program (MTN.TNC/W/FA, p. L.19, 20 December 1991).WT/DS103/R
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VIII.  CONCLUSIONS
8.1 In the light of the above findings we conclude that Canada:
(a) through Special Milk Classes 5(d) and (e) - and this for all of the dairy products in
dispute (butter, cheese and "other milk products") and for both marketing years at
issue (1995/1996 and 1996/1997) - has acted inconsistently with its obligations underArticle 3.3 and Article 8 of the Agreement on Agriculture by providing export
subsidies as listed in Article 9.1(a) and Article 9.1(c) of that Agreement in excess of
the quantity commitment levels specified in Canada's Schedule;  and
(b) by restricting the access to the tariff-rate quota for fluid milk to (i) consumer
packaged milk for personal use and (ii) entries valued at less than C$20, acts
inconsistently with its obligations under Article II:1(b) of GATT 1994.
8.2 Since Article 3.8 of the DSU provides that "[i]n cases where there is an infringement of the
obligations assumed under a covered agreement [including the Agreement on Agriculture and GATT
1994], the action is considered prima facie  to constitute a case of nullification or impairment", we
conclude that - to the extent Canada has acted inc onsistently with its obligations under the Agreement
on Agriculture and GATT 1994 - it has nullified or impaired benefits accruing to New Zealand and the
United States under these Agreements.
8.3 We recommend  that the Dispute Settlement Body requests Canada:  (i) to bring its dairy
products marketing regime into conformity with its obligations in respect of export subsidies under the
Agreement on Agriculture
531;  and (ii) to bring its tariff-rate quota for fluid milk into conformity with
GATT 1994.
__________
                                                     
531 In this respect, we recall our  findings under Article 10.1 and Article 8 of the Agreement on Agriculture (paras. 7.117-7.134).