Inside US Trade | January 4, 2002
The continuing fight over a Canadian dairy program in the World Trade Organization has raised new issues on the definition of export subsidies that could potentially give countries more leeway under current rules to support export sales that are below the domestic price. It also highlights a short-coming of the World Trade Organization dispute settlement rules that do not allow an Appellate Body to remand a decision to a panel.
At issue is the Canadian dairy program, which sets up a higher price for milk used domestically than for milk processed for dairy product exports, in what the U.S. and New Zealand claim is a violation of Canada's export subsidy disciplines.
In the latest stage of the WTO dispute, parties are fighting over a new benchmark used by the Appellate Body to determine if a program bestows an export subsidy and for assessing if there is government involvement. The new benchmark was set in a Dec. 3 decision by the Appellate Body, which overturned a panel's compliance review under Article 21.5 of the Dispute Settlement Understanding.
The Appellate Body ruled that it did not have sufficient facts before it to judge whether the Canadian system continued to subsidize exports. The ruling would let the system stand without giving it the seal of approval.
As a result of the Appellate Body's decision, the U.S. and New Zealand have requested a new Article 21.5 review since the DSU does not allow a remand to a panel. That panel was established in a Dec. 18 meeting of the Dispute Settlement Body where Canada complained that the move potentially created an endless loop of litigation and raised issues of double jeopardy. Nevertheless, Canada did not block the establishment of the panel.
The outcome of a new review, and possible return to the Appellate Body, will have an impact on future agriculture negotiations. If the panel finds Canada is violating its WTO obligations, any plans by the European Union and others to emulate such a program would be seen as contrary to the negotiations' aim of eliminating export subsidies, industry sources said.
If the panel were to rule in Canada's favor, the U.S. and others would likely want to clarify existing rules on export subsidies to prevent their circumvention by such programs, industry sources said.
The Appellate Body set a new benchmark for determining whether exports are subsidized, which the U.S. and New Zealand oppose. The Appellate Body said that the payments to Canadian dairy farmers must be compared to their cost of production, not the domestic price for milk. This benchmark would be more difficult to calculate in non-market economies like China, one source said.
A second issue centers on whether the Canadian system is based on government actions, or whether the freedom of Canadian dairy farmers not to produce for export prevents the system from being considered an export subsidy.
Lastly, the Appellate Body report raises questions about whether countries' domestic support measures can spill over and "erode" countries' export subsidy commitments.
Under Canada's program, dairy farmers are allotted a quota of milk to sell for the domestic market at an inflated, administered price. They can sell excess production under a separate class for milk--commercial export milk--to companies who process it for export.
In the panel proceedings, Canada argued these sales were commercial and unsubsidized and conducted without government interference. The U.S. and New Zealand argued that the government intervention subsidized the milk for export, which was sold at a lower price than the domestic milk.
The Appellate Body said that to judge the U.S.-New Zealand claim, a comparison would have to be made between the price of the milk for export and the cost of production for Canadian dairy farmers. Comparison to world prices would not reveal a subsidy, because Canada's cost of production could be higher than world prices, the Appellate Body said. At the same time, comparison to the domestic price also did not necessarily show a subsidy as the U.S. and New Zealand argued, according to the Appellate Body.
Because the domestic milk price in Canada is administered and is above market rates, a comparison with the lower price given for milk for export would show a difference but not necessarily reveal a subsidy, according to the Appellate Body. But the Appellate Body said it did not have sufficient facts before it to fully analyze whether a comparison with the cost of production revealed that the exports were subsidized. It noted however that this was not a finding that the dairy program was consistent with WTO rules.
At the Dec. 18 DSB meeting, the U.S. noted that cost of production was not a benchmark in the agriculture agreement for finding whether there was a subsidy. The U.S. questioned why the Appellate Body rejected the use of market prices as an indicator of the existence of a subsidy, and why considerations of profit, in addition to cost of production, should not be factored in.
The U.S. also noted this contradicted the original Appellate Body ruling against Canada's dairy program, which used the test of whether prices were below domestic prices to determine the existence of an export subsidy.
Both New Zealand and Australia also criticized the new benchmark set by the Appellate Body. New Zealand said that the new benchmark should only apply when the payment is made by an independent operator, not the government itself, and when the domestic price is administered and not a market rate.
New Zealand's remarks to the DSB also noted that in pursuing a second compliance review it would take note of the new standard set by the Appellate Body as well as the earlier comparison to market rates. Canada's new dairy program would fail either test, New Zealand alleged.
U.S. industry sources said that a comparison between the domestic price and the cost of production would likely yield less of a subsidy than a comparison with the domestic, administered price. Nevertheless, they argued that any finding of subsidy would still put Canada in violation of its quantitative limit on export subsidies for cheese--the product at the commercial heart of the case--, which is set at 9000 tons.
The EU, which defended Canada's program as a third party in the dispute, also questioned the benchmark set by the Appellate Body, telling the DSB it failed to see any legal foundation for the new criteria and questioned how it would operate in practice.
But the EU did say it agreed with the Appellate Body when it questioned the panel ruling that Canadian dairy farmers were "obliged" or "driven" to provide subsidized milk for export. The Appellate Body agreed that the Canadian system prevented the cheaper milk for export from being diverted to the domestic market, but said it did not "see how producers are obliged or driven to produce additional milk for export sale."
"[E]ach producer is free to decide whether or not to produce additional milk for sale as CEM [Commercial Export Milk]. Furthermore. the majority of Canadian milk producers choose not to sell CEM. For these reasons, we disagree with the Panel's characterization of the measure as 'obliging producers, at least de facto, to sell outside-quota mil for export,'" the Appellate Body wrote.
The U.S. said Appellate Body had confused the two questions--whether dairy farmers are obliged to produce milk over their domestic quota or whether the milk they do produce over quota can only be sold for export. There was no dispute that milk above the quota for domestic sales could be sold only for export, the U.S. said. The issue centers on the WTO requirement that for an export subsidy to be found, there must be a government hand in subsidizing the milk for export.
The Appellate Body decision also reined in the panel's ruling that potentially blurred the distinction between export subsidies and domestic support, but noted that there was the possibility of a spillover between the two.
"We believe that it would erode the distinction between the domestic support and export subsidies disciplines of the Agreement on Agriculture if WTO-consistent domestic support measures were automatically characterized as export subsidies because they produced spill-over economic benefits for export production," the Appellate Body wrote. It noted that a comparison between administered domestic prices and export prices as a tool for determining whether exports were subsidized tended to collapse the distinction between the two categories.
The EU highlighted the distinction the Appellate Body drew between export subsidy and domestic support disciplines. But New Zealand and Australia seized on another aspect of the Appellate Body ruling that highlighted the potential for domestic support programs "eroding" domestic support disciplines.
By comparing prices with the cost-of production, " the potential for WTO Members to export their agricultural production is preserved, provided that any export-destined sales by a producer at below the total cost of production are not financed by virtue of governmental action. The export subsidy disciplines of the Agreement on Agriculture will also be maintained without erosion," the Appellate Body said.
New Zealand's reading of the Appellate Body's ruling in this respect, as a caution to countries with administered pricing systems that they could be potentially in violation of export subsidy disciplines.
The U.S. was silent on this subject at the Dec. 18 DSB meeting. An overly broad ruling on the impact of domestic support measures on export subsidy commitments could potentially implicate some of its own programs, such the peanut program, sources said.
The Appellate Body's failure to rule because of the absence of sufficient facts highlighted the need for giving it the possibility of a remand for decisions to panels, New Zealand said. This issue should be taken up in the review of the Dispute Settlement Understanding mandated in the Doha declaration, New Zealand said. Because of the absence of remand procedures, New Zealand was forced to seek a second compliance review under Article 21.5.
Canada, by contrast, argued that this second recourse to a compliance review by New Zealand and the U.S. created an endless loop of litigation under which an issue is never definitively resolved. It said that allowing this "double jeopardy" in the dispute settlement process was a serious flaw that needed to be corrected. Canada said that the Appellate Body ruling showed its dairy program was in full conformity with WTO rules but that endless litigation created commercial uncertainty that was harmful to Canada's interests.Inside US Trade:
