On July 14,1995, the U.S. Trade Representative's office (USTR) requested a dispute resolution panel to hear a complaint under Chapter 20 of the North American Free Trade Agreement (NAFTA). At issue is whether NAFTA or the World Trade Organization (WTO) rules will pertain in trade disputes over protective measures.

The U.S. contends that under NAFTA Article 302, Canada has no right to protect its barley, egg, poultry and dairy producers from U.S. exports through new or higher tariffs that make imports prohibitively expensive. The tariffs now range from 182 percent on turkey to 351 percent on butter products.1

Canada has responded that its protections of those commodities are sanctioned under Article 11 of the General Agreement on Tariffs and Trade (GATT), and hence under its successor, the World Trade Organization (WTO). The WTO obliges Canada, the U.S. and all other signatories to convert import quotas and other non-tariff trade barriers to tariffs. Canada argues that when the U.S. signed GATT, it agreed to the continued use of tariffs - albeit at reduce rates in aggregate, not to their elimination.2

Stakes and Expectations

The stakes in this dispute exceed the sectoral interests of producers and go to the heart of the relation between the WTO and regional trade agreements. Canadian dairy, poultry, egg and barley products do not compete with the U.S. for export markets and the Canadian market is a relatively small one. The U.S. appears to be targetting these commodity subsidies less for economic reasons than for the legal reason of setting a precedent in which NAFTA overrules the WTO.

However, since more than half of Canada's 1994 agri-food exports went to the U.S. and three-fifths of its agri-food imports came from the U.S., Canada is vulnerable to unilateral U.S. trade retaliation, should the NAFTA panel not rule in the U.S.'s favor. The decision on the dispute, expected between June and August 1996, will not only affect the commodities named in the complaint, but will establish a precedent for the tariff regime of the Free Trade Area of the Americas negotiations and clarify WTO/regional trade agreement obligations.

The sectoral interests are clear. A study commissioned by Canadian dairy and poultry groups projected that if the U.S. wins the dispute, the country would lose 27,000 food and agricultural processing jobs and $3 billion in agricultural output within one year, although consumers would save 40 cents on a U.S.$80 basket of goods. A recent national opinion survey showed that 67% of Canadians oppose removal of the tariffs on egg, poultry and dairy products. Eighty percent reject the idea that Canadians would be better off if the U.S. supplied their dairy, poultry and egg markets.3

Mike Gifford, a trade specialist in the Canadian agricultural ministry, said that if Canada loses the trade dispute, it would negotiate a gradual phase-out of tariff protection, such as the phase-out negotiated in NAFTA to remove protection for Mexican corn (see SFS Fact Sheet #3, "Mexican Corn and Hunger")4

The Dairy Sector

The Chairman of the Ontario Milk Marketing Board, John Core, testified to the House of Commons that "many countries went back [from the Uruguay Round negotiations] and created expectations among their citizens. I know that happened in the U.S. dairy industry. The U.S. dairy industry thinks their country negotiated open borders with Canada. That is the whole basis of the challenge under the North American Free Trade Agreement. The reality is that they didn't do that. They negotiated an agreement that created new rules."5

Indeed, pressured by dairy industry practices and U.S. policies in the so-called "Freedom to Farm" legislation, farmers from one region are pitted against farmers from another. U.S. dairy farmers hope that export markets will save them from the high-volume, high-cost, low-profit margin trends created by "free" trade agricultural policy. USDA support for dairy programs has fallen from a peak of $2.5 billion in FY 1983 to $158 milllion in FY 1994.6 Under "Freedom to Farm," price support authority is eliminated at the end of 1999, when a recourse loan program is implemented at the 1999 support level.7

Similarly, some U.S. dairy farmers may be looking to Canada to replace phased-out U.S. government price supports and the Mexican market originally promised to them by NAFTA proponents. Despite those promises, U.S. dairy exports to Mexico have fallen 42% since 1994. This market collapse prompted Farmers Union Milking Marketing Cooperative President Stewart G. Huber to state, "We were promised big new dairy export markets in Mexico in return for [giving up dairy price supports in] Section 22".8

Complicating the U.S. case is evidence that Canada has moved to comply with new WTO rules for dairy, while the U.S. is close to violating them. In 1995, Canada decreased its dairy export subsidies by a third and plans to eliminate dairy subsidies by August 1996.9 Core said that U.S. dairy industry subsidies would be targetted for discipline at the WTO agriculture talks scheduled for 1999, and that if Canada wins the dispute before the NAFTA panel, it will be in a strong position to argue against U.S. dairy industry subsidies at the WTO.10

The NAFTA Dispute Resolution Process - Thus Far

The binational dispute resolution process was the result of a compromise that salvaged the 1988 Free Trade Agreement negotiations. Canada sought to limit arbitrary use of U.S. trade remedy law, whereas the U.S. wished to restrict all Canadian subsidies. Since the U.S. refused to relinquish its unilateral determination of trade violations under Section 301 of U.S. trade law, and Canada would not relinquish its subsidies, a five member bi-national panel was proposed as a way of adjudicating differences.11

On January 22, 1996, the U.S. filed its seven-page submission to the NAFTA dispute resolution panel. On that same day, a letter signed by 165 U.S. companies and associations in the dairy, egg and poultry industries was sent to the U.S.T.R. in support of its complaint.12

In February, Canada responded with several volumes of rebuttal, arguing that "there was no new market agreement, no new common intention, and no expectation that at the end of NAFTA negotiations that the U.S. had secured increased access to the Canadian market." The Canadian government stated that "the parties continue to expect that any further access to each other's agricultural markets would be addressed through an agreement negotiated under the Uruguay Round." Canada buttressed its claim by quoting U.S. dairy and poultry association officials' acknowledgements that Canada made no market access concessions in the NAFTA negotiations. The Canadian argument concludes that if the U.S. wins the dispute and Canada cannot impose tariffs, then the conversion of import volume quotas to tariffs, as required under WTO rules, will be impossible.13

Subsequently, the two governments exchanged 50-page post-hearing submissions. The Canadians believe that the U.S. has argued in bad faith, does not substantiate its claim of Canadian NAFTA violations, and contains procedural violations of the dispute resolution hearing process, particularly in raising and rebutting arguments not presented at the hearing. Canada says it will move to strike all or part of the post-hearing submission from the record, if panelists agree that procedural rules were not followed.

Much of the U.S. post-hearing submission counters the Canadian argument that the Uruguay Round agricultural provisions of GATT take precedence over NAFTA. The U.S. also argues that the NAFTA text is unambiguous and that the panel should not consider as evidence draft working documents to determine the intent of NAFTA (although it also contended that examination of such documents would support the U.S. position).14

Conclusion

However the panel rules on the U.S. complaint, it is likely that the losing party will seek another venue in which to present their claims. If Canada complains against U.S. dairy subsidies to the WTO, and the U.S. loses, that loss could become subject to Congressional review under legislation that Senator Bob Dole will try to pass before he leaves the Senate on June 11. According to this bill, U.S.-appointed trade experts will review WTO decisions against the U.S. to determine if the WTO has followed its own dispute resolution rules. If the trade experts find that the WTO has ruled unfairly against the U.S. in three cases, then Congress would vote on whether to withdraw from the WTO.

Sources

1 "Canada's choice to head free trade panel on poultry and dairy products: Jacques Bourgeois," Financial Post (September 30-October 2, 1995), 85.

2Bernard Simon and Nancy Dunne, "US to challenge Canadian tariffs," Financial Times, July 14, 1995, and Ian Elliot, "U.S. files ag trade action against Canada under NAFTA," Feedstuffs, July 24, 1995.

3 Agriculture in Canada, The Canadian Federation of Agriculture; Ottawa, Ontario, 1995.

4 Bill Dimmick and Karen Montel, Ontario Milk Producer (March 1996), 15-16.

5 "Loss of tariffs would bring about negotiations on phase-in period," The Western Producer, May 16, 1996.

6 Elliot, "Ontario producer challenges U.S. view," Feedstuffs, October 2, 1995

7 Ralph M. Chite, "Farm Bill Issues: Dairy," Congressional Research Service Issue Brief (Feburary 12, 1996),4, and Joel McNair, "Milk Price Groups Go Separate Ways," Agri-View, May 17, 1996.

8 FUMMC Milk Matters, July 17, 1995.

9 Jerry Hagstrom, "Free, fair and final?" AgWeek, April 1, 1996.

10 "NAFTA is Big Failure on Dairy Export Promises," FUMMC Milk Matters, April 30, 1996.

11 Ian Elliot, "Subsidy, stock cuts keep dairy prices firm," and "Canada to eliminate dairy subsidies," Feedstuffs, March 11, 1996.

12 Elliot, "U.S. dairy subsidies a target in the next round of WTO talks," Feedstuffs, April 15, 1996.

13 U.S.-Canada Free Trade Agreement: Factors Contributing to Controversy in Appeals of Trade Remedy Case to Binational Panels, Washington, DC: General Accounting Office (June 1995), 15.

14 "U.S. Canada Name Panelists To Settle Dairy, Poultry Dispute," Inside U.S. Trade (January 26, 1996), 5-6

15 Elliot, "U.S., Canada trade dispute centers on tariffication," Feedstuffs, April 1, 1996.

16 "Canada blast U.S. conduct in dairy-poultry case as anti-NAFTA," Inside U.S. Trade, May 3, 1996, 21-22.

17 John Maggs, "The 'sore loser' commission," Journal of Commerce, May 16, 1996.