FINAL REPORT OF THE PANEL UNDER CHAPTER 18 OF THE CANADA-UNITED STATES FREE TRADE AGREEMENT

IN THE MATTER OF:

The Interpretation of and Canada's Compliance with Article 701.3 with Respect to Durum Wheat Sales

Panel:

The Honourable Griffin B. Bell, Chair

The Right Honourable Brian Dickson, P.C.

Mr. E. William Olson, Q.C.

The Honourable Davis R. Robinson

Mr. Robert B. Shanks, Esq.

1. On May 11, 1992, the United States of America requested, pursuant to Chapter 18 of the Canada-U.S. Free Trade Agreement (the "Agreement"), that a Panel be established to decide certain questions arising from a dispute between the United States and Canada over exports by the latter of durum wheat to the territory of the former. Canada accepted the request on May 18, 1992.

2. Accordingly, a Panel was convened and, pursuant to Article 1807(3) of the Agreement, the United States and Canadian governments agreed on the individuals who would serve as panelists, namely, the Honourable Griffin B. Bell (Chairman), the Right Honourable Brian Dickson, P.C., E. William Olson, Q.C., the Honourable Davis R. Robinson, and Robert B. Shanks, Esq.

3. Following the appointment of the Panel, a timetable was agreed upon by the Parties, as follows:

4. The United States' initial submission and Canada's counter-submission were received in accordance with the above timetable, and the oral hearing also took place as originally planned.

5. However, at the conclusion of the hearing on the 21st of September, the Parties agreed, at the suggestion of the Panel, to a revised timetable, namely:

6. In light of the importance and complexity of the dispute, the Panel decided again to extend the time for filing objections to its Initial Report to Monday, December 7, 1992. In addition, at the request of the Parties, the Panel afforded the Parties until Friday, January 22, 1993 to answer the Panel's request, made in its Initial Report, that they suggest an information-sharing mechanism which would protect the confidentiality of the information while ensuring compliance with Article 701.3. Consequently, the date for filing this Final Report was extended to February 8, 1993.

7. The Parties have agreed to the following "Terms of Reference", thus identifying the questions to be addressed:

8. It is evident from the above Terms of Reference that the United States' complaint essentially involves questions of interpretation of a key provision of the Agreement, namely, Article 701.3, which states:

9. As stated above, these questions of interpretation arise in the context of Canadian exports of durum wheat to the United States of America. In particular, the United States alleges in its First Submission (pages 9-10), and this is not contested by Canada, that:

10. The United States alleges that in the "crop year (June-May) 1991/92" (sic), Canada exported 363,000 metric tons of durum wheat to the United States. Further, Canada is said to be the world's current leading exporter of durum wheat (ibid., page 10).

11. While prices in the United States appear to have declined over the last few years, the average price of a metric tonne of durum wheat for the 1991-92 crop year was $U.S. 135.12 or $CND 158.72. Given the significant quantities of durum wheat involved (which is only one of myriad agricultural products traded between the Parties), it is self-evident that the resolution of this dispute is of great importance to both the United States and Canada.

12. In this regard, the Panel is of the view that it cannot resolve the specific issues of interpretation identified in the Terms of Reference without, first, deciding upon the general principles of interpretation bearing upon international treaties such as the Agreement.

13. The Agreement came into force in both the United States and Canada as of January 1989. Its enactment was preceded by long and arduous negotiations between the two countries. It is the most comprehensive trade agreement ever concluded between two countries. It obtains between two states each of which is the other's largest trade partner and which, historically, have enjoyed a unique relationship.

14. In construing the meaning of the relevant provisions of the Agreement, the Panel has had regard to the rules of interpretation set out in the Vienna Convention on the Law of Treaties ("the Vienna Convention"). Although the United States, unlike Canada, is not a party to this Convention, it agreed, in answering a specific request made of the Parties by the Panel concerning the law applicable to this dispute, that the Panel should refer to "the principles memorialized in the Vienna Convention on the Law of Treaties" (the United States' Response to the Panel's Questions of September 4, 1992, page 3).

15. Section 3 of the Vienna Convention sets out specific principles for the interpretation of treaties such as the Agreement. For convenience, the Panel sets out below the pertinent portions of Articles 31 and 32 of Section 3 of the Vienna Convention:

16. Article 31 makes it plain that a treaty such as the Agreement must be given a contextual and purposive interpretation. In this connection, the Panel wishes to refer to the Preamble to the Agreement which, as Article 31(2) of the Vienna Convention stipulates, may be useful in ascertaining the context and purpose of a treaty:

17. This Preamble underscores that the Parties have enjoyed a special relationship. Indeed, while it is always the case when treaty obligations between sovereign states are involved that, in interpreting the terms of an international agreement, the good faith of each Party should be presumed, this is a fortiori true between Canada and the United States.

18. The Panel also underscores the parts of the Preamble which show the resolve of each country "to adopt clear and mutually advantageous rules governing their trade" and "to ensure a predictable commercial environment for planning and investment". These principles of clarity and commercial certainty will have a bearing on the way in which the provision at issue in this matter is to be interpreted.

19. With regard to the applicability of Article 32 of the Vienna Convention, the United States took the position that, as the terms of Article 701.3 were clear and unambiguous, the Panel need not resort to Article 32. Canada, on the other hand, suggested that the Panel could resort to Article 32.

20. Resort to Article 32 is not conditional, as the United States has argued, upon a finding that the terms of the Agreement are "ambiguous or obscure" (Second Submission of the United States, October 5, 1992, page 5). Rather, the first circumstance in which the Panel would be justified in having recourse to supplementary means of interpretation is in order to confirm the meaning resulting from the application of Article 31 [see Brownlie, Principles of Public International Law (1990), 630].

21. Moreover, the fact that the Parties were unable, after a series of meetings and communications aimed at resolving the dispute, to settle their differences as to the proper interpretation of Article 701.3, shows that Article 32 is relevant in the case before us and should be resorted to, either to confirm the ordinary meaning of the words or to resolve any ambiguity.

22. Indeed, oral argument reflected very sharp differences between the Parties as to the meaning of Article 701.3.

23. Accordingly, on October 21, 1992, the Panel requested the Parties "to produce copies of any and every document relevant to the interpretation of Article 701.3, including all internal memoranda, briefing notes, drafts of Article 701.3, transcripts of testimony before legislative committees of Parliament and Congress, and official correspondence." Some of these documents had already been provided by the Parties in their various submissions to the Panel. However the Panel wanted, with this directive, to ensure that a complete record, which could assist in the interpretation of Article 701.3, was made available.

24. In essence, the United States contends that the Panel need only focus on the allegedly clear and unambiguous language of Article 701.3 to resolve the issues of disputed interpretation between the Parties. Yet, the United States' interpretation of the "clear and unambiguous" language of Article 701.3 is opposed in several respects to the Canadian interpretation.

25. Canada also contends that the language of this article is clear and unambiguous, but it has put a greater emphasis on a contextual and purposive analysis.

26. In our view, it is important to consider the specific questions posed in the Terms of Reference in the context of Article 701 as a whole, and of the object of each of its subsections.

27. Chapter 7 of the Agreement deals with the subject of agriculture. Article 701 itself is concerned specifically, as its title indicates, with "Agricultural Subsidies". It will be convenient now to set out in full the text of Article 701:

28. Article 701.1 sets out no express or implicit prohibition of subsidies, but simply states the primary goal of each Party to achieve "on a global basis, the elimination of all subsidies which distort agricultural trade". No distinction is made in Article 701.1 between "domestic" and "export" subsidies.

29. Article 701.2, however, does contain an express prohibition of any export subsidy on agricultural goods traded between the territory of each Party. In this regard, the Parties agree that an "export subsidy" is one that is "conditioned" on export, that is to say, a subsidy that is only available if goods are exported to another country. Strictly for the purposes of Article 701, every other form of subsidy is considered to be a "domestic subsidy", even though in fact, goods which are exported may have benefited from the subsidy.

30. Article 701.3 does not make any direct reference to subsidies, either export or domestic. We will address this point presently.

31. Article 701.4 expressly deals with the subject of export subsidies to third countries. To a certain extent, Article 701.4 is similar to Article 701.1, in that it does not contain any express prohibition of export subsidies. Rather it contains hortatory language that Parties must take into account the export interests of the other Party in using export subsidies to third countries.

32. Article 701.5 is the most specific of all the articles, and while it does not in so many words mention subsidies, there is no question that the reference to the transportation rates established under the Western Grain Transportation Act ("WGTA") is a reference to a specific subsidy provided under that legislation. In effect, therefore, Article 701.5 amounts to the prohibition of an export transportation subsidy in respect of agricultural goods originating in Canada but shipped to the United States via west coast ports.

33. The combined effect of Articles 701.1, 701.2, 701.4, and 701.5, therefore, is as follows:

34. While all subsidies are recognized as potentially distorting the agricultural trade, only export subsidies are banned as between the Parties including, most specifically, the west coast transportation subsidy obtaining pursuant to the WGTA.

35. The Panel has concluded that the overall object and purpose of Article 701 is clear - namely, the prohibition of export subsidies to each Party's territory and the tolerance of domestic subsidies - and that this overall object and purpose should inform the analysis of Article 701.3, unless the ordinary meaning of the words used in that article cannot be reconciled with it.

36. This interpretation of the overarching purpose of Article 701 can be confirmed (as is permitted by Article 32 of the Vienna Convention) by supplementary means, such as public statements made by high level United States officials. Thus, citing from Canada's submission of September 9, 1992:

37. While Article 701.3 does not explicitly deal with export subsidies, it concerns export sales of agricultural goods from one Party's territory to that of the other. Thus, it logically follows after Article 701.2 (which expressly prohibits export subsidies as between the territory of either Party) since Article 701.3 is specifically focused on the export trade between the Parties.

38. Article 701.3 is included, as pointed out above, in an article dealing with agricultural subsidies. And while the word "subsidy" is not mentioned in this subsection, one must assume, given its inclusion in Article 701, that Article 701.3 seeks to prohibit a form of commercial transaction between the two Parties which would be akin to, or have the effect of, an export subsidy. Indeed, since only export subsidies between the two countries are explicitly banned, it is only logical to conclude that Article 701.3, which deals expressly with export sales as between the Parties, should be concerned with the prohibition of export-like subsidies.

39. In simple terms, Article 701.3 prohibits the United States and Canada, either directly or indirectly through public entities that they may have established, from selling agricultural goods for export to the territory of the other Party, at a price below certain costs, including the acquisition price of the goods. While the Terms of Reference make evident that the meaning of certain words used in Article 701.3 requires further elucidation, it is apparent that the raison d'être of Article 701.3 is that the Parties wanted to strengthen the general prohibition on export subsidies contained in Article 701.2. Thus, the Panel agrees with the submission of Canada (transcript page 148, lines 16-22) that Article 701.3 was intended to deal with a situation where a government may absorb commercial losses of a public entity selling agricultural goods for export below their acquisition cost (plus any storage, handling or other costs incurred by it) whereby the government would effectively be subsidizing exports. That is what Article 701.3 was intended to prevent.

40. The United States' concerns about pricing by the Canadian Wheat Board ("the Board"), were linked to a two-price system that was in effect in Canada for some years before the Agreement came into force. Under this system, Canada's domestic prices were kept above export prices in certain circumstances. When the Agreement was before Congress, there were repeated references in testimony by U.S. officials to the two-price system as a practice that would be controlled by the new provision (the old two-price system was thereafter abandoned by Canada). This is evidenced by a document prepared by the U.S. Department of Agriculture for the hearing before the House Ways and Means Committee on 25 March 1988, entitled "Concerns and USDA Rebuttals". This document referred to Article 701.3 and concluded that:

To Continue with Whose Costs are Covered by 701.3