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


Article 1807
Secretariat File No.
CDA-92-1807-01

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.


I. Introduction

A) Procedural matters:

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:

August 19, 1992 - United States files initial submission;

September 9, 1992 - Canada files counter-submission;

September 21, 1992 - Oral hearing (Ottawa, Canada);

September 28, 1992 - each Party files a supplementary submission;

November 5, 1992 - Panel issues initial report;

November 19, 1992 - Parties file objections;

December 7, 1992 - Panel issues final report.

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:

October 5, 1992 - each Party files a supplementary submission;

October 15, 1992 - each Party files a response to the other's supplementary submission;

November 16, 1992 - the Panel issues its initial report;

November 25, 1992 - the Parties file objections to the initial report;

January 25, 1992 - the Panel issues its final report.

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.

B) Nature of the Dispute:

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

(1) The Panel is asked to consider the following:

(a) whether the term "the acquisition price of the goods" in Article 701.3 includes solely the initial payments made by the Canadian Wheat Board, or whether it includes all payments made with respect to a durum wheat crop (initial plus interim and final payments, if any);

(b) whether the term "storage and handling costs" in Article 701.3 includes elevation charges at terminal elevators and other related charges, such as weighing, inspection, and certification of durum wheat for export, which are performed by the Canadian Grain Commission under the authority of the Canada Grains Act;

(c) whether the phrase "other costs incurred by it" in Article 701.3 includes freight rate payments made by the Canadian Government pursuant to the Western Grain Transportation Act for the shipment of durum wheat to Thunder Bay, Ontario, for export to the United States;

(d) whether the phrase "other costs incurred by it" in Article 701.3 includes freight costs (for example, those for shipment of durum wheat from Thunder Bay, Ontario, to other locations for subsequent export to the United States), paid by the Government of Canada or public entities that it establishes or maintains, such as the Canadian Wheat Board; and

(e) whether any administrative costs of the Canadian Wheat Board and other public entities established by the Government of Canada, incurred with respect to durum wheat sold for export to the United States, are properly included in the scope of "other costs incurred by it" in Article 701.3.

(2) In light of the determinations made by the Panel under (1), determine whether or not the Government of Canada, including any public entity that it has established or maintained, has sold durum wheat for export to the territory of the United States since the Agreement came into effect on January 1, 1989, at a price below the acquisition price of the durum wheat plus any storage, handling or other costs incurred by it with respect to such durum wheat.

(3) The Panel's report shall include its recommendations, if any, for the resolution of the dispute between the Parties.

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:

Neither Party, including any public entity that it establishes or maintains, shall sell agricultural goods for export to the territory of the other Party at a price below the acquisition price of the goods plus any storage, handling or other costs incurred by it with respect to those goods.

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:

Since 1986, Canadian production of durum wheat has more than doubled, from 2 million metric tons in 1985/86 to 4.6 million metric tons in 1991/92. Canadian exports of durum wheat [worldwide] have risen substantially, from 2 million metric tons in 1986/87 to 3.2 million metric tons in 1991/92. Although Canada only began to export durum wheat to the United States on a regular basis in 1986, its exports have increased sharply since that time...

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.

II. Applicable Principles of Interpretation

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:

ARTICLE 31

General rule of interpretation

1. A treaty shall be interpreted in good faith in accordance with the ordinary meaning to be given to the terms of the treaty in their context and in the light of its object and purpose.

2. The context for the purpose of the interpretation of a treaty shall comprise, in addition to the text, including its preamble and annexes:

a) any agreement relating to the treaty which was made between all the parties in connexion with the conclusion of the treaty;

b) any instrument which was made by one or more parties in connexion with the conclusion of the treaty and accepted by the other parties as an instrument related to the treaty.

...

4. A special meaning shall be given to a term if it is established that the parties so intended.

ARTICLE 32

Supplementary means of interpretation

Recourse may be had to supplementary means of interpretation, including the preparatory work of the treaty and the circumstances of its conclusion, in order to confirm the meaning resulting from the application of article 31, or to determine the meaning when the interpretation according to article 31:

a) leaves the meaning ambiguous or obscure; or

b) leads to a result which is manifestly absurd or unreasonable.

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:

The Government of Canada and the Government of the United States of America, resolve:

to strengthen a unique and enduring friendship between their two nations;

to promote productivity, full employment, and the steady improvement of living standards in their respective countries;

to create an expanded and secure market for the goods and services produced in their territories;

to adopt clear and mutually advantageous rules governing their trade;

to ensure a predictable commercial environment for business planning and investment;

to strengthen the competitiveness of the United States and Canadian firms in global markets;

to reduce government-created trade distortions while preserving the parties' flexibility to safeguard the public welfare;

to build on their mutual rights and obligations under the General Agreement on Tariffs and Trade and other multilateral and bilateral instruments of cooperation; and

to contribute to the harmonious development and expansion of world trade and to provide a catalyst to broaden international cooperation; ... (emphasis added)

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.

III. Construction of Article 701.3

A) Object of Article 701:

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:

Article 701: Agricultural Subsidies

1. The Parties agree that their primary goal with respect to agricultural subsidies is to achieve, on a global basis, the elimination of all subsidies which distort agricultural trade, and the Parties agree to work together to achieve this goal, including through multilateral trade negotiations such as the Uruguay Round.

2. Neither Party shall introduce or maintain any export subsidy on any agricultural goods originating in, or shipped from, its territory that are exported directly or indirectly to the territory of the other Party.

3. Neither Party, including any public entity that it establishes or maintains, shall sell agricultural goods for export to the territory of the other Party at a price below the acquisition price of the goods plus any storage, handling or other costs incurred by it with respect to those goods.

4. Each Party shall take into account the export interests of the other Party in the use of any export subsidy on any agricultural good exported to third countries, recognizing that such subsidies may have prejudicial effects on the export interests of the other Party.

5. Canada shall exclude from the transport rates established under the Western Grain Transportation Act agricultural goods originating in Canada and shipped via west coast ports for consumption in the United States of America.

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:

1) in general, neither domestic nor export subsidies are prohibited worldwide;

2) however, export subsidies to the territory of either Party are prohibited;

3) the only subsidy which is explicitly prohibited is that granted by Canada pursuant to the WGTA in respect of grain moving to the United States through west coast ports.

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:

54. In May 1988, Deputy USTR Alan Holmer explained why the Thunder Bay WGTA had not been addressed in the following terms:

... the subsidies that are provided to the wheat going east are not contingent upon export. They are, therefore, under the rules domestic subsidies, and we did not want to put our domestic subsidies on the table with their domestic subsidies as part of these negotiations.

We also overall wanted to reserve these issues for the Uruguay round of trade negotiations and not have the United States and Canada both unilaterally disarmed in this area.

55. When testifying before the Committee on Agriculture, in February, 1988, [U.S. Trade Representative] Ambassador Yeutter repeated this view:

Canada will cease granting export subsidies under the Western Grain Transportation Act (WGTA) which have benefited Canadian exporters (primarily of feed) to the U.S. through west coast ports. The Agreement does not restrict existing rights of either country to grant domestic subsidies, so WGTA subsidies on products shipped east from the prairies provinces can be maintained as long as they also apply when the product is consumed in Canada. (Emphasis added)

(See also the passage excerpted from a letter of Ambassador Yeutter cited below at paragraph 106).

B) Purpose of Article 701.3:

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:

The United States and Canada have agreed that neither government, including any public entity it establishes or maintains, shall sell agricultural goods to the other country at below the acquisition price of the goods plus any storage, handling or other costs incurred by it with respect to these goods. This provision will prevent the CWB from selling products into the United States below cost. Therefore, the CWB cannot use its dual-pricing system to dump into the United States.

(Tab 16, p. 577, Canada's Counter-Submission)

To Continue with Whose Costs are Covered by 701.3