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

41. Since several of the questions posed in the Terms of Reference relate to the scope of the costs covered by Article 701.3, it is important at this stage to ascertain whether the costs to be computed pursuant to that Article are strictly those incurred by the Board, or whether they could include all costs which are incurred either by the government of Canada or any public entity that might be involved in relation to the wheat in question.

42. The United States contends that all costs incurred by the government of Canada, both directly and through any public entity, which are attributable to the goods exported, must be considered cumulatively in determining the "bright line" price below which Canada cannot sell amber durum wheat into the United States. The United States, stressing in particular the presence of the word "including" in Article 701.3, contends further that this interpretation follows from the plain language of Article 701.3.

43. We disagree. While Article 701.3 prohibits each Party, "including any public entity ...," from selling agricultural goods below the acquisition price of the goods plus certain other costs, the emphasis in that Article is upon the entity that does the selling. Such sales may be accomplished either by the Party directly, as a government, or through a "public entity" established for that purpose. In the case before us, the sale is actually effected by the Board through the use of export agents. Canada has not contended that because the sales were not made by the Board itself, the sales are not covered by Article 701.3.

44. Canada established the Board through the Canadian Wheat Board Act (Revised Statutes of Canada 1985, C.-24 ("CWBA")) as a body corporate having the capacity to contract in the name of the Board (Section 4(1)). Section 4(2) of the CWBA provides that "the Board is, for all purposes, an agent of Her Majesty in right of Canada, and it may exercise its powers under this Act only as an agent of Her Majesty in right of Canada."

45. Section 5 of the CWBA states: "the Board is incorporated with the object of marketing in an orderly manner, in interprovincial and export trade, grain grown in Canada." Section 6 provides that the Board possesses the power "to buy, take delivery of, store, transfer, sell, ship and otherwise dispose of grain."

46. Thus, a Party, namely Canada, has established by means of the CWBA, a public entity, namely the Board, and has given the Board all requisite powers to sell grain abroad. The selling activity at issue here is that of the Board. Therefore, the costs which the Board, as a delegate of the government of Canada, incurs with respect to the grain must be considered in determining the "bright line".

47. The language of Article 701.3 itself addresses the selling costs attributable to the entity engaged in the selling. Article 701.3 is aimed at prohibiting export-like subsidies, not domestic subsidies. We have seen no evidence that the Canadian government directly incurs any costs with respect to export grain which it does not incur with respect to grain sold within Canada. Including in the computation of the costs referred to in Article 701.3 all costs which the Canadian government may incur, directly or indirectly, in connection with every other activity related to the production and marketing of grain, could clearly sweep in domestic subsidies, i.e., subsidies not conditioned on export, a result which the Parties did not intend. On the other hand, including in the "bright line" the costs that the Board itself incurs as a result of export sales between the Parties is completely consistent with the general purpose of Article 701.

48. The expression "the acquisition price of the goods" is not defined in the Agreement and the Parties were unable to explain to the Panel precisely why this expression was selected by the drafters, although Canada suggested that they must have wanted to choose an expression which could apply not only to the payments made by the Board, but to any payments regardless of form made by Canada or the United States for the purchase of the goods.

49. It is admitted by both Parties that, currently, Article 701.3 would only apply to Canada, as no export sales of agricultural products are made to Canada by either the government of the United States directly, or through any public entity it has established. That is not to say, obviously, that legally Article 701.3 is not binding on both Parties.

50. Further, there is no disagreement as between the Parties that the drafters of this section were well aware of the existence of the CWBA and of the payment scheme thereunder. It is important, therefore, to have a basic understanding of the statutory framework involved.

51. Part III of the CWBA is entitled "Interprovincial and export marketing of wheat by the Board". It deals, inter alia, with the purchase of wheat by the Board and the method by which payments are made to wheat producers for the purchase of this wheat. In the most simple terms, the CWBA makes a distinction between three types of payments, namely, initial payments (which may be adjusted pursuant to Section 32(1)), interim payments (Section 33(3)) and final payments (Section 33(1)).

52. In essence, the initial payment is the amount of money which the Board pays to the producers at the time it buys the wheat from the producers. Specifically, it is identified by the legislation as a "sum certain per tonne basis in storage Thunder Bay", which sum certain is fixed either by regulation of the Governor in Council (in practice, the Canadian government), or by the Board with the approval of the Governor in Council. Historically, this sum certain has averaged 80% of the price which the Board expects the wheat will fetch on the market.

53. The sum certain may be adjusted upward during a pool period (August 1 to July 31) and, in such circumstances, the difference must be remitted to grain producers who had hitherto received the smaller amount (Section 32(1)(c)).

54. On or after January 1 of the year commencing after the end of any pool period, the Board must distribute to grain producers the balance remaining in its account (after making certain deductions provided for by the legislation); this distribution is made on the basis of certificates (acquired when the grain was initially delivered) entitling the producers to a share in the equitable distribution of the surplus, if any, arising from the operations of the Board (Section 32(1)(d)). This is commonly known as the "final payment", which would usually be made no earlier than 17 months after the beginning of the crop year for which the original sum certain of the initial payment was fixed.

55. Prior to any final payment being remitted, the Board may make interim payments, if the Governor in Council is of the opinion that an interim payment can be made without loss by the Board (Section 33(3)). Such payments would be made only after the durum wheat pool was closed (i.e., after July 31) and before the following January.

The meaning of "acquisition price":

56. The United States argues that the "acquisition price of the goods" includes the initial (with adjustments, if applicable), plus any interim and final payments made. Canada, for its part, contends that the "acquisition price of the goods" consists only of the initial payment, including any adjustment that may have been made to the sum certain pursuant to Section 32(1)(c) in respect of sales occurring after such adjustment. However, neither the remittance of an adjustment to the sum certain for export sales occurring prior to the adjustment, nor any interim or final payments can ever be included, because they are in the nature of a distribution of profit.

57. The United States' position is essentially based on the argument that each one of the three payments above-mentioned is manifestly a part of the total price which has to be paid for the acquisition of the goods.

58. Canada, on the other hand, contends that the words "price of the goods" are modified by the term "acquisition" which precedes them, and that together they mean, "what has been paid to acquire the grain at the time the exports are made". (Canada's Supplementary Submission, October 5, 1992, p. 2, para. 4).

59. Canada relies not only on the "ordinary" meaning of "acquisition price", but also on what it asserts is a qualitative difference between the initial payment, and any interim or final payment. In essence, Canada asserts that the latter two payments are in fact and in law a distribution of profits, as opposed to an amount paid for the acquisition of the grain.

60. There is support in the CWBA for this interpretation. For whereas the initial payment, or more specifically, "the sum certain" calculated pursuant to paragraph 32(1)(b), is the only payment which is made in exchange for the delivery of the grain itself, the interim and final payments, if any, may be made to the producer on account of a certificate issued upon delivering the grain, "which certificate entitles the producer named therein to share in the equitable distribution of the surplus, if any, arising from the operations of the Board with regard to the wheat produced in the designated area sold and delivered to the Board during the same pool period" (Section 32(1)(d)).

61. The distribution of the surplus which the Board is entitled to make pursuant to Section 33(2) of the CWBA, is explicitly referred to as "profits" in Section 7(2) of the CWBA which states the following:

62. The effect of this section is that profits realized in the wheat pool are remitted to producers, after deduction of the Board's expenses. The characterization of the final payment as "a distribution of profits" is also supported by a decision of the Federal Court of Canada in Lacey v. Canada [1990], 1 F.C. 168, at 188.

63. It is evident from the above discussion that an approach to the interpretation of "acquisition price" which focuses solely on dictionary and/or statutory definitions will not yield a definitive answer.

Purposive interpretation of "acquisition price":

64. Section 31 of the Vienna Convention directs that the terms of a treaty must be given their ordinary meaning "in their context and in the light of [the treaty's] object and purpose". Section 31(2) further directs that the purpose of the interpretation of the treaty shall comprise, in addition to the text, its preamble.

65. It is obvious that the purpose of the Agreement is to promote free trade. But, more specifically, in terms of the purpose of Article 701.3, it appears most logical that the aim of Article 701.3 is to provide an additional protection against government assistance which would have the effect of an export subsidy but which, strictly speaking, may not be labeled as such. Indeed, the United States in its Second Submission (October 5, 1992) stated:

66. Pursuant to the CWBA, as we have seen, profits realized in the operation of a wheat pool are distributed to the producers pursuant to their proportionate shares of grain sold to the Board. In this case, there is no subsidization by the Canadian government with regard to the amounts paid to the producers for their grain. Such distribution is made through a final payment, which may be preceded by an interim payment.

67. If, on the other hand, the Board sustains a loss in respect of its wheat pool from its operations under Part III, such losses are reimbursed to the Board by the government of Canada pursuant to subsection 7(3)(a) of the CWBA. This, in effect, amounts to a subsidy of the Board's operations, and indirectly, of the price paid to producers for the wheat by the Canadian government.

68. The interpretation of Article 701.3 put forth by the United States is not compatible with the purpose of Article 701.3 to preclude subsidization by the Canadian government in the case of losses on export sales. For, by including in the calculation of the acquisition price, not only the sum certain paid upon acquisition of the goods, but also the interim and final payments, Article 701.3 becomes operative even in the case where the pool is profitable and there is no government subsidization.

69. The Canadian interpretation, on the other hand, effectively means that the Board would not sell to the United States at a price below the initial payment (as it may be adjusted), plus handling, storage and other costs. A sale below that level would likely result in a loss in the pool account and, therefore, require a subsidy by the government of Canada pursuant to Section 7(3) of the CWBA. Any sale over that amount, on the other hand, would not be objectionable because no government subsidy would be triggered.

70. The Panel is of the view that the purpose of Article 701.3, as defined by the United States itself, is better served if the Canadian interpretation of "acquisition price" is adopted.

71. Moreover, the major objection to the United States' interpretation is that it would be impossible practically for the Board to know in advance at what price wheat is likely to be sold when final payments are made, 17 months after the sum certain was paid.

72. We do not believe that the framers of the Agreement could have intended that the Parties be put in the position of selling agricultural products without knowing the "bright line", i.e. the price below which the product may not be sold into the territory of the other Party, until many months after the sale. The world price of durum wheat is notoriously volatile, as evidenced by the Board's Annual Reports before the Panel. The 1988-89 pool account for amber durum wheat shows an Initial Payment to Producers of $186.652 per tonne and a Balance for Distribution to Producers of $12.072 for a total of $198.724. The 1989-90 pool account reflects an Initial Payment to Producers of $143.706 and a Balance for Distribution to Producers of $13.660 for a total of $157.366. The 1990-91 account shows an entirely different picture: an Initial Payment to Producers of $123.689 and no final distribution to producers. Instead, there was a deficit on operations of $20.364 per tonne.

73. In short, the United States' interpretation would bind Canada to an unworkable rule, having the effect of either a) driving Canada from the marketplace or b) putting Canada in a position where it might not know for 17 months whether or not a particular sale was in breach of Article 701.3 of the Agreement. Neither Party should be faced with the prospect of retroactive illegality. The United States' interpretation simply cannot be reconciled with the Canadian pooling system.

74. In this connection, the Panel refers, as it is directed to do by Article 31 of the Vienna Convention, to the Preamble to the Agreement which states, inter alia, that the Parties resolve "to adopt clear and mutually advantageous rules governing their trade" and to "ensure a predictable commercial environment for business planning and investment". It is evident that these objects are best served if the Board can know at the time it sells its grain into the United States the level below which it may not sell. This can only be done if the acquisition price is taken to be the sum certain stipulated by Section 32 of the CWBA.

75. The Panel concludes, from the application of Article 31 of the Vienna Convention, that the acquisition price of the goods referred to in Article 701.3 includes only the initial payment; or, in the event of an upward adjustment, the acquisition price for goods sold after the adjustment is the initial payment plus such adjustment.

76. Much of the legislative history submitted by the United States, and indeed U.S. counsel's oral and written submissions, reflected that Party's deep concern that defining the "acquisition price" to include only the initial payment (with adjustments), could allow Canada to "manipulate" the initial, interim and final payments so as to enable Canada to undercut U.S. grain producers in the U.S. market. This could be done by setting low initial payments, and recouping any profits realized in the U.S. market through later interim or final payments to Canadian durum wheat producers.

77. This concern of the United States government was reflected at the most senior level in a 1988 communication from the President of the United States to the Congress. In that communication, the President wrote to the Congress:

78. In correspondence from the Minister for International Trade of the Government of Canada to the Premier of the Province of Saskatchewan and Minister of Agriculture, the Minister of Trade reviewed Article 701.3 in a letter dated January 19, 1988:

79. This letter from the Minister of Trade raises two points of special significance to the Panel. First, it makes clear that the government of Canada was uncertain as to whether "acquisition price" for purposes of Article 701.3 would be interpreted to mean the "initial payment level". The Minister regarded this result at the end of the negotiating process as only "likely". Secondly, the last sentence in the Minister's letter could conceivably be misinterpreted as implying that the government of Canada was indeed free to "manipulate" (a term used by the United States in its Submission) the initial payment level by "setting" it at an "appropriate" amount in relation to "world market price levels". This possible misinterpretation might also arise as a result of a December 15, 1987 internal briefing note by the Grain Marketing Bureau of Agriculture Canada that states: "It is not expected that U.S. market prices will be below initial payment levels very frequently and Canada will have the flexibility to set its initial payment levels below U.S. market prices in most market situations." (emphasis added)

80. The Panel has considered this issue with the greatest of care and scrutiny. However, for the following reasons, the Panel believes that the "acquisition price" for purposes of Article 701.3 in this case is as stated in paragraph 75 above.

81. First, the practice envisaged by the United States would be inconsistent with the purposes and past practices of the Canadian pooling system, which was established to provide the Canadian grain producers with price stability and to allow the producers to escape the risks of price fluctuations over the course of each pooling period. We see no evidence that Canada has abused the pricing process mandated by Part III of the CWBA. No evidence was submitted by the United States suggesting that the level of the initial payment was reflected in the price of Canadian wheat sold into the United States. Rather, it appears that the prices obtained by Canadian durum wheat producers were the prevailing U.S. market prices for grain of comparable quality. Indeed, the evidence suggests that the Board sets the initial payment on the basis of the market price it anticipates for the wheat, not to allow Canadian wheat to sell at a discount from prices set by the market.

82. The United States has argued that the absence of evidence of specific Canadian sales below U.S. market prices is due to Canada's refusal to provide requested market data. This may or may not be true, but it does not relieve a complainant from adducing evidence in support of its complaint. Furthermore, this evidentiary problem should be resolved if the Parties abide by the Panel's recommendations made below (para. 126) regarding an effective information-sharing mechanism.

83. Secondly, the fundamental purpose of Article 701 is to prohibit trade distortions arising from government export subsidies, and in the case of Article 701.3 specifically, from government payments which have the effect of export subsidies. In the case before us, a government export subsidy could occur if the Board set the initial payment at a level which proved to be higher than the price for which it ultimately sold the wheat, thereby creating a shortfall which the Government of Canada would absorb. Exactly this situation occurred in the 1990-91 crop year.

84. However, the Panel underscores that a shortfall does not necessarily indicate that the Board has violated the terms of Article 701.3 by selling durum wheat into the United States at a price lower than the initial payment (with adjustments). Rather, a shortfall could result even if the Board scrupulously followed the provisions of Article 701.3, selling into the United States at prices at or above the initial payment, but sold into other nations at lower prices.

85. For those reasons, and also on the basis of the information-sharing mechanism recommended below, we do not believe that our interpretation of "acquisition price" affords a license to the Board to "manipulate" its payments so as to allow Canadian producers to compete unfairly in the U.S. durum wheat market at artificially low prices.

Confirmation by supplementary means:

86. Pursuant to Article 32 of the Vienna Convention, our interpretation can be confirmed by recourse to supplementary means of interpretation. It is appropriate to rely on "supplementary means of interpretation", as provided by Article 32 of the Vienna Convention, to confirm the interpretation Canada has proposed. The testimony and statements referred to in the following paragraphs are relevant because:

87. Canada produced a copy of a Memorandum to File dated July 17, 1987 (prior to the Agreement coming into force and long before this dispute) which records the results of a meeting between the Parties regarding, inter alia, agricultural subsidies. The memorandum contains the following statement:

88. Subsequent to the meeting of July 15, 1987, Canada and the United States jointly prepared and tabled a draft provision dated August 28, 1987, which included the expression "acquisition price" (see Tab 7 to Canada's Supplementary Submission). While there were some changes in wording made during the drafting of the "legal text" in late 1987, there is no evidence of further substantive discussions between the negotiators on this matter before the Agreement was concluded. In fact, the subject matter of Article 701.3 was omitted from an "Elements of the Agreement" text initialled by both agricultural negotiators on October 3, 1987.

89. A Canadian briefing note, dated December 14, 1987, and prepared in anticipation of a First Ministers' meeting (after the legal text had been completed) contained the following statement:

90. In January, 1988, in an intergovernmental memorandum, there are listed talking points for "selling the FTA in the U.S.A." and point 6 contained therein reads as follows:

91. In this regard, the Panel notes the statement made by Ms. Ann Veneman, Deputy Secretary of the United States Department of Agriculture, who, in her testimony before the House of Representatives Subcommittee on Trade of the Committee on Ways and Means, in February/March, 1988, stated in response to a question on the application of Article 701.3 to the Board payment system:

92. The United States has, both in the oral hearing and in its subsequent written submissions, attempted to avoid this statement. Yet, as pointed out in the Reply by Canada to the Second Submission by the United States, no doubt was cast upon the accuracy of Ms. Veneman's testimony in a follow-up written statement, dated March 25, 1988, filed by the U.S. Department of Agriculture (Annexes to Submission by Canada, September 9, 1992, Tab 16).

93. Ms. Veneman's opinion of the meaning of "acquisition price" was conclusively confirmed in answers provided by the U.S. Administration to certain questions posed on the Agreement by the Senate Committee on Finance, which answers were delivered under cover of a letter, dated April 18, 1988, from U.S. Trade Representative Clayton Yeutter to the Honourable Lloyd Bentsen, Chairman, Committee on Finance:

94. The Panel concludes that the extraneous evidence, which it was entitled to review pursuant to Article 32 of the Vienna Convention, supports and confirms the interpretation of Article 701.3 which follows by application of Article 31 of the Vienna Convention.

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