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

1b) 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;

95. The United States takes the position that all storage and handling costs which have been incurred in connection with grain eventually exported to the United States, even though not incurred or paid for by the Board, should be computed for the purposes of Article 701.3. Canada responds that such costs should not be included, as they have not been incurred or paid for by the Board.

96. We do not agree with the interpretation proposed by the United States. The purpose of Article 701.3 is to preclude what can amount in effect to export subsidies on sales of grain to the United States or to Canada. In the case before us, the only Party which is charged with the mandate of marketing grain in the United States is the Board. To include in the required computation costs which may be incurred by another public entity could have the effect of sweeping domestic subsidies within the ambit of Article 701.3. Services performed by the Canadian Grain Commission, while they may amount to domestic subsidies, are clearly not export subsidies since they apply to all grain regardless of destination.

97. Further, the plain language used in Article 701.3 focuses on the cost of the entity selling the agricultural goods. Therefore, the Panel believes that only storage and handling charges paid by the Board, the seller, should be included in determining Article 701.3 costs.

98. The United States raises the spectre that, unless its interpretation were adopted, Canada could set up a structure whereby most costs which may be related to export sales of grain to the United States would be absorbed by myriad public entities other than that which ultimately effects the sale. There is no evidence, however, that Canada has modified its statutory marketing scheme after the implementation of the Agreement in an attempt to circumvent Article 701.3.

99. The Panel is of the view that the freight rate payments made by the Canadian Government pursuant to the WGTA to Thunder Bay are not included in the phrase "other costs incurred by it".

100. First, the evidence is clear that those transportation payments, which amount to approximately Cdn $20.00 per metric tonne, far outweigh the payments specifically mentioned in Article 701.3, namely, handling and storage costs which, together, add up to less than Cdn $2.00 for crop year 1991-92 (Table 6 to Canadian Submission, September 9, 1992). It would be anomalous, indeed, if the Parties had intended to cover such transportation costs by the catch-all phrase, "other costs incurred by it".

101. More important, the WGTA subsidy payments through Thunder Bay are clearly domestic subsidies. Subsidy payments, as pointed out earlier, are prohibited only when they are export subsidy payments and occur in connection with export shipments to the United States through Canada's western ports pursuant to Article 701.5. Indeed, the overall purpose of Article 701.3 was clearly not to prohibit domestic subsidies.

102. Furthermore, we do not believe that the Agreement's drafters, who specifically referred to the WGTA in Article 701.5, would nevertheless have intended a similar prohibition against domestic subsidies for goods exported through Thunder Bay without any explicit mention of the WGTA.

103. The United States responds to this concern by stating that Article 701.3, unlike Article 701.5, does not prohibit subsidized transport rates through Thunder Bay; it simply means that such subsidies (or costs) have to be taken into account in computing the costs associated with export sales to the United States. Yet, the effect is exactly the same in practice: as a matter of commercial reality, it would be impossible, and this assertion by Canada is not contradicted, for the Board to successfully market durum wheat in the United States if the WGTA domestic subsidies were included in the calculation.

104. One of the objects referred to in the Preamble to the Agreement is the resolve of both Parties "to create an expanded and secure market for the goods and services produced in their territories". Clearly, were Canada to have agreed indirectly and tacitly to include the WGTA domestic subsidy in computing the cost of the durum wheat exported to the United States from Thunder Bay, it would not expand or secure any market in the United States, but would reduce and probably eliminate that export market for durum wheat.

105. Furthermore, it is clear that the domestic subsidies in question are incurred by the Canadian Government and not the Board, whose costs, as we found earlier, are the only ones which should be taken into account in relation to the purchase and sale of goods into the United States for the purposes of Article 701.3.

106. Again, our interpretation may be confirmed by reference to extraneous means of interpretation, as permitted pursuant to Section 32 of the Vienna Convention. Thus, the U.S. Trade Representative, Ambassador Yeutter, stated in relation to Article 701 and the WGTA:

107. Ambassador Yeutter's opinion is completely consistent with the U.S. Administration's formal answer to the following question from Senator Baucus:

108. In our view, this authoritative statement confirms that WGTA payments for shipments through Thunder Bay are to be excluded from any cost calculation required by Article 701.3.

109. For the reasons expressed above (paragraphs 41-47), only the costs incurred by the public entity which is involved in the marketing and sale of durum wheat into the United States, namely the Board, are eligible for the purposes of the computation required by Article 701.3.

110. Whether, specifically, "freight costs" incurred by the Board are to be included in the calculation as falling within the words "other costs incurred by it" depends on whether such costs are of the same type or "genus" as the costs expressly mentioned in Article 701.3. Thus, pursuant to the doctrine of ejusdem generis, which is equally applied by Canadian and American domestic courts and by international courts and tribunals (see references in Canada's Submission, September 9, 1992, page 38, paras. 139-140), general words following specific words are limited to the class indicated by the specific words.

111. It is evident that the common denominator of "storage" and "handling" costs is that they are direct costs associated with specific activities required to bring to market specific shipments of the goods to be sold.

112. In this regard, Canada concedes that freight costs absorbed by the Board for shipping the grain into the United States do fall within the requisite genus and should be included within Article 701.3.

113. In practice, freight costs are normally borne by the accredited exporters through whom the sales are consummated in the United States. However, where the Board is actually responsible for paying the cost of shipping durum wheat to a designated point in the United States ("track USA sales") or to a transfer elevator on the St. Lawrence Seaway for export to the United States on an "in store St. Lawrence" basis, such costs must be taken into account.

114. Again, for the reasons articulated above (paragraphs 41-47), the Panel concludes that only the costs of the public entity actually involved in the marketing and selling of the durum wheat, namely, the Board, come within the ambit of Article 701.3. Accordingly, even if administrative costs were eligible for inclusion in Article 701.3, only those of the Board could be included.

115. There appeared to be a common understanding between the Parties that administrative costs involved fixed charges (e.g., rent, management staff, utilities) which do not vary with the amount of goods purchased and sold. Thus, administrative costs are to be understood in contradistinction to direct and variable costs, such as storage and handling costs, which vary more or less in direct correlation with the quantities of goods handled by the Board.

116. The Panel does not believe that administrative costs were intended to be included in the expression "any other costs incurred by it". First, administrative costs, being fixed and not direct costs, are qualitatively different from the types of costs specifically mentioned in Article 701.3, namely, storage and handling costs. As such and pursuant to the doctrine of ejusdem generis mentioned earlier, the drafters cannot be assumed to have intended their inclusion in Article 701.3 as "other costs".

117. Moreover, Article 701.3 prohibits the sale of agricultural goods at a price "below the acquisition price of the goods, plus any storage, handling and other costs incurred by it (a Party) with respect to those goods" (emphasis added).

118. The words, "with respect to those goods", clearly qualify the earlier words "other costs incurred", and suggest the necessity of a direct linkage between the goods sold and the costs associated with such sales. Yet, as earlier noted, the singular characteristic of administrative costs is that they are not directly attributable to any sales. Therefore, in the Panel's view, administrative costs are not covered in Article 701.3.

119. In its comments on the Initial Report, the United States suggested that this finding contradicted an earlier Panel's decision In the Matter of Article 304 and the Definition of Direct Costs of Processing (June 8, 1992). In our view, there is no contradiction. What that Panel found was that a list of illustrations did not constitute an "exhaustive code": p. 20, para. 42. That is not inconsistent with this Panel's opinion that, while the list of "costs" specifically mentioned in Article 701.3 (i.e. storage and handling) was clearly not exhaustive, it should be narrowed by application of the doctrine of ejusdem generis and because of the limiting expression, "with respect to those goods".

120. The Panel is of the view, in light of the evidence presented by the United States and the Panel's answers to questions 1(a) - (e), that it is not possible nor desirable at this stage that it make any finding as to whether Canada has violated Article 701.3. Moreover, since the Parties - as is explained below - have agreed on an audit of the Board retrospective to January 1, 1989, the United States will have access to the best evidence to assess whether Canada has violated Article 701.3 since the implementation of the Agreement, rather than having to rely on information and assumptions of dubious quality.

121. Indeed, in its written submissions and during oral argument, counsel for the United States complained forcefully about Canada's lack of cooperation in furnishing the information required to ascertain whether a breach had taken place.

122. Canada replied that it had no duty to provide any information to the Party making the complaint. It further asserted that it had furnished substantial information, notwithstanding the lack of obligation to do so.

123. Clearly, there are two competing values at stake: on the one hand, disclosure is critical to verifying compliance (especially in light of the concerns expressed by the United States as witnessed by the previously cited legislative history); on the other, confidentiality is essential in order to protect commercial viability and competitive advantages.

124. At the time the Parties submitted this dispute for the Panel's consideration, they had been unable to agree on a mutually acceptable information-sharing mechanism which would satisfy each Party's concerns. Considering that it ought not to be beyond the bounds of the Parties' imagination to devise adequate mechanisms, the Panel invited them to suggest, by January 22, 1993, a method for sharing relevant information on a retrospective basis and within a prompt period, so as to provide a timely assurance of compliance.

125. The Panel also suggested that the Parties may find it helpful, in this regard, to consider Article 1802.4 of the Agreement, which permits the Canada-United States Trade Commission to "establish, and delegate responsibilities to, ad hoc or standing committees or working groups and seek the advice of non-governmental individuals or groups".

126. The Panel has carefully reviewed the submissions received from the United States and Canada and makes the following recommendations with regard to information-sharing:

Accordingly, the Panel is of the view that Canada's Alternative Proposal is acceptable and recommends that the Parties endorse it, with the exception that the notes made by the Audit Committee members be kept in a confidential file in the Binational Secretariat's office in Ottawa, and that the Audit Committee consist of six members.

127. In effect, the Panel's answers to questions 1(a) - (e) amount to a declaratory judgment, without damages, given that the United States was not seeking compensation from Canada in the event that the Panel found violations of Article 701.3. The Panel believes, therefore, that its rulings on the question of interpretation raised by the Terms of Reference should be sufficient to resolve the dispute between the Parties, and that the information-sharing method recommended in answer to question (2) will both maximize compliance with Article 701.3 and ensure effective monitoring.

128. Finally, the Panel wishes to make a suggestion which transcends the resolution of the specific dispute between the Parties, but which arises from its attempt to adjudicate it. Thus, the Panel believes that panels of a more permanent nature, rather than ad hoc panels, would be very beneficial in developing expertise and consistent interpretation of the Agreement. The Panel therefore recommends that such panels be appointed for the purpose of resolving disputes falling within Chapter 18 of the Agreement.

Respectfully Submitted: