C. Canada's Tariff-rate Quota on Fluid Milk and Cream

2.64 In Canada's WTO Schedule V, the tariff-rate quota for fluid milk (HS 0401.10.10) is 64,500 tonnes (product weight basis). The following text is contained under "other terms and conditions":

2.65 Currently, Canada does not impose any monitoring of cross-border imports of consumer packaged milk (limited to the value of C$20.00 per entry) .

2.66 Canada has applied the over-quota tariff to fluid milk shipments in commercial containers or in bulk. As noted above in paragraph 2.11, no permits have been issued for imports of milk (HS 0401) for industrial use under the Import for Re-Export Program.

III. Claims of the Parties

A. Exportation of Dairy Products

1. Product coverage and period of time

3.1 The dairy products and marketing years covered by the claims of New Zealand and the United States are set out in Table 1 below.

2. Nature of Measure

3.2 New Zealand and the United States claimed that there was extensive government involvement in all critical aspects of Canada's Special Milk Classes Scheme, from its initiation through to its administration and operation. Canada's Special Milk Classes Scheme was a product of governmental authority and was operated under the auspices of the federal and provincial governments. This government involvement in the scheme was sufficient to constitute government action within the meaning of the jurisprudence developed by GATT and WTO panels.

3.3 Canada claimed that the Complainants' assumptions of government control, direction or mandate were without basis in fact and were, therefore unsustainable. Government involvement was limited to providing an appropriate regulatory framework and essentially responsive to the initiatives of the Canadian dairy industry.

3. Agreement on Agriculture

(a) Article 1(e)

3.4 Both New Zealand and the United States claimed that the Special Milk Classes Scheme was an export subsidy in the sense of Article 1(e) of the Agreement on Agriculture.

3.5 Canada claimed that as the sales of milk at differing prices under Special Classes 5(d) and (e) did not constitute a "subsidy" pursuant to the definition of the SCM Agreement, it followed that these sales could not constitute a subsidy for the purposes of the Agreement on Agriculture. Therefore, by definition, such sales could not constitute an "export subsidy" within the meaning of the definition in Article 1(e) of the Agreement on Agriculture.

(b) Article 9.1(a) and (c)

3.6 New Zealand and the United States claimed that the Special Milk Classes Scheme constituted export subsidy practices listed in Article 9.1(a) and (c). As such, these practices were subject to reduction commitments under the Agreement on Agriculture. Canada refuted both these claims.

(c) Article 3.3 and Article 8

3.7 New Zealand and the United States claimed that Canada's provision of export subsidies under Article 9.1(a) and (c) of the Agreement on Agriculture in excess of its scheduled export subsidy commitments was a violation of Article 3.3 of that Agreement. Furthermore, Canada was in violation of its obligation under Article 8 of the Agreement on Agriculture not to provide export subsidies otherwise than in conformity with the Agreement on Agriculture.

3.8 Canada claimed that since the sales of milk at differing prices for domestic and export markets did not constitute an "export subsidy" as that term was defined in Article 1(e) of Agreement on Agriculture, the practice at issue did not fall within the scope of Article 8; that article could therefore not apply.

(d) Article 10

3.9 Alternatively, New Zealand and the United States claimed that Special Classes 5(d) and (e) of the Special Milk Classes Scheme constituted an export subsidy not listed in Article 9.1 that was being applied in a manner which circumvented or threatened to lead to circumvention of Canada's export subsidy commitments contrary to Article 10.1 and 10.3 of the Agreement on Agriculture.

3.10 Canada claimed that Article 10 did not apply in the present case as it could not be established that there existed "export subsidies", including those export subsidies listed in Article 9.1. Nor could it be established that there was actual or threatened circumvention of Canadian export subsidy commitments.

4. Agreement on Subsidies and Countervailing Measures ("SCM Agreement")

(a) Article 1 and Paragraph (d) of the Illustrative List of Export Subsidies in Annex I

3.11 New Zealand and the United States claimed that even on the basis of Canada's own approach to the interpretation of the term "subsidy" Canada had not shown that the Special Milk Classes Scheme fell outside the definition of subsidy under the SCM Agreement. The Scheme constituted a subsidy within the meaning of Article 1 of the SCM Agreement. In addition, that the Special Milk Classes Scheme constituted the provision of an export subsidy within the meaning of Paragraph (d) of the Illustrative List of Export Subsidies in Annex I of the SCM Agreement.

3.12 Canada claimed that the sale of milk at differing prices did not constitute a "subsidy" within the meaning of Article 1 of the SCM Agreement. Further, Canada claimed that the practices at issue were not "export subsidies" in the sense of Paragraph (d) of the Illustrative List of Export Subsidies in Annex I of the SCM Agreement.

(b) Article 3

3.13 The United States claimed that as Canada's Special Milk Classes Scheme was inconsistent with Canada's obligations under the Agreement on Agriculture it was consequently in violation of Article 3 of the SCM Agreement.

B. Importation of Milk

1. Article II of GATT 1994 and the Agreement on Import Licensing Procedures

3.14 The United States claimed that Canada's administration of its tariff-rate quota on fluid milk ³⁷ which restricted access to the in-quota quantity of its tariff-rate quota for fluid milk to entries that were valued at less than C$20 and that were for the personal consumption of Canadian residents, was inconsistent with its obligations under Article II:1(b) of GATT 1994 and Article 3 of the Agreement on Import Licensing Procedures.

3.15 Canada claimed that its current treatment of fluid milk imports was fully consistent with the terms and conditions of the tariff concession for fluid milk (HS 0403.10.10) in its Schedule. Canada further refuted any alleged violation of the Import Licensing Agreement.

C. Recommendations requested by the Parties

3.16 New Zealand requested that the Panel, in accordance with Article 19 of the DSU, recommend that Canada bring its measures into conformity with the Agreement on Agriculture.

3.17 The United States requested that the Panel find the Canadian Special Milk Classes Scheme and the denial of access to imports under the tariff-rate quota on fluid milk and cream to be inconsistent with Canada's WTO obligations. Accordingly, the Panel should recommend that Canada bring those measures into conformity with its obligations under the GATT 1994, the Agreement on Agriculture, the Agreement on Subsidies and Countervailing Measures, and the Agreement on Import Licensing Procedures. More specifically, the Panel should recommend (i) that Canada either withdraw its export subsidies or reduce the level of its subsidized exports of dairy products to a level commensurate with its reduction commitments and (ii) that such action be taken without delay. In this regard, the United States saw no reason why Canada could not bring its export subsidies into compliance within 30 days of the adoption by the Dispute Settlement Body of recommendations and rulings. With respect to market access, the United States respectfully submitted that the Panel should recommend that Canada not apply its tariff-rate quota in a manner that denies entry at the in-quota rate to any fluid milk imports made within the quantitative limit of the tariff-rate quota.

3.18 Canada requested the Panel to find that (i) Canada's Special Milk Classes did not provide an export subsidy and thus did not violate Canada's obligations under Articles 8, 9 or 10 of the Agreement on Agriculture nor under Article 3 of the SCM Agreement; and (ii) that Canada's administration of its tariff-rate quota on fluid milk and cream was consistent with Canada's obligations under Article II:1(b) of the GATT 1994 and Article 3 of the Agreement on Import Licensing Procedures. Canada requested the Panel to dismiss all claims brought against Canada in this case by the United States and New Zealand.

To continue with Arguments of the Parties

³⁷ The specific products subject to this claim were classified in Canada's tariff schedule within tariff item numbers 0401.10 and 0401.20. The US claim relating to Canada's fluid milk tariff-rate quota related to the last three years (1995-1997) as well as the current year (1998).