(a) Outline

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

4.2 Canada claimed that the Complainants' arguments rested entirely on erroneous descriptions of the Canadian dairy system. This was particularly true of the way that they had attempted to miscast the means by which milk was marketed for export use in Canada. Exports of milk from Canada were controlled and directed by Canadian dairy producers, not governments. As such, the assumptions of government control, direction or mandate that premised each of the Complainants' arguments was without basis in fact. Therefore, each of these arguments was unsustainable. Governments did play a role, but it was limited and essentially responsive to the initiatives of the industry.

4.3 Canada emphasized that the objective behind the institution of the Special Milk Classes Scheme had been to provide export opportunities that were consistent with Canada's WTO commitments, while providing reasonable continuity to dairy producers. Canada noted that the current dispute was not about domestic dairy supply management in Canada: it was about the marketing of milk in Special Classes 5(d) and (e). Even if the Canadian domestic supply management regime were found to be governmental, in Canada's view, that would not necessarily imply that the marketing of milk in Special Classes 5(d) and (e) would be governmental as such.

(b) The Authority and Role of the Canadian Dairy Commission (CDC)

4.4 New Zealand argued that the price that processors paid for milk, both for domestic and export use, was determined by the exercise of governmental authority through the operation of the CDC and provincial marketing boards and agencies. The CDC and the provincial marketing agencies were in effect a part of the executive branch of government. The fact that they were composed largely of producers could not be allowed to disguise that fact. This was evident, in New Zealand's view, from several Canadian sources. The Act establishing the CDC granted it authority to "establish the price, or minimum or maximum price, to be paid ... to producers of milk or cream ... " (paragraph 2.12 and following). ³⁸ The British Columbia Milk Marketing Board, whose members were appointed by the Lieutenant Governor in Council, was "authorised to regulate the marketing of milk in inter-provincial and export trade ... ". ³⁹ The CDC's internet website ⁴⁰ , describing the relationship between the federal and provincial authorities in the marketing of milk stated: "certain marketing activities related to industrial milk are carried out jointly between the federal government and participating provinces". The Annual Report of the CDC for 1996-97 described the Commission as a "crown corporation" and referred to the "framework" provided by the Commission for "the federal/provincial participation that is crucial to the success of the dairy sector". ⁴¹ It referred to the authority of the CDC "to purchase, store, process or sell dairy products" and "to make payments to milk and cream producers". ⁴²

4.5 New Zealand noted, in respect of a few key features of the operating procedures of the CMSMC ⁴³ , that it was noteworthy that the CDC, as Chair of the CMSMC, had a de facto veto power over almost all aspects of that Committee's decision-making. ⁴⁴ In other words, if the CDC disagreed with the rest of the CMSMC, it could then resolve the disagreement by its own unilateral decision. In this and in other respects, the CMSMC was intrinsically linked to the CDC, a Crown agency, and to the federal government.

4.6 The United States argued that the Canadian Special Milk Classes Scheme depended for its existence on legislation enacted by the Government of Canada. The Canadian Government's role did not stop with the planning and enactment of the authorizing federal legislation. The CMSMC established and revised the annual national production quota. The CDC established the target prices and Special Milk Class prices. The CDC issued the permits that were required to initiate surplus removal, which was then exported. The CDC, working with the provincial marketing boards (the powers of which were derived from the provincial and federal governments), calculated the sales returns received by the provinces, and adjusted those returns to reflect participation in the Special Milk Classes. The CDC had even financed the Special Class distributions by obtaining a line of credit. ⁴⁵

4.7 The United States argued that the Canadian federal and provincial governments had demonstrated the compulsory nature of the dairy regime's production quotas, administered price levels, and revenue pooling; the CDC and the Province of British Columbia, had for over a decade, sought through legal action to prevent producers in that province from shipping milk without the benefit of a quota allotment under the federal/provincial MSQ. ⁴⁶ Those milk producers had contested the authority of the provincial government to regulate the production and marketing of milk. The reaction of the federal and provincial government was instructive regarding the urgency with which they met this perceived challenge to supply management and the levies which subsidized dairy exports. ⁴⁷ Following an initial set back in litigation in British Columbia, both the federal government and provincial governments throughout Canada amended the governing legislative authority to address the court's finding that the provincial marketing board in British Columbia possessed only the power to regulate intra-provincial trade and, therefore, could not either regulate production or impose the levies necessary to finance the system relating to industrial milk. In response to the court's decision, the applicable federal legislation was amended to delegate authority to the provinces to regulate inter-provincial and export trade and the provinces then amended their own authority to reflect this delegation of administrative powers from the Government of Canada. ⁴⁸

4.8 The United States noted that the Attorney-General for Canada joined the litigation to preserve the authority to collect levies to finance dairy product exports and to dispute the contentions of the unlicensed dairy farmers that the exercise of power by the provincial marketing board and the Canadian Dairy Commission was ultra vires. ⁴⁹ In submissions to the court, the Attorney General stated that "it was intended by Parliament that the Governor in Council delegate to others the administration of such a scheme [administration of a quota based regulatory system] and, in the Federal Regulations there was a valid delegation of administrative powers to the Commission [the CDC], the Committee [the CMSMC], and to provincial Boards." ⁵⁰ Later in the same document, the Attorney General declared that the:

4.9 The United States noted that the Special Milk Classes Scheme was established through the collaborative efforts of the federal and provincial governments. Specifically, the Special Milk Classes Scheme was created by the Comprehensive Agreement on Special Class Pooling (P9 Agreement, see also paragraph 2.24). ⁵² That Agreement was an agreement between the federal government in Canada and the provincial governments. The powers necessary to create the Special Classes and to administer the Special Milk Classes Scheme had been conferred on the Canadian Dairy Commission, a Crown corporation, by amendment to federal legislation, the Canadian Dairy Commission Act. ⁵³

4.10 The United States emphasized that the powers of the Canadian Dairy Commission, as set forth in Section 9 of the CDC Act (paragraph 2.13) ⁵⁴ , were numerous and broad. The Act conferred the authority to the CDC: (i) to purchase any dairy product and sell, or otherwise dispose of, any dairy product purchased by it; (ii) to establish and operate a pool or pools in respect of the marketing of milk and cream; (iii) to establish the price, or minimum or maximum price, paid or to be paid to the Commission, or to producers of milk or cream; (iv) to collect the price paid or to be paid to the Commission, or to any producer in respect of the marketing of any quantity of milk or cream; and (v) to do all acts and things necessary or incidental to the exercise of any of its powers or the carrying out of its functions under the Act. The power to establish a pool, to establish prices, and to collect the price to be paid had all been added in 1995 at the time of the creation of the Special Class system. Furthermore, conspicuous by its absence in the CDC's enumerated powers was any qualification that those powers were subject to the decision of milk producers.

4.11 The United States further noted that the Comprehensive Agreement on Special Class Pooling contained several interrelated elements. First, the Agreement provided for the adoption of both the Memorandum of Understanding on Special Class Pooling ("MOU on Special Classes") and also an Addendum to the Memorandum of Understanding. The MOU on Special Classes provided that the provincial governments would enter into a revenue pooling arrangement for milk in the Special Classes. The MOU directed the CDC to determine the percentage of total production by special class utilization in each province. The MOU also contained an agreement to establish and harmonize prices for Special Classes in the CMSMC. Significantly, section 11 of the MOU stated that a province could join the MOU only by the action of the individual provincial governments, not through the action of the marketing boards, or the decision of milk producers, either individually or collectively. Annex B of the Comprehensive Agreement addressed the question of surplus removal and confirmed the role of the CDC in the operation of surplus removal. The Annex provided that there would be both a CDC-initiated surplus removal plan, as well as provision for processor-initiated surplus removal. Paragraph C(1)(iii) of Annex B provided that the CDC would remove the surplus milk by authorizing dairy processors to acquire milk under Special Class 5(e) and manufacture dairy products for purchase by the CDC for export. Sub-paragraph (vii) stipulated that the processor would receive an assured margin and that the level of the margin would be negotiated by the CDC with the processor. No mention was made at all in this Annex for a decision-making role for milk producers in any of these decisions. Nor were producers given such a role in connection with a decision of processor-initiated surplus removal. While the MOU established an advisory group, consisting of an equal number of processors and milk producers, their role was to advise the CDC on when the CDC-initiated surplus removal should be initiated.

4.12 Canada did not deny that the CDC played an important role in the Canadian dairy system but it was not the central directing agency that the Complainants alleged. The CDC acted as a centre of technical expertise that was available to the dairy industry as a whole and to the producer-dominated decision-makers at the CMSMC. It supplied recommendations and data for the consideration of the CMSMC to assist it in deciding on the annual MSQ. It also calculated a "Support Price" ⁵⁵ used by the producer boards to assist them in negotiating and establishing domestic price levels. Furthermore, the CDC's role as chair of the CMSMC was one of facilitation. The role of the CDC for practical, legal, historical and political reasons, was necessarily that of facilitator and consensus-builder.

4.13 Canada argued that although the CDC did indeed act as the chair of the CMSMC, the CDC did not act in the manner suggested by the Complainants: that of dominant director, telling the industry how they were going to carry out federal government policy. Its role was that of facilitator and technical advisor. Ultimately, the CDC implemented the policies and programmes agreed upon in the CMSMC; it neither dictated nor directed them. Canada argued that the CDC, in its role as the administrator of aspects of the dairy system, operated under the direction and control of the CMSMC and was routinely subject to rigorous scrutiny at each meeting of the CMSMC. The CMSMC, unlike the CDC, was not a governmental body. For example, CDC-initiated surplus removal did not begin with a decision of the CDC. It began with a decision of the Advisory Group on the Surplus Removal Program (known as the SRC, paragraph 2.54 and footnote thereto refers), a body composed of producers and processors. ⁵⁶ Only when the industry representatives on the SRC had decided that the domestic market was being satisfactorily supplied, did it instruct the CDC to open such a programme. Once the CDC-initiated surplus removal programme had been opened, the CDC entertained proposals from private exporters with whom it negotiated on behalf of the producers as agent. Canada rejected the US suggestion that Annex B of the Comprehensive Agreement on Special Class Pooling confirmed the role of the CDC in surplus removal (paragraph 4.11). What the Comprehensive Agreement on Special Class Pooling did was empower the continuation of the CDC role at the direction of the CMSMC. The difference was important because the role of the CDC had changed profoundly in 1995. The old Offer to Purchase Program, under which butter was bought on open offer by the CDC and then sometimes exported, had been eliminated. Instead, the CDC was instructed to be guided by the decisions of the SRC in deciding whether surplus removal activity was required. In other words, the empowerment for any activity was now squarely with the industry, not the CDC.

4.14 Canada emphasized, in respect of the CDC's role as Chair of the CMSMC and its "de facto veto power", as alleged by New Zealand (paragraph 4.5), that the Comprehensive Agreement on Special Class Pooling had now all but superseded the provisions in the NMMP. Pursuant to Article 1 of Schedule I of the Comprehensive Agreement on Special Class Pooling, all decisions relating to matters covered by that Agreement required unanimity, including all matters with respect to export trade. Given the breadth of coverage of the Comprehensive Agreement on Special Class Pooling, little of significance was left without a unanimity requirement. Hence, very little scope had been left for the CDC to take a decision where no consensus was reached in the CMSMC. In addition, Canada noted that the Comprehensive Agreement on Special Class Pooling had a formal dispute settlement process to ensure that no "de facto" CDC veto existed. The Complainants would have been better informed if they had taken note of the clear direction given in the Comprehensive Agreement on Special Class Pooling:

4.15 Canada further argued that similarly, the process of negotiation with exporters with respect to the price for Special Class 5(d) and (e) sales was subject to CMSMC control and direction. Even more importantly, the CDC was required under the terms of the Comprehensive Agreement on Special Class Pooling to act in these negotiations as agent. Section 2 of Schedule II of the Agreement stated that the "CDC shall act as agent in carrying out the administrative functions in the operations of the programme".

4.16 Canada emphasized the importance of the character of the Government's participation as it occurred in practice. Canada argued that to suggest that the mere presence of legislative authority under which an industry operated made that business "governmental" in character was untenable. All businesses operated to some degree within legal and regulatory frameworks established by government to ensure that the public interest was protected. If it were true that a legislative framework made business "governmental" then any regulated industry, including banking or utilities, would be deemed to be "governmental" in nature. It would even be possible to argue that private corporations established under corporation law were "governmental". This would be absurd. Obviously, to establish that business was "governmental" in nature, significantly more governmental intervention had to be shown.

4.17 Canada argued that once established, producer boards were provided with the authority they required to operate their affairs. This was done through enabling legislation. ⁵⁸ It established the framework for producer board operations and enabled the board to exercise certain functions when and as required. These discretionary functions related to the issuance and administration of quota, the pooling of returns, prices, producer record-keeping and reporting, inspection and the ability to enter into co-operative arrangements with other producer boards and the CDC. The critical point in this regard was that the authority provided to the producer boards was enabling, not mandatory. The producer boards were not directed or obligated by the enabling legislation to carry out certain tasks or functions, as might be the case with mandatory legislation or regulation. The result of establishing producer boards equipped with authority under enabling legislation had to be to allow producers to join together to run their own affairs, subject to a government oversight function to ensure that this authority was used in the public interest. It was absurd to suggest that, where governments had taken steps to enable citizens or industries to govern their own affairs, and withdrawn from or avoided imposing government direction and control, that the resulting self-governing regime was an arm or extension of government.

4.18 Canada noted that the authority provided to the producer boards was now essentially exercised primarily with respect to the domestic market. Producers had to be licensed to participate in the industry either with respect to milk for domestic or export sales. One of the criteria for such licensing was the holding of a minimal amount of marketing quota, quota that could be purchased in the open market. Producer boards only used their pricing authority with respect to the domestic and general use classes (Classes 1 through 5(c)) and, even in those cases, prices were usually the result of negotiations between the producer boards and the processors. More particularly, the pricing authority was not used with respect to the export classes: Special Classes 5(d) and (e). Prices for sale in these classes were the result of transaction by transaction negotiations between the processor/exporter and the CDC, acting as agent for the producers. In addition, the pooling function was not exercised with respect to over-quota sales under Special Class 5(e).

4.19 Canada acknowledged that the CDC was involved in the negotiation with exporters of prices to be paid for the milk for export purposes. However, the CDC was acting under the direction of the CMSMC, whose policies were driven by the producer-run marketing boards. Further, in acting as intermediary with the exporter, the CDC was acting as an agent on behalf of producers and in furtherance of their interests. The CDC was expected to obtain the best possible price for the producers based on prevailing returns in the world market. CDC performance in this regard was carefully monitored by the CMSMC. The producers proceeded on the expectation that the CDC would, in its negotiations, obtain the highest possible return for them. If, on review at the regular meeting of the CMSMC, there was some question that the CDC had not maximised producer returns on the export market, the CMSMC could direct the CDC to abandon the market in question or work to obtain better prices.

4.20 Furthermore, Canada argued that these negotiations were true commercial negotiations. The CDC, acting for the producers, negotiated with competing processors, pressing for the best price for the producers. The exporter sought the lowest price. The competition among exporters coupled with the forces of the international marketplace drove the negotiations. The CDC was in no position to offer, contrary to the interests of the producers, prices lower than those dictated by the world market. Nor could the CDC force an exporter to pay for a particular transaction more than world prices permitted for it to be profitable. The issuance of a "permit" by the CDC was merely a recommendation to the respective board that milk be supplied for a particular proposal. The producers, through their boards, were under no obligation to accept that recommendation. Nor was the permit recipient required to actually carry out the proposed export. The CDC did not control milk supply. Thus, it was evident that the ultimate control over decisions to produce milk for export and to pursue any particular sale rested with the producers. It was equally evident that control of production and sales relating to exports did not rest with government.

To continue with The Authority and Role of the CDC

³⁸ Section 9(1)(g) of the CDC Act, New Zealand, Annex 13.

³⁹ Section 3 of the British Columbia Milk Order, 1994 (SOR/94-511).

⁴⁰ http://www.cdc.ca/shared.html

⁴¹ New Zealand, Annex 7, p.6.

⁴² Ibid.

⁴³ National Milk Marketing Plan (the document which constitutes and lays down the operating procedures of the CMSMC), New Zealand, Annex 12.

⁴⁴ New Zealand referred, in particular, to Section 3 of the Memorandum of Agreement, November 1982, which forms part of the National Milk Marketing Plan. Section 3 provides that the CDC shall resolve disagreements in cases where unanimity is not required. The only operative requirement for unanimity is in respect of the provincial shares of the production quota (Section 18 of the Memorandum of Agreement).

⁴⁵ Canadian Dairy Commission, Annual Report, 1996/97. (United States, Exhibit 8)

⁴⁶ British Columbia Milk Marketing Board and Canadian Dairy Commission v. Luigi Aquilini, et al, Supreme Court of British Columbia, No. A950636. (United States, Exhibit 26)

⁴⁷ The United States noted that when the CDC Act was amended in 1995 to provide powers to the Commission to create the Special Classes, Canada's Attorney-General was also given authority to seek injunctive relief in actions on behalf of the Canadian Dairy Commission. (United States, Exhibit 5)

⁴⁸ The Governor in Council's Orders revising the delegation of authority to the provinces of Ontario and Quebec to include administrative powers respecting inter-provincial and export trade are contained in United States, Exhibit 27.

⁴⁹ The United States noted that in February 1997, Agriculture Minister Ralph Goodale separately explained the reason for federal intervention in the litigation as follows: "Right now, some Alberta and British Columbia producers are trying to take advantage of supply management by selling milk illegally. The only way to stop it is to bring them in court, which means a lot of expenses. We believe that producers shouldn't be the only ones to pay a bill in which the governments have a responsibility." The Western Producer, 6 February 1997 edition, "Ottawa may share B.C. dairy battle legal costs". (United States, Exhibit 28) Notably, one of the regulations that the British Columbia Board and the CDC sought to enforce in the B.C. litigation was the imposition of the levies on producers used to support supply management and to fund export subsidies. The government succeeded in this pursuit when the Supreme Court of British Columbia in a 12 September 1997 opinion ruled that unpaid provincial and federal levies were enforceable debts. "Oral Reasons for Judgment", Mr. Justice Wong, 12 September 1997, p. 6.

⁵⁰ "Outline of the Argument of the Attorney General of Canada," filed 24 September 1996, in the Supreme Court of British Columbia in British Columbia Milk Marketing Board and CDC v. Luigi Aquilini, p. 8. (United States, Exhibit 29)

⁵¹ United States, Exhibit 29, p.12.

⁵² United States, Exhibit 5.

⁵³ United States, Exhibit 15.

⁵⁴ United States, Exhibit 37.

⁵⁵ Canada stressed that the CDC did not operate a price support system. In the past, it set a "support price" which was in fact applied in operating an open offer to purchase programme. This programme had been terminated, although the CDC still set a misnamed "support price" which, as noted, was used for reference purposes by the producer boards, as well as certain limited domestic seasonality programmes.

⁵⁶ Canada noted that the CDC required under the terms of the Comprehensive Agreement on Special Class Pooling to form the SRC, to be composed of producers and processors. The processors had insisted that they have such a significant role so that their interests would be respected.

⁵⁷ The Comprehensive Agreement on Special Class Pooling, the ("P9 Agreement"), Schedule I, Section 1. (Canada, Exhibit 7)

⁵⁸ Canada noted that due to the constitutional division of responsibilities in Canada, legislation was required at both the provincial and federal levels. In the case of the dairy industry, enabling authority within the provincial sphere was passed directly to the producer boards through provincial legislation. On the federal side, the required enabling authority was provided initially to the Canadian Dairy Commission, which in turn, pursuant to an agreement, conveyed authority to the provincial producer boards.