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

4.21 New Zealand noted that Canada did not seek to deny that the CDC and the provincial milk marketing boards and agencies derived their authority from statute. Instead, Canada argued that reference to the statutory basis of these bodies gave a misleading picture because many of the powers that existed in legislation were not used in practice (paragraph 4.16). But this ignored the fact that the statutory powers of a body gave it a status and character that existed regardless of whether all aspects of those powers were exercised in fact. It did not need to exercise every power that it had on every occasion, or at all, in order to maintain the authority that the government had given it. Its governmental authority derived just as much from its residual as from its exercised authority. Thus, describing legislation as "enabling" did not prove anything. The fact that the federal and provincial legislation in question "enabled" the operation of the Special Milk Classes Scheme was not disputed. The question was whether that scheme entailed sufficient government involvement to meet the relevant definition of an export subsidy. In this respect, enabling legislation was an important first step. It "enabled" the construction of the market for milk into two separate markets. It "enabled" the compelling of producers to ship their milk into one or the other of those markets, and it "enabled" the provision of lower-priced milk to exporters, the subsidy that was the subject of this case.

4.22 New Zealand argued that the above could be demonstrated by reference to the authority of the CDC to resolve differences in the Canadian Milk Supply Management Committee (the CMSMC) by its own unilateral decision. ⁵⁹ The fact that it might not do so in practice, as Canada alleged, was irrelevant. The fact that it had the authority to make such decisions would have a significant impact on the reaching of consensus within the CMSMC. The process of reaching consensus when one party had the ultimate power of decision was fundamentally different from the process of reaching consensus when no one could individually make that decision. Moreover, in this case, the power of decision rested, not just with a private entity, but with an agency vested with all the authority of government.

4.23 Furthermore, Canada had amended the legislation establishing the CDC in order to enable it to implement the Special Milk Classes Scheme. Thus, there was no lack of opportunity for legislative amendment in Canada. If the Canadian Government's argument that the regulation and pricing of milk was not a matter of governmental authority, New Zealand questioned why then it had been necessary to amend both provincial and federal legislation to provide such powers; for example, why had it been necessary to amend the CDC Act to provide that the CDC may "establish the price, or minimum or maximum price, paid or to be paid to the Commission, or to producers of milk or cream ... " ⁶⁰

4.24 New Zealand noted that the process by which milk was accessed for export implicated federal and provincial authorities in an integral way. Exporters had to obtain a permit under Special Class 5(d) or 5(e) from the CDC. That permit was presented to the relevant provincial milk marketing agency in order to obtain milk at the Special Class 5(d) or (e) price. Canada claimed that this permit was "merely a recommendation" (paragraph 4.20). But that was simply a statement about the relationship of the CDC to the provincial marketing agencies, reflecting constitutional authority regarding the setting of prices for milk in a federal system. The exporter had no choice in the matter. The only way to access milk for export in Classes 5(d) and (e) was with a permit. The system was mandatory and the source of that authority was not producer agreement; it was derived from the statutory authority of the CDC and the provincial marketing agencies to compel such behaviour.

4.25 New Zealand argued that Canada's assertion that the CDC operated as a collective bargaining agent for producers, and was controlled by those producers acting through their producer-run marketing boards, equally did not withstand analysis. Canada claimed that the CDC's performance in negotiating prices for exports had to satisfy the boards and the producers or they would require a re-evaluation of CDC practices through the CMSMC (paragraph 4.15). The impression sought to be conveyed was that the CDC was somehow subservient to producers and not exercising government authority. New Zealand claimed that the opposite was the case. The CMSMC could not control the CDC which ultimately had a veto within the CMSMC, whether or not in practice that veto ever needed to be exercised. Naturally, the CDC would want to maximise returns for producers; that was part of its statutory mandate. And, if producers were unhappy with the CDC, political pressure would be brought to bear on it. Yet this was a normal description of how government agencies functioned. It did not demonstrate that somehow the CDC lost its governmental character through participating in the administration of the Special Milk Classes Scheme. New Zealand noted that Canada downplayed the role of the CDC, arguing that it did not exercise the statutory functions that it had in fact been given. Yet, in New Zealand's view, the actual functions exercised by the CDC were more than sufficient to show the necessary government involvement in the administration and operation of the Special Milk Classes Scheme.

4.26 New Zealand noted that Canada also sought to argue that New Zealand had wrongly focused on the CDC when it was the CMSMC which was the key decision-maker in respect of special milk classes. The CMSMC, Canada argued, was not a governmental body (paragraph 4.13). Yet the CMSMC was created under the National Milk Marketing Plan (the NMMP) ⁶¹ and the NMMP was described by Canada as a "contractual agreement", hence the CMSMC "is a contractual body not a creation of government". ⁶² New Zealand agreed that the NMMP was indeed an agreement. Its opening words were "This Plan is a federal-provincial agreement ... ". It was entered into by the CDC, a federal Crown Corporation, and the provinces. In some instances the agreement was signed by the Ministers of Agriculture for the province as well as the representative of the provincial milk marketing board; in other instances it was signed by the milk marketing board for the province. The NMMP was an intergovernmental agreement entered into between the representative of the federal government, the CDC, and the authorised representatives of the provinces who varied province by province. As a result, the CMSMC was a creature of intergovernmental agreement. Thus, to characterise it as a "contractual body not a creature of government" was misleading. The preamble to the Plan recognised that "the participation of the Federal and Provincial authorities is required to assure the adoption and implementation of such Plan". ⁶³

4.27 New Zealand noted that although Canada did not deny that the CDC was a Crown agency and was the representative of the Government of Canada, it argued that its role on the CMSMC, which it chaired, was not governmental. Canada said that the CDC's role was that of "facilitator and technical adviser," and the CDC "implements the policies and programmes agreed upon in the CMSMC; it neither dictates nor directs them". Such a view ignored the ultimate decision-making powers of the CDC whose influence through research and technical expertise, as well as its authority derived from the fact that it was the representative of the government of Canada, could not be hidden by focusing on a collegial decision-making process within CMSMC meetings. The CDC did not need to "dictate" or "direct" the policies of the CMSMC. The fact that at the end of the day it could do so, gave the CDC the central role in the CMSMC. New Zealand noted that in the Bari case, the British Columbia Supreme Court had found that the provincial boards and the CMSMC had valid administrative powers - derived from the CDC Act - "to carry out ... the efficient marketing of milk and milk products". ⁶⁴

4.28 New Zealand noted that Canada denied that the CDC had a veto power within the CMSMC claiming that the Comprehensive Agreement on Special Class Pooling had "all but superseded" the provisions of the NMMP which grant such authority to the CDC (paragraph 4.14). It was notable that Canada carefully qualified this statement about the redundancy of the NMMP. It was particularly important to do so because what Canada sought to rely on to support its position simply did not prove its point. The "veto power", Canada said, had been replaced by a unanimity rule. But that made New Zealand's point; it did not contradict it. Under a unanimity rule, the CDC would have a "de facto veto power". The Chairman of the CDC, Mr Guy Jacob, when describing the role of the CDC within the CMSMC to the Canadian House of Commons Standing Committee on Agriculture and Agrifood, in March of 1998 ⁶⁵ , said:

4.29 New Zealand pointed out that in its Annual Report for 1996/97, the CDC stated that it "is largely responsible for the administration of the National Milk Marketing Plan, [and] the federal/provincial agreement governing industrial milk production and management in Canada ... ". ⁶⁶ The reality was that the Special Milk Classes Scheme operated through the combined actions of the CDC, a federal government agency, and provincial milk marketing boards. New Zealand noted that these institutions, acting individually, or collectively within the CMSMC, exercised governmental functions that were essential for the operation of the Special Milk Classes Scheme. They established and administered the quota regime on which the Special Milk Classes Scheme was based. They set prices and determined whether milk was to be sold in domestic or export markets. They prohibited entry by new producers except in accordance with the quota regime. They exercised enforcement authority over both quota holders and those outside the system. In respect of the federal government agency - the CDC - it had specific authority within the framework of the CMSMC when unanimity was not reached. It also issued permits to exporters, which constituted the only way in which access to lower-priced milk could be obtained.

4.30 New Zealand noted that regardless of the composition of provincial milk marketing boards, these boards exercised governmental functions - functions that had been expressly mandated by government in the boards' constituent statutes or regulations, or functions that had been delegated to them by the federal government's agency, the CDC. The CDC both functioned independently as a governmental actor under the Special Milk Classes Scheme and was the source of delegated governmental authority exercised by the provincial milk marketing agencies.

4.31 The United States stressed that the Special Milk Classes Scheme could not exist without the CDC to oversee its operations. As noted by New Zealand (paragraph 4.23), if this had not been the case, it would have been unnecessary to amend the Canadian Dairy Commission Act to grant specific additional powers to the CDC to supervise establishment of the Special Classes, to empower it to pool revenue from the Special Classes, and to establish the price to be paid.

4.32 In respect of the producers' involvement in the price-setting of milk, the United States argued that while Canada contended that the MOU on Special Class pooling appointed the CDC to negotiate prices with the processors as agent for the milk producers, Canada had been unable to point to specific language that established this principal-agent relationship. Canada failed to identify any provision that demonstrated that the CDC negotiated prices as agent for the producers. In fact, Section 4 of the CDC Act specifically stated that the CDC was the agent of the Crown for all purposes of the Act. Indeed, the facts suggested to the contrary that the CDC was primarily negotiating a price for inputs for the exporters that would allow them to be competitive in world markets for processed dairy products. Furthermore, the language of the MOU specifically contradicted Canada's assertion that the producers negotiated the processors' assured margin on the latter's export sales. Paragraph C(1)(vii) of Annex B to the MOU directed that this was the role of the CDC, not the milk producers. ⁶⁷

4.33 The United States argued that an examination of the documents that provided the foundation for the Special Milk Classes Scheme revealed that the Canadian argument that producers retained the ultimate decision-making authority was baseless. The United States had already detailed the scope of the powers that Canada's Parliament granted to the CDC to operate the Special Milk Classes Scheme, as well as the authority provided to the CDC to delegate some of its newly-created powers to both the provincial governments and the provincial milk marketing boards - powers which had been provided mainly through amendment of the CDC Act and the Dairy Product Marketing Regulations (paragraph 4.10 and following). ⁶⁸ The Memorandum of Understanding establishing the Special Classes was an agreement between the provinces and the CDC, a Canadian Crown corporation. Paragraph 11(a) of Schedule I of the MOU stated that "[i]f a Province wishes to become a party to this agreement, its Provincial Government representative shall send a note of its intent to the CDC" (emphasis added). The MOU did not state that provinces would join the Special Classes Agreement when the milk producers or the provincial milk marketing boards so decided. The MOU very plainly stated that Provinces joined the Agreement by the action of their Provincial Government representative. While milk marketing boards were also signatories to the Agreement, the dispositive fact for each province was whether its Government representative indicated an intent to join. The United States did not dispute that most Provincial governments conferred with their industry representatives to determine whether the industry supported the Special Classes Agreement. However, government/industry consultations and a government's receptivity to citizen's input did not alter the essential legal fact that the Comprehensive Agreement on Special Class Pooling was first, and foremost, between the Provincial governments and the CDC.

4.34 The terms of the National Milk Marketing Plan, which had long been the centre piece of Canada's dairy supply management, were similar in effect to the Special Class MOU. The opening paragraph of the NMMP stated "[t]his Plan is a federal-provincial agreement in respect of the establishment of a National Milk Marketing Plan ... ". The Preamble, in fact, stated that "the participation of the Federal and Provincial authorities was required to assure the adoption and implementation of the Plan." In contrast, the terms of the Plan made it clear that the participation of milk marketing boards was not essential to the working of either the Plan or the CMSMC. Paragraph H(3) of the Plan provided:

4.35 Moreover, the United States noted that the Governor in Council had delegated some of his powers to the CDC. For example, the Dairy Products Marketing Regulations provided that the CDC shall cause a federal licence to be issued only to a person to whom a share of the portion of the federal quota had been allocated. Moreover, the regulations stipulated that no person should engage in the marketing in inter-provincial or export trade of a dairy product unless the dairy product was, or was made from, milk or cream that was produced by a person who held a federal licence. The CDC, thus, could deny any milk producer that did not possess a federal quota the right to market milk. The regulations were also important in that they provided specifically for the delegation of federal powers to the dairy marketing boards which operated in the various provinces. Thus, when those dairy boards acted with respect to the Special Classes and inter-provincial or export trade, they functioned under powers delegated by the federal government. Hence, the source of the authority for the regulation of the milk marketing in inter-provincial and export trade was federal law and the Canadian Parliament. The entities that had been tasked with performing the functions necessary to implement the legislated regime were also federal and provincial governments, or marketing boards acting with authority delegated from the federal government, not from the Canadian dairy industry. The price the processors paid for milk, both domestically and for export, was determined by the exercise of governmental authority through the operation of the CDC and provincial marketing boards and agencies. The United States noted that Section 3 of Bill C-86, which was the legislation which amended the CDC Act in 1995 ⁶⁹ gave the CDC the authority, with the approval of the Governor in Council, to enter into agreements with a province or a marketing board to set prices, establish pools, and collect prices to be paid.

4.36 The United States noted that Canada had stated that although the CDC issued permits to processors to enable them to purchase milk at reduced prices, such "permits" did not actually require that milk be made available to the processors at such discounted prices. Instead, Canada claimed that the permits were only recommendations, and that the milk boards were not compelled to provide milk to the processors according to the terms of the permit. However, there was no question that the processors could not obtain the milk at the lower price without the permits. ⁷⁰ In this sense, Canada minimized two equally, if not more, important practical considerations: (i) the milk producers were essentially price takers; and (ii) processors could not access the lower priced Class 5(d) and (e) milk without a permit. Thus, a CDC issued permit was a condition for receipt by the processor of the Special Class 5(d) and (e) milk, and boards possessed few options but to accept the price that was offered.

4.37 Canada argued that to the extent that authority in respect of the Special Milk Classes Scheme was conferred on the CDC, this was to assist in the implementation of the decisions taken through the producer-boards and the CMSMC as reflected in the Comprehensive Agreement on Special Class Pooling. Canada stressed that the amendments to the CDC Act were intended to supplement the existing authority of provincial producer boards with the necessary federal enabling authority so that the producer boards could fulfil their tasks effectively. It was not intended by Parliament that the enabling amendments to the Act would result in the CDC directing the producer boards to conduct their functions in a particular way. On the contrary, Section 9.1 of the amended Act contemplated agreements providing for the performance by those very boards of functions otherwise vested in the CDC in respect of inter-provincial and export trade. In the specific case of pricing, Sections 9(1)(g) and 9.1 of the amended Act were together intended to permit the producer boards' pricing functions in respect of Classes 1 - 4 and 5(a), (b) and (c) to be supplemented with the requisite federal authority, thereby filling the legal gap identified in the Bari II case. Contrary to what was suggested by the Complainants, the CDC did not, as a result of the inclusion of Section 9(1)(g) in the Act, exercise price-setting powers. Pricing for Classes 1 - 4 and Classes 5(a), (b) and (c) was negotiated and decided by the provincial boards either directly or through the CMSMC. Pricing for Classes 5(d) and (e) was negotiated on a contract-by-contract basis, with the producer boards exercising ultimate control over the supply of milk at the negotiated price recommended by the CDC. Class 5(d) and Class 5(e) prices were not fixed through the exercise of regulatory powers, whether under Section 9(1)(g) or otherwise, but were established on a commercial basis based on world market conditions.

4.38 In respect of the US assertion that Canada had not identified specific language that established a principle-agent relationship in respect of the CDC's role as agent for the milk producers in price negotiations with processors (paragraph 4.32), Canada drew the Panel's attention to Section 2, Schedule II, Addendum of the Comprehensive Agreement on Special Class Pooling, which stated that: " ... that the Canadian Diary Commission (CDC) shall act as agent in carrying out administrative functions in the operation of the program" and, also, in Section 1, Schedule I to the same Agreement which stated that the CMSMC "... will be the supervisory body which will oversee the implementation of the [Comprehensive Agreement on Special Class Pooling] agreement."

4.39 Canada emphasized that the role of the CDC as a technical advisor and consensus builder - rather than as a decision-maker at the CMSMC - was evident in the setting and allocation of the MSQ. In practice, the CMSMC asked the CMSMC Secretariat to develop estimates of market requirements for Canadian industrial milk (paragraph 4.27 and following refer). The CDC presented the estimates developed by the Secretariat to the CMSMC for consideration in advance of each dairy year. The technical estimates prepared by the Secretariat were then actively debated by the CMSMC. Typically, the market requirements initially calculated by the CMSMC Secretariat were revised on the basis of directions received from the CMSMC. Canada stressed that the CMSMC was in no way bound to accept the figures suggested by the Secretariat. Nor did the CMSMC merely rubber stamp these suggested market requirements. Only after the CMSMC was satisfied with the market requirements estimates was a decision made on the MSQ allocations among the various provinces. Canada reiterated that it was the CMSMC, not the CDC, that decided on the MSQ allocation. Such allocation required unanimity. 4.

40 Canada argued that the Complainants had suggested that because many types of discretionary authority had been conferred on the CDC through the CDC Act, this somehow indicated that the CDC carried out all of the things it was empowered to do. This was insupportable both in principle and in fact. First, simply because enabling legislation permitted an entity to carry out certain acts, this did not mean that they would be exercised. The entity could be constrained from acting by other legal obligations, or may simply find that certain actions were not needed in a particular circumstance. Alternatively, it could not be in a political or technical position to undertake the action it was authorized to do. The point was: enabling legislation did not compel any action. In practice, the list of functions actually carried out by the CDC was much more circumscribed than the list of functions in the CDC Act. ⁷¹ Further, Canada argued that the Complainants' argumentation ignored the fundamental principle in the WTO and the GATT that obligations were only attached to what a Member actually did, not what they could do. For example, an entity could have all the necessary power to provide subsidies in excess of a Member's obligations, but this was of no consequence unless such subsidies were actually provided.

To continue with Government Involvement

⁵⁹ New Zealand referred to Section 3 of the Memorandum of Agreement, November 1982, which formed part of the National Milk Marketing Plan (NMMP). (New Zealand, Annex 12)

⁶⁰ Section 9(1)(g) of the CDC Act. (New Zealand, Annex 13)

⁶¹ New Zealand, Annex 12.

⁶² New Zealand referred to p. 21 of the text accompanying Canada's audio-visual presentation at the first substantive meeting of the Panel.

⁶³ New Zealand referred to the fourth preambular paragraph of the NMMP.

⁶⁴ British Columbia Milk Marketing Board and the CDC v. Aquilini et al, (Vancouver Registry, No. A950636). para. 31.

⁶⁵ Mr. Guy Jacob, President, CDC, p. 2, United States, Exhibit 45.

⁶⁶ 1996/1997 Annual Report of the Canadian Dairy Commission, p.5. (New Zealand, Annex 7)

⁶⁷ The United States noted that 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. No mention was made at all in this Annex for a decision-making role for milk producers in any of these decisions.

⁶⁸ United States, Exhibit 37.

⁶⁹ United States, Exhibit 15.

⁷⁰ The United States referred to the testimony of Mr. Guy Jacob, President, CDC: "In other words in order for an exporter to be able to buy milk at a lower price, he must first obtain a permit from the Canadian Dairy Commission." (United States, Exhibit 45, p. 2)

⁷¹ Canada noted that a fuller discussion of the actual activities of the CDC, as opposed to the list put forward in United States, Exhibit 37, was attached as Annex C to its Second Submission.