(c) Government Involvement

4.41 New Zealand argued that the Special Milk Classes Scheme was a response to the belief that export subsidies, which existed under the producer levy scheme, would no longer be compatible with Canada's international trading obligations. The fact that Canada had chosen to abandon the producer levy-based subsidies in favour of an alternative scheme made it clear that the reduction and eventual elimination of the incentives provided by those subsidies was not an option Canada was prepared to follow. The Special Milk Classes Scheme was not, as Canada maintained, a response to the fact that as a result of the new WTO Agreements Canada no longer had to limit production of milk. New Zealand argued that the Special Milk Classes Scheme was a substitute for the old producer levy-based subsidy. Moreover, it was a federal government agency, the CDC, that had spearheaded the process that led to the development of the Special Milk Classes Scheme.

4.42 New Zealand noted that the question of the degree of governmental involvement necessary for measures to be regarded as government measures had arisen on several occasions under both the GATT 1947 and the WTO. The 1960 GATT Panel studying the obligation on states to notify subsidies financed by a non-governmental levy under GATT Article XVI, spoke of schemes "which are dependent for their enforcement on some form of government action." ⁷² The Panel on Japan - Photographic Film emphasised the fact that where non-binding action of government "creates incentives or disincentives largely dependent on governmental action for private parties to act in a particular manner, it may be considered a governmental measure." ⁷³

4.43 New Zealand contended that in the present case, an obvious parallel could be drawn with the decision of the Panel in EEC - Restrictions on Imports of Dessert Apples. ⁷⁴ In deciding whether the EEC regime relating to the marketing of apples constituted a governmental measure within the meaning of GATT Article XI:2(c)(i), the Panel noted that:

4.44 Hence, New Zealand noted that in such a situation, of combined public and private responsibility, the Panel had considered the EEC regime to be governmental in nature - even although the involvement by public authorities was indirect.

4.45 New Zealand contended that the Special Milk Classes Scheme had been initiated with direct government involvement. The CDC, a federal Crown corporation, had identified the need for changes to the programmes it offered as early as 1994. ⁷⁶ It was a participant in the industry Consultation Committee which concluded that export subsidy reduction commitments would "render the use of levies ineffective". ⁷⁷ A federal-provincial task force was established to review the matter. The CDC chaired the "Dairy Industry Strategic Planning Committee" that recommended a classified pricing system for milk based on end-use and a national pooling system. A negotiating sub-committee of the CMSMC brought those recommendations to federal and provincial Ministers of Agriculture in December 1994. This was the genesis of the government-initiated Special Milk Classes Scheme.

4.46 New Zealand contended that the Special Milk Classes Scheme was implemented through government action. It was embodied in a federal-provincial agreement, the Comprehensive Agreement on Special Class Pooling. The CDC ACT was amended to allow the CDC to administer the Special Milk Class permit system and the pooling arrangements. Under the Comprehensive Agreement on Special Class Pooling the CDC was to "act as agent [of the federal Government] in carrying out administrative functions in the operation of the programme" (Schedule II).

4.47 New Zealand stressed that the scheme required continued government involvement for its operation and enforcement. In order to be effective and to provide the appropriate incentives, the scheme had to be mandatory and new entrants prohibited. This was done through the exercise of statutory authority. Government involvement was therefore essential to the scheme's existence. The mandatory character of pooling, the administrative functions of the CDC and of the provincial milk marketing boards or agencies in the operation of "special milk class" access, pricing and pooling, were all activities of government. Indeed, in Canada - Import Restrictions on Ice Cream and Yoghurt ⁷⁸ , Canada itself had claimed that its milk supply management system constituted governmental measures within the meaning of GATT Article XI:2(c)(i).

4.48 New Zealand claimed that the centrality of governmental involvement in the Special Milk Classes Scheme was readily apparent when the question was asked whether the scheme could continue to operate if the governmental presence were removed. There would be no legislative basis for the operation of the scheme. There would be no NMMP, there would be no Comprehensive Agreement on Special Class Pooling. In the absence of government authority, there would be no mechanism to set prices or to compel compliance except through the agreement of the members of the "producers' club". Nothing could prevent those outside the "club" from marketing milk domestically. There would be no government agency, no CDC, to chair the CMSMC and resolve differences where unanimity could not be reached, and there would be no delegated governmental powers residing in provincial marketing boards. Furthermore, to the extent that some agency was needed to administer a permit system under which access to "special class" milk was provided, it would have to be a private agency established by the producer members themselves. New Zealand argued that the Special Milk Classes Scheme would simply not function if everything was left to private producer agreement. Indeed, any attempt at price setting by private producer agreement would raise questions about compliance with competition laws. It did not do so under Canada's supply management system because of the very involvement of government in the scheme. Hence, government involvement was critical to the functioning of all aspects of the Special Milk Classes Scheme. Canada's argument that the scheme operated through the private activity of producers with only a government oversight function simply was not credible.

4.49 New Zealand recalled that Canada had not argued that there had been any real change to the role of government after the introduction of special milk classes. At no point had Canada sought to suggest that special milk classes heralded a shift in the extent of federal and provincial governments' involvement in the dairy marketing system. Instead, the picture Canada painted of government activity within the dairy supply management system was one of continuity. To Canada, it had remained a producer-driven and dominated dairy marketing system (paragraph 4.62). New Zealand argued that, if this were the case, there would not have been sufficient government involvement within Canadian terms under the old producer levy scheme to meet the requirement of government involvement in order to constitute an export subsidy. It would simply have been a system whereby producers within their own organisations - milk marketing agencies and the CMSMC - decided to levy themselves in order to support exports, and government involvement would simply have been to act as the designated agent of the producers to assist in implementing the system. Although this was the consequence of Canada's position, even Canada had admitted that its old producer levy system would have constituted a subsidy under Article 9.1(c) of the Agreement on Agriculture. ⁷⁹ In New Zealand's view, such an admission undermined Canada's portrayal of government involvement in the Special Milk Classes Scheme.

4.50 New Zealand noted that Canada claimed that the government role was one of oversight only and provincial and federal governments simply provided a framework for the activities of producer-run marketing boards; within the CMSMC, the government's role was to ensure that the system was operated in accordance with the general public interest (paragraph 4.16). Canada sought to equate the role of government in the operation of the Special Milk Classes Scheme, and in dairy supply management more broadly, to that of its role in society generally - to act in the public interest. However, the role of government in the Special Milk Classes Scheme was much more intrusive than the exercise of its general function of oversight in the public interest. Without the active participation of government in the administration and operation of the scheme, including its residual enforcement authority, the system could not work. Instead of describing the nature of the government involvement, Canada had gone to the other extreme and sought to have the government disappear altogether from the Special Milk Classes Scheme.

4.51 New Zealand argued that in the case of non-mandatory measures, the determining factor in deciding whether conduct could be ascribed as resulting from governmental action had been whether there were sufficient incentives or disincentives for the measures to take effect. ⁸⁰ Most recently, a WTO Panel had noted that "the fact that an action is taken by private parties does not rule out the possibility that it may be deemed to be governmental if there is sufficient government involvement with it". ⁸¹ The Panel had gone on to note that it was difficult to establish definitive rules, and that a case-by-case analysis was required.

4.52 New Zealand maintained that under any of these tests the operation of the Special Milk Classes Scheme was a government activity. The scheme derived from the agreement of agencies of the federal and provincial governments created by statute. These agencies administered a supply management scheme that could function only through the interplay of the exercise of federal and provincial authority. The Bari litigation demonstrated that provincial authority alone was not sufficient to give effect to a quota regime affecting inter-provincial and export trade. There had to be the joint action of federal and provincial governments to enable the system to function.

4.53 The Special Milk Classes Scheme, as an aspect of Canada's supply management system, was compulsory: essentially, the only way that milk could be sold on the export market was through special milk classes. Producers did not have the option of selling on the export market independently of a government-mandated scheme. The subsidy that exporters received under the Special Milk Classes Scheme was provided through the cooperative activity of the CDC and the provincial milk marketing agencies. Exporters had to obtain a permit from the CDC and obtain milk through the provincial milk marketing agency. The scheme was thus government-mandated, maintained through the actions of government agencies, and enforced by government authority.

4.54 The United States also agreed that milk would not be available to processors of dairy products for export at the indicated prices absent the structure of the dairy regime established by the Canadian federal and provincial governments and which was administered and enforced by those governments. The pervasiveness of the government's role in the Special Milk Classes Scheme was evident from consideration of the legislatively granted authority that those entities possessed and exercised (paragraph 4.4 and following). Despite Canada's claims to the contrary, government action and authority was not transformed into private action simply because private parties, in this case dairy farmer organizations, could approve in specific instances of the actions taken by their government. If this were the case, any action by a government to benefit a portion of its citizenry would be converted into private action. For example, most anti-dumping measures would be "private actions" by definition and the WTO Agreement on Anti-Dumping would be nullified.

4.55 The United States argued that it was sufficient to look to the marketing boards' own statements about the source of their powers to lay to rest Canada's contention that the boards receive their power from the dairy farmers. For example, the British Columbia Milk Marketing Board's Consolidated Order of 1 August 1997, described both its purpose and the basis for the Board's authority. The stated purpose of the Order prominently referenced both the provincial and federal authority that permitted the Board to act. ⁸² Also, a regulation issued by the Ontario Milk Marketing Board in June 1995 had a similar effect with respect to the powers delegated to it by the federal government as the authority for its control over the marketing of milk produced in the Province of Ontario. ⁸³

4.56 The United States argued that both the manner of creation of the Special Classes and the actions by the provincial and federal governments following the Bari II litigation also refuted Canada's allegations that the Special Milk Classes Scheme represented an agreement between private parties that was simply pursued within an overall legislative and regulatory framework that was government created. ⁸⁴ Indeed, if the Special Milk Classes Scheme were simply an agreement between the various producer dominated provincial marketing boards, the United States questioned: (i) why any government involvement was required; (ii) why did the Comprehensive Agreement state that it applied only to those provinces whose provincial governments had approved it ⁸⁵ ; (iii) why was it necessary for the Canadian Parliament to amend the CDC Act to provide specific powers to the CDC to operate the Special Classes; and (iv) why such powers could not simply be conferred by the dairy marketing boards in their capacity as representatives of the dairy farmers. Canada had not, in the US view, provided responses to any of these questions. Its only answer was that the provincial marketing boards (which performed most, if not all, of their relevant responsibilities by virtue of powers delegated to them by both the federal and provincial governments) could not remain in office if they did not satisfy the desires of their dairy farmer constituency (paragraph 4.19). The United States argued that if this were the test for determining whether action was governmental or not, any action by a popularly-elected government would be deemed not to be governmental action. Moreover, every time a government agency or legislature took action which benefited a class of individuals, that action would no longer be considered to be governmental in character.

4.57 The United States noted that a body of legal authority had developed in the GATT and WTO that was relevant to the issues before this Panel. Several GATT and WTO panels had considered, primarily in the context of Article XI of the GATT, whether actions by a government that did not impose specific requirements on private parties were, nonetheless, government measures. While this analysis had necessarily to be conducted on a case-by-case basis, the consistent conclusion that each Panel had reached was that action need not be mandated by a government to constitute enforcement of a government measure. This issue was first addressed in Japan - Restrictions on Imports of Certain Agricultural Products (hereafter "Japan - Certain Agricultural Products"). ⁸⁶ There the Panel had wrestled with the question of whether the Japanese system relating to restrictions on domestic production provided for "enforcement of government measures". The Panel found that the restrictions emanated from the government and that "administrative guidance" from the Government of Japan played an important role in the enforcement of those measures. ⁸⁷ This principle was taken a step further by the Panel in Japan - Semiconductors. ⁸⁸ In that dispute, the Panel found that "an administrative structure had been created by the Government of Japan which operated to place maximum possible pressure on the private sector to cease exporting at prices below company-specific costs." ⁸⁹ The Panel concluded that despite the absence of any legally binding obligation, the complex of measures that Japan had adopted operated in a manner equivalent to mandatory requirements. ⁹⁰

4.58 Also, the United States claimed that the analysis of the panel which examined Japan - Photographic Film ⁹¹ demonstrated exactly how schemes such as the Special Milk Classes Scheme fitted within the body of WTO law. The Photographic Film panel addressed the related issues of whether certain governmental actions were "measures" for the purposes of the non-violation nullification or impairment remedy under GATT Article XXIII:1(b) and were "laws, regulations or requirements" for the purposes of GATT Article III. Agricultural trade measures of a hybrid nature had been the subject of GATT panel findings. As the Photographic Film panel observed, "a 1989 panel on EEC - Restrictions on Imports of Dessert Apples noted that 'the EEC internal regime for apples was a hybrid one, which combined elements of public and private responsibility. Legally there were two possible systems, direct buying-in of apples by Member State authorities and withdrawals by producer groups'. That panel found that both the buying-in and withdrawal systems established for apples under the EEC regulation could be considered to be governmental measures for the purposes of Article XI:2(c)(i)." ⁹² The rule formulated by the Photographic Film panel was that " ... the fact that an action is taken by private parties does not rule out the possibility that it may be deemed to be governmental if there is sufficient government involvement with it. It is difficult to establish bright-line rules in this regard, however. Thus, that possibility will need to be examined on a case-by-case basis." ⁹³

4.59 The United States noted that the Photographic Film panel also examined the Fair Trade Promotion Council's 1984 Self-Regulating Standards. Whereas Japan argued that this Council was a mere private entity, the panel had noted the extensive links between the Council and the Japanese government - "dependence of the Fair Trade Promotion Council on liaison with the JFTC for the establishment of these standards" - and found that these standards were attributable to the Japanese government. ⁹⁴ The Photographic Film panel examined a Retailers Fair Competition Code and its enforcement body, the Retailers Fair Trade Council. Japan argued that this Code was only self-regulation among business entities, and the Council was a voluntary organ to implement this self-regulation. The panel rejected Japan's position:

4.60 The United States argued that the same dangers that the Photographic Film Panel found, also existed in the context of Canada's Special Milk Classes Scheme. Canada was giving disproportionate weight to the involvement of private dairy farmers in the operation of the marketing boards, and would minimize the greater importance of the boards' dependence on powers delegated by the federal and provincial governments in Canada. The United States argued that if the current Panel found that the Special Milk Classes Scheme was outside the WTO Agreements simply because it incorporated some private elements into an essentially government scheme, other countries, led by the United States, would be impelled to similarly rearrange their affairs. The economics of dairy trade provided overwhelming pressure to imitate Canada's regime if it was determined to be WTO consistent, a result which the United States believed would be entirely unjustified.

4.61 The United States emphasized that the Special Class prices for exported milk were determined by the CDC or the provincial marketing boards. This was essentially achieved by the CDC negotiating an assured margin for processors, which was then subtracted with other costs to provide a net return to the milk producers. In cases of exports by the CDC, this was the end of the matter. Where the CDC reached agreement with a processor on a price to be paid to the producers, Canada insisted that the marketing boards then could determine whether to accept the price obtained. Nonetheless, Canada admitted that the boards rarely failed to accept the price. But more importantly, when the boards accepted that price, they were exercising the governmental powers that had been delegated to them. Their actions, therefore, were no less governmental than those of the CDC. It was not an exaggeration that the boards were essentially extensions of the executive branch of the Government of Canada for most purposes relating to regulation of milk marketing and the Special Classes in particular. ⁹⁶

4.62 Canada argued that governments did play a role, in that they had taken the necessary steps to provide enabling authority to the producers and their organisations to ensure that the system could fulfill its supply management objectives while retaining an oversight function to ensure that such enabling authority was not misused and that the public interest was protected. Subject to this oversight function, governments in Canada had devolved discretionary authority to the dairy industry so it could run its own affairs. This function was diametrically opposed to the fanciful image suggested by the Complainants of coercive government control and direction.

4.63 Canada refuted the US argument that producer boards were essentially extensions of the executive branch of its government (paragraph 4.61). The executive branch of the Government of Canada consisted of officials and departments directed by ministers of the Crown and the principal executive body, the Cabinet, headed by the Prime Minister. Producer-run and producer-controlled provincial marketing boards could in no way be equated with the executive branch of any government, merely because they carried out certain activities pursuant to enabling legislation and were subject to government oversight. Canada rebutted as equally ill-founded the characterization by New Zealand of the producer boards as "government agencies". The hallmark of a government "agency" (referred to in Canadian, and New Zealand, legal parlance as a "Crown agency") was a "body which was subject at every turn in executing its powers to the control of the Crown". ⁹⁷ The producer boards in the Canadian dairy sector had a vastly greater degree of independence, private accountability and discretion than "government agencies". Hence, far from being government agencies, the producer boards had the character of private agents representing dairy producers. The boards were collective agents for producers as a group. Producers could revoke the agency at any time. However, as was characteristic of a collective agency role performed by trade unions, revocation decisions were made on a collective not an individual basis. Canada argued that the activities carried out by the producer-run boards (the private bodies in question) were necessary for the proper operations of their affairs. The authority provided to them by governments, fell short of the test of being "governmental" in character. ⁹⁸

To continue with Government Involvement

⁷² Panel Report on Review Pursuant to Article XVI:5, adopted 24 May 1960, L/1160, BISD 9S/188, p. 192; Panel Report on Japan - Trade in Semi-Conductors, (hereafter "Japan - Semi-Conductors"), adopted 4 May 1988, L/6309, BISD 35S/116, pp.154-155.

⁷³ Panel Report on Japan - Measures Affecting Consumer Photographic Film and Paper, (hereafter "Japan - Photographic Film"), adopted 22 April 1998, WT/DS44/R, pp. 383-384 (para. 10.45).

⁷⁴ Panel Report on EEC - Restrictions on Imports of Dessert Apples (Complaint by Chile), (hereafter "EEC - Dessert Apples"), adopted 22 June 1989, BISD 36S/93.

⁷⁵ Ibid, p. 126 (para. 12.9); Japan - Photographic Film, WT/DS44/R, 31 March 1998 at pp. 383-384 (para. 10.45)

⁷⁶ 1992/1993 Annual Report of the Canadian Dairy Commission, p.3. New Zealand recalled that the Dunkel draft was the basis of the Agreement on Agriculture.

⁷⁷ Report of the Consultation Committee on the Future of the Dairy Industry, p.12.

⁷⁸ Panel Report on Canada - Import Restrictions on Ice Cream and Yoghurt (hereafter "Canada - Yoghurt"), L/6568, BISD 36S/68, adopted 5 December 1989, p. 73 (paragraph 22).

⁷⁹ Canada's Second Written Submission, Annex B, pp. 7-9.

⁸⁰ Panel Report on Japan - Semi-Conductors, op. cit., p. 155.

⁸¹ Panel Report on Japan - Photographic Film, op. cit., para.10.56.

⁸² "The British Columbia Milk Marketing Board (the "Board") has approved this Consolidated Order for the purpose of promoting, controlling and regulating the production, transportation, packing, storing and marketing of milk, fluid milk, and manufactured milk products within British Columbia under provincial authority, and for the purpose of regulating the production for marketing, or the marketing, in inter-provincial trade of milk, fluid milk, and manufactured milk products, under federal authority". The United States noted that then, in the immediately succeeding section of the Order, the Board identified the specific bases for its authority, citing the Natural Products Marketing (B.C.) Act, the British Columbia Milk Marketing Board Regulation, the British Columbia Milk Order - made under the Agricultural Products Marketing Act (federal legislation), and the Dairy Products Marketing Regulations - made under the Canadian Dairy Commission Act (again federal legislation). (United States, Exhibit 43)

⁸³ "This regulation has been enacted by the Board under its delegated Federal authority to ensure that all milk marketed is covered by the authority of the Ontario Milk Marketing Board. This Regulation makes it clear that the same requirements that exist for producer licenses, license fees, quota, pooling and transportation that apply to local trade apply to any milk attempted to be marketed in inter-provincial or export trade." (United States, Exhibit 44)

⁸⁴ The United States noted that Canada's Answer to Question 7 of the Panel also confirmed the necessity of the delegation of additional federal powers to enable the marketing boards to act.

⁸⁵ REO Paragraph 11 of the Comprehensive Agreement on Special Class pooling. (United States, Exhibit 5)

⁸⁶ Report adopted 22 March 1988, L/6253, BISD 35/163.

⁸⁷ Ibid, para. 5.4.1.4.

⁸⁸ Report on Japan - Semi-Conductors, op. cit.

⁸⁹ Ibid, para. 117.

⁹⁰ Ibid.

⁹¹ Panel Report on Japan - Photographic Film, op. cit.

⁹² Panel Report on EEC - Dessert Apples, op. cit., p. 126.

⁹³ Panel Report on Japan - Photographic Film, op. cit., para. 10.56.

⁹⁴ Ibid, para. 10.314.

⁹⁵ Ibid, para. 10.328.

⁹⁶ The United States referred to Canada's answers to the Panel's Questions 9(a), 8(a) and 7(c).

⁹⁷ Canada noted that one of the leading cases on this point in Canada was the Supreme Court of Canada decision in Westeel-Rosco Limited v. Board of Governors of South Saskatchewan Hospital Centre, [1977] 2 S.C.R. 238 which in turn referred to a decision of the Privy Council, Metropolitan Meat Industry Board v. Sheedy, [1927], A.C. 899 holding that an agricultural board which had government-appointed members and was subject to a government veto power on certain matters was nonetheless not a Crown agency.

⁹⁸ Canada noted that except for the producer board in the province of British Columbia, which had been given the capacity of natural person, the other provincial milk producer boards had the status of private (i.e., non-governmental) bodies corporate. The Fédération des producteurs de lait du Québec was a professional union incorporated under the Professional Syndicates Act (L.R.Q. c. S-40) as recognized by the Farm Producers Act (L.R.Q. c. P-28) and it grouped together 14 regional unions of milk producers. It was charged by producers to act as a marketing board and to administer the collective marketing plan established following a decision of its members.