(ii) The meaning of the term "direct"

4.188 New Zealand argued that the term "direct" in relation to subsidization was used in a variety of senses and its meaning in any particular case had to be derived from the context in which it was used. In the context of subsidies under the GATT 1947, the word "direct" bore a particular meaning which was articulated in the negotiation of Article XVI of the GATT 1947. The term "indirectly" in Article XVI, it was explained, made it clear that "subsidization" could "not be interpreted as being confined to subsidies operating directly to affect trade in the production under consideration." ¹⁹⁸ In other words, a "direct" subsidy was one affecting trade in the product directly rather than one affecting trade incidentally or indirectly. In the present case, the subsidy provided was clearly "direct". Revenue was being foregone for the very purpose of affecting the trade in question - indeed of permitting its very existence. Without this foregoing of revenue no export trade would exist. ¹⁹⁹ The objective of this foregoing of revenue was to secure export performance. It was not a subsidy that had other objectives with export performance as an incidental effect; it was a subsidy that provided only for products which were destined for export. It was a direct subsidy contingent on export performance, and thus fell within the ordinary meaning of the words of Article 9.1(a).

4.189 New Zealand argued that in Article 9.1(a) the term subsidies had to be interpreted in the light of the fact that this provision was referring to "direct" subsidies and in view of the fact that the category of direct subsidies had to be large enough to include "payments-in-kind." This alone was sufficient to demonstrate that a simple reliance on the definition of the term "subsidy" in Article 1 of the SCM Agreement was inadequate for the interpretation of Article 9.1(a). As this was ignored by Canada, Canada had failed to interpret Article 9.1(a) properly and thus had failed to show that the Special Milk Classes Scheme did not constitute an export subsidy within the meaning of Article 9.1(a). Accordingly, Canada had not discharged the burden of proof placed on it under Article 10.3 of the Agreement on Agriculture (paragraphs 4.290 and following refer).

4.190 Canada refuted the broad interpretation of the term "direct" in Article 9.1(a) given by the Complainants. Canada rejected any necessity to enter into such an exercise and referred the Panel to Article 1.1(a)(1) of the SCM Agreement where "direct" was used to qualify a "subsidy" implying a transfer of funds by a government. Canada reiterated that no direct export subsidy existed in Canada for dairy products.

(c) Article 9:1(c)

(i) The meaning of the term "payment"

4.191 New Zealand noted that the word "payment" was defined in the Oxford English Dictionary as: "1. the action, or an act of, paying; the remuneration of a person with money or its equivalent ... 2. a sum of money (or other thing) paid; ... ". ²⁰⁰ The Dictionary of Canadian Law defined "payment" as "remuneration in any form." ²⁰¹ The term "remunerate" was defined in the Oxford English Dictionary as "1. To repay, requite, make some return for (services etc) ... 2. To reward (a person) ... to pay (one) for services rendered ... 3. to give as compensation ... ". ²⁰² New Zealand argued that the term "payments" covered both payments-in-kind and revenue foregone. The ordinary meaning of the term payment included a "payment-in-kind". Adding "in-kind" to the word "payment" simply described the form in which a payment was made. In respect of Article 9.1(a), the provision to exporters of lower-priced milk was a "payment-in-kind". It was the delivery of something of value in a form other than by way of a money transfer.

4.192 The United States argued that the common meaning of the word "payment" was "the action, or an act, of paying; the remuneration of a person with money or its equivalent; the giving of money, etc. in return for something in discharge of a debt". The word was also defined as "a sum of money (or other thing) paid; pay, wages; or price". ²⁰³ The verb "to pay," from which the noun "payment" was derived, was variously defined as "to give what is due, as for goods received; remunerate; recompense; to give or return as for goods, or services; to give or offer." However, "to pay" had also been construed as meaning "to give money or other equivalent value for; to hand over the price of a (thing); to bear the cost of; to be sufficient to buy or defray the cost of". ²⁰⁴ Thus, although the word payment often connoted an exchange of value for the provision of goods or services, or the provision of value on the occasion of a particular event or condition, it could also encompass bearing the cost. This latter meaning was perhaps the most consistent with the word's use in the context of a provision defining subsidies. Thus, the term payment could be used in Article 9.1 consistent with the concept of conferring a benefit through the bearing of a cost. ²⁰⁵

4.193 In respect of the term "payment", Canada refuted that its ordinary meaning included "revenue foregone". The ordinary meaning of the term "payments" was straightforward - it meant "a sum of money." ²⁰⁶ Canada noted that, pursuant to Article 33 of the Vienna Convention, the French language version of the text of this provision provided additional support for its interpretation of the word "payment". The term used in the French text was "versement" which meant literally to remit money. ²⁰⁷

4.194 Canada recalled that while the United States acknowledged that the common meaning of payment was "the action, or act of paying; the remuneration of a person with money or its equivalent; the giving of money, etc. in return for something in discharge of a debt" (paragraph 4.192), wishing to argue that the ordinary meaning of the word payment included "revenue forgone" and realizing that this "common meaning" was not supportive of their position, the United States had attempted to find an alternative meaning through the verb "pay", pointing to the eleventh listed definition which includes the phrase "bear the cost". This was a frail argument when it was considered that this was found within the eleventh definition of a related word, and did not appear at all the most recent New Shorter Oxford English Dictionary. ²⁰⁸ "Payments" had to be interpreted in its "ordinary meaning": i.e. to reflect an action of paying something of value.

4.195 Canada noted that New Zealand as well encountered difficulty in establishing that the "ordinary meaning" of the word "payment" included "revenue forgone". New Zealand noted that the Oxford English Dictionary definition of "payment" included "remuneration of a person with money or its equivalent" and suggested that the reference to "remunerate" indicated that the term was to be read broadly. Canada argued that there was a major difference between suggesting that payments could be made with a wide variety of items of value, i.e., from actual cash to payment-in-kind, to concluding that the ordinary meaning of "payment" included an indirect result such as "revenue foregone".

4.196 In New Zealand's view the dictionary definitions referred to above, indicated that the concept of "payment" had a wide ambit. New Zealand noted that in order to determine how the term payment was being used in the specific case of Article 9.1(c), reference had be made to the context in which the term was used and the object and purpose of the Agreement on Agriculture as a whole. ²⁰⁹ New Zealand noted that Article 9.1(c) was contained in a provision that identified the mechanisms that states had used to provide export subsidies and which were subject to reduction commitments. One mechanism the negotiators of Article 9.1(c) had in mind was the use of producer levies to fund payments to exporters to compensate for the high cost of a product purchased at domestic rather than at world prices. Such payments were referred to specifically as being included in the definition of "payments on the export of an agricultural product." The wording of Article 9.1(c) made clear that it had not been intended that its provisions be limited only to money paid from the proceeds of a producer levy. ²¹⁰ An examination of the context in which the word "payments" in Article 9.1(c) appeared confirmed that in the light of the object and purpose of the Agreement on Agriculture as a whole, the term "payments" covered both revenue foregone and payments-in-kind.

4.197 New Zealand emphasized that as Article 9.2 included revenue foregone within the determination of budgetary outlay commitments to be made with regard to the subsidies listed in Article 9.1, the concept of "payments", in Article 9.1(c), had to include "revenue foregone" as they had to be quantified under the heading of "budgetary outlays", and this included, explicitly, revenue foregone. There was no need to provide specifically that "payments" included revenue foregone because the definition of "budgetary outlays" already carried that implication.

4.198 The meaning of the phrase "payments on the export of an agricultural product" in Article 9.1(c) of the Agreement on Agriculture must, however, be distinguished from the term "the payment of subsidies exclusively to domestic producers" under Article III:8(b) of the GATT 1994. In Canada - Certain Measures Concerning Periodicals the Appellate Body stated that:

4.199 Accordingly, New Zealand noted that the Appellate Body concluded that a reduction in postal rates did not constitute a "payment of a subsidy exclusively to a domestic producer" within the meaning of GATT Article III:8(b). In reaching this conclusion the Appellate Body was influenced by the fact that Article III:8(b) was an exception to the national treatment obligation. In its view, it was never intended that exceptions to national treatment by way of subsidies based on tax reductions or other forms of revenue foregone were to be permitted under Article III:8(b).

4.200 In fact, New Zealand maintained that the rationale of the Canada - Periodicals decision reinforced the conclusion that the term "payments on the export of an agricultural product" in Article 9.1(c) had to include revenue foregone. The objective of the list in Article 9.1 was to bring agricultural export subsidies under WTO disciplines. An interpretation of Article 9.1(c) that narrowed the scope of the subsidies included therein to direct money transfers would defeat rather than serve the object and purpose of Article 9. It would expand the opportunity for Members to avoid their WTO obligations - precisely what the Appellate Body in Canada - Periodicals was seeking to avoid. Such a conclusion was strengthened when the object and purpose of the export competition provisions of the Agreement on Agriculture as a whole were considered. Revenue foregone, which was simply an alternative way of securing a benefit that could be obtained through the direct transfer of money, had to be included in the concept of "payment" under Article 9.1(c) if the progressive reduction of export subsidies through reduction commitments was to be successful.

4.201 New Zealand noted that under the old producer levy system, the CDC, acting in concert with provincial milk marketing boards or agencies, transferred money to exporters to compensate for the cost of processors purchasing milk for products for export at domestic rather than at world prices. Under Classes 5(d) and (e) of Special Milk Classes, processors were permitted to purchase milk for products for export at world rather than at domestic prices. The difference between the two approaches was one of form only. In each case, the processor for export was being shielded from the high domestic cost of milk. In each case, the processor for export was being provided with a subsidy that was captured by the phrase "payments on the export of an agricultural product" in Article 9.1(c) of the Agreement on Agriculture. Under Classes 5(d) and (e) revenue was foregone by provincial milk marketing boards or agencies providing access to milk from producers to processors at "special class" prices. The provincial milk marketing board or agency forewent the revenue that it would have received if the milk had been sold at domestic prices.

4.202 New Zealand contended that although the provincial milk marketing board or agency was the vehicle for providing the special milk classes subsidy, it was the producer who bore the financial cost. The role of the provincial board or agency was one of a conduit - to pass on to the producer through the pooling arrangements the revenue that results from Special Milk Class sales. In fact, what the agency passed on to the producer were the losses that resulted from sales of milk at world market prices. It was the producer who forewent the revenue that would have been received if all milk was sold to processors at domestic prices. The Special Milk Classes Scheme shrouded in complexity the obvious fact that it was the producer who made the "payments on the export of an agricultural product" that brought the scheme within Article 9.1(c).

4.203 New Zealand claimed that, in substance, the revenue foregone by producers "on the export of an agricultural product" was the equivalent of a subsidy provided to such processors by a direct money transfer financed from the proceeds of a levy on "an agricultural product from which the exported product is derived" - a form of subsidy that Article 9.1(c) expressly enjoined. Hence, the Special Milk Classes Scheme involved an elaborate structure for a very simple subsidy. It consisted of the foregoing of revenue on the export of an agricultural product. That foregoing of revenue could be viewed as a foregoing by a provincial milk marketing board or agency, or it could be viewed as the foregoing of revenue by producers. The difference between the two was largely a matter of accounting. The form could differ, but the substance remains the same.

4.204 As noted under Article 9.1(a), New Zealand argued that Classes 5(d) and (e) of the Special Milk Classes Scheme could also be characterised as providing payments-in-kind - something that was equally encompassed in the ordinary meaning of the term "payment". A payment-in-kind involved remuneration through something other than, or something equivalent to, money. The provision of goods (milk) at a reduced price, instead of providing a money sum to compensate for the higher price that would be paid for milk for processing into products destined for the domestic market, was a payment-in-kind. It was a direct substitute for a payment by way of money transfer. And that, of course, was its intent. It should be seen as a substitute for the old "money-transfer" subsidies paid by Canada from producer levies. It was a "payment-in-kind" that fell within the concept of "payments on the export of an agricultural product" under Article 9.1(c).

4.205 The United States claimed that like the producer levy programme it replaced, the Special Milk Classes Scheme was an export subsidy within the meaning of Article 9.1(c) of the Agreement on Agriculture. By the express terms of that sub-paragraph, there was no requirement that an export subsidy be a charge on the public account. By way of example, the Article specified that payments subject to its coverage may be "financed from proceeds of a levy imposed on the agricultural product concerned or on an agricultural product from which the export product is derived." As argued under Article 9.1(a), the United States claimed that the term "payment" was broad enough to include instances in which value was given by some other means than the actual transfer of funds (paragraph 4.192). If this were the case, then a fortiori "payment" included situations where value was given to another by means such as a product, in this case milk, at less than the market price.

4.206 The United States noted that the term payment was used twice in Article 9.1(c), but was not defined there or elsewhere in the Agreement on Agriculture. ²¹² The United States noted that the Vienna Convention counselled that the ordinary meaning of a term was to be given in light of its context, which, in this case, was the Agreement on Agriculture and, more specifically, that Agreement's provisions governing export subsidy disciplines. The meaning of the term "payment" had also to be fixed by considering the object and purpose of the pertinent treaty. Article 9.1, as a whole, broadly identified the subsidies, including payments within Article 9.1(c), that were to be taken into account in calculating the maximum level of expenditure for export subsidies that a Member could incur in a given year consistent with its Schedule of Concessions and Commitments and Articles 3 and 8 of the Agreement on Agriculture. This level constituted the Member's budgetary outlay reduction commitment. The term "budgetary outlays" was defined in Article 1(e) of the Agreement on Agriculture to include "revenue foregone." Thus, for example, not only direct subsidies, such as those described in Article 9.1(a), but also reduced charges, i.e., revenue foregone, as described in Paragraph 1(c), counted toward the budgetary outlays that were subject to the reduction commitments, whether or not charged to the public account.

4.207 The United States argued that in this context, and given that the purpose of Part V of the Agreement was to impose discipline on export subsidies, the term "payment" had to be construed consistently with the broad meaning given to budgetary outlays. If such outlays, and thus the applicable reduction commitments overall were expressly defined to include revenue foregone, then one consistent construction was to construe "payments" in a similar manner. Such an interpretation was consonant with the purpose of the Agreement to bring export subsidies under the transitional disciplines established by the reduction commitments. Considered from this perspective, if the total expenditures subject to reduction commitments were defined as total budgetary outlays and revenue foregone, then the individual expenditures had logically to comprise all payments, including price reductions that had the same economic effect as an export rebate. By mandating the sale of industrial milk at a discount, the Government of Canada was conferring a benefit to milk processors equivalent in its trade distorting effect to an export rebate. Moreover, the principle that an export subsidy could be accorded in the form of sales of products at a loss, or by offering goods or services for export at a more advantageous price than when offered for sales for domestic consumption, was not only inherent in the Agreement's definition of budgetary outlays, but was also reflected in the provisions of Article 9.1(a), (b) and (e) which defined "payments-in-kind," sales of non-commercial stocks, and discounted transport and freight charges as forms of subsidization. ²¹³

4.208 In addition, the United States noted that the context of Article 9.1(c) also included the related subsidy reduction commitments contained in Articles 3, 8, and the remainder of 9 of the Agreement on Agriculture. These provisions were collectively intended to impose meaningful disciplines on the use of export subsidies. The Agreement on Agriculture thus narrowed the universe, and amount, of potential subsidies in several respects. First, Article 3 specified that no export subsidies were to be provided "in respect of any agricultural product not specified" in a Member's schedule. A Member could not introduce subsidies for products that were not identified in its schedule and which had not been subsidized during the pertinent base period. Furthermore, Article 9.1 referenced a broad cross-section of subsidy practices that were intended to capture the agricultural subsidies used by the Members at the time of negotiation of the Agreement. Such subsidies were made subject to reduction commitments pursuant to Articles 3, 8 and 9 of the Agreement, with significant reductions required in both subsidy outlays and the quantity of exports that benefitted from subsidies to occur during the transition period. In addition, Article 10, to protect Article 9 disciplines on export subsidies, prohibited the introduction of any subsidies not listed in Article 9 that either "results in, or which threatens to lead, to circumvention of export subsidy commitments ... " And finally, Article 3 of the SCM Agreement, when read in conjunction with Article 13 of the Agreement on Agriculture, provided that if a Member did not comply with the export subsidy disciplines contained in the Agreement on Agriculture, any offending export subsidy was to be subject to the terms of the SCM Agreement and its prohibition on export subsidies. ²¹⁴

4.209 Hence, the United States argued that given the Agreement on Agriculture's comprehensive treatment of export subsidies, which revealed the Members' intent to establish real and effective disciplines respecting export subsidies, a narrow construction of the term "payment" that would result in a weakening of the export subsidy reduction commitments and disciplines, would be contrary to the over-arching objective and purposes of the relevant treaty provisions as a whole.

4.210 In this regard, the United States noted that Professor Tangermann also compared the pernicious effect of producer-financed export subsidies with price pooling by state export agencies and concluded that the latter should be subject to the same export competition disciplines:

4.211 The United States argued that in construing the text of Article 9.1(c), it was clear that the reference to the levy financed export rebates was made for purposes of illustration, and did not limit the scope of Article 9. Thus, the language in Article 9.1(c) relating to the "payments that are financed from the proceeds of a levy" commenced with the introductory word "including", indicating that payments so financed constituted only one example of the types of payments which fell within the scope of the Article 9 subsidy disciplines. There was nothing in the text of the paragraph to provide a basis for concluding that other types of producer-financed funding for export payments, such as discounted prices, would be excluded from the subsidy constraints imposed by Article 9.1(c). To the contrary, subsidies that were the functional equivalent of producer-financed levies had to be assumed to be included in Article 9.1(c) disciplines.

To continue with The meaning of the term "payment"

¹⁹⁸ Report of the Drafting Committee of the Preparatory Committee of the UN Conference on Trade and Employment (20 January - 25 February 1947), E/PC/T/34/Rev.1 (29 May 1947), p. 26.

¹⁹⁹ New Zealand noted that Lyle Vanclief, then Parliamentary Secretary to the Minister of Agriculture and Agri-Food had told the Canadian House of Commons in 1995 that if the legislation which was to allow the CDC to implement "special milk classes" were not implemented by 1 August 1995 "dairy exports to the United States using producer-financed levies [would] be in jeopardy. Furthermore, while export subsidies by levies to other destinations could continue to grow for now, these subsidized shipments [would] also have to be reduced over time": House of Commons Debates, Volume 133 (No. 202), Tuesday 16 May 1995, p. 12668.

²⁰⁰ The Oxford English Dictionary (2nd Edition) - Volume XI, Clarendon Press, Oxford, pp. 379-380.

²⁰¹ The Dictionary of Canadian Law, p. 755.

²⁰² The Oxford English Dictionary (2nd Edition) - Volume XIII, Clarendon Press, Oxford, p. 604.

²⁰³ The Oxford English Dictionary (2nd Edition), Clarendon Press, 1989, pp. 379-80.

²⁰⁴ Ibid, p. 376, definition no. 11.

²⁰⁵ The United States noted that this would be consistent with the requirement in the SCM Agreement that a subsidy involve a benefit.

²⁰⁶ Canada noted that the New Shorter Oxford English Dictionary referred to; "1. an act, or the action or process, of paying. (Foll. by of the money etc. paid, the debt discharged, the payee; for the thing bought or recompensed.) ME. 4. (a sum of) money etc. paid. LME." (Canada, Exhibit 26)

²⁰⁷ Canada referred Le Petit Larousse, 1994: "1. Action de verser de l'argent à qqn, à un organisme, sur son compte, etc.; 2. Somme versée." (Canada, Exhibit 28)

²⁰⁸ Canada, Exhibit 26.

²⁰⁹ New Zealand noted that such an approach had been endorsed by the Appellate Body in Canada - Certain Measures Concerning Periodicals (hereafter "Canada - Periodicals"), WT/DS31/AB/R, adopted 30 July 1997, in seeking to interpret the meaning of the term "the payment of subsidies exclusively to domestic producers" in GATT Article III:8(b): p.34.

²¹⁰ New Zealand noted that Article 9.1(c) referred to "payments on the export of an agricultural product ... including payments that are financed through the proceeds of a levy ... "

²¹¹ Appellate Body Report on Canada - Periodicals, op. cit., p.34. New Zealand further noted that similar views were expressed in the Panels on US - Malt Beverages, op. cit. and Indonesia - Certain Measures Affecting the Automobile Industry, (hereafter "Indonesia - Automobile Industry"), WT/DS54/DS55/DS59/DS64/R, adopted 23 July 1998, p.340.

²¹² The United States noted that although the word "outlay" was used elsewhere in Article 9, it was defined in Article 1 of the Agreement to include revenue foregone, no definition of the word "payment" appeared in Article 1 with the other defined terms.

²¹³ The United States noted that the concept that subsidies that resulted in a price lower for export sale than for domestic consumption were export subsidies was, of course, a fundamental aspect of the export subsidy discipline contained in Article XVI of the GATT. Article XVI:4 stated, in relevant part: "... contracting parties shall cease to grant either directly or indirectly any form of subsidy on the export of any product other than a primary product which subsidy results in the sale of such product for export at a price lower than the comparable price charged for the like product to buyers in the domestic market."

²¹⁴ Paragraph (c) of Article 13 of the Agreement on Agriculture, the so-called "Peace Clause", provided that export subsidies that conformed fully to the export subsidy disciplines contained in Part V of the Agreement were "exempt from actions based on Article XVI of GATT 1994 or Articles 3, 5, and 6 of the Subsidies Agreement." Article 3 of the SCM Agreement, which contained the prohibition on export subsidies, stated that the prohibition was inapplicable to the extent provided in the Agreement on Agriculture.

²¹⁵ "A Developed Country Perspective of the Agenda for the Next WTO Round of Agricultural Negotiations," Stefan Tangerman, paper presented at the Graduate Institute of International Studies, p. 22-23. (United States, Exhibit 24)