(i) The meaning of the term "payment" (Cont.)

4.212 The United States argued that Canada's Special Milk Classes Scheme differed from the producer levy programme that preceded it only in form, not substance. Revenue foregone (on export sales under the Special Classes) by the milk producers, which translated into discounted prices for dairy product manufacturers, was equivalent to the export rebates paid to such manufacturers under the levy system. To exclude such discounted milk from the coverage of Article 9.1(c) because the benefit or payment received by the dairy product exporter was in the form of a lower milk price, rather than in the form of an export rebate contingent on export of a product in which the milk had been used, would elevate form over substance. Hence, the Special Milk Classes Scheme, like the producer levy programme that it replaced, qualified as "payments on the export of an agricultural product" within the meaning of Article 9.1(c). First, the discounted milk prices provided for in Special Milk Classes 5(d) and (e) were available only in connection with the production of dairy products for export and, thus, were provided "on the export of an agricultural product". Second, the lower prices extended to milk processors, contingent on the use of the milk for production of dairy products for export, were the same both in substance and economic effect as the earlier levy-financed export rebates and, therefore, were likewise a "payment" within the meaning of that term as used in Article 9.1(c) of the Agreement. ²¹⁶

4.213 Canada submitted that the sales of milk under Special Classes (d) and (e) did not constitute an export subsidy within the meaning of Article 9.1(c) as it could not be shown that "payments" were made on the export of products from Canada.

4.214 Canada argued that, in accordance with the Vienna Convention, the interpretation of the text of WTO agreements had to proceed on the following basis: (i) the starting point was always the actual text and its ordinary meaning; (ii) the ordinary meaning of the terms of the agreement was to be read in their context; (iii) "context" had to comprise the text of the agreement, including other contemporaneous agreements reached by all the parties, as outlined in Article 31.2 of the Vienna Convention, and (iv) recourse could only be had to supplementary means of interpretation, such as negotiating history, in the event of ambiguity or to confirm a meaning.

4.215 Canada noted that New Zealand argued that support for the proposition that payment should include revenue forgone could be found the Canada - Periodicals case (paragraph 4.198 and following). In that case, the Appellate Body had ruled that the term "payment" as it appeared in Article III:8(b) of the GATT 1994 did not include a reduction of postal rates since Article III:8(b) was an exception and should be interpreted narrowly. New Zealand suggested that on the basis that Article 9.1 was a positive obligation the reverse should hold true: its terms should be interpreted broadly. Canada submitted that this misconstrued the proper interpretive approach. The fundamental rule was that of "ordinary meaning" under Article 31 of the Vienna Convention. In the case of an exception, the exceptional approach of a narrow approach was applied. Absent an exception, the interpreter had to revert to the fundamental rule of "ordinary meaning".

4.216 Canada argued that it was also noteworthy that in Article 1 of the SCM Agreement, the drafters were careful to add a provision covering "government revenue that is otherwise due is forgone", they had realized that the ordinary meaning of the preceding provision relating to "direct transfers of funds" would not be sufficient to cover "revenue forgone".

4.217 Canada refuted the allegations that the interaction between Article 9.2 and Article 9.1 implied that the defined meaning of "budgetary outlays", i.e., including "revenue forgone" was applicable to "payment" in Article 9.1(c). This would be to set aside the ordinary meaning of a word based on an indirect inference and notwithstanding the clear contextual confirmation provided by Annex 2.

4.218 Canada noted that in United States - Reformulated Gasoline, the Appellate Body undertook a comparison of the words used in different paragraphs of Article XX to determine the meaning of the test set out in Article XX(g). The Appellate Body noted that different words were used in the different paragraphs so as to properly describe the required relationship or degree of connection between the objectives in question and the measures implemented: "necessary" in certain paragraphs, "relating to" in certain others, "for the protection of" in another, and so on. Accordingly, the Appellate Body held that:

4.219 Hence, Canada argued that it could be presumed that specific words carried specific meanings and that the use of different words in a treaty text meant that the parties to the treaty intended different meanings to be applied to those differing terms. The approach to the interpretation of the term "payments" in Article 9.1(c) in the context of Article 9.1 as a whole should be no less rigorous. Canada argued that the choice of different terminology in each provision of Article 9.1 clearly indicated that negotiators had very precise and distinct concepts in mind with respect to each provision. In the light of the terms used in the other provisions, the selection of the word "payment" in Article 9.1(c) indicated an intention to apply a precise and limited ambit to the application of Article 9.1(c). Accordingly, the term "payment" had to be given its ordinary meaning and not be construed so as to encompass practices that could be covered by the use of broader terms such as "subsidies".

4.220 Canada argued that the negotiating history of Article 9.1 demonstrated that with respect to Article 9.1(c) in particular, the course of the agriculture negotiations had been to narrow the scope of that provision. Thus, the essential issue was what the parties agreed to at the end of the negotiations. In the context of the Agreement on Agriculture, this very point was made in one of the exhibits relied upon by the United States (paragraph 4.210). ²¹⁸ Therein, Professor Tangermann identified production quotas with over-quota output sold at world market prices and price pooling arrangements as matters not presently covered under the Agreement on Agriculture and thus were subjects to be pursued in future negotiations. ²¹⁹ Professor Tangermann recognized that the proper way to reconcile the divergent economic theories was by multilateral negotiation, not negotiation through litigation. Canada argued that it was apparent that Professor Tangermann viewed the results of the Uruguay Round in agriculture as having an unsatisfactory economic result. While Professor Tangermann was entitled to his opinion as to the outcome he would consider to be desirable ²²⁰ , the Agreement on Agriculture was not concerned with any particular economic theory but rather with specific legal obligations that were agreed to by Members.

4.221 Canada argued that if, indeed, the intention of the negotiators had been to stretch the meaning of "payment" beyond its ordinary meaning, this would have been provided for specifically. For example, the terms "budgetary outlay" and "outlay" had been defined in Article 1 of the Agreement on Agriculture as including "revenue foregone". Payment, however, which did not incorporate "revenue forgone" in its ordinary meaning, was not similarly defined. Confirmation of this could be found in the treatment of the word "payment" as it was used elsewhere in the Agreement on Agriculture. "Payment" appeared prominently in Annex 2 with respect to domestic support. In Article 5 of Annex 2 the reference was to "payments (or revenue forgone, including payments in kind)". Clearly, the drafters were aware that the ordinary meaning of payment did not include "revenue forgone" and specific provision for its inclusion would be required. The absence of any counterpart in Article 9.1 could only lead to the conclusion that in the case of Article 9.1(c) the drafters intended the ordinary meaning of "payment" to stand.

4.222 Canada further claimed that the negotiating history of the Agreement on Agriculture also supported Canada's submission that the term "payment" had to be construed precisely. Article 32 of the Vienna Convention permitted recourse to supplementary means, including the travaux préparatoires, to support the interpretation arrived at under Article 31.

4.223 Canada noted that Annex 7 to the Draft Dunkel Working Papers dated 21 November 1991 provided a proposed list of measures that would be deemed to be "export subsidies" for the purposes of reduction commitments. ²²¹ As such, this list, which reflected earlier draft texts circulated in the summer of 1991 ²²² , was a precursor to the eventual Article 9.1 in the Agreement on Agriculture. In particular, Article 3(k) of this draft was an early version of the text that would ultimately become Article 9.1(c). This paragraph referred to "subsidies", not "payments". The text of Paragraph 1(c) continued to refer to "subsidies" in the text of the 12 December Dunkel draft. ²²³ On 17 December 1991, Canada submitted to Arthur Dunkel a number of specific redrafting proposals on the agriculture text. Amongst these was an amendment to Paragraph 1(c) so as to substitute the word "payments" for the word "subsidies". ²²⁴ The text of Article 9(1) of the "Draft Final Act" of 20 December 1991 reflected this change and referred to "payments". ²²⁵ This drafting history confirmed that the term "payments" was specifically and deliberately selected in place of a broader term. Accordingly, the word "payment" in Article 9(1)(c) had to be interpreted strictly in accordance with its ordinary meaning.

4.224 Moreover, Canada recalled its argument as set out under Article 9.1(a) that even if the word "payments" were held to include "revenue forgone", there was no revenue for the producers to forego with respect to sales of milk for export use under Special Classes 5(d) and (e) (paragraph 4.181 and following).

4.225 New Zealand noted that in the context of Article 9.1(c), Canada denied that the Special Milk Classes Scheme fell within the Agreement on Agriculture because (i) the word "payments" in Article 9.1(c) did not encompass revenue foregone and hence could not encompass what occurred under special milk classes, and (ii) even if the term "payments" did encompass revenue foregone, in fact no revenue was foregone under special milk classes. New Zealand refuted both contentions.

4.226 New Zealand maintained that in arguing for a restrictive meaning of the term "payments", Canada relied on both a contextual reading of the provision and negotiating history. In New Zealand's view, Canada had misread the context in which the term "payments" appeared and drawn inadmissible conclusions from the negotiating history.

4.227 New Zealand maintained that Canada sought to draw meaning for the word "payments" from the broad context of the Agreement on Agriculture, arguing that since in Article 5 of Annex 2 to the Agreement the terms "revenue foregone" and "payments in kind" were expressly included after the word payments, then the failure to mention either of these in Article 9.1(c) meant that they were excluded. New Zealand pointed out that Canada conveniently omitted to state that the term in Article 5 of Annex 2 was "direct payments" which in that context, given its connotation of money transfers, would have otherwise excluded "revenue foregone" or "payments-in-kind".

4.228 Furthermore, New Zealand argued that Canada had opted to explain the term payments by looking at the broader context of the Agreement on Agriculture, and focusing on domestic support disciplines, while ignoring the actual context of Article 9 itself. New Zealand emphasized that Article 9.2 made it clear that export subsidy reduction commitments were to include subsidies in the form of revenue foregone. It would thus defeat the purpose of Article 9 disciplines to read revenue foregone and payments-in-kind out of the definitions on which those commitments were based. The negotiators of Article 9 could not have intended such a result.

4.229 New Zealand argued that the express reference to revenue foregone and payments-in-kind in Article 5 of Annex 2, as well as the reference to revenue foregone in Article 9.2 (and other similar references in Annex 2, Articles 1(a), 2, 3 and 4; and Annex 3, Article 2), confirmed that subsidization by these particular means was specifically contemplated as being subject to the disciplines of the Agreement on Agriculture.

4.230 New Zealand noted that Canada further argued that the use of different terms to describe the export subsidy in question in each of the different sub-paragraphs of Article 9.1 was evidence that different meanings for each of those terms was intended. However, the examples used all proved the opposite of Canada's contention. Each was an example of a subsidy, and thus it could not seriously be contended that only those sub-paragraphs where the word "subsidies" was used were, in effect, to be interpreted as referring to a subsidy or, as the Canadians stated, to be interpreted as broadly as express repetition of the word "subsidy" would require.

4.231 New Zealand noted the inference drawn by Canada from the fact that the word "payments" had been inserted in Article 9.1(c) of Article 9.1 in place of the word "subsidies" during the drafting phase - it appeared that Canada was of the view that this was done to limit the scope of the discipline in Article 9.1(c) so as not to include revenue foregone or payments-in-kind (paragraph 4.223). However, no negotiating history was cited by Canada to verify this assertion. In arguing that the change in wording indicated an intention to narrow the scope of Article 9.1(c), Canada overlooked the fact that at the same time as the change to the word "subsidies" was made, language was inserted aimed clearly at broadening the scope of that same sub-paragraph. The text was changed to make subsidies financed from the proceeds of a producer levy simply an example of the coverage of the provision rather than its specific referent.

4.232 New Zealand considered Canada's use of negotiating history in the context of Article 9.1(c) as problematic. Article 32 of the Vienna Convention permitted recourse to negotiating history as a supplementary means of interpretation to confirm a meaning or to resolve ambiguity or absurdity. ²²⁶ Canada claimed that it was using negotiating history simply to confirm a meaning. However, rather than showing a pattern of consistency in the use of the term, Canada was seeking to show that since the word "payments" differed from the word used in earlier drafts, that this confirmed the meaning Canada sought to ascribe to it. This was not using negotiating history to confirm a meaning. It was seeking confirmation by the drawing of a negative inference from the negotiating history. That was not, in New Zealand's view, what Article 32 contemplated.

4.233 Furthermore, New Zealand argued that given the nature of the negotiations in the Uruguay Round, the only negotiating history that could be referred to were the successive drafts of provisions. In the absence of negotiating records reflecting the intentions of the drafters, the meaning of changes in those successive drafts could be no more than conjecture. In the absence of records of the negotiators' discussions, there was no justification for choosing one explanation over another. New Zealand argued that in the present case, the use of the word "payments" could well have been designed to avoid the circularity that the word "subsidies" would have entailed. Paragraph 9.1(c) was defining a subsidy; to have called it a subsidy at the outset - especially when no particular characterisation, such as "direct" was needed - would have been tautologous. In short, the Canadian explanation of the meaning of the term "payments" on the basis of negotiating history proved nothing.

4.234 New Zealand noted that the issue of producer-financed export subsidies was the subject of considerable discussion in the negotiations on agriculture. The "conditions governing government participation in the operation of producer-financed subsidy schemes" was identified in the de Zeeuw Text as an issue to be resolved. ²²⁷ The negotiating document of 2 August 1991 identified, under the heading of "General Criteria", differential pricing arrangements as falling within the concept of an export subsidy. ²²⁸ The Illustrative List recognised specifically as an export subsidy, in Paragraph (k):

4.235 New Zealand argued that this provision was clearly the precursor to Article 9.1(c) of the Agreement on Agriculture. New Zealand further argued that both the reference in the "General Criteria" to differential pricing and the terms of Paragraph (k) clearly treated schemes such as that now found in "special milk classes" as subsidies. Two changes were, however, made to Paragraph (k) before it found its way into Paragraph (c) of Article 9.1. First, the word "payments" was substituted for the word "subsidies" at the beginning of the sub-paragraph. Second, the provision was not limited to subsidies financed by producer levies. Producer levy-based subsidies became simply an illustration of producer-financed subsidies. Both of these changes confirmed the conclusion that Special Classes 5(d) and (e) of the Canadian scheme fell within Article 9.1(c). The word "payments" carried within it both the sense of revenue foregone and payment-in-kind. The change to make clear that producer-levy-financed subsidies were not the only producer-financed subsidies that were covered by the sub-paragraph, only reinforced the conclusion that subsidies, such as that provided under "special milk classes", were to be covered.

4.236 New Zealand noted that following Canada's approach, if the word "subsidies" had been used in Article 9.1(c), it would have had to have been interpreted in accordance with Article 1 of the SCM Agreement. This of itself would have qualified the scope of the subsidy under Article 9.1(c). Yet, as Canada had acknowledged (paragraph 4.127) that Article 9.1 provided an "illustrative list" of export subsidies and hence broadened the scope of the concept of export subsidies under Article 1 of the Agreement on Agriculture. By this analysis, in order to be consistent, Canada should be arguing that the use of the word "payments" in Article 9.1(c) was designed to expand the scope of the measures beyond that which would have been covered if the word "subsidies" had been used.

4.237 New Zealand argued that whether it was viewed as revenue foregone by the provincial milk marketing board or agency, or revenue foregone by the producer - which was, in New Zealand's view, precisely the type of subsidisation that Article 9.1(c) was designed to capture - or whether it was viewed as a payment-in-kind, the provision of lower-priced milk to the processors of dairy products for export, under Special Classes 5(d) and (e), was a "payment on the export of an agricultural product" within the meaning of Article 9.1(c).

4.238 The United States claimed that Canada had misrepresented the conclusions of Professor Tangermann regarding the applicability of the Agreement on Agriculture's disciplines on export subsidies to Canada's Special Milk Classes Scheme (paragraph 4.220). Canada had focussed on a discussion in the Tangerman article that related to quota systems that involved the export of the actual product subject to the quota, for example, sugar from the European Communities, a different situation than was represented by Canada's Special Milk Classes Scheme, where it was the export processor who benefitted from the low priced over-quota production. Canada failed to mention the more pertinent conclusions reached by Professor Tangerman later in his article, which specifically addressed the Canadian dairy regime: "Countries should, therefore, not be allowed to escape their export subsidy commitments by using a price pooling regime. It should be clear that an effective constraint on the extent of price pooling is established through the commitments on export subsidies."(footnotes omitted) United States, Exhibit 24, at p.33. In footnote 13 of his paper, Professor Tangerman said: "This may have serious implications for the new price pooling regime for milk established in Canada, which substituted for the producer-financed export subsidies used in Canada prior to the conclusion of the Uruguay Round."

4.239 Canada noted that New Zealand disputed the precision of "payment" by arguing that the expression "direct payment" would have been used if that precision had been intended (paragraph 4.227). This contradicted New Zealand's position on "direct subsidy" - New Zealand had argued that "... a 'direct' subsidy was one affecting trade in the product directly rather than one affecting trade incidentally or indirectly." (paragraph 4.188). In Canada's view, Article 9.1(c) export subsidies were not limited to direct payments (i.e., it did not exclude payments affecting trade incidentally or indirectly) but they were limited to "payments" in the ordinary meaning of the word. Canada argued that the negotiators had felt the need to clarify references to direct payment in Annex 2 by explicitly including the concept of "payment-in-kind." Had the negotiators intended to include that concept in Article 9.1(c) they would have explicitly included it in this provision as well. The fact that they did not was significant in interpreting the Agreement.

4.240 Canada further noted that the Complainants had suggested that the term "payment" in Article 9.1(c) included "revenue foregone". While "revenue foregone" was part of the definition of subsidy, it was not part of the ordinary meaning of "payment". For example, it was common for retail establishments in Canada to offer price discounts to persons over 60 or 65 years of age. It was not at all common for these discounts to be considered "payments" received by these shoppers. Canada further noted that the United States had acknowledged that the concept of revenue foregone was generally associated only with circumstances involving a governmental treasury and public funds, such as where taxes were forgone. ²²⁹ Canada reiterated that even if "payment" were to include revenue foregone, there was no revenue foregone as producers received the best price available in either the domestic market or the export market (paragraph 4.181 and following). Moreover, the only payment was the commercial payment made by the processor to obtain the product. In addition, there was no evidence of these payments being financed by virtue of government action.

To continue with Financed by virtue of governmental action

²¹⁶ The United States noted that the Appellate Body considered the subsidy exception contained in Article III:8(b), which included the phrase "payment of subsidies exclusively to domestic producers," in Canada - Periodicals, op. cit. The meaning of that phrase had received consideration in a number of GATT disputes, e.g., US - Malt Beverages, op. cit., para. 5.8. The United States, however, submitted that these decisions gave considerable weight in interpreting the phrase in Article III:8(b) to its context and the purpose of the treaty provision. That context and purpose, involving the construction of an exception to the principle of national treatment, was unquestionably different than that presented by Article 9.1(c) of the Agreement on Agriculture.

²¹⁷ Appellate Body Report on US - Reformulated Gasoline, op. cit, p. 18.

²¹⁸ "A Developed Country Perspective on the Agenda for the Next WTO Round of Agriculture Negotiations", paper presented at the Graduate Institute of International Studies, Stefan Tangermann, contained in United States, Exhibit 24.

²¹⁹ Ibid, p. 21: "Much effort was made in the Agreement on Agriculture to define export subsidies as precisely as possible, through appropriate wording in Article 9. However, there may be reasons to consider some improvements. In particular, there are policies which effectively may result in cross-subsidisation of exports and which may not be clearly enough outlawed by the current wording. Two cases in point are production quotas with above-quota output sold at world market prices, and price pooling arrangement." (emphasis added) Further at p. 23 Professor Tangermann wrote of the difficulty of getting countries to address this perceived problem and suggested two solutions: "However, one could seek agreement that new regimes of this type (ad (sic) new changes to old regimes resulting in the same type of effects on exports) established after the Uruguay Round are included in the definition of export subsidies. Alternatively, one could agree explicitly (in some appropriate legal form) that such regimes fall under Article 10 of the Agreement on Agriculture, i.e., that they amount to 'circumvention of export subsidy commitments'." (emphasis added)

²²⁰ Ibid. p. 21: "Such exports may, therefore appear not to fall under the export subsidy commitments under the Agreement on Agriculture. From an economic point of view this situation is not quite satisfactory." (emphasis added) Further at p. 22-23: "It is, therefore somewhat problematic, to say the least, that the Agreement on Agriculture so far does not include such indirect cross-subsidisation in its definition of export subsidies."

²²¹ Canada, Exhibit 29.

²²² Canada, Exhibit 30.

²²³ Canada, Exhibit 53.

²²⁴ Canada, Exhibit 31.

²²⁵ Canada, Exhibit 32.

²²⁶ New Zealand argued that the WTO Agreements, including the WTO Agreement on Agriculture, were to be interpreted in accordance with Articles 31 and 32 of the Vienna Convention on the Law of Treaties 1969 (the "Vienna Convention"). New Zealand noted that Article 31 of the Vienna Convention required that a treaty be interpreted in accordance with "the ordinary meaning to be given to the terms of a treaty in their context and in the light of its object and purpose". Article 32 provided that the preparatory work and the circumstances of the conclusion of a treaty could be referred to as a "supplementary means of interpretation" to confirm a meaning derived from the application of Article 31, or where the application of the approach set out in Article 31 produced a result that was "ambiguous or obscure," or was "manifestly absurd or unreasonable."

²²⁷ MTN.GNG/NG5/W/170, p.6 (para. 22).

²²⁸ MTN.GNG/AG/W/1/Add.10, p.1 (para. 2).

²²⁹ Canada referred to the US response to the Panel's Question 4 (p.5) to New Zealand and the United States.