(ii) Financed by virtue of governmental action

4.241 New Zealand argued that the requirement of governmental involvement in subsidization under Article 9.1(c) was clearly met in the present case (see arguments set out in paragraph 4.41 and following). The government action concerned did not have to involve the government itself paying money or foregoing revenue because immediately after the phrase "financed by virtue of government action" were the words "whether or not a charge on the public account is involved." Moreover, the words "by virtue of" indicated that while the involvement of government had to be present, government action need not be the sole or exclusive agent in the financing of the subsidy.

4.242 In the specific context of export subsidies under the Agreement on Agriculture, the phrase "financed by virtue of governmental action" in Article 9.1(c) suggested that the intention of the drafters of the Agreement on Agriculture was not that there be a high threshold for government involvement in order to constitute subsidisation. Canada's actions in respect of the Special Milk Classes Scheme met the appropriate threshold.

4.243 New Zealand noted that Canada had admitted that the government involvement in its dairy supply management system was sufficient to meet the requirement that any "payments" had been "financed by virtue of governmental action." In Annex B to its Second Written Submission, Canada stated:

4.244 New Zealand maintained that what had been replaced was the way in which exporters were relieved from the high domestic price of milk; what was not replaced was the nature or level of government involvement in the system. According to the description that Canada had provided of its system, decisions were made by producers operating through dairy marketing boards and the CMSMC. The role of the CDC was simply to implement these producer-made decisions. That, presumably, was what the CDC was doing when the producer levy/rebate system was in operation, and that was what the CDC was, according to Canada, doing today. Hence, even accepting, for purposes of argument, the Canadian depiction of the role of government in the operation of the system, then an admission that the producer-levy scheme fell within Article 9.1(c) was an admission that the existing Special Milk Classes Scheme had to be "financed by virtue of governmental action".

4.245 In view of this admission by Canada, the only issue under Article 9.1(c) was whether the action of providing lower-priced milk to exporters constituted a "payment" within the meaning of that provision. New Zealand argued, in light of the discussion under Section (i) above, that since the term "payments" in Article 9.1(c) of the Agreement on Agriculture included the foregoing of revenue or payments-in-kind, the Special Milk Classes Scheme constituted a payment on the export of an agricultural product financed by virtue of governmental action within the meaning of Article 9.1(c) and hence constituted an export subsidy.

4.246 The United States noted, in respect of the second condition to the applicability of Article 9.1(c), i.e, that the export payment be "financed by virtue of governmental action", that as the term "governmental action" was not defined in the Agreement on Agriculture, resort to the Vienna Convention for assistance in interpreting that term was appropriate.

4.247 The United States maintained that the ordinary meaning of the phrase "financed by virtue of governmental action" reasonably included circumstances in which the financial underpinning of an export payment was fixed by the undertakings of a government entity. In this context, government action could include activity either at the federal level or provincial level, or by both, in a federal system. By the very terms of Article 9.1(c), its scope was not limited to export subsidies funded by charges on the public account. To the contrary, the section explicitly stated that a charge on the public account was not a prerequisite to its coverage. By inference, there had to be financing based on some form of contribution from private entities that was mandated by a government, whether national or local in jurisdiction. Article 9.1(c)'s specific inclusion of "payments that are financed from the proceeds of a levy," in this context, made clear that a levy imposed on an agricultural product to support either its export, or that of a product derived from it, and which was administered by a government, meant that government action to administer and enforce such producer levies satisfied the requirement that a payment be "financed by virtue governmental action". By logical extension, similar administrative and enforcement actions by a Member government of other forms of subsidies financed through joint, but not voluntary ²³¹ , producer actions had to be included within the scope of Article 9.1(c) as well. This construction of the phrase "financed by virtue of governmental action" was consistent with both the purpose and objective of the reduction commitment provisions of the Agreement, as well as the historical background against which the treaty was negotiated. As had been noted earlier, the inclusion of producer-financed subsidies within the listing of export subsidies subject to reduction commitments was the result of the view that such subsidies were no different from subsidies funded by a government's treasury in terms of the deleterious effect which they had on trade (paragraph 4.146).

4.248 The United States maintained that the concerted action of Canada's federal and provincial governments in establishing and enforcing the levy system and then introducing and administering the special milk class price system satisfied the Article 9.1(c) requirement that the export payments be financed by virtue of governmental action. Thus, the actions of the Canadian government pervaded virtually every aspect of the producer-financed export subsidies, which were now entirely dependent on the Special Milk Classes Scheme (see the United States' argument under paragraph 4.54 and following).

4.249 The United States contended that the Canadian government's involvement in every aspect of supply management, including the Special Milk Classes, and the pooling arrangements through which the Special Milk Class prices were made possible, demonstrated that the financing of the milk discounts, which constitute "payments on the export" of dairy products, was accomplished by virtue of action by the Government of Canada. Accordingly, all prerequisites for the applicability of Article 9.1(c) to the Canadian Special Milk Class system were satisfied, and this producer-financed export subsidy was, therefore, subject to the export subsidy reduction commitments set forth in Part V of the Agreement on Agriculture.

4.250 Canada maintained that the sales of milk under Special Classes 5(d) and (e) did not constitute an export subsidy within the meaning of Article 9.1(c). In order to show that Special Classes 5(d) and (e) were export subsidy practices within the meaning of Article 9.1(c), the Complainants had to show that (i) "payments" were made on the export of products from Canada; and (ii) that such "payments" were "financed by virtue of governmental action". Canada claimed that this test had not been met.

4.251 Canada contended, in respect of the differences in the nature of government involvement between the new Special Milk Classes Scheme and the old levy-based system (paragraph 4.242), that under the old system, the CDC had made payments directly to processors to rebate the price of milk already paid by the processors exporting dairy products. Such payments would only take place if exports were taking place. These payments were financed by levies imposed on all producers for every hectolitre of milk produced. The funds were held in an account by the CDC and could be used by it, at its own discretion, in any amount necessary to make any sale it felt to be appropriate. Producer boards were aware of CDC actions only as they were reported in accounting to the CMSMC for the overall cost of the surplus disposal programme. The boards exercised control by approving a levy rate, after which the operation of the programme passed to CDC. Individual producers were aware only of the levy rate on their production, and of the year-end adjustments that sometimes resulted if not all the levy funds were spent over the course of a dairy year. Levies were mandatory payments not unlike taxes. The payments were issued by the CDC under general direction of the CMSMC, not unlike government subsidies (although there was no government money involved). In addition, under the old system, over-quota production was discouraged and penalised. The discouragement of over-quota production was not merely a policy decision, but was a result of Canada's obligation under GATT Article XI:2(c)(i) to limit production and marketing as a condition of maintaining quantitative import restrictions.

4.252 Canada argued that the current Canadian dairy export arrangements were entirely different. No levies were imposed on producers any longer. The CDC did not have any pot of money with which to make payments to exporters, and in fact, no payments were made to processors. For each transaction under Classes 5(d) and (e), processors and the CDC as the agent of producers commercially negotiated the price of milk. The producer boards reviewed each transaction and had the ultimate authority to reject or accept the CDC recommendation with respect to any particular Class 5(d) or (e) permit. The producer boards acted in this system as true commercial representatives of the producers, seeking to ensure that the terms of each sale were to their benefit. Producers were made aware on each milk cheque of the returns achieved for Class 5(e) transactions. They had the necessary information to make a decision whether to seek, through their producer boards, any adjustments to quota levels needed to minimise in-quota sales under Class 5(e). They were also in a position to assess clearly, on an individual basis, the attractiveness of over-quota production, which was no longer penalised. As Canada had demonstrated, significant numbers of them had decided that such production was worthwhile, and they had pursued it.

4.253 Accordingly, Canada contended that the practices in dispute did not constitute payments that were "financed by virtue of government action." The basis for the sale of milk for export purposes was through arm's length negotiations involving processors and agents acting for producers. This resulted in sales based on world market prices. Such conditions could not fall within the concept of "financed by virtue of government action".

(d) Article 10

(i) Outline

4.254 New Zealand argued that, in the alternative, the Special Milk Classes Scheme constituted an export subsidy within the meaning of Article 1 of the Agreement on Agriculture that operated to circumvent Canada's export subsidy commitments under Article 9 of that Agreement. Hence, Canada was in breach of its obligations under Article 10 of the Agreement on Agriculture.

4.255 The United States claimed that even if the Panel determined that neither Article 9.1(a) nor 9.1(c) encompassed the Special Milk Classes Scheme, it was nonetheless an export subsidy within the meaning of Article 10 of the Agreement on Agriculture. This conclusion followed from the treatment of producer-financed subsidies as export subsidies in the 1960 Working Party Report relating to the notification of export subsidies under Article XVI of the GATT 1947. This conclusion was also compelled by an analysis of the Special Milk Classes Scheme under the SCM Agreement (paragraph 4.301 and following).

4.256 The United States further claimed that the object and purpose of Article 10.1 of the Agreement on Agriculture was to prevent the circumvention of export subsidy commitments. This was reinforced by Article 10.3 which placed the onus on an exporting Member to demonstrate that any exports in excess of its scheduled commitments were not subject to export subsidies. Canada concurred in this construction of the Article 10.3 obligation. Hence, the United States claimed that that Special Milk Classes Scheme resulted in, and threatened to lead to, circumvention of Canada's WTO subsidy reduction commitments.

4.257 Canada submitted that Article 10 did not apply in the present case as it could not be established that there existed export subsidies other than the export subsidies listed in Article 9.1, nor could it be established that there was actual or threatened circumvention of the export subsidy commitments. Canada noted that Article 10.1 consisted of three components. There had to be either:

4.258 Canada's position was that neither component (a) or (b) existed in the current case and thus it was not necessary to consider the application of component (c) in order to resolve the dispute. Canada claimed that neither the United States nor New Zealand relied upon component (b) in furtherance of their claims. ²³² The only remaining possibility for the application of Article 10.1 was if the practices constituted export subsidies other than an export subsidies listed in Article 9.1. Canada submitted that the analysis applied by Canada demonstrated that no such export subsidy existed.

(ii) "Export subsidy" within the meaning of Article 10

4.259 New Zealand argued that even if the export subsidy provided under the Special Milk Classes Scheme was not encompassed by the list of subsidies in Article 9.1, it would still constitute an export subsidy within the meaning of Article 10. The basic definition of an export subsidy for the purposes of the Agreement on Agriculture was found in Article 1(e). That provision defined "export subsidies" as "subsidies contingent upon export performance." There was no doubt that access to lower-priced milk under Special Classes 5(d) and (e) was contingent on the milk being used in the production of products for export and hence was "contingent upon export performance". Any measure not listed in Article 9 that came within this definition would thus meet the requirements of Article 10.1. This would include, for example, any measures that met the definition of subsidy under Paragraph (d) of the Illustrative List of Export Subsidies in Annex I to the SCM Agreement. The question was whether providing this lower-priced milk was a subsidy.

4.260 New Zealand noted that the Agreement on Agriculture did not define the concept of a subsidy; accordingly recourse had to be had to the broader context of the WTO Multilateral Trade Agreements in Annex IA to the WTO Agreement in order to determine what fell within the scope of a "subsidy". In this regard, guidance could be obtained from the SCM Agreement which provided both a definition of what constituted a "subsidy" for the purposes of that Agreement and an Illustrative List of Export Subsidies. New Zealand noted that Canada's arguments against the application of Article 10 of the Agreement on Agriculture were simply an extension of its argument that Article 1 of the SCM Agreement provided the definition of subsidy for the Agreement on Agriculture. Since, Canada argued, the Special Milk Classes Scheme did not provide a subsidy within the meaning of Article 1 of the SCM Agreement or of the Illustrative List of Export Subsidies in Annex I of that Agreement, then there was no export subsidy within the meaning of Article 10.

4.261 New Zealand claimed that the Special Milk Classes Scheme did come within the definition of Article 1 of the SCM Agreement, and also constituted a subsidy under Paragraph (d) of the Illustrative List (Section 4). Thus, even if the Panel were to conclude that the specific provisions of Article 9.1(a) or 9.1(c) had not been met, there would still be an export subsidy within the meaning of Article 10 that circumvented or threatened to lead to circumvention of Canada's export subsidy commitments. New Zealand argued that the scope of the concept of export subsidy under the Agreement on Agriculture was broader than the definition of subsidy under Article 1 of the SCM Agreement. Export subsidies under the Agreement on Agriculture included those subsidies listed in Article 9.1 of that Agreement. As Canada had acknowledged (paragraph 4.127) in addition to being an exhaustive list for the purposes of Article 9.1, the Article 9.1 list was an illustrative list of export subsidies for the purposes of Article 1 of the Agreement on Agriculture. Thus, in determining what constituted an "export subsidy" for the purposes of Article 10 of the Agreement on Agriculture, guidance could be sought from the types of measures included in Article 9.1.

To continue with "Export subsidy" within the meaning of Article 10

²³⁰ Annex B of Canada's Second Written Submission, p.7.

²³¹ The United States noted that, as had been indicated, the participation of dairy farmers in the special milk class price system was not voluntary, nor was their participation in the predecessor producer levy/rebate programme.

²³² In response to a Panel question, the United States noted that it had not relied in its claims on the second part of Article 10.1, which directed that non-commercial transactions shall not be used to circumvent export subsidy reduction commitments. The United States argued that to the extent that transactions involving non-commercial dairy products had occurred, those transactions appeared to be included within the scope of the subsidies specifically enumerated in Article 9.1 of the Agreement and, therefore, reliance on the second part of Article 10.1, even if applicable, appeared to be unnecessary. New Zealand stated that it was not making a case in the context of non-commercial transactions in the context of Article 10.1 of the Agreement on Agriculture.