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

4.262 New Zealand noted that in the present case, the Canadian scheme differed only from the previous levy-based system by virtue of a "book-keeping entry" (that is, milk was now being provided at a reduced price "contingent upon export", instead of being provided previously at full price with a rebate being subsequently paid). New Zealand had argued that such a change in book-keeping did not remove the scheme from the reach of Article 9.1. However, in the event that the Panel did not accept this, New Zealand believed that the "special milk class" scheme was, nonetheless, precisely the kind of circumventory measure that the negotiators of Article 10 would have intended to catch. It was a measure analogous to an Article 9.1 measure and thus one that fell within the scope of an "export subsidy" within the meaning of Article 1 of the Agreement on Agriculture and hence was an export subsidy under Article 10.

4.263 The United States noted that the Agreement on Agriculture defined export subsidies as "subsidies contingent on export performance, including subsidies listed in Article 9 of this Agreement." (Article 1(e)) The reference in Article 10.1 to "export subsidies" not listed in Article 9, was thus intended to capture all export subsidies within the meaning of Article 1(e) of the Agreement other than those specifically described in Article 9.1 of the Agreement on Agriculture. Because neither Article 10, nor any other provision of the Agreement on Agriculture, expressly defined the term "subsidy", it was necessary, consistent with "customary rules of interpretation of public international law", to consider the context, object and purpose of this particular treaty provision to give meaning to that term. The context of Article 10 included the remaining provisions of the Agreement on Agriculture, as well as the provisions of other relevant WTO Agreements, including the Agreement on Subsidies and Countervailing Measures. Both the Illustrative List of Export Subsidies contained in Annex I of the SCM Agreement and Article 1 of that Agreement informed the meaning of "subsidies" for purposes of the Agreement on Agriculture (Section 4). Therefore, measures that satisfied the requirements of either the Illustrative List or Article 1 of the SCM Agreement also would be subsidies for purposes of Article 10 of the Agreement on Agriculture.

4.264 Canada argued that it had shown that the sales of milk in question did not constitute an "export subsidy" under Article 1 of the Agreement on Agriculture. More specifically, Canada had shown that there was no "subsidy" as that term was defined in the SCM Agreement and that there was no practice that fell within the list of "export subsidies" in the Illustrative List attached to that agreement. As a result, there was no "export subsidy not listed in Paragraph 1 of Article 9". Therefore, Article 10.1 could not apply.

(iii) "Circumvention"

4.265 New Zealand noted that prior to the conclusion of the Uruguay Round, Canada disposed of its surplus milk through subsidised exports financed by producer levies. New Zealand argued that the essence of the producer levy-based subsidy scheme had been that exporters of dairy products would be compensated for the high domestic price of milk. Producers would pay the cost of this subsidy. Canada's new scheme achieved precisely the same result. In substance, nothing had changed under the Canadian system. The financial effects for the producer and the exporter were essentially the same. Under the old scheme the exporter of dairy products benefited from a subsidy that provided protection from the high domestic cost of inputs in the production of those products, and the producer paid the cost of this subsidy. Exactly the same situation existed today.

4.266 New Zealand argued that the export competition rules in the Agreement on Agriculture sought to discipline action by governments that shielded the exporters of dairy products from actual costs in the production of those products. Producer levy-based subsidies were expressly included in Article 9 for that reason. A scheme that in substance and effect achieved precisely the same result as the producer levy-based subsidy was circumvention. That this was the case was evident from the introduction of the Special Milk Classes Scheme. It came into effect on 1 August 1995, the day on which the export subsidy reduction commitments in Canada's WTO Schedule became effective. New Zealand noted that the objective of Canada's Special Milk Classes Scheme of avoiding the consequences of abolishing the producer levy-based subsidies and replacing them with a system that would have precisely the same economic effect, had been acknowledged openly by Canadian government and Canadian dairy industry officials. Lyle Vanclief, then Parliamentary Secretary to the Minister of Agriculture and Agri-Food, told the Canadian House of Commons Committee on Agriculture:

4.267 New Zealand contended that the effect of the Special Milk Classes Scheme was to circumvent Canada's export subsidy commitments under the Agreement on Agriculture. Canada's export subsidy commitment for butter by volume for 1995/1996 was 9,464 tonnes. Its actual exports for that year were 14,574 tonnes. For 1996/1997, its commitment in respect of butter was 8,271 tonnes. Its actual exports were 15,567 tonnes. Canada's export subsidy commitment in respect of cheese by volume for 1996/1997 was 11,773 tonnes. Its actual exports were 20,086 tonnes. Canada's export subsidy commitment for "Other Milk Products" by volume for 1996/1997 was 35,649 tonnes. Its exports of whole milk powder alone in 1996/1997 were 36,632 tonnes. New Zealand concluded that there was a pattern that showed that Canada's exports of major dairy products, with the exception of skim milk powder, had increased dramatically since the introduction of the Special Milk Classes Scheme. These exports of subsidised products completely undermined the export subsidy commitments made by Canada on becoming a Member of the WTO. The Special Milk Classes Scheme clearly constituted circumvention of Canada's export subsidy commitments and given Canada's rapidly expanding exports of dairy products on the basis of the incentives provided by "special milk classes", there was a threat of further circumvention of Canada's export subsidy commitments.

4.268 The United States noted that to determine the meaning of the term "circumvent", it was necessary to consider the ordinary meaning of the term. ²³⁴ The ordinary definition of the verb to circumvent (from which the noun "circumvention" was derived) was to overreach, outwit, avoid or evade. ²³⁵ Thus, Article 10.1's mandate that export subsidies, other than those listed in Article 9.1, were not to be used in a manner that resulted in, or threatened to lead to, circumvention of the export subsidy commitments had be construed to mean that such other export subsidies were not be used to evade or avoid the export subsidy disciplines contained in Article 9.1.

4.269 The United States argued that a broad construction of the term "export subsidy" was justified by the object and purpose of Article 10.1. Article 10.1 of the Agreement on Agriculture was an anti-circumvention provision. Its purpose was to ensure that reduction commitments on the export subsidies listed in Article 9.1 were not undermined. It recognized that Members might introduce export subsidies of a kind not listed in Article 9.1, but which would nevertheless achieve the same or similar results in practice. Pursuant to Article 10.1, those "other export subsidies" were subject to the same export reduction commitments.

4.270 The United States recalled that the reduction commitments entailed both a reduction in the amount of the outlays, and also a reduction in the quantity of exports subsidized. ²³⁶ The commitments specific to each Member were set forth in Section IV, Part II, of each Member's schedule. Thus, an export subsidy bestowed by a Member which subsidized exports of a specific product in excess of the quantity set forth in its Schedule for a specific year would constitute a circumvention within the plain meaning of Article 10.1, of that country's reduction commitments for that product.

4.271 The United States noted that this construction of the circumvention language in Article 10.1 was consistent with both the object and purpose of the export subsidy disciplines contained in Part V of the Agreement and the Agreement as a whole. As stated in the preamble to the Agreement, ²³⁷ the Members' objective in concluding the Agreement included the goal of establishing a fair and market-oriented agricultural trading system and specific binding commitments respecting export competition. Thus, the object and purpose of Article 10.1 required that a Member not use any export subsidies in connection with export quantities exceeding the levels to which commitments had been made in the Member's respective schedules. ²³⁸ To allow otherwise would significantly undermine those subsidy disciplines, and thereby permit evasion of the reduction commitments which represented a fundamental aspect of the reform in agricultural trade. In this connection, the language of Article 10.3 discussed was highly pertinent (paragraph 4.295 and following). This provision directed that if a Member exceeded its reduction commitment relating to the quantity of subsidized exports of a specific product, it had to demonstrate that no export subsidy had been granted with regard to those exports that exceed the volume commitment. The key operative language in this provision was that no export subsidy, whether or not listed in Article 9, was permitted with regard to that quantity of exports that exceeds the reduction commitments. Any subsidy of a quantity of exports that was greater than the reduction levels adopted in the pertinent Member's schedule was inconsistent with that Member's obligations under the Agreement in Agriculture.

4.272 Hence the United States argued that to the extent that a country provided an export subsidy that fell outside the export subsidy categories set forth in Article 9.1, that export subsidy could not be used to circumvent the subsidy reduction commitments. Consequently, an application of an export subsidy to a quantity of exports that was greater than that set forth in a Member's schedule would by definition constitute a circumvention of its obligations under Articles 3, 8 and 9 of the Agreement.

4.273 The United States maintained that Canada had transformed its producer-financed export levies by adopting a new subsidy regime in an apparent effort to evade any reduction commitment. This was precisely the action that Paragraphs 1 and 3 of Article 10 were designed to address. The drafters of Article 9.1 knew that the export subsidy disciplines would be undermined if Members were free to substitute different export subsidies from those listed in Article 9. Article 10.1 was simply intended to preclude such substitution if the export subsidies either resulted in, or threatened, circumvention of the reduction commitments contained in a Member's schedule.

4.274 The United States recalled that the officials of the Government of Canada and the Canadian dairy industry had stated that the special milk class price system was designed to support exports in the same manner that the pre-WTO levy/export rebate system had subsidized exports. Moreover, it was estimated by Canadian officials that the conversion to the special milk class price system would not alter the economic equation, in terms of revenue received and costs incurred, for either the dairy farmers or the dairy product producers.

4.275 In conclusion, the United States argued that Canada's special milk class price system was an export subsidy of dairy products in excess of the limits for Canada under the Agreement on Agriculture, whether they fall under Article 9 or Article 10 of that Agreement. As a result, those subsidies did not benefit from the exemption in Article 13(c)(ii) of that Agreement on Agriculture. Consequently, these export subsidies were also inconsistent with Canada's obligations under Article 3 of the SCM Agreement.

4.276 Canada argued that the Complainants were basing themselves more on rhetoric than on law, in arguing that Canada was circumventing the obligations of the Agreement on Agriculture because it was pursuing the same objectives (preserving the integrity of the Canadian milk supply management system) as it pursued prior to the entry into force of the WTO Agreement. The Complainants' arguments relied on statements made by Canadian officials to the effect that, in bringing Canada's measures into conformity with the WTO Agreement, Canada would continue to seek the same objectives as before. Yet, Canada argued that Article 10.1 manifestly did not regulate objectives. It simply stated that "export subsidies not listed in Paragraph 1 of Article 1" were not to be used in a way that would circumvent the commitments.

4.277 Canada argued that the statement made by the United States was unnecessarily broad in saying that an export subsidy, irrespective of whether it is covered by Article 9.1, in excess of the quantity set out in its Schedule "would constitute a circumvention within the plain meaning of Article 10.1" (paragraph 4.270). It was only "export subsidies" other than those covered by Article 9.1 that could possibly be subject to Article 10. An export subsidy covered by Article 9.1 that exceeded the quantity commitments was not a circumvention of Article 9 but rather a violation of Article 8. The United States was mistaken to the extent that they appeared to suggest that the use of export subsidies listed in Article 9 in excess of a Member's subsidy reduction commitments under that Article gave rise to a separate claim of circumvention under Article 10. Canada concurred that where export subsidies, other than those listed in Article 9.1, had been applied to a commodity subject to subsidy reduction commitments in excess of the reduction commitment level specified in a Member's schedule for that commodity, a presumption of circumvention pursuant to Article 10 would arise. The critical issue was whether any such "export subsidies" had been granted.

4.278 Canada stressed the importance of the exact nature of Article 10.1. It did not say that parties could not use mechanisms other than "export subsidies" in order to attain the general or political objectives for which "export subsidies" were previously used. To the contrary, it was drafted to have a very targeted and limited meaning: to limit the use of "export subsidies" defined in Article 1 of the Agreement on Agriculture, not listed in Article 9.1, to circumvent export subsidy reduction commitments. The drafters did not intend it to be used to limit the rights of Members to use measures that the negotiators of the Agreement on Agriculture did not agree should be restricted.

4.279 Canada argued that bringing measures into conformity with the WTO Agreements while trying to achieve the same policy objectives did not, in itself, constitute "circumvention" or an "evasion" of the reduction commitments. The Canadian statements quoted in the Complainants' submissions had to be viewed in that light. Canada did not dispute that following the entry into force of the WTO Agreement, it intended to preserve the integrity of the Canadian milk supply management system. Indeed, the continued preservation of certain domestic agricultural programmes within the legal framework established by the Agreement on Agriculture was the intention of almost every WTO Member. The special regime provided for in the Agreement on Agriculture made no sense seen in any other light.

4.280 Canada argued that the change from a levy system to the present system of individual and collective producer decisions based on market-based prices for exports was one of the many steps taken to bring Canadian measures into conformity with WTO commitments in the implementation process; the character and effect of the new system compared to the pre-Uruguay Round levy system was profoundly different. With the introduction of the Special Milk Classes Scheme, Canada moved from a penalty-based system designed to limit production closely to domestic requirements for GATT 1947 Article XI purposes, to a new market-driven opportunity system that offered producers the chance to take commercial risks and enter the export market. Presented with opportunity, rather than penalties, those producers who wished to enter the new environment could do so with a completely different attitude. However, since no one was forced to do so, producers also had the option to rely only on the domestic market. Hence, it was quite accurate to indicate to producers that, if they so chose, they could decide not to export and there would be no great impact on their positions.

4.281 Canada argued that it was inaccurate to suggest that there was circumvention because the Special Milk Classes Scheme were essentially the same and that in substance, nothing had changed. Canada noted that there had indeed been a significant increase in exports from Canada under the new Special Milk Classes Scheme, reflecting the fact that it was a different system. Hence, if the old and new systems were the same, as argued by the Complainants, then they had to explain why the current system was producing such different results. Those producers that did not wish to participate in export markets (beyond the limited amount included in-quota) could remain largely unaffected by the export market. Those who wished to do so could have an unlimited commercial opportunity to participate in export markets on the basis of actual world price signals. In practice, therefore, Canada's new export policies for dairy exports reflected the assurances of continuity provided to producers by Ministers in 1995, while at the same time opening up new opportunities, consistent with the new rules negotiated under the WTO. In summary, Canada submitted that the introduction of the new Special Milk Classes Scheme demonstrated Canada's intention to be consistent with its WTO obligations and not to circumvent them.

4.282 New Zealand stressed that the objective of Article 10 was to discipline circumvention. It was designed to capture measures which did not meet the particular definitions in Article 9.1, but which nevertheless had the same economic effect as a subsidy subject to Article 9 reduction commitments. Measures analogous to those listed in Article 9.1, although not technically meeting the strict letter of Article 9, clearly were in the minds of drafters seeking to avoid circumvention of Article 9 commitments. Hence, the illustrative role of Article 9.1 export subsidies in the definition of export subsidies under Article 1 of the Agreement on Agriculture.

4.283 New Zealand noted that Canada had also argued that even if there was an export subsidy there was still no "circumvention". The essence of the Canadian position was that there was no prohibition under the WTO against adopting measures that achieved the same objectives as were achieved by previously used export subsidies. However, New Zealand contended, that was not the issue. What was at issue in this case was whether it was permissible under the Agreement on Agriculture to introduce an export subsidy that had the same effect as an export subsidy for which reduction commitments have been made. Article 10 clearly proscribed such subsidies because they circumvented export subsidy reduction commitments. New Zealand believed that this was what had occurred in this case. Canada had introduced a measure that constituted an export subsidy. That subsidy achieved precisely the same effect as the export subsidy based on producer levies which Canada abandoned because it fell within Article 9.1 of the Agreement on Agriculture. Whether Canada intended or did not intend that the new measure comply with its WTO obligations was irrelevant. Article 10 did not require that there be any proof of intent to circumvent, it only required that there be actual or threatened circumvention of commitments.

4.284 New Zealand noted that Canada rested its response to the argument that the Special Milk Classes Scheme contravened Article 10 of the Agreement on Agriculture simply on the basis that the measure was not a subsidy within the meaning of the SCM Agreement, and hence did not fall within Article 10 of the Agreement on Agriculture. This approach to the interpretation of the Agreement on Agriculture was flawed. More specifically, in the context of Article 10, it constituted a denial of the object and purpose of that provision which was to prevent circumvention of export subsidy commitments. Interpreting the meaning of "export subsidy" under Article 10 had to involve looking at the term in its particular context and in the broader context of the Agreement on Agriculture as a whole. Thus, the broad scope of the concept of export subsidy under Article 1 of the Agreement on Agriculture, for which Article 9.1 provided an "illustrative list", and the object of preventing circumvention which lay at the heart of Article 10, provided an important part of the context for the interpretation of the meaning of "export subsidy" under Article 10.

4.285 New Zealand argued that the ambit of "circumventing" or simply of "threatening to lead to circumvention" was very broad and this gave some insight into the objective of Article 10. Article 10 was included in the Agreement on Agriculture because Members were concerned that the export subsidy commitments undertaken under Article 9 could be nullified by subsidies that did not fit the precise definition of Article 9 but equally had the effect of shielding exporters from the actual cost of production of goods destined for export. That object and purpose also had to be taken into account in determining what constituted an export subsidy for the purposes of Article 10.

4.286 New Zealand submitted that the broad scope of the definition of export subsidy in Article 1(e) of the Agreement on Agriculture, together with the circumvention objective of Article 10, lead to the conclusion that the Special Milk Classes Scheme was an export subsidy that was being applied in a manner that circumvented, or threatened to lead to circumvention, of Canada's export subsidy commitments under Article 10 of the Agreement on Agriculture.

4.287 Moreover, New Zealand argued that in Article 10 the term "export subsidies" was found in a context that was concerned with the prevention of actual or threatened circumvention of export subsidy commitments . The context, and object and purpose, of Article 10 argued for a flexible construction of the term "export subsidy" in order that Article 10 could live up to the intentions of its drafters. What would undermine, or threaten to undermine, a Member's reduction commitments would naturally vary according to the particular circumstances of each case. This meant therefore, that the determination of whether a measure constituted an export subsidy for the purposes of Article 10, had to be made on a case-by-case basis.

4.288 New Zealand argued that in this regard, an analogy could be drawn between the non-circumvention objective of Article 10 and the non-circumvention objectives of GATT Article XXIII:1(b) which was concerned with redressing actions that nullified or impaired a Member's legitimate expectations of benefits from tariff negotiations. In Japan - Measures Affecting Consumer Photographic Film and Paper the Panel took the view that in order to achieve this purpose, "it is important that the kinds of government actions considered to be measures covered by Article XXIII:1(b) should not be defined in an unduly restrictive manner." ²³⁹ Under the Agreement on Agriculture, the type of measure to which Article 10 applied had already been prescribed. It was an "export subsidy". Nevertheless, the importance of achieving the purpose of non-circumvention under Article 10 meant that the term export subsidy should not be interpreted in an "unduly restrictive manner". Indeed, seeking to draw a sharp line around the definition of "export subsidy" by means of an exhaustive and prescriptive definition could well encourage the adoption of measures that exhibited the same subsidisation effects as Article 9.1 subsidies but which did not fall strictly within its terms. This could lead to evasion of the Agreement's export subsidy disciplines, and thereby fundamentally undermine Article 10's anti-circumvention purpose. The anti-circumvention provision itself would be circumvented.

4.289 New Zealand argued that in the present case, if the "special milk class" scheme was found not to constitute an export subsidy under Article 9.1(c) because the provision of lower-priced milk to exporters was, for instance, not regarded as a "payment", then the fact that the measure was not materially different in terms of its subsidization effect from an export subsidy listed in Article 9.1, and the actual or threatened circumventory nature of the measure, had to be relevant considerations in determining whether it constituted an export subsidy within the meaning of Article 10. Similarly, if the Special Milk Classes Scheme was not found to be an export subsidy under Article 9.1(a), the scheme could still nonetheless meet the definition of export subsidy in the context of Article 10. The circumventory nature of the scheme would again be a relevant factor to be taken into account. Taking account of these considerations, it was New Zealand's view that even if the "special milk class" regime failed to meet the test of Article 9, it would nevertheless constitute an export subsidy which circumvented, or threatened to circumvent, Canada's export subsidy commitments within the meaning of Article 10.

To continue with Article 10.3 - the Burden of Proof

²³³ House of Commons Committee on Agriculture Hearing (30 May 1995) at p.9 of the material downloaded from www.parl.gc.ca on 27 March 1997. (New Zealand, Annex 2)

²³⁴ Appellate Body Report on Brazil - Desiccated Coconut, op. cit., p.15.

²³⁵ The Oxford English Dictionary, 2nd Edition, Clarendon Press, 1989.

²³⁶ Article 3.3, 8, Agreement on Agriculture.

²³⁷ The United States noted that the panel in United States - Import Prohibition of Certain Shrimp and Shrimp Products (hereafter "US - Shrimp-Turtle"), WT/DS58/R, adopted 6 November 1998, para. 7.42, had observed that the preamble of an agreement may assist in determining its object and purpose.

²³⁸ The United States noted that Article 3.3 limited the use of export subsidies listed in Article 9.1 to the specific subsidy outlays and export quantities specified in each Member's schedule.

²³⁹ Panel Report on Japan - Photographic Film, op. cit., para.10.50.