(iv) Article 10.3 - the Burden of Proof

4.290 New Zealand noted that the Agreement on Agriculture contained, in Article 10.3, a provision which had implications for the burden of proof. ²⁴⁰ Article 10 was concerned with the prevention of circumvention of export subsidy commitments. A Member which claimed that quantities exported in excess of reduction commitment levels were not subsidised "must establish" that no export subsidy had been granted. The language was mandatory and unequivocal. New Zealand maintained that the fact that this obligation was intended to be a stringent one, and one applicable in the context of dispute settlement, was made clear from the preparatory work relating to Article 10. The negotiating Draft Text on Agriculture of 12 December 1991 provided as follows:

4.291 New Zealand argued that the language of a "prima facie case" was the language used by the Appellate Body under the rules relating to burden of proof. In the EC - Hormones, the Appellate Body paraphrased the approach of the Panel:

4.292 New Zealand argued that the effect of a rule deeming that a prima facie case had been made out, as the earlier drafts of Article 10 provided, was to reverse the burden of proof. Under such a rule, the normal obligation on the complaining party to establish a prima facie case was dispensed with. The burden started with the responding party. This was the explicit effect of the language used in the earlier drafts of Article 10. Although the wording of Article 10 had changed, and no explicit reference to a prima facie case was retained, the earlier draft provided guidance to the thinking of the negotiators of the rules on circumvention. The changes made to the wording of what became Article 10.3 were not incompatible with the express terms of the earlier draft. They simply stated, in a more general way, that there was an obligation on a Member whose exports of a product in respect of which reduction commitments had been made exceeded the volume of those commitments, to "establish" that no subsidy had been granted. In effect, once it had been "established" that the exports of a Member were in excess of its reduction commitments, the burden was then on that Member to "establish" that no subsidy had been granted. The burden of proof clearly shifted.

4.293 Hence, New Zealand argued that properly interpreted in its context, Article 10.3 spoke to dispute settlement situations. It imposed a specific obligation on Members that would usually arise only in a dispute settlement context. Where a Member was challenged in dispute settlement proceedings on the ground that the quantities of its exports exceeded its reduction commitment levels, then that Member "must establish" that no export subsidy had been granted in respect of those quantities. Such a rule could only have the effect of placing the burden on the Member against which the complaint had been made to establish that no subsidisation has occurred.

4.294 New Zealand noted that Article 10.3 had important implications for the case at issue. Since the quantities of butter exported by Canada in 1995/1996 and 1996/1997 exceeded the reduction commitments made by Canada in respect of butter for both of those years, Article 10.3 required that Canada "must establish" that no export subsidy had been granted in respect of butter. Since the quantity of cheese exported by Canada in 1996/1997 was in excess of Canada's reduction commitment for cheese for that year, Article 10.3 required that Canada "must establish" that no export subsidy had been granted in respect of cheese. And since the quantity of whole milk powder exported by Canada in 1996/1997 exceeded Canada's reduction commitments in respect of "Other Milk Products", Article 10.3 required that Canada "must establish" that no export subsidy has been granted in respect of whole milk powder. In each case, the burden of proof lay on Canada. In this respect, New Zealand noted that Canada had acknowledged that the burden of proof was on Canada to establish that no export subsidy existed in respect of the Special Milk Classes Scheme.

4.295 The United States argued that Article 10.3, which complemented the prohibition on circumvention contained in Article 10.1, required the exporting Member to establish that export subsidies had not been provided with respect to those quantities of a product exported that were greater than the annual export quantities set forth in that Member's schedule for the product in question. The imposition of this requirement in Article 10.3, emphasized the seriousness which the Agreement attached to the possibility of circumvention of the export subsidy reduction commitments. Its application in the context at issue meant that Canada had to establish that no export subsidy had been granted in respect of the quantity of exports that were in excess of its reduction commitments. As the export quantities for butter, cheese, and dairy products in the "other dairy product" category exceeded the reduction commitments for those categories in Canada's Schedule, Canada had to show that such exports did not benefit from export subsidies.

4.296 The United States submitted that Canada could not meet the requirement of Article 10.3 because the quantities of the identified dairy products that were exported exceeded the reduction commitments and the special milk class price system was an export subsidy.

4.297 Canada agreed that the wording of Article 10.3 had the effect of reversing the usual burden of proof rule as set out above. Thus, once it had been established that the exporting country had exported quantities of a product in excess of the level of the reduction commitment for that product, the burden lay on that exporting country to show a prima facie case that the exports in excess of the reduction commitment were not subject to export subsidies. Once such a prima facie case had been established, the burden of proof moved to the complaining party. Canada claimed that it had clearly surpassed any prima facie standard in demonstrating that no export subsidies had been granted with respect to the products in question.

(e) Other Relevant Provisions of the Agreement on Agriculture

(i) Article 8 and 3.3

4.298 New Zealand argued that Canada's provision of export subsidies under Article 9.1(a) and (c) of the Agreement of Agriculture in excess of its scheduled export subsidy commitments was a violation of Article 3.3 of that Agreement. Furthermore, Canada was in violation of its obligation under Article 8 of the Agreement on Agriculture not to provide export subsidies otherwise than in conformity with the Agreement on Agriculture.

4.299 The United States argued that as the Special Milk Classes Scheme was an export subsidy within the meaning of Article 9.1 of the Agreement on Agriculture, Canada was in breach of Article 3.3 of the Agreement on Agriculture not to provide export subsidies in excess of its quantity commitments levels specified in Section II of Part IV of its Schedule. Furthermore, Canada was in breach of Article 8 of the Agreement on Agriculture not to provide export subsidies otherwise than in conformity with the Agreement and with the commitments specified in its Schedule.

4.300 Canada argued that Marcador no definido.Article 8 did not apply. As Canada had shown that sales of milk at differing prices for domestic and export markets did not constitute an "export subsidy" as that term was defined in Article 1 of Agreement on Agriculture, the practice at issue did not fall within the scope of Article 8.

4. Agreement on Subsidies and Countervailing Measures ("SCM Agreement")

(a) Outline

4.301 New Zealand claimed that even on the basis of its own approach to the interpretation of the term "subsidy", under the SCM Agreement, Canada had not shown that the Special Milk Classes Scheme fell outside the definition of subsidy. New Zealand argued that the scheme constituted a subsidy within the meaning of Article 1 of the SCM Agreement in the following respects:

4.302 New Zealand noted that Article 1 of the SCM Agreement provided that a subsidy shall be deemed to exist when there was a financial contribution by a government or any public body, or any form of income or price support in the sense of Article XVI of GATT 1994, and a benefit was thereby conferred. The Special Milk Classes Scheme consisted of a financial contribution by government. Alternatively, the Special Milk Classes Scheme might be viewed as a form of income or price support in the sense of Article XVI of GATT 1994. In either case, a benefit was conferred within the meaning of Article 1 of the SCM Agreement.

4.303 In addition, the Special Milk Classes Scheme constituted the provision of an export subsidy within the meaning of Paragraph (d) of the Illustrative List of Export Subsidies in Annex I of the SCM Agreement.

4.304 The United States considered that the definition of subsidy was substantially the same for purposes of the Agreement on Agriculture and the SCM Agreement. As the SCM Agreement was one of the other Agreements set forth in Annex 1A of the Marrakesh Agreement, the SCM formed part of the context of the Agreement on Agriculture.

4.305 The United States claimed that even if it were to be assumed that the SCM Agreement was dispositive of what constituted an export subsidy, solely for purposes of argument and without prejudice to the views of the United States concerning the applicability of Articles 9 and 10 of the Agreement on Agriculture, Paragraph (d) of the Illustrative List of Export Subsidies contained in Annex I lead directly to the conclusion that the Special Milk Classes Scheme was an export subsidy. Hence, the United States claimed that the Special Milk Classes Scheme, and specifically the provision of lower priced milk through Special Class 5(d) and (e) to exporters, constituted an export subsidy within the meaning of the Agreement on Agriculture as well as the SCM Agreement.

4.306 Canada claimed that the sale of milk for export purposes in Canada did not constitute a "financial contribution by a government or a public body" pursuant to Article 1.1(a)(1) of the SCM Agreement. Nor did it constitute "any form of income or price support in the sense of Article XVI of GATT 1994" . Nor did the sale of milk in Canada for export constitute a "benefit" for the purchaser over and above the normal commercial conditions that applied in such a market; there could be no "benefit" as the term should be interpreted under Article 1 of the SCM Agreement.

4.307 Hence Canada submitted that the sale of milk at differing prices did not constitute a "subsidy" within the meaning of Article 1 of the SCM Agreement. As noted, the term "subsidy" as it was used in the definition of "export subsidy" in the Agreement on Agriculture had to be interpreted in accordance with the definition of subsidy in Article 1 of the SCM Agreement. Accordingly, since there was no "subsidy", there could not be any "export subsidy" for the purposes of the Agreement on Agriculture.

4.308 Further, Canada claimed that the practices at issue were not "export subsidies" in the sense of Paragraph (d) of Illustrative List of Export Subsidies attached to the SCM Agreement. Although Paragraph (d) was the only item on this list that was in any way relevant to the issue at hand, it was concerned with differences between internal domestic prices and export prices. Indeed, other than Article 9.1(b) of the Agreement on Agriculture, it was the only provision in either the Agreement on Agriculture or the SCM Agreement that touched on such price differentials. Canada had demonstrated that its Import for Re-Export Program (paragraph 4.11) provided exactly the conditions that would exclude a measure from the application of Paragraph (d). This confirmed that the practices in question did not fall within the meaning of the term "export subsidy" for SCM Agreement or Agreement on Agriculture purposes. Accordingly, Canada claimed that not only was there no subsidy within the meaning of the Agreement on Agriculture and the SCM Agreement but, in particular, there was no prohibited export subsidy as set out in the Illustrative List of Export Subsidies found in Annex I of the SCM Agreement.

(b) Article 1

(i) Article 1.1(a)(1) - Financial Contribution

4.309 Canada claimed that there was no financial contribution by government pursuant to Article 1.1(a)(1) and, accordingly, the sale of milk for export purposes in Canada did not constitute a "financial contribution by a government or a public body" pursuant to Article 1.1(a)(1).

4.310 Canada submitted that under Article 1.1(a)(1), the term "financial contribution by a government or any public body" was defined exhaustively ²⁴³ and was limited to the circumstances described in the four sub-paragraphs (i) to (iv). Accordingly, if the practices at issue did not fall within any of the items in (i) to (iv), then the practices could not be considered to be "financial contributions by government or any public body". Moreover, there could be measures or practices which could arguably fall within the meaning of the term "financial contribution" but did not fall within one of the various descriptions in sub-paragraphs (i) through (iv). In such a case, the measure or practice was outside the scope of what was a "financial contribution" for the purposes of the subsidy definition.

4.311 Canada noted that the plain meaning of the term "financial contribution" was that something of value was being contributed to a recipient by the donor. In this case, "financial contribution by a government or any public body" meant that there was a transfer of something of value to a recipient from a government or other public body. In the absence of any evidence that there was any such transfer of resources, there could not be a "financial contribution". Each of the items set out in (i) to (iv) had to be interpreted as reflecting this basic concept. Canada submitted that an examination of each of the items set out in sub-paragraphs (i) to (iv) of Article 1.1(a)(1) demonstrated that none of them applied to the practices at issue.

Sub-paragraph (i)

4.312 Canada noted that sub-paragraph (i) included as "a financial contribution by government or any public body", "a government practice involv[ing] a direct transfer of funds (e.g. grants, loans and equity infusion), and potential direct transfers of funds or liabilities (e.g., loan guarantees)". This provision covered the most common form of financial contribution made in connection with subsidies, i.e., the direct payment to a recipient of funds from government treasuries. Canada argued that it was evident from the facts that the practices in dispute did not involve any direct grants or transfer of funds from governments to any recipient. There was nothing in the marketing of milk for export at world prices analogous to a government grant, loan or equity infusion were anything like a potential direct transfer of funds or liabilities such as a loan guarantee. No evidence or allegation to the contrary had been offered by the Complainants.

Sub-paragraph (ii)

4.313 Canada recalled that sub-paragraph (ii) included as "a financial contribution by government or any public body" circumstances where "government revenue that is otherwise due is foregone or not collected (e.g. fiscal incentives such as tax credits)". This provision referred to any practice under which a government chose not to collect tax or other duties owing to it ²⁴⁴ and thus made financial contribution to the person owing the revenue to the government. It was clear that the practices at issue did not involve any such foregoing of government taxes, duties or other government monies owing. No evidence to the contrary has been offered by the Complainants.

Sub-paragraph (iii)

4.314 Canada noted that sub-paragraph (iii) included as "a financial contribution by government or any public body" a situation where "a government provides goods or services other than general infrastructure, or purchases goods". Canada argued that the various levels of government in Canada did not provide milk to anyone. As demonstrated in Part I, the Canadian dairy industry was composed entirely of privately-owned farms producing milk for sale to privately owned or co-operative dairy processors. While these sales took place within a framework established by legislation, it was the private actors that produced and sold the milk. The core of the system was operated on the foundation of the decisions by producers made on a strictly commercial basis.

4.315 Canada reiterated that the milk marketing boards were "producer-run". They did not constitute government or government agencies. To the contrary, they were established pursuant to referenda of dairy producers in each of the respective provinces and, in most provinces, they were controlled by the elected representatives of the dairy producers. While legislation required that the boards take into account a broader range of interests than those of the producers alone, the fact remained that the boards operated as an extension of the commercial operations of the individual dairy producers of Canada.

4.316 Canada argued that if the conduct of commercial operations by private producers and processors within a regulatory framework constituted Government provision of the good or service provided through the commercial transactions, then virtually all activities in a modern economy could be so characterized. For example, labour provided through collective agreements established under government labour laws or determined by minimum wage laws could be considered labour provided by government.

4.317 Furthermore, Canada argued that sub-paragraph (iii) had to be read in the context of the term "financial contribution". Thus, in order for government to be providing goods within the meaning of the provision, it had to be demonstrated that this provision of goods involved a contribution of a financial nature from public resources controlled by the government. The sale of milk to processors by producers collectively through or with the participation of producer-run marketing boards could in no way be construed as the provision of goods by government or any public body, nor was it the provision of goods that entailed a governmental financial contribution.

4.318 Canada contended that the participation of the milk marketing boards in providing milk sourced from producers to processors did not involve any "financial contribution" from the boards. The boards acted as agents for the producers in collecting and selling milk to the processors. With respect to exports, processors purchased the milk through or with the participation of the boards for prices based on the world market return being obtained by the processors. Thus, the producers only received for the milk a market price paid initially to the board as their agent. This was best illustrated by a counter-example. If the boards were purchasing milk at high domestic prices and then reselling the milk to the processors at low prices and absorbing the difference, then it might be open to argue that the boards would be making a "financial contribution", albeit of a non-governmental type. However, in the case of Canadian dairy exports, as agents of the producers the boards paid to the producers what the boards receive from the processors for the milk. As Canada had described, the price paid back to the producers was flowed entirely through the board and there was no "adjustment' or "contribution" by the boards to this revenue stream. This reinforced the conclusion that there was no "financial contribution" to the processors by the boards, and therefore Article 1.1(a)(1) could not apply.

4.319 New Zealand argued that the Special Milk Classes Scheme involved a financial contribution within the meaning of Article 1.1(a)(1)(iii). The Special Milk Classes Scheme involved the providing of goods by the combined action of governmental agencies - the CDC and the provincial milk marketing boards (Section 1). Canada's denial of this was based on its view that the Special Milk Classes Scheme involved producers operating collectively without significant government involvement. However, New Zealand held that role of government in the operation of the Special Milk Classes Scheme was integral and essential. The providing of lower-priced milk to exporters - which was the export subsidy in this case - was effected through the joint action of the CDC and the provincial milk marketing boards.

4.320 New Zealand further noted that Canada argued that in any event there was no financial contribution because the boards were simply agents of producers; what was passed on to exporters was the producer's milk. New Zealand noted that the boards did not pass milk on to exporters because they were acting as agents of producers. Boards had a right to dispose of milk regardless of the wishes of producers. A producer could not deny the board the right to sell its milk - a producer could not revoke the "agency". Nor could this, according to New Zealand, be seen just as a matter of the decision of the provincial milk marketing board. The system under which milk - a good - was provided to exporters did not just involve that board. It was an operation involving both federal and provincial action.

4.321 The United States argued that where surplus milk was provided to processors/exporters under Classes 5(d) and (e), this involved the Canadian Government through its legislative arrangements providing goods (i.e. milk) at prices below those prevailing in the domestic market. Hence, the provincial milk marketing boards, on behalf of the milk producers in their respective provinces, provided milk at prices lower than available on the domestic market to processors. The processors used that low priced milk in manufacturing dairy products for export. Those same marketing boards, moreover, operated under the authority of powers delegated to them by the federal and provincial governments. The boards did not receive their authority and powers from the milk producers. Thus, their actions, together with those of the Canadian Government, acting through the CDC, provided goods, here milk, to processors. The United States claimed that this constituted a subsidy under Article 1.1(a)(1)(iii) of the SCM Agreement.

To continue with Sub-paragraph (iv)

²⁴⁰ Article 10:3 of the Agreement on Agriculture stated: "Any Member which claims that any quantity exported in excess of a reduction commitment level is not subsidised must establish that no export subsidy, whether listed in Article 9 or not, has been granted in respect of the quantity of exports in question."

²⁴¹ New Zealand, Annex 35.

²⁴² Appellate Body Reports on EC - Measures Concerning Meat and Meat Products (Hormones), (hereafter "EC - Hormones"), WT/DS26/AB/R, WT/DS48/AB/R, adopted 13 February 1998, paragraph 98.

²⁴³ Canada argued that the use of the term "i.e." indicated that the items that followed were intended to be an exhaustive, rather than an illustrative list. In this regard, Canada noted that the Uruguay Round negotiators agreed to replace the term "such as" in the Cartland I draft of the SCM Agreement, MTN.GNG/NG10/W/38 (18 July, 1990), with "i.e." in Cartland II, MTN.GNG/NG10/W/39/Rev.1 (4 September 1990), thus clearly indicating an intent to move from an illustrative definition to an exhaustive definition. (Canada, Exhibit 25) Canada also noted that "e.g." was also used within the subsidy definition in Article 1 to indicate an illustrative list. (Canada, Exhibit 25)

²⁴⁴ Canada argued that the intent of the negotiators to link the term "government revenue" to taxes or duties was made clear both by the reference to "tax credits" as the illustrative example provided in the provision and the discussion of "duties" in the footnote to the provision.