Sub-paragraph (iv)

4.322 Canada noted that the first part of sub-paragraph (iv) included as "a financial contribution by government or any public body" circumstances where "a government makes payments to a funding mechanism". This provision was intended to cover a situation where a government, rather than making direct payments from its treasury to the targeted recipients as described in sub-paragraph (i), provided bulk funding to some other body or mechanism for the subsequent re-distribution of the financial contributions. As previously noted with respect to sub-paragraph (i), there was no evidence that any level of government in Canada made any contribution, either directly (i.e., sub-paragraph (i)) or indirectly through a funding mechanism (i.e., sub-paragraph (iv)) of funds with respect to the sale of milk at differing prices.

4.323 Canada argued that none of the "functions" set out in sub-paragraphs (i) through (iii) in Article 1.1(a)(1) were carried out by government with respect to the practices at issue. Similarly, it could not be said that any government in Canada "entrusts or directs a private body to carry out one or more of the type of functions illustrated in (i) to (iii) above which would normally be vested in the government and the practice, in no real sense, differs from practices normally followed by governments" as set out in the second part of Article 1.1(a)(1)(iv). In this regard, Canada stressed that to show that the practices of a private body fell within the terms of this provision, three elements had to be proven: (i) there had to be direction or entrustment of a function to a private body by government; (ii) the function had to be one listed in subclauses (i) to (iii); and (iii) that function had to be one that was normally carried out by government and "in no real sense differs from practices normally followed by governments".

4.324 Canada argued that its government did not "entrust or direct" any private body to carry out any of the functions detailed in (i) through (iii) with respect to sales of milk for export purposes in Canada. In particular, governments in Canada did not so "entrust ²⁴⁵ or direct" the milk marketing boards in Canada to carry out such functions. Canada recalled that the boards were not directed by governments (Section 1). Boards had come into existence on a vote of the producers in a province. They were entrusted by producers who had elected them and to whom they were responsible to act on their behalf and to market their products; they were therefore not "entrusted" by governments to undertake any of the activities referred to in Article 1 of the SCM Agreement.

4.325 Canada argued that there could be no basis for suggesting that that the marketing of milk, whether for domestic or export sale, was one that was normally carried out by government and that in no real sense differed from practices normally followed by governments. A distinction had to be made between the regulatory functions of the boards and their commercial activities. In the exercise of certain regulatory functions, the boards might engage in activities that were governmental in nature and that could be considered "normally followed by governments." The establishment and enforcement of quality standards for milk delivered from farms and the establishment of quotas for domestic purposes, for example, could be argued to fall within the range of such activities. However, the marketing of milk, i.e., arranging the collection of milk from farms and its delivery to processing plants, negotiating payments with processors and remitting funds to producers, was not a function normally carried out by government. Indeed, the structure and the autonomy of the boards, indicated that governments had essentially no responsibility, direct or indirect, in this area, except that of general oversight in support of the public interest.

4.326 Canada noted that this was particularly true with respect to sales of milk for export purposes. Governments had not "entrusted" a private body, i.e., the milk marketing boards, with a mandate to sell inputs for products for export at a price lower than those destined for domestic consumption. The sale of milk to processors for export purposes was the result of arm's length bargaining between willing buyers and willing sellers without any government direction or expectation of the outcome. Thus, there had been no entrustment by government as required under the paragraph. In addition, what this provision manifestly did not capture, contrary to the contentions of the Complainants, was regulatory frameworks, stipulated by law, through which private interests had the opportunity of maximizing their returns in commercial markets and in accordance with commercial considerations. Moreover, since the milk marketing boards were selling milk through arm's length sales to processors at market prices, this practice could not be constructed to be a "financial contribution" to the processors under any common sense analysis.

4.327 New Zealand argued that even if the provincial milk marketing board was not a body with governmental attributes, and was indeed just an agent of producers, there would still be a "financial contribution" within the meaning of sub-paragraph (iv) of Article 1.1(a)(1) of the SCM Agreement, which applied to circumstances where a government "entrusts or directs a private body to carry out one or more of the type of functions" set out inter alia, in Paragraph (iii) of Article 1.1(a)(1). In the present case, what would now be viewed as a private body, the provincial milk marketing agency, had been entrusted with providing the goods in question.

4.328 New Zealand further noted that sub-paragraph (iv) also stipulated that the practice that was alleged to constitute a subsidy "in no real sense, differs from practices normally followed by governments." On this ground, Canada denied the applicability of sub-paragraph (iv), arguing that no such function of providing goods had been entrusted by government to a private body and that the functions in question were not normally carried out by governments. The first aspect of this response was no more than a reiteration of Canada's denial of government involvement in the Special Milk Classes Scheme (Section 1, paragraph 4.41 and following). In respect of the second aspect, Canada argued that although the regulatory function of milk marketing boards could be viewed as functions normally carried out by governments, the marketing of milk was not. However, the effect of the Special Milk Classes Scheme was to reallocate income from producers to exporters, and the reallocation of income within society was a function normally carried out by government. Thus, contrary to Canada's claims, the Special Milk Classes Scheme did provide a financial contribution within the meaning of Article 1.1(a)(1) of the SCM Agreement.

4.329 Furthermore, in respect of Article 1.1(a)(1)(iv), and functions that "would normally be vested in the government and the practice, in no real sense, differs from practices normally followed by governments", New Zealand drew the Panel's attention to Canada's own implementation of that provision in its own domestic legislation contained in the Special Import Measures Act. ²⁴⁶ Section 2(1.6) of that Act incorporated the terms of Article 1.1(a)(1)(iv) of the SCM Agreement by providing that a financial contribution that amounted to a subsidy existed where:

4.330 In New Zealand's view, the language adopted by Canada in this legislative implementation of the definition of subsidy under the SCM Agreement reflected, presumably, what Canada understood the provisions of the SCM Agreement to mean. Thus, it was revealing that Canada used the phrase "permits or directs" in its implementing legislation for the phrase "entrusts or directs" in Article 1.1(a)(1)(iv). However, in the case at issue, Canada took the view that the legislative basis for the Special Milk Classes Scheme was enabling only. Canada argued that "enabling legislation" did not compel any action. Canada did not, it argued, "entrust or direct" milk marketing boards with any of the functions listed in sub-paragraphs (i) through (iii) of Article 1.1(a)(1) (paragraph 4.340).

4.331 In New Zealand's view it was clear that the Special Milk Classes Scheme would meet the requirements of Section 2(1.6)(d) of Canada's Special Import Measures Act and thus if it were a measure of another country would constitute a subsidy under Canadian law. However, Canada appeared to want to apply a different standard in this case and deny that the Special Milk Classes Scheme met the requirements of the provision of the SCM Agreement on which Section 2(1.6)(d) was based.

4.332 New Zealand argued, moreover, that the Canadian legislative incorporation of sub-paragraph (iv) precisely reflected the intent of the drafters of Article 1 of the SCM Agreement. The origin of the words that appeared in sub-paragraph (iv) was the 1960 Report of the Panel on Subsidies on Review Pursuant to Article XVI: ²⁴⁷ where the Panel took the view that the requirements of GATT Article XVI would be met in schemes where "the government took a part either by making payments into a common fund or by entrusting to a private body the functions of taxation and subsidisation with the result that the practice would in no real sense differ from those normally followed by government." These words made clear that the "practice" was the practice of taxation or subsidisation and that the manner in which it was being performed by the private body was in no real sense different from the way governments undertook such practices. This was the present day import of sub-paragraph (iv) and it had been identified correctly in Canada's Special Import Measures Act.

4.333 The United States argued, like New Zealand, that the Special Milk Classes Scheme provided a subsidy under Article 1.1(a)(1)(iv) of the SCM Agreement. Thus, even if the provincial milk marketing agencies were not considered to be acting as government bodies, there would still be a "financial contribution" within the meaning of sub-paragraph (iv) of Article 1.1(a)(1) because they were entrusted with government functions. The provincial milk marketing boards, together with the CDC, had been entrusted to price goods to allow their export at competitive levels. Furthermore, this was a function normally provided by government within the meaning of Paragraph (iv) since the Special Milk Classes Scheme operated to reallocate income from one group (the milk producers) to another class (the dairy processors), a common function of government. Indeed, the levy system that the Special Classes replaced, performed the same governmental function.

4.334 The United States argued that the applicability of Article 1.1(a)(1)(iv) of the SCM Agreement depended on the fulfilment of three conditions. More specifically, the existence of the financial contribution necessary to the finding of a subsidy under Paragraph (iv) required that: (i) a government entrusted or directs a private body to carry out one or more of the type of functions illustrated in Paragraphs (i)-(iii) of Paragraph (a)(1) to Article 1.1; (ii) such functions would normally be vested in the government; and (iii) the practice, in no real sense, differed from the practices normally followed by governments. The United States contended that Canada incorrectly concluded that none of the foregoing conditions were met by the Special Milk Classes Scheme.

4.335 In respect of the first factor, the United States argued that the Government of Canada together with the provincial governments made provision for milk producers, through their provincial marketing boards, to supply milk for export at prices that were below those available to manufacturers of dairy products for sale in the domestic market. By doing so, the government shifted certain costs from the processors to the milk producers, and also provided a good to the processors. Thus, a function provided for under Article 1.1(a)(1), was entrusted to a private entity. Both the Comprehensive Agreement and the CDC Act provided specifically for the delegation of certain federal powers, including powers of the CDC, to the marketing boards to establish pools, set prices, and collect payments. There was no dispute that the boards exercised delegated government powers, including the power to set prices, to establish quotas, and to pool revenue. Thus, they had been entrusted with governmental powers.

4.336 The United States further argued, in respect of the first requirement, that Paragraph (d) of the Illustrative List Export Subsidies in Annex I of the SCM Agreement was relevant as it was part of the context of Article 1 of that Agreement. Thus, the language of Article 1 was informed by the practices identified as export subsidies in Annex I. As set out in further detail below (paragraph 4.385 and following), Paragraph (d) of the Illustrative List specified that the "provision by governments or their agencies either directly or indirectly through government-mandated schemes" of goods on more favorable terms for export was an export subsidy. Both Paragraphs (iii) and (iv) of Article 1 had to be interpreted with this in mind. Otherwise, a fundamental contradiction in meaning would result with that practice constituting an identified export subsidy for purposes of the Illustrative List, but not being a subsidy for purposes of Article 1. Therefore, a government-mandated scheme, such as Canada's Special Milk Classes Scheme, that resulted in the provision of goods within the meaning of the Illustrative List also satisfied the requirement of Paragraph (iii) of Article 1 of the same Agreement that the provision, directly or indirectly, of goods by a government, constituted a financial contribution. Hence, since the provision of a good was a government function specifically listed in Article1.1(a)(1)(iii) of the Agreement, the first requirement for the application of Article 1 was satisfied.

4.337 The United States argued that the Special Milk Classes Scheme also satisfied the second requirement because the subsidized provision of goods and the fixing of prices were functions normally vested in governments. Indeed, it was a common practice in the agricultural sector for governments to influence the price level for agricultural products, especially basic food articles such as milk. Whether the Special Milk Classes Scheme was viewed as providing goods at lower prices for exports or as fixing price levels for milk used for the manufacture of export products, the function involved was one normally vested or performed by governments. Canada's argument that there was no specific order from the federal or provincial government to producers to set prices for milk used in exports at a particular level was inaccurate and beside the point. First, over-quota milk could only be sold for export at the Special Class 5(e) price. The producer had no choice. In-quota milk was sold at prices negotiated by the CDC, that were rarely modified. Second, pursuant to Article 1.1(a)(1)(iv) of the SCM Agreement it was unnecessary for the government to set the price for the milk if it entrusted that function to the milk boards, which it had done. The entire rationale for Paragraph (iv) was that practices of private parties entrusted with government functions were to be treated as subsidies where the practice, "in no real sense, differs from practices normally followed by governments" and a benefit was thereby provided.

4.338 Furthermore, the United States argued the common governmental function of shifting costs and reallocating income from one private entity to another was the very function previously fulfilled by the levy/rebate system, which Canada had acknowledged was replaced with the Special Milk Classes Scheme. Further, the United States argued that the conclusions reached by the 1960 Working Party that considered, inter alia, whether producer-financed subsidies were to be notified pursuant to Article XVI:1 of GATT 1947 supported this construction of Paragraph (iv). ²⁴⁸ The United States emphasized, moreover, that the language in the SCM Agreement that was contained in Article 1.1(a)(1)(iv) respecting "functions normally vested in the government" and "which in no real sense, differs from practices normally followed by governments", first appeared in the 1960 Working Party report. Furthermore, the Working Party had found that producer-financed levy/rebates satisfied those requirements where there was sufficient government involvement in the programme.

4.339 Finally, the United States argued that the Special Milk Classes Scheme operated to establish prices for milk for export in a manner that was indistinguishable from practices normally followed by governments. The inclusion of this practice in the Illustrative List certainly supported the conclusion that it was a recognized, albeit unwelcome, government practice. That practice, moreover, was specifically subject to the export subsidy disciplines contained in both the Agreement on Agriculture and the SCM Agreement. Moreover, producer-financed subsidy schemes, in which governments performed a substantial function, were treated as export subsidies in the Agreement on Agriculture, and before that in the 1960 Working Party Report, precisely because they did not differ in any practical sense from the practices normally followed by governments. Thus, contrary to Canada's conclusions, each of the prerequisites to the applicability of Article 1.1(a)(1) of the SCM Agreement was satisfied by the Special Milk Classes Scheme.

4.340 Canada refuted the US argument that Canada made provision for milk producers, through their provincial marketing boards, to supply milk for export at prices that were below those available to manufacturers of dairy products for sale in the domestic market (paragraph 4.335) Canada claimed that the facts made it clear that there was no governmental requirement placed on milk producers, through their marketing boards to supply milk for export, let alone a governmental requirement to sell that milk for export at a prescribed price. Permitting producers to adopt a course of action did not amount to entrusting or directing a private body to carry out a government function.

4.341 Furthermore, Canada rebutted the United States claim that the government shifted costs from processors to producers (paragraph 4.338). The costs of production were always borne by the producers. Processors paid the highest price that producer boards could obtain given the externally-determined economic realities of the markets in which they sold the final products. Producers were not forced to provide milk at any given price but rather milk was supplied pursuant to negotiated agreements. Thus, there was no shifting of costs. Moreover, the United States' explanation also failed to address why a significant number of producers would choose to produce above their quotas if the effect was to shift costs to them from processors. The only rational explanation would be that producers were coerced to act against their own best interests but no such coercion existed. Canada noted that the United States also claimed that this alleged government action provided a good to the processors. This directly contradicted their own statement that producers, through their marketing boards supplied the milk.

4.342 Moreover, Canada noted in respect to the requirement regarding functions normally vested in the government, that the United States characterized the government function in this case to be one of reallocation of wealth within society. Canada argued that sales of milk by milk producers at market prices did not "reallocate" income at all. A willing buyer purchased a good from a willing seller in an arm's length transaction at the market price. Although obviously money changed hands, the ordinary language to describe such a transaction was that the seller earned income, not that the transaction reallocated income from one party to the other. The redistribution of wealth that occurred through transactions at market prices was not a practice normally followed by governments when they sought to redistribute income. Government actions to reallocate income were generally achieved through government charges (taxes) and payments (subsidies) in which government forced one group in society to give up income which it either had or could otherwise obtain, and provided another group with income that would not be forthcoming in the market. Canada maintained that the key characteristic of sales of milk under Special Classes 5(d) and (e) was that governments did not control the sales prices, and they did not delegate to anyone else the power to control the sales prices. The implicit assumption in the US arguments was that any transaction at market prices, as opposed to controlled domestic prices, had to be considered a "reallocation of income." In fact, it was the absence of control over prices for export use that formed the basis of the Complainants' case. Canada was a small country on world dairy markets. It was a price taker. It would be the purest of nonsense for any Canadian government to claim to control the price at which Canadian dairy exports took place.

4.343 The drafters of the SCM Agreement in providing for a definition of "subsidy" were careful to distinguish in Article 1.1(a)(1) between the circumstances where governmental "financial contributions" referred to a government practice involving a direct transfer of funds, the foregoing of government revenue or a government making payments to a funding mechanism (sub-paragraphs (i), (ii) and (iii)) and the indirect provision of the governmental financial contribution through a "private body" (sub-paragraph (iv)). Accordingly, where the entity in question was a private body, as conceded in this circumstance (US reference in paragraph 4.335), the applicable provision was sub-paragraph (iv). Hence the drafters had carefully circumscribed the circumstances under which Paragraph (iv) could apply to a private body. The government had to "entrust or direct" the private body and the function must be "one which would normally be vested in the government and the practice, in no real sense, differs from the practices normally followed by governments." Thus, in the context of "subsidies", the drafters of the SCM Agreement appreciated that where private bodies were involved, careful limits had to be drawn against the implication of governmental activity.

To continue with Article 1.1(a)(2) - Income or Price Support

²⁴⁵ Canada noted that the meaning of "entrust" was related to the companion word "direct": see the New Shorter Oxford English Dictionary on Historical Principles, Lesley Brown (ed.), (Oxford: Oxford University Press, 1993) (the "NSOED"): "to invest with a trust; give the responsibility for a task; commit the... execution of (a task) to a person." (Canada, Exhibit 26)

²⁴⁶ Special Import Measures Act, S.C. 1984, c.25, s.2.

²⁴⁷ Panel Report on Review Pursuant to Article XVI:5, op. cit.

²⁴⁸ Ibid.