(ii) Article 1.1(a)(2) - Income or Price Support in the sense of Article XVI of GATT 1994

4.344 Canada argued that the practices at issue did not fall within the description of "any form of income or price support in the sense of Article XVI of GATT 1994". Article XVI:1 of GATT 1994 included as a subsidy "any form of price or income support, which operates directly or indirectly to increase exports from ... its territory". This clearly contemplated a system under which exports were encouraged independently of market forces. As described above, the practice under which milk was sold for export purpose in Canada was exclusively linked to market forces. Dairy producers received a return on their sales of milk for export purposes based on actual sales into export markets. It was in response to these price signals that milk was produced for the export market.

4.345 Canada noted that it had been long established in GATT practice that supply management systems which relied on border measures to support domestic price levels were not to be considered "subsidies" under Article XVI. This view was reflected in the 1960 Report of the Panel on Subsidies on "Review Pursuant to Article XVI:5":

4.346 Canada argued that it was evident that the supply management system in Canada did not constitute a subsidy pursuant to the above comments. The exclusion in this passage from the subsidy concept of any system where higher domestic prices were supported by tariff measures was particularly noteworthy in the context of this dispute. ²⁵⁰

4.347 In respect of GATT 1994 Ad Article XVI:B:3, Canada argued that in the case of systems for the stabilization of domestic prices for primary products ²⁵¹ , an export subsidy was not involved where two tests were met: (i) the system had resulted in, or was designed to result in, export prices higher than the domestic prices; and (ii) the system did not stimulate exports unduly or otherwise seriously prejudice the interests of other contracting parties. With respect to the first test, Canada contended that its system for the sale of milk for export purposes contemplated the possibility of export prices higher than the domestic price. Indeed, in recent months as certain domestic milk prices in the United States had exceeded domestic prices in Canada, price levels in Special Classes 5(a) through (c) (which were linked to price levels in US markets and could be used either for export or domestic purposes) had exceeded price levels in the domestic use classes. In addition, since Canada's system for sales of milk for export purposes was based on world market conditions, it could not be alleged that it stimulated exports unduly or otherwise seriously prejudiced the interests of other WTO Members. Thus, Canada's dairy supply management system did not involve an export subsidy pursuant to this provision.

4.348 Canada argued that the drafters of the SCM Agreement expressly incorporated the concept of "income and price support", as defined by Article XVI, into Article 1 of the SCM Agreement and that practices such as those used for the sale of milk in Canada for export purposes were clearly excluded from this definition. This suggested that the intent of the negotiators was that such programmes did not fall within the concept of "subsidy" in the Article 1 of the SCM Agreement. ²⁵² Accordingly, Canada argued that the sale of milk in Canada for export purposes could not constitute "any form of income or price support in the sense of Article XVI of GATT 1994" as provided for in Article 1.1(a)(2). Hence, the practices at issue in this dispute did not correspond with either half of the first part of the two-part test in Article 1.1, and consequently, there could be no "subsidy" pursuant to that definition.

4.349 New Zealand noted that Article 1 of the SCM Agreement included within the definition of a subsidy "any form of income or price support in the sense of Article XVI of GATT 1994". Section A.1 of Article XVI of GATT 1994 included within its scope income or price support "which operates directly or indirectly to increase exports of any product". Section B.4 of Article XVI of GATT 1994 included subsidies which resulted "in the sale of such product for export at a price lower than the comparable price charged for the like product to buyers in the domestic market." These definitions clearly encompassed a scheme under which the government ensures that milk was made available for the production of products for export at a price that was lower than that for milk available for the production of equivalent products for domestic consumption.

4.350 New Zealand further noted that Canada denied that the Special Milk Classes Scheme constituted a form of income or price support within the meaning of Article XVI of GATT 1994. Article XVI:1, Canada argued, contemplated a system under which exports were encouraged independently of market forces (paragraph 4.344). Thus, Canada's reasoning here, too, was based largely on its argument that dairy exporters responded to market signals and not to any incentives provided through the Special Milk Classes Scheme. The reality was, in New Zealand's view, otherwise. The allocation of milk to domestic or export markets was not the decision of the producer (as argued under paragraph 4.93 and following). Milk was sold for export rather than domestically not in response to market signals but in response to the determination of federal and provincial representatives operating through the CMSMC. Moreover, it was not the incentive for the producer that was in issue. It was the exporter who received the support. Exporters were encouraged to export because they were shielded from domestic prices, precisely the incentive to export regardless of market conditions that Canada said was contemplated by Article XVI.

4.351 New Zealand further noted that Canada argued that its system met the requirements of Ad Article XVI:B:3 of GATT 1994 (and was not therefore a subsidy for the purposes of Article XVI of GATT 1994) because the system contemplated the possibility of export prices being higher than domestic prices. But Canada's argumentation in support of this related only to Special Classes 5(a) through 5(c) and did not deal at all with Special Classes 5(d) and (e), the provisions that were in issue in this case. Moreover, it was extremely unlikely that the prices for these latter classes would ever rise to such an extent that they would exceed Canadian domestic prices. World prices would have to rise over 300 per cent before the Special Class 5(e) price approached the Canadian domestic price. Thus, in respect of those sub-classes, the requirements of Ad Article XVI:B:3 could, realistically, never be met. Further, in New Zealand's view, the Canadian system did operate to "stimulate exports unduly" within the terms of Ad Article XVI:B:3 given that, absent special milk classes, Canadian dairy exports would be largely uneconomic and would be severely curtailed.

4.352 New Zealand noted Canada's attempt to deny the applicability of Article 1.1(a)(2) of the SCM Agreement which incorporated within the definition of "subsidy" any form of income or price support in the sense of Article XVI of GATT 1994. New Zealand noted that Canada cited, in paragraph 4.345, as authority for this, a passage from the 1960 Report of the Panel on Subsidies ²⁵³ where the Panel said that a situation where a government fixed a minimum price to producers and maintained it simply by "quantitative restrictions or flexible tariff or similar charges" "might" be a case where there was no subsidy. Canada then extrapolated from this qualified comment the absolute proposition that the Panel was of the view that any system where higher domestic prices were supported by tariff measures would not represent a subsidy. In New Zealand's view Canada had failed to make any allusion whatsoever to the Panel's key conclusion ²⁵⁴ regarding producer-funded subsidies: that the requirements of GATT Article XVI would be met in schemes where "the government took a part either by making payments into the 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". New Zealand's conclusion that the Canadian scheme did indeed provide price or income support in the sense of GATT Article XVI, and that the requirements of Ad Article XVI:B:3 could never realistically be discharged by Canada, had not been rebutted.

4.353 The United States argued that even if Canada's supply management regime with its price classification system were found to be a system of stabilization of domestic prices within the meaning of Ad Article XVI, the Canadian Special Milk Classes Scheme clearly resulted in "the sale of the product for export at a price lower than the comparable price charged for the like product to buyers in the domestic market." Because the special milk class price system did not result, and was not designed to result, in "the sale of the product for export at a price higher than the comparable price charged for the like product to buyers in the domestic market" it did not, and could not, satisfy the exception from treatment as a subsidy contained in Ad Article XVI. Thus, when Canada's special milk class price system was analyzed within the framework of Ad Article XVI, the result reached was the same as under the SCM and Agreement on Agricultures: the special milk class price system was an export subsidy.

4.354 Canada, in response to a question by the Panel as to why Canada felt there was not "price or income support in the sense of Article XVI" when Canada had a positive Aggregate Measurement of Support ("AMS") with respect to dairy products, argued that its domestic support commitments were not price or income support in the sense of Article 1.1(a)(2) of the SCM Agreement. The term "market price support", as it was used with respect to Domestic Support in Annexes 3 and 4 of the Agreement on Agriculture, was fundamentally different in content and purpose from the term "price or income support in the sense of Article XVI of GATT 1994".

4.355 Canada argued that Market Price Support"("MPS") was a term chosen to be one of the elements to be used in calculating a comprehensive measurement of domestic support through the AMS in the Agreement on Agriculture. AMS was intended to be a broad measurement of government support in favour of agricultural producers, for the purpose of developing reduction commitments. As such, it had been, and was, a very ad hoc measure, not a rigorous measurement of "subsidies" as they might be otherwise understood or defined. Thus, MPS was a negotiated measuring device adopted for a specific purpose in the Agreement on Agriculture negotiations. It bore no linkage or lineage with any other concept of "price support", and in particular, was quite distinct from the term "price or income support in the sense of Article XVI of GATT 1994", as it used in the SCM Agreement. In contrast, the purpose of the use of the term "price or income support in the sense of Article XVI of GATT 1994" in the SCM Agreement was to bring some price support systems within the ambit of the disciplines on export subsidies in that Agreement. This built on the similar purposes captured in the language of Article XVI of the GATT 1994 itself. In that case, the term was restricted to the specific circumstances as set out in Interpretative Note 2 ad Paragraph 3 of Article XVI and as discussed in the 1960 Report of the Panel on Subsidies. Accordingly, unlike MPS, this term was to be linked directly to the concept of "subsidies".

4.356 Canada noted that it had indicated (for 1995/96) - with respect to Canada's notifications of its AMS under the Agreement on Agriculture - that it had MPS with respect to butter and skim milk powder. This notification was based on the gap between the fixed external reference price (the 1986-88 average export minimum prices agreed under the International Dairy Arrangement) and an "applied administered price" (the CDC support prices, as operated at that time). Canada emphasized that although the CDC continued to announce a "Support Price", this had become a misnomer - whereas the CDC used to use a "Support Price" as the basis for a standing offer to purchase programme, this had been terminated. The CDC "Support Price" was now essentially used as a reference price by the CMSMC and the provincial producer boards as a target in their negotiations with processors, with the objective that milk prices not be too far out of line in different provinces. As such, it no longer appeared to constitute an "applied administered price" for the purposes of MPS calculation.

4.357 Canada stressed that the issue before the panel was whether Special Classes 5(d) and (e) constituted "export subsidies" for the purposes of the Agreement on Agriculture. In that regard, the definition of "export subsidy", in the context of the definition of "subsidy" as it was found in Article 1 of the SCM Agreement, bore no relationship, textually or historically, to the formula used to calculate MPS or APS as a result of the Uruguay Round.

4.358 New Zealand did not accept the conclusion reached by Canada where it sought to distinguish the term "market price support", in the Agreement on Agriculture, from the reference to "any form of income or price support" in Article 1 of the SCM Agreement. The Aggregate Measurement of Support (which included specific provision for calculating market price support) as it was defined in Article 1 of the Agreement on Agriculture, would certainly catch all forms of income and price support within the meaning of GATT Article XVI. This was made very clear, for example, in Paragraph 6 of Annex 2 of the Agreement on Agriculture which defined the conditions when (decoupled) "income support" can be exempted from the Aggregate Measurement of Support. Conversely, in Paragraph 1(b) of the same Annex, "price support to producers" was specifically excluded from the category of exempt domestic support and thus must be included in the Aggregate Measurement of Support.

4.359 In New Zealand's view, the linkage between the two concepts was confirmed by Article 13 of the Agreement on Agriculture. That Article, setting out the applicability of certain provisions of other agreements to measures covered by the Agreement on Agriculture stated, in Paragraph (b), that "domestic support measures ... as reflected in each Member's Schedule" (i.e., the AMS commitments) shall be "exempt from actions based on Paragraph 1 of Article XVI of GATT 1994 ... ".

4.360 New Zealand noted that Canada stated that the support price no longer appeared to constitute an 'applied administered price' for the purposes of "[market price support] calculation" (paragraph 4.356). New Zealand disagreed with this on the basis that support prices were still used by the CDC to buffer domestic supplies seasonally and, to a very minor extent regionally and between processors ²⁵⁵ and they also assisted producer boards in "establishing domestic price levels. ²⁵⁶ Despite the fact that buffer stocks might represent only a small part of domestic production, the effect of the CDC, a government agency, purchasing and selling stocks on the basis of support prices meant that those support prices represented the market clearing level for the products concerned - applied administered prices remained, as did price and income support in the sense of Article XVI:1 of GATT 1994.

4.361 Canada emphasized that the reference in Article 1.1(a)(2) was to Article XVI as a whole and not just to the Paragraph 1 of Article XVI. The phrase "any form of income or price support" did not appear in Paragraph 1 of Article XVI; it did as a subset of the term "subsidy": i.e., "any subsidy, including any form of income or price support". The plain meaning of this was that the term "subsidy" was to include "any form of income or price support" and the notification obligations in Paragraph 1 attaching to "subsidies" had necessarily to apply to income or price support systems.

4.362 Canada noted that Paragraph 3 of Article XVI stated that "contracting parties should seek to avoid the use of subsidies on the export of primary products". The second sentence then set out stronger injunctions with respect to the use of "such subsidies" in certain circumstances. Thus, both Paragraph 1 and Paragraph 3 were concerned with "subsidies", with Paragraph 3 concerned with certain kinds of "subsidies": i.e., export subsidies on primary products. The fundamental principle of interpretation applicable in this circumstance was that the same term (e.g., "subsidy") should be interpreted consistently when it was used in the same agreement. Where the same term was used within a single article the presumption in favour of consistency in interpretation was all the stronger. Absent any direction to the contrary, there was no reason to consider the meaning of the term "subsidy" in Paragraph 1 to differ from the use of the term "subsidy" in Paragraph 3. Paragraph 1 referred to all "subsidies" and Paragraph 3 referred only to some of those "subsidies"; those "subsidies" that were export subsidies on primary products. However, any "subsidy" that fell within the parameters of Paragraph 3 was also a "subsidy" for the purposes of Paragraph 1.

4.363 Canada argued that the term "any form of income or price support" was expressly included in the term "subsidy" in Paragraph 1. Although this express inclusion was not repeated in Paragraph 3, if the term "subsidy" was to have a consistent meaning throughout Article XVI, then the term "subsidy" as it was used in Paragraph 3 had also to include "any form of price or income support", except to the extent that there was any express direction to the contrary. There was, in fact, such an express exclusion. It was found in Interpretative Note 2 to Paragraph 3 in Ad Article XVI. This note stated that "a system for the stabilisation of the domestic price or of the return to domestic producers of a primary product independently of the movement of export prices", (i.e., price or income support), under certain specified conditions, "shall not be considered to involve a subsidy on exports within the meaning of paragraph 3". Thus, the term "subsidies on exports" as it appeared in Paragraph 3 shall not include these particular types of income or price supports. The carve-out in the Ad Article of certain kinds of price and income support systems served as confirmation that, as a first step, all income or price support systems were in fact implicitly included in Paragraph 3, mirroring the express inclusion in Paragraph 1.

4.364 Canada argued that the presumption had to be that the meaning of the term "subsidy" was consistent throughout Article XVI. Since the subsidies referred to in Paragraph 3, export subsidies, were a subset of all subsidies, any practices which were declared not to be "subsidies" in Paragraph 3 could not be considered to be "subsidies" for the purposes of Paragraph 1 if the principle of consistency of interpretation was to be upheld. It was important in this context to note that the Ad Article referred to "within the meaning of paragraph 3", not "for the purposes of paragraph 3". The latter formulation might suggest that, notwithstanding the usual meaning of "subsidy", the provisions of Paragraph 3 did not apply to these particular income or price support systems. The choice of the word "meaning", however, directed the interpretative note to the meaning of the word, as it was used in Paragraph 3, but without restricting that application to Paragraph 3. Since the principle of consistency of interpretation presumed that the meaning that applied in one part of an Article, i.e., Paragraph 3, also had to apply in the rest of the Article, the application of the Ad Article flowed into the consistent interpretation of the term "subsidy" throughout Article XVI. Accordingly, the term "subsidy" in Paragraph 1 of the Article XVI had the same meaning as it had in Paragraph 3. It included all income or price support systems other than those specifically excluded by the Ad Article. Similarly, the term "all income or price support" as it was expressly used with respect to "subsidy" in Paragraph 1, had to have the same consistent meaning as the implied term "all income or price support" as it was necessarily implied with respect to "subsidy" in Paragraph 3.

4.365 Canada recalled that the reference in Article 1 of the SCM Agreement was to "any form of income or price support in the sense of Article XVI of the GATT 1994". If the application of the Ad Article was only to Paragraph 3 of Article XVI, and did not flow to Paragraph 1, then there would be a different meaning for "any form of price and income support" for each of the two paragraphs. The result would be that the reference in Article 1 of the SCM Agreement to "any form of income or price support" would be left in a state of confusion and therefore meaningless. Consequently, in Canada's submission, particularly in the context of this case, "any income or price support" as it was used in Paragraph 1 of Article XVI could not be interpreted without reference to Paragraph 3 or Ad Article XVI. In this respect, Canada noted that the GATT Analytical Index, 1995, at p. 445 directed the reader to "Interpretative Note 2 ad Paragraph 3 of Article XVI" for the interpretation of the phrase "including any form of income or price support", as it was used in Paragraph 1 of Article XVI. This clearly reflected an accepted interpretative approach to the provisions of Article XVI. The reference to "Article XVI" in Article 1 of the SCM Agreement, rather than any particular paragraph of the Article, provided confirmation and endorsement of this approach.

4.366 The United States noted that Canada did not explain why it maintained the obviously cumbersome and complex arrangements for milk exports, i.e., the Special Milk Classes Scheme, if sales of surplus production were not a necessary element of its milk price support system. Although it might be true that Canada's domestic support arrangements could survive without export sales, either its domestic prices would be lower or its domestic production levels would be forced to be lower to maintain the current price levels. It was to avoid these results that the levy system existed, and later was replaced by the Special Milk Classes Scheme when the levy system was explicitly defined to be an export subsidy. Even if Canada eliminated its planned export programme, Canada would still have a structural surplus of skim milk powder that would have to be exported if domestic prices levels were to be maintained.

4.367 The United States argued that Canada's analysis of Article XVI reflected a serious omission with respect to its application of Interpretative Note 2 to Paragraph 3 of Ad Article XVI. Canada stressed that the term "subsidy" as it was used in Paragraph 3 had also to include "any form of price or income support", except to the extent that there was any express direction to the contrary. Canada had then noted that such an "express exclusion" existed in Interpretative Note 2 to Paragraph 3 in Ad Article XVI. It referred to the "system for the stabilization of the domestic price" under certain specified conditions shall not be considered an export subsidy within the meaning of Paragraph 3. In the view of the United States, Canada had completely glossed over with oblique reference to "certain specified conditions" that Canada's system did not satisfy the criteria for such conditions. First, the system had to result only "at times" in the export sale of the product at a price lower than the comparable domestic price. For that reason, the Contracting Parties had to also determine "(a) the system has also resulted, or is so designed as to result, in the sale of the product for export at a price higher than the comparable price charged for the like product to buyers in the domestic market; and (b) the system is so operated, or is designed so to operate ... as not to stimulate exports unduly or otherwise seriously to prejudice the interests of other contracting parties." The Canadian regime failed in all respects. Canada's contention, moreover, that the rare instance in which Special Class 5(a) through 5(c) prices might be higher than domestic prices satisfied the criteria of the exception set forth in Ad Article XVI ignored the fact that Class 5(a) through 5(c) milk was sold at exactly the same price in both domestic and export markets. Canada, indeed, argued that access to Class 5(a) through (c) were not conditioned on export. Consequently, by Canada's own analysis, if the exception was not available, the system was a subsidy on exports within the meaning of Article XVI.3 and, in turn, a subsidy within the meaning of Article XVI as a whole.

To continue with Article 1.1(b) - "Benefit"

²⁴⁹ Ibid, para.11.

²⁵⁰ Canada noted that the fact that the Panel emphasized that their decision was based on the fact that there was "no loss to the government" had importance for the interpretation of Article 1 of the SCM Agreement as a whole, since the drafters of that Article expressly linked the definition of "subsidy" to Article XVI of the GATT 1994. There was an implication in this concept that there had to be some transfer of value from public sources to the recipients, resulting in a loss to treasuries in some way. This was also consistent with the analytical approach adopted by the Working Party Report in Australian Subsidy on Ammonium Sulphate, (GATT/CP.4/39) 3 April 1950 at paragraph 10: "The working party then examined the question of whether the Australian Government had complied with the terms of Article XVI on subsidies. It noted that, although this Article is drafted in very general terms, the type of subsidy which it was intended to cover was the financial aid given by a government to support its domestic production and to improve its competitive position either on the domestic market or on foreign markets".

²⁵¹ Canada noted that Ad Article XVI:B of GATT 1994 stated in part: "For the purposes of Section B, a "primary product" is understood to be any product of farm, forest or fishery, or any mineral, in its natural form or which has undergone such processing as is customarily required to prepare it for marketing in substantial volume in international trade."

²⁵² Canada argued that the comments of the Appellate Body in Brazil - Desiccated Coconut, op. cit., had to be noted in this context. At p. 14 they noted that "The Agreement on Agriculture and the SCM Agreement reflect the latest statement of WTO members as to their rights and obligations concerning agricultural subsidies." They went on to comment that these Agreements "represent a substantial elaboration of the provisions of the GATT 1994", and recognized that pursuant to Annex 1A, the other goods agreement prevail in the event of a conflict with GATT 1994. However, the Appellate Body cautioned that "this does not mean that the other goods agreements in Annex 1A, such as the SCM Agreement, supersede the GATT 1994" and cited with approval the comments of the panel that "Article VI of the GATT 1994 and the SCM represent an inseparable package of rights and disciplines that must be considered in conjunction." Canada argued that similar logic also applied to the relationship of Article XVI and the SCM Agreement and the Agreement on Agriculture.

²⁵³ Panel Report on Review Pursuant to Article XVI:5, op. cit.

²⁵⁴ Ibid.

²⁵⁵ New Zealand referred to paragraph 57 of Canada's First Submission.

²⁵⁶ New Zealand referred to paragraph 45 of Canada's Second Written Submission.