(ii) Government mandated ...

4.390 New Zealand argued that the scheme could be viewed as either the provision by a government or its agency of products for the use in the production of exported goods, or it could be viewed as the provision of such products by producers through a government-mandated scheme. The role of the CDC and of the provincial milk marketing boards and agencies in providing lower-priced milk for the production of dairy products for export was one of implementing a government-mandated scheme.

4.391 The United States argued that the provision of milk at the Special Class prices was mandated by the federal and provincial governments and the Special Class prices were only available for milk used in production of export products. The United States submitted that the Panel consider at least two relevant factors in analyzing the mandatory nature of Canada's Special Class System: (i) the various GATT and WTO cases, including Japan - Photographic Film, EEC - Dessert Apples, and Japan - Semiconductors, which were each pertinent to a determination whether there was a government measure requiring compliance; and (ii) milk that was determined to be surplus by the CDC had to be sold at the Special Class 5(e) price when sold to processors for export.

4.392 Canada argued that milk for use in export markets was not provided by governments in Canada or their agencies. Nor was milk provided "indirectly" through "government-mandated schemes". Paragraph (d) required that the scheme in question be "mandated" ²⁶⁶ by government and not merely permitted or enabled. The distinction was critical. The ordinary meaning of the word "mandated" implied an act by government directing a certain outcome or course of action. This was confirmed by reference to dictionary definitions of "mandate" which confirmed that the term required a direction or order by superior body, not a mere empowerment. The New Shorter Oxford English Dictionary referred to a "mandate" as being: "a command, an order, an injunction"; "a legal command from a superior to an inferior"; and "instruction as to policy supposed to be given by the electors to a parliament". Canada pointed out that this also appeared to be the understanding of the United States who carefully distinguished "authorize" and "mandate", equating the latter with "require", with respect to their Uruguay Round implementing legislation. ²⁶⁷

4.393 New Zealand refuted Canada's arguments that the requirements of Paragraph (d) of the Illustrative List of Export Subsidies had not been met because milk was not provided by a "government-mandated" scheme, and that the terms and conditions on which milk was sold were not more favourable than those commercially available on world markets to exporters. Canada derived a definition of "mandated" by choosing selectively from the dictionary definition of the word "mandate" in its noun form. But, the term "government-mandated" used the past participle of the verb "to mandate". Included amongst the Oxford English Dictionary definitions of the verb form of mandate were "to delegate authority to". The term "mandated" was defined to mean "permitted to act on behalf of a group". ²⁶⁸ The critical distinction that Canada wished to make dissipated in the face of a more accurate use of dictionary definitions.

4.394 New Zealand claimed that it had already been demonstrated that the Special Milk Classes Scheme did involve the provision of goods by government. Moreover, with regard to the alternative argument regarding the indirect provision of goods through government-mandated schemes, Canada's attempt to rely on dictionary definitions of the word "mandate" were not credible in light of definitions of the verb form of mandate, which was the form in which it was used in the term "government-mandated", were examined. The Oxford English Dictionary recorded that the term "mandated" in this form was frequently used to mean "permitted to act on behalf of a group". ²⁶⁹ The Special Milk Classes Scheme thus met this aspect of Paragraph (d).

4.395 Canada argued that the first listed definition of the verb form of "mandate" was "to command." The definition that New Zealand used was part of the last listed definition of the verb form of "mandate." The first part of this last listed definition read "To give a mandate to, to delegate authority to (a representative, group, organization, etc.)." As this definition began with giving "a mandate" to someone, an examination of the noun form of the word "mandate" was more than warranted. In looking at the noun form in the Oxford English Dictionary: "1. A command, order, injunction; 2.a. A judicial or legal command from a superior to an inferior." Canada maintained that the ordinary meaning connoted more than merely the sense of "permitted or enabled." In respect of "mandate", Canada further argued that the immediate context ²⁷⁰ of the words confirmed Canada's understanding that "government-mandated" means "government-ordered" or "government commanded." Item (c) of the Illustrative List of Export Subsidies of the SCM Agreement (the "Illustrative List") identifies as a subsidy the following:

4.396 Canada argued that the meaning of "mandated" in Item C of the Illustrative List was that of "commanded" or "ordered." That which made such discounted charges on export shipments an "export subsidy" was the government involvement requiring that they be given. For example, a private transport company that offered better rates for transport to some destination rather than to others, even if those destinations were foreign, would not be considered an export subsidy for the purposes of the WTO Agreements. To hold otherwise would require all Members to know and take responsibility for all transport charges on every shipment within their territory. Indeed, the mere fact that such companies were allowed to charge different rates to different clients, certainly could not mean to say that such private party practices were "government-mandated." The same logic would apply to Article 9.1(e) of the Agreement on Agriculture. Hence, moving to Paragraph (d) of the Illustrative List then, it seemed natural to read "government-mandated" in the same fashion as "mandated by government." Truly, such a reading coincided with the very notion of governmental control with respect to a measure identified as being a "government subsidy." The measure had necessarily to be imposed by the government as this item itself added as a condition "... if (in the case of products) such terms or conditions are more favourable than those commercially available...".

4.397 Canada further argued that its interpretation was consistent with the object and purpose of Paragraph (d). That was, to identify as a governmental export subsidy the provision of inputs for export purposes at artificially advantageous terms or conditions, whether by government or at the insistence of government. Furthermore, the Agreement as a whole did not purport to restrict private party actions but rather was concerned with constraining governments from providing subsidies or from entrusting or directing private parties to do so. Producer boards were private parties who were not directed by government to carry out subsidy functions and they were entrusted by their members to act on their behalf, not by government.

4.398 Canada argued that this approach to schemes or actions carried out by non-governmental entities was also reflected in the text of the definition of "subsidy" in Article 1 of the SCM Agreement and the use of the word "imposed" in Article 9(1)(c) of the Agreement on Agriculture. In Canada, milk producers and the marketing boards that represented producers were completely free to participate or not participate in export opportunities as they choose. Moreover, boards were not required by any government direction to establish or operate the Special Class export practices. This was entirely a matter of their own choice. The most that could be said was that governments made it possible for boards to put special class arrangements into place. The Complainants had provided no evidence that the goods in question were provided through a government-mandated scheme. ²⁷¹

(iii) Terms or conditions more favourable ...

4.399 New Zealand argued that the terms and conditions on which milk was made available were more favourable than for the provision of like or directly competitive products for the production of goods for domestic consumption. Milk was made available at the lower world price and not at the higher domestic price.

4.400 The United States argued that the Special Class 5(d) and (e) prices were uniformly lower than prices for the same milk components sold in the same market categories in the domestic market. Although Canada could dispute that the Special Class prices were fixed by the CDC, there was no question that the provincial marketing boards had to establish a price and that they did so through powers delegated to them by the federal and provincial government in their respective jurisdictions over provincial and inter-provincial trade and exports.

4.401 Canada noted that while milk could be sold in Canada for export purposes at prices which were lower than those for milk for use in products destined for the domestic market, this was not always so. In fact, as discussed with respect to Article 1.1(a)(2) of the SCM Agreement, recently the prices of some dairy components under Classes 5(a) and (b), which were linked to US domestic milk prices, had begun to exceed prices for milk classes in Canada for domestic use. Therefore, it was not always true that milk sold for export was sold on terms and conditions more favourable than those that apply to milk for domestic use.

4.402 The United States argued, in respect of prices for Special Classes 5(a), (b) and (c), that the only instances in which such prices could be argued to be higher than domestic prices, according to the data from the Canadian International Trade Tribunal, would be if prices to different end-use classes were compared. For example, by comparing the price of butterfat used in yoghurt with butterfat used in cheese. Such a comparison would be entirely inappropriate, however, as the Canadian system specifically differentiated among product markets in establishing price levels. Thus, the only appropriate comparison would be between prices for the same component in the same product market. This was the approach which the United States took, and using that approach, the resulting comparisons uniformly showed the Special Class prices to be lower than domestic prices for each of the three major milk components, i.e., butterfat, proteins, and other solids.

(iv) Terms and conditions more favorable than those commercially available ...

4.403 New Zealand further claimed that the requirement that the terms and conditions be more favourable than those commercially available on world markets were also met. A footnote to Paragraph (d) indicated that the term "commercially available" meant "that the choice between domestic and imported goods is unrestricted and depends only on commercial considerations." In the case of milk for processing into exported products, the choice between domestic and imported products was not unrestricted. Canada's tariff restrictions on the importation of milk meant that the terms and conditions on which milk was provided for processing into exported products under "special milk classes" were more favourable than those commercially available to Canadian processors on world markets.

4.404 The United States claimed that the terms and conditions for access to Special Class 5(d) and (e) were more favorable than those commercially available on world markets to Canada's dairy product exporters. The United States noted that Canada conceded that, in fact, "[w]ith respect to milk of HS 0401, no permits have been issued for milk for manufacturing purposes under the Import for Re-Export Program". ²⁷² Thus, the record was presently clear that Canadian exporters had no access to imported fluid milk under the Import for Re-Export Program. Therefore, its exporters did have access to milk under the Special Milk Classes Scheme on terms and conditions that were more favorable than those commercially available to them within the meaning of Paragraph (d) of the Illustrative List. ²⁷³

4.405 Canada argued on this point that the requirement was essentially a requirement that inputs not be provided at prices lower than exporters obtained for similar inputs on world markets. Sales of milk for export purposes under Special Classes (d) and (e) were tied directly to sales of the resulting dairy products into world markets and producers sought to obtain the optimum return from such sales to processors. The result was that milk inputs were not provided to processors at less than world market levels.

4.406 Canada noted that the footnote to Paragraph (d) stated that the term "commercially available" meant that "the choice between domestic and imported products is unrestricted and depends only on commercial considerations". Canada claimed that processors seeking to use imported dairy inputs had unhindered access to inputs on the world market for use in re-exported dairy products from Canada. Canada operated an Import for Re-Export Program under the provisions of the Export and Import Permits Act pursuant to which permits were freely issued to processors to access inputs on the world market, subject only to the condition that imported products met Canadian sanitary requirements and that all resulting manufactured products be re-exported from Canada. Canada argued that inputs imported under the Import for Re-Export Program were not part of Canada's scheduled tariff quota commitments. Such imports entered under supplemental import permits issued by the Department of Foreign Affairs and International Trade. As such, these imports were not counted against Canada's TRQ commitments. Accordingly, processors had an unrestricted choice between domestic and imported inputs for exported dairy products that depended only on commercial considerations.

4.407 Canada argued that due to the perishable nature of the product and difficulty in shipping, there was little trade in fluid milk for manufacturing purposes. Trade in milk consisted largely of trade in the storable and tradeable milk derivatives, such as skim milk power, whole milk power and butter. The commercial availability of these substitutable dairy ingredients, through the Import for Re-Export Program, provided effective international competition for sales of milk for processing purposes to Canadian customers. Canada noted the fact that the programme had been used in not insignificant quantities and that prices paid for imported dairy products under the Import for Re-Export Program were negotiated between Canadian buyers and foreign suppliers. This supported Canada's position that processors made their choices based on commercial considerations.

4.408 New Zealand argued that the granting of permits under an Import for Re-Export Program, to which Canada referred in passing, did not mean that the choice between imported and domestic products was "unrestricted" within the terms of the footnote to Paragraph (d). Paragraph (d) did not grant Members the right to provide each input into a product at lower prices for export than for domestic uses where tariff protection was provided as long as there happened to be a scheme in place that allowed the temporary import of those inputs for manufacture in bond. A duty draw-back mechanism was not sufficient justification for governments to provide car engines, wheels and other vehicle components at cheap prices solely for export use. In short, Canada had failed to provide any evidence that the choice between imported and domestic products was "unrestricted" within the meaning of Paragraph (d) of the Illustrative List.

4.409 New Zealand argued that it was clear that the prices of products derived from over-quota milk would be below domestic market prices in order that exports could be commercially viable from the exporters' point of view ²⁷⁴ . New Zealand also believes that there was a risk that such prices would also be below world market prices. Although Canada argued that the CDC must negotiate vigorously with exporters in order to maintain the confidence of producers and the CMSMC, the reality was that the alternative to disposing of Class 5(e) milk by way of export was to pour it away. Accordingly, when pressure for effective surplus removal was added to the need for exporters to obtain a profit margin, the result could well be that prices paid by exporters were below world market prices.

4.410 New Zealand maintained that Canada's image of unhindered access was hardly in accord with the reality that permits were issued on a discretionary basis and goods were imported subject to the "within access" tariff. A tariff was a form of restriction. This in itself would be enough to render the Program inconsistent with the requirement set out in the footnote to Paragraph (d). New Zealand also commented on the careful use of language in the Canadian submissions relating to the Import for Re-Export Program by virtue of which Canada asserted that processors had unhindered access to "dairy inputs", rather than to "milk" on the world market. It had become clear that the shift in language that was used in preceding paragraphs which had referred to "milk" was anything but stylistic. It simply would not have been accurate for Canada to have said that processors had unhindered access to milk on the world market. Canada had admitted that "no permits have been issued for milk for manufacturing purposes under the Import for Re-Export Program". ²⁷⁵ But the other dairy "inputs" to which Canada refered were simply not relevant to the current case, which was about the provision of lower-priced milk to exporters. Canada had further sought to ascribe this lack of trade to the "perishable nature" of milk and "difficulty in shipping", although it did not explain why shipping milk a short distance across the Canada-United States border was more "difficult" and likely to lead to a "perishing" of the product, than shipping it potentially much longer distances from within Canada.

4.411 Hence, New Zealand maintained that in practice, milk was not "commercially available" on world markets to Canadian processors under the Import for Re-Export Program. Thus, the terms and conditions on which "special class" milk was made available were more favourable than those commercially available on world markets. Clearly, the requirements of Paragraph (d) of the Illustrative List were met.

4.412 The United States recalled that Canada had admitted in its response to the Panel's questions that milk in liquid form was not imported into Canada for use in manufacturing. ²⁷⁶ Thus, such milk was clearly not commercially available within the meaning of Paragraph (d). Canada sought to imply that phytosanitary barriers did not exist. The United States noted that in their argumentation on this context, Canada referred to dairy products, not milk. This statement did not alter the fact that milk was not entering Canada. Also Canada sought to argue that the components of milk and milk itself were the same. This was not true as the ingredients had a much narrower range of applications, than the whole milk product. These other dairy products were not "like or directly competitive" products within the meaning of Paragraph (d). In addition, the other dairy products mentioned by Canada certainly could not be used by Canada's processors for many end-uses that were served by liquid milk. For example, a manufacturer of skim milk powder or butter could not import those same products to replace the milk that he received under the Special Milk Classes Scheme. This was a critical consideration because a considerable portion of Canada's dairy product exports consisted of butter and skim milk powder.

4.413 Furthermore, the United States argued that the very modest level of imports reported by Canada emphasized their lack of competitiveness with milk available through the Special Classes. The total volume of such imports, such as milk powder and evaporated milk, comprised less than 5 per cent of Canada's export volume of dairy products, and significantly less than 1 per cent of Canada's domestic consumption of milk. These volumes indicated that processors had decided that the other dairy products to which Canada referred were not available on as favorable terms and conditions as milk under the Special Milk Classes Scheme. Such paltry import volumes also provided unrefuted evidence that Canada's processors did not find such other dairy products to be directly competitive with the industrial milk provided by Canada's Special Milk Classes Scheme.

4.414 Furthermore, the United States claimed that Canada had failed to demonstrated that those other dairy products were available on terms and conditions as favorable as those provided by the Special Classes. For example, Canada admitted that milk in Special Class 5(e) was provided at world prices or an approximation of world prices, and also conceded that milk ingredients imported under the Re-Export Program had to bear an in-quota duty rate. Even if the Panel accepted Canada's argument regarding the direct competitiveness of the milk ingredients (which the United States submitted misstated the competitiveness of such products), the imports had to be higher priced as they were subject to import tariffs and the underlying purchase price was a world market price. Thus, by definition such imports were available on less favorable terms and conditions than those provided by the Special Classes.

4.415 Hence, the United States concluded that the application of the Illustrative List of Export Subsidies resulted in a finding that the Special Milk Classes Scheme was an export subsidy. Consideration of the criteria regarding subsidies contained in Article 1 of the SCM Agreement only confirmed this result.

4.416 Canada argued, in respect of its sanitary requirements, that under Paragraph 26(1)(a), (b) and (c) of the Dairy Product Regulations ²⁷⁷ , under the Canadian Agricultural Products Act, dairy products imported into Canada had to originate in a country that had "standards for dairy products that are at least equivalent to those set out in these regulations", and "a system for inspection for dairy products and establishments that are at least equivalent to that in Canada". The product had to also "meet the standards for a similar dairy product that is produced in Canada" and "has been prepared under conditions at least that equivalent to those required by these regulations". ²⁷⁸ These standards did not prevent US dairy products from entering Canada. As a matter of practice, the Canadian Food Inspection Agency (CFIA) routinely approved the import of dairy products into Canada from the United States on the basis that standards in the United States met the standards set out in the regulations. Once imported into a province, raw milk would be subject to the same provincial standards as milk produced in that province. These standards would not pose any barrier for milk sourced in the United States. Thus, while there were sanitary standards, these were normal routine matters and did not pose anything like the "effective prohibition" as suggested by the United States. Canada argued that although it was true that there had not been any imports of raw industrial milk in recent years under the Import for Re-Export Program, this does not reflect any denial of access to the Canadian market. There had not been a request to the CFIA for approval of the import of industrial milk under their sanitary regulations. The reasons for no imports of industrial milk into Canada were commercial, not regulatory.

4.417 Canada noted that the United States had suggested that there was a qualitative difference for manufacturing purposes between liquid milk and milk components that limited the use of milk components to certain niche products. Canada argued that milk components were not different products - they were simply part of the same product. The quality of milk components such as skim milk powder, butter or other milk ingredients had greatly improved in recent years. This had now reached the point that it was argued that final product quality was actually enhanced by the use of specialized whey protein concentrates in place of skim milk in ice cream for example. Where components were competitive with liquid milk, questions of cost would come into play. Costs of transport of a product such as liquid milk were considerable when it was considered that up to 87 per cent of the product consisted of water. In addition, raw milk could be a less economically efficient input for a manufacturer than dairy products that supplied the components needed for a particular manufacturing process. Hence, Canada argued that the supposed barriers to liquid milk for Canadian processors from the United States did not exist. There was no commercial basis to suggest that liquid milk and tradeable milk components could not be used for the same manufacturing processes.

4.418 In sum, Canada argued that processors had unrestricted access to dairy product inputs through the Import for Re-export Program, and they had access to those products at world market prices. Inputs sold to processors through Special Classes 5(d) and (e) were sold at world market prices. The use of the Import for Re-Export Program indicated that these two sources of supply effectively competed. Processors had not shown any overwhelming preference for ingredients sourced under Special Classes 5(d) and (e). Hence, it could be concluded that Special Class prices were not more favourable than prices commercially available to Canadian exporters on world markets. Given that prices of dairy inputs were available to processors at internationally competitive prices, both through the Import for Re-Export Program and through Special Classes 5(d) and (e), and both avenues were used, this suggested that Special Classes 5(d) and (e) could not be said to provide a "benefit."

4.419 Canada contended that the imports under the Import for Re-Export Program in recent years had been of significant quantities. ²⁷⁹ Furthermore, these imports of dairy inputs from the United States entered Canada duty-free. For all products imported under the Programme in 1998, the average trade-weighted tariff was less than 1 per cent.

To continue with Terms and conditions more favorable

²⁶⁶ In defining "mandate", the NSOED referred to: "a command, an order, an injunction"; "a judicial or legal command from a superior to an inferior". (Canada, Exhibit 26)

²⁶⁷ Canada, Exhibit 27, p.213.

²⁶⁸ New Zealand referred to the Oxford English Dictionary, Second Edition, Volume IX, p. 301.

²⁶⁹ Ibid.

²⁷⁰ In respect of the term "mandate" Canada argued that the Appellate Body had noted that a treaty interpreter ought not to stop at the ordinary meaning of a word. The analysis had to continue to consider the context in which the word was found, as well as the object and purpose of the provision itself, and if necessary, of the agreement as a whole: Appellate Body Report on United States - Import Prohibition of Certain Shrimp and Shrimp Products, (hereafter "US - Shrimp-Turtle"), WT/DS58/AB/R, adopted 6 November 1998, pp. 41-42, para. 114-116.

²⁷¹ Canada maintained that New Zealand's arguments with respect to this provision were flawed by their assumption that there was a "government-mandated scheme".

²⁷² Canada's reply to New Zealand's Question 1(b).

²⁷³ The United States noted that although Canada asserted that exporters had access to other dairy inputs, such as milk powder and evaporated milk, through the Import for Re-Export Program, the United States in its response to the Panel's Question 5 had demonstrated that such products simply were not substitutable in any practical sense for the liquid milk that Canada's exporters receive through the Special Milk Classes Scheme.

²⁷⁴ For example, Figure 3 of New Zealand's First Submission provided a representation of the price of the butterfat component of butter manufactured from Class 4(a) milk and that manufactured from Class 5(e) milk.

²⁷⁵ Canada's responses to New Zealand questions of 20 October 1998.

²⁷⁶ Canada's Response to Question 1 from New Zealand: "With respect to milk of HS 0401, no permits have been issued for milk for manufacturing purposes under the Import for Re-Export Program."

²⁷⁷ P.C. 1979 - 3088, as amended.

²⁷⁸ Canada, Exhibit 54.

²⁷⁹ Statistics on imports under the Import for Re-Export Program in recent years were attached to Canada's Second Oral Statement of 18 November 1998 ("Comments by Canada on Oral Statement of United States").