7.82 Under both Classes 5(d) and (e) processors/exporters can only access milk if they obtain a permit from the CDC, a government agency. It is not the individual producer who decides what milk it thus sells for export. It is the CDC, acting on the advice of the Surplus Removal Committee ("SRC") ⁴⁴¹ , the CMSMC or the provincial marketing boards, which decides whether domestic requirements are met and whether, therefore, milk should be considered as "surplus" and be exported. Such exports are made, not necessarily because no more milk could be sold on the domestic market at a higher price, but mainly in order to maintain the high domestic price. ⁴⁴² As noted by the current President of the CDC, Mr. Guy Jacob:

7.83 Under both Classes 5(d) and (e), once a processor/exporter has obtained the required permit from the CDC, it has to appeal to the provincial marketing board to actually obtain the milk. Although the board is not under an obligation to provide such milk, Canada submits that in practice it always does so. It is, again, not the individual milk producer which independently allocates part of its production to export sales, but rather the provincial marketing board which makes such milk available at the request of the CDC. All milk sales in Canada necessarily have to pass through the provincial marketing board. An individual producer only decides how much it produces; it has no control over what part of its production will be exported. The producer only knows that for over-quota production, a lower export return will be obtained.

7.84 It is the CMSMC which sets and periodically adjusts the quota level and thereby decides what share of a producers' milk production is labelled as over-quota and thus obtains lower export returns. ⁴⁴⁴ It is also the CMSMC which annually sets the amount of milk allowed for export under Class 5(d). For both Classes 5(d) and (e) it is the CDC which, finally, takes the decision whether milk actually gets exported by issuing the required permit. No link exists between what is over-quota for an individual producer and what actually gets authorized for export by the CDC. Indeed, the CDC can even decide that over-quota milk should in fact not be exported but sold domestically to make up a shortfall. ⁴⁴⁵

7.85 We recall, in addition, that the CDC negotiates the milk price for transactions under Classes 5(d) and (e), as well as - for exports made by the CDC itself - the processor margin; that the large majority of export sales under these Classes are initiated by the CDC ⁴⁴⁶ ; and that the CDC itself is a major exporter of processed dairy products. ⁴⁴⁷

(v) The Panel's finding on whether the milk is provided by governments or their agencies

7.86 As outlined above, the CDC, advised by other bodies acting under the authority delegated to them by governments, decides whether or not any and how much milk can be exported. The CDC then - in a very direct way, by providing a permit - makes milk available under Classes 5(d) and (e). Finally, the provincial milk marketing boards, acting under delegated authority, physically offer the milk to processors. We find, therefore, on the basis of the specific circumstances of this case, that the milk made available to processors for export under Classes 5(d) and (e) at a discounted price, is provided by Canada's governments or their agencies in the sense of Article 9.1(a).

(c) The Panel's finding under Article 9.1(a)

7.87 We found earlier that the provision of lower priced milk to processors for export under Classes 5(d) and (e) constitutes a payment in kind to processors/exporters contingent on export performance. ⁴⁴⁸ We also found that this milk is provided by Canada's governments or its agencies. ⁴⁴⁹ On these grounds ⁴⁵⁰ , we find that the making available of milk under Classes 5(d) and (e) constitutes an export subsidy within the meaning of Article 9.1(a).

6. Article 9.1(c) of the Agreement on Agriculture

7.88 We have found that the Special Milk Classes Scheme involves an export subsidy as listed in Article 9.1(a). The complainants submit that this scheme also constitutes an export subsidy as listed in Article 9.1(c). This provision subjects the following type of action to Canada's export subsidy commitments:

7.89 In our view, the first part of Article 9.1(c) - "payments on the export of an agricultural product that are financed by virtue of governmental action" - includes the core elements of an export subsidy as listed in that provision. The subsequent part provides further clarification - in an illustrative way - as to the meaning of these core elements. We, therefore, consider that there are two conditions that have to be met for there to be an export subsidy as provided in Article 9.1(c):

We next examine whether these two conditions are met in this case.

(a) "payments on the export of an agricultural product"

7.90 We found earlier that the provision of milk at a discounted price under Classes 5(d) and (e) involves "payments-in-kind" in the sense of Article 9.1(a) to processors/exporters that are "contingent on export performance". ⁴⁵¹ Under Article 9.1(c) we need to examine whether such provision of milk involves a "payment on the export of an agricultural product". In our view, if the word "payment" in Article 9.1(c) were to include "payments-in-kind", we would have to conclude that the provision of milk at a discounted price under Classes 5(d) and (e) also constitutes a "payment" in the sense of Article 9.1(c). Since, as we saw earlier ⁴⁵² , the provision of this cheaper milk is only available in case the dairy products produced with it are actually exported, we would then also need to conclude that it constitutes a payment "on the export of an agricultural product". ⁴⁵³ In our view, the term "payment on the export of an agricultural product" means, indeed, that the payment is conditional or contingent on the export of such product (in casu, the processed dairy products that are specified in the CDC permits issued under Classes 5(d) or (e)). Our finding as to whether or not the Special Milk Classes Scheme also involves "payments on the export of an agricultural product" in the sense of Article 9.1(c) thus only depends on whether or not the word "payment" in this provision covers not only payments in money but also "payments-in-kind". This is the issue we examine next.

7.91 We recall that according to the rules of treaty interpretation set out in Article 31 of the Vienna Convention on the Law of Treaties, the meaning of a term is to be determined by reference to its ordinary meaning, read in its context, and in the light of the object and purpose of the treaty.

7.92 As to the ordinary meaning of the word "payment", we note that the Oxford English Dictionary defines "payment" as "1. the action, or an act of, paying; the remuneration of a person with money or its equivalent; the giving of money, etc. in return for something in discharge of a debt". ⁴⁵⁴

This indicates that the ordinary meaning of the word "payment" includes both the act of remunerating a person with money and the act of remunerating a person with its equivalent in kind, a so-called "payment in kind". Indeed, benefits available under the export rebate system in place before the Special Milk Classes were introduced ⁴⁵⁵ and the provision of more milk for the same price under this scheme are, in our view, both captured by the ordinary meaning of the word "payment".

7.93 The validity of this interpretation is confirmed when taking into account the context of the word "payment" as it is used in Article 9.1(c). The immediate context to turn to is, in our view, the second part of Article 9.1(c) which further defines the kind of "payment" required. It refers to a "charge" on the public account (an element not required for there to be an Article 9.1(c) export subsidy). We consider that a "charge" can arise both as a consequence of a transfer of money and of the provision of a good at a discounted price. The second part of Article 9.1(c) also provides an example of an export subsidy as listed in that provision. In so doing, it refers to payments "financed from the proceeds of a levy". "Financing" a "payment" can, in our view, be done by way of a transfer of money but also by means of charging a discounted price for a good. Therefore, the second part of Article 9.1(c), in our view, implicitly confirms that the notion of "payment" in Article 9.1(c) also covers payments-in-kind, such as the provision of milk at a reduced price.

7.94 We consider that the other provisions of the Agreement on Agriculture also form part of the context of Article 9.1(c). Article 9.1 identifies certain practices as export subsidies subject to the reduction commitments made by WTO Members. These commitments take the form of a ceiling imposed on "budgetary outlays" and on the quantity of exports for which export subsidies can be granted. They are specified for each year of the implementation period in the Schedule of the WTO Member concerned. According to Article 9.2(a), the export subsidy commitment levels represent "with respect to the export subsidies listed in [Article 9.1]: (i) in the case of budgetary outlay reduction commitments, the maximum level of expenditure for such subsidies that may be allocated or incurred in that year in respect of the agricultural product, or group of products, concerned". ⁴⁵⁶ In principle, the ceiling on "budgetary outlays" thus applies to all export subsidies listed in Article 9.1, including the Article 9.1(c) export subsidies. The concept of "budgetary outlay", however, is defined in Article 1(c) as including "revenue foregone". Since, therefore, the notion of "payment" in Article 9.1(c) would also include "revenue foregone", it can be implied that "payment" thereby not only includes payment in money terms but also payments-in-kind, i.e., "revenue foregone" by providing milk for use in exports at a discounted price (whereby, in casu, higher returns to be obtained on the domestic milk market are "foregone" by producers). In other words, since "revenue foregone" is to be taken into account in calculating the levels of reduction commitments - including the level of export subsidies as listed in Article 9.1(c) - it should, implicitly, also be included in the definition of the export subsidies for which these reduction commitments are made, including the definition of export subsidies under Article 9.1(c). In our view, this consideration confirms our interpretation that "payment" in the sense of Article 9.1(c) includes "payments-in-kind".

7.95 The idea that the export subsidies identified in Article 9.1 generally, and Article 9.1(c) in particular, also include payments-in-kind and, specifically, the provision of a good at a reduced price, is also confirmed in other sub-paragraphs of Article 9.1. Article 9.1(a) refers to "direct subsidies, including payments-in-kind". Article 9.1(b) mentions the sale or disposal for export of non-commercial stocks "at a price lower than the comparable price charged for the like product to buyers in the domestic market". Article 9.1(d) refers to a reduction in the costs of marketing exports. Finally, Article 9.1(e) is directed at reduced internal transport and freight charges on export shipments. None of the provisions under Article 9.1 - not even Article 9.1(a) which deals with "direct subsidies" - seems to be limited to contributions in money terms only; all of them, in one way or another, explicitly or implicitly, include reference to payments-in-kind such as lower prices or a reduction in costs or charges. In our view, this consideration further confirms our interpretation that "payment" in the sense of Article 9.1(c) includes payment in kind.

7.96 Canada argues that if the drafters of the Agreement on Agriculture had intended the word "payment" in Article 9.1(c) to include payment in kind they would have explicitly added such language. Canada refers to other provisions where such language was added. It refers, in particular, to paragraph 5 of Annex 2 of the Agreement on Agriculture which mentions "direct payments (or revenue foregone, including payments in kind)". However, in our view, this inclusion of "payments in kind" does not qualify or add to the meaning of the word "payment", but to the meaning of the word "direct payment". Moreover, if another provision, part of the context of Article 9.1(c), defines "direct payments" as including "payments in kind", we consider that it can be presumed that the more general word "payments" in Article 9.1(c) a fortiori includes "payments in kind". Nowhere in the Agreement on Agriculture is the word "payment" as such explicitly qualified as excluding or including payment in kind. Article 9.1(a), for example, refers to "direct subsidies [not "payments"], including payments-in-kind". As we noted earlier, the ordinary meaning of the word "payment" as well as the context in which it is used in Article 9.1(c), on the contrary, indicate that "payment" includes not only payment in money terms but also payment in kind. ⁴⁵⁷

7.97 In the same vein, Canada refers to the Appellate Body report on Canada - Periodicals where the term "payment of subsidies exclusively to domestic producers, including payments to domestic producers derived from the proceeds of internal taxes or charges" in Article III:8(b) of GATT 1994 was interpreted as only including "the payment of subsidies which involve the expenditure of revenue by a government". ⁴⁵⁸ A reduction of postal rates granted by Canada Post for the distribution of certain publications was thus found to be excluded from the exemption under Article III:8(b). In our view, however, one needs to distinguish the term "payments" as used in Article III:8(b), from that in Article 9.1(c) and this because of the different context in which it is set and the different object and purpose it serves. First, Article III:8(b) only provides a specific exemption to the national treatment provisions in Article III for the payment of certain production subsidies, namely "the payment of subsidies exclusively to domestic producers". ⁴⁵⁹ It does not in any way provide a general definition of what a subsidy - let alone an export subsidy - is for purposes of GATT 1994 (and even less so for purposes of the Agreement on Agriculture). Article 9.1(c), on the other hand, provides a concrete example of an export subsidy, not constituting an exemption to any other provision, but part of a positive list of export subsidies made subject to reduction commitments under the Agreement on Agriculture. ⁴⁶⁰ Second, Article III:8(b) exempts the "payment of subsidies exclusively to domestic producers" from Article III obligations and provides certain "payments" as an example of such subsidies. In other words Article III:8(b) when giving the example of certain "payments" does not define or further clarify the broader term "subsidy" or "payments" - the latter term being the only one provided in Article 9.1(c) and the term we have to interpret here - but the more narrow term "payment of subsidies exclusively to domestic producers". Recalling also the textual and contextual elements proper to Article 9.1(c) set out above ⁴⁶¹ - and not to be found under Article III:8(b) - we thus consider that Canada's reference to Article III:8(b) of GATT 1994 does not alter our interpretation that "payment" in Article 9.1(c) also includes payment in kind.

7.98 Canada further claims that there is no revenue for the producers to forego with respect to sales of milk for export use under Classes 5(d) and (e) and, therefore, no payment in kind made by these producers. It submits that under the Canadian milk marketing system, such milk cannot be sold in the market for export uses if it is required for Canadian domestic requirements. Thus, sales of milk for export purposes at prices based on word market prices cannot be made until there is no opportunity to sell milk into domestic markets at the higher domestic prices. According to Canada, "revenue foregone" implies a choice of markets, a choice foregone and in this case producers do not have a choice.

7.99 In response to Canada's argument, we agree that the milk producer - with respect to Classes 5(d) and (e) milk - does not have a choice to make between selling its milk at a higher price for domestic use or at a lower price for export. However, we do so for reasons different from those put forward by Canada. As we noted earlier, it is not the milk producer that takes the decision where to allocate its milk production. ⁴⁶² It is the CDC (acting on the advice of the SRC), the CMSMC and the provincial marketing boards, that decide whether domestic requirements are met and whether, therefore, milk should be considered as "surplus" and be exported. Such exports are made, not necessarily because no more milk could be sold on the domestic market at a higher price, but mainly in order to maintain the high domestic price. ⁴⁶³ If it is thus decided - by means of the issuance of a CDC permit under Classes 5(d) or (e) - that in-quota milk is to be exported, the milk producer has to accept a lower price. Through the pooling of all in-quota milk returns, this lower price is reflected in a lower average pooled price granted to milk producers for all of their in-quota milk. With respect to over-quota milk, it is again because of Canada's governments or their agencies - through the CMSMC - that a certain quantity of milk is labelled as over-quota. Once so labelled, milk necessarily obtains a lower price based on the world market price. Therefore, whenever producers produce milk over-quota, as defined by Canada's governments or their agencies, they have to sell it at a lower export related price.

7.100 Canada is, therefore, correct that producers do not have a choice to make with respect to the allocation of Classes 5(d) and (e) milk. However, in our view, this is so (i.e., the producers' choice is predetermined) not - as Canada implies - because of commercial reasons (e.g., because of a lower domestic demand the producer - depending on its profitability - decides, in order to maximize its total revenue, to allocate a certain share of its production to lower priced export markets), but because of governmental actions. Under the Canadian system, selling milk for use in the domestic market is no longer an option (i.e., the choice for a higher return is taken away) mainly because the quotas - set by Canadian governments or their agencies - are met; not because there is no more domestic demand for milk. As noted earlier, producers would likely be able to sell more milk domestically if they were allowed to do so, albeit probably at a somewhat lower price. ⁴⁶⁴ In conclusion, we consider that producers do forego a choice or revenue - albeit through governmental action - and, therefore, make a payment in kind to processors/exporters in the sense of Article 9.1(c).

7.101 In conclusion, a careful examination of the ordinary meaning of the term "payment" in Article 9.1(c), in its context and in light of the object and purpose of the Agreement on Agriculture, leads us to the conclusion that it does include payment in kind and thus, in casu, the provision of milk at a reduced price. Recalling our considerations in paragraph 7.90, we thus find that the provision of milk to processors/exporters under Classes 5(d) and (e) involves a "payment on the export of an agricultural product" in the sense of Article 9.1(c).

(b) payments "financed by virtue of governmental action"

7.102 We recall that it is not in dispute that the payments-in-kind made under Classes 5(d) and (e) do not directly involve a charge on the public account. ⁴⁶⁵ The cost of selling milk at a reduced price for export is not borne by the government. It is borne by the milk producers either collectively (by means of pooling the lower in-quota export returns with the higher domestic returns and paying out an average pooled price for all in-quota milk to all producers) or, at least in principle, individually (with respect to over-quota milk, revenues of which are generally not pooled with higher returns from other milk producers). However, in our view, it is clear from the language of Article 9.1(c) that producer-financed payments can in principle be covered by this provision. "[W]hether or not a charge on the public account is involved" is explicitly stated to be irrelevant for purposes of Article 9.1(c). Moreover, Article 9.1(c) explicitly provides an example of a producer-financed payment, covered by Article 9.1(c), namely "payments that are financed from the proceeds of a levy imposed on the agricultural product concerned or on an agricultural product from which the exported product is derived". The word "including" indicates that such payments financed from levies on agricultural products constitute only one example of a producer-financed export subsidy as listed in Article 9.1(c). In order to decide whether or not the scheme at issue here is another example of such export subsidies, we need to determine next whether or not this scheme involves payments "financed by virtue of governmental action".

7.103 We found earlier that the type and degree of government involvement in the making available of milk to processors/exporters under Classes 5(d) and (e) is such that the payment in kind involved is "provided by" Canada's governments or their agencies in the sense of Article 9.1(a). ⁴⁶⁶ We recall, in particular, that Canada's governments or their agencies through the Special Milk Classes Scheme decide when milk is to be exported, negotiate the price for such milk and actually provide the milk to processors/exporters.

7.104 We note, in addition, that it is the provincial milk marketing board, assisted by the CDC and operating under federal and/or provincial authority delegated to it, that (i) calculates the monthly pay cheque to be sent to each milk producer according to the relevant pooling arrangements and the specific rules or regulations the province concerned applies with respect to payments for over-quota milk; and (ii) eventually pays the milk producers a monthly income based on their production and the milk returns obtained through the scheme during a certain period. All milk necessarily passes through the intermediary of the provincial milk marketing boards which, together with the CDC and the CMSMC, arrange all milk sales, cash the returns obtained from processors/exporters for the milk sold and, finally, re-route these returns - including, in particular, the returns from milk sold under Classes 5(d) and (e) - to the individual milk producers on the basis of complex calculations.

7.105 We further note that, by virtue of the CDC Act, the CDC is, inter alia, authorized to (i) "distribut[e] money to producers of milk or cream received from the marketing of any quantity of milk or cream" ⁴⁶⁷ ; (ii) "establish the price, or minimum or maximum price, paid or to be paid to the Commission, or to producers of milk or cream, the basis on which that payment is to be made and the terms and manner of payment that is to be made in respect of the marketing of any quantity of milk or cream" ⁴⁶⁸ ; and (iii) "collect the price paid or to be paid to the Commission, or to any producer in respect of the marketing of any quantity of milk or cream ... or recover that price in a court of competent jurisdiction". ⁴⁶⁹ The CDC also calculates the returns received by each province for Special Milk Classes sales, based on data provided by provincial marketing boards, and may audit the books of processors/exporters to ensure that they have used Classes 5(d) and (e) milk for export purposes.

7.106 On these grounds ⁴⁷⁰ , we find that the payment in kind offered under Classes 5(d) and (e), namely the provision of milk at a discounted price to processors/exporters, although it is not financed directly with governmental funds, is, nevertheless, "financed by virtue of governmental action" in the sense of Article 9.1(c).

To continue with Additional considerations with respect to sales of in-quota milk

⁴⁴¹ See para. 7.71.

⁴⁴² In the Standing Committee on Agriculture and Agri-Food of 17 March 1998, US Exhibit 45, p. 5, one Member of Parliament (Mr. Jean-Guy Chrétien) argued that many processors are willing and could produce far more dairy products for the domestic market but that they cannot access the required milk; whereas other processors, producing for export, have a much wider access to milk given that "there is no danger of flooding the domestic market". In reply, Mr. Guy Jacob, President of the CDC, stated: "Yes, we are hearing the same message from processors and producers ... Processors are saying that they would have markets and could process more milk if the raw material were available".

⁴⁴³ Standing Committee on Agriculture and Agri-Food of 17 March 1998, US Exhibit 45, p. 2.

⁴⁴⁴ The quota level can vary considerably year by year and can even be adjusted during the year, so that it may be difficult for the producer to adjust production to its quota. In 1995/1996 and 1996/1997 the national quota for industrial milk (Market Sharing Quota or MSQ) was 44.2 million hL. In 1997/1998 it was decreased by 3 per cent to 43.3 million hL. In 1998/1999, on the other hand, it was increased by 4 per cent to 44.7 million hL.

⁴⁴⁵ This over-quota milk then obtains the higher domestic price, the benefit of which does not go directly to the individual producer (who only gets the lower Class 5(e) return) but is shared among all producers.

⁴⁴⁶ In 1995/1996, 96.6 per cent of surplus removal was initiated by the CDC; in 1996/1997, 91.49 per cent; in 1997/1998, 70.61 per cent.

⁴⁴⁷ See statement by Mr. Guy Jacob, President of the CDC, Standing Committee on Agriculture and Agri-Food of 17 March 1998, US Exhibit 45, p. 4: "The [CDC] remains a major exporter. Last year [1997] its direct exports totalled some 200 million dollars".

⁴⁴⁸ See para. 7.61.

⁴⁴⁹ See para. 7.86.

⁴⁵⁰ See also paras 7.39 and 7.40.

⁴⁵¹ See paras. 7.40 and 7.58.

⁴⁵² See para. 7.40.

⁴⁵³ Referring to para. 7.41, to the extent that the US claims also cover any of the milk classes other than Classes 5(d) and (e), we note that all of these other milk classes can also (often exclusively) be accessed by processors which produce for the domestic market. Nothing offered under these other milk classes can thus constitute a payment "on the export of" an agricultural product. We therefore find that these other milk classes do not involve an export subsidy as listed in Article 9.1(c).

⁴⁵⁴ The Oxford English Dictionary (2nd Edition) - Volume XI, Clarendon Press, Oxford, pp. 379-380 (emphasis added).

⁴⁵⁵ We note in this respect that Canada, during our proceedings, acknowledged that its previous levy system - where levies were imposed on all milk producers and pay backs were made to processors/exporters with the proceeds of these levies - involved "payments" in the sense of Article 9.1(c).

⁴⁵⁶ Emphasis added.

⁴⁵⁷ We are not convinced either by Canada's argument that the French text of Article 9.1(c) uses the word "versement" which, according to Canada, connotes only payments in money terms. We note, in this respect, that the French text of Article 9.1(a), when addressing "payments-in-kind", uses the term "versements en nature". This, in our view, confirms that also the meaning of the French term for "payment", namely "versement", does not exclude payment in kind, i.e., "versement en nature".

⁴⁵⁸ Appellate Body report on Canada - Certain Measures Concerning Periodicals, adopted on 30 July 1997, WT/DS31/AB/R, p. 36.

⁴⁵⁹ Article III:8(b) states: "The provisions of this Article shall not prevent the payment of subsidies exclusively to domestic producers ..." (emphasis added).

⁴⁶⁰ In this respect, we note the Panel Report on Indonesia - Certain Measures Affecting the Automobile Industry, adopted 23July 1998, WT/DS54/R, which highlights the special and different context and object and purpose of Article III and Article III:8(b) in particular, when it states in para. 14.33: "As was the case under GATT 1947, we think that Article III of GATT 1994 and the WTO rules on subsidies remain focused on different problems. Article III continues to prohibit discrimination between domestic and imported products in respect of internal taxes and other domestic regulations, including local content requirements. It does not "proscribe" nor does it "prohibit" the provision of any subsidy per se"; and in para. 14.43: "We consider that the purpose of Article III:8(b) is to confirm that subsidies to producers do not violate Article III, so long as they do not have any component that introduces discrimination between imported and domestic products. In our view, the wording "payment of subsidies exclusively to domestic producers" exists so as to ensure that only subsidies provided to producers, and not tax or other forms of discrimination on products, be considered subsidies for the purpose of Article III:8(b) of GATT".

⁴⁶¹ See paras. 7.92-7.96.

⁴⁶² See paras. 7.82 ff.

⁴⁶³ See para. 7.82 and footnote 442.

⁴⁶⁴ Ibid.

⁴⁶⁵ See para. 7.64.

⁴⁶⁶ See para. 7.86.

⁴⁶⁷ CDC Act, Subsection 9(1), paragraph (f), (i).

⁴⁶⁸ CDC Act, Subsection 9(1), paragraph (g).

⁴⁶⁹ CDC Act, Subsection 9(1), paragraph (h).

⁴⁷⁰ See paras. 7.103-7.105.