Additional considerations with respect to sales of in-quota milk

7.107 We find additional support for our finding in the previous paragraph, in so far as it relates to in-quota milk sold under Classes 5(d) or (e), in the fact that the returns of in-quota milk are pooled with all other in-quota milk returns. ⁴⁷¹

7.108 At the national level, a system which pools all returns from in-quota milk in Special Class 5 was set up in the Comprehensive Agreement on Special Class Pooling. This agreement was concluded by the same bodies that established the CMSMC. Its implementation is overseen by the CMSMC, a body we considered earlier to be (at least to some extent) an agency of Canada's governments. ⁴⁷² Moreover, in order to allow the CDC to administer this pooling system, the federal CDC Act was amended. Subsection 9(1), paragraph (f) of the Act, as amended, grants federal authority to the CDC to "establish and operate a pool or pools in respect of the marketing of milk or cream".

7.109 At an inter-provincial level, one pooling agreement was concluded between six eastern provincial boards ("the P6 Agreement"), another between four western provincial boards ("the P4 Agreement"). Both of these agreements pool all in-quota milk returns other than Special Class 5 returns (which are pooled nationally). These agreements were typically concluded by the relevant provincial governments, marketing boards and supervisory boards, all of which we presumed earlier to be agencies of Canada's governments. ⁴⁷³ Also the CDC itself is a signatory to both of these agreements. An example of how pooling of in-quota milk actually occurs is provided in paragraphs 2.59 to 2.63 above.

7.110 The authority vested in the provincial marketing boards to conclude, operate and enforce any of these three pooling agreements was delegated to them either by federal authorities (to the extent inter-provincial and international trade is involved, e.g., by the CDC ⁴⁷⁴ ) or by provincial authorities (which have constitutional authority over all other aspects of production and sale of milk). The orders and regulations of the boards in respect of pooling - established pursuant to federal and provincial enabling legislation - can be enforced by the provincial boards before the normal courts by means of, e.g., a request for civil injunction or civil damages.

7.111 On these grounds, we consider that each of the three pooling arrangements are imposed on milk producers by virtue of governmental action. The pooling agreements are compulsory. Individual producers cannot opt-out of these pooling systems with respect to their in-quota milk. ⁴⁷⁵ It is this pooling mechanism that "finances" the payment in kind provided by the producers to the processors/exporters under Classes 5(d) and (e) with respect to in-quota milk. The pooling ensures that the producer which sells in-quota milk for export at a discounted price, does not have to bear the total cost of the "payment" thus provided to the processor/exporter. All milk producers share this cost by putting their higher returns from milk sold for domestic use in the same pool. The net result is that all producers obtain one average pooled price for all their in-quota milk. This pooling system confirms our finding that the provision of in-quota milk under Classes 5(d) and (e) is a payment in kind "financed by virtue of governmental action". ⁴⁷⁶

Additional considerations with respect to sales of over-quota milk

7.112 We note, finally, that even though returns of over-quota milk sold under Class 5(e) are generally not pooled with other in-quota milk returns, over-quota milk returns are also, at least to some extent, pooled. This again occurs, we consider, by virtue of governmental action. First, any over-quota milk return is pooled annually with all other over-quota milk returns. On a monthly basis, the individual milk producer receives, from its provincial marketing board, a price for its monthly over-quota share. This price is not the actual return for the transaction made, but a three-month moving average of all returns achieved nationally for over-quota milk. Moreover, at the end of the dairy year, an adjustment is made to ensure that the total monthly payments made to individual producers correspond, on an averaged basis, to the total returns generated nationally that year by all over-quota milk sales. Therefore, even though each export transaction may - and mostly does - generate a different price (depending on the competitive conditions in the export market concerned, the dairy product in question and the delivery terms and timing of the transaction), at the end of the year an individual milk producer is not affected by this spectrum of variables, but receives a nationwide average pooled return for all of its over-quota milk. ⁴⁷⁷ Second, depending on the applicable provincial regulations, some degree of pooling also takes place between over-quota returns and in-quota returns. This is achieved, in some provinces, by offsetting over-quota production of some producers against under-quota production of others. ⁴⁷⁸ These so-called "flexibility" provisions or "fall incentives" essentially excuse over-quota production in certain months. This variable determination of what is labelled as over-quota milk in each province by virtue of provincial regulations, not only results in a shared financing of certain over-quota sales (including by those producers which did not produce over-quota); it also confirms that it is not the individual producer but Canada's governments or their agencies that essentially determine when milk receives the lower export return. In our view, this pooling of over-quota returns confirms our finding in paragraph 7.106 that the provision of over-quota milk under Class 5(e) is also a payment in kind "financed by virtue of governmental action".

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

7.113 We found earlier that the provision of lower priced milk to processors for export under Classes 5(d) and (e) constitutes a "payment" to these processors/exporters "on the export of an agricultural product". ⁴⁷⁹ We also found that this "payment" is "financed by virtue of governmental action". ⁴⁸⁰ On these grounds, 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(c).

7. Article 3.3 of the Agreement on Agriculture

7.114 We have found that the provision of milk to processors/exporters at a reduced price under Classes 5(d) and (e) constitutes an export subsidy as listed in Article 9.1(a) ⁴⁸¹ and Article 9.1(c). ⁴⁸² We recall that Article 3.3 provides as follows:

7.115 We further note that, according to figures submitted by Canada, the total amount of exports generated through Classes 5(d) and (e) exceeds Canada's quantity reduction commitment levels as set out in Section II of Part IV of its Schedule and this (i) for all of the dairy products in dispute (butter, cheese and "other milk products") and (ii) during both marketing years at issue (1995/1996 and 1996/1997). ⁴⁸³ The relevant figures are reflected in the table below:

Product	Marketing Year	Canada's Export Quantity commitment level	Total exports generated through Classes 5(d) and 5(e)
Butter	1995/1996 1996/1997	9,464 8,271	9,527 10,312
Cheese	1995/1996 1996/1997	12,448 11,773	13,751 20,409
Other milk products	1995/1996 1996/1997	36,990 35,649	37,358 60,300

7.116 On these grounds ⁴⁸⁴ , we find that Canada provides export subsidies as listed in Article 9.1 in respect of the three dairy products at issue, and this for both marketing years in dispute, in excess of the quantity commitment levels specified in its Schedule, contrary to its obligations under Article 3.3.

8. Article 10 of the Agreement on Agriculture

7.117 We have found that the Special Milk Classes Scheme involves an export subsidy as listed both in Article 9.1(a) and in Article 9.1(c). In the alternative - i.e., in the event we would have found that the scheme does not involve an export subsidy as specified in either Article 9.1(a) or Article 9.1(c) - the Complainants submit that this scheme, nevertheless, constitutes an export subsidy contrary to Article 10.1 of the Agreement on Agriculture. This provision reads as follows:

7.118 The Complainants only invoke the first phrase of Article 10.1. We note that this phrase only applies to "export subsidies not listed in paragraph 1 of Article 9". Export subsidies listed in Article 9.1 cannot, therefore, be found to contravene Article 10.1. ⁴⁸⁵ Having found that Canada's Special Milk Classes 5(d) and (e) involve export subsidies as listed in Article 9.1, we thus decide this dispute on the basis of Article 9.1. None of the complainants requested the Panel to make concurrent findings on both Article 9.1 and Article 10.1. In our view, the text of Article 10.1 and our findings based on Article 9.1 exclude such concurrent findings in respect of the same export subsidies. If our findings under Article 9.1 are adopted by the DSB, we consider that making additional findings under Article 10.1 would not be warranted in the light of the mutually exclusive relationship between Article 9.1 and Article 10.1.

7.119 However, in our examination of the claims relating to violations of Article 9.1 or Article 10.1, we also noted the following elements:

On these grounds, and in particular in order to (i) enable the Appellate Body and the DSB to make findings on Article 10.1 in the event that it considers it necessary ⁴⁹⁰ and (ii) avoid a continuation of the dispute over Canada's obligation to bring its dairy products marketing regime into conformity with its obligations under the Agreement on Agriculture, we have decided to proceed with our examination under Article 10.1 and to include that examination in our report as one on which no recommendation or ruling by the DSB would be necessary if our findings under Article 9.1 are adopted. We emphasize that our examination of Article 10.1 is made in the alternative only, i.e., assuming that Classes 5(d) and (e) do not involve export subsidies as listed in Article 9.1.

To continue with The two elements under Article 10.1

⁴⁷¹ In this respect, we note that New Zealand and the United States have argued that Classes 5(d) and (e) constitute an export subsidy to milk processors/exporters financed by milk producers contingent on the export of the processed dairy product. Neither complainant suggested that the pooling of in-quota milk returns represents a payment to some milk producers financed by other milk producers contingent on the export of milk.

⁴⁷² See para. 7.80.

⁴⁷³ See paras. 7.73 ff.

⁴⁷⁴ In Schedule II to the Comprehensive Agreement on Special Class Pooling, the CDC, subject to the approval of the Governor in Council, authorizes the provincial boards "insofar as it is necessary to enable the Boards to fully carry-out the program as set out in [the Comprehensive Agreement on Special Class Pooling] and its Annexes, to exercise all the powers of the [CDC] set out in paragraphs 9(1)(f) to (i) of the [CDC Act]".

⁴⁷⁵ See Canada's answer to Panel Question 4(d) to Canada.

⁴⁷⁶ See para. 7.106.

⁴⁷⁷ See Canada's answer to Panel Question 34 to Canada.

⁴⁷⁸ For example, in the provinces of Alberta, Manitoba and Saskatchewan, according to Canada's answer to Panel Question 20(b) to Canada and US Exhibits 39 and 58.

⁴⁷⁹ See paras. 7.90 and 7.101.

⁴⁸⁰ See paras. 7.103 ff.

⁴⁸¹ See para. 7.87.

⁴⁸² See para. 7.113.

⁴⁸³ See Table 2 in para.2.41.

⁴⁸⁴ See paras. 7.114-7.117.

⁴⁸⁵ However, in our view, the mutual exclusiveness of Article 9.1 and Article 10.1 does not prevent that one element or aspect of a given scheme may constitute an export subsidy as listed in Article 9.1, while another element or aspect of the same scheme may be covered by Article 10.1 and that, as a result, the factual elements to be considered under both provisions might well be closely related if not the same in certain respects.

⁴⁸⁶ In this respect, we also note Article 19.1 of the DSU providing that a panel "[i]n addition to its recommendations ... may suggest ways in which the Member concerned could implement the recommendations".

⁴⁸⁷ A footnote refers to DSU, Article 3.7.

⁴⁸⁸ A footnote refers to DSU, Article 21.1.

⁴⁸⁹ Appellate Body report on Australia - Measures Affecting Importation of Salmon, WT/DS18/AB/R, adopted 6 November 1998, para. 223.

⁴⁹⁰ In this respect, we refer to the dispute on Australia - Measures Affecting Importation of Salmon (WT/DS18/AB/R, adopted 6 November 1998), where the Appellate Body, after having reversed certain Panel findings, was "unable to come to a conclusion on [the claim under Article 5.6 of the SPS Agreement] due to the insufficiency of the factual findings of the Panel and of facts that are undisputed between the parties" (para. 213; see also para. 241). See also the Appellate Body Report on Canada - Certain Measures Concerning Periodicals (WT/DS31/AB/R, adopted 30 July 1997, p. 22: "We note that, due to the absence of adequate analysis in the Panel Report in this respect, it is not possible to proceed to a determination of like products [under Article III:2, first sentence, of GATT 1994]"). In this respect, see also the Panel Report on India - Patent Protection for Pharmaceutical and Agricultural Chemical Products (WT/DS50/R, adopted 16 January 1998) where the Panel decided to continue its examination under Article 63 of the TRIPS Agreement after it had found a violation under Article 70.8 of that Agreement (para. 7.44: "Although the United States formulates it [the Article 63 claim] as an alternative claim in the event that the Panel were to find that India has a valid mailbox system in place, and we have, as stated above, found that the current mailbox system in India is at variance with Article 70.8(a) of the TRIPS Agreement, we believe it necessary to make our findings clear on the issue of transparency in order to avoid a legal vacuum in the event that, upon appeal, the Appellate Body were to reverse our findings on Article 70.8").