20 November 1958 

1.The Panel for Conciliation examined a complaint by the Government of Australia that as a result of subsidies being granted by the French Government on exports of wheat and wheat flour, inconsistently with the provisions of Article XVI:3, French exports have displaced Australian trade in these products particularly in its traditional wheat flour markets in Ceylon, Indonesia and Malaya, and have thus impaired the benefits which accrue to Australia under the General Agreement. At meetings held on 29 April and 1 May 1958 the Panel heard statements from both parties concerned and then decided to suspend consideration of the complaint pending the outcome of further bilateral discussions which were then to be resumed. In September the Australian Government reported that further bilateral discussions had led to no satisfactory outcome and accordingly the Panel was reconvened during the Thirteenth Session of the CONTRACTING PARTIES. The Panel heard further statements from the representatives of Australia and France and obtained additional information from them in order to clarify certain points in its further examination of the complaint. It also heard a statement by the representative of Japan who recorded his Government's concern in the situation which led to the Australian complaint in view of its interest in the export trade in wheat flour.

2.On the basis of these statements, together with statistical data provided by both parties and the secretariat, the Panel considered:

(a)whether or not the operation of the French price equalization system for wheat and flour amounted to the grant of subsidies on exports of those products;

(b)whether in fact this had resulted in France obtaining more than an equitable share in world trade for these products inconsistent with the provisions of Article XVI:3; and

(c)further, whether and to what extent, the operation of the system had impaired the benefits accruing directly or indirectly to the Government of Australia under the General Agreement.

3.Finally, the Panel agreed on the text of a recommendation¹ which, in its opinion, would assist the Australian and French Governments in arriving at a satisfactory adjustment of the case submitted by Australia to the CONTRACTING PARTIES to GATT.

(i)Operation of the French price stabilization system for wheat

4.Under French law the Office National Interprofessionnel des Céréales (ONIC) controls the production, collection, storage and domestic sale of cereals including wheat and flour and exercises a monopoly on imports and exports thereof. One of the main provisions of the legislation enforced by ONIC is the institution of a legal domestic price for wheat. A price is guaranteed to the producer each year for deliveries up to a maximum amount, or quantum. Quantities produced in excess of that quantum are not purchased at the basic guaranteed price and the producer receives only that price which ONIC can obtain either by selling on the world market or at concessional prices on the domestic market. The quantum includes not only quantities for anticipated domestic consumption but also a margin in excess of that for export. The producer does not, however, finally realize the basic guaranteed price since apart from taxes on all deliveries deducted to defray storage costs and other such expenses incurred by ONIC a surplus disposal tax (taxe de résorption des excédents) is levied on deliveries within the quantum at a highly progressive rate increasing in proportion to deliveries; the proceeds of that tax are utilized to cover ONIC's losses in the disposal of wheat surpluses either at home or exported abroad. Moreover, the ONIC receives repayments from traders and co-operatives based on the price differential for wheat delivered in excess of the quantum (redevance hors du quantum) and any deficit in the operations of the ONIC is financed out of budgetary appropriations.

5.With regard to exports of wheat and wheat flour the procedures are as follows:

(a)In view of the fact that world prices are lower than French guaranteed prices the ONIC makes a payment (ristourne) to the exporter designed to cover the difference.

(b)In the case of wheat the ristourne is paid on the basis of tenders submitted by exporters, the ONIC accepting the bid which involves the lowest payment; these tenders are not considered according to destination and the ONIC may reject tenders or make counter-proposals. The amount of the ristourne is in effect governed by current price trends in the world market for wheat.

(c)Insofar as exports of wheat flour are concerned the ristourne is based on the average ristourne paid in respect of wheat export bids during the week preceding the flour sale. Over and above this basic payment the exporter of flour also receives a bonus fixed from time to time which amounts at present to 200 francs per quintal of wheat utilized and is designed to make up for the price differential between wheat and flour in world markets and to defray additional expenses incurred in milling grain with a high moisture content. In addition a variable bonus is granted according to distance of the export market which is fixed from time to time. This bonus at present varies from 0 to 160 francs per quintal of wheat utilized.

(ii)The development of French exports of wheat and wheat flour

6.In both the inter-war period and the early post-war years, the volume of French exports of wheat and wheat flour respectively has been characterized by wide fluctuations (see Table 1). Since world exports of wheat and of wheat flour have fluctuated less, France's share in the world total has been quite unstable. However, it rose to much higher levels in 1954 and especially in 1955, as regards both wheat flour _ particularly the latter. Disregarding effects of the crop failure of 1956, French exports of wheat now account for 7� per cent of the world total and her exports of wheat flour represent 9 to 10 per cent of world exports.

8.The Panel considered the contention of the Australian Government that the operation of the French system amounted to the grant of subsidies on the export of wheat and wheat flour. The Panel noted the view of the French representative that the French system was rather a scheme for the stabilization of domestic prices and returns to producers. In this connection the Panel referred to an interpretative note to paragraph 3 of Article XVI, in which the CONTRACTING PARTIES had recognized that in certain circumstances a system for the stabilization of domestic prices would not be considered as involving a subsidy on exports within the meaning of that paragraph; it found that even if the French system had the characteristics described in paragraph 2 of the latter interpretative note the exemption provided from the provisions of paragraph 3 of Article XVI would be precluded if operations under such a system were "wholly or partly financed out of government funds in addition to funds collected from producers in respect of the products concerned". Accordingly the Panel addressed itself to a consideration of whether the operation of the French system involved financial contributions from the Government.

9.In the first instance the Panel noted that exporters of wheat and wheat flour were exempted from the tax of 235 francs per quintal of wheat and wheat equivalent in flour delivered on the domestic market which was levied for the financing of agricultural family allowances. Although it is questionable whether such an exemption was within the ambit of the preamble to the interpretative notes to Article XVI, the Panel did not think it necessary to make a judgment on this point since the ristourne which traders received represented a much higher amount.

10.According to data furnished by the French representative the average ristourne paid to wheat exporters during the 1957-58 crop season amounted to 1,566 francs per quintal. Exporters of flour received on the average 1,878 francs per quintal of wheat utilized, i.e. 2,608 francs per quintal of flour. As indicated in paragraph 5 (c) the former payment represented a basic ristourne plus a fixed and variable bonus. In the light of the above, therefore, and of the fact that the legal price for sales of wheat on the domestic market was 3,662 francs per quintal, the Panel noted that traders could obtain wheat for export at a price approximately 1,800 francs per quintal lower than that prevailing on the domestic market and that in the case of wheat flour this difference was greater.

11.As indicated in paragraphs 4 and 5, the ONIC bears the losses resulting from payments to exporters and sales of wheat on the home market at reduced prices to cover domestic bread requirements and either direct sale as livestock feedstuff or costs of denaturation for such use. The 1957 wheat harvest yielded an excess over domestic requirements amounting to 30 million quintals of which 9 million quintals were denatured and sold for feeding purposes and the remaining 21 million quintals were exported in the form of wheat and flour. A percentage breakdown of ONIC's total expenditure for that crop year shows that 50 per cent was allocated in the form of ristournes to wheat exporters and 22 per cent to exporters of wheat flour. The remaining 28 per cent covered losses incurred from sales on the domestic market.

12.As stated, however, the ONIC receives its revenue from three main sources, namely the surplus disposal tax (taxe de résorption des excédents) and repayments for deliveries in excess of the quantum (redevance hors du quantum) with the balance being met by budgetary appropriations. For the 1957-58 crop year the first two items provided 20 and 45 per cent of receipts respectively and the balance of 35 per cent was contributed from Government funds.

13.The Panel noted that it was not possible to apportion or link the various sources of the ONIC's revenue directly to the items of expenditure and accordingly it would be difficult to assess with any precision the share of the budgetary appropriation in the financing of exports. If it was considered, however, that the receipts were uniformly divided under the various items of expenditure then it could be claimed that for the 1957-58 crop year 35 per cent of the payments on exports were derived from Government funds. Moreover, even if it was assumed that the export losses were primarily financed by sources of revenue other than budgetary appropriations then there would still have to be a part of these losses to be covered by the latter. This situation obtained even in the favourable circumstances of the 1957-58 crop year when funds collected from the producers were relatively high as compared with the 1955-56 crop year when budgetary appropriations represented 61 per cent of total revenue and payments on exports amounted to 94 per cent of ONIC's total expenditure. In that year, therefore, the bulk of payments made to exporters was covered by Government funds.

14.Accordingly, on the basis of these considerations, the Panel concluded that the operation of the French system did in fact result in the grant of subsidies on the export of wheat and wheat flour within the terms of paragraph 3 of Article XVI.

15.The Panel considered whether, in the terms of paragraph 3 of Article XVI, France had granted subsidies on the export of wheat and wheat flour in such a manner as to have resulted in France having obtained more than an equitable share of world export trade in these products. The Panel noted that there was no explicit definition in Article XVI of what constituted an "equitable" share in world markets. It was recalled, however, that at both Havana and the Review Session when the provisions of this paragraph were discussed it was implicitly agreed that the concept of "equitable" share was meant to refer to share in "world" export trade of a particular product and not to trade in that product in individual markets. It was understood, moreover, that in making such a determination the CONTRACTING PARTIES should not lose sight of the desirability of facilitating the satisfaction of world requirements of the commodity concerned in the most effective and economic manner, and that due account should be taken of any special factors affecting world trade in the products under reference with particular regard to the exporting country's share of world trade in those products during a previous representative period.

16.In the first instance, the French representative drew attention to France's established position in world trade as an exporter of wheat and wheat flour. Although curtailed in immediate post-war years as a result of damage incurred during the war, France was again assuming its traditional rôle. This de facto status of France as an exporter of wheat and wheat flour has been recognized by the International Wheat Agreement under which export quotas have been accorded to France. Moreover, France's share in the exports of wheat and wheat flour among the five major exporting countries (United States, Canada, Argentina, Australia and France) was considerably less in proportion to her production as compared with the others.

17.The Panel noted that French exports of wheat and wheat flour began to rise in 1954 in absolute quantity to levels very substantially exceeding the quantities exported in any year since 1934 and have since remained considerably higher than in pre-war or post-war years. This increase in the absolute quantities of wheat and of wheat flour exported by France also represents an increase in France's share of world exports, especially as regards wheat flour.

18.The Panel further considered whether this increase in France's share of world exports, particularly of wheat flour, could be attributed to the operation of the French subsidy system. The facts above mentioned in paragraph 7 (and also in Appendix Table A) show that French exporters have been able to quote prices for wheat flour lower than those quoted by other exporters, whether at f.o.b. or c.i.f. values. Moreover, judging from export unit values, the price charged by French exporters for wheat flour has in recent years barely exceeded that charged for wheat. While this seems to be the practice followed also in some other European countries, e.g. in Germany, flour is exported even more cheaply than wheat, the export price for flour charged by Australia, Canada and the United States does exceed the export price of wheat by 30 to 50 per cent (see Table 2).

19.In these circumstances, it is reasonable to conclude that, while there is no statistical definition of an "equitable" share in world exports, subsidy arrangements have contributed to a large extent to the increase in France's exports of wheat and of wheat flour, and that the present French share of world export trade, particularly in wheat flour, is more than equitable.

20.On the basis of statistical data before it the Panel considered whether and to what extent the operation of subsidies granted by France on the export of wheat and wheat flour had caused injury to Australia's normal commercial interests, and whether such an injury represented an impairment of benefits accruing to Australia under the General Agreement.

21.The Australian representative contended that the effect of the French subsidies had been such as to impair benefits Australia expected under the General Agreement, viz., the assurance that its export trade would not face subsidies going beyond the limits permissible under Article XVI. It was pointed out, in particular, that on the basis of statistical data (see Appendix Table B) French exports of wheat flour had displaced normal Australian exports to markets in Southeast Asia, especially Ceylon, Malaya (including Singapore) and Indonesia. Furthermore, the losses suffered by Australia included not only direct damage to the flour milling industry, but also a reduction in the domestic supply of by-products, such as bran and pollard, and finally adverse effects upon Australia's transport facilities for exports of other goods to the Southeast Asian markets, since wheat flour was used as a "bottom cargo".

22.On the basis of statistics on the Australian wheat situation (see Appendix Table C) the French representative expressed the view that Australia's claim was not well founded since the deterioration in her position in Southeast Asian wheat flour markets was not due to French deliveries but to inability to supply as a result of two consecutive short crops. Even the reduced wheat and wheat flour exports of Australia could only be effected by reducing stocks to excessively low levels and even by recourse (though on a limited scale) to imports.

23.On the basis of the statistics submitted and of the explanations provided by the Australian and French representatives, the Panel arrived at the following conclusions:

(a)French exports of wheat flour to the three Southeast Asian countries rose substantially in recent years and accounted for a growing share in France's total wheat flour exports which rose from 13 per cent in 1953-54 to 34 per cent in 1957-58. Australia's exports to these markets fell substantially during this period and their share in Australia's total export of wheat flour declined from 64 per cent in 1953-54 to 50 per cent in 1957-58.

(b)In the three Southeast Asian markets combined, French supplies represented a greatly increased proportion of total imports of wheat flour, accounting for 0.7 per cent in 1954 and 46 per cent in the first half of 1958. The share of Australian supplies, on the other hand, fell from 83 per cent in 1954 to 37 per cent in the first half of 1958.

(c)While other suppliers of wheat flour have recently begun to play a larger part in the Southeast Asian markets, and although it is difficult to estimate to what extent such incursions as these are displacing traditional exporters, it is nevertheless clear that French supplies have in fact to a large extent displaced Australian supplies in the three markets.

(d)As regards the contention of the French representative that the reduction in Australia's exports to these markets was due to limited supplies, it is clear that Australia could not have maintained her combined exports of wheat and wheat flour at normal levels in 1957-58. However, Australia could have effected her traditional exports of wheat flour in spite of the crop failures, owing to measures taken by the Australian Wheat Board to set aside a quantity of wheat considered necessary to keep up normal exports of flour; this was substantiated by the declaration of the Australian representative that there were no contractual commitments for the export of wheat in the form of grain. Actually, the growth of French subsidized exports to Ceylon and other Southeast Asian countries and the consequent displacement of normal Australian flour exports resulted in the wheat thus available for transformation into flour being exported as wheat to other markets.

(e)Since it is obviously more profitable to export wheat flour rather than wheat, Australia has suffered a direct damage which could be evaluated by applying the price difference between wheat flour and wheat to the quantity of Australian exports that were displaced by French exports. It would, however, be difficult to assess this displacement quantitatively with any precision. In addition to this direct damage, there were other incidental adverse effects upon Australia which cannot be measured. Thus, Australia has suffered indirectly by the reduction in the domestic supply of the by-products of flour milling and by the reduction in transport facilities for other Australian export goods to the Southeast Asian Markets.

24.The Panel then directed its attention to the question of whether the damage apparent in recent years was likely to recur or be prolonged. In this connection it noted a statement by the French representative that France had concluded no important new contracts for sales of flour to this area since 1957 and that deliveries in 1958 were mostly the result of contracts entered into the previous year. Furthermore, it was estimated that the French wheat harvest for the year would not be as large as in previous years, and that there was a probability that there would be less available for export, whether as wheat or flour, in the near future. In this connection the French representative stressed that his Government's policy was in fact to reduce wheat production in favour of coarse grains as feedstuffs to promote the livestock industry, and to that end regulations had been announced in October 1957 which would gradually lower the basic production price for wheat from 3,350 francs per quintal to 3,200 francs by 1961, and thus the quantities available for export should be reduced. The Panel noted, however, the recent decision by the French Government to increase the quantum on which the guaranteed price is paid from 68 to 72 million quintals and considered that this decision might to a certain extent counteract the effects of its long-term policy.

25.Although the Panel recognized that the French Government's policy would tend to reduce the effects of the system on patterns of world trade, it considered, nevertheless, that the operation of the system was such that when climatic circumstances were favourable there might be substantial quantities of wheat in excess of normal domestic consumption requirements. Although the ONIC disposes of part of the surplus on the domestic market, the nature of French wheat was such that with its high moisture content, it was not capable of being stored for long periods. Moreover, storage and drying facilities were inadequate and it was inevitable that a substantial part of any sizeable surplus would have to be disposed of on the world markets. The French system appears very flexible in the sense that the amount of subsidy on wheat and flour exports may be increased without any government limitation in order to meet terms of competition on different markets. Also experience has shown that French wheat and flour exports have been regularly quoted at prices below those tendered by other suppliers and that there was no inherent guarantee in the system that it would operate in such a manner as to conform to the limits contemplated in Article XVI:3.

26.Before concluding its report the Panel wishes to draw the CONTRACTING PARTIES' attention to the general state of disequilibrium in the Southeast Asian flour markets, which its examination of the case before it has revealed. It had noted that substantial shifts had taken place as to source of supplies; France, for instance, had once exported large quantities of flour to what formerly constituted French Indochina. In the years 1951-54 that market had received 50,000-60,000 tons annually from France. For various reasons, particularly owing to non-commercial supplies from other sources, however, French flour exports to that market had fallen to zero by 1957. Accordingly, French exporters had been forced to seek alternative markets in the region, thus resulting in incursions on the traditional markets of other exporters. Moreover, other European countries became or returned as occasional and sporadic suppliers of substantial quantities of flour to those markets. This had further contributed towards the general state of disequilibrium which is apparent. In view of this situation, therefore, the Panel considered that so long as trade in flour with this region was likely to be affected by other than strict commercial considerations and the agriculture policy of a number of countries enabled exporters to obtain substantial assistance from their governments, it would be necessary for some arrangement to be arrived at to take due account of the interest of traditional suppliers. The most practical method of achieving this end thus avoiding any further disorganization of the flour markets in this region, appears to the Panel to be inter-governmental consultations.

27.In the light of the considerations set forth in Sections III and IV of this report, the Panel submits the following draft recommendation⁶ for the consideration of the CONTRACTING PARTIES.

Table B

TRADE IN WHEAT FLOUR OF FRANCE AND AUSTRALIA WITH CEYLON,

MALAYA (INCLUDING SINGAPORE) AND INDONESIA

FRANCE

AUSTRALIA

OTHER SUPPLIERS

TOTAL

French export returns

Importers' returns

Australian export returns

Importers' returns

Importers' returns                  of which                  Germany

Importers' returns

'000 tons

%

'000 tons

%

'000 tons

%

'000 tons

%

'000 tons

%

'000 tons

%

'000 tons

Ceylon 1954 1955 1956 1957 1958 Malaya and Singapore 1954 1955 1956 1957 1958 Indonesia 1954 1955 1956 1957 1958 Sum of countries listed 1954 1955 1956 1957 1958 Other destinations 1954 1955 1956 1957 1958

35.3 65.7 66.2 33.6 76.9 - - 15.2 9.6 18.1   - - - - 48.8 35.3 65.7 81.4 43.2 143.8 235.8 362.4 430.2 153.9 280.9

13.0 15.3 12.9 17.0 18.1 - - 3.0 4.9 4.3   - - - - 11.5 13.0 15.3 15.9 21.9 33.9 87.0 84.7 84.1 78.1 66.1

3 76 52 37 99*   - - 19 10 29*   - - neg. 9 65**   3 76 71 56 193

1.5 34.9 28.1 19.0 75.0   - - 12.3 6.9 19.0   - - 5.8 49.2   0.7 16.0 13.2 11.3 46.1

202.8 102.0 105.0 160.4 47.2   128.5 149.5 123.1 108.0 115.4   124.9 86.6 161.3 104.8 57.1   456.2 338.1 389.4 373.2 219.7   253.6 244.4 215.6 303.1 216.1

28.6 17.5 17.4 23.7 10.8   18.1 25.7 20.3 16.0 26.5   17.6 14.9 26.7 15.5 13.1   64.3 58.0 64.4 55.2 50.4   35.7 42.0 35.6 44.8 49.6

146 134 120 128 2*   119 126 119 112 98*   98 108 151 97 62**   363 368 390 337 153

71.9 61.5 64.9 65.6 1.5   93.7 92.6 76.8 77.8 57.5   89.0 88.5 76.6 62.2 47.0   82.5 77.3 72.6 68.1 36.5

54 8 13 30 31*   8 10 17 22 37*   12 14 46 50 5**   74 32 76 102 73

26.6 3.7 7.0 15.4 23.5   6.3 7.4 10.9 15.3 23.9   10.9 11.5 23.4 32.1 3.8   16.8 6.7 14.2 20.6 17.4

- - neg. neg. 14*   - - 1 1 7*   - - - - -   - - 1 1 21

- - - - 10.6   - - 0.6 0.7 4.5   - - - - -   - - 0.2 0.2 5.0

203 218 185 195 132*   127 136 155 144 155*   110 122 197 156 132**   440 476 537 495 419