1. On 7 September and 7 October 1988, the United States and Canada held consultations pursuant to Article XXII on quantitative restrictions imposed by Canada on imports of various ice cream and yoghurt products. As these consultations did not result in a satisfactory resolution of the matter, the United States, in a communication dated 8 December 1988, requested the CONTRACTING PARTIES to establish a panel to examine the matter under Article XXIII:2 (L/6445).

2. The Council, at its meeting on 20 December 1988, agreed to establish a panel on the matter with the terms of reference indicated below. It also authorized the Chairman of the Council to designate the Chairman and members of the panel in consultation with the parties concerned (C/M/227).

3. On 3 April 1989, the Council was informed that agreement had been reached on the following composition of the Panel (C/164):

Chairman: Mr. Lars E.R. Anell

Members:

Mr. Hugh W. Bartlett

Mrs. Carmen Luz Guarda

4. The Panel met with the parties to the dispute on 11 May and 17 July 1989, and with interested third parties on 11 May 1989. It submitted its report to the parties to the dispute on 12 September 1989.

5. On 28 January 1988 Canada amended the Import Control List by adding the following products:

With the exception of the last product (yoghurt), the other items will hereinafter be referred to as "ice cream".

6. A notice to importers, dated 25 March 1988, stated that import permits were required for any imports of ice cream and yoghurt. The notice was issued pursuant to the Canadian Export and Import Permits Act. It required importers seeking permits for any of the restricted products for the remainder of 1988 to document their import performance with respect to these products in 1984, 1985, 1986 and 1987. No quota levels were established for 1988. Permits were requested for 3,536 tons of ice cream and for 2,279 tons of yoghurt. Permits were issued for 349 tons of ice cream and for 1,212 tons of yoghurt.

7. On 17 January 1989, a Notice to Importers was issued which established annual global quotas for calendar year 1989 as follows:

The notice further stated that the main criterion for determining the size of quota allocated to individual importers would be the documented level of their imports during 1985, 1986 and 1987. Some quantities could, however, be made available for new importers. Individual import permits are required for each shipment and are issued through an on-line automated system. Permits normally have a validity period of 30 days around the date of arrival specified by importers (5 days prior to and 24 after), but are charged to the importers' quota allocations only if they are used.

8. Canada restricts the importation of a number of dairy products in conjunction with its domestic milk supply management programme. This supply management programme has two distinct elements, provincial measures with respect to the production and marketing of fluid milk (raw milk from the cow used for processing into fresh table milk and fresh cream) and joint federal-provincial programmes with respect to industrial milk (raw milk used for processing into other dairy products).

9. The market for fluid milk, which accounts for approximately 38 per cent of total Canadian raw milk production, is administered by each province. At the beginning of each year, an estimate is made of the total quantity of fluid milk needed to ensure adequate fluid milk availability in each province on a daily basis. Individual fluid milk quotas are allocated to those farmers authorized to produce milk for fluid use.

10. The industrial milk market is administered nationally under a joint agreement between the federal government and nine (of Canada's ten) provinces. (Newfoundland produces milk only for its fluid market and has no industrial milk processing plant.) At the beginning of each year, an estimate is made of the anticipated domestic demand for industrial milk products to which is added planned exports of dairy products minus anticipated imports. This net demand for dairy products is converted to milk equivalents. This is the national Market Share Quota (MSQ); it is then shared among provinces who in turn distribute the provincial share among all farmers producing milk.

11. In Canada all milk production is subject by law to supply management programmes, and sales of milk outside the system are liable to prosecution. Farmers can sell milk only through their provincial milk marketing boards or agencies. Deliveries of raw milk are first channelled to meet fluid milk requirements; milk delivered in excess of the fluid milk requirement is considered industrial milk and is counted against the farmer's individual industrial milk quota. A farmer receives a higher return for fluid milk than for industrial milk. The provincial milk marketing boards oversee allocation of the milk to processors. The receipts from the marketings are assigned to two separate pool accounts - a fluid pool account and an industrial pool account. Each month a farmer receives a statement from the board showing the part of his deliveries under his fluid quota which have been used in the fluid market and the part of his deliveries which have been charged to his industrial quota. If any of the raw milk delivered by the farmer is also in excess of his industrial quota, it is not eligible for direct federal payments and an over-quota levy is imposed on this milk. The marketing board deducts the levies and transport and administration charges, and pays the net amounts from both pools to the farmer.

12. Canadian production of total raw milk, industrial milk, ice cream and yoghurt, as well as import levels of ice cream and yoghurt, are given in the following table. The United States is the principal foreign supplier of ice cream and yoghurt to Canada.

13. The United States considered that the Canadian restrictions on imports of ice cream and yoghurt were inconsistent with the obligations of Canada under the General Agreement. The permit system and quotas violated in particular the prohibition of import restrictions in Article XI:1, and could not be justified as an exception under Article XI:2. In addition, the implementation of the restrictions was inconsistent with Articles X and XIII. This infringement of the provisions of the General Agreement constituted prima facie a case of nullification or impairment of benefits accruing to the United States under the GATT. The United States requested the Panel to suggest to the CONTRACTING PARTIES that they recommend to Canada that it eliminate its quotas and permit scheme on imports of ice cream and yoghurt.

14. Canada maintained that the actions it had taken to place quantitative import restrictions on ice cream and yoghurt were consistent with Canada's rights and obligations under Article XI:2(c)(i). The administration of these restrictions was fully consistent with Articles X and XIII. Thus, Canada's actions did not nullify or impair any benefits accruing to the United States. Canada requested the Panel to find that the quantitative restrictions on ice cream and yoghurt were consistent with Canada's rights and obligations under Article XI, as well as Articles X and XIII.

15. The United States recalled that Article XI:1 prohibited the restriction of imports regardless of whether such restrictions were made effective through quotas, import licences or other measures. The Canadian import permit scheme thus fell within these provisions. The permit scheme established by the Export and Import Permits Act and the Notices to Importers operated to restrict imports. Permits were not freely granted to all qualified importers, but only to traditional importers who could document their status. The permits were valid for a limited time, and only for 5 days prior to entry. Depending on the means of transportation involved, importers sometimes could not obtain a valid permit until the goods were in transit. The uncertainty and limitations imposed by the scheme could deter exporters from undertaking the planning, promotion and investment activities necessary to develop and expand markets in Canada for their products. The permits thus had restrictive effects on trade in addition to those caused by the quota, and in the absence of justified quotas, could not be reconciled with Article XI.

16. Canada maintained that the permit system was not trade restrictive and was simply the administrative instrument to effect the draw-down of the quota allocations by each quota holder. The permits themselves were not restrictive, and the Canadian mechanism, which was the same for all products subject to import quotas, resulted in quota utilization rates approaching 100 per cent. Although the permits had a 30 day validity period, they could be amended or reissued at any time, and were charged to the importer's quota allocation only if they were actually used. It was left to the judgement of the individual importers when and how they used their quota shares.

17. Canada indicated that quota levels were not established in 1988 because bilateral consultations with the major supplier of ice cream and yoghurt to the Canadian market (the United States) were continuing and Canada preferred to await the outcome of the consultations before setting the quota levels. However, import permits were readily granted to applicants who qualified by meeting certain criteria, the principal one being historical import performance and reasonable allowance was made for new entrants. Permitted imports in 1988 exceeded the import level of the previous year.

18. The United States stated that the language of Article XI:2(c)(i), its interpretive note, the relevant drafting history, and prior panel reports adopted by the CONTRACTING PARTIES made it clear that the exception for products subject to a domestic supply management system was very narrow. It was designed to provide for the limited use of otherwise outlawed measures, such as quotas and licenses, in circumstances where the restrictions on imports of like products were necessary for the enforcement of governmental measures to protect unorganized producers from the vagaries of the weather. It was not intended to, and did not, provide a blanket derogation for the agricultural sector generally or the dairy sector in particular; nor did it authorize policies of agricultural self-sufficiency or permit contracting parties to protect domestic producers or processing industries from international competition.

19. Canada argued that Article XI:2 was not an exception to the General Agreement in the sense of Article XX, but rather that it defined a number of circumstances under which contracting parties had the right to apply quantitative restrictions. One of the purposes of Article XI:2 was to permit a government to organize its market for particular agricultural products so as to avoid the problems of surplus production. Unlike Article XI:2(c)(ii) which specifically referred to temporary surpluses, Article XI:2(c)(i) did not specify any time frame and could thus cover either temporary or systemic surpluses.

20. The United States observed that the burden of providing evidence that all the requirements of an exception under Article XI:2(c)(i) had been met rested on the contracting party invoking that provision. The conditions which had to be met could be summarized as follows:

1. The measure had to constitute an import restriction rather than a prohibition.

2. The import restriction had to be on an agricultural or fisheries product.

3. There had to be a governmental measure which operated to restrict the quantities of a product permitted to be marketed or produced.

4. The import restriction had to apply to the "like" product restricted by the domestic supply management system (or to a directly substitutable product if there was no substantial production of the like product) or to a product processed from the like product which:

(a) was in an early stage of processing, and

(b) was still perishable, and

(c) was directly competitive with the fresh product, and

(d) if freely imported, would tend to make the restriction on the fresh product ineffective.

5. The import restriction had to be necessary to the enforcement of the domestic supply restriction.

6. Public notice had to be given of the total quantity or value of the quota for each product.

7. The restriction on imports could not reduce the total of imports relative to the total of domestic production, as compared with the proportion which might reasonably be expected to rule between the two in the absence of restrictions, with due regard to special factors affecting or which might affect the trade in the product.

21. Although the United States agreed with Canada that its measures were restrictions rather than prohibitions, it maintained that Canada could not demonstrate that all of the other Article XI:2(c)(i) requirements had been satisfied.

22. Canada agreed that it had to provide evidence that it had fulfilled the conditions of Article XI:2(c)(i). Canada had fulfilled this obligation and considered that there was a burden on both parties in this case. The Canadian milk supply management system was a comprehensive one which relied on the interrelationship of various components, including production controls, price supports and levies, and import controls. The system was designed with the requirements of Article XI:2(c)(i) in mind, and met all of the criteria for this provision.

23. Canada did not consider that the conclusions of the Japanese agricultural panel report⁹ provided a clear or valid precedent on issues such as "perishability", "early stage of processing" and "like products", nor did that report override the previous interpretation agreed by the Contracting Parties in the EC Tomato Concentrates case. ¹⁰ At the time of adoption of the Japanese agricultural panel report Canada had expressed its concern that that panel had, in some respects, given insufficient consideration to the economic and other linkages which existed between processed and fresh products. In particular, Canada had noted that:

Canada's position at that time had been supported by a number of other contracting parties. The facts in the Japanese case were significantly different from those in this case, and Canada indicated that the rulings in that panel report had no relevance to this case. Each case had to be examined on its merits.

24. The United States contested Canada's claim that the Japanese agricultural panel report was an invalid or irrelevant precedent. That case involved import restrictions on the same or similar products. The Japanese panel report had recently been adopted by the Council by consensus, despite Canada's misgivings. Canada was seeking to abandon the limitations agreed to in the interpretative note to Article XI:2, at least with respect to the dairy sector, by stretching their interpretation to include almost any imported processed dairy product that could displace sales of domestic milk.

25. Canada maintained that it effectively managed the supply of all domestically produced milk, through the provincial controls on fluid milk and the joint federal provincial market share quota system for industrial milk. It was an agreed interpretation of the General Agreement that "in interpreting the term "restrict" for the purposes of paragraph 2(c), the essential point was that the measures of domestic restrictions effectively keep output below the level which it would have attained in the absence of restrictions" (Havana reports, page 89). The Canadian programmes restricted production to a level less than would be the case without the governmental controls. Farmers' participation in the supply management programmes was mandatory. Production quotas were ultimately established at the individual farm level, and the imposition of severe financial disincentives for overproduction assured the effectiveness of the system. The level of return received by producers for over-quota industrial milk was lower than the cash cost of production. The over-quota levy thus effectively restricted production above the quantitative level established by the quotas. Over the last decade there had been under-production of milk in some years, and over production in others. In the most recent six years, over-quota production of milk averaged only one per cent of total milk production. While it could not be directly demonstrated that production would be higher in the absence of the programmes, there was considerable indirect evidence that it would be. Each province fully utilized its Market Share Quota (MSQ) and applications for increased MSQs indicated that farmers had the capacity and willingness to produce more milk at the current prices if not restricted by the over-quota levy. Canada further cited recent econometric analyses which indicated that milk production would be 31 to 39 per cent higher in the absence of restrictions.

26. The United States argued that Canada had failed to demonstrate that it effectively restricted domestic production of milk. The differentiation between "fluid" and "industrial" milk was an artificial one for administrative purposes; with regard to GATT obligations, the product at issue was raw milk from the cow, regardless of what further use was made of it. The use of the word "permitted" in Article XI:2(c)(i) required that there be a limitation on the total quantity of milk that domestic producers were authorized or allowed to produce or sell. The provincial controls on fluid milk did not restrict the quantities permitted to be produced; rather dairy farmers could produce and market as much milk as could be sold as beverage milk or table cream. There were no penalties for delivering more than a farmer's fluid milk quota, it was only if deliveries exceeded actual fluid milk usage or sales that it counted against his industrial milk quota. At least one province did not participate in this voluntary system, and another province had considered leaving it. Furthermore, Canada did not even prohibit the production or sale of milk that exceeded the Market Share Quota. The method used to calculate direct support payments on within-quota deliveries assured that most dairy farmers would completely recover all of their fixed and variable costs on their within-quota deliveries. The farmer was permitted to produce and market milk in excess of the quota, and perhaps had an economic incentive to do so.

27. The United States noted that in the past six years total industrial milk production had consistently exceeded the established Market Sharing Quota, and concluded that the Canadian system was a regulation of production but not a restriction of production. Proposals to amend Article XI:2(c)(i) to replace the word "restrict" with "regulate" had been defeated; what was required was the reduction of production. The results of the econometric analyses cited by Canada provided no indication of what would happen to milk production in the absence not only of the production quotas, but also of the accompanying high price guarantees which operated as incentives to produce. According to the official publication of the Canadian Dairy Commission, a key element of Canada's national dairy policy was to promote self-sufficiency in milk production. The effectiveness of the government supply controls had to be compared to what the situation would be in the absence of all government measures.

28. Canada indicated that raw milk was not normally traded internationally, but rather processed into another form to be used or traded. In fact all raw milk had to be processed to be marketed commercially in Canada including for sale as beverage milk. Ice cream and yoghurt were simply milk in a tradeable form. Ice cream and yoghurt were not like products to raw milk. Article XI:2(c)(i) allowed import restrictions on agricultural products "imported in any form". Ice cream and yoghurt were industrial milk "in any form" within the meaning of this Article. As demonstrated in the drafting history (EPCT/A/PV/19 page 21), by controlling the production of raw milk, Canada ipso facto controlled the production of ice cream and yoghurt. The Canadian Dairy Commission Act defined a dairy product as a product manufactured wholly or mainly from milk. Both ice cream, which was made up of approximately 65-85 per cent milk and cream, and yoghurt which was 90-99 per cent milk, were dairy products. The addition of non-dairy ingredients during the production of ice cream and yoghurt did not disqualify them from being considered as like products "in any form" to industrial milk, nor did their tariff classification.

29. The United States maintained that milk, even "industrial" milk, was not the "like domestic product" of ice cream or yoghurt under any definition of the term. Canada maintained no restriction on the production or marketing of the "like domestic product", which was its domestically produced ice cream or yoghurt. Although Article XI:2(c)(i) permitted application to the like product "in any form", its interpretive note made it explicit that this meant "the same products when in an early stage of processing and still perishable, which compete directly with the fresh product and if freely imported would tend to make the restriction on the fresh product ineffective." Ice cream and yoghurt were not the "same products" as raw milk; they had both been processed to such an extent as to have completely lost any identity with fresh milk. Furthermore, ice cream was often not even made from fresh milk but rather from a wide variety of intermediate processed milk products.

30. Canada argued that ice cream and yoghurt met all the conditions of the interpretative note to Article XI:2(c)(i). The drafters viewed "in an early stage of processing and still perishable" to be a single concept. The provision was extended to "those earlier stages of processing which result in a perishable product". (EPCT/A/PV/19 page 43) The extension of this Article to cover the product "in any form", as well as the product under direct control, was necessary to avoid undermining the effectiveness of the domestic production restrictions. The drafters cited kippers as an example of a product "in any form". There was a direct parallel between the processing of fresh herring into kippers, and the processing of raw milk into ice cream and yoghurt. Kippers, like ice cream and yoghurt, were in their final form of processing ready for commercial sale. The process of transforming raw industrial milk into ice cream and yoghurt was a simple, direct and continuous process. Raw milk entered the dairy processing plants, and any one of a number of products, including ice cream and yoghurt came out. Once the raw milk began the process to convert it into ice cream or yoghurt, it was not possible to change it into any other product. Although production of commercial quantities involved sophisticated equipment, the processes they performed were essentially very simple. There was no storage of industrial milk prior to its production into ice cream or yoghurt, and there were no intermediate forms produced in the process which could be placed into storage for later use or sold commercially. Given the perishable nature of ice cream and yoghurt, for health reasons they were packaged immediately after the completion of processing. They had thus undergone the stage of processing which resulted in a product ready for commercial sale, but that did not negate the fact that they were in an "early stage of processing".

31. The United States indicated that ice cream and yoghurt were not in an early stage of processing, but were products which had undergone the final stage of a multistep production process. A significant number of additional ingredients had been added, the products had been adapted for distinctly different uses, and processed into finished, packaged retail products. They were prepared foods and bore virtually no resemblance to the raw commodity from which they were primarily derived. Article XI:2(c)(i) was a narrow exception to the prohibition of import restrictions and was not intended to permit the protection of domestic food processors. The wording of the phrase made it clear that the exception was limited to only those agricultural products that were at or near the beginning step of the series of operations undertaken to convert the raw agricultural commodity into a processed product. Such highly processed, consumer ready, finished foods as ice cream and yoghurt could not be characterized as being "in an early stage of processing."

32. With regard to perishability, Canada observed that few other products were as perishable as raw milk, which had to be processed within hours of its receipt and was incapable of being stocked. It was also the common understanding that ice cream and yoghurt were perishable products and they were treated as such by the industry and by consumers. Without constant, specialized handling they would spoil within hours. Under appropriate storage conditions the shelf life of yoghurt was approximately three weeks and that of ice cream produced to Agriculture Canada specifications, only three months. There was no basis for the US argument that the processed product had to be as perishable as the primary product in order to be considered as "still perishable". In the Canadian view, to accept the US argument would be to deny the application of the term "in any form" to virtually all the dairy sector, thus effectively denying the industrial milk sector coverage under Article XI:2(c). The EC Tomato Concentrates Panel considered that "tomato concentrate was still perishable because after a certain time it would decline in quality and value".¹¹ Kippers were less perishable than fresh herrings.

33. The United States recognized that all agricultural products and all prepared foodstuffs were to some extent perishable. However, the United States argued that the phraseology of the interpretive note, limiting application to "the same products ... when still perishable", was intended to exclude not only shelf stable foods but also those which had been processed in such a way as to reduce their perishability when compared to the restricted domestic fresh product, and which were capable of being stocked. As the Panel on Japanese Agricultural Restrictions had noted, "one of the purposes of Article XI:2 (c)(i) was to allow governments to intervene in situations in which there was an unexpected excess of supplies of agricultural products that could not be stored under normal conditions until the market had improved" (L/6253, page 62). The drafters of the provision had stated that what they had in mind was "the perishable kind of processed product, not the kind which is capable of being stocked" (EPCT/A/PV/19). Such a situation of unexpected excess supply rarely occurred in the dairy sector because milk output was largely a function of the number, breeds, and ages of the cows and was not closely related to the weather or other factors that varied widely on the short term. To the extent that governments withdrew excess supplies - normally stored as non-fat dry milk, butter, and cheese - from the market, such measures were usually undertaken to achieve long-term domestic price and producer income objectives rather than to remove short-term excesses resulting from the "capricious bounty of nature". Accordingly, the purposes of the exception would not be advanced by giving the words "still perishable" a broad meaning in the context of the dairy sector.

34. The United States observed that ice cream and yoghurt were not "still perishable" in comparison to raw milk and could be stored, if necessary, for extended periods. Under modern production techniques, ice cream and yoghurt could be manufactured from intermediate stage products previously processed from milk - such as butter oil, plastic cream, non-fat dry milk, caseinates, whey powder, and the like - many of which themselves were highly shelf stable products. Unexpected excess supplies of raw milk would not cause ice cream and yoghurt to flood the market and depress prices. Moreover, some of the ice cream and yoghurt products subject to Canada's import restrictions, such as frozen yoghurt and certain hard-frozen ice cream novelty items, could be stored for one year or more. These products were thus not "still perishable".

35. Canada considered that imported ice cream and yoghurt, if uncontrolled, would displace domestically produced ice cream and yoghurt. This is turn would result in a lower demand for industrial milk. What had to be examined was the effects of the imports on the producers. Imported ice cream and yoghurt competed directly with raw milk in the effect that they had on the supply control programme under which the producers operated. Industrial milk was not available to consumers in its raw state but only in its processed forms. A consumer purchasing imported ice cream or yoghurt was thus purchasing a product which was directly competitive with that produced by the Canadian industry from industrial milk, leading to a reduction in demand for industrial milk from Canadian farmers. This was the same situation as fishermen experiencing decreased demand for fresh fish due to imports of kippers, or farmers selling fewer tomatoes due to imports of tomato concentrates. Canada rejected the US argument that products such as cakes, cookies and confectionary items made from milk would also be covered under Article XI:2(c)(i). Milk was not the primary component of these products, but rather a secondary component.

36. The United States replied that the condition under Article XI:2(c)(i) was that the processed imported product had to "compete directly with the fresh product" subject to domestic production, in this case, fresh milk. Products which competed directly were those which came into rivalry in a market without any intervening step or diverting factor. Imported ice cream and yoghurt competed directly with domestically produced ice cream and yoghurt, and were all consumed as snacks and desserts. They did not compete directly with the fresh product - raw milk - at all. These products did not even compete in the same markets; fresh milk was marketed to creameries for processing, whereas ice cream and yoghurt were normally marketed to retail outlets.

37. Further, the United States noted that the language of the interpretive note to Article XI:2(c)(i) was explicit with regard to "compete directly with", which did not mean the same as "compete with", "compete indirectly with", or much less "displace". As the importation of every processed food product could arguably result to some extent in a decline in demand for the commodities used as ingredients, virtually all processed food products would qualify under Canada's displacement argument. The drafting history made it clear that the exception could not be used with respect to indirect competition such as between apples and bananas, much less, the United States argued, could it embrace such indirect competition as existed between prepared foods and the raw agricultural commodities from which they were processed.

38. Canada noted that it was not historical levels of trade which were relevant, but rather the potential for unrestricted imports to displace domestic production of ice cream and yoghurt, which accounted for 11 per cent of industrial milk production on a butterfat basis. Uncontrolled imports could cause a domestic surplus of raw milk, and would require either a scaling back of production during the year and/or increased payments by farmers for disposal. Farmers accepted restrictions on domestic milk production, but expected that as part of the arrangement imports should not be allowed to take unfair advantage of the situation. As uncontrolled imports of ice cream and yoghurt would allow other countries to circumvent the governmental measures restricting domestic milk production, this would threaten the effectiveness of Canada's supply management programme for industrial milk.

39. The United States found no reason to believe that if ice cream and yoghurt were permitted to be freely imported they would tend to make ineffective the Canadian production restriction on industrial milk. These products had been freely imported over the many years Canada had a supply management system for industrial milk without any Canadian claim that they caused any problem whatsoever for the milk supply programme. Unrestricted imports of ice cream and yoghurt had not even gained three tenths of one per cent of the market share during any of the 5 years prior to the imposition of import restrictions. Even if imports were to register a sudden and dramatic increase, it was hard to believe that they could eliminate all the domestic competition. Unrestricted imports of ice cream and yoghurt combined during the five most recent years had not even approached the amount of oversupply Canada tolerated under its Market Share Quota. The United States further noted that Canada had failed to present any evidence to substantiate its argument. Acceptance of an hypothetical, worst-case scenario without supporting evidence would render this criterion meaningless.

40. Canada stated that its supply management system was comprehensive and its effectiveness relied on an interrelation between production controls, over-quota production penalties, and an accurate measure of total supply to the market. Imports were one of the essential elements used in the calculation of the Market Sharing Quota. In order to maintain the system, it was necessary to monitor the level of imports and to bring imports under control when the levels become high enough to threaten the system. Prior to 1987, Canada had no reason to anticipate that United States exports of ice cream to Canada would exceed traditional levels. Since that time, however, the situation had changed considerably as changes in the United States dairy support programme included in the Food Security Act of 1985 encouraged the expansion of US dairy exports. This Act provided for continued unlimited support purchasing of surplus product by the US government. Export opportunities were further promoted by the US government's Targeted Export Assistance Programme for ice cream and other high value products. These developments, along with the widening differential between United States and Canadian milk support prices and the scheduled elimination of the tariffs on ice cream and yoghurt under the Free Trade Agreement, led to the determination, as part of a continuing review of imports, that continued uncontrolled access for imports of these products would threaten the Canadian system. Expectations of greatly increased ice cream and yoghurt imports were substantiated by the large requests for quotas for these products after controls were instituted. Furthermore, Canada noted that while imports of specific types of products might be relatively small, the accumulation of uncontrolled imports of many different products would render the system ineffective, making their restriction necessary. It was accepted in the GATT that relatively small amounts of imports had the potential of disrupting markets. The Working Party on Canadian Egg Quotas (BISD 23S/91) had found that import quotas of less than one per cent of domestic production met the requirements of Article XI.

41. The United States recalled the statement of the Working Party on Quantitative Restrictions that "it would be an abuse of intent of the provisions under paragraph 2(c)(i) of Article XI if the contracting parties were to apply restrictions to processed products exceeding those "necessary" to secure enforcement of the actual measure restricting production or marketing of the primary product" (BISD 3S/190). Canada had established quota amounts for imports of ice cream and yoghurt (processed products) equivalent to approximately 0.0001 per cent of the quantity of domestic production of raw milk (the primary product) authorized by the MSQ even though Canada had permitted over-quota domestic production of approximately 4.0 per cent. The United States also objected to Canada's attempt to justify its import quotas by reference to the reductions in US dairy price support levels pursuant to the Food Security Act of 1985. These unilateral reductions of domestic price supports might have the incidental effect of making US exports of dairy products more price-competitive on the world market, but a Contracting Party should not invoke such desirable and progressive attempts to reduce trade-distorting domestic price supports as a justification for imposing protectionist trade barriers. The United States also pointed out that the Targeted Export Assistance Programme, with one exception, had not been used to promote the marketing of ice cream, and the sole instance in which it was so used did not involve exports of ice cream to Canada. Moreover, the United States noted that the official publication of the Canadian Dairy Commission declared: "Canada's dairy policy is based on national self-sufficiency in milk production on a butterfat basis. This means the domestic market is essentially supplied from Canadian milk production ..."¹² This assertion of the true policy of Canada undermined the undocumented explanations based upon changes in the United States dairy programme. Finally, the United States maintained that the Report of the Working Party on Canadian Import quotas on Eggs was irrelevant. It also noted that the Working Party did not render any conclusion with respect to whether the quotas on imports of eggs met the requirements of Article XI:2(c)(i).

42. Canada stated that the decision to place ice cream and yoghurt on the Import Control List was announced on 19 January 1988 by the Ministers of International Trade and Agriculture. The changes to the Import Control List were published on 28 January 1988 and details were sent to importers and foreign missions in Canada, and the contracting parties were officially notified (L/6462). Quota levels were not announced in 1988 due to ongoing consultations with the largest supplying country - the United States. The levels for 1989 were announced in a Notice to Importers circulated 17 January 1989. One quota was established for the various ice cream products as this provided the importer with greater flexibility in determining exactly which items to import, thus encouraging a fuller utilization of the quota.

43. The United States observed that the requirement in Article XI:2(c) was for "... public notice of the total quantity or value of the product permitted to be imported ...". Canada had failed to provide such notification of the total amount of ice cream and yoghurt permitted to be imported during 1988. The notification for 1989 was of a "basket" quota for ice cream. The United States recalled that a previous panel had found that the establishment of "basket" quotas could not satisfy the requirements of Article XI:2(c) (L/6253, p.68, paragraph 5.3.1.3).

44. In establishing the level of quotas, Canada indicated that it had considered the import levels during the three-year period immediately preceding the introduction of import restrictions. It had set the quota for ice cream at 345 tons, which was the average for this three-year period. In determining the level for yoghurt, Canada had noted an increasing trend in imports and had decided to set a level of 330 tons to accommodate this rising trend. This resulted in a higher level than if an average over a three-year period had been used.

45. In determining the levels of imports of ice cream and yoghurt in future years, Canada stated its intention of maintain proportionality with domestic production of industrial milk. If domestic industrial milk production increased, so would import levels. Similarly, if domestic production fell, import levels would also be lowered. Canada was not asking other contracting parties to assume a greater burden than it was asking of its own dairy farmers. Nor could Canada ask its dairy farmers, whose production was being restricted, to suffer further penalties due to uncontrolled imports.

46. The United States argued that whereas Canada had frozen the volume of imports at an historical level (between 1984 and 1987 for some importers and between 1985 and 1987 for other importers), Canada had undertaken no action to similarly freeze the volume of milk allowed to be produced and marketed and had placed no restriction whatever on its production or marketing of ice cream or yoghurt.

Furthermore, Canada had made no provision which would allow the importation of ice cream and yoghurt to increase as domestic demand and supply increased. Canada had also failed, in determining the quota amount, to give due regard to the most salient special factor affecting trade in these products: the reduction and eventual elimination of customs duties on these products resulting from the United States-Canada Free Trade Agreement (FTA). The undoubted effect of the removal of these barriers to trade would have been to increase the volume of imports of these products into Canada, in particular from the United States.

TO CONTINUE WITH: CANADA - IMPORT RESTRICTIONS ON ICE CREAM AND YOGHURT

¹Source: Statistics Canada, Imports by Commodities and Countries CITC Detail, for 1982-1987. Includes ice cream, ice cream novelties, ice cream mix liquid, ice cream mix dry.

²Published by Statistics Canada as 457 tons. All customs entries were audited and it was found ice cream mix imports were overstated by 214 tons.

³Statistics Canada Imports by Commodity and by Country of Origin (H.S. 2105.00.00.10 and H.S. 2105.00.00.20). Special Trade Relations Bureau import permits issuance for Jan. 29 - Dec. 31 1988 amounted to 349 tons.

⁴Source: Agriculture Canada, Dairy Market Review 1986, 1987 using Statistics Canada Data. Statistics Canada confirms that ice cream mix

production is best measure of ice cream production in Canada. Conversion factor 1 litre ice cream mix = 1.10 Kg.

⁵Source: Statistics Canada, Imports by Commodities and Countries, CITC Detail, for 1982-1987

⁶Statistics Canada Imports by Commodity and by Country of Origin indicates 1141 tons (H.S: 0403.10). Special Trade Relations Bureau import permit issuance for Jan. 29-Dec. 31, 1988 amounted to 1,212 tons.

⁷Source: Agriculture Canada, Dairy Market Review 1986, 1987 using Statistics Canada data. Conversion factor 1 litre yoghurt = 1 Kg.

⁸Source: Agriculture Canada, Dairy Market Review 1986, 1987 using Statistics Canada data. Conversion factor 1 litre milk = 1.02969 Kg.

⁹Report of the Panel on "Japan - Restrictions on Imports of Certain Agricultural Products", L/6253, adopted 2 February 1988.

¹⁰Report of the Panel on "EEC - Programme of Minimum Import Prices, Licences and Surety Deposits for Certain Processed Fruits and Vegetables", BISD 25S/98-103.

¹¹Report of the Panel on "EEC - Programme of Minimum Import Prices, Licences and Surety Deposits for Certain Processed Fruits and Vegetables", BISD 25S/100, paragraph 4.10.

¹²The Canadian Dairy Commission Annual Report, 1987-1988, page 4.