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21 February 1992

PANEL ON CANADIAN COUNTERVAILING DUTIES ON GRAIN CORN FROM THE UNITED STATES

(Continued)

Report of the Panel adopted by the Commmittee on Subsidies and Countervailing Measures on 26 March 1992
(SCM/140 and Corr.1 - 39S/411)

3.2.23 The United States said that Canada had presented new factual evidence on import trends at the Panel's meeting. On the basis of the data available during the CIT proceedings, the United States pointed out that Canadian imports of grain corn fell in the last full year of the CIT investigation, and had also declined in 1983/84 and 1985/86 crop years; except for the 1984/85 crop year, there had been a steady decline in these imports since the 1980/81 peak. Arguing that the intended and actual effect of the United States subsidy programmes was to reduce production, and that the volume of imports from the United States had been trending downward over time, the United States maintained that the CIT opinion provided no positive evidence whatever that imports were likely to surge or cause material injury in the near future.

3.2.24 Canada said that the data different from that available to the CIT had been provided in response to a question of the Panel. It was not an attempt to suggest that this was the information available to the CIT. Regarding the fall in imports in the last year of the period of investigation, Canada said that this had happened because it was a good crop year for the country, and imports would in any case have been down even in normal circumstances. However, Canada emphasised that though there

were a number of reasons for the level of imports to vary, this did not reduce the reality of price suppression occurring through the effects of actual or potential imports in this case.

Examination of the price effects of subsidized imports

3.2.25 The United States claimed that the CIT did not use appropriate price data to ascertain the price effects of subsidized imports. According to the United States, the CIT could not have considered the price data pertaining to import sales because it did not collect such data in this case. The United States contended that failing even to seek data pertaining to one of the mandatory factors specified in the Subsidies Agreement demonstrated conclusively the invalidity of the CIT determination.

3.2.26 Canada disagreed with the United States' position, and said that the CIT had made its finding of price effects on the basis of the Chicago price for corn, which was essentially the import price because this was the price offered to Canadian buyers of corn from the United States. Canada said that the CIT had noted that in cases of highly price-sensitive, fungible commodities such as corn, where the price of the next probable or potential import was known (the Chicago Board of Trade price in this case) to both buyers and sellers, the price of these imports exerted a suppressive effect on these commodities. Canada said that the CIT had examined in detail the effect of the Chicago price on the Canadian price for corn, including the dynamics of the pricing relationship in this situation where virtually all (i.e., 99.99 per cent) of Canada's grain corn imports came from the United States on account of transport costs and phyto-sanitory requirements. On this basis, the CIT had reached a conclusion that the Canadian corn producers had virtually no choice but to match the United States price or lose sales. Thus Canada claimed that the CIT had considered the appropriate price of subsidized imports in drawing a link between actual and potential subsidized imports and price suppression.

3.2.27 The United States maintained that by using the observation that Canadian prices tended to track prices of corn in markets in the United States as evidence of price suppression, the CIT had not relied on positive data in order to determine whether imports were a cause of price suppression. For a proper investigation, the United States argued that the CIT needed to base its findings on one or more of several different evidentiary indicia of price suppression, including, for example, confirmed instances where imports from the United States were sold at a price which undercut the Canadian price, or to specific instances of sales lost to the imports from the United States due to the lower prices offered for the United States product, or to illustrative and specific instances of revenues lost on account of specific Canadian producers being forced to lower their asking price due to a specific competing offer to sell by a United States producer. The United States pointed out that what is key is consideration of prices of imports, which the CIT did not do, and that the CIT staff itself indicated that the Chicago price did not reflect the actual price of imports. To back its assertion that the CIT determination rested on a mere assumption rather than positive evidence, the United States mentioned that the CIT Staff Report had said that there were many factors at play, working in concert, to determine the price for specific lots of corn, and that the United States (Chicago) price would only be one influence on the actual prices even in "the normal course of market operations". Thus the United States said that "Absent facts showing a significant relationship between prices of U.S. imports and price suppression in Canada, Canada's findings as to price suppression cannot stand under the Code".

3.2.28 Canada said that though the type of evidence mentioned by the United States was usually collected in the preliminary phase of the CIT investigation by seeking such price data from the relevant parties, the assessment of the CIT staff in this case was that collection of this type of data would not be feasible. Such data could be gathered only for products whose individual transactions could easily be examined. Injury examinations involving commodity-type products could not always be done on a transactions basis, especially for items such as corn. Canada said that there were no middlemen in the case of corn, and that the equivalent levels of trade was foreign seller/domestic buyer and domestic producer/domestic buyer. Because of the fungible nature of the product, there was no way for the buyers to tell which domestic sales were from imports or from domestic production. Additional complications arose on account of the tens of thousands of transactions ordinarily involved. Therefore, in this case, it was clear that trade effects could not be localized and attributed to particular transactions. Instead of considering factors governing individual behaviour, the CIT analysis had to look at factors governing the market, and it was necessary to determine factors in the aggregate, through statistical and economic methodologies. In Canada's view, aggregate analysis in this case was additionally valid since pricing between buyers and sellers was essentially transparent as it was based on known, open market quotations. Hence, Canada argued that the CIT's approach was justified in light of the facts of the case, and mentioned that this approach had not been challenged by United States exporters represented by counsel at the CIT hearings, including expert witnesses from both sides.

3.2.29 Refuting Canada's assertion regarding all parties having accepted the price analysis of the CIT, the United States said that during the CIT hearings, exporters from the United States had pointed out that the CIT was not considering the import price. Further, the United States stated that while it did not disagree that given the nature of commodity markets, price suppression could occur for these products, it was not appropriate to presume price suppression on the basis of a foreign price. The United States' contention was that even for fungible commodities, the sales (or transaction) prices of imports could be ascertained through investigation, and that the United States had not found it impossible to get such price data for fungible commodities; the representative of the United States was not aware of a single United States case where such relevant information had not been sought. The United States said that by not considering sales (or transaction) prices of imports, the CIT decision sanctioned a finding of price suppression merely on the basis of the presence of a country which was a large producer of a fungible product and relatively open international markets. Furthermore, the United States said that if injury occurred due to a decline in the world price, it had to be addressed by a measure other than a countervailing duty.

3.2.30 Canada said its authorities had not conducted as many injury investigations as had the United States but the nature of the corn case was such that the CIT staff had decided on assessing the case that getting import transaction price data that would have any degree of reliability was difficult if not impossible.

3.3 The parties to the dispute disagreed as to whether the CIT had drawn a causal link with subsidized imports or with a subsidy programme.

3.3.1 The United States said that the CIT's determination had found that the injury to Canadian industry was due to a factor other than the subsidized imports, namely, the world supply and demand for corn and, in particular, world prices for corn. According to the United States, the sole focus of the CIT inquiry was to determine whether there was a nexus between subsidies provided in accordance with the United States Food Security Act of 1985 and the injury suffered by Canadian corn growers (emphasis by the United States). In this context, the United States quoted from the CIT's opinion and finding 18:

"The essential question to be addressed is whether the operation of the 1985 U.S. Food Security Act ... was such as to cause prices in Canada to decline to levels judged to be of a material nature. ... For these reasons, the majority of the panel therefore concludes that the subsidization of U.S. grain corn has caused and is causing material injury to Canadian corn producers [and] will continue to cause material injury to Canadian production of like goods" (emphasis added by the United States).

The United States argued that the CIT reached its affirmative determination on the basis of the following line of reasoning: there is an imbalance in the world supply and demand for grain corn; United States production and stocks have a dominant impact on world supply and demand and the setting of world prices for grain corn; United States subsidy programmes have a major influence on levels of United States production; these programmes have had the effect of lowering world prices; grain corn movement between Canada and the United States is essentially unrestricted; and because of the open nature of the Canadian market these lower prices were transferred to Canada, with substantial adverse effect on Canadian producers.

3.3.2 Thus the United States said that Canada had not established the nexus between subsidized imports and material injury as required by the Subsidies Agreement. Elaborating on the Subsidies Agreement's requirement, the United States referred to the provisions of Article 6.1 that determination of injury must involve an examination of:

"both (a) the volume of the subsidized imports and their effect on prices in the domestic market for like products ... and (b) the consequent impact of these imports on domestic producers of such products" (emphasis added by the United States).

The United States said that similarly, references to "subsidized imports" recurred in Articles 6.2, 6.6 and 6.7 as well. In particular, the United States pointed out that Article 6.2, which addresses the relevance of price suppression or depression, states that the injury analysis must include a consideration of,

"whether the effect of such imports is otherwise to depress prices to a significant degree or to prevent price increases, which otherwise would have occurred, to a significant degree" (emphasis added by the United States).

3.3.3 Canada replied that in this case, the CIT had not made an injury determination on the mere existence of a subsidy programme in another country or on the basis of vague effects of world prices as was alleged in complaint by the United States. Canada said that the provisions with respect to causality were contained in Article 6.4 of the Subsidies Agreement. This Article stated that, "It must be demonstrated that the subsidized imports are, through the effects of the subsidy, causing injury ..." (emphasis added by Canada).

Thus, what must be considered in demonstrating a causal link were only those effects of the subsidy that relate to subsidized imports. Canada said that these effects, i.e. those linked to subsidized imports, were set out in footnote 19 of the Subsidies Agreement, which directed one to the detailed factors provided in Articles 6.2 and 6.3 which included price suppression (where subsidized imports were matched by domestic producers and thus, did not flow across the border) and increased burdens on government support programmes. Canada argued further that the ability to examine the price suppressive effects and effects on government support programmes of subsidized imports in Article 6 would have little meaning if it were limited to those subsidized goods that had already been sold and imported. In reviewing the case for injury to domestic producers of corn caused by subsidized imports, it would therefore have been remiss for the CIT to limit the examination of injury to actual imports and not to examine the impact of higher levels of imports that would flow in the absence of a price response by Canadian producers. Canada said that the CIT decision was closely linked to a careful demonstration that subsidized imports were, through the effects of the subsidy, causing injury within the meaning of the Subsidies Agreement, as required by Article 6. The standard used by the CIT did not constitute a license to find injury in almost any circumstance where a country had subsidies, nor was it based on the notion of "hypothetical" imports.

3.3.4 The United States said that the Subsidies Agreement expressly required a finding based on a nexus between the effects of imports and injury, not between the effects of the subsidy and injury. In this regard, the United States said that the Subsidies Agreement had set out mandatory factors for consideration, namely, the significance of the volume of imports, their price effects and their impact on the domestic industry (emphasis by the United States). Further, referring to footnote 17 of the Subsidy Agreement, the United States argued that the Agreement stipulated that the nature and effect of the subsidy was only a permissive factor and not a mandatory factor.

3.3.5 While agreeing with the United States that footnote 17 was permissive, Canada said that this footnote did not constrain the authority provided under Article 6.4 to examine the price suppression effects of potential subsidized imports.

3.3.6 In addition to the argument that the decline in world price of grain, and not subsidized imports from the United States, was found by the CIT to cause declining prices in the Canadian market, the United States pointed out that the CIT had noted that, though important, the United States subsidies were among a variety of salient factors which had affected international trade in corn, such as the "disarray" in the international agricultural environment, the openness of Canada's market, the size of United States grain corn production relative to Canadian production, and the increasing self-sufficiency of other countries. The United States thus claimed that Canada had not met the fundamental and explicit requirement imposed by the Subsidies Agreement on the levying of countervailing duties that a causal link between subsidized imports and material injury be demonstrated. The United States pointed out that on page 14 of its finding, the CIT had found that the reason for the declining prices in the Canadian market was the dramatic decline in the world price of grain. According to the United States, "allowing 'world market conditions' alone to justify the imposition of countervailing duties in the manner of the CIT in this case would negate the material injury determination required by the Code". Furthermore, the United States said that contrary to Article 6.4 of the Agreement, the CIT had failed to issue a negative determination despite finding that a factor other than subsidized imports was the reason for the injured condition of the Canadian industry.

3.3.7 Canada said that the injury determination in this case was not based on the absence of actual subsidized imports, nor was it a determination based solely on the fact that certain goods in another market happen to be subsidized. Canada argued that the CIT decision was not, as suggested by the United States, based on a "disarray" in world agricultural trade. According to Canada, the CIT had examined both actual and potential imports in a case where a pattern of trade had been established, and taking into account the commercial reality, had established the necessary causal link between injury to domestic production and subsidized imports. Canada said that the CIT had also considered evidence of price suppression caused by those subsidized imports, i.e. potential or probable imports, whose low prices were matched by Canadian producers. Canada further said that the United States had not contested that there were subsidized imports or material injury.

3.3.8 The United States disagreed with Canada's assertion that the United States had conceded that their grain corn exports to Canada were subsidized. It clarified that the United States position in this regard was that, "we are not, in this proceeding, contesting the subsidy portion of Canada's determination." Regarding Canada's argument that the CIT had drawn a link between material injury and potential imports, the United States said that Canada was giving a post-hoc rationalization of the CIT reasoning. According to the United States, a reading of the CIT finding showed that its decision was based on the subsidy programme, and only passing references were made to potential imports.

4. SUBMISSION BY THIRD PARTY

4.1 In its submission as a third party to the Panel, the European Community said that Article 6 of the Subsidies Agreement clearly stated the requirement that "a determination of injury has to involve an objective examination, based on positive evidence, of the volume of subsidized imports and the effect of these imports on prices in the domestic market of the importing country". 19 Similarly, Article 6.2 referred explicitly to subsidized imports. According to the Community, it was mandatory that an investigation of injury under Article 6 of the Agreement required the presence of subsidized imports, and an examination of the effects of these subsidized imports to demonstrate a causal link with material injury. Factors other than subsidized imports, such as price effects, could be examined only after the examination of the mandatory factors. The Community's opinion was that injury in this case had been caused by factors other than the imports of subsidized goods, and Canada had made its finding on the basis of these other factors without considering the mandatory factors.

4.2 In reply, Canada said that it fully agreed with the Community's interpretation of the Agreement that subsidized imports must be present and a causal link with material injury should be drawn with these imports. However, Canada disagreed with the Community's view that in this case, injury was caused by factors other than imports of subsidized goods and that the Canadian finding was in violation of the Subsidies Agreement. Arguing that the Community's allegations were unsubstantiated, Canada said that its response to the Panel had shown that the Community's position did not reflect the facts in the case at hand.

4.3 Referring to the Community's statement that after examining subsidized imports, it suggested that the investigating authorities look at the effects of prices, Canada asserted that this was what the CIT had done. "It examined very carefully the price effects of the United States subsidy programme and found that it dramatically influenced the price and supply of corn in the United States and via imports, the price in Canada".

5. FINDINGS

5.1 Introduction

5.1.1 The Panel noted that the issues before it arose essentially from the following facts: Pursuant to SIMA, a countervailing duty investigation was initiated by the Government of Canada on 2 July 1986 in respect of imports of grain corn from the United States. On 20 March 1987, the CIT issued an affirmative determination that "the subsidizing of importations into Canada of grain corn ... has caused, is causing and is likely to cause material injury to the production in Canada of like goods". 20

5.1.2 The CIT's determination was based upon findings that: the grain corn markets of Canada and the United States were closely integrated, with an established pattern of trade between the two countries; the only border measure affecting exports to Canada was a two per cent tariff, and due to the nature of Canada's phytosanitary regulations and the costs of transportation, the United States was the only viable source for Canada's imports of grain corn, accounting for virtually all imports into Canada during the relevant period of the CIT investigation (January 1984 - June 1986); the price in the United States and in the world market was based on the price quoted by the Chicago Board of Trade, the principal grain exchange where open market bids and offers determined the spot and future prices; the United States Food Security Act of 1985 (the "1985 Farm Bill") subsidized corn produced in the United States and also lowered the floor price of grain corn in the country; given the dominance of the United States as a producer and exporter of grain corn in the world, the decline in the United States price was in very large measure responsible for a dramatic decline in the international price for grain corn; Canadian producers had to accept lower prices in order to maintain sales in the face of low-priced United States corn; and the magnitude of the price decline was such as to constitute material injury, whether borne by the farmers directly in terms of reduced income, or indirectly by increased burden on government support programmes.

5.1.3 The issue submitted to the Panel was whether the determination of injury by the CIT, in its Finding in respect of "Subsidized Grain Corn Originating In or Exported from the United States of America", was based on an objective examination, in accordance with the provisions of Article 6 of the Subsidies Agreement, of both (a) the volume of subsidized imports of grain corn from the United States and their effect on prices in Canada for the like product and (b) the consequent impact of these imports on Canadian producers of the like product.

5.1.4 The United States requested the Panel to find that the CIT's determination of injury in the case of grain corn imports from the United States was inconsistent with Canada's obligations under Article 6 of the Subsidies Agreement. The United States requested the Panel to limit the enquiry to the issue set out in the preceding paragraph and not to consider whether the United States had subsidized the production of grain corn, or whether this subsidization may have contributed to a decline in the world market price for grain corn, or even whether this decline in the world market price constituted injury to the Canadian domestic industry in the form of depressed prices for grain corn. The United States further requested the Panel to recommend to the Committee that the Committee request Canada to bring its measure into conformity with its obligations under the Subsidies Agreement. Canada requested the Panel to find that the CIT's determination of injury was fully consistent with the requirements of Article 6.

5.2 Consistency of CIT Determination with Article 6

5.2.1 The Panel noted that the following provisions of Article 6 of the Subsidies Agreement are relevant in this case 21:

"1. A determination of injury 22 for purposes of Article VI of the General Agreement shall involve an objective examination of both (a) the volume of subsidized imports and their effect on prices in the domestic market for like products and (b) the consequent impact of these imports on domestic producers of such products.

2. With regard to volume of subsidized imports the investigating authorities shall consider whether there has been a significant increase in subsidized imports, either in absolute terms or relative to production or consumption in the importing signatory. With regard to the effect of the subsidized imports on prices, the investigating authorities shall consider whether there has been a significant price undercutting by the subsidized imports as compared with the price of a like product of the importing signatory, or whether the effect of such imports is otherwise to depress prices to a significant degree or prevent price increases, which otherwise would have occurred, to a significant degree. No one or several of these factors can necessarily give decisive guidance.

3. The examination of the impact on the domestic industry concerned shall include an evaluation of all relevant economic factors and indices having a bearing on the state of the industry such as actual and potential decline in output, sales, market share, profits, productivity, return on investments, or utilization of capacity; factors affecting domestic prices; actual and potential negative effects on cash flow, inventories, employment, wages, growth, ability to raise capital or investment and, in the case of agriculture, whether there has been an increased burden on Government support programmes. This list is not exhaustive, nor can one or several of these factors necessarily give decisive guidance.

4. It must be demonstrated that the subsidized imports are, through the effects 23 of the subsidy, causing injury within the meaning of this Agreement. There may be other factors 24 which at the same time are injuring the domestic industry, and the injuries caused by other factors must not be attributed to the subsidized imports."

5.2.2 The Panel noted that Article 6.1 directs that a determination of injury be based on positive evidence and include an objective examination of (a) the volume of subsidized imports and their effect on prices of the like product in the domestic market and (b) the consequent impact of these subsidized imports on the domestic industry; Article 6.2 gives more specificity on how to determine the volume and price effects of the subsidized imports; Article 6.3 specifies the factors which may be relevant in examining the impact of the subsidized imports on the domestic industry, including an additional factor in the case of agriculture, namely, whether there has been an increased burden on government support programmes; and Article 6.4 makes clear that there may be "other factors" which may at the same time be injuring the domestic industry, and the injury from these "other factors" must not be attributed to the subsidized imports. The Panel decided to examine these elements successively.

5.2.3 As the Panel considered that paragraphs 2, 3 and 4 of Article 6 provide more detailed guidance on the interpretation and application of Article 6.1, it was appropriate to begin its analysis of the CIT decision by considering if the CIT, in accordance with Article 6.2, examined whether there had been a significant increase in imports of subsidized grain corn from the United States, either in absolute terms or relative to production or consumption in Canada. In this regard, the Panel noted that the CIT briefly considered the question of imports, indicating that "imports into Canada have existed in recent years, albeit at modest levels". 25 The import data available to the CIT indicated that Canadian imports of grain corn fell in the last full year of the CIT investigation, and had also declined in the 1983-84 and 1985-86 crop years. Except for a surge in the 1984-85 crop year, there had been a steady decline in imports since the peak in 1980-81. 26 The CIT also commented that

"other indicia of injury normally considered, such as increased imports and loss of sales and employment, are not present in this case because Canadian corn producers have accepted lower prices in order to maintain sales in the face of the potential inflow of low-priced U.S. corn". 27 (emphasis added)

5.2.4 Whereas the CIT did not find evidence of increased imports in this case, the Panel noted that the CIT made reference to the "potential or likely imports" that would occur in the absence of a price response by Canadian producers. 28 The Panel recalled that Canada, in its submissions to the Panel, argued that this reference by the CIT to "potential or likely imports" was the basis for its finding that subsidized imports had caused injury. The CIT stated in its Finding, after concluding that the subsidization of United States grain corn caused material injury to Canadian corn producers,

"Since the economic and commercial realities of international trade dictate that price be met or market share lost, the majority ... is persuaded to adopt the broader interpretation of 'subsidized imports,' that is, that cognizance be taken of potential or likely imports in the determination of material injury. ... In the case of grain corn, imports into Canada have existed in recent years, albeit at modest levels. The issue, therefore, is not whether imports have taken place, but whether they would have increased substantially in the absence of a price response by the domestic producers to the subsidized U.S. grain corn. Given the openness of the Canadian market, much higher levels of imports would have been a certainty." 28 (emphasis added)

The Panel considered that any effort at quantification of this notion of potential imports, as enunciated by the CIT, to determine the volume of imports which would have occurred in the absence of an adequate price response by the domestic producers would be a speculative exercise and had potentially very broad implications for the countervailing duty remedy.

5.2.5 Thus, the Panel came to the conclusion that the CIT did not consider positive evidence of the level or trend of United States subsidized imports of grain corn into Canada 29, as required by Article 6.2.

5.2.6 The Panel then examined whether, pursuant to Article 6.2, the CIT examined the price effects of subsidized imports in the domestic market. On this point, the Panel first noted that the CIT did not have any information with respect to actual import prices and did not attempt to collect any statistics on this basis. 30 The Panel also noted that the CIT did not consider any evidence of price undercutting. As the Panel recalled, much of the CIT opinion was devoted to a discussion of the decline in world market prices for grain corn and its impact on Canadian producers. The CIT concluded that

"the price declines experienced by Canadian grain-corn producers are of a magnitude such as to constitute material injury, whether borne by the farmer directly in terms of reduced income, or indirectly by increased burden on government-support programs". 31

It then went on to analyze the relationship between the 1985 Farm Bill of the United States and this world price decline, concluding that

"the dramatic decline in the international price for corn is, in very large measure, a direct consequence of the provisions of the 1985 Farm Bill ... Because of the open nature of the Canadian market these lower prices were transferred to Canada, with substantial adverse effect on Canadian producers. ... For these reasons, the majority ... concludes that the subsidization of U.S. grain corn has caused, ... is causing ... [and] will continue to be a cause of material injury to the Canadian production of like goods." 32

The Panel noted however that whereas the CIT equated the world market price decline with the decline and depression of the price for corn in the Canadian market, the CIT did not attempt to make a link between subsidized imports and the price decline and depression in the Canadian market. No positive evidence was adduced on this point. Also, rather than attempting to investigate actual import price data, the CIT considered

"that, generally, Canadian corn must be priced competitively with the cost of landing corn from the United States; in fact, buyers look to the Chicago Board of Trade price in deciding what they will offer for Canadian corn, and sellers look to the Chicago price in deciding the price they are prepared to accept." 33

Thus, the CIT discussed the effect of the Chicago price for grain corn on the Canadian price for the like product, but did not examine the effect of subsidized imports on the Canadian price. The CIT concluded that the Canadian grain corn producers had virtually no choice but to match the United States (Chicago) price or lose sales, but did so without considering any positive evidence on price depression or sales lost due to subsidized imports. The Panel accordingly found that the CIT did not consider the price effects of subsidized imports, as required by Article 6.2.

5.2.7 The Panel then examined whether the CIT determination complied with the provisions of Article 6.3 and 6.4, which require the examination of the consequent impact of the subsidized imports on the domestic industry, and a demonstration that the subsidized imports are, through the effects of the subsidy, causing the material injury to the domestic industry. Injuries caused by other factors must not be attributed to the subsidized imports. With respect to Article 6.3, the Panel noted the following statement of the CIT:

"The essential question to be addressed is whether the operation of the 1985 U.S. Food Security Act, which, as the Deputy Minister found, subsidized grain corn produced in the United States, was such as to cause prices in Canada to decline to levels judged to be of a material nature. Other indicia of injury normally considered, such as increased imports and loss of sales and employment, are not present in this case because Canadian corn producers have accepted lower prices in order to maintain sales in the face of the potential inflow of low-priced U.S. corn." 34 (emphasis added)

The CIT thus did not consider the "indicia of injury normally considered", and focused on the impact of the decline in world market price for grain corn in terms of the declining price for grain corn in Canada and the increased burden on government support programmes in Canada. The Panel recalled that increased burden on government support programmes is an additional element that, in accordance with Article 6.3, the investigating country may take into consideration in the case of subsidized imports of agricultural products. However, the Panel noted that consideration of this additional element did not justify a non-consideration of the mandatory elements of Article 6.2, i.e. the volume and price effects of subsidized imports. Here, the CIT did not consider positive evidence required to show that the increased burden on government support programmes was a result of subsidized imports. Instead, the CIT's finding regarding the increased burden was based on the world market price decline, which the CIT attributed -- at least in major part -- to the 1985 Farm Bill in the United States. Thus, in the view of the Panel, the CIT determination did not properly examine the relevant evidence of the impact of subsidized imports on the domestic industry, as required by Article 6.3 and 6.4.

5.2.8 With respect to the requirements of Article 6.4, the Panel noted that the CIT acknowledged the existence of factors other than subsidized imports having an effect on the price of Canadian grain corn, but made no effort to ensure that the injuries caused by other factors were not attributed to the subsidized imports. The CIT referenced various factors which contributed to the build-up of stocks of grain corn in the United States, the reduction in United States exports and the consequent drop in the world market price. The factors enumerated included:

"worldwide recession; the increasing cost of U.S. product to importing countries; the increasing foreign debt burden of many developing countries, the servicing of which reduced their purchasing power; development of higher-yielding corn varieties combined with improved agricultural technology; and the U.S. embargo on grain exports to the U.S.S.R. in connection with the Afghanistan invasion, which caused some countries to regard the United States as an unreliable supplier. Whatever the reasons, many countries have chosen to adopt a policy of supplying a greater part of their need from local production." 35

The Panel noted that several of the items enumerated in the CIT decision were similar or identical to those mentioned in a footnote to Article 6.4, namely, "contraction in demand or changes in the pattern of consumption, ... developments in technology and the exports performance and productivity of the domestic industry". However, the CIT, contrary to the evidence in this case, attributed the injury only to subsidization of United States grain corn, and thus did not meet the express requirements of Article 6.4.

5.2.9 In the view of the Panel, the CIT's findings of injury and causality were themselves largely based on factors other than subsidized imports: in particular, the factor of a dramatic decline in world market prices resulting in large part from a United States subsidy under the 1985 Farm Bill. 36 Clearly, if there is a general and dramatic decline in world market prices for grain corn, this will affect Canadian producers. It will affect Canadian producers even if Canada does not import any grain corn from the United States, even if it imports grain corn from third countries, even if it is completely self-sufficient in grain corn or, indeed, even if it is a net exporter of grain corn, as it was in some crops years during the period of the CIT investigation. In each case, the Canadian price for corn would still be directly impacted -- in a material way -- by the world price decline. Thus, the price depression experienced in the Canadian market would have occurred in all such cases, and the imposition of countervailing duties would be contrary to Article 6.4, which requires that price depression or prevention of price increases caused by other factors must not be attributed to subsidized imports. Since no case was made by the CIT that subsidized imports from the United States were responsible for the decline in prices suffered in Canada, the Panel concluded that the CIT determination was inconsistent with the requirements of Article 6 of the Subsidies Agreement.

5.2.10 The Panel considered that the purpose of countervailing duties is to allow signatories to counteract injury from subsidized imports, not from a general decline in world market prices. Only a generally applicable import tariff, not however a countervailing duty on imports from a particular country, can normally prove effective in raising the domestic price when there is a general decline in world prices. The fact that in the present case the countervailing duty may have been partially effective in raising the price of grain corn in Canada, in that the United States was the only viable source for imports given the existence of phytosanitary regulations which effectively barred all other imports, does not relieve Canada of the duty of making an injury determination in accordance with Article 6, namely, of showing that subsidized imports are the cause of material injury. The Panel of course recognized that a general decline in world market prices resulting from a foreign subsidy may cause serious problems to domestic producers, and that this may have occurred in the present case. In this regard, the Panel recalled that the Subsidies Agreement takes account of situations where subsidies may cause injury which may not be remedied by countervailing duties, and provides for procedures to address such situations in Article 13.4.

6. CONCLUSIONS

6.1 The Panel concludes that the determination of injury by the CIT in respect of "Subsidized Grain Corn Originating In or Exported from the United States of America" is not consistent with the requirements of Article 6 of the Subsidies Agreement because the CIT did not determine on the basis of positive evidence relating to subsidized imports of grain corn from the United States that material injury to Canadian grain corn producers was caused by such imports.

6.2 The Panel recommends that the Committee request Canada to bring its countervailing duty measure into conformity with Canada's obligations under the Subsidies Agreement.


18 Finding of the Canadian Import Tribunal, page 9 and 19.

19 Emphasis by the European Community. The Community said that this statement was based on Article 6.1 and footnote 17.

20 Finding of the Canadian Import Tribunal, page 19.

21 The parts of the provisions which the Panel considered particularly relevant are underlined.

22 "Determination of injury under the criteria set forth in this Article shall be based on positive evidence. In determining threat of injury the investigating authorities, in examining the factors listed in this Article, may take into account the evidence on the nature of the subsidy in question and the trade effects likely to arise therefrom."

23 "As set forth in paragraphs 2 and 3 of this Article."

24 "Such factors can include, inter alia, the volume and prices of non-subsidized imports of the product in question, contraction in demand or changes in patterns of consumption, trade restrictive practices of and competition between the foreign and domestic producers, developments in technology and the export performance and productivity of the domestic industry."

25 Finding of the Canadian Import Tribunal, page 16.

26 Finding of the Canadian Import Tribunal, page 20.

27 Finding of the Canadian Import Tribunal, page 9.

28 Finding of the Canadian Import Tribunal, page 16.

29 The Panel noted that the CIT dissent contained the following statements on this issue:

"An examination of the record discloses that U.S. imports have been on a declining trend since the early '80s. ... While in some years Canada is a net exporter of corn, in others it is a net importer. In recent years, the volume on either account is less than 10 per cent of production. More recently, exports have exceeded imports. ... The conclusions I draw from the evidence is that Canada is basically self-sufficient in grain corn, that it is not a U.S. export target, that imports enter Canada on a need, or perceived need, basis and not because of any price advantage. ... The reality of trade in corn is that the world pricing mechanism inhibits exports to countries which are self-sufficient in corn, as is Canada, except for special circumstances of geography or need." Finding of the Canadian Import Tribunal, Dissenting Views, pages 32 and 35.

30 See paragraph 3.2.28 above.

31 Finding of the Canadian Import Tribunal, page 10.

32 Finding of the Canadian Import Tribunal, page 14.

33 Finding of the Canadian Import Tribunal, page 10.

34 Finding of the Canadian Import Tribunal, page 9.

35 Finding of the Canadian Import Tribunal, pages 11-12.

36 Finding of the Canadian Import Tribunal, page 14.