21 February 1992

1.1 Since 1987, the United States has consulted with Canada on several occasions regarding the latter's countervailing duty investigation and subsequent determination of injury from grain corn imports from the United States. Following the failure to reach a mutually satisfactory solution through consultations in early 1987 under Article 3 of the Agreement on Interpretation and Application of Articles VI, XVI and XXIII of the General Agreement (the "Subsidies Agreement"), the United States requested consultations with Canada under Article 16.1 of the Subsidies Agreement on 30 April 1987 (SCM/82). These consultations, held on 30 July 1987 and 29 June 1989, did not result in a mutually acceptable solution to the matter. On 2 October 1989, the United States referred this matter to the Committee on Subsidies and Countervailing Measures (the "Committee") for conciliation pursuant to Article 17 of the Subsidies Agreement (SCM/95). As the conciliation process did not lead to a resolution of this dispute, the United States, on 8 July 1991, requested the establishment of a panel under Article 18 of the Subsidies Agreement to examine the matter (SCM/118).

1.2 At its special meeting on 18 July 1991, the Committee agreed to establish a panel on the matter (SCM/M/52). The representative of the European Community reserved the Community's rights to intervene in the proceedings of the panel.

1.3 The Committee decided on the standard terms of reference provided in Article 18.1 of the Subsidies Agreement as follows (SCM/M/52):

Terms of Reference:

1.4 The composition of the Panel was agreed on 7 August 1991 as follows:

Composition

1.5 The Panel met with the parties on 27 September and 4 November 1991. It submitted its report to the parties to the dispute on 13 January 1992.

2.1 In the view of the Panel, the following are the factual aspects of this dispute.

2.2 On 2 July 1986, pursuant to the Special Import Measures Act (SIMA), the Government of Canada initiated a countervailing duty investigation of imports of grain corn from the United States. The complaint was filed by the Ontario Corn Producers Association, a group of Canadian producers located within the Canadian province of Ontario. The investigation period considered for this case was 1 January 1984 to 1 July 1986. On 20 March 1987, the Canadian Import Tribunal (CIT) issued an affirmative finding that "subsidizing of importations into Canada of grain corn from the United States has caused, is causing and is likely to cause material injury". ¹ In the Finding of the Canadian Import Tribunal, the section on the CIT's opinion included the following points.

2.3 Summary Of The CIT Opinion

The Main Features of the Canadian Market for Corn

2.3.1 The CIT stated that the Canadian market for corn received limited protection from international, and particularly United States, influences because the only measure of border protection for it was a low Canadian tariff (about 2% ad valorem equivalent tariff). In addition, due to the requirements of Canada's Plant Quarantine Act and the Animal Disease and Protection Act, the United States was the only viable source for its imported grain corn. Since the low Canadian tariff and transport costs

were the only barriers to Canadian imports of grain corn from the United States, the grain corn markets of Canada and the United States were closely integrated. There was an established history of importation of corn from the United States and the Canadian corn had to be priced competitively with the cost of landing United States corn. The spot and future prices for corn established by the trading activity at the Chicago Board of Trade were the prices looked to by all corn traders, not only in the United States but also in many other parts of the world. The actual delivered prices at any given destination were determined relative to the Chicago Board of Trade, with differences accounted for by transportation costs and special circumstances in local markets. The CIT noted that the primary factors determining the Chicago Board of Trade price at any time were the supply and demand for grain corn, with supply including the amount held in storage at any particular time.

2.3.2 As evidence of the close link between the corn prices in Canada and the United States, the CIT Pre-hearing Staff Report had noted that the time profiles of the Chatham price and the Chicago price were closely correlated, and the CIT referred to the open border and access to a ready source of supply of United States grain corn based on price. Regarding Canadian imports of grain corn, the CIT noted the evidence that import volume had progressively declined from 1,364 thousand tons in 1980/81 to 226 thousand tons in 1983/84, before increasing to 612 thousand tons in 1984/85. Subsequently, the import volume declined in 1985/86 to 416 thousand tons. ²

2.3.3 The CIT noted that the United States Food Security Act of 1985 subsidized grain corn produced in the United States, and also lowered the floor price of grain corn in that country. Moreover, the use of the Payments in Kind (PIK) Certificates by the United States allowed the stored corn "that is not supposed to be released to the market until the price rises well above the loan rate ... being released in massive quantities at prices well below the loan rate." ³ Given the dominance of the United States as a producer and exporter of grain corn in the world, the CIT concluded that the decline in United States price was in very large measure responsible for a dramatic decline in the international price for grain corn. On account of the open nature of the Canadian corn market, the Canadian producers had to accept lower grain corn prices in order to maintain domestic sales in the face of low-priced United States corn. 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. The CIT noted that since the Canadian farmers had accepted lower prices to maintain sales, other indicia of injury normally considered, such as increased imports and loss of sales and employment, were not present in this case.

2.3.4 The CIT took account of the fact that for any primary agricultural product, a consideration of injury includes an increase in the financial burden on a federal or provincial agricultural support programmes. In the case at hand, the CIT noted that though the costs associated with the prevailing low prices were initially being borne primarily by the government support programmes, the burden would shift to the Canadian producers in future years because the support levels were determined mainly in relation to historical price levels.

2.3.5 For the reasons given above, and taking into account the increase in the competitiveness of the United States corn producers due to the United States government subsidies which also insulated them from the decline in prices, the CIT concluded "that the subsidization of United States grain corn has caused and is causing material injury to Canadian corn producers." ⁴ In addition, the CIT found that the subsidization of United States grain corn would continue to cause material injury to the Canadian producers of like goods because there was every indication that the prevailing conditions (i.e., the subsidy and large supply of subsidized grain corn in the United States whereby the lower prices were transferred to Canadian producers because of the open nature of trade in grain corn between Canada and the United States), would persist for some time.

2.3.6 Both parties to the CIT injury investigation raised the issue of the interpretation of subsidized imports. In responding to the various arguments raised the CIT view was that, "Both the Special Import Measures Act and the GATT Subsidies Code exist for the express purpose of dealing with unfairly traded goods which cause or threaten injury. Necessarily, their provisions must be interpreted, not in the abstract, but within the context of the environment within which they apply, namely, international trade. Since the economic and commercial realities of international trade dictate that price must be met or market share lost, the majority of the panel 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. To do otherwise, in the view of the majority of the panel, would be to frustrate the purpose of the system." ⁵

2.3.7 Thus, in this case of price suppression, the CIT included in the definition of subsidized imports actual and potential or likely imports for the purpose of establishing the causal link between subsidized imports and material injury which is required for imposing a countervailing duty. The inclusion of potential or likely imports was based on the argument that these imports would have actually occurred had the Canadian producers not lowered their prices. The CIT opinion in this context was that, "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. corn. Given the openness of the Canadian market, much higher levels of imports would have been a certainty." ⁵

2.3.8 One member of the CIT dissented with the majority view ⁶, saying that "even if the premise be accepted that the subsidization has contributed to the depressed world price, no case has been made that U.S. subsidized imports into Canada are responsible for the harm being suffered". ⁷ The dissenting member said that an array of factors impacted on the world price, and for the complaint to succeed, the injury suffered must be related to subsidized imports and not simply to the availability of trans-border stocks at depressed world prices, i.e. the issue was one of causality. Arguing that, "the evidence is that Canada is basically self-sufficient in grain corn, that it is not a U.S. export target, that imports [of grain corn] enter Canada on a need, or perceived need, basis and not because of any price advantage" ⁸, the dissenting member was of the view that the required causality had not been demonstrated in this case. Regarding likelihood of injury, the dissenting member's opinion was that it "would be sheer speculation and conjecture to hold that, in the absence of a countervailing duty, subsidized imports would enter Canada in such volume as to cause material injury. 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 and need". ⁹

3.1 Findings sought by the Parties

3.1.1 The issue before the Panel was to examine whether Canada acted in a manner consistent with its obligations under Article 6 of the Subsidies Agreement in making a determination that the subsidization of United States grain corn had caused, was causing and was likely to cause material injury to Canadian corn producers. 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 the Subsidies Agreement, and to recommend to the Committee that the Committee request that Canada bring its measure into conformity with its obligations under the Agreement.

3.1.2 Canada requested the Panel to find that the CIT injury finding with respect to imports of grain corn from the United States was consistent with Article 6 of the Subsidies Agreement.

3.2 Nature of the Evidence as Required by Article 6

3.2.1 The United States said that the type of evidence used by the CIT for determining injury did not meet the requirements of Article 6 of the Subsidies Agreement. The United States contended that instead of investigating the volume and price effects of imports from the United States on Canadian prices on the basis of positive evidence, the CIT made an affirmative injury determination on the basis of mere presence of some imports from the United States together with price suppression, which as the CIT found, resulted from lower world prices. Similarly, with regard to threat of injury and inclusion of potential imports in the volume of subsidized imports, the United States said that positive evidence was neither sought nor adduced by the CIT in support of an affirmative determination that the effects of U.S. imports in Canada, or that significantly increased volumes of U.S. imports, were imminent and likely. For these reasons, the United States claimed that the CIT had demonstrated neither threat nor present injury in conformity with requirements of the Subsidies Agreement, and that "the CIT determination rests on a mere assumption rather than on positive evidence necessary for an affirmative determination under the Code".

3.2.2 Canada said that the CIT had used appropriate evidence in this case. In its determination of injury, including threat to domestic like products, the CIT had sought and examined carefully the relevant and feasible positive data on subsidized imports, import prices and the indices of injury. Thus, Canada argued that the CIT had met the requirements specified for determining injury under Article 6 of the Subsidies Agreement.

3.2.3 According to the United States,

Thus, the United States argued that the CIT's demonstration of material injury under the Subsidies Agreement should have been based on positive evidence of the volume of imports from the United States, their market share over time, the actual prices at which subsidized imports entered Canada and the effect of these prices on Canadian producers in terms of loss of sales or inability to maintain or raise prices.

3.2.4 Canada agreed that for an injury determination, there must be actual imports of the subsidized product and that these imports must be examined, considered and taken into account. Canada said there were actual subsidized imports and that the CIT examined these imports. Canada noted further that Canadian law did not permit a finding of injury in the absence of actual subsidized imports. Its Special Import Measures Act required that an investigation be terminated prior to the making of a preliminary determination where, inter alia, the actual or potential volume of imports was negligible. The subsidized imports of grain corn which were the subject of the preliminary determination by Canada's Deputy Minister of National Revenue were explicitly referred to and taken into account by the CIT. ¹⁰

3.2.5 Canada referred to the fact that, as stated in the CIT Pre-hearing Staff Report, the CIT first examined the actual subsidized imports of United States corn, and then turned to a detailed examination of the effects of the United States subsidies provided under the 1985 Farm Bill in order to assess the effect of existing and future subsidized corn imports. In its examination, the CIT had considered the volume of imports, and had noted that their trend had varied during the period of investigation and the period preceding the investigation. The investigation made it clear to the CIT that the price of Canadian corn was set by the United States market, and that much more than the normal volume of corn would flow into Canada unless domestic producers matched the price of subsidized imports.

3.2.6 The United States said that the mere noting of the presence of actual imports was not sufficient for an affirmative determination under the Subsidies Agreement. According to the United States, demonstration of injury under the Subsidies Agreement must be grounded in an analysis of actual imports, using positive evidence to make a determination, and the CIT had not met this requirement.

3.2.7 Canada agreed with the United States' observation that when looking at the issue of price undercutting, the investigating authority must, necessarily, examine the actual price and sales data. Canada pointed out, however, that Article 6.2 of the Subsidies Agreement provides that the investigating authority shall consider price undercutting or price depression (emphasis by Canada). The consideration of price undercutting is, thus, one of two options and is not mandatory as the United States had asserted (emphasis by Canada). Canada said that the CIT concluded from its examination that loss of sales and increased imports were not present in this case. Accordingly, the CIT focused its consideration on the price depression or suppression element, thereby fully meeting the obligations of Article 6.2. Further, Canada noted that on examining the situation, the CIT had concluded that the immediate effect of price suppression was being borne by the government support programmes, rather than by a loss in market share of the domestic producers. ¹¹

3.2.8 The United States pointed out that the CIT did not draw a nexus between the effects of subsidized imports (as required by Article 6.2) and any other factor in Article 6.3, including an "increased burden on government support programmes". The United States also said that increased burden on government support programmes as set out in Article 6.3 was not intended to substitute for other factors set out in this Article regarding the impact of imports. Article 6.3 provided that an injury analysis include an examination of all the relevant economic factors including the impact on agricultural support programmes.

3.2.9 Canada said that its contention was not that the increased burden on government support programmes was intended as a substitute for other factors set out in Article 6.3. Canada's intent was simply to highlight that the Subsidies Agreement recognised, in the case of agricultural products, that the normal indices of injury may not apply and that the impact of subsidization may be felt more or even predominantly in terms of increased pay-outs to producers from government support programmes (emphasis by Canada). Canada mentioned that the CIT had examined other indices of injury, but determined that in this case, they were not applicable given the nature of the injury in terms of price suppression and the existence and operation of domestic government support programmes. ¹²

3.2.10 The United States argued that though the CIT had noted the increased burden on government support, it had not demonstrated the price and volume effects of the imports from the United States, on which basis an evaluation of their impact on the Canadian industry - including with reference to the Canadian support programmes - might have occurred. The volume, market share, and pricing of the imports were not discussed or tied to a finding of a causal link between the subsidized imports and the material injury.

3.2.11 Canada said that Article 6 allowed that in addition to an examination of subsidized imports which actually crossed the border, authorities may also examine the effects of potential subsidized imports when this was appropriate to determine causality between subsidized imports and material injury suffered or threatened to domestic producers of like goods. In the case at hand, given the open border, a highly price sensitive, highly fungible commodity, readily available in large volumes to the Canadian domestic consumers in the form of low priced subsidized United States imports, a larger volume of grain corn imports would have been a certainty if the Canadian producers had not responded with lower prices to the subsidized imports. Canada said that for a price sensitive, fungible commodity such as grain corn, if domestic producers match the lower import price, actual imports do not increase - in fact they may even decrease for a time depending on the capability of the producers, in conjunction with the support programmes, to meet the unfair competition. Thus Canada maintained that in addition to an examination of actual imports, by considering potential or probable imports, the CIT had fully taken into account the relevant subsidized imports and had made a clear linkage between these imports and the material injury suffered by domestic producers. According to Canada, injury due to price suppression from potential or probable imports was no less real than that caused by actual imports, and therefore, the examination of probable or potential imports conducted by the CIT in its investigation of material injury was both reasonable and in accordance with commercial reality in certain cases, including the present one.

3.2.12 The United States agreed that an injury determination, particularly in the case of price suppression or depression, need not be limited to actual imports which had crossed the border. However, the United States said that the determination of injury on the basis of potential or likely imports as used by the CIT had introduced a standard which was broad and ambiguous, and was susceptible to far more than one definition and interpretation. In this context, the United States pointed out that even Canada had had difficulty defining "potential imports" and had used a number of different attempted definitions of the term during the Panel proceedings. The United States argued that allowing the standard used by the CIT under the Subsidies Agreement would result in material injury being demonstrated on the basis of speculative or hypothetical imports. The United States pointed out that a threat of material injury analysis under the Subsidies Agreement can only be caused by imports whose future entry is imminent, not by imports that "would have" happened in the past but never in fact did, as asserted by the CIT. To characterize a continuing but never-realized possibility as a "threat" was to permit a countervailing duty to be imposed under virtually any circumstances.

3.2.13 According to the United States, an unambiguous and non-speculative interpretation of the Subsidies Agreement required that if an investigation of injury had to include a consideration of subsidized imports other than those which had already crossed the border, the coverage of such subsidized imports be limited to sales for importation which had been completed or were imminent. ¹³ The United States contended that the CIT had not met such a requirement because it did not base its determination on, for example, actual, binding sales or contracts to sell. Instead, "what the CIT considered, thus, was essentially an open-ended offer to sell, to the world, at a given price."

3.2.14 Canada said that in the context of this case, by "potential" imports the CIT was not referring to goods which were hypothetically capable of being imported, but to those imports which were probable, i.e. those imports that were or are available - on offer - and had or have a high probability of being sold for import into the market of the investigating country. Pointing out that the United States had agreed that it may be proper to include sales for importation which had been completed or were imminent, Canada said that in the case of grain corn, the imminence of sales was a critical factor in the consideration of the effect potential imports had on prices. The CIT had found that there was a large supply of highly subsidized United States grain corn that was readily available for export to Canada ¹⁴, the United States was the only viable source for imported grain corn, bilateral trade was essentially unrestricted except for a low tariff and transportation costs, the buyers in Canada were indifferent between domestic and United States sources for grain corn, there was a ready access of buyers in Canada to supplies from the United States, and there was an established pattern of trade in grain corn between Canada and the United States. Canada argued that in this situation, with the Chicago Board of Trade price being known and given for the relevant buyers and sellers, the sales of imported United States corn were imminent (or a certainty as the C.I.T. had concluded), unless Canadian producers matched the given price.

3.2.15 Further, Canada maintained that since the CIT had logically examined those imports which would have flowed in the past or would flow in the future if the domestic producers did not match the subsidized import price, the United States was not correct in claiming that the CIT had considered only "essentially an open-ended offer to sell, to the world, at a given price". For the same reason, a consideration of probable or potential imports as used by the CIT did not open the door to abuse of the injury provisions.

3.2.16 Regarding the use of more than one definition of potential imports by Canada in these proceedings, Canada said that the definitions were not different; the alternative definitions were merely an elaboration of the first definition.

3.2.17 The United States replied that the CIT had used the term "potential imports" only in passing and had neither announced nor applied the definitions of this term that had been offered by Canada in the Panel proceedings. According to the United States, the arguments given by Canada were an elaborate post-hoc rationalization of a concept which was not made the centrepiece of the CIT finding. The United States said that the CIT had offered no evidence to support its assertion that much higher levels of imports from the United States would have been a certainty. The mere existence of a world spot-market for a fungible, low-value commodity like corn did not necessarily establish that imports from the United States into Canada adversely affected the industry. To substantiate this point, the United States quoted the dissenting member of the CIT who had said that, "there is nothing new about the corn granary of the world being situated just next door ... 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 ...". ¹⁵ The United States thus argued that even if it was assumed that Canada's definition of potential imports was correct, the Subsidies Agreement's requirement that an injury determination be based on positive evidence concerning the volume and price effects of imports, had not been met by the CIT.

3.2.18 Canada stated that practically speaking, any attempt to measure the level of the potential subsidized imports which would have occurred in the absence of domestic price suppression would be a purely speculative exercise. The basis of the CIT decision was, rather, more appropriately focused on the effects of the price suppression caused by the subsidized imports (including potential or probable subsidized imports which would have occurred in the absence of a price response by the Canadian corn producers), and whether there was a causal link to the material injury suffered by the Canadian corn producers.

3.2.19 Regarding threat of injury, the United States said that the Subsidies Agreement required that a threat of material injury be real and imminent, and be based on positive evidence. However, the United States said that the Subsidies Agreement did not provide significant guidance on how to conduct a threat analysis. The United States argued that for this purpose, better guidance was available from the Anti-dumping Agreement, which had been negotiated at the same time, and went into greater detail by establishing a number of requirements for conducting a threat analysis. Quoting from Article 3.6 of the Anti-dumping Agreement, the United States said that:

3.2.20 The United States presented several arguments to claim that the required criteria had not been met by Canada in this case. Thus, according to the United States, the CIT had provided no evidence of the likelihood of "substantially increased imports" in the immediate future, and the CIT had not adduced any evidence that material injury resulting from imports from the United States was clearly foreseen and imminent. The United States said that the CIT record showed that in the latest crop year for which data were available, imports from the United States had declined by about one-third, while the Canadian consumption had actually increased, resulting in a sharp fall in the Canadian market share held by the United States. Similarly, there was no evidence of binding contracts to supply an increasing amount of the subsidized product for importation in the immediate future nor a trend of increasing United States stocks diverted to the Canadian market. According to the United States, the CIT had not found a convincing reason to believe that the United States would unload its stocks of corn onto the Canadian market in the near future. The United States argued that on the basis of the available evidence, it would be inconsistent with any rational determination under the Subsidies Agreement that a threat of material injury was imminent by reason of imports of corn from the United States. According to the United States, reliance on potential imports alone as a basis for a threat determination could allow an affirmative determination simply on the basis of underutilized capacity in the exporting country, without any evidence of a likelihood that such exports would be directed to the country conducting the investigation. The United States quoted the CIT finding, "that the United States is able to transfer its farm policies to international markets has been demonstrated, with the exception of its ability to expand exports. ... Despite dramatically lower prices and the availability of export assistance programs, the U.S. has not succeeded in improving export performance." ¹⁶ (emphasis added by the United States)

3.2.21 Commenting on the trends in grain corn imports, Canada said that rather than following a downward trend, the level of imports had varied. In this context, Canada mentioned that the level of Canadian imports of grain corn had increased in the three years preceding the investigation. Various factors at any time affected the normal level of imports. In the period of investigation during which there was price suppression there had been a high crop yield which would normally have reduced import needs. In addition Canadian farmers had no choice but to match lower import prices, and their action had affected the level of Canadian imports.

3.2.22 With regard to the United States' point that a threat of material injury must be real and imminent, and be based on positive evidence, Canada said that the CIT had considered the market situation and had determined that the disposal of United States surplus of grain corn was an ongoing process, which would not be ending soon. ¹⁷ On the basis of the evidence before it, the CIT had determined that the injury to domestic like goods due to price suppression was likely to continue in the future as the large volume and the low price of the subsidized United States grain corn would not diminish in the foreseeable future. Thus the CIT had concluded that in the absence of a price response by the Canadian producers, increased subsidized imports would be a certainty. Furthermore, Canada pointed out that the CIT had considered the effect of the United States' subsidization on Canada's government support programmes, and had found that "the cost of prevailing lower prices was being borne by those programmes, but that because support payments were determined in relation to historical price levels, the burden would shift to producers in future years." Thus, Canada argued that the CIT had used positive evidence to find threat of material injury to Canadian producers of like goods.

TO CONTINUE WITH PANEL ON CANADIAN COUNTERVAILING DUTIES ON GRAIN CORN FROM THE UNITED STATES

¹ The conclusion of the CIT is given on page 19 of the "Subsidized Grain Corn Originating In or Exported From the United States of America, Finding of the Canadian Import Tribunal in Inquiry No. CIT-7-86 under Section 42 of the Special Import Measures Act", dated 6 March 1987 (herein referred to as "Finding of the Canadian Import Tribunal").