(b) The Relevance of the Vienna Convention and Negotiating History

4.140 New Zealand argued that there was no need to define the term "subsidy" in the abstract. The term needed definition when it arose in the context of a particular provision of the Agreement. What constituted an export subsidy under Article 10 would necessarily differ from what constituted an export subsidy under Article 9, because Article 10 was concerned with export subsidies that were not listed in Article 9. Yet both articles used the term "subsidy". The correct approach to interpretation in the case at issue was to apply the customary principles of interpretation of public international law as required by Article 3 of the DSU. This meant applying the principles of interpretation set out in the Vienna Convention on the Law of Treaties - that is, giving words their ordinary meaning in their context and in the light of the object and purpose of the treaty as a whole.

4.141 New Zealand argued that there was nothing in the negotiating history of the Agreement on Agriculture or the SCM Agreement that suggested that the negotiators intended that the definition of "subsidy" in the SCM Agreement would be simply accepted as the definition of subsidy in the Agreement on Agriculture, or for that matter in other WTO Agreements. Indeed, the fact that the negotiations were conducted separately, and that two separate Agreements were concluded, suggested that, contrary to the Canadian position, there was no understanding reached that the definition of Article 1 of the SCM Agreement would be the exhaustive or governing definition of subsidy for the purposes of the Agreement on Agriculture. Furthermore, the negotiators did not purport to work out all the details of the relationship between the two Agreements. It was well understood at the end of the Uruguay Round that the relationship between the Agreement on Agriculture and the SCM Agreement was to be worked out in practice. ¹⁵⁰

4.142 New Zealand argued that the Uruguay Round did not result in a universal definition of the term "subsidy" for the purposes of all of the WTO Agreements. There was a definition for the purposes of the SCM Agreement in Article 1 of that Agreement, although that definition had also to be read in the light of the list of export subsidies in the Illustrative List. The Agreement on Agriculture did not contain any such definition. Thus, in interpreting the Agreement on Agriculture other definitions in the WTO Agreements, in particular the SCM Agreement, were relevant but not determinative.

4.143 The United States noted that although the Agreement on Agriculture did not list all export subsidies or define the term "subsidy," the Appellate Body had indicated that it was neither necessary nor appropriate to confine the interpretative analysis of the terms of an Agreement to the text of the particular treaty provision. ¹⁵¹ In addition, treaty interpreters could look to the customary rules of interpretation of public international law reflected in the Vienna Convention for assistance in construing the terms of a treaty provision. As an additional aid to interpretation the Appellate Body had emphasized Article XVI:1 of the WTO Agreement ¹⁵² which provided that:

4.144 The United States noted that the reports developed under GATT Article XVI, the Tokyo Round Agreement on Interpretation and Application of Articles VI, XVI, and XXIII of the GATT ("the Subsidies Code"), and the SCM Agreement were therefore relevant to interpretation of the term "export subsidy" as used in the Agreement on Agriculture.

4.145 The United States noted that a recurring theme appeared in the GATT and WTO discussions of subsidies. There had long been a reluctance to provide a specific and exhaustive definition of the term "subsidy" for fear of inadvertent exclusion of a particular practice or inability to foresee the development of some new type of subsidy. ¹⁵⁴ Thus, a 1960 panel on subsidies noted the longstanding lack of an explicit definition for the term. ¹⁵⁵ Another panel "considered that it was neither necessary or feasible to seek an agreed interpretation of what constituted a subsidy." ¹⁵⁶ Despite this initial reluctance to confine the scope of the term subsidy by compiling lists of recognized subsidy practices, panels had identified various guidelines inherent in the GATT rules on subsidies as to what could be considered to fall within the term subsidy and what lay outside. ¹⁵⁷ Article 1 of the SCM Agreement now provided a definition of subsidy.

4.146 The United States noted that one of the first illustrative lists of subsidies was contained in a 1960 Working Party Report, which was the precursor for the illustrative lists contained in both the Tokyo Round Subsidies Code and the WTO SCM Agreement. ¹⁵⁸ That Report set forth a detailed list of measures that had been considered to be export subsidies by a number of Contracting Parties, including both the United States and Canada. ¹⁵⁹ Among the practices determined to be an export subsidy were the deliveries by government or governmental agencies of production inputs "for export business on different terms than for domestic business ... " ¹⁶⁰ This was, in the view of the United States, the essence of the Special Milk Classes Scheme, which provided for provincial government dairy boards to deliver discounted milk to manufacturers of dairy products for export. During the same year, another panel examined the scope of the export subsidy reporting requirement under Article XVI of GATT 1947. ¹⁶¹ The panel in its review considered whether producer-financed subsidies were notifiable under Article XVI and determined that they were subject to the reporting requirement where the "levy/subsidy schemes affecting imports or exports ... are dependent for their enforcement on some form of government action." ¹⁶² The panel's conclusion was that producer-financed export subsidies that were part of a government-directed system were essentially indistinguishable from direct government export subsidies. ¹⁶³

4.147 The United States argued that the analysis of the May 1960 panel was also reflected in work prepared by the GATT Secretariat in support of the Uruguay Round negotiations on the Subsidies and Countervailing Measures Agreement. In a paper prepared by the Secretariat, broadly examining a variety of issues pertinent to the subsidies negotiations, ¹⁶⁶ the Secretariat recounted the discussion of the 1960 Panel Report and its conclusions regarding the lack of a meaningful distinction between the producer-financed export subsidies that were enforceable by a government and direct government subsidization of exports. ¹⁶⁷ The United States noted that the SCM Agreement recognized in Article 1.1(a)(1)(iv) that entities other than governments could perform functions normally vested in the government, and that that could also constitute a subsidy (this argument is further developed in paragraph 4.333 and following).

4.148 The United States pointed out that in the Uruguay Round, producer-funded export assistance with significant government related action continued to be viewed as an export subsidy. Thus, the discussions during the Uruguay Round in the Secretariat papers prepared for the Chairman of the Committee on Agriculture ¹⁶⁸ , as well as the proposed framework agreement developed by Chairman de Zeeuw ¹⁶⁹ and the notes prepared by Chairman Dunkel ¹⁷⁰ all characterized producer-financed export assistance as export subsidies. The only issue that surrounded producer-financed export payments and other producer-financed export assistance was not whether they were export subsidies, but whether they should be exempted from any disciplines imposed on export subsidies on agricultural products. The Agreement on Agriculture resolved this question by including such subsidies in Article 9.1 of the Agreement.

4.149 The United States argued that producer-financed export subsidies had been treated as export subsidies because they were likely to have the same distorting effect on trade and competition as subsidies paid from a government treasury. Producer-financed subsidies conferred a benefit on the exported product and, when substantial government involvement was present, as in Canada's Special Milk Classes Scheme, the resulting subsidy could not be distinguished from purely governmental action. This fact was recognized in Article 9.1(c) of the Agreement on Agriculture that provided that producer-financed export payments were an export subsidy subject to the Agreement's reduction commitments (further developed in paragraph 4.196 and following).

4.150 In this respect, the United States pointed out that Article 9.1 of the Agreement on Agriculture referenced six broad classes of export subsidy practices which were subject to reduction commitments. There had been no apparent effort in Article 9.1 to specify particular subsidy programmes. Instead the intent had been, as initially set forth in Chairman de Zeeuw's "Framework" and later in Chairman Dunkel's "Checklist" and "Notes", to develop a list as all-encompassing as possible to address "direct budgetary assistance to exports, other payments on products exported and other forms of export assistance." ¹⁷¹ Thus, these export subsidy categories were defined broadly, similar to the illustrative list in the SCM Agreement. In fact, there was substantial commonality between several paragraphs of Article 9.1 of the Agreement on Agriculture and the Illustrative List which results from the drafters' initial consideration of the Illustrative List, as well as the SCM Agreement's definition of export subsidy, as possible models for the export subsidy disciplines in the Agreement on Agriculture. Indeed, the six categories were sufficiently broad that there was potential (and actual) overlap between the coverage of the subsections. For example, subsidies used to reduce the cost of marketing exports of agricultural products that were addressed in subsection (d) of Article 9.1 could also be captured under the broader category of direct export subsidies set forth in Article 9.1(a) of Article 9.1.

4.151 The United States noted that both the SCM Agreement and the Agreement on Agriculture considered the provision of products or services at a price lower for export than the comparable price charged for the like product to buyers in the domestic market to be a central feature of many export subsidies. ¹⁷² This principle was also reflected in the language of Article XVI:4 of the GATT 1947, which provided that:

4.152 The United States submitted that in the unlikely event of a conflict between the definition of subsidy contained in the SCM Agreement and the non-exhaustive list of export subsidies in the Agreement on Agriculture, the latter would prevail for purposes of interpretation of a provision in the latter Agreement. In other words, if one of the six categories of export subsidies set forth in Article 9.1 of the Agreement on Agriculture were determined not to be a "subsidy" within the meaning of Article 1 of the SCM Agreement, the practice would still comprise a "subsidy" for the purposes of the Agreement on Agriculture. This result was dictated by Paragraph 1 of Article 21 of the Agreement on Agriculture which provides that:

4.153 Canada argued that Article 3.2 of the DSU recognized that the covered agreements were to be interpreted in accordance with "customary rules of interpretation of public international law." The Vienna Convention set out some of the applicable rules of international law. The rights and obligations of the Parties under the SCM Agreement and the Agreement on Agriculture must therefore be interpreted in accordance with the Vienna Convention and, in particular, Articles 31 and 32. ¹⁷³ Canada argued that based on these governing provisions, the interpretation of the text of WTO agreements had to proceed on the following basis:

4.154 Canada noted that the Appellate Body reiterated in its Report in India - Pharmaceuticals,

4.155 Canada argued that under Article XVI:1 of the WTO Agreement, the body of adopted pre-WTO GATT panel reports and other "decisions, procedures and practices" had been given a certain status as points of non-binding reference. ¹⁷⁵ It was evident from the views of the Appellate Body in Japan-Taxes on Alcoholic Beverages ¹⁷⁶ that pre-WTO GATT materials carried some weight but it was strictly limited. At best, these materials could be considered as supplementary means of interpretation in the context of the rules of the Vienna Convention. Supplementary means of interpretation were, by definition, supplementary. They were not to be given primacy over the principles set out in Article 31. Nor were they to be treated as having on the same significance as the text or the "context" of the terms in question.

4.156 Canada argued that the weight to be ascribed to pre-WTO materials was also governed by relevance. Where the WTO text in question incorporated a pre-WTO text, then the relevance was stronger. However, in those circumstances where new agreements were reached in the negotiations in the Uruguay Round, materials relating to previous agreements that had been overtaken by the new regime could be of less interpretative value.

4.157 Therefore, Canada argued that the role of the Vienna Convention was fundamental. It was the starting point for any interpretative inquiry and that inquiry had be conducted in accordance with the principles that were laid out in its provisions. Canada maintained that the United States and New Zealand appeared to be reluctant to begin with the "ordinary meaning" of the term "export subsidies" in its context in the Agreement on Agriculture or to consider the close relationship between the provisions of the SCM Agreement and the Agreement on Agriculture respecting "export subsidies". However, this was not an option open to a treaty interpreter. The starting point under Article 31 of the Vienna Convention must be ordinary meaning of the actual words agreed upon by the parties in their context, which in this case included the SCM Agreement.

4.158 Canada maintained that the Complainants, while acknowledging the application of the Vienna Convention, had departed from its principles; they did not appear to give the Vienna Convention adequate recognition as the primary guide to interpretation of WTO Agreements. In particular, the United States appeared to confuse the relationship between Article XVI:1 of the WTO Agreement, which brought prior GATT practice into the WTO, with the principles of the Vienna Convention. This led to an analysis that mixed past GATT practice with the treatment of "export subsidies" under the SCM Agreement.

4.159 Canada reiterated that the Agreement on Agriculture defined an "export subsidy" as a "subsidy" contingent upon export performance. However, the Agreement on Agriculture did not provide a definition of the term "subsidy". Canada recalled that Article 31 of the Vienna Convention directed that the meaning of a term had to be sought in its ordinary meaning and in its context. It then specifically included companion agreements within "context". While there was no express link between the definition of "subsidy" in the SCM Agreement and the definition of the "export subsidy" in the Agreement in Agriculture, such a link should be inferred since the SCM Agreement was part of the "context" of the Agreement on Agriculture. The definition of "subsidy" in the SCM Agreement was the only place a definition of "subsidy" appeared in the WTO agreements as a whole. As was well established, all of the WTO agreements were to be considered as part of a single integrated system and there was a particular relationship between the Agreement on Agriculture and the SCM Agreement with respect to export subsidies on agricultural products. ¹⁷⁷ Given the very similar definitions of "export subsidies" in both the SCM Agreement and the Agreement on Agriculture and the fact that the definition of "subsidy" in Article 1 of the SCM Agreement formed part of the definition of "export subsidy" as found in the SCM Agreement, the "subsidy" definition in the SCM Agreement was also applicable to the Agreement on Agriculture. ¹⁷⁸ Hence, Canada submitted that the definition of "subsidy" provided in Article 1 of the SCM Agreement was the applicable definition of "subsidy" for the purposes of the Agreement on Agriculture. . This was also consistent with the comments of the Appellate Body on the relationship of the SCM Agreement and the Agreement on Agriculture:

4.160 Canada further noted that the term "subsidy" was found in both the definition of "export subsidy" in Article 1 and in several items listed in Article 9.1, such as Article 9.1(a). The interpretation of this term had then to be the same in all these provisions. Accordingly, if the practices at issue did not constitute "subsidies" under the SCM Agreement definition, there could not be a subsidy for the purposes of either Article 1 or the relevant items in Article 9.1 of the Agreement on Agriculture. ¹⁸⁰

4.161 Moreover, Canada argued that pursuant to the customary principles of treaty interpretation, a treaty had to be interpreted and applied to reflect the underlying common intention of the parties. Parties had therefore to resist seeking through dispute resolution benefits that were not obtained from negotiation. A trade agreement, in particular, expressed a delicate and carefully achieved balance of economic rights and obligations between the parties within a specific historical context. This had been repeatedly acknowledged in GATT practice where, given equally plausible alternative interpretations, GATT panels had applied the interpretation that best maintained the intended balance of the agreement. ¹⁸¹ That approach, reflecting a longstanding principle of public international law, had been affirmed by the Appellate Body in its Reports in the United States - Restrictions on Imports of Cotton and Man-made Fibre Underwear and United States - Measure Affecting Imports of Woven Wool Shirts and Blouses from India cases. ¹⁸²

To continue with The Agreement on Agriculture

¹⁵⁰ New Zealand noted that commentators had noted that "one of the principal tasks for WTO member countries during the implementation period will be to sort out the overlap" between the Agreement on Agriculture and the SCM Agreement; Stewart T. P. (ed.), The World Trade Organisation: The Multilateral Framework for the 21st Century and US Implementing Legislation, Washington, American Bar Association, 1996, p. 171.

¹⁵¹ Appellate Body Report on Brazil - Desiccated Coconut, op. cit.

¹⁵² Ibid, p. 14.

¹⁵³ The United States noted that the term subsidy had not been expressly defined in either the GATT 1947 or in the Tokyo Round Subsidies Agreement interpreting GATT Article XVI. It had not been until the entry into force of the SCM Agreement (under the WTO), that the term "subsidies" had been defined in either a GATT or WTO Agreement.

¹⁵⁴ BISD 10S/201, L/1442, adopted 21 November 1961, para. 23.

¹⁵⁵ "Operation of the Provisions of Article XVI", adopted 21 November 1961, BISD 10S/208, para. 23. The United States noted that one commentator had noted that in spite of the great care taken by the GATT to establish detailed procedures to regulate the use of subsidies, there was no internationally binding definition of what constituted a subsidy for a substantial time period. Beseler, Antidumping and Anti-subsidy Law p.119.

¹⁵⁶ J. Jackson, "World Trade and the law of the GATT" (1969), citing GATT, BISD 10S/201, para. 23.

¹⁵⁷ The United States referred to, e.g., Working Party Report on Provisions of Article XVI:4, L/1381, BISD 9S/185, adopted 19 November 1960, para. 5.

¹⁵⁸ Ibid.

¹⁵⁹ Ibid, p. 188 (the "industrialized countries in Western Europe and North America.").

¹⁶⁰ The United States noted that although the example contained in the list referred to inputs consisting of imported raw materials, the concept of differential prices constituting a subsidy when the preferential prices were extended exclusively to export production had been recognized, para. 5. See also, Paragraph (d) of the Illustrative List of Export Subsidies contained in Annex I to the SCM Agreement.

¹⁶¹ Panel Report on Review Pursuant to Article XVI:5, op. cit.

¹⁶² Ibid, p.192, para. 12.

¹⁶³ The United States noted that the Government of Sweden later reached an identical conclusion as observed in its 1990 WTO offer, where it stated that: "In the country list, Sweden has indicated how producer-financed export subsidies in Sweden have had an effect similar to budget financed export subsidies. It is consequently Sweden's opinion that producer-financed export subsidies could be just as trade distorting as government funded export subsidies, and should therefore be tightly circumscribed in order not to compromise reform efforts on the latter form of subsidies. This should be reflected in the disciplines to be worked out under the GATT to govern producer-financed export subsidies."

¹⁶⁴ The United States noted that the high domestic prices which made a levy economically feasible were often, as in the case at issue, a result of government action in fixing import barriers, production quotas, and price supports, although these factors had not been noted by the panel.

¹⁶⁵ Working Party Report on Provisions of Article XVI:4, op. cit., para. 12.

¹⁶⁶ "Subsidies and Countervailing Measures," MTN.GNG/NG10/W/4 (28 April 1987).

¹⁶⁷ Ibid, p.9.

¹⁶⁸ Note Prepared By the Secretariat in Consultation with the Chairman, AG/W/9/Rev.3, App. C-IV.

¹⁶⁹ MTN.GNG/NG5/W/170. (United States, Exhibit 30)

¹⁷⁰ MTN.GNG/AG/W/1; MTN.GNG/AG/W/1/Add.1. (United States, Exhibits 31 and 32)

¹⁷¹ MTN.GNG/NG5/W/170, para. 17. (United States, Exhibit 30)

¹⁷² The United States referred to e.g., Paragraph (b) of Article 9.1 of the Agreement on Agriculture and Annex I, Paragraph (d) of the SCM Agreement. One recent work commissioned by the Organization of Economic Cooperation and Development (the "OECD"), found that "Implicit subsidies occur when a government programme or agency provides a subsidy in kind ... In some cases, subsidies take the form of below-market input prices ... " N. Bruce, "Measuring Industrial Subsidies: Some Conceptual Issues", OECD Dept. Of Economics and Statistics Working Paper No. 75 (February 1990), p.2.

¹⁷³ Appellate Body Report on United States - Standards for Reformulated and Conventional Gasoline (Hereafter "US - Reformulated Gasoline"), WT/DS2/AB/R, adopted on 20 May 1996, pp. 16-17; Appellate Body Report on Japan - Taxes on Alcoholic Beverages (Hereafter "Japan - Liquor Tax"), WT/DS8/DS10/DS11/AB/R, adopted 1 November 1996, pp. 10-12; confirmed in the Appellate Body Report on India - Patent Protection for Pharmaceutical and Agricultural Chemical Products (Hereafter "India - Pharmaceuticals"), WT/DS50/AB/R, adopted 16 January 1998, paras. 43-48.

¹⁷⁴ Appellate Body Report on India - Pharmaceuticals, op. cit., para. 45.

¹⁷⁵ Appellate Body Report on Japan - Liquor Tax, op. cit., p. 14.

¹⁷⁶ Ibid.

¹⁷⁷ Appellate Body Report on Brazil - Desiccated Coconut, op. cit., pp. 11-14.

¹⁷⁸ Canada noted that further linkage was found through Article 13 of the Agreement on Agriculture.

¹⁷⁹ Appellate Body Report on Brazil - Desiccated Coconut, op. cit., p.14

¹⁸⁰ Canada acknowledged that the Agreement on Agriculture would take precedence over the SCM Agreement in the event of any conflict between the two. However, there had been no suggestion by either of the Complainants that the two Agreements were in conflict.

¹⁸¹ Canada referred to United States - Measures Affecting Alcoholic and Malt Beverages (1992) (hereafter "US - Malt Beverages"), adopted 19 June 1992, DS17/R, para. 5.79, BISD 39S/206 at 296.

¹⁸² Appellate Body Report on United States - Restrictions on Imports of Cotton and Man-made Fibre Underwear (hereafter "US - Cotton Underwear"), WT/DS24/AB/R, adopted 25 February 1997, p. 15; Appellate Body Report on United States - Measure Affecting Imports of Woven Wool Shirts and Blouses from India (hereafter "US - Wool Shirts"), WT/DS33/AB/R, adopted 23 May 1997, p. 16.