DS: Canada — Measures Affecting the Importation of Milk and the Exportation of Dairy Products

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Current status

 

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Key facts

 

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Latest document

  

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Summary of the dispute to date

The summary below was up-to-date at

Consultations

Complaint by the United States.  (See also DS113)

On 8 October 1997, the United States requested consultations with Canada in respect of export subsidies allegedly granted by Canada on dairy products and the administration by Canada of the tariff-rate quota on milk. The United States contended that these export subsidies by Canada distort markets for dairy products and adversely affect US sales of dairy products. The United States alleged violations of Articles II, X and X1 of the GATT 1994, Articles 3, 4, 8, 9 and 10 of the Agreement on Agriculture, Article 3 of the SCM Agreement, and Articles 1, 2 and 3 of the Import Licensing Agreement.

On 2 February 1998, the United States requested the establishment of a panel. At its meeting on 13 February 1998, the DSB deferred the establishment of a panel.

 

Panel and Appellate Body proceedings

Further to a second request by the United States, at its meeting on 25 March 1998, the DSB established a single panel, pursuant to Article 9.1 of the DSU, to examine this dispute and DS113. Australia and Japan reserved their third-party rights. On 12 August 1998, the panel was composed.

On 17 May 1999, the panel report was circulated to Members. The panel found that the measures complained against were inconsistent with Canada’s obligations under Article II:1(b) of the GATT 1994, and Articles 3.3 and 8 of the Agreement on Agriculture by providing export subsidies as listed in Article 9.1(a) and 9.1(c) of the Agreement on Agriculture.

On 15 July 1999, Canada notified the DSB of its decision to appeal certain issues of law and legal interpretations developed by the panel. On 13 October 1999, the Appellate Body report was circulated to Members. The Appellate Body:

• reversed the panel’s interpretation of Article 9.1(a) and, in consequence, reversed the panel’s finding that Canada acted inconsistently with its obligations under Article 3.3 and 8 of the Agreement on Agriculture.
   
• upheld the panel’s finding that Canada was in violation of Article 3.3 and 8 of the Agreement on Agriculture in respect of export subsidies listed in Article 9.1(c) of the Agreement on Agriculture.
   
• partly reversed the panel’s finding that Canada acted inconsistently with its obligations under Article II:1(b) of the GATT 1994.

At its meeting on 27 October 1999, the DSB adopted the Appellate Body report and the Panel report, as modified by the Appellate Body report.

 

Reasonable period of time

At the DSB meeting on 19 November 1999, Canada informed the DSB that it intended to fully implement the DSB recommendations and rulings.  On 23 December 1999, Canada and the United States informed the DSB that, pursuant to Article 21.3 of the DSU and after having agreed to extend the time periods set forth in Article 21.3(b) of the DSU, they had reached an agreement on four discrete periods of time to be accorded a staged implementation process. According to the implementation agreement, Canada must complete the last stage of the implementation process no later than 31 December 2000. On 11 December 2000, Canada and the United States informed the DSB that they had agreed to extend the reasonable period of time until 31 January 2001.

 

Compliance proceedings

On 22 December 2000, Canada and the United States informed the DSB of an Understanding regarding procedures under Articles 21 and 22 of the DSU.  On 2 February 2001, the United States requested consultations pursuant to Article 21.5 of the DSU claiming that Canada had failed to implement the DSB recommendations and rulings by substituting the Special Class 5(e) export subsidies by new programmes that allow exporters to purchase milk at prices below the prevailing market levels in Canada for milk used in dairy products sold into Canada's domestic market and by retaining the Special Class 5(d) export subsidy found to be an export subsidy. On 16 February 2001, the United States requested the establishment of a compliance panel.  In parallel, the United States also requested the DSB authorization to suspend concessions and other obligations pursuant to Article 22.2 of the DSU (see below). At its meeting on 1 March 2001, pursuant to Article 21.5 of the DSU, the DSB referred to the original panel the matter raised by the United States and the matter raised by New Zealand (see DS113). Australia, the European Communities and Mexico reserved their third party rights. On 12 April 2001, the compliance panel was composed.

On 11 July 2001, the compliance panel report was circulated to Members. The compliance panel concluded that Canada, through the CEM scheme and the continued operation of Special Milk Class 5(d), had acted inconsistently with its obligations under Articles 3.3 and 8 of the Agreement on Agriculture, by providing export subsidies within the meaning of Article 9.1(c) of the Agreement on Agriculture in excess of its quantity commitment levels specified in its Schedule for exports of cheese, for the marketing year 2000/2001.

On 4 September 2001, Canada notified the DSB of its decision to appeal certain issues of law covered in the compliance panel report and certain legal interpretations developed by the compliance panel. In particular, Canada appealed the compliance panel’s finding that the Canadian measures in question constitute an export subsidy within the meaning of Article 9.1(c)of the Agreement on Agriculture. Canada considered that the compliance panel’s finding that commercial export sales constitute payments that are financed by virtue of governmental action is based on erroneous findings on issues of law and on related legal interpretations with respect to the interpretation and application of the said Article 9.1(c).

On 3 December 2001, the Appellate Body report was circulated to Members. The Appellate Body reversed the compliance panel’s findings to the effect that the supply of CEM by domestic milk producers to domestic dairy processors involves “payments” on the export of milk “that are financed by virtue of governmental action” under Article 9.1(c) of the Agreement on Agriculture. The Appellate Body concluded that, in the light of the factual findings made by the compliance panel and the uncontested facts in the compliance panel record, it was unable to complete the analysis of the claims made by New Zealand and the United States under Articles 9.1(c) or 10.1 of the Agreement on Agriculture, or the claim made by the United States under Article 3.1 of the SCM Agreement.

At its meeting on 18 December 2001, the DSB adopted the Appellate Body report and the compliance panel report, as reversed by the Appellate Body report.

 

Proceedings under Article 22 of the DSU (remedies)

On 16 February 2001, the United States requested, simultaneously with its request for compliance proceedings (see above), authorization from the DSB, pursuant to Article 22.2 DSU, to suspend the application to Canada of tariff concessions and related obligations under the GATT 1994, covering trade in the amount of USD 35 million on an annual basis or, if applicable, to an amount determined through arbitration pursuant to Article 22.6 of the DSU to be equivalent to the nullification or impairment of benefits accruing to the United States, given that, based on the Understanding signed between Canada and the United States regarding procedures under Articles 21 and 22 of the DSU (see above), the United States understands that Canada will object to the level of suspension of concessions requested and/or make a claim under Article 22.3, thus referring the matter to arbitration. On 28 February 2001, Canada objected to the level of suspension and requested that the matter be referred to arbitration pursuant to Article 22.6 DSU. At its meeting on 1 March 2001, the DSB referred the matter to arbitration.

Pursuant to the Additional Understanding regarding procedures under Articles 21 and 22 of the DSU, the parties agreed to request that the arbitration requested by Canada under Article 22.6 of the DSU remain suspended pending the work of the second compliance panel (see below).

On 16 January 2003, the parties informed the DSB that they had requested an extension of the suspension of the Article 22.6 DSU arbitration until 7 February 2003, in order to permit time for further consultations. On 6 February 2003, the parties informed the DSB that they had agreed that the arbitration remain suspended until 10 April 2003. On 9 April 2003, the parties informed the DSB that they had agreed to further suspend the arbitration until 9 May 2003.

 

Compliance proceedings (second recourse)

On 6 December 2001, the United States requested, pursuant to Article 21.5 of the DSU, the establishment of a second compliance panel . The United States considered that, since the Appellate Body’s compliance report did not make any findings on the consistency of Canada’s new measures, the United States continued to believe that Canada had failed to comply with the original recommendations and rulings of the DSB.

At its meeting on 18 December 2001, the DSB agreed, pursuant to Article 21.5 of the DSU, to refer to the original Panel, for the second time, the matter raised by the United States and the matter raised by New Zealand (see DS113). The European Communities and Australia reserved third-party rights. On 28 December 2001, Argentina reserved its third-party rights.

On 18 December 2001, Canada and the United States notified the DSB of an Additional Understanding regarding procedures under Article 21 and 22 of the DSU.

On 17 January 2002, the compliance panel was composed. On 26 July 2002, the compliance panel report was circulated to Members. The compliance panel concluded that Canada, through the CEM scheme and the continued operation of Special Milk Class 5(d), had acted inconsistently with its obligations under Articles 3.3 and 8 of the Agreement on Agriculture, by providing export subsidies within the meaning of Article 9.1(c) of the Agreement on Agriculture in excess of its quantity commitment levels specified in its Schedule for exports of cheese and “other dairy products”. It also concluded that Canada had acted inconsistently with its obligations under Article 10.1 of the Agreement on Agriculture and that therefore Canada had acted inconsistently with its obligations under Article 8 of the Agreement on Agriculture. Accordingly, the compliance panel recommended that the DSB request Canada to bring its dairy products marketing regime into conformity with its obligations in respect of export subsidies under the Agreement on Agriculture.

On 23 September 2002, Canada notified the DSB of its decision to appeal certain issues of law and legal interpretations developed by the compliance panel. On 20 December 2002, the Appellate Body report was circulated to Members. The Appellate Body upheld the compliance panel’s finding that the measure at issue-the supply of “commercial export milk” (“CEM”) by Canadian milk producers to Canadian dairy processors-involves export subsidies in the form of “payments” on the export of milk that are “financed by virtue of governmental action” within the meaning of Article 9.1(c) of the Agreement on Agriculture. It reversed the compliance panel’s interpretation of the rules on burden of proof in Article 10.3 of the Agreement on Agriculture. However, the Appellate Body held that this error did not affect any of the compliance panel’s other findings under the Agreement on Agriculture. In view of its conclusion under Article 9.1(c) of the Agreement on Agriculture, the Appellate Body declined to rule on the compliance panel’s alternative finding under Article 10.1 of that Agreement.

On 17 January 2003, the DSB adopted the Appellate Body report and the compliance panel report, as modified by the Appellate Body report.

 

Mutually agreed solution

On 9 May 2003, Canada and the United States informed the DSB that they had reached a mutually agreed solution under Article 3.6 of the DSU.