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Issues covered by the WTO’s committees and agreements

REPERTORY OF APPELLATE BODY REPORTS

Agreement on Agriculture


ON THIS PAGE:

Article 1(a) and Annex 3 — “Aggregate Measurement of Support”
Article 1(a)(ii) and Annex 3 — “AMS commitments”
Article 1(e) — “subsidy”
Article 1(e) — “contingent upon export performance”
Article 3.1 — “export subsidy commitments”
Article 3.1 — “commitments limiting subsidization”
Article 3.3 — “export subsidies”
Article 3.3 — “budgetary outlay and quantity commitment levels”
Articles 3.3 and 10.1 — “export subsidy commitments”
Article 4 — “market access”
Article 4.1 — Market access commitments contained in Schedules. See also Tariff Quotas — Non-discriminatory Administration (T.2)
Article 4.2 and Footnote 1 — Conversion of certain border measures into ordinary customs duties
> Article 4.2 and Footnote 1 — Measures of the kind
Article 4.2 and Footnote 1 — Minimum import price
Article 4.2 and Footnote 1 — Similar border measures
Article 4.2 and Footnote 1 — Variable import levies
Article 5 — special safeguard
Article 6.3 — domestic support commitments
Article 8 — “export competition commitments”
Article 9.1 — “export subsidies”
Article 9.1
Article 9.1 — “subject to reduction commitments”
Article 9.1(a) — “direct subsidies, including payments-in-kind”
> Article 9.1(a) — “governments or their agencies”
Article 9.1(a) — “contingent on export performance”
Article 9.1(c) — “payments”
Article 9.1(c) — Benchmark for payments-in-kind
Article 9.1(c) — Benchmark — world market prices vs. domestic prices
Article 9.1(c) — Benchmark — cost of production
Article 9.1(c) — Industry-wide vs. Individual standard
Article 9.1(c) — “imputed” costs
Article 9.1(c) — Selling and quota costs
Article 9.1(c) — “governmental action”
Article 9.1(c) — Governmental action vs. Private action
Article 9.1(c) — “by virtue of”
Article 9.1(c) — “financed”
Article 9.1(c) — Cross-subsidization
Article 9.1(d) — “costs of marketing”
Article 9.2 — Budgetary outlay and quantity commitment levels
Article 10 — General
Article 10.1 — “export subsidy commitments”
Article 10.1 — “export subsidies” not listed in Article 9.1
Article 10.1 — Actual circumvention
Article 10.1 — Threat of circumvention
Article 10.1 — “non-commercial transactions”
Article 10.1 — Relationship with Article 9.1
Article 10.2 — Export Credit Guarantees
Article 10.3 — Reversal of Burden of Proof. See also Burden of Proof, reversal (B.3.4)
Article 10.3 — Relationship with Article 6.2 of the DSU
Article 10.4 — “food aid”
Article 13 — “due restraint” (peace clause). See also Agreement on Agriculture, Relationship between the Agreement on Agriculture and the GATT 1994 (A.1.37)
Annex 2 — “green box”
Annex 3, paragraph 7 — Measures directed at agricultural processors benefitting producers of agricultural products
Annex 3, paragraph 8 — “market price support”
Relationship between Domestic Support and Export Subsidies Disciplines
Relationship between the Agreement on Agriculture and the GATT 1994. See also Tariff Concessions, Relationship between Member’s Schedules and the Agreement on Agriculture (T.1.4)
Relationship between the Agreement on Agriculture and the Modalities Paper
Relationship between the Agreement on Agriculture and the SCM Agreement. See also Agreement on Agriculture, Article 1(e) — “subsidy” (A.1.3); SCM Agreement, Article 3.1 — “except as provided in the Agreement on Agriculture” (S.2.11)
 


A.1.1 Article 1(a) and Annex 3 — “Aggregate Measurement of Support”     back to top

A.1.1.1 Korea — Various Measures on Beef, para. 115
(WT/DS161/AB/R, WT/DS169/AB/R)

… for purposes of determining whether a Member has exceeded its commitment levels, Base Total AMS, and the commitment levels resulting or derived therefrom, are not themselves formulae to be worked out, but simply absolute figures set out in the Schedule of the Member concerned. As a result, Current Total AMS which is calculated according to Annex 3, is compared to the commitment level for a given year that is already specified as a given, absolute, figure in the Member’s Schedule.

 
A.1.2 Article 1(a)(ii) and Annex 3 — “AMS commitments”     back to top

A.1.2.1 Korea — Various Measures on Beef, para. 112
(WT/DS161/AB/R, WT/DS169/AB/R)

Looking at the wording of Article 1(a)(ii) itself, it seems to us that this provision attributes higher priority to “the provisions of Annex 3” than to the “constituent data and methodology”. From the viewpoint of ordinary meaning, the term “in accordance with” reflects a more rigorous standard than the term “taking into account”.

A.1.2.2 Korea — Various Measures on Beef, para. 114
(WT/DS161/AB/R, WT/DS169/AB/R)

In the circumstances of the present case, it is not necessary to decide how a conflict between “the provisions of Annex 3” and the “constituent data and methodology used in the tables of supporting material incorporated by reference in Part IV of the Member’s Schedule” would have to be resolved in principle. As the Panel has found, in this case, there simply are no constituent data and methodology for beef. Assuming arguendo that one would be justified — in spite of the wording of Article 1(a)(ii) — to give priority to constituent data and methodology used in the tables of supporting material over the guidance of Annex 3, for products entering into the calculation of the Base Total AMS, such a step would seem to us to be unwarranted in calculating Current AMS for a product which did not enter into the Base Total AMS calculation. …

 
A.1.3 Article 1(e) — “subsidy”     back to top

A.1.3.1 Canada — Dairy, para. 87
(WT/DS103/AB/R, WT/DS113/AB/R, WT/DS103/AB/R/Corr.1, WT/DS113/AB/R/Corr.1)

… Correspondingly, a “subsidy” involves a transfer of economic resources from the grantor to the recipient for less than full consideration. As we said in our Report in Canada — Aircraft, a “subsidy”, within the meaning of Article 1.1 of the SCM Agreement, arises where the grantor makes a “financial contribution” which confers a “benefit” on the recipient, as compared with what would have been otherwise available to the recipient in the marketplace. …

A.1.3.2 US — FSC, para. 137
(WT/DS108/AB/R)

Therefore, in this case, we will consider, first, whether the FSC measure involves a transfer of economic resources by the grantor, which in this dispute is the government of the United States, and, second, whether any transfer of economic resources involves a benefit to the recipient.

A.1.3.3 US — FSC (Article 21.5 — EC), para. 194
(WT/DS108/AB/RW)

… We have rejected the United States’ appeal regarding the proper characterization of the measure under Article 3.1(a) of the SCM Agreement. The Panel held, and we have upheld, that the measure involves the foregoing of revenues that are otherwise due under Article 1.1(a)(ii) of the SCM Agreement. As we indicated in USFSC, where a government foregoes revenues that are otherwise due in relation to agricultural products, a subsidy may arise under the Agreement on Agriculture. The fiscal treatment of agricultural products, under the measure, is not materially different from the fiscal treatment of products falling within the scope of the SCM Agreement. Accordingly, we see no reason to reach any conclusion under the Agreement on Agriculture that differs from our conclusion under the SCM Agreement. …

A.1.3.4 EC — Export Subsidies on Sugar, para. 269
(WT/DS265/AB/R, WT/DS266/AB/R, WT/DS283/AB/R)

The chapeau of Article 9.1 provides: “The following export subsidies are subject to reduction commitments”. Hence, Article 9.1 sets forth a list of practices that, by definition, involve export subsidies. In other words, a measure falling within Article 9.1 is deemed to be an export subsidy within the meaning of Article 1(e) of the Agreement on Agriculture. We observe that Article 9.1(c) requires no independent enquiry into the existence of a “benefit”.

 
A.1.4 Article 1(e) — “contingent upon export performance”     back to top

A.1.4.1 US — FSC, para. 141
(WT/DS108/AB/R)

… We see no reason, and none has been pointed out to us, to read the requirement of “contingent upon export performance” in the Agreement on Agriculture differently from the same requirement imposed by the SCM Agreement. The two Agreements use precisely the same words to define “export subsidies”. Although there are differences between the export subsidy disciplines established under the two Agreements, those differences do not, in our view, affect the common substantive requirement relating to export contingency. Therefore, we think it appropriate to apply the interpretation of export contingency that we have adopted under the SCM Agreement to the interpretation of export contingency under the Agreement on Agriculture. …

A.1.4.2 US — Upland Cotton, para. 571
(WT/DS267/AB/R)

Although an export subsidy granted to agricultural products must be examined, in the first place, under the Agreement on Agriculture, we find it appropriate, as has the Appellate Body in previous disputes, to rely on the SCM Agreement for guidance in interpreting provisions of the Agreement on Agriculture. Thus, we consider the export-contingency requirement in Article 1(e) of the Agreement on Agriculture having regard to that same requirement contained in Article 3.1(a) of the SCM Agreement.

A.1.4.3 US — Upland Cotton, para. 582
(WT/DS267/AB/R)

In sum, we agree with the Panel’s view that Step 2 payments are export-contingent and, therefore, an export subsidy for purposes of Article 9 of the Agreement on Agriculture and Article 3.1(a) of the SCM Agreement. The statute and regulations pursuant to which Step 2 payments are granted, on their face, condition payments to exporters on exportation. In order to claim payment, an exporter must show proof of exportation. If an exporter does not provide proof of exportation, the exporter will not receive a payment. This is sufficient to establish that Step 2 payments to exporters of United States upland cotton are “conditional upon export performance” or “dependent for their existence on export performance”. That domestic users may also be eligible to receive payments under different conditions does not eliminate the fact that an exporter will receive payment only upon proof of exportation.

A.1.4.4 US — Upland Cotton, para. 615
(WT/DS267/AB/R)

… Article 1(e) of the Agreement on Agriculture defines “export subsidies” as “subsidies contingent upon export performance, including the export subsidies listed in Article 9 of this Agreement”. (emphasis added) The use of the word “including” suggests that the term “export subsidies” should be interpreted broadly and that the list of export subsidies in Article 9 is not exhaustive. Even though an export credit guarantee may not necessarily include a subsidy component, there is nothing inherent about export credit guarantees that precludes such measures from falling within the definition of a subsidy. An export credit guarantee that meets the definition of an export subsidy would be covered by Article 10.1 of the Agreement on Agriculture because it is not an export subsidy listed in Article 9.1 of that Agreement.

 
A.1.4A Article 3.1 — “export subsidy commitments”     back to top

A.1.4A.1 EC — Export Subsidies on Sugar, paras. 166-167
(WT/DS265/AB/R, WT/DS266/AB/R, WT/DS283/AB/R)

A preliminary question for our consideration is what rules apply in interpreting export subsidy commitments specified in a Member’s Schedule under the Agreement on Agriculture. We observe that Article II:7 of the General Agreement on Tariffs and Trade 1994 (the “GATT 1994”) provides that the “Schedules annexed to this Agreement are hereby made an integral part of Part I of this Agreement.” Furthermore, Article 3.1 of the Agreement on Agriculture provides that “export subsidy commitments in Part IV of each Member’s Schedule … are hereby made an integral part of [the] GATT 1994”.

The applicable rules for interpreting the provisions of the GATT 1994 are the “customary rules of interpretation of public international law”. The Appellate Body has held that these rules are codified in the Vienna Convention on the Law of Treaties (the “Vienna Convention”). As provisions of a Member’s Schedule are “part of the terms of the treaty”, they are subject to these same rules of treaty interpretation. …

 
A.1.4B Article 3.1 — “commitments limiting subsidization”     back to top

A.1.4B.1 EC — Export Subsidies on Sugar, para. 209
(WT/DS265/AB/R, WT/DS266/AB/R, WT/DS283/AB/R)

… We do not see Article 3.1 as permitting a Member to limit subsidization to whatever commitment it chooses to specify in its Schedule without regard to Members’ obligations under the Agreement on Agriculture. Rather, with respect to export subsidy commitments, we see Article 3.1 as requiring a Member to limit its subsidization to the budgetary outlay and quantity reduction commitments specified in its Schedule in accordance with the provisions of the Agreement on Agriculture. …

 
A.1.5 Article 3.3 — “export subsidies”     back to top

A.1.5.1 US — FSC, para. 132
(WT/DS108/AB/R)

… A finding of inconsistency with Article 3.3 of the Agreement on Agriculture is dependent on the Member having provided export subsidies listed in Article 9.1. …

A.1.5.2 US — FSC, para. 152
(WT/DS108/AB/R)

As regards scheduled products, when the specific reduction commitment levels have been reached, the limited authorization to provide export subsidies as listed in Article 9.1 is transformed, effectively, into a prohibition against the provision of those subsidies. …

 
A.1.5A Article 3.3 — “budgetary outlay and quantity commitment levels”     back to top

A.1.5A.1 EC — Export Subsidies on Sugar, paras. 193-194
(WT/DS265/AB/R, WT/DS266/AB/R, WT/DS283/AB/R)

By its terms, Article 3.3 of the Agreement on Agriculture prohibits the granting of export subsidies (listed in Article 9.1) in excess of the budgetary outlay and quantity commitment levels specified in a Member’s Schedule. Article 3.3 does not, however, explicitly state that export subsidy commitments must be specified in a Member’s Schedule in terms of both budgetary outlay and quantity commitment levels. At the same time, Article 3.3 does not explicitly state that a Member may specify its commitment level in terms of either of the two forms of commitments. In our view, the use of the conjunctive “and”, and the corresponding use of the word “levels” in the plural, suggest that the drafters of the Agreement intended that both types of commitments must be specified in a Member’s Schedule in respect of any export subsidy listed in Article 9.1. Had the drafters intended that a Member could specify one or the other of the two forms of commitments, they would have chosen the disjunctive “or” and correspondingly used the word “level” in the singular. Given the choice, Members would choose only one or the other type of commitment, but not both, so as to minimize their obligations. Therefore, it appears to us that the drafters intended to ensure that export subsidy commitments are specified in Members’ Schedules in terms of both budgetary outlay and quantity commitments, by using the word “and” as well as the word “levels” in the text of Article 3.3.

We find contextual support for the above interpretation in Article 9.2(b)(iv) of the Agreement on Agriculture, which provides:

(iv) the Member’s budgetary outlays for export subsidies and the quantities benefiting from such subsidies, at the conclusion of the implementation period, are no greater than 64 per cent and 79 per cent of the 1986-1990 base period levels, respectively. For developing country Members these percentages shall be 76 and 86 per cent, respectively.

This provision prescribes the export subsidy commitment levels to be reached at the conclusion of the implementation period (and to be maintained thereafter), and those commitment levels are expressed in terms of both budgetary outlays and quantities. We do not see how a Member could comply with Article 9.2(b)(iv), or for that matter Article 9.2(a), without having specified its export subsidy commitments in terms of both budgetary outlays and quantities. We also consider it significant that both Article 9.2(b)(iii) and Article 9.2(b)(iv) use the expression “budgetary outlays for export subsidies and the quantities benefiting from such subsidies”. (emphasis added) This shows the drafters’ recognition of the need to address the budgetary outlays and quantities together.

A.1.5A.2 EC — Export Subsidies on Sugar, para. 196
(WT/DS265/AB/R, WT/DS266/AB/R, WT/DS283/AB/R)

Our interpretation that Article 3.3 (as well as Article 9.2) requires that export subsidy commitments in a Member’s Schedule must be expressed in terms of both budgetary outlay and quantity commitment levels is also in consonance with the object and purpose of the Agreement on Agriculture. We note, as did the Panel, that the third paragraph of the Preamble to the Agreement recognizes that the “long-term objective” of WTO Members, in initiating a reform process to deal with the distortions in the world agricultural markets, is “to provide for substantial progressive reductions in agricultural support and protection”. Pursuant to this objective, the fourth paragraph of the Preamble expresses the commitment of the WTO Members “to achieving binding commitments” in the three specified areas, including “export competition”. An interpretation that export subsidy commitments must be expressed in a Member’s Schedule in terms of both budgetary outlay and quantity commitment levels is more in harmony with the objectives stated in the Preamble to the Agreement than an interpretation that a Member is only obliged to fulfil “whatever commitments” it chooses to specify in its Schedule.

A.1.5A.3 EC — Export Subsidies on Sugar, para. 197
(WT/DS265/AB/R, WT/DS266/AB/R, WT/DS283/AB/R)

We are also of the view that if an export subsidy commitment were allowed to be specified in only one form, budgetary outlay or quantity, as a Member may choose, and its conformity were measured on the basis of that one commitment alone, it would undermine the export subsidy disciplines of the Agreement on Agriculture. As we noted above, the drafters recognized the need to deal with budgetary outlays and quantities together in order to restrain subsidized exports. A commitment on budgetary outlay alone provides little predictability on export quantities, while a commitment on quantity alone could lead to subsidized exports taking place that would otherwise have not taken place but for the budgetary support. This is especially so given that the Agreement on Agriculture has initiated a reform process in an environment of high levels of export subsidies taking the form of budgetary outlays and quantities. …

A.1.5A.4 EC — Export Subsidies on Sugar, para. 200
(WT/DS265/AB/R, WT/DS266/AB/R, WT/DS283/AB/R)

… we agree with the Panel that Article 3.3 requires a Member to schedule both budgetary outlay and quantity commitment levels in respect of export subsidies listed in Article 9.1 of the Agreement on Agriculture. …

 
A.1.6 Articles 3.3 and 10.1 — “export subsidy commitments”     back to top

A.1.6.1 US — FSC, para. 145
(WT/DS108/AB/R)

Under Article 3, Members have undertaken two different types of “export subsidy commitments”. Under the first clause of Article 3.3, Members have made a commitment that they will not “provide export subsidies listed in paragraph 1 of Article 9 in respect of the agricultural products or groups of products specified in Section II of Part IV of its Schedule in excess of the budgetary outlay and quantity commitments levels specified therein”. …

A.1.6.2 US — FSC, paras. 146-147
(WT/DS108/AB/R)

Under the second clause of Article 3.3, Members have committed not to provide any export subsidies, listed in Article 9.1, with respect to unscheduled agricultural products. This clause clearly also involves “export subsidy commitments” within the meaning of Article 10.1. …

… The term “export subsidy commitments” has a wider reach that covers commitments and obligations relating to both scheduled and unscheduled agricultural products.

A.1.6.3 EC — Export Subsidies on Sugar, para. 211
(WT/DS265/AB/R, WT/DS266/AB/R, WT/DS283/AB/R)

… we examine whether the claimed commitment in Footnote 1 “limiting” subsidization of exports of sugar can prevail over the provisions of the Agreement on Agriculture, despite such a commitment being inconsistent with Articles 3.3 and 9.1 of the Agreement on Agriculture. …

A.1.6.4 EC — Export Subsidies on Sugar, para. 222
(WT/DS265/AB/R, WT/DS266/AB/R, WT/DS283/AB/R)

… Footnote 1, being part of the European Communities’ Schedule, is an integral part of the GATT 1994 by virtue of Article 3.1 of the Agreement on Agriculture. Therefore, pursuant to Article 21 of the Agreement on Agriculture, the provisions of the Agreement on Agriculture prevail over Footnote 1. …

 
A.1.7 Article 4 — “market access”     back to top

A.1.7.1 Chile — Price Band System, para. 200
(WT/DS207/AB/R)

… we turn now to Article 4, which is the main provision of Part III of the Agreement on Agriculture. As its title indicates, Article 4 deals with “Market Access”. During the course of the Uruguay Round, negotiators identified certain border measures which have in common that they restrict the volume or distort the price of imports of agricultural products. The negotiators decided that these border measures should be converted into ordinary customs duties, with a view to ensuring enhanced market access for such imports. Thus, they envisioned that ordinary customs duties would, in principle, become the only form of border protection. As ordinary customs duties are more transparent and more easily quantifiable than non-tariff barriers, they are also more easily compared between trading partners, and thus the maximum amount of such duties can be more easily reduced in future multilateral trade negotiations. The Uruguay Round negotiators agreed that market access would be improved — both in the short term and in the long term — through bindings and reductions of tariffs and minimum access requirements, which were to be recorded in Members’ Schedules.

 
A.1.8 Article 4.1 — Market access commitments contained in Schedules.
See also Tariff Quotas — Non-discriminatory Administration (T.2)     back to top

A.1.8.1 EC — Bananas III, para. 156
(WT/DS27/AB/R)

Article 4.1 of the Agreement on Agriculture provides as follows:

Market access concessions contained in Schedules relate to bindings and reductions of tariffs, and to other market access commitments as specified therein.

In our view, Article 4.1 does more than merely indicate where market access concessions and commitments for agricultural products are to be found. Article 4.1 acknowledges that significant, new market access concessions, in the form of new bindings and reductions of tariffs as well as other market access commitments (i.e. those made as a result of the tariffication process), were made as a result of the Uruguay Round negotiations on agriculture and included in Members’ GATT 1994 Schedules. These concessions are fundamental to the agricultural reform process that is a fundamental objective of the Agreement on Agriculture.

A.1.8.2 EC — Bananas III, para. 157
(WT/DS27/AB/R)

… we do not see anything in Article 4.1 to suggest that market access concessions and commitments made as a result of the Uruguay Round negotiations on agriculture can be inconsistent with the provisions of Article XIII of the GATT 1994. There is nothing in Articles 4.1 or 4.2, or in any other Article of the Agreement on Agriculture, that deals specifically with the allocation of tariff quotas on agricultural products. …

A.1.8.3 US — Upland Cotton, para. 548
(WT/DS267/AB/R)

Our approach in this case is consistent with the Appellate Body’s approach in EC — Bananas III. In that case, the European Communities relied on Article 4.1 of the Agreement on Agriculture in arguing that the market access concessions it made for agricultural products pursuant to the Agreement on Agriculture prevailed over Article XIII of the GATT 1994. The Appellate Body, however, found that “[t]here is nothing in Articles 4.1 or 4.2, or in any other Article of the Agreement on Agriculture, that deals specifically with the allocation of tariff quotas on agricultural products”. It further explained that “[i]f the negotiators had intended to permit Members to act inconsistently with Article XIII of the GATT 1994, they would have said so explicitly”. The situation before us is similar. We have found nothing in Article 6.3, paragraph 7 of Annex 3 or anywhere else in the Agreement on Agriculture that “deals specifically” with subsidies that are contingent on the use of domestic over imported agricultural products.

 
A.1.9 Article 4.2 and Footnote 1 — Conversion of certain border measures into ordinary customs duties     back to top

A.1.9.1 Chile — Price Band System, paras. 206-207
(WT/DS207/AB/R)

… Article 4.2 of the Agreement on Agriculture should be interpreted in a way that gives meaning to the use of the present perfect tense in that provision — particularly in the light of the fact that most of the other obligations in the Agreement on Agriculture and in the other covered agreements are expressed in the present, and not in the present perfect, tense. In general, requirements expressed in the present perfect tense impose obligations that came into being in the past, but may continue to apply at present. As used in Article 4.2, this temporal connotation relates to the date by which Members had to convert measures covered by Article 4.2 into ordinary customs duties, as well as to the date from which Members had to refrain from maintaining, reverting to, or resorting to, measures prohibited by Article 4.2. The conversion into ordinary customs duties of measures within the meaning of Article 4.2 began during the Uruguay Round multilateral trade negotiations, because ordinary customs duties that were to “compensate” for and replace converted border measures were to be recorded in Members’ draft WTO Schedules by the conclusion of those negotiations. These draft Schedules, in turn, had to be verified before the signing of the WTO Agreement on 15 April 1994. Thereafter, there was no longer an option to replace measures covered by Article 4.2 with ordinary customs duties in excess of the levels of previously bound tariff rates. Moreover, as of the date of entry into force of the WTO Agreement on 1 January 1995, Members are required not to “maintain, revert to, or resort to” measures covered by Article 4.2 of the Agreement on Agriculture.

If Article 4.2 were to read “any measures of the kind which are required to be converted”, this would imply that if a Member — for whatever reason — had failed, by the end of the Uruguay Round negotiations, to convert a measure within the meaning of Article 4.2, it could, even today, replace that measure with ordinary customs duties in excess of bound tariff rates. But, as Chile and Argentina have agreed, this is clearly not so. It seems to us that Article 4.2 was drafted in the present perfect tense to ensure that measures that were required to be converted as a result of the Uruguay Round — but were not converted — could not be maintained, by virtue of that Article , from the date of the entry into force of the WTO Agreement on 1 January 1995.

 
A.1.10 Article 4.2 and Footnote 1 — Measures of the kind     back to top

A.1.10.1 Chile — Price Band System, para. 208
(WT/DS207/AB/R)

Thus, contrary to what Chile argues, giving meaning and effect to the use of the present perfect tense in the phrase “have been required” does not suggest that the scope of the phrase “any measures of the kind which have been required to be converted into ordinary customs duties” must be limited only to those measures which were actually converted, or were requested to be converted, into ordinary customs duties by the end of the Uruguay Round. Indeed, in our view, such an interpretation would fail to give meaning and effect to the word “any” and the phrase “of the kind”, which are descriptive of the word “measures” in that provision. A plain reading of these words suggests that the drafters intended to cover a broad category of measures. We do not see how proper meaning and effect could be accorded to the word “any” and the phrase “of the kind” in Article 4.2 if that provision were read to include only those specific measures that were singled out to be converted into ordinary customs duties by negotiating partners in the course of the Uruguay Round.

A.1.10.2 Chile — Price Band System, para. 209
(WT/DS207/AB/R)

The wording of footnote 1 to the Agreement on Agriculture confirms our interpretation. … the use of the word “include” in the footnote indicates that the list of measures is illustrative, not exhaustive. And, clearly, the existence of footnote 1 suggests that there will be “measures of the kind which have been required to be converted” that were not specifically identified during the Uruguay Round negotiations. …

A.1.10.3 Chile — Price Band System, para. 216
(WT/DS207/AB/R)

Article 4.2 speaks of “measures of the kind which have been required to be converted into ordinary customs duties”. The word “convert” means “undergo transformation”. The word “converted” connotes “changed in their nature”, “turned into something different”. Thus, “measures which have been required to be converted into ordinary customs duties” had to be transformed into something they were not — namely, ordinary customs duties. The following example illustrates this point. The application of a “variable import levy”, or a “minimum import price”, as the terms are used in footnote 1, can result in the levying of a specific duty equal to the difference between a reference price and a target price, or minimum price. These resulting levies or specific duties take the same form as ordinary customs duties. However, the mere fact that a duty imposed on an import at the border is in the same form as an ordinary customs duty, does not mean that it is not a “variable import levy” or a “minimum import price”. Clearly, as measures listed in footnote 1, “variable import levies” and “minimum import prices” had to be converted into ordinary customs duties by the end of the Uruguay Round. The mere fact that such measures result in the payment of duties does not exonerate a Member from the requirement not to maintain, resort to, or revert to those measures.

A.1.10.4 Chile — Price Band System, para. 278
(WT/DS207/AB/R)

… we disagree with the Panel’s definition of “ordinary customs duties” and, therefore, we reverse the Panel’s finding, in paragraph 7.52 of the Panel Report, that the term “ordinary customs duty”, as used in Article 4.2 of the Agreement on Agriculture, is to be understood as “referring to a customs duty which is not applied to factors of an exogenous nature”.

 
A.1.11 Article 4.2 and Footnote 1 — Minimum import price     back to top

A.1.11.1 Chile — Price Band System, paras. 236-237
(WT/DS207/AB/R)

The term “minimum import price” refers generally to the lowest price at which imports of a certain product may enter a Member’s domestic market. Here, too, no definition has been provided by the drafters of the Agreement on Agriculture. However, the Panel described “minimum import prices” as follows:

[these] schemes generally operate in relation to the actual transaction value of the imports. If the price of an individual consignment is below a specified minimum import price, an additional charge is imposed corresponding to the difference.

The Panel also said that minimum import prices “are generally not dissimilar from variable import levies in many respects, including in terms of their protective and stabilization effects, but that their mode of operation is generally less complicated.” The main difference between minimum import prices and variable import levies is, according to the Panel, that “variable import levies are generally based on the difference between the governmentally determined threshold and the lowest world market offer price for the product concerned, while minimum import price schemes generally operate in relation to the actual transaction value of the imports.” (emphasis added)

 
A.1.12 Article 4.2 and Footnote 1 — Similar border measures     back to top

A.1.12.1 Chile — Price Band System, para. 226
(WT/DS207/AB/R)

We agree with the first part of the Panel’s definition of the term “similar” as “having a resemblance or likeness”, “of the same nature or kind”, and “having characteristics in common”. … The better and appropriate approach is to determine similarity by asking the question whether two or more things have likeness or resemblance sufficient to be similar to each other. In our view, the task of determining whether something is similar to something else must be approached on an empirical basis.

 
A.1.13 Article 4.2 and Footnote 1 — Variable import levies     back to top

A.1.13.1 Chile — Price Band System, para. 233
(WT/DS207/AB/R)

To determine what kind of variability makes an import levy a “variable import levy”, we turn to the immediate context of the other words in footnote 1. The term “variable import levies” appears after the introductory phrase “[t]hese measures include”. Article 4.2 — to which the footnote is attached — also speaks of “measures”. This suggests that at least one feature of “variable import levies” is the fact that the measure itself — as a mechanism — must impose the variability of the duties. Variability is inherent in a measure if the measure incorporates a scheme or formula that causes and ensures that levies change automatically and continuously. Ordinary customs duties, by contrast, are subject to discrete changes in applied tariff rates that occur independently, and unrelated to such an underlying scheme or formula. The level at which ordinary customs duties are applied can be varied by a legislature, but such duties will not be automatically and continuously variable. To vary the applied rate of duty in the case of ordinary customs duties will always require separate legislative or administrative action, whereas the ordinary meaning of the term “variable” implies that no such action is required.

A.1.13.2 Chile — Price Band System, para. 234
(WT/DS207/AB/R)

However, in our view, the presence of a formula causing automatic and continuous variability of duties is a necessary, but by no means a sufficient, condition for a particular measure to be a “variable import levy” within the meaning of footnote 1. “Variable import levies” have additional features that undermine the object and purpose of Article 4, which is to achieve improved market access conditions for imports of agricultural products by permitting only the application of ordinary customs duties. These additional features include a lack of transparency and a lack of predictability in the level of duties that will result from such measures. This lack of transparency and this lack of predictability are liable to restrict the volume of imports. As Argentina points out, an exporter is less likely to ship to a market if that exporter does not know and cannot reasonably predict what the amount of duties will be. …

A.1.13.3 Chile — Price Band System, para. 254
(WT/DS207/AB/R)

… we find nothing in Article 4.2 to suggest that a measure prohibited by that provision would be rendered consistent with it if applied with a cap. Before the conclusion of the Uruguay Round, a measure could be recognized as a “variable import levy” even if the products to which the measure applied were subject to tariff bindings. And, there is nothing in the text of Article 4.2 to indicate that a measure, which was recognized as a “variable import levy” before the Uruguay Round, is exempt from the requirements of Article 4.2 simply because tariffs on some, or all, of the products to which that measure now applies were bound as a result of the Uruguay Round.

 
A.1.14 Article 5 — special safeguard     back to top

A.1.14.1 EC — Poultry, para. 153
(WT/DS69/AB/R)

… we interpret the “price at which the product concerned may enter the customs territory of the Member granting the concession, as determined on the basis of the c.i.f. import price” in Article 5.1(b) as the c.i.f. import price not including ordinary customs duties. …

A.1.14.2 EC — Poultry, para. 168
(WT/DS69/AB/R)

… neither the text nor the context of Article 5.5 of the Agreement on Agriculture permits us to conclude that the additional duties imposed under the special safeguard mechanism in Article 5 of the Agreement on Agriculture may be established by any method other than a comparison of the c.i.f. price of the shipment with the trigger price.

A.1.14.3 Chile — Price Band System, para. 217
(WT/DS207/AB/R)

Article 5, also found in Part III of the Agreement on Agriculture on “Market Access”, lends contextual support to our interpretation of Article 4.2. In our view, the existence of a market access exemption in the form of a special safeguard provision under Article 5 implies that Article 4.2 should not be interpreted in a way that permits Members to maintain measures that a Member would not be permitted to maintain but for Article 5, and, much less, measures that are even more trade-distorting than special safeguards. In particular, if Article 4.2 were interpreted in a way that allowed Members to maintain measures that operate in a way similar to a special safeguard within the meaning of Article 5 — but without respecting the conditions set out in that provision for invoking such measures — it would be difficult to see how proper meaning and effect could be given to those conditions set forth in Article 5.

 
A.1.14A Article 6.3 — domestic support commitments     back to top

A.1.14A.1 US — Upland Cotton, para. 544
(WT/DS267/AB/R)

… Article 6.3 deals with domestic support. It establishes only a quantitative limitation on the amount of domestic support that a WTO Member can provide in a given year. The quantitative limitation in Article 6.3 applies generally to all domestic support measures that are included in a WTO Member’s AMS. …

A.1.14A.2 US — Upland Cotton, para. 545
(WT/DS267/AB/R)

Article 6.3 does not authorize subsidies that are contingent on the use of domestic over imported goods. It only provides that a WTO Member shall be considered to be in compliance with its domestic support reduction commitments if its Current Total AMS does not exceed that Member’s annual or final bound commitment level specified in its Schedule. It does not say that compliance with Article 6.3 of the Agreement on Agriculture insulates the subsidy from the prohibition in Article 3.1(b). …

A.1.14A.3 US — Upland Cotton, para. 546
(WT/DS267/AB/R)

… we find that paragraph 7 of Annex 3 and Article 6.3 of the Agreement on Agriculture do not deal specifically with the same matter as Article 3.1(b) of the SCM Agreement, that is, subsidies contingent upon the use of domestic over imported goods.

 
A.1.14B Article 8 — “export competition commitments”     back to top

A.1.14B.1 EC — Export Subsidies on Sugar, para. 216
(WT/DS265/AB/R, WT/DS266/AB/R, WT/DS283/AB/R)

It is clear from the plain wording of Article 8 that Members are prohibited from providing export subsidies otherwise than in conformity with the Agreement on Agriculture and the commitments as specified in their Schedules. Thus, compliance with both is obligatory. As compliance with the provisions of the Agreement on Agriculture is obligatory, it is clear that the commitments specified in a Member’s Schedule must be in conformity with the provisions of the Agreement. …

A.1.14B.2 EC — Export Subsidies on Sugar, para. 220
(WT/DS265/AB/R, WT/DS266/AB/R, WT/DS283/AB/R)

… we find no provision under the Agreement on Agriculture that authorizes Members to depart, in their Schedules, from their obligations under that Agreement. Indeed, as we have noted, Article 8 requires that, in providing export subsidies, Members must comply with the provisions of both the Agreement on Agriculture and the export subsidy commitments specified in their Schedules. This is possible only if the commitments in the Schedules are in conformity with the provisions of the Agreement on Agriculture. Thus, we see no basis for the European Communities’ assertion that it could depart from the obligations under the Agreement on Agriculture through the claimed commitment provided in Footnote 1.

 
A.1.14C Article 9.1 — “export subsidies”     back to top

A.1.14C.1 EC — Export Subsidies on Sugar, para. 269
(WT/DS265/AB/R, WT/DS266/AB/R, WT/DS283/AB/R)

The chapeau of Article 9.1 provides: “The following export subsidies are subject to reduction commitments”. Hence, Article 9.1 sets forth a list of practices that, by definition, involve export subsidies. In other words, a measure falling within Article 9.1 is deemed to be an export subsidy within the meaning of Article 1(e) of the Agreement on Agriculture. We observe that Article 9.1(c) requires no independent enquiry into the existence of a “benefit”.

Article 9.1 — Relationship with Article 10.1. See Agreement on Agriculture, Article 10.1 — Relationship with Article 9.1 (A.1.33)     back to top

 
A.1.14D Article 9.1 — “subject to reduction commitments”     back to top

A.1.14D.1 EC — Export Subsidies on Sugar, para. 206
(WT/DS265/AB/R, WT/DS266/AB/R, WT/DS283/AB/R)

The chapeau of Article 9.1 says that the subsidies listed in that Article “are subject to reduction commitments under this Agreement”. The export subsidies given to ACP/India equivalent sugar, which admittedly fall within the ambit of Article 9.1(a), are therefore subject to reduction commitments. Furthermore, as noted by the Panel, the provisions of Article 9.2(b)(iv) apply to Members that take advantage of the flexibility provisions of Article 9.2(b). Article 9.2(b)(iv) specifies the reduction levels to be achieved at the conclusion of the implementation period with respect to both budgetary outlays and quantities. The provisions of Article 9.2(b)(iv) lend contextual support to the view that export subsidies listed in Article 9.1 are subject to reduction commitments. We further note that Article 9.2(a)(i) and (ii) also make it clear that both budgetary outlay and quantity commitments specified in a Member’s Schedule for each year of the implementation period are “reduction” commitments. It follows that the export subsidies provided to ACP/India equivalent sugar are subject to reduction commitments in terms of Article 9.1 of the Agreement on Agriculture.

 
A.1.15 Article 9.1(a) — “direct subsidies, including payments-in-kind”     back to top

A.1.15.1 Canada — Dairy, para. 87
(WT/DS103/AB/R, WT/DS113/AB/R, WT/DS103/AB/R/Corr.1, WT/DS113/AB/R/Corr.1)

In our view, the term “payments-in-kind” describes one of the forms in which “direct subsidies” may be granted. Thus, Article 9.1(a) applies to “direct subsidies”, including “direct subsidies” granted in the form of “payments-in-kind”. We believe that, in its ordinary meaning, the word “payments”, in the term “payments-in-kind”, denotes a transfer of economic resources, in a form other than money, from the grantor of the payment to the recipient. However, the fact that a “payment-in-kind” has been made provides no indication as to the economic value of the transfer effected, either from the perspective of the grantor of the payment or from that of the recipient. A “payment-in-kind” may be made in exchange for full or partial consideration or it may be made gratuitously. Correspondingly, a “subsidy” involves a transfer of economic resources from the grantor to the recipient for less than full consideration. As we said in our Report in Canada — Aircraft, a “subsidy”, within the meaning of Article 1.1 of the SCM Agreement, arises where the grantor makes a “financial contribution” which confers a “benefit” on the recipient, as compared with what would have been otherwise available to the recipient in the marketplace. Where the recipient gives full consideration in return for a “payment-in-kind” there can be no “subsidy”, for the recipient is paying market-rates for what it receives. It follows, in our view, that the mere fact that a “payment-in-kind” has been made does not, by itself, imply that a “subsidy”, “direct” or otherwise, has been granted.

 
A.1.16 Article 9.1(a) — “governments or their agencies”     back to top

A.1.16.1 Canada — Dairy, para. 97
(WT/DS103/AB/R, WT/DS113/AB/R, WT/DS103/AB/R/Corr.1, WT/DS113/AB/R/Corr.1)

… According to Black’s Law Dictionary, “government” means, inter alia, “[t]he regulation, restraint, supervision, or control which is exercised upon the individual members of an organized jural society by those invested with authority”. (emphasis added) This is similar to meanings given in other dictionaries. The essence of “government” is, therefore, that it enjoys the effective power to “regulate”, “control” or “supervise” individuals, or otherwise “restrain” their conduct, through the exercise of lawful authority. This meaning is derived, in part, from the functions performed by a government and, in part, from the government having the powers and authority to perform those functions. A “government agency” is, in our view, an entity which exercises powers vested in it by a “government” for the purpose of performing functions of a “governmental” character, that is, to “regulate”, “restrain”, “supervise” or “control” the conduct of private citizens. As with any agency relationship, a “government agency” may enjoy a degree of discretion in the exercise of its functions.

 
A.1.16A Article 9.1(a) — “contingent on export performance”     back to top

A.1.16A.1 US — Upland Cotton, para. 582
(WT/DS267/AB/R)

In sum, we agree with the Panel’s view that Step 2 payments are export-contingent and, therefore, an export subsidy for purposes of Article 9 of the Agreement on Agriculture and Article 3.1(a) of the SCM Agreement. The statute and regulations pursuant to which Step 2 payments are granted, on their face, condition payments to exporters on exportation. In order to claim payment, an exporter must show proof of exportation. If an exporter does not provide proof of exportation, the exporter will not receive a payment. This is sufficient to establish that Step 2 payments to exporters of United States upland cotton are “conditional upon export performance” or “dependent for their existence on export performance”. That domestic users may also be eligible to receive payments under different conditions does not eliminate the fact that an exporter will receive payment only upon proof of exportation.

 
A.1.17 Article 9.1(c) — “payments”     back to top

A.1.17.1 Canada — Dairy, para. 107
(WT/DS103/AB/R, WT/DS113/AB/R, WT/DS103/AB/R/Corr.1, WT/DS113/AB/R/Corr.1)

We have found that the word “payments”, in the term “payments-in-kind” in Article 9.1(a), denotes a transfer of economic resources. We believe that the same holds true for the word “payments” in Article 9.1(c). The question which we now address is whether, under Article 9.1(c), the economic resources that are transferred by way of a “payment” must be in the form of money, or whether the resources transferred may take other forms. As the Panel observed, the dictionary meaning of the word “payment” is not limited to payments made in monetary form. In support of this, the Panel cited the Oxford English Dictionary, which defines “payment” as “the remuneration of a person with money or its equivalent”. (emphasis added) Similarly, the Shorter Oxford English Dictionary describes a “payment” as a “sum of money (or other thing) paid”. (emphasis added) Thus, according to these meanings, a “payment” could be made in a form, other than money, that confers value, such as by way of goods or services. A “payment” which does not take the form of money is commonly referred to as a “payment in kind”.

A.1.17.2 Canada — Dairy, para. 108
(WT/DS103/AB/R, WT/DS113/AB/R, WT/DS103/AB/R/Corr.1, WT/DS113/AB/R/Corr.1)

We agree with the Panel that the ordinary meaning of the word “payments” in Article 9.1(c) is consistent with the dictionary meaning of the word. Under Article 9.1(c), “payments” are “financed by virtue of governmental action” and they may or may not involve “a charge on the public account”. Neither the word “financed” nor the term “a charge” suggests that the word “payments” should be interpreted to apply solely to money payments. A payment made in the form of goods or services is also “financed” in the same way as a money payment, and, likewise, “a charge on the public account” may arise as a result of a payment, or a legally binding commitment to make payment by way of goods or services, or as a result of revenue foregone.

A.1.17.3 EC — Export Subsidies on Sugar, paras. 262-265
(WT/DS265/AB/R, WT/DS266/AB/R, WT/DS283/AB/R)

Article 9.1(c) does not qualify the term “payments” by reference to the entity making, or the entity receiving the payment. This may be contrasted with, for instance, Articles 9.1(a) and 9.1(b) of the Agreement on Agriculture, which specifically refer to the entities making and also, in the case of Article 9.1(a), to the entity receiving the alleged export subsidy. Moreover, Article 9.1(c), on its face, does not qualify the meaning of the term “payments”, other than by requiring that the alleged “payments” be “on the export of an agricultural product” and “financed by virtue of governmental action”.

As we noted above, the European Communities submits, first, that a “payment” within the meaning of Article 9.1(c) requires, by definition, the presence of two distinct legal entities. We agree with the European Communities that a “payment”, within the meaning of Article 9.1(c), certainly occurs when one entity transfers economic resources to another entity. …

This, however, does not imply that the term “payment” necessarily requires, in each and every case, the presence of two distinct entities. In other words, contrary to the European Communities’ argument, we do not see, a priori, any reason why “payments”, within the meaning of Article 9.1(c), cannot include, in the particular circumstances of this dispute, transfers of resources within one economic entity. The “payment” in this case is not merely a “purely notional” one but, rather, reflects a very concrete transfer of economic resources to C sugar production. In the specific dispute before us, C sugar is being sold on the world market by European Communities’ sugar producers/exporters at a price that does not “even remotely” cover its average total cost of production. In the light of the enormous difference between the price of C sugar and its average total cost of production, we do not see how the “payment” identified by the Panel was “purely notional”.

The European Communities’ approach is, in our view, too formalistic. To illustrate, one could envisage a scenario under which the producers of C sugar are legally distinct from the producers of A and B sugar. In this situation, the European Communities’ approach could recognize that a “payment” under Article 9.1(c) could exist because there would be a transfer of economic resources between different parties. If, however, these same producers of A, B, and C sugar were integrated producers and organized as single legal entities, a payment under Article 9.1(c) would not exist, because the transfer would be merely “internal”. We do not believe that the applicability of Article 9.1(c) should depend on how an economic entity is legally organized.

A.1.17.4 EC — Export Subsidies on Sugar, paras. 268-269
(WT/DS265/AB/R, WT/DS266/AB/R, WT/DS283/AB/R)

… The European Communities argues that, because the alleged “cross-subsidization” involves no “transfer of resources” to the sugar producers, it confers no benefit upon these producers and, therefore, cannot be considered to provide a subsidy. The European Communities disagrees with the Panel’s finding that Article 9.1(c) does not require the demonstration of a benefit for a measure to constitute a “payment” within the meaning of that provision.

The chapeau of Article 9.1 provides: “The following export subsidies are subject to reduction commitments”. Hence, Article 9.1 sets forth a list of practices that, by definition, involve export subsidies. In other words, a measure falling within Article 9.1 is deemed to be an export subsidy within the meaning of Article 1(e) of the Agreement on Agriculture. We observe that Article 9.1(c) requires no independent enquiry into the existence of a “benefit”.

 
A.1.18 Article 9.1(c) — Benchmark for payments-in-kind     back to top

A.1.18.1 Canada — Dairy (Article 21.5 — New Zealand and US), para. 73
(WT/DS103/AB/RW, WT/DS113/AB/RW)

Although we did not have to examine whether the benchmarks used by the panel in the original proceedings were appropriate, our findings in those proceedings provide guidance in identifying when “payments” are made under Article 9.1(c). We recall that we upheld the original panel’s finding that “the provision of discounted milk to processors or exporters under Special Classes 5(d) and 5(e) involves ‘payments’ within the meaning of Article 9.1(c) of the Agreement on Agriculture.” (emphasis added) In reaching this conclusion, we noted that, where milk is sold at “reduced rates (that is, at below market-rates), ‘payments’ are, in effect, made to the recipient of the portion of the price that is not charged.” (emphasis added) We noted that the producer of the milk “foregoes” the uncharged portion of the price. In short, we indicated that there are “payments” under Article 9.1(c) when the price charged by the producer of the milk is less than the milk’s proper value to the producer.

A.1.18.2 Canada — Dairy (Article 21.5 — New Zealand and US), para. 74
(WT/DS103/AB/RW, WT/DS113/AB/RW)

Thus, the determination of whether “payments” are involved requires a comparison between the price actually charged by the provider of the goods or services — the prices of CEM in this case — and some objective standard or benchmark which reflects the proper value of the goods or services to their provider — the milk producer in this case. We do not accept Canada’s argument that as the producer negotiates freely the price with the processor, and CEM prices are, therefore, market-determined, it is not necessary to compare these prices with an objective standard.

A.1.18.3 Canada — Dairy (Article 21.5 — New Zealand and US), para. 75
(WT/DS103/AB/RW, WT/DS113/AB/RW)

Article 9.1(c) of the Agreement on Agriculture does not expressly identify any standard for determining when a measure involves “payments” in the form of payments-in-kind. The absence of an express standard in Article 9.1(c) may be contrasted with several other provisions involving export subsidies which do provide an express standard. Thus, for instance, even within Article 9.1 itself, sub-paragraphs (b) and (e) expressly provide that the domestic market constitutes the appropriate basis for comparison.

A.1.18.4 Canada — Dairy (Article 21.5 — New Zealand and US), para. 76
(WT/DS103/AB/RW, WT/DS113/AB/RW)

We believe that it is significant that Article 9.1(c) of the Agreement on Agriculture does not expressly identify a standard or benchmark for determining whether a measure involves “payments”. It is clear that the notion of “payments” encompasses a diverse range of practices involving a transfer of resources, either monetary or in-kind. Moreover, the “payments” may take place in many different factual and regulatory settings. Accordingly, we believe that it is necessary to scrutinize carefully the facts and circumstances of a disputed measure, including the regulatory framework surrounding that measure, to determine the appropriate basis for comparison in assessing whether the measure involves “payments” under Article 9.1(c).

A.1.18.5 Canada — Dairy (Article 21.5 — New Zealand and US), para. 81
(WT/DS103/AB/RW, WT/DS113/AB/RW)

… There can be little doubt, however, that the administered price is a price that is favourable to the domestic producers. Consequently, sale of CEM by the producer at less than the administered domestic price does not, necessarily, imply that the producer has foregone a portion of the proper value of the milk to it. In the situation where the producer, rather than the government, chooses to produce and sell CEM in the marketplace at a price it freely negotiates, we do not believe it is appropriate to use, as a basis for comparison, a domestic price that is fixed by the government.

 
A.1.19 Article 9.1(c) — Benchmark — world market prices vs. domestic prices     back to top

A.1.19.1 Canada — Dairy (Article 21.5 — New Zealand and US), para. 83
(WT/DS103/AB/RW, WT/DS113/AB/RW)

… If a producer wishes to sell milk for export processing, it is obvious that the price of the milk to the processor must be competitive with world market prices. If it is not, the processor will not buy the milk, as it will not be able to produce a final product that is competitive in export markets. Accordingly, the range of world market prices determines the price which the producer can charge for milk destined for export markets. World market prices do, therefore, provide one possible measure of the value of the milk to the producer.

A.1.19.2 Canada — Dairy (Article 21.5 — New Zealand and US), para. 84
(WT/DS103/AB/RW, WT/DS113/AB/RW)

However, world market prices do not provide a valid basis for determining whether there are “payments”, under Article 9.1(c) of the Agreement on Agriculture, for, it remains possible that the reason CEM can be sold at prices competitive with world market prices is precisely because sales of CEM involve subsidies that make it competitive. Thus, a comparison between CEM prices and world market prices gives no indication on the crucial question, namely, whether Canadian export production has been given an advantage. Furthermore, if the basis for comparison were world market prices, it would be possible for WTO Members to subsidize domestic inputs for export processing, while taking care to maintain the price of these inputs to the processors at a level which equalled or marginally exceeded world market prices. …

 
A.1.20 Article 9.1(c) — Benchmark — cost of production     back to top

A.1.20.1 Canada — Dairy (Article 21.5 — New Zealand and US), para. 87
(WT/DS103/AB/RW, WT/DS113/AB/RW)

Although the proceeds from sales at domestic or world market prices represent two possible measures of the value of milk to the producer, we do not see these as the only possible measures of this value. For any economic operator, the production of goods or services involves an investment of economic resources. In the case of a milk producer, production requires an investment in fixed assets, such as land, cattle and milking facilities, and an outlay to meet variable costs, such as labour, animal feed and health-care, power and administration. These fixed and variable costs are the total amount which the producer must spend in order to produce the milk and the total amount it must recoup, in the long-term, to avoid making losses. To the extent that the producer charges prices that do not recoup the total cost of production, over time, it sustains a loss which must be financed from some other source, possibly “by virtue of governmental action”.

A.1.20.2 Canada — Dairy (Article 21.5 — New Zealand and US), para. 88
(WT/DS103/AB/RW, WT/DS113/AB/RW)

In our view, reliance upon the total cost of production, in this dispute, as a basis for determining whether there are “payments” within the meaning of Article 9.1(c), is in harmony with the domestic support and export subsidies disciplines of the Agreement on Agriculture. Under Article 3 of the Agreement on Agriculture, WTO Members are entitled to provide “domestic support” to agricultural producers within the limits of their domestic support commitments. The same Article establishes separate disciplines on export subsidies which prohibit WTO Members from providing such subsidies in excess of their export subsidy commitments.

A.1.20.3 Canada — Dairy (Article 21.5 — New Zealand and US), para. 89
(WT/DS103/AB/RW, WT/DS113/AB/RW)

It is possible that the economic effects of WTO-consistent domestic support in favour of producers may “spill over” to provide certain benefits to export production, especially as many agricultural products result from a single line of production that does not distinguish whether the production is destined for consumption in the domestic or export market.

A.1.20.4 Canada — Dairy (Article 21.5 — New Zealand and US), para. 90
(WT/DS103/AB/RW, WT/DS113/AB/RW)

We believe that it would erode the distinction between the domestic support and export subsidies disciplines of the Agreement on Agriculture if WTO-consistent domestic support measures were automatically characterized as export subsidies because they produced spill-over economic benefits for export production. Indeed, this is another reason why we do not agree with the Panel that sales of CEM at any price below the administered domestic price for milk can be regarded as “payments” under Article 9.1(c) of the Agreement on Agriculture. Such a basis for comparison would tend to collapse the distinction between these two different disciplines.

A.1.20.5 Canada — Dairy (Article 21.5 — New Zealand and US), para. 91
(WT/DS103/AB/RW, WT/DS113/AB/RW)

However, we consider that the distinction between the domestic support and export subsidies disciplines in the Agreement on Agriculture would also be eroded if a WTO Member were entitled to use domestic support, without limit, to provide support for exports of agricultural products. Broadly stated, domestic support provisions of that Agreement, coupled with high levels of tariff protection, allow extensive support to producers, as compared with the limitations imposed through the export subsidies disciplines. Consequently, if domestic support could be used, without limit, to provide support for exports, it would undermine the benefits intended to accrue through a WTO Member’s export subsidy commitments.

A.1.20.6 Canada — Dairy (Article 21.5 — New Zealand and US), para. 92
(WT/DS103/AB/RW, WT/DS113/AB/RW)

In our view, by relying upon the total cost of production in this dispute, to determine whether there are “payments”, the integrity of the two disciplines is best respected. The existence of “payments” is determined by reference to a standard that focuses upon the motivations of the independent economic operator who is making the alleged “payments” — here the producer — and not upon any government intervention in the marketplace. More importantly, using this basis for comparison, the potential for WTO Members to export their agricultural production is preserved, provided that any export-destined sales by a producer at below the total cost of production are not financed by virtue of governmental action. The export subsidy disciplines of the Agreement on Agriculture will also be maintained without erosion.

A.1.20.7 Canada — Dairy (Article 21.5 — New Zealand and US), para. 93
(WT/DS103/AB/RW, WT/DS113/AB/RW)

Our approach is supported by the standards used in items (j) and (k) of the Illustrative List of the SCM Agreement. Item (j) is concerned with export subsidies that arise through the provision by the government of a variety of export credit guarantee and insurance programmes. Under item (j), the provision of such services by the government involves export subsidies when the premium rates charged do not “cover the long-term operating costs and losses of the programmes”. (emphasis added) Thus, the measure of value under item (j) is the overall cost to the government, as the service provider, of providing the service. Likewise, in item (k), where the government provides export credits, the measure of the value of the service provided by the government is the amount “which [governments] actually have to pay for the funds so employed (or would have to pay if they borrowed on international capital markets …)”. Again, the measure of value is by reference to the cost to the government, as the service provider, of providing the service. Therefore, items (j) and (k) give contextual support and rationale, for using the cost of production as a standard for determining whether there are “payments” under Article 9.1(c) of the Agreement on Agriculture in these proceedings.

A.1.20.8 Canada — Dairy (Article 21.5 — New Zealand and US), paras. 94-95
(WT/DS103/AB/RW, WT/DS113/AB/RW)

A producer’s cost of production may be measured in, at least, two ways. First, for any given unit of production, for instance a hectolitre of milk, there is an average total cost of production, which is the total cost of production divided by the total number of units produced, regardless of whether the production is destined for the domestic or export markets. The total cost of production includes all fixed and variable costs incurred in the production of all the units in question. Second, there is also the marginal cost of production which includes only the additional costs incurred by the producer in producing an extra unit of production. Generally, the marginal cost of production does not include any amount for the fixed costs of production. Although a producer may very well decide to sell goods or services if the sales price covers its marginal costs, the producer will make losses on such sales unless all of the remaining costs associated with making these sales, essentially the fixed costs, are financed through some other source, such as through highly profitable sales of the product in another market.

In the ordinary course of business, an economic operator chooses to invest, produce and sell, not only to recover the total cost of production, but also in the hope of making profits.

A.1.20.9 Canada — Dairy (Article 21.5 — New Zealand and US), para. 96
(WT/DS103/AB/RW, WT/DS113/AB/RW)

Accordingly, in the circumstances of these proceedings, where the alleged payment is made by an independent economic operator and where the domestic price is administered, we believe that the average total cost of production represents the appropriate standard for determining whether sales of CEM involve “payments” under Article 9.1(c) of the Agreement on Agriculture. The average total cost of production would be determined by dividing the fixed and variable costs of producing all milk, whether dest