(iii) Milk sales under Special Milk Classes 5(d) and (e): the provision of milk for the processing of dairy products for export by the CDC with an assured margin for the processor

7.59 In addition to milk being offered at a discounted price otherwise not available, we note that with respect to the export sales conducted by the CDC itself - for which the CDC engages a processor to make dairy products with milk sourced under Classes 5(d) or (e) - there is another element which indicates that processors for export receive special treatment (i.e., a benefit) under Classes 5(d) and (e) which is otherwise not granted on commercial grounds. That is, no matter how low the world price is for the dairy product that a processor is requested to produce - and thus no matter how low the milk price should be in order for the processor to be able to produce the dairy product at such a low price - a Canadian processor for export is always sure to obtain a certain "margin". ⁴¹⁰ This processor "margin" covers the cost of transforming milk into, e.g., butter or skim milk powder, and a return on investment for the processors. ⁴¹¹ This margin ensures that, in respect of exports by the CDC, processors are able to access milk at a price which enables the CDC to sell the processed dairy products on the world market at a competitive price. But for the Special Milk Classes Scheme, this guarantee offered to processors/exporters would not be commercially available.

7.60 In our view, this assured processor margin for certain exports generated with milk sourced under Classes 5(d) and (e) confirms the finding we made in paragraph 7.58, namely that the provision of milk to processors/exporters under Classes 5(d) and (e) on the reported favourable terms and conditions confers a benefit to these processors/exporters and, for that reason, constitutes a payment in kind in the sense of Article 9.1(a).

(iv) Concluding remarks on the payment in kind offered to processors/exporters

7.61 But for Classes 5(d) and (e), processors for export under the current Canadian milk regime would have to pay a significantly higher price for milk. By accessing this milk, these processors/exporters are effectively shielded from the high domestic milk price, the high import tariffs on fluid milk and - at least in respect of those exports made by the CDC itself - the risk of having to sell dairy products for sale on the world market at a reduced margin or at a loss.

7.62 We want to stress, however, that the existence of this "payment in kind" to processors does not in and of itself establish the existence of an export subsidy within the meaning of Article 9.1(a). In our view, in particular the existence of parallel markets for domestic use and for export with different prices does not necessarily constitute an export subsidy. ⁴¹² Whether or not the "payments-in-kind" to processors in this dispute constitute an export subsidy depends on the government's involvement in providing it. ⁴¹³ This relates to the second condition under Article 9.1(a).

(b) provided "by governments or their agencies"

7.63 Under this condition, we need to examine whether the milk made available to processors for export at a discounted price under Classes 5(d) and (e) - which we found earlier to constitute a payment in kind - is provided by the Canadian governments or their agencies.

(i) The provision of milk under Classes 5(d) and (e) is not financed by governmental funds but by milk producers either collectively (in-quota) or individually (over-quota)

7.64 All parties agree that under Classes 5(d) and (e) no governmental funds are directly involved. ⁴¹⁴ Neither the Canadian government nor its agencies buy milk at the high domestic price to sell it subsequently, at a loss, at a lower price for export, whereby the cost would be covered by governmental funds. It is undisputed that only the milk producers finance the sales of milk for export. For milk produced within a producer's quota and subsequently exported, the price differential between the price for export and the higher domestic price is collectively borne by all Canadian milk producers. This is so because all in-quota export revenues are pooled with all other in-quota milk returns. This pooling results in an average or pooled milk price - lower than the domestic price - which is the same for all in-quota milk produced by a given producer. Any milk produced over-quota necessarily obtains the lower price for export. However, in principle, only the individual producer who produces the over-quota milk bears the cost of such lower returns. This is so because returns of over-quota milk by one producer are generally not pooled with in-quota returns obtained by other producers. ⁴¹⁵

7.65 In our view, the fact that the government does not grant governmental funds to finance the payment in kind does not prevent this payment in kind from being provided by the government or its agencies in the sense of Article 9.1(a). The ordinary meaning of the word "provide" is not restricted to a financial contribution. The dictionary meaning of the word "provide" is rather:

(ii) The degree of government involvement required for there to be a "provision by governments or their agencies" under Article 9.1(a)

7.66 Canada does not argue that governments are not involved in providing milk under Classes 5(d) and (e). Rather, its position is that governments only have an implementing and oversight role to play in the establishment and efficient operation of the system. According to Canada, such government intervention does not approach the level required by Article 9.1(a). The complainants contend that the system would not exist without governmental intervention and that none of the provisions at issue requires that governments dictate every aspect of a measure for an export subsidy to exist. The complainants conclude that in this case the government involvement in the Special Milk Classes Scheme does meet the level required by Article 9.1(a).

7.67 The question of government involvement required under Article 9.1(a) is one of degree that must be addressed on a case-by-case basis. In this dispute, we need to examine first how milk is made available under Classes 5(d) and (e). Thereafter, we need to assess the extent to which Canadian governments or their agencies are involved in this process. On that basis - and applying the ordinary meaning of the term "provision by governments or their agencies" referred to above ⁴¹⁷ , in its context and in light of the object and purpose of the Agreement on Agriculture ⁴¹⁸ - we will then decide whether or not the payment in kind made under Classes 5(d) and (e) can be said to be provided by Canada's governments or their agencies.

(iii) How milk for export is made available under Classes 5(d) and (e)

Sales of milk for export under Class 5(d)

7.68 Class 5(d) covers so-called "traditional" export sales. These traditional sales - which are calculated into the national quota and thus constitute in-quota milk - are linked to certain trade opportunities, such as tariff-rate quotas of third countries that are traditionally made available to Canadian exporters, as well as sales arising out of longer term trading relationships. The volume of Class 5(d) is a set amount annually fixed by the Canadian Milk Supply Management Committee ("the CMSMC").

7.69 Exporters with access to these traditional markets approach the Canadian Dairy Commission ("the CDC") with proposals to purchase milk under Class 5(d). The CDC negotiates the transaction, including the milk price, and issues a permit which will allow the exporter to obtain the required milk for use in the planned exports from one of the provincial marketing boards. The permits issued by the CDC under Class 5(d) specify the dairy products to be exported.

Sales of milk for export under Class 5(e)

7.70 Both in-quota milk - mainly the so-called "sleeve" or safety margin which is finally not used in domestic markets ⁴¹⁹ - and over-quota milk can be exported under Class 5(e). The removal of surplus milk by means of exports under Class 5(e) is composed of two operational elements: a CDC-initiated and a processor-initiated surplus removal element.

7.71 A first possibility is that the CDC itself initiates "preemptive surplus removal". In doing so, it "will be guided by an advisory group established by the CDC for that purpose". ⁴²⁰ This advisory group, the Surplus Removal Committee ("SRC"), decides whether surplus milk is available in the system. If so, the CDC can activate the preemptive surplus removal program. To do so, the CDC does not have to seek further agreement from the provincial marketing boards that milk surplus to domestic requirements is available. If the CDC decides to activate the program, it will actively remove surplus by contracting with processors for the manufacture of products suitable for export. At this stage, two possibilities arise: either (i) the CDC, acting in its own right, purchases the dairy products and exports them through transactions it negotiates with state importers in other countries, or (ii) the CDC issues permits to processors which will allow these processors to buy milk under Class 5(e) from one of the provincial marketing boards, whereafter these processors themselves, or through traders, export the dairy products produced. The permits issued by the CDC under Class 5(e) specify the dairy products to be exported. In both instances, it is the CDC which negotiates the milk price with the processor. In the event of exports by the CDC itself, it is also the CDC which negotiates and grants the processor margin. ⁴²¹

7.72 A second possibility arises during the period in which the CDC initiated surplus removal program is inactive. In these circumstances, "access to CDC contracts to dispose of surpluses will be available when requested by individual processors". ⁴²² In practice, a processor wanting to produce for export first negotiates the terms of a potential sale of dairy products with a foreign buyer. The processor then needs to access milk, in order to produce the dairy product, at a price which will allow it to make the transaction. To do so, the processor has to obtain a permit from the CDC, allowing it to buy milk under Class 5(e). This permit also specifies the dairy products to be exported. The CDC can only issue such permit "when all demand for milk by processors in the province in harmonized Classes 1 to 5(d) is met". It is the CDC which negotiates the milk price with the processor. Once the processor obtains a Class 5(e) permit from the CDC, it approaches the local marketing board which in practice provides the processor with the milk at the negotiated price. Under this second possibility, the CDC itself can also buy the processed dairy products - produced with Class 5(e) milk - and export them in its own right. In that event, processors receive "full margin for product sold", a margin negotiated and granted by the CDC. ⁴²³

(iv) The extent to which Canada's governments or their agencies are involved in the making available of milk under Classes 5(d) and (e)

Canada's governments and their agencies

7.73 Canada is a federal state with a federal government and ten provincial governments. Regulatory jurisdiction over trade in dairy products is divided between the federal government and the provinces. The federal government has constitutional authority over interprovincial and international trade. All other aspects of production and sale of milk are under provincial jurisdiction. Both the Canadian federal government and provincial governments are "governments" for the purposes of Article 9.1(a). ⁴²⁴

7.74 Three bodies play a direct decision-making role under Classes 5(d) and (e): the CDC, the provincial marketing boards and the CMSMC.

7.75 First, the CDC is a Canadian Crown Corporation. That the CDC is an "agency" of Canada's federal government in the sense of Article 9.1(a) is undisputed. ⁴²⁵

7.76 Second, the provincial milk marketing boards are established and operate within a legal framework set up by federal and provincial legislation. ⁴²⁶ These boards exercise powers in respect of inter-provincial and external trade delegated to them by the federal government through the CDC, as well as powers delegated to them by provincial authorities. Three of these boards (Alberta, Nova Scotia and Saskatchewan) are, according to Canada, agencies of the provincial government. Orders or regulations issued by the provincial marketing boards can be enforced before the Canadian courts. In most provinces, individual decisions by the boards are subject to appeal to a provincial supervisory board or commission (of which Canada recognizes the governmental nature).

7.77 While we acknowledge that producers play an important role in the provincial marketing boards, we also note that these boards act under the explicit authority delegated to them by either the federal or a provincial government. Accordingly, they can be presumed to be an "agency" of one or more of Canada's governments in the sense of Article 9.1(a). ⁴²⁷ In this respect, we refer to paragraph 2 of the Ad note to Article XVII:1 of GATT 1994 ⁴²⁸ as well as to Article XXIV:12 of GATT 1994 ⁴²⁹ , both constituting part of the context of Article 9.1(a). That the provincial marketing boards cannot issue orders or regulations without the backing of provincial or federal authority was confirmed by the Canadian courts in the so-called Bari II case. ⁴³⁰ In that case, it was found that the provincial marketing boards could not act at the inter-provincial or international level since they did not have the necessary federal authority. This shortcoming has now been rectified by amending the CDC Act.

7.78 In our view, the fact that most of the provincial boards are not formally incorporated as government agencies and that all or most of them are composed, completely or partially, of individuals which are also dairy producers, does not alter our conclusion. When - and to the extent that - these boards act under explicit delegated governmental authority, they can be presumed to act as an agency of the government. ⁴³¹ Nor is our conclusion altered by the fact that the authority thus delegated to the boards offers the boards a certain discretion. It is precisely because the boards receive the authority from the governments to regulate certain areas themselves that their actions become governmental. What is important though is that Canadian governments maintain the ultimate control and supervision of most, if not all, of the boards' activities. ⁴³² These governments define, and approve changes to, the boards' mandates and functions. ⁴³³

7.79 The third body which plays a decision-making role under Classes 5(d) and (e) is the CMSMC. ⁴³⁴ The CMSMC was established by the National Milk Marketing Plan (NMMP) which, in turn, is "a federal-provincial agreement in respect of the establishment of a National Milk Marketing Plan for the purposes of regulating the marketing of milk and cream products relating to Canadian domestic requirements and for any additional industrial milk requirements in Canada". ⁴³⁵ The NMMP was entered into by nine provinces ⁴³⁶ and the CDC. The bodies signing on behalf of each province are typically the provincial milk marketing board, the provincial supervisory board (which provides oversight of the operations of the provincial marketing board and is recognized by Canada as a provincial authority) and the provincial Minister for Agriculture. These two entities and the provincial Minister for Agriculture select a single "designated representative" who casts the vote on behalf of the province concerned. The CDC chairs the CMSMC and also has the right to vote. Decisions by the CMSMC are taken by consensus. In certain cases, disagreement is resolved by decision of the CDC. The CMSMC is also "the supervisory body which will oversee the implementation" ⁴³⁷ of the Comprehensive Agreement on Special Class Pooling. This agreement was concluded by the same bodies that are signatories to the NMMP and prevails over the NMMP. Decisions by the CMSMC under the Comprehensive Agreement on Special Class Pooling are taken by consensus. Instead of the CDC resolving disagreements, under the Comprehensive Agreement on Special Class Pooling a specific dispute settlement procedure is provided for. ⁴³⁸

7.80 We have found that all of the signatories to the NMMP and the Comprehensive Agreement on Special Class Pooling - i.e., the provincial governments and provincial supervisory boards, the CDC and the provincial marketing boards - may be considered as "agencies" of Canada's governments or are effectively Canada's provincial governments. Hence, we must presume that actions taken by these "agencies" or governments through the CMSMC are, in turn, actions taken by an "agency" of Canada's governments. We recognize the influential role played by producers in the CMSMC. At the same time, however, and considering the structure, delegated powers and responsibilities of the CMSMC as outlined above ⁴³⁹ , the concrete government involvement in the CMSMC is more than obvious. The NMMP itself states that "the participation of the Federal and Provincial authorities is required to assure the adoption and implementation" of the NMMP. ⁴⁴⁰ Most decisions by the CMSMC require the agreement of both the CDC (an agency of the federal government) and the provincial governments signatories to the NMMP (the provincial government is one of the three bodies appointing the "designated representative" of a province). In some instances, the CDC may even decide alone when there is a disagreement between the signatories of the NMMP.

To continue with The concrete government involvement

⁴¹⁰ See Section 1 (vii) and 2 (v) of Annex B to the Comprehensive Agreement on Special Class Pooling stating, respectively, "the processor will receive a reduced margin" and "[p]rocessors will receive full margin for the product sold".

⁴¹¹ See Canadian International Trade Tribunal, Profile of the Canadian Dairy Industry, Staff Report, reference No. GC-97-001, New Zealand Exhibit 8, p. 36.

⁴¹² The price differential may, for example, be a consequence of high - but WTO consistent - import tariffs that can cause domestic prices to be higher than the world market price. In such scenario, efficient producers may take the decision - based on their own profitability - to also produce and sell milk for export, albeit at a lower price than the domestic price. If the decision to sell in either the domestic market or the export market is one made by the individual producer and based on commercial grounds only (e.g., on an allocation of sales to the two markets with a view to obtaining a maximised total revenue, taking into account the inherently limited domestic demand for milk and the lower price for export) - not a decision by the government or its agencies taken on behalf of the producers - such scenario would, in our view, not appear to be an export subsidy in the sense of Article 9.1.

⁴¹³ In this respect, we note the Panel Report on Review Pursuant to Article XVI:5 (of GATT 1947), addressing the question of when subsidies are notifiable under Article XVI of GATT. There, the Panel stated the following:

⁴¹⁴ In any event, the complainants did not contest the extent to which the full costs associated with the administration of the scheme for exporting milk surplus to Canadian domestic requirements, are effectively recovered by the CDC and the provincial governments or agencies.

⁴¹⁵ See, however, para. 7.112.

⁴¹⁶ The New Shorter Oxford English Dictionary, Ed. Brown, L., Clarendon Press, Oxford, Volume 2, p. 2392.

⁴¹⁷ See para. 7.65.

⁴¹⁸ See paras. 7.24 ff.

⁴¹⁹ See para. 2.40.

⁴²⁰ Section 1(i) of Annex B to the Comprehensive Agreement on Special Class Pooling.

⁴²¹ Section 1 (vii) of Annex B to the Comprehensive Agreement on Special Class Pooling.

⁴²² Section 2 (i) of Annex B to the Comprehensive Agreement on Special Class Pooling.

⁴²³ Section 2 (v) of Annex B to the Comprehensive Agreement on Special Class Pooling.

⁴²⁴ Article XXIV:12 of GATT 1994, part of the context of Article 9.1(a), provides as follows: "Each contracting party shall take such reasonable measures as may be available to it to ensure observance of the provisions of this Agreement by the regional and local governments and authorities within its territory". The Understanding on the Interpretation of Article XXIV of GATT 1994, under Article XXIV:12, explicitly provides that "[t]he provisions of Articles XXII and XXIII of GATT 1994 as elaborated and applied by the Dispute Settlement Understanding may be invoked in respect of measures affecting its observance taken by regional or local governments or authorities within the territory of a Member". These provisions imply that all GATT provisions apply to "regional and local governments and authorities" within a WTO Member, in accordance with the general principle of public international law that a party to a treaty "may not invoke the provisions of its internal law as justification for its failure to perform a treaty" (set out in Article 27 of the Vienna Convention on the Law of Treaties). Article XXIV may act to limit the obligation of a WTO Member, which is a federal State, to secure the implementation of its GATT obligations. However, in our view, it does not limit the applicability of the provisions of GATT 1994 (see Panel Reports on Canada - Measures Affecting the Sale of Gold Coins, L/5863, unadopted, dated 17 September 1985, paras. 53-54 and 63-64; Canada - Import, Distribution and Sale of Alcoholic Drinks by Canadian Provincial Marketing Agencies, adopted on 22 March 1988, 35S/37, p. 91, para. 4.33; and Canada - Import, Distribution and Sale of Certain Alcoholic Drinks by Provincial Marketing Agencies, adopted on 18 February 1992, 39S/27, p. 86, para. 5.35).

⁴²⁵ See paras. 2.12-2.15.

⁴²⁶ See paras. 2.16-2.20.

⁴²⁷ In this respect, we refer to Article 7:2 of the Draft Articles on State Responsibility of the International Law Commission (ILC) - which might be considered as reflecting customary international law - which states: "The conduct of an organ of an entity which is not part of the formal structure of the State or of a territorial governmental entity, but which is empowered by the internal law of that State to exercise elements of the governmental authority, shall also be considered as an act of the State under international law, provided that organ was acting in that capacity in the case in question" (Report of the ILC on the Work of its 48th Session, General Assembly, Official Records, 51st Session, Supplement No. 1 (A/51/10), under Chapter III).

⁴²⁸ Paragraph 2 of the Ad note to Article XVII:1 of GATT 1994 states: "The activities of Marketing Boards which are established by contracting parties and which do not purchase or sell but lay down regulations covering private trade are governed by the relevant Articles of this Agreement". Since, accordingly, GATT 1994 applies to such activities of "marketing boards" - and the Canadian provincial milk marketing boards are, in our view, such "marketing boards" - one can assume that most of the activities of the Canadian milk marketing boards are governmental in nature.

⁴²⁹ Provincial marketing boards acting under the authority explicitly delegated to them by federal or provincial governments are, in our view, "regional" or "local" authorities in the sense of Article XXIV:12 of GATT 1994, outlined above in footnote 424. See, in this respect, the 1988 Panel Report on Canada - Import, Distribution and Sale of Alcoholic Drinks by Canadian Provincial Marketing Agencies: "The panel noted that there was no dispute that the provincial liquor boards were 'regional authorities' within the meaning of Article XXIV:12" (adopted on 22 March 1988, 35S/37, p. 91, para. 4.33) and the 1992 Panel Report on Canada - Import, Distribution and Sale of Certain Alcoholic Drinks by Provincial Marketing Agencies: "The Panel noted that the parties to the dispute agreed that the provincial liquor boards were 'regional authorities' within the meaning of Article XXIV:12 of the General Agreement and that this Article was therefore applicable to all provincial practices at issue" (adopted on 18 February 1992, 39S/27, p. 86, para. 5.35).

⁴³⁰ B.C. Milk Marketing Board v. Bari Cheese et al. (11 August 1993), Vancouver C912303 (B.C.S.C.); (14 August 1996), (B.C.C.A.), unreported.

⁴³¹ If we were to accept Canada's argument - namely, that the provincial marketing boards are not governmental agencies because they are composed mainly of milk producers and producer-driven - it would mean that also a decision by a government minister - being, for example, also a farmer or having his or her electoral base in the agricultural sector - which favoured farmers would, for that reason, no longer constitute a governmental action but a private action by farmers.

⁴³² In the Bari III case, for example, the Supreme Court of British Columbia found that the sub-delegation by the Governor in Council (of certain governmental powers granted to him under the CDC Act) to the CDC, the CMSMC and the provincial boards constitutes valid sub-delegation. The Court found that the functions sub-delegated are administrative, not legislative; that the sub-delegation was done out of "administrative necessity"; and that "sufficient direction has been provided ... as to how [the CDC, the CMSC and the boards] are to perform these functions" (British Columbia Milk Marketing Board and Canadian Dairy Commission v. Luigi Aquilini et al., Reasons for Judgment of the Hon. Mr. Justice Wong, 12 September 1997, para. 117).

⁴³³ This delegation of governmental authority to the boards should be distinguished from the government's involvement in creating a legal framework for, e.g., private banks (an example referred to by Canada). The boards are not only provided with a framework within which they can operate; they receive the authority to themselves regulate certain aspects of the milk market. Private banks, on the contrary, are legally recognized and subject to certain rules and thus operate within a framework set by the government. However, they do not - like the boards - receive the power to regulate themselves, e.g., the financial markets.

⁴³⁴ See paras. 2.27-2.33.

⁴³⁵ Introduction (A) to the NMMP. On the NMMP, see paras. 2.21-2.26.

⁴³⁶ All Canadian provinces are parties to the NMMP except for Newfoundland which is, according to Canada, not a party to the NMMP because its milk producers produce almost exclusively for the local fluid milk market and because Newfoundland has not traditionally contributed to the industrial milk supply that is the subject of the NMMP.

⁴³⁷ Schedule I, Section 1 of the Comprehensive Agreement on Special Class Pooling.

⁴³⁸ Annex D to the Comprehensive Agreement on Special Class Pooling, according to which the CMSMC first acts as the Supervisory Body in an attempt to resolve the dispute prior to arbitration by an arbitration Panel. The CDC acts as secretariat for all dispute settlement purposes.

⁴³⁹ See para. 7.79.

⁴⁴⁰ Preamble (B) to the NMMP, fourth paragraph.