WTO Rules Canada's Dairy Scheme Won't Fly

July 13, 2001

The United States has won an important agriculture case before the World Trade Organization (WTO) that challenged Canadian dairy export subsidies as a violation of WTO rules. In a ruling released Wednesday, a WTO dispute settlement panel found that the steps Canada took to address an earlier adverse ruling regarding its dairy export practices were insufficient. The panel ruled that Canada's dairy export subsidies are inconsistent with its WTO commitments. The United States estimates that Canadian dairy export subsidies result in lost sales by American farmers and dairy processors of up to $35 million per year. Canada is expected to exercise the one last appeal available.

"This is a victory for American dairy farmers and processors. Canada has been improperly subsidizing its dairy exports - that's unfair to American dairy farmers and dairy processors who are competing with the Canadians in world markets," said U.S. Trade Representative Robert B. Zoellick. "Trade and export competition is a critical issue for American farmers. America's farmers support President Bush's legislative trade agenda and Trade Promotion Authority because they know that agricultural exports are critical to the health of our economy and rural America."

The Agriculture Secretary said she expected the decision "will greatly benefit U.S. dairy producers" and added a plug for trade promotion authority for the administration to negotiate trade deals. "To make further progress, it is critical that the president have the necessary tools to negotiate trade agreements that help U.S. farmers. Trade Promotion Authority is one of the most important tools in helping expand market opportunities and eliminate export subsidies," she said.

The U.S. dairy organizations involved in the process applauded the action. "This ruling reinforces the clear message that Canada needs to comply with its obligations," said Tom Suber, president of the U.S. Dairy Export Council (USDEC). "U.S. cheese exporters need to be able to compete in and regain market share in areas where Canada's illegal practice has prevented them from doing so before."

Jaime Castaneda, vice president of trade policy for the National Milk Producers Federation (NMPF), said, "It's important that the WTO take a hard line against any country that seeks to bend the rules to gain an unfair advantage. This is part of our ongoing effort to achieve fair trade in the world dairy market, and increases the ability of the U.S. dairy industry to compete in world dairy markets."

The International Dairy Foods Association (IDFA) joined in highlighting the importance of the ruling. "This is an extremely important case for the U.S. dairy industry, not just because of lost sales resulting from subsidized Canadian exports, but because of the clear message that two-tiered pricing systems, backed by government enforcement, are subject to limits," said IDFA Vice President and General Counsel Janet Nuzum. "The U.S. dairy industry should not be expected to compete against subsidized exports, however well disguised."

As a result of the ruling, and pending one more appeal by Canada, the United States and New Zealand may decide to impose trade sanctions on Canada for its failure to comply with the 1999 WTO ruling, the dairy industry statement said. Both countries announced in February that they would ask for the WTO's authorization to impose $35 million each in their annual punitive duties on Canadian imports if the compliance ruling went in their favor. The USTR has listed Canadian fish, dairy products, fruits and vegetables, cereals, sugar and beverages as possible targets for retaliatory tariffs. If Canada files an appeal, the appellate body is expected to issue its ruling within 90 days of the filing.

Besides the direct economic impact, the WTO ruling sets an important precedent which will help prevent other countries from adopting similar export subsidy programs harmful to America' s dairy industry. "This is another example of how the United States is able to work within the WTO dispute process, make a strong case for America's interests and come away with a win - in this case for our dairy producers," Zoellick added.

In 1997, the National Milk Producers Federation, the U.S. Dairy Export Council and the International Dairy Foods Association petitioned the USTR to challenge Canada's dairy trade practices as inconsistent with its WTO obligations on export subsidies and market access. After bilateral consultations, the United States referred its complaint to a WTO dispute settlement panel in February 1998. New Zealand joined the WTO challenge to Canada's export subsidies.

In 1999, a WTO dispute settlement panel found that Canada's special milk class system and import restrictions on dairy products violated WTO obligations. The WTO Appellate Body affirmed the panel's finding on export subsidies.

In response to the panel and Appellate Body reports, Canada replaced its special milk class system with a new dairy export program in each province. However, Canada's new measures left unchanged the fundamental aspects of the programs found by the WTO to constitute export subsidies. As a result, the United States and New Zealand requested that the WTO review the new provincial programs. The United States argued, and the panel agreed, that the continued involvement of Canadian federal and provincial governments in the provision of low-cost milk to processors for export constituted an export subsidy and that Canada already had exceeded its commitment under the WTO Agriculture Agreement on subsidized cheese exports. Canada has 60 days to appeal the report to the WTO Appellate Body.