Try, and try again (in disputes settlement)

Geneva, 18 (Chakravarthi Raghavan) - - The Dispute Settlement Body Tuesday adopted an Appellate Body ruling in a dispute brought by New Zealand against Canada, reversing a compliance panel ruling that Canada had not complied with an earlier ruling that it was violating WTO rules in exporting subsidised dairy products.

And promptly, New Zealand tabled a new request for a second compliance panel on the same issue and had it referred to the original panel.

Several members in their interventions expressed concerns about the systemic issue raised - of complainants bringing up complaints repeatedly on the same issue, until they win.

The original ruling involved a complaint by New Zealand against fellow Cairns group member Canada that the latter was violating its export subsidy commitments by providing subsidies for exporters of milk and milk products, without including them within the export subsidy ceiling commitments. The panel and appellate body rulings were adopted by the DSB in October 1999.

By agreement, Canada was given time till 31 January 2001 to implement the ruling.

Canada modified its arrangements and notified it to the DSB on 19 January 2001, and announced that it was now in full compliance. Canada eliminated one category, under its law, of Special Milk Class 5 (d) - entitled to receive domestic milk supplies at subsidised prices - and restricted the exports of dairy products under another category 5 (3) to its export subsidy commitment levels.

However, Canada continued its pre-existing milk supply management scheme including establishment of an annual market sharing quota for industrial milk and its allocation to milk producers as well as regulation of supplies and prices of milk through other categories (or ‘Milk Classes’). A new class of domestic milk was also created under which over the quota milk could only be sold as animal feed. A new category of milk for export processing, ‘commercial export milk (CEM)’ was created, and through contracts concluded in advance of production Canadian producers can sell any quantity of CEM to Canadian processors for export processing on terms and conditions negotiated between the producers and processors. CEM milk sales did not require any form of quota or permit from Canadian government or its agencies, and revenues derived by the product from sales of CEM are collected directly without government being involved.

However, if a processed dairy product, produced by use of CEM, is sold on the domestic market, the processor is liable to financial penalties for diverting the dairy product into the domestic market.

New Zealand and the United States challenged the Canadian position of compliance and sought reference to a compliance panel under Art.21.5 of the DSU. They also sought simultaneously, authorisation for suspension of equivalent concessions under Art. 22.2. With Canada objecting to the level of suspension proposed, this was referred to an arbitrator, who was requested by both parties to suspend arbitration pending the ruling on the 21.5 request.

The panel concluded that through the CEM scheme, and continued operation of Special Milk Class 5 (d), Canada had acted inconsistently with its obligations under Articles 3.3 and 8 of the Agreement on Agriculture, by providing export subsidies within the meaning of Art 9.1© of the AoA, in excess of its quantity commitment levels in its schedules for exports of cheese.

The Appellate Body reversed the compliance panel’s ruling that the supply of CEM by domestic milk producers to domestic processors involved “payments” on the export of milk “financed by virtue of governmental actions” under Art. 9.1.c of the AoA.

However, the AB said on the basis of the panel’s factual findings and the uncontested facts on record, the AB was unable to complete its own analysis of the claims of New Zealand and the US under Art. 9.1.c or 10.1 of the AoA or the US (alternative) claim that the Canadian action violated Art.3.1 of the Agreement on Subsidies.

[Under Art. 10.1 ‘Export subsidies not listed in Art. 9.1 shall not be applied in a manner which results in, or which threatens to lead to circumvention of export subsidy commitments; nor shall non-commercial transactions be used to circumvent such commitments.]

The AB observed: “In the light of the facts available to us, we have found that we are unable to determine whether the measure at issue is an export subsidy listed under Art. 9.1.c. However, it remains possible that the measure is such an export subsidy. Clearly, in that event, the opening clause of Art. 101. Means that the measure could not also be an export subsidy under Art. 10.1

“In these circumstances, where we are unable to determine the legal character of the measure under Art. 9.1 of the AoA, we are similarly unable to rule upon the legal character of the measure under Art. 10.1 of that agreement.”

The AB report has raised the issue of a deficiency in the DSU, which gave it no power to remand the dispute back to the panel for ascertaining the facts.

Earlier, over the adoption of the AB report in the compliance ruling case, the EC expressed its concern over the AB (in effect ‘legislating’) by talking about the new “below average total production cost standard” as a benchmark for judging subsidy, and wondered how the new benchmark would operate in practice.  It was also concerned that the AB had developed this benchmark without any of the parties raising or arguing about it. The AB, it noted, had left the dispute unresolved and in effect ‘remanded’ it to the panel.

In seeking a new compliance panel reference, New Zealand complained of the absence of a definitive ruling, and resulting in a kind of “ping-pong” dispute settlement - “hardly the most efficient way to secure settlement of disputes”

Trade observers however say that the problem is due to the DSU was put together by a small group of countries, and the highly legalistic approach to the dispute settlement process under the WTO - with panels and the appellate body approaching the problem not with a view to promoting settlement of disputes, but in a legal way and exercising the socalled ‘judicial economy’ and not answering all the questions raised and providing a definitive view of the WTO rules and the DSB forced to adopt the reports through the negative consensus rule.

In other matters, the DSB chair in a statement sought to initiate negotiations on the DSU review, mandated at Doha, to be completed no later than May 2003, but not as a part of the single undertaking in the work programme, and that the DSB should initiate the work, including getting proposals from members.

However, the EU, insisted it should be handled as part of the Trade Negotiations Committee Process. – SUNS5034

The above article first appeared in the South-North Development Monitor (SUNS) of which Chakravarthi Raghavan is the Chief Editor.

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