AGRI Committee Meeting

STANDING COMMITTEE ON AGRICULTURE AND AGRI-FOOD

COMITÉ PERMANENT DE L'AGRICULTURE ET DE L'AGROALIMENTAIRE

EVIDENCE

[Recorded by Electronic Apparatus]

Tuesday, February 17, 1998

• 0909

[English]

The Chairman (Mr. Joe McGuire (Egmont, Lib.)): Good morning, everyone. I'll call the meeting to order.

As you see on number 4 of the agenda we have a motion by Mr. Jay Hill. Do we want to deal with that motion at a later time today ?

Mr. Leon E. Benoit (Lakeland, Ref.): He prefers to postpone it until the next meeting.

The Chairman: Is it agreed that the motion be postponed until the next meeting?

Some hon. members: Agreed.

• 0910

The Chairman: Today, pursuant to Standing Order 108(2), we will consider the United States' challenge on dairy export pricing policy. Our witnesses today are from the Department of Agriculture and Agri-Food. We have Mike Gifford and Paul Martin who are both with us again.

You're going to be two very familiar faces, I understand, in this next year or so.

We'll take the statements from the witnesses and then we'll go to questions.

Mr. Gifford.

Mr. Mike Gifford (Acting Assistant Deputy Minister, Market and Industry Services Branch, Department of Agriculture and Agri-Food): I should start by saying that we've been joined by our colleagues from the Department of Foreign Affairs and International Trade. In particular, we have with us today Mr. John McNab, who is the director of the trade remedies division in the Department of Foreign Affairs and International Trade.

Basically, on this exercise, we have a Team Canada approach with the Departments of Agriculture and Foreign Affairs and International Trade. We are working very closely together with the provinces and the industry, both the Dairy Farmers of Canada and the National Dairy Council of Canada.

I thought, Mr. Chairman, what I would try to do very quickly is just give you the background in context to what led up to this dispute.

The Chairman: You have John McNab and...?

Mr. Mike Gifford: Mr. Ian McLeod is the lawyer at the Department of Foreign Affairs and International Trade, Mr. Chairman, who is in fact advising the group that's working on this particular panel.

I will give you some background, Mr. Chairman, in terms of what led up to this panel. I will then turn to Mr. McNab just to bring you up to date on exactly what the process is in Geneva and when we can expect basically a panel report and then probably an appellant body determination.

First of all, I'd just like to remind the committee that unlike the industrial sector that agreed to prohibit the use of export subsidies back in the 1950s, agricultural export subsidies are still permitted in the GATT. The big difference was that in the Uruguay Round, which concluded in December 1993, for the very first time agricultural export subsidies were brought under effective discipline.

We basically defined more precisely what constituted an agricultural export subsidy. It was then agreed that we would reduce those defined subsidies by certain amounts over a six-year phase-in period. Although it would still leave a level of export subsidization, it certainly represented the first time that the international community had attempted to reduce the use of agricultural export subsidies.

During a discussion of the definition of what constituted an export subsidy, Mr. Chairman, there was no discussion about what to do with two-price systems. This is the situation where in many countries, many industries will basically price up to the duty-paid import price to establish a domestic price level and then they will export at various prices into various markets, depending on end uses.

I can state categorically that during the negotiations of the revised list of export subsidies there was no real discussion of what to do with so-called two-price systems.

There was, however, a provision that in effect said that the subsidy reduction commitments should not be circumvented. This idea was not really discussed to any great extent, but certainly there was an open-ended commitment that somehow countries should not circumvent their very specific export subsidy commitment reductions.

I just might add that both in the case of dairy and in the case of sugar, both Canada and Europe had export practices in the old days that were defined as export subsidies for the purposes of this agreement. In the case of European sugar and Canadian dairy the two systems were very much the same.

In the case of dairy, Canadian dairy producers were assessed a levy by their provincial milk marketing boards. That levy was then paid to the Canadian Dairy Commission. The Canadian Dairy Commission officials then used to write a cheque to a Canadian dairy exporter to allow him to export to international markets at prices that were lower than those prices prevailing in Canada.

• 0915

It was this idea of producers paying a levy, in effect, to a governmental or quasi-governmental agency such as the Canadian Dairy Commission, who in turn wrote specific cheques to firms engaged in exports, that was defined, for the purposes of the WTO, as an export subsidy.

One of the things that occurred after the conclusion of the Uruguay Round was the decision by the Canadian dairy industry on what to do with these new disciplines. For a number of reasons, some of which related to their own initiative to reform domestic policies—that is, to establish genuine pooling across the country, and to basically split the country into a western pool and an eastern pool—the dairy industry collectively decided that rather than continue the old system, which it was entitled to do so long as it was within the export commitments put into Canada's export schedule, they would change the system to what's been called “classified pricing”. That is to say, Canadian provincial milk marketing boards would sell milk to processors at various prices, depending on the end use and the market.

The long and the short of all of this, Mr. Chairman, is that the United States, first of all, and New Zealand secondly, have basically claimed that the system Canada introduced as of August 1, 1995, the so-called system of export pricing, which replaced the old producer-financed export assistance program, is an export subsidy and is in effect circumventing Canada's export subsidy reduction commitments.

I might add in parentheses, Mr. Chairman, that in talking to U.S. dairy producer representatives, they've made it very clear that their objective is basically to get the United States government to once and for all clarify what exactly are a country's rights with respect to use of export subsidies and two-price systems. If the United States wins this WTO panel case, that's fine, but if Canada wins the panel case, that's equally fine, because then United States producers will simply ask the U.S. government to introduce a system similar to Canada's.

In the case of New Zealand, the New Zealand concern about the Canadian dairy export pricing system doesn't really relate to Canada's significance as a dairy exporter, because we are a very small dairy exporter relative to Europe, relative to New Zealand, Australia and even the United States. But New Zealand's concern is very much a concern that if Canada's system of export pricing is found to be in conformity with our export subsidy reduction commitments, then there are some people in Europe, in particular France and Denmark, who've been actively lobbying Brussels to adopt a pricing system very similar to that of Canada's. So New Zealand's concern is that the European Union, which is the world's largest dairy exporter, would in fact move to adopt the Canadian system.

The French and the Danish proposals that Brussels adopt that kind of system has so far been turned down by the European Commission and some of the other member states. New Zealand's concern is that they want to basically clarify again, once and for all, what exactly are a country's export rights and obligations when it comes to agricultural export subsidies.

• 0920

I might conclude, Mr. Chairman, by saying “once and for all” is not something we should say categorically, because it seems to me as a practical matter that irrespective of the outcome of this panel—which we expect to come down before the end of the year—countries will want to discuss in the next round of agricultural negotiations what kind of new disciplines, if any, should apply to two-price systems.

New Zealand, for example, does sell milk for fluid use in New Zealand at a higher price than it sells for export. But it has been arguing, for example, that it's selling 90% of what it produces at the world price, and only 10% at the New Zealand price, and moreover the New Zealand price isn't really supported by very high tariffs.

Other countries try to make the argument that basically there is some kind of qualitative difference if a country relies 90% on the domestic market that's protected by high tariffs, and basically only exports 10%.

The bottom line on all of this, Mr. Chairman, is that it's going to require a panel and probably an appellate body after that—basically an appeal to the court of appeal of the WTO—to determine, at least between now and the introduction of any new rules that might be introduced as a result of the next round of negotiations, or clarify exactly what countries can do and can't do with respect to agricultural export subsidies.

If you don't mind, Mr. Chairman, perhaps before turning the floor back to you for questioning, I might ask Mr. McNab to give you a snapshot of what exactly is the process in Geneva and when we can expect some of these key decision points.

The Chairman: Okay. Mr. McNab.

Mr. John McNab (Director, Trade Remedies Division, Department of Foreign Affairs and International Trade): Thank you very much, Mr. Chairman.

As you may know, the dispute settlement process under the WTO is much more structured than it was under the GATT. There are certain timeframes that have to be honoured, and once the process is initiated, there are certain time lines that you can predict, not with certainty but certainly with some approximation.

The case involving the United States really began domestically in the United States under section 301, which is a domestic provision in the U.S. that allows an industry group to petition USTR—to bring to the attention of USTR a practice of a trading partner that they think may be in violation of an international agreement. If USTR agrees that there is a basis to proceed, then they must initiate the dispute settlement procedures of the agreement under which the allegation is made. So in that case, that meant initiating the dispute settlement procedures of the WTO.

The first step in any WTO dispute is a request for consultations, which was made in October. The consultations with the United States were held in November in Geneva. Japan and Australia participated in those consultations as well. Following the consultations, if there is no resolution to the dispute, after a period of 60 days the country requesting the consultations is able then to request the establishment of a panel.

The United States did request the establishment of a panel last week at a meeting of a body called the Dispute Settlement Body. Under the procedures of the Dispute Settlement Body the first request for a panel can be turned down by the other countries. In this case, Canada did not agree at the first request for the establishment of a panel.

The United States is free to request the establishment of a panel at the next meeting of the Dispute Settlement Body, which we think will be in early March. Under the rules of the WTO, at the time the second request is made it must be accepted. A panel will be established if the U.S. does make the second request.

• 0925

Also, the interest of New Zealand has been indicated in a request for consultations they made at the very end of December. Consultations were held with New Zealand in Geneva at the end of January. So New Zealand will soon be in a position as well, after the end of February, to request a panel. The request could be made simultaneously with the second request by the United States, but we'll have to wait and see.

If the U.S. does proceed with the second request for a panel and it's established on March 13, then that does initiate the process under the dispute settlement understanding. This would lead to the submission of arguments by both sides in early May and at the end of May. There would be a first hearing at which both parties would be given an opportunity to appear before the panel probably around mid-June. An interim report of the panel would be sent back to the parties around mid-August and we would expect a final report of the panel around mid-October.

As Mr. Gifford said, one of the major differences between the GATT and the WTO dispute settlement process is that there is now an appeals procedure in the WTO. There is an appellate body so that if a party to a panel disagrees with the panel's finding or with the reasoning of the panel, it can request an appellate review. The appellate body works very quickly. If there is an appeal of a decision that comes out in October, it would have to be finished in January or early February of next year.

So if the whole process is initiated by the United States early next month, it would end in January or early February of next year.

Thank you, Mr. Chairman.

The Chairman: What is the big difference, then, Mr. Gifford, between our old way of doing this and our new way?

Mr. Mike Gifford: Under the GATT, particularly when it came to agriculture export subsidies, over the last four or five years of the GATT there was a consistent tendency of all major participants to block the adoption of panel reports. So, in effect, you could get a panel ruling on something, but then one of the complainants to the panel would block its adoption and therefore the rule would not come into effect.

The difference under the WTO dispute settlement is that a party to a dispute cannot block the adoption of a panel report. Some people were concerned that if the panel reports were going to be adopted without opposition, there would have to be a double check, a safety check. There would have to be a provision for an appeal of a panel report.

That's why one of the new things under the WTO is this appellate body, which is comprised exclusively of lawyers, and largely of ex-judges. So it's a very high-calibre body.

Although I stand to be corrected here, John, I don't believe any panel report to date has been overturned by any appellate body finding. There have been instances where some of the specifics of a panel finding have been modified by the appellate body.

Mr. John McNab: Every panel report has been appealed so far.

The Chairman: Mr. Benoit.

Mr. Leon Benoit: Thank you, Mr. Chairman.

Good morning, gentlemen. Welcome.

First, Mr. McNab, on your comment that the U.S. may choose to ask for a panel, do you feel they may not in fact...or are you just leaving it open because there's always some uncertainty?

Mr. John McNab: You can't predict the actions of others with certainty. Given that the United States did not request a panel immediately when they had the right to—they did delay a bit and then chose to request a panel at the last meeting—they may well request a panel at the next meeting.

• 0930

Mr. Leon Benoit: Could I ask you to make up a brief sheet laying out the process with the different steps as you've just outlined it to us, perhaps with just a little more detail on what you might expect at each stage. I think that would be helpful.

Mr. John McNab: Thanks.

Mr. Leon Benoit: Mr. Gifford, you made a comment on the U.S. and on Europe, saying that if the U.S. loses in this process, in the challenge against the Canadian pricing system that they may in fact go to the Canadian-style pricing system. You said the same thing about Europe; they may well go to the Canadian-style pricing system. Why do you think they would do that?

Mr. Mike Gifford: Today, Mr. Chairman, the United States does have a major dairy export subsidy program. They have direct government export subsidies. So they still have that right to use export subsidies up to the defined limits. Some U.S. producer groups have been arguing that it would make sense to adopt a system similar to Canada. They have, in effect, classified pricing to some extent in the United States. For example, the price that they sell milk for on the retail market for fluid use is different from the price that they sell it for for various manufactured uses, such as butter or cheese. So they have a system of classified pricing.

Mr. Leon Benoit: Would they do this because it would make them able to compete better in certain markets, or would they do it because they're less likely to be challenged on it?

Mr. Mike Gifford: Particularly in the last four or five years they believe the future of the U.S. dairy industry is basically on a global basis. They feel very close to being able to produce milk at a globally competitive price. That being said, they want the opportunity to have maximum flexibility. They think that having a system somewhat like Canada's would give them more flexibility.

You'd have to ask the U.S. dairy producers. I'm just reporting the comments they've made to me several times in the past, that if the United States loses this case, then they will ask the United States government to adopt a system similar to Canada's.

Mr. Leon Benoit: In the case of Europe, is it a much similar kind of thinking?

Mr. Mike Gifford: The European Commission in Brussels has a domestic policy view that they want to make changes to European dairy policy, but they don't necessarily see eye to eye with the French and the Danish governments. The French and the Danish governments are on public record as suggesting that Europe should adopt a system very similar to Canada's. For their own domestic policy reasons, the European Commission and some of the other member states are saying they would prefer to reform European dairy policy in a somewhat different fashion.

Mr. Leon Benoit: You mentioned that sugar has a very similar system in Europe to dairy products in Canada. What would likely happen with sugar? Would it have an impact on the way Europeans handle their sugar marketing?

Mr. Mike Gifford: Perhaps I can simplify it. The system that was defined as an export subsidy for sugar in Europe, Mr. Chairman, is a system that basically says a certain percentage is sold on the domestic market, a certain quantity is sold on the domestic market at European prices. A product that's sold for export is sold at world prices. So basically it's a two-price system to simplify it down to its bare essentials.

The way they operated the system though did provide for the use of direct financial payments by the European Commission and the member states to European sugar exporters. Therefore, it was defined as an export subsidy, just as the Canadian dairy system prior to August 1, 1995, was a defined export subsidy. We collected these levies; we gave them to the Canadian Dairy Commission. They wrote a cheque and gave it to a Canadian dairy exporter.

Mr. Leon Benoit: Could you see this having an impact on any other agricultural commodities either in the United States or Europe?

• 0935

Mr. Mike Gifford: No, I don't think so, Mr. Chairman. I think there's a growing sense of inevitability that in the next round of negotiations there's a distinct likelihood that agricultural export subsidies will be banned after a phase-out period, just like industrial export subsidies were banned in the 1950s. This will precipitate a detailed discussion that if we are going to finally ban agricultural export subsidies, what kind of international disciplines are appropriate for those countries—this will cover virtually all countries—that in effect practise some kind of two-price system? It doesn't matter whether you have a 10% or 200% tariff at the border, it always pays you to price up to the duty-paid price on the domestic sales and then sell into export markets at whatever the prevailing export price will be.

In legal terms, that's considered to be dumping under the WTO, but often importing countries don't really care whether the product is dumped because they just want to get it at the lowest possible price. But then the question is about the concerns of other affected exporters in third markets when one country is using a two-price system. I think this is a genuine concern, Mr. Chairman, that will have to be addressed in the next round.

Mr. Leon Benoit: Their concern isn't just the concern to Americans. The restaurant industry, especially the pizza retailers, have faced some very serious problems due to the two-price system. They're almost unable to compete with the supermarkets, which have a frozen pizza that's very close in quality to what a pizzeria can produce. The pizza industry in Canada has shrunk dramatically over the last several years, and they argue that it is because of this two-price system.

So the concerns aren't just expressed by the Americans. It's also by Canadians who feel the negative impact of the two-price system, especially when they don't have it available while others do.

Mr. Mike Gifford: All I can say is that there are many instances in the United States itself of these kinds of systems. For example, the U.S. sugar system has a domestic price of roughly 21¢ U.S. a pound for sugar, but they export to offshore markets or to other markets at prices substantially below that. There are other instances, other products, in the United States where they sell various products to different end users at different prices. This is a typical business practice. It's not unique to agriculture.

The Chairman: Mr. Chrétien.

[Translation]

Mr. Jean-Guy Chrétien (Frontenac—Mégantic, BQ): Mr. Gifford, your colleague told us earlier that, according to the time lines, we might get the final report on the American challenge around the month of January of next year. However, the next WTO negotiations should start in the fall of 1999. In your opinion, why are the Americans not waiting for the next round to start before putting on the table all those little irritants they have found yearly since the 1993 negotiations? After all, that next round is due to start soon.

[English]

Mr. Mike Gifford: Mr. Chairman, all we can do is speculate. I assume the United States government would prefer to get an authoritative interpretation from a panel and the appellate party as to what the existing rules mean, in order to determine whether they should press for any changes in the next round.

Recognizing that for the next round, although it will start in late 1999, there is no idea as to when it will conclude and even less idea as to when the new provisions of the new agreement would come into force.... For the sake of argument, if January 1, 2005 is when the next round results start to be implemented, you still have a period between now and 2005 under the existing system.

• 0940

[Translation]

Mr. Jean-Guy Chrétien: What are the chances of Canada winning that second round of negotiations, in your opinion?

[English]

Mr. Mike Gifford: Mr. Chairman, our American friends made a major error the last time around when American government officials told their domestic constituency that it was going to be a slam dunk with respect to the NAFTA panel—in other words, that the panel was going to vote 5-0 in favour of the United States. In fact, the panel voted 5-0 in favour of Canada.

When somebody asked me the same question a couple of years ago, Mr. Chairman, I said we were out to win this panel, but it would be a very foolish person who would try to anticipate the results of a panel. We are working very closely with the Dairy Farmers of Canada, the National Dairy Council of Canada, the Canadian Dairy Commission and the provinces. The provinces are providing their legal counsel advice to us, and so is the private sector. We're going to present as good and as tough a case as we did the last time around, Mr. Chairman.

[Translation]

Mr. Jean-Guy Chrétien: You are optimistic. If I am not mistaken, in the 1993 negotiations, we set very high tariffs on eggs, poultry and dairy products in order to keep our supply management system. If those customs tariffs are applied, it will discourage all exporters and importers in Canada.

Our milk producers are presently producing big amounts of milk, within their quotas of course. If you have a surplus on the Canadian market even though you are still within quotas, you will be selling it at a lower price; that is, you will sell it at 50¢ in Canada, for example, and export it at 25¢ a litre. The farm producer or the milk producer will agree to getting half the regular price.

I would like to know what percentage of our manufacturing milk production is being exported at a lower price.

[English]

Mr. Mike Gifford: Mr. Chairman, my recollection—and we will provide you with specific data—is that domestic sales, both fluid and product going into manufacturing, would account for over 95% of our production, so exports today represent less than 5% of our total production. However, I think the important thing that the industry itself is beginning to struggle with is that the domestic market is a very slowly growing market. In fact, it could be stagnant or declining.

[Translation]

Mr. Jean-Guy Chrétien: Those 5%, Mr. Gifford, could easily be compensated by reducing our butter oil imports that now represent over 3%.

Twice you said that if Canada were to win, the U.S. milk producers would ask the U.S. government to emulate Canada. Some of my friends are milk producers along the U.S.-Québec border, mostly in Vermont, and they find that quite odd. Maybe they are not typical of the American farming community, but if they are, let me tell you that the Americans are not really keen on introducing a management supply system similar to Canada's.

[English]

Mr. Mike Gifford: Mr. Chairman, I am not suggesting the Americans are saying they would want a supply management system like Canada's. I am saying they would like an export pricing system like Canada's, if in fact Canada won the panel. It's the export pricing system they are interested in copying, not the supply management system, Mr. Chairman.

[Translation]

Mr. Jean-Guy Chrétien: To conclude, I will make this comment. Our milk producers who are selling 5% of their product in the U.S. at half price do it because they don't want to throw it down the drain, but they are not getting any government subsidy. I think that if the Americans were willing to sell their milk at a cheaper price—and I doubt they would ever do it—, they would ask their government for compensation.

• 0945

[English]

Mr. Mike Gifford: I think producers in Canada and the United States both realize that you can't expect to sell your milk to all markets at the identical price. Even in the U.S. you sell fluid milk at a substantially higher price than you would milk for, say, fresh cream or cottage cheese. Milk going into cottage cheese would be sold at a much higher price than milk going into butter or cheese. It's quite common in the dairy sector around the world for milk to be sold at different prices for different end uses within a country, and then to be sold for different prices, different markets for different end uses when they export. This is something that's not unique to Canada, Mr. Chairman.

The Chairman: Thank you.

Mr. Calder.

Mr. Murray Calder (Dufferin—Peel—Wellington—Grey, Lib.): Thank you, Mr. Chairman.

I would like to carry on where Mr. Chrétien has been going, and perhaps back up a bit. When we went through the last Uruguay Round, Canada was working on supply management with article 11. The United States suggested we go to tariffication, which we did. Europe right now is still working on a subsidy system that quite frankly they're worried about, so they're looking towards the tariffication system more than what they're into at the present time.

The bottom line is that as a farmer I have to address that balance sheet. If my expenses are higher than my income, I'm not in business for very long.

I think what we're hearing out of Europe right now is that they are worried about their subsidies going lower than they are right now; they are probably looking at moving more towards the tariffication aspect of the two-price system. There's a groundswell in the United States with their agricultural people. You have the eastern dairy compact. There are a number of examples of supply management that are starting to sprout up in the United States, and I think it all stems from this balance sheet aspect of it.

Is that why we're hearing the United States and Europe talking more about a two-price system than we've ever heard before, or am I a little off-track here?

Mr. Mike Gifford: There's no uniform position in Europe or in the United States, for that matter. I think there's a majority view in Europe that supply management production controls, a system very similar to Canada's, is something they're going to have. In fact, Commissioner Fischler has suggested that he's prepared to guarantee that system continuing to at least 2006. But they're the world's largest dairy exporter and if they're going to export—it's not a question of surplus production, they're the world's largest dairy exporter—they're going to be constrained by these export subsidy disciplines. At some point they know that export subsidies are going to be banned.

So the question is what kind of a system is going to replace the current system, which is predicated on the one hand at the production level with production controls, and on the other hand with export subsidies? If Europe wants to continue to be the world's largest dairy exporter, somehow they're going to have to come up with a domestic and trade policy for dairy that's consistent with a new world, and I think that's what they're struggling to do.

Similarly, in the United States they went from a very inward-looking dairy sector that was very sensitive to imports 10 years ago, to a sector today where in California and the southwest the dairy farms are extremely large and they believe they can compete on a worldwide basis. You have producers in New England, Vermont and New York, for example, who are concerned that under that kind of scenario they are high-cost producers and won't be able to survive. So even within the United States dairy sector there are conflicting views as to where the U.S. dairy sector should go in the future.

Mr. Chairman, we're all trying to deal with the recognition that in the future import barriers are going to be reduced. In the next round there's a distinct possibility that there could be that big leap forward to the decision to finally phase out export subsidies.

• 0950

In that kind of world environment, how do you position yourself for the next century? I think dairy producers in Canada, the U.S., and Europe are all struggling to figure out how to do it.

Mr. Murray Calder: Okay. I'll go right back to the point you made about the export subsidies.

Obviously an export subsidy is in place to protect the domestic industry. Say it's overproducing and you have to get rid of surplus product. If you put it on the world market and produce it below the cost of production, there needs to be a subsidy or there would be no sense in producing it, because you would be losing money.

Obviously a government wants to protect its domestic industry. We want to protect dairy here in Canada, the United States wants to protect dairy in that country, and so on and so forth. It would make sense to me that after a while these countries are going to be looking at it this way: if there is no more export subsidy, why the heck would you want to produce a product on which you're losing money to export?

Mr. Mike Gifford: Within it, Mr. Chairman, I guess is one of the challenges. You can look at a balance sheet from the perspective of a per unit and say that the average cost of production on a per unit basis is this and I should get this to cover my cost, or you can look at a balance sheet from the overall point of view of your total income and your total expenses. It's fair to say that even dairy producers in Canada have recognized that it's impossible to sell a litre of milk at the same price for all markets even within Canada. The price for fluid is one price, for ice cream it's another, and for cheddar cheese it's another, so there is differential pricing.

At the end of the day, Mr. Chairman, it's up to each producer to make an assessment as to whether or not, in terms of his overall revenue and expenses, he should contract, stay the same, or expand his operation. It's basically an individual decision on how he can compete relative to his other colleagues in the sector.

Mr. Murray Calder: I totally agree with what you're saying. I know when you lump all those different prices for those different products, you've satisfied the cost of production formula or you're not in business. In other words, you're producing a product on which you're making a profit.

I want to move toward the New Zealand example. We have two dairy industries that are relatively similar. The dairy industry here in Canada has a high capital component, which is the quota, and the dairy industry in New Zealand has a high capital component, which is the land. Land is very expensive over there. You therefore have two industries whose start-up costs are relatively similar. However, we basically have planned production over here, so we don't export a lot and New Zealand doesn't either.

I'm not aware of any major sugar industry in New Zealand, and I'm heading toward the butter oil and sugar blend right now. I'm not aware of any sugar industry in New Zealand. They do have a surplus of butterfat, though, because they have no planned production over there.

Now you have an industry that has to—

The Chairman: Mr. Calder.

Mr. Murray Calder: I'll go very quickly; this is my last one.

You have an industry that is now importing sugar into New Zealand to mix with their surplus butterfat so they can fly it to Canada. Working on the premise I'm working with right now, is that not dumping?

Mr. Mike Gifford: Mr. Chairman, New Zealand is a long way from everywhere, but it's closer to Australia than it is to most other countries and it can get access to world-price sugar from Australia. So it is possible to access sugar at world prices, and certainly New Zealand butter prices would be at world level.

I stand to be corrected by my colleagues, but I think it's fair to say that New Zealand milk that is sold for retail fluid consumption is sold at a higher price than New Zealand milk that goes into butter manufacture. Whether it's for domestic or export use, it's still not clear to what extent there is in effect differential pricing in their domestic price for butter and their export price.

• 0955

For example, we have a relatively small quota of under 2,000 tonnes for butter for all sources; New Zealand has been given a country reserve. When they've got limited access into a market such as the United States and Canada, the New Zealand dairy board, as a single-desk seller, will try to raise the price to get the maximum economic advantage from that limited access.

Mr. Chairman, it's not clear where the New Zealand dairy board is pricing the butter content of the sugar-butter blends.

The Chairman: We'll go to Mr. Proctor.

Mr. Dick Proctor (Palliser, NDP): Thanks very much, Mr. Chair.

Mr. McNab, you indicated in your presentation that Canada did not agree with section 301 the first time it came up. Could you elaborate a bit more on the reasons for our disagreement? Why did we disagree?

Mr. John McNab: It wasn't with the section 301.

Mr. Dick Proctor: A dispute settlement.

Mr. John McNab: That's right. The section 301 process is a domestic U.S. process by which the U.S. industry can petition the U.S. trade representatives to take action. The action they then take is to initiate the dispute settlement in Geneva under the WTO.

I don't know if there are many cases in which the potential defendant doesn't disagree the first time around just to gain more time, perhaps to gain more information, to hear their statement. The rules allow it, and I think almost invariably everyone takes advantage of that.

New Zealand also requested consultations, but later. The consultations with the United States were in November and with New Zealand they were in January. Both countries will be in a position to request a panel, and to allow the two systems to come together in time is also one of the results of this.

Mr. Dick Proctor: Okay, but did we have specific objections or did we just say we object?

Mr. John McNab: We just said we objected.

Mr. Dick Proctor: We don't have specific—

Mr. John McNab: No. You don't have to elaborate on why you're objecting.

Mr. Dick Proctor: Mr. Gifford, can you tell us a little bit about the subsidies you see in the U.S. dairy industry now? Do you have specifics?

Mr. Mike Gifford: Yes, Mr. Chairman. They have a dairy export subsidy program, which is paid for by the USDA. In most circumstances, in my years of experience, in order to export, the United States uses a direct export subsidy.

They also have an offer to purchase program, whereby the Commodity Credit Corporation offers to purchase butter, cheese, and skim milk powder at predetermined prices. When those stocks become onerous, they will dispose of them at world prices. That again is an export subsidy.

There are no direct deficiency payment-type programs, no direct income payment-type programs in the United States for dairy. United States dairy producers, like other dairy producers, are entitled to the farm programs that might be generally available from the USDA or state departments of agriculture, but essentially the main support to U.S. dairy has been provided in the past by border protection. These are the section 22 import quotas, which got converted into these tariff equivalents. They've basically been able to maintain in most years a price higher than the world price through the use of border protection.

Mr. Dick Proctor: This is my last question, Mr. Chair.

This standing committee should look into the level of subsidization through a joint committee. We should look at U.S. dairy producers and U.S. farm policies to try to help dairy farmers, I guess, as we head into the next round. Without getting into the internal politics of the committee, do you think this would be a good use of the committee's time?

• 1000

Mr. Mike Gifford: It's fair to say that primary producers—and processors, for that matter—always want to hope and believe that they're competing on a level playing field and not against somebody else's treasury. So I think it is important to know what kind of support levels are provided to competitors, yes indeed.

Mr. Dick Proctor: Thank you.

The Chairman: Mr. Bonwick.

Mr. Paul Bonwick (Simcoe—Grey, Lib.): Thank you, Mr. Chair. I have a couple of questions.

Mr. Gifford, does your department monitor and analyse how the U.S. subsidizes its dairy industry?

Mr. Mike Gifford: In general terms, yes. In fact, the OECD has a system whereby it measures the support levels for the major commodities in all countries. We participate actively in that program.

Mr. Paul Bonwick: Thank you. I'm keeping it short because I have a few questions here for you.

So it's entirely possible for you to present and prepare reports back to this committee on what the U.S. government is actually doing with respect to subsidies.

Mr. Mike Gifford: Yes.

Mr. Paul Bonwick: I wanted to bring that up with respect to the motion that will be addressed later in the week, Mr. Chair. That's suggesting we already have access to that information. There's no sense spending more dollars of this committee, or members of Parliament reinventing the wheel, if I may.

Second, not having graduated with a BA in agriculture, I'm wondering if I might get a clearer answer to Mr. Calder's question, “Is it dumping?” I'm wondering if there is one of three simple answers—it is, it isn't, or you don't know.

Mr. Mike Gifford: It's a complicated subject, but I'll try to simplify it. What we're talking about here under WTO law is whether the product in question, which in this case is a mixture of sugar and butter oil, is being dumped—in other words, sold at a lower price in Canada than in New Zealand. It's quite possible that a combination of butter oil and sugar is not even manufactured for sale in New Zealand. Therefore, the only sales they have would be to export markets. I simply don't know whether that's the situation.

The bottom line, though, is that dumping doesn't take place because the inputs are being sold at differential prices but the product. In this particular case, it is the butter oil and sugar blend. Is that being sold in Canada at a price lower than in New Zealand?

Mr. Paul Bonwick: Okay. Now that the government has chosen to ask for a decision from the CITT, is it normal for the government to pick up the costs for, say, the DFC on a matter like this if they are going to represent themselves?

Mr. Mike Gifford: No. Parties to a CITT hearing would pay their own expenses.

Mr. Paul Bonwick: But is it possible for the government to pick up the costs?

Mr. Mike Gifford: It has never occurred, in my experience.

Mr. Paul Bonwick: If the decision is found in favour of the DFC or the farmers, does the government pay retroactively to the loss of income because of its decision to ask the CITT to make a decision rather than make the decision themselves and act as a defendant rather than a plaintiff?

Mr. Mike Gifford: The question of compensation is a political decision, not a technical decision, obviously. If the dairy farmers wanted to make that case to the government, the government would have to take the policy decision on request.

Mr. Paul Bonwick: Finally, just so that I'm clear on the second question, at this point in time we don't know as a government whether or not New Zealand is actually dumping, based on the lack of information we have on what is taking place in their country.

Mr. Mike Gifford: Usually a dumping complaint comes from an affected Canadian manufacturer, who will complain that the product is being sold in Canada below the price being sold in a domestic market. We've received no complaints to that effect.

Mr. Paul Bonwick: There's no need for me to go on. I just think it is this government's responsibility to know whether or not it's dumping.

The Chairman: Mr. Hoeppner.

Mr. Jake E. Hoeppner (Portage—Lisgar, Ref.): Thank you, Mr. Chair.

Just for Mr. Bonwick's information, if he ever goes into agriculture I would suggest a Bachelor of Science rather than a Bachelor of Arts. It would probably do him more good in farming.

Some hon. members: Oh, oh!

• 1005

Mr. Denis Coderre (Bourassa, Lib.): Have you been to school yourself, Jake?

Mr. Jake Hoeppner: Mr. Gifford, the Americans are very good at hiding their export subsidies or internal subsidies. On this $45-an-acre subsidy that grain farmers are getting, are dairy farmers also getting that for feed production?

Mr. Mike Gifford: Mr. Chairman, my understanding of the American program is that this is a replacement for the old style of the Commodity Credit Corporation cereal program that it used to have. It's a direct income payment that's paid on the basis of what you produced in the past, not on what you produce today. Therefore, if you produced 100 acres a wheat and 50 acres of corn and 30 acres of soybeans—that was your base acreage—then you'll get a payment based on that base acreage, irrespective of what you plant today.

Mr. Jake Hoeppner: Does it really help the dairy producers as far as feed costs are concerned, then?

Mr. Mike Gifford: The U.S. dairy producers get feed prices at what I would imagine would be very close to world competitive prices for both feed grains and for protein supplements, Mr. Chairman. They can get all the barley and wheat they want from Canada, and they can get all the canola cake and oil cake duty free. So the U.S. dairy producers have access to inputs at world competitive prices.

Mr. Jake Hoeppner: I'm looking at the smaller dairy farmer, Mr. Chairman, at the one who still grows the majority of his own feed. That is where I was leaning towards. I know in some of the states that is the major dairy production. Even in certain areas like New Mexico you have the huge dairy conglomerates.

Mr. Mike Gifford: I stand to be corrected on this one, Mr. Chairman, but I would have thought that a dairy producer who was producing corn silage historically would not be entitled to basically a grain acreage payment. We'll double-check that, Mr. Chairman. If is incorrect, we'll let you know.

Mr. Jake Hoeppner: Thank you for that.

We were talking about subsidies, and I heard Mr. Calder say that the dairy producers really fund export subsidies themselves, and I think that is true. The Americans are a little different probably.

Isn't a subsidy a subsidy if you set the price high enough in your own country so that consumers can give you a price so you can afford to sell 10% to 15% at no cost at all, really? Wouldn't an appellate body probably look at that as a subsidy? If they are lawyers and judges... I would be very hesitant to just feel that would appear as a subsidy.

Mr. Mike Gifford: All I can say on that, Mr. Chairman, is that economists have a certain definition of what constitutes a subsidy, and even that's not a homogeneous definition. Certainly, the appellate body will have to look at the legal definition of what constitutes a subsidy and basically not look at some of the various interpretations that are loosely used for what constitutes a subsidy.

Just as dumping is used very loosely, Mr. Chairman, it has a very specific and a very legal meaning in the WTO.

Mr. Jake Hoeppner: Mr. Gifford, what about the area of the Asian countries? That is where we're all looking for extra export opportunities. We know their economy is such that we will probably have to provide the funding for them to buy our products. I think it was South Korea that had $55 billion from the World Bank. Will that have some effect in terms of probably leaning favourably towards some industrial countries that probably have put more funds into that area than others?

Mr. Mike Gifford: Mr. Chairman, if you recall the case of Mexico, it had a financial crisis several years ago. It borrowed a considerable amount of money from the World Bank and from the United States. Mexico has successfully paid back all of those loans and the Mexican economy is growing and growing.

I guess we're hopeful that the various Asian countries will weather the current difficulties and basically repeat the pattern that Mexico has demonstrated. It is possible to go through an economic crisis and come out the other end with a strong and more vibrant economy.

• 1010

The Chairman: Thank you very much. And now to the graduate, Mr. McCormick.

Mr. Larry McCormick (Hastings—Frontenac—Lennox and Addington, Lib.): Thank you, gentlemen, for being here today.

Mr. Gifford, I don't expect you to know everything off by heart. I would like to find out one of these times what the average herd size in Canada is—counting the herd as the number of animals being milked—and also what it is in New Zealand and the United States. I'd like to get that information for the future.

I would like you to talk to what kind of discipline we might expect or what type of system would apply if there is a two-tier pricing system that comes out of this if the United States lose, and if they and other countries move that way?

Mr. Mike Gifford: Mr. Chairman, this is something that's never been discussed in Geneva. What is the difference between a 10% tariff and a 300% tariff? Does it really matter? The bottom line is that you still have the ability to price differentiate if you have any kind of tariff with what you export.

At this point, Mr. Chairman, I simply can't speculate on where the international discussions may lead. All I have is the sense that if in fact the international community agrees to phase out direct export subsidies paid by governments, then those countries that have export subsidies that are going to be phased out will then be paranoid about ensuring that everybody's on the same level playing field. There will be pressure somehow to reach some understanding internationally on what you can and can't do with respect to differential pricing, with respect to two-price systems.

Mr. Chairman, I can't say anything beyond that at this point.

Mr. Larry McCormick: Thank you, Mr. Chair. I wonder what percentage of Canadian dairy products are supplied by imports. I realize there could be a debate on what we call a dairy import, but I'm just looking for general information.

Mr. Mike Gifford: As Mr. Chrétien pointed out, our guesstimate on a milk-equivalent basis of what we allow into Canada in the way of dairy products is roughly 3%, if memory serves me right. That is primarily 20,000-odd tonnes of cheese and a couple of thousand tonnes of butter and other bits and pieces beyond that, but basically it's the cheese. We have a tariff rate quota for just under 21,000 tonnes of cheese, and that constitutes the bulk of Canada's dairy imports.

Mr. Larry McCormick: Yes, I realize the butter oil and sugar blend is of utmost importance to all areas of Canada where we have dairy producers. In my riding it's $1.8 million that is taken out of the economy, so I am concerned. It doesn't affect the figures much, and that's the concern and the worry of the producers.

Mr. Gifford, you know so well the schedule of how long our tariffs exist under the current rulings and then under the next round of the WTO, where there'll be no doubt a reduction of the tariffs. You mention that possibly or probably in the following round it might be the elimination of subsidies. I wonder if you could give me a timeframe of years. I'm not holding you to the year; I just want to learn from you.

Mr. Mike Gifford: Mr. Chairman, the reason I'm somewhat optimistic that the international community might agree to phase out export subsidies the next time around is mainly because of a proposal made by the European Commissioner for Agriculture, Mr. Fischler. He proposes basically to reduce his internal support prices for cereals by another 20%, effective the year 2000. Our guesstimate would be that if he's successful in persuading the member states to do that, it will mean that the European Union will no longer have to use export subsidies for cereals.

Mr. Fischler and his colleagues also see the writing on the wall that the international community is moving towards eliminating export subsidies. Even for sectors where export subsidies would still need to be used—other things being equal—for example, in the dairy and sugar sectors, they anticipate that at the very minimum there's going to be a substantial reduction in the use of export subsidies, and quite possibly the phase-out.

• 1015

Now, the more sensitive the sector, Mr. Chairman, usually the longer the transition period. I would hazard a guess that if countries agree to phase out export subsidies in the next round, for some commodities, for some countries, the phase-out period could be as long as 10 years.

Mr. Larry McCormick: Mr. Chair, and Mr. Harvard, if I could, this 10 years, if that were the point, would be 10 years from when? Can you clarify that?

Mr. Mike Gifford: There's still no agreement as to when the next round will conclude. It's supposed to start in late 1999. If you're an optimist, it's a two- or three-year negotiation. If you're a pessimist, it could be a four- or five-year negotiation.

A voice: Or ten years.

Mr. Mike Gifford: But let's say, for example, that the agreement comes into effect on January 1, 2005. That is not unrealistic. We could say January 1, 2004 perhaps, but say 2005, then 10 years from that.

Mr. Larry McCormick: Thank you very much.

The Chairman: John.

Mr. John Harvard (Charleswood—Assiniboine, Lib.): Thank you, Mr. Chairman.

Mike, as you said earlier, these issues are very complex, and the BSC is no guarantee that we're going to have a full understanding of all the issues.

But for informational purposes, let me ask you a couple of questions having to do with subsidies. First, is there widespread agreement as to what constitutes a subsidy under the WTO? Or do we bicker over just what the definition is? That's the first question.

Second, in the case of, say, dairy farmers, if dairy farmers choose to have a two-price system, if they choose to sell their products into the export markets at a lower price, but they are not compensated for that lower price and simply take a lower profit margin, does that constitute a subsidy?

Third, what is the situation with respect to our current sales of dairy products into the export markets?

The other thing I would like to know from you, Mike, is related to what you mentioned earlier in your opening statement. You said that at one time levies were imposed, and those levies were used to compensate exporters who presumably sold their products into the export markets at a lower price. You're saying that this is what used to be done, that's what was done in the past. What's done now? What is the difference between the two systems?

Mr. Mike Gifford: Mr. Chairman, I will start with the last question first. Under the old system provincial milk marketing boards would collect a levy from individual producers as a tax. They would then turn the proceeds of this tax over to the Canadian Dairy Commission. In order to permit, say, a Canadian cheese exporter to export cheese, for example, to the U.K., the Canadian Dairy Commission would then write out a cheque to the cheese exporter, in effect to make up for the difference between Canada's domestic price for cheese and the U.K. price.

So that was the old system. Under the new system the milk is sold for different uses at different prices. There are examples where the milk is sold in Canada to manufacture a process food product, irrespective of whether it's sold domestically or for export.

For example, in the chocolate industry the Canadian dairy producers have agreed to supply chocolate manufacturers in Canada with dairy ingredients at U.S. competitive prices. They did that because they realized that if chocolate manufacturers could not get dairy ingredients at U.S. competitive prices, and the chocolate was coming in duty-free from the United States, that chocolate industry would simply close up shop in Canada and move wholesale to the United States. That was one of the reasons that dairy producers chose to lower the price of dairy ingredients in chocolate.

• 1020

In other cases, such as for cheese, milk is provided to processors for export at a price lower than the price they are charged for cheese that's manufactured for sale in Canada. In most cases it is the pricing decision of the relevant individual provincial milk marketing board. The trouble is, in the Canadian dairy industry, it's very difficult and sometimes dangerous to generalize, because not all the systems in each of the ten provinces are identical. There are minor differences between each.

Mr. John Harvard: You said that under the old system somebody wrote out a cheque, so presumably somebody received a cheque.

Mr. Mike Gifford: That's right.

Mr. John Harvard: Under the current system, is there any of that?

Mr. Mike Gifford: Nobody receives a cheque.

Mr. John Harvard: Nobody gets a cheque now.

Mr. Mike Gifford: Nobody gets a cheque.

Mr. John Harvard: Does that mean there's no compensation?

Mr. Mike Gifford: No, the processor gets milk at different prices for different uses for different markets. He does not acquire milk at one homogeneous price. He buys it at a range of prices for different specified uses. There is no cheque writing as there was under the old system.

On the question of two-price systems and whether or not there's a “subsidy”, some economists might use the word “subsidy” loosely. I think the bottom line is that we would argue that differential pricing, where a firm decides to price a product at different levels for different end uses, is something that's not unique to dairy, not unique to agriculture, and is in fact a practice of many industrial corporations and firms. We don't regard this as a subsidy. A definition of subsidy is contained in the subsidies and countervailing duties provisions of the WTO, but there is no definition of subsidy in the agricultural agreement in the WTO.

Mr. Chairman, without trying to get into the legality of all this, the bottom line is that there are some definitions of what constitutes a subsidy. They are very specific and are contained in the WTO provisions on subsidies and countervailing duties.

The Chairman: Mrs. Ur.

Mrs. Rose-Marie Ur (Lambton—Kent—Middlesex, Lib.): Thank you, Mr. Chairman.

Mr. Gifford, how have we worded the butter oil and sugar challenge to the CITT?

Mr. Mike Gifford: We worded it very broadly. The CITT has been given an extremely broad mandate to look into any aspect it feels justified looking into, whether it's the appropriate tariff classification or the question of the butter oil and sugar blends or other possible combinations of dairy ingredients. The terms of reference have been written very broadly in order to give maximum latitude to the CITT to look into all aspects they consider to be relevant to this question.

Mrs. Rose-Marie Ur: I think the butter oil and sugar—

Mr. Mike Gifford: No, it's all blends.

Mrs. Rose-Marie Ur: I've been meeting with some of my dairy farmers, and this is one of the concerns they brought forward. They felt it wasn't specified enough. They're concerned it's being brought under a whole umbrella, and I think that's why they're a little concerned with the way the government has approached this with the CITT.

Mr. Mike Gifford: I think the point the government was making, Mr. Chairman, was simply that we're aware that today's problem is butter oil and sugar blends, but we're also aware that potentially there are other combinations of ingredients that could come into Canada outside the existing tariff rate quota system. We wanted the CITT to try to quantify it if they could.

Mrs. Rose-Marie Ur: Another concern is this. Why are we not putting a hold on imports until this is resolved? I think there is a mechanism in place whereby if there's a rapid increase in imports, you can put it on hold until the challenge is resolved. Why are we not doing this with the butter oil and sugars coming into Canada until we know what's going on?

• 1025

Mr. Mike Gifford: I think this is a suggestion that Canada should apply what's called a safeguard action, an emergency import safeguard. Canada, like any other member of the WTO, is entitled to apply an additional tariff or import quota under certain specified conditions. But first of all, the product in question has to be imported in such quantities or threatened to be imported in such quantities as to cause or threaten to cause serious injury to the domestic industry.

The one practical problem that has to be addressed is the question of what is the domestic industry. It's the manufacturer of the like product to that imported. So who is the manufacturer of the like product to butter oil and sugar blends? It's a dairy processor. Is it a butter manufacturer? But it certainly is not a primary dairy producer.

The fact that trade occurs in the processed product as opposed to the primary product has bedevilled agricultural negotiations for a long time now. Can the cattleman complain about imports of beef? He doesn't produce beef; the packer produces beef. So under the WTO rules, you have to demonstrate injury to the Canadian packer rather than to the Canadian cattleman. That's analogous to the dairy industry.

We have certainly informed the Dairy Farmers of Canada what the various trade remedies are, including Canada's safeguard provisions. Basically it's up to an affected part of the Canadian industry to make a case, but you have to demonstrate threat or actual serious injury to the CITT.

Mrs. Rose-Marie Ur: Are you saying the DFC has to present that case and not the government?

Mr. Mike Gifford: It would be the manufacturer of the product or something that's equivalent to that product. In this case it would be the Canadian dairy processors, some of whom are producer co-ops, by the way.

Mrs. Rose-Marie Ur: The producers aren't really going to complain if they can get it cheaper. The farmers are losing out on this, not the processors.

Mr. Mike Gifford: But apart from Ontario, most of the Canadian dairy processors are in fact producer co-ops.

Mrs. Rose-Marie Ur: I do not really feel the numbers quantify the fact that we should be looking at this or someone should be looking at it. It has almost tripled in the last couple of years and surely that's an indication.

Mr. Mike Gifford: Certainly the possibility of invoking safeguards is something the CITT will address explicitly, as I understand it.

Mrs. Rose-Marie Ur: Certainly if that were looked at a little more diligently, maybe the Dairy Farmers of Canada would be a little more compatible in this concern.

You may not have time or have the information with you, but I think we'd be interested in seeing a draft report or a briefing on New Zealand's dairy system, what subsidies it has in its system and how it affects the butter oil.

Mr. Mike Gifford: We'd be happy to provide that.

Mrs. Rose-Marie Ur: Thank you.

The Chairman: Mr. Calder.

Mr. Murray Calder: Thank you very much, Mr. Chairman.

On what Mrs. Ur has said, we looked at 3,200 tonnes of blends coming in from New Zealand in 1996 and we're up to 8,200 tonnes right now and it's still moving. I still have to go on the fact they're flying this stuff in. There has to be something a little deeper if we dig far enough.

Mike, do you think we will ever be able to define a subsidy?

Mr. Mike Gifford: As I said, there is a definition of a subsidy in the subsidies and countervailing duty provisions of the WTO, and there are definitions of what constitutes an export subsidy in the agricultural provisions of the WTO. Basically it will be up to the panel and the appellate body to interpret those provisions to determine whether or not the Canadian system is an export subsidy or not. It's our contention that Canada's export pricing system for dairy products is not an export subsidy as defined by the WTO agricultural provisions.

• 1030

Mr. Murray Calder: In that line, I'm very curious. If there is this internationally recognized definition of what a subsidy is, how effective is it in your opinion?

Mr. Mike Gifford: Well, Mr. Chairman, my expertise is agricultural. I very rarely stray into the non-agricultural realms of the WTO, so I might turn to my colleagues to venture an opinion on the definition of subsidies in the subsidies countervailing provisions.

Mr. John McNab: It's true that there is a definition of subsidy now contained for the first time in the subsidies and countervailing measures agreement that forms part of the WTO. There hasn't yet been a panel. A panel in the appellate body is the only means by which you can get a definitive interpretation of this or any other aspect of the agreement. The first case has now begun at the request of the United States against Australia under the subsidies agreement, but up to now it's taken this many years and intense negotiations in the Uruguay Round to arrive at a definition for subsidy. There may be some argument or debate about how it should apply in a certain case, and those differences of view will only be settled by panel.

Mr. Murray Calder: Okay, so we basically have an internationally recognized definition of what a subsidy is, but it really hasn't been put to the test yet.

If we're going to have a two-price system that is going to be recognized internationally, obviously we have to have a recognized definition of the subsidy that has been tested. Otherwise, as I would see it, the scenario would be that—and again I go back to this balance sheet, where we have to make a profit if I'm going to stay on my chicken farm or dairy farm, etc.—you'd probably end up with countries around the world maybe overproducing what they need domestically by about 10% to 15%. That would then go out onto the international market, for which they're obviously going to produce in a loss situation. They're also going to average their own domestic price so that they have a slightly lower profit margin. That 10% to 15% for all countries concerned is therefore probably going to work for third world countries, countries that are developing, or whatever we're looking at. Would you agree with that?

Mr. Mike Gifford:

[Editor's Note: Inaudible]

Mr. Murray Calder: Okay, what I'm looking at very simply is this, Mike. If we end up with an internationally recognized definition of a subsidy, and if the fact is that I have to address a balance sheet to stay in business, in essence that subsidy is basically going to set up worldwide supply management through pricing.

Mr. Mike Gifford: Not necessarily, Mr. Chairman. As I said before, you don't necessarily have to have supply management to have a system of export pricing. I think this is what the United States is in fact saying. If they lose at the panel, then they want to set up a system of export pricing, a two-price system similar to Canada's, but that doesn't necessarily mean they'll have supply management together with the export pricing system. It's quite possible to have a system that allows you to price differentiate between end uses and various markets without having a supply management system. That's the bottom line, Mr. Chairman.

The Chairman: We go to the final question, which goes to Mr. Hoeppner.

Mr. Jake Hoeppner: Thank you, Mr. Chairman.

Mr. Gifford, agricultural trade is your speciality. If you could rub a bottle and a genie popped out and you were the czar of all foreign trade, what would you do to get harmony into this whole system?

Mr. Mike Gifford: Mr. Chairman, we're well on the way. As you heard me say many times before, until the time of the WTO, we had anarchy in agricultural trade mainly because there were no rules that applied equally. Some countries had exemptions from the GATT rules, like the United States. When some countries joined the GATT, they said they were not including their agricultural sectors under the GATT rules. So if you were Minister of Agriculture of Canada and your officials told you they were sorry, but Canada is supposed to live by the rules, but the rules don't really apply to the United States because the United States has a waiver, and the rules don't apply to Switzerland because when Switzerland joined the GATT it basically made its joining conditional on not accepting any disciplines on agriculture, and the European variable import levy isn't even covered by any GATT rule, it's just a sort of a black hole...then you would sympathize with that minister when he asks, “What the hell am I supposed to do when it comes to agricultural trade if there are no effective rules?”

• 1035

I think the international community realized that enough was enough in the early 1990s, when in fact they introduced the agreement on agriculture as part of the WTO agreement. And now for the first time, governments know what the rules of the game are. They know if they are in breach of those rules another country won't do something unilaterally. Americans won't use a section 301 and clobber us with a 2x4.

If a country doesn't agree with what you're doing, it will then take you to effective dispute settlement, which is binding on both countries. It seems to me that for a small or medium-sized country such as Canada, which is so heavily dependent on trade, having a system of rules that applies equally to the large as well as to the small and that is backed up by a transparent and effective dispute settlement system, this is basically where we're heading.

I suggest, Mr. Chairman, that the proof is in the pudding. When the commission of agriculture for Europe basically says the common agricultural policy that existed in the 1950s, 1960s, 1970s, 1980s and 1990s is going to have to change because that system is simply incompatible with a future world where barriers are coming down over time and where export subsidies are going to be prohibited...and that's changing the domestic policies.

What I'm saying, Mr. Chairman, is that at the end of the day, the problems in agricultural trade are primarily related to the types of domestic agricultural policies countries practice. And there are ways of supporting rural sectors that are less trade distorting and ways of supporting those sectors that are very trade distorting. And over time, governments, I think, are making choices to modify the domestic agricultural policies in ways that are less trade distorting. But in the so-called good old days, governments could and did develop domestic agricultural policies in a vacuum, as if the rest of the world did not exist, because there were no effective rules, Mr. Chairman.

Mr. Jake Hoeppner: What would you then say to my good friend Mr. Bob Roehle from the Canadian Wheat Board? In a documentary shot here about a year ago, he said, if you farmers think that you're ever in this world going to get a free-trading system in wheat, you had better jump in the creek, because the government is not going to give up their interest in holding down the price of food, not just in Canada but abroad.

Mr. Mike Gifford: Everybody is entitled to their own opinion, Mr. Chairman.

Mr. Jake Hoeppner: So you wouldn't agree with that?

Mr. Mike Gifford: No, Mr. Chairman.

Mr. Jake Hoeppner: That's one for me, Mr. Chairman.

The Chairman: It's been said recently that Japan didn't agree to the agricultural rules and got away with it.

Mr. Mike Gifford: That's incorrect, Mr. Chairman. I think what was being suggested by that comment was that on rice the Japanese still maintain an import quota, at least until the end of the next round. But they had to pay a price for that, Mr. Chairman. The general rule or guideline was that you had to provide a minimum-access commitment of 3%, going up to 5% of consumption, and in order to have a dispensation that would allow you to maintain an import quota, you had to cough up 8% access.

That option was offered to the supply management industries in Geneva, and all of them said thanks, but no thanks. They were not prepared to basically provide increased access simply to get the temporary use of import quotas. They said they would rather, in effect, rely on these tariff equivalents that have been negotiated.

So that option was available, Mr. Chairman. It was turned down by the Canadian supply management industry. The Japanese now have to provide access for 8% rather than 5%, and in the next round, if they want this derogation to continue, they're going to have to negotiate that with the other rice suppliers, such as the United States, Thailand and Australia. You can bet your bottom dollar that the access price those exporters will extract from Japan will be very high.

• 1040

So, Mr. Chairman, I don't think it's fair at all to say that Japan escaped from WTO disciplines. It did reduce its tariffs by and large on an average of 36%. It did reduce most of them by that, with some by less, some by more. Japan is just as much a full member of the WTO agricultural agreement as is Canada or the United States.

The Chairman: Was the intention that we could have done something different for the butter oils because Japan did what it wanted to do and agriculture doesn't...?

Mr. Mike Gifford: No, Mr. Chairman, Japan in fact has been subject to WTO panels. It recently lost a WTO panel on the way it was applying discriminatory taxes on liquor. From that, Japan has undertaken to bring its measures into conformity with the panel findings. So Japan is living by the same rules that we're living by, Mr. Chairman.

The Chairman: Larry, do you have another question?

Mr. Jake Hoeppner: I have a short one, if you don't mind, Mr. Chairman.

The Chairman: Larry had his hand up.

Mr. Larry McCormick: Mr. Chair, thank you. It's just a very brief one.

Mr. Gifford, you mentioned that there are other ways of providing subsidies to rural areas. Whether it's now or at another time, I would like to learn of some your ideas.

Mr. Mike Gifford: Basically, Mr. Chairman, direct income payments are basically income transfers from the government to the producer, and are made without being directly linked to current production. That's one way.

When we started the Uruguay Round, nobody had heard of decoupled income payments. That was an expression that grew up during the course of the negotiations. Unlike the old system in which you had deficiency payments—basically, the more you produced, the more government payments you got—it was linked to how much you produced this year. I think the American grain producer would be the first to admit that the old system of grain supports that they had in the United States basically encouraged producers to farm the program rather than to produce for the market. Right now, you have relatively more soya bean and corn production in the United States and relatively less wheat production because of the change in the U.S. grain support program.

Certainly in Canada's case, Mr. Chairman, the elimination of the WGTA has had a dramatic impact on western Canadian agriculture. Before it was primarily a grain-dominated agricultural sector in which livestock production in effect was discouraged, and in which value-added processing was in effect discouraged because it paid producers to ship their raw material out of western Canada. Today that program change has resulted in a massive diversification effort in western Canada, with more livestock production and more food processing.

Mr. Larry McCormick: Mr. Chair, if you'll allow my final comments, it's certainly good to see what's happening in Brandon, Manitoba. I am glad to know that the Canadian Wheat Board is there for the rest of the growers in western Canada and that they can be assured of a healthy future.

Thank you, Mr. Chair.

The Chairman: Mr. Hoeppner, you had a small question.

Mr. Jake Hoeppner: Yes.

I was just wondering about the import duties you're talking about on the liquor in Japan, Mr. Gifford. Does that also hold true for canola products?

Mr. Mike Gifford: No, I was talking about a domestic tax on liquor that was lower on local liquor as opposed to imported liquor, Mr. Chairman. Basically that was a case of discrimination between the way tax treatment was applied to domestic liquor as compared to imported liquor.

In the case of canola, the Japanese have a specific duty on canola oil. On canola, it's duty-free. On canola oil, it's so many yen per kilo, and they reduced that tariff by 36%. The problem that the canola growers and canola crushers in Canada face is that because the yen has appreciated over time, the ad valorem equivalent of that specific duty has gone up and down. Obviously one of Canada's objectives in the next round of negotiations is to negotiate duty-free access around the world for all oilseeds and oilseed products—a so-called zero-for-zero approach to oilseeds, including canola.

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The Chairman: Thank you very much, gentlemen, for coming in this morning.

This meeting is adjourned until Thursday at nine o'clock.